Subprime Loans Case Study

1171 Words3 Pages
bulb-icon

Recommended: The 2008 US subprime mortgage crisis

Interpret Ethical Issues with Subprime Loans
Introduction
In paper will consist of a blog on the interpreting Ethical Issues with Subprime Loans. According to the United States Department of Housing and Urban Development defined subprime loan “a type of mortgage loan for individuals who do not qualify prime rate loans due to blemished or limited credit histories. These loans carry a higher rate of interest than prime mortgage loans to compensate for increased credit risks (4). These loans were created to allow individuals and households with blemished or limited credit histories, modest incomes, or insufficient funds for a down payment that otherwise would be prevented in buying a house or refinance an existing home. Since the early 1990s, …show more content…

In an eleven-year span between 1994 to 2005, the subprime loans have increased $630 billion, from $35 billion to $665 billion (5). With the housing started to bubble in 2006, according to Nassar (2007), the first three-quarters over 60% of all mortgages entering foreclosures were subprime, compared to 30% in 2003 (5). This caused the subprime market to collapse, which caused the housing crisis that led to the financial crisis in the United States. This blog will look at ethical issues surrounding subprime loans, and the risks they pose to the lender and borrower. Next, critiquing the role of leadership decision-making in the subprime loan financial crisis. Then evaluate subprime loans with the notion of social responsibility. Furthermore, comparing and contrasting the resulting consequences for these actions. Finally, measures have …show more content…

With this type of loans, the borrower has a higher risk of defaults, because of the adjustable interest rates, which increases over time. That can lead to the foreclosures on their homes, which affects the neighborhood houses losing property value and taxes from this foreclosure. The risk to the lenders of these subprime mortgage loans, including having higher default and foreclosure rates on their properties than standard prime mortgages that require the homeowner to put some amount of money down on the mortgage. Subprime mortgage loans have a higher default rate sometimes as much as 20 times greater than prime mortgage loans (0609). Also, the lender has a higher than average loss rate from their subprime portfolio (0609). The combination of the higher default rates and the greater than average loss rates that may become unmanageable and cause the lender to go out of

Show More
Related

  • Predatory Lending in the Housing Industry

    2967 Words  | 6 Pages

    In closing, it is my opinion that predatory lending is money driven trend that destroys everyone and everything in its path. The difficulty in defining where predatory lending originates, for each individual case, is that a great deal of work in the housing industry is done in partnerships and alliances with organizations, which present their own challenges for ethical conduct. In ending predatory lending, the challenge is not in generating ethical guidelines for all the organizations and licensed professionals involved. But it is in the application of how they conduct themselves and their business.

    Read More

  • Similarities Between the Great Depression and the Great Recession

    974 Words  | 2 Pages

    Leading up to the crisis of the housing market, borrowers got mortgages without understanding the terms. Banks were giving out loans to people the banks weren't sure could pay the money back. The closer to the crisis, the higher the frequency of illegitimate loans and mortgages. Because there were so many mortgages on houses that could not be paid back, millions of mortgages were foreclosed on, and the houses we...

    Read More

  • Causes of the 2008 US Recession

    1519 Words  | 4 Pages

    A majority of mortgage defaults that Americans used were on subprime mortgage loans, which were high-interest-rate loans lent to people with high risk credit rates (Brue). Despite knowing the risks, the Federal government encouraged major banks to lend out these loans to buyers, in hopes, of broadening ho...

    Read More

  • Subprime Loans: The under-the-radar loans

    1842 Words  | 4 Pages

    Subprime loans started out as a generous, philanthropic idea. Giving people who had bad credit the opportunity to own a home regardless of their income or past credit issues showed compassion and caring for the poor, middle class and elderly who couldn’t possibly qualify for a home loan under the previous strict lending standards. However, predatory lenders used this vulnerable groups desire to live the American dream, to own a home, against them. Billions of dollars were made by loan companies and similar financial institutions by writing relaxed standards loans for borrowers as fast as they could. (Jennings, 2012) To make matters worse, lenders knowingly wrote loans to speculators who had no intention of ever living in the home; or at least no longer than it would take to flip the property. In a marketplace with quickly rising property values, the adverse impact of this activity was completely shadowed, and yet lurking in the background is the one market constant, what goes up must come down.

    Read More

  • The Sub-Prime Mortgage Crisis of 2008

    934 Words  | 2 Pages

    The Sub-Prime Mortgage Crisis of 2008 has been the largest financial crisis to take place since the end of the Great Depression. It was the actions of individuals and companies that caused this crisis. For although it could have been adverted, too much money was being made by too many people in place of authority to think deeply on the situation. As such, by the time actions were taken to attempt to rectify the situation, it was already too late. Trillions of dollar of tax payers’ money was spent trying to repair the situation that was caused by the breakdown of ethics and accountability in the private sector. And despite the government’s actions to attempt to contain the crisis, hundreds of thousands lives were negatively affected before, during, and after this crisis.

    Read More

  • Greediness of Mortgage Lenders

    666 Words  | 2 Pages

    Subprime loans are ethical but misused in a way that created ethical issues. Subprime loans are loans made to borrowers, generally people who would not qualify for traditional loans, at a rate higher than the prime rate depending on factors like credit score, down payment, debt-to-income ratio, and payment delinquencies (Ferrell, O., Fraedrich, & Ferrell, L., 2010). Subprime loans help consumers get mortgage loans that do not qualify for a conventional mortgage loan product.

    Read More

  • Subprime Mortgage Crisis

    866 Words  | 2 Pages

    Mortgage crisis can evidently be associated with excessive borrowing from the financial institutions without proper considerations of the terms and conditions of the deal. The prospects that surround business in real estate are always promising and this presumption got into the mind of all stakeholders involved in the subprime mortgage lending business. This is because in 2000, the mortgage rates were low and everybody would afford a mortgage. Unfortunately, the financial models were flawed as the rate was adjustable. After many people were nested in the mortgage bracket, greed propelled the rates to levels subprime cannot afford thus leading to foreclosures. It can be concluded that greed, lack of sufficient knowledge and flawed financial models led to the emergency of subprime mortgage crisis.

    Read More

  • The 2008 Economic Recession

    1050 Words  | 3 Pages

    subprime mortgages were major factors of the collapse of the 2007-2009 economy collapse. All of America suffered from the 2008 recession.

    Read More

  • How Sub Prime Loans Led To A Global Recession

    1575 Words  | 4 Pages

    Sub prime lending means making loans that are in the riskiest category of consumer loans. It is lending to borrowers with bad credit, limited debt experience, a history of missed payments and recorded bankruptcies. With a subprime loan there’s a higher risk that the lender doesn’t get paid back, and so a higher interest rate is charged due to the greater risk for the lender.

    Read More

  • The Housing Boom

    674 Words  | 2 Pages

    Whenever an investment is made there is risk that accompanies it, the higher the risk of the investment, the higher the expected return. The same is true with the real estate market, and the mortgages banks issue. Each loan a bank gives out to a customers is an investment. To a prime borrower banks could loan them money at a stable, fairly low interest rate because these borrowers have a low risk of defaulting. However during the real estate boom banks were able to lend a large amount of subprime mortgages, mortgagees given to less than prime borrowers, with an inflated interest rate to make up the risk of these borrowers defaulting. “Overall, the subprime market was $600 billion in 2006, 20 percent of the $3 trillion mortgage market, according to Inside Mortgage Finance. In 2001, subprime loans made ups just 5.6 percent of mortgage dollars.” (Kratz, 2007) Banks were lending out to subprime borrowers at a lower teaser rate, giving borrowers an affordable payment because the interest rate was held artificially low until the teaser rate period was ov...

    Read More

  • The 2008 Financial Crisis

    1322 Words  | 3 Pages

    Subprime mortgage is simply defined as loan offered to someone with a weak credit history (Zandi, 2008). Since the 2008 financial crisis had its source in the poor housing policies, low income earners consisting of members of the subprime mortgage were the most affected because of rapid increase in interest rates. ...

    Read More

  • Housing Bubble Essay

    439 Words  | 1 Pages

    The savings rate by the 1960s was seven to eight percent. Back then people would save to purchase things they eventually wanted to get such as cars and household goods. During this time period, homeownership typically required a 20 percent down payment. Lending practices were one of the most significant contributors to the housing bubble and subsequent crisis. Banks and other lending institutions were very particular about the creditworthiness of the individuals to whom they would lend money. With a push from the federal government to get more people into homes of their own, banks began lending to people with lower credit scores, also known as subprime borrowers. Subprime mortgages carry a higher interest rate than prime rate mortgages, meaning a larger profit for the institution. The adjustable-rate mortgage, or ARM, was one way banks found they could lend back to borrowers with lower credit scores. These mortgages usually begin with a low interest rate that adjusts.. Although lending institutions were taking on risky, subprime mortgages, they didn’t look so risky at the time of the housing bubble. In the period between 1997 and 2006, home prices rose by over 132 percent. During this period, mortgage lenders were not at all concerned about default. . Banks were willing to issues loans they knew could not be paid off because they could sell these loans in the secondary market. Subprime mortgages were seen as

    Read More

  • 2008 Financial Crisis Essay

    1536 Words  | 4 Pages

    The "subprime crises" was one of the most significant financial events since the Great Depression and definitely left a mark upon the country as we remain upon a steady path towards recovering fully. The financial crisis of 2008, became a defining moment within the infrastructure of the US financial system and its need for restructuring. One of the main moments that alerted the global economy of our declining state was the bankruptcy of Lehman Brothers on Sunday, September 14, 2008 and after this the economy began spreading as companies and individuals were struggling to find a way around this crisis. (Murphy, 2008) The US banking sector was first hit with a crisis amongst liquidity and declining world stock markets as well. The subprime mortgage crisis was characterized by a decrease within the housing market due to excessive individuals and corporate debt along with risky lending and borrowing practices. Over time, the market apparently began displaying more weaknesses as the global financial system was being affected. With this being said, this brings into question about who is actually to assume blame for this financial fiasco. It is extremely hard to just assign blame to one individual party as there were many different factors at work here. This paper will analyze how the stakeholders created a financial disaster and did nothing to prevent it as the credit rating agencies created an amount of turmoil due to their unethical decisions and costly mistakes.

    Read More

  • The Cause and Effect of the Subprime Mortgage Crisis

    1310 Words  | 3 Pages

    The subprime mortgage crisis is an ongoing event that is affecting buyers who purchased homes in the early 2000s. The term subprime mortgage refers to the many home loans taken out during a housing bubble occurring on the US coast, from 2000-2005. The home loans were given at a subprime rate, and have now lead to extensive foreclosures on home loans, and people having to leave their homes because they can not afford the payments. (Chote) The cause and effect of this crisis can be broken down into five major reasons.

    Read More

  • Ethical Issues In The Big Short Movie

    1581 Words  | 4 Pages

    Individuals like the two young and rambunctious mortgage consultants portrayed in the film gave loans to anyone and everyone that could sign the paper, regardless of the recipient’s ability to pay the loan in full. It is doubtful that all consultants fully understood the ramifications of their actions, but undoubtedly the overall disregard for consequence was the start of the collapse. Mortgage consultants mislead and tricked people into loans they could never afford by playing on their desire to live the American dream. Distributing adjustable rate loans to individuals without jobs, without collateral is unconscionable. Unfortunately, from their perspective they were helping these individuals. In a twisted way, these consultants were acting ethically from a utilitarian point of view. The consultants won because they received utility in the form of a bonus for distributing the loans, and the loanee won because they could now afford the home of their dreams. What the consultants didn’t consider in their calculations were the long term results and utility of their actions, unethically building the flawed foundation of the housing

    Read More

More about Subprime Loans Case Study

Open Document