Selling Mortgage-Backed Securities

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Introduction

According to news article on September 2nd contributed by Rexrode (2011) from AP, “The government on Friday sued 17 financial firms, including the largest U.S. banks, for selling Fannie Mae and Freddie Mac (Appendix) billions of dollars worth of mortgage-backed securities that turned toxic when the housing market collapsed”. Beyond the apparent legal issues, this article intrigued me to examine whether or not there are ethical issues involved regarding banks selling mortgage-backed securities. A mortgage-backed security is defined by Securities and Exchange Commission (SEC 2010) as debt obligations that represent claims to the cash flows from pools of mortgage loans, most commonly on residential property. To put it simple, the buyers/investors of such securities are the lenders to all the homebuyers in the Unites States who pay mortgages.

The reason why US government sues major banks seems rational at first glance: Subprime mortgage crisis caused millions of people lost their jobs; after all, someone must take the blame, right? But after second thought, we may wonder, are banks really the ones that caused subprime mortgage crisis by selling mortgage-backed securities? Should banks be blamed for the hefty loss of investors that involved in subprime mortgage? Is it justified for the government to sue those banks now, instead of stopping the issue of risky securities before? To be specific, the purpose of this essay is to identify if major banks are ethical for selling mortgage-backed securities.

Discussion

Housing Market vs. Major Banks

Should banks be blamed by selling mortgage backed securities? They shouldn’t be blamed for it, because the dramatic price drop of mortgage backed securities was not the ul...

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Fannie Mae (2011). About Fannie Mae.

Retrieved September, 21, 2011, from: http://www.fanniemae.com/kb/index?page=home&c=aboutus

Freddie Mac (2011). About Freddie Mac.

Retrieved September, 21, 2011, from http://www.freddiemac.com/corporate/company_profile/our_business/index.html

Parsons, J. (2011) Inflation adjusted house price. JP’s Real-estate Chart

Retrieved September, 21, 2011, from: http://www.jparsons.net/housingbubble/

Rexrode, C. (2011) Feds sue big banks over sales of risky investments.

New York: Associated Press

Retrieved September, 21, 2011, from: http://online.wsj.com/article/APb385e88b96c543718ec2671061996bab.html?KEYWORDS=federal+government+sue+bank#articleTabs%3Darticle

SEC (2010) Mortgage-Backed Securities.

Retrieved September, 21, 2011, from: http://www.sec.gov/answers/mortgagesecurities.htm

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