A mortgage is payments divided up over a period of time with some interest rate on them. Instead of waiting around and simply collecting interest, the firm passes on the mortgage to an interested bank. Then the bank sells the mortgage to the stock market so investors can have a field day. This quick pass off of such an important and delicate subject leads to a great deal of negligence. It gets even worse when the mortgages are collected in one big money making pile at Wall Street.
The bad assets were a large number of mortgages and consumer loans that were converted into bonds that were backed by real estate or other property, another words if the borrower defaulted on their loan,... ... middle of paper ... ...nity. It has sweeping consequences that are still lingering. The economy should recover from this financial crisis, yet it has come at great cost. Many in finance are looking for new avenues of investment and looking for the next big thing. Many get greedy and repeat the cycle of the previous generations failures.
Unfortunately, the Countrywide Financial case was not an isolated case. Many top name mortgage companies have been guilty of unethical behavior. Just as the American housing market was starting to recover from its worst battering since the Great Depression, a new scandal, an epidemic of flawed or fraudulent mortgage documents, threatens to send not just the housing market but the entire economy back into a tailspin (Nation, 2010). Countrywide Financial got greedy and started to make questionable and unethical decisions to make money. Countrywide Financial preyed on consumers that could not qualify for conventional loans and those that could to make more money with subprime loans.
Financiers eventually grew blind with greed. They “claimed to have found a way to banish risk when in fact they had simply lost track of it”(economist). The financial crisis was a result of poor government regulation, lax policies and the housing bubble burst that caused homeowners to default on their mortgages. By irresponsibly lending mortgages to “subprime buyers” for the past three years, banks had created a potentially huge problem if homeowners started defaulting on their mortgages. Banks sold these mortgages, along with their risk of default, to bigger banks that pooled mortgages around America into one big investment.
With billions of dollars being pumped into the banking system why then are banks still timid to continue financing home loans? 1. They are concerned that home prices will continue to fall, adding further risk to their bottom line. 2. Due to the immense derivative (OTC- Over the Counter) losses banks are simply faced with using taxpayer bailout money to stay afloat and continue manufacturing these exotic instruments that Warren Buffett has labeled as “Weapons of Mass Financial Destruction” .
The US Financial System: A Crumbling Empire The financial system has been crucial to the role of free enterprise. “Financial markets have come to supply non-financial corporations with mechanisms for managing their risks and for comparing and evaluating diverse investment opportunities in a highly complex global economy” (Cindin, 2008). “However, despite the lifetimes it took to build our financial institutions, bad luck and careless risk management have jeopardized careers and mortgaged these institutions’ futures”(Wallace, 2008). The nation is currently attempting to deal with the biggest financial crisis since the Great Depression. It is now imperative that a way be found which will re-regulate finance without undermining finance’s needed innovative capacity.
This illustrates that credit rating companies are not independent, objective, prudent and accurate in performance of their duties (Zhu, 2013). Misled by the overly optimistic rating results, many investment institutions such as funds and commercial banks invest heavily in sub-prime mortgage bonds and its derivatives, which make the cirsis scale extend and result more serious (Zhu, 2013). References Zhu, Y. (2013, May 30). The causes and corresponding strategy of sub-prime mortgage crisis.
Credit has to power to both build and destroy an economy. A 700 billion dollar bailout, named TARP, was created by the government to bailout banks and businesses that were on the brink of failure and forcing the economy to nearly go with them. The recession of 2008 was a very unfortunate learning experience for the United States, as was the hut glut for Usonia. They were forced into great debt because they simply wanted easy money, and focus purely on that and not more productive things. This forced them to borrow from their foreign neighbors.
The actions of mortgage lenders in the mid-2000s led to the most economically devastating financial crisis since the Great Depression. We believe mortgage lenders should shoulder much of the responsibility for creating such a crisis. The lenders took several specific unethical actions, which will be defined in this report. First, the lenders failed to act in good faith. Conflicts of interest were created when they sold pre-packaged mortgages as securities to investment banks at a profit.
The foreclosure crisis was caused by a pattern of risky investments by the leading United States banks that put the short term pursuit of profit above the long term interests of homeowners. This unquenchable desire for short-sighted quarterly profits, oblivious to long-term risk, motivated the decision of some banks to begin offering adjustable rate mortgages. These banks lured honest homeowners with low adjustable interest rates that were at serious risk to rise precipitously if short-term interest rates reverted to historic levels. The established government policy of stressing homeownership that was supported by Reagan, Clinton, and both Bush administrations heavily incentivized purchasing homes. The combination of low interest loans and government incentives produced a dramatic rise in homeownership that was unsustainable.