Subprime Loans Case Study
analytical Essay
1171 words
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,
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In this essay, the author
- Analyzes the ethical issues surrounding subprime loans, and the risks they pose to the lender and borrower.
- Explains that subprime mortgages emerged during the 1970s as a financial innovation intended to allow riskier borrowers access to home ownership opportunities that they otherwise would not have.
- Explains that the subprime mortgage loan borrower has impaired or limited credit histories, high debt to income ratio, and cannot document all of the underwriting information in their application.
- Explains that the role of leadership in regards to decision-making in any financial institution is critical in ensuring that mortgage brokers and lending officers’ decisions to follow the rules and regulations of the financial institutions.
- Explains the goal of the american policy to promote home ownership to the low-income and minority households.
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
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- Greediness of Mortgage Lendersexplanatory essay(1) Mortgage loans are a substantial form of revenue for the financial industry. Mortgage loans generate billions of dollars in the financial industry. It is no secret that companies have the ability to make a lot of money by offering a variety of mortgage loan products. The problem was not mortgage loans but that mortgage companies were using unethical behavior to get consumer mortgage loans approved. Unfortunately, the Countrywide Financial case was not an isolated case.
In this essay, the author
- Explains that the department of labor's decision to rule in eileen foster’s favor was an accurate decision. the facts in the case of countrywide financial support her claims.
- Explains that mortgage loans are a substantial form of revenue for the financial industry. the countrywide financial case was not an isolated case; many top name mortgage companies have been guilty of unethical behavior.
- Explains that subprime loans are ethical but misused in a way that created ethical issues.
- Explains that countrywide financial's downfall was a result of its unethical practices — subprime loans are priced higher due to the risk of the borrower.
666 wordsRead More - Sub-Prime Mortgages and the Death of the American Dreamexplanatory essaySub-Prime Mortgage: The Snowball Effect Intermediate Macroeconomics Sub-prime mortgages were a lucrative new market idea, pushed by the government, executed by the lending institutions, in order to provide everyone the American Dream. During the expanding economy, this dream became a reality—untested and unchecked—as low interest rates fueled the desire of investors to make dreams come true! Ultimately, the vicissitudes of the economy turned downward and the snowball effect began while financial sectors and investors scrambled to catch the falling knife. While history is being written this very day and hindsight is 20/20, we can reflect on the ideologies and policies that brought forth the worst economic downturn since the Great Depression.
In this essay, the author
- Explains that sub-prime mortgages were a lucrative new market idea, pushed by the government, executed by lending institutions, in order to provide everyone the american dream.
- Explains that the sub-prime mortgage market was profitable because of low interest rates, low unemployment, and high demand for housing. the market assumed an annual foreclosure rate of 8% with the average loss being 30%.
- Explains how the sub-prime market was flooded with capital, fueled by a spike in foreclosures, and increased supply, which drove down the values of homes.
- Explains that the sub-prime mess was only a symptom of the global problems yet to come as investors from all around the world were buying up these securities. rating agencies worked closely with investors to ensure these mortgages and bonds were receiving "aaa" rates.
- Explains that americans now have less discretionary assets than they did before, and credit tightened as interest rates went up and originators and the second mortgage industry had trouble selling off these liabilities.
- Explains that the global economy is spiraling downward into a recession, with the credit markets frozen, everyone is being forced to sell securities to raise capital in order to meet obligations.
- Opines that there are many uncertainties as to what is in store for our economy. the government passed a $700 billion bailout package for the lending institutions.
- Opines that an expansionary fiscal policy will funnel money into the economy, but will it change the 21st century’s mindset which has enjoyed vast spending towards a propensity to save?
- Cites petroff, eric, and amerman, daniel. the subprime crisis is just beginning.
1574 wordsRead More - The Housing Boomexplanatory essayWhenever 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...
In this essay, the author
- Explains that during the housing boom, banks were supplying subprime loans and upping the risk in the real estate market. these loans were risky and irresponsible.
- Explains how the real estate market and mortgages banks issue is an investment. prime borrowers were able to borrow money at a stable, fairly low interest rate.
- Explains that the banks' lending these subprime loans knew the risk that went along with each loan and each borrower. they packaged loans up and sold them to large investment firms as mortgage backed securities.
- Opines that the housing crisis shows that everyone takes a risk when it comes to investing and everyone may pay the consequences of risking too much.
- Explains that the 600 billion dollar subprime loan market crashed, and the risk banks took by lending these loans did not pay off.
674 wordsRead More - In order to solve the problems that America faces, a brief overview of their origin is necessary. Misplaced confidence in the continuous bright future of home prices and the attempts of lenders to profit in every way possible were major causes of the current crisis. Lenders often made mortgage contracts with little consideration for the ability of the recipient to repay. They were able to do this with little risk for themselves because these loans were bundled and sold off to investors. Furthermore, the demand for loans with more flexible standards was tolerated by the lenders because the lenders believed, just as those demanding the loans did, that the increase in home prices had no foreseeable end (Shiller 50). Many people saw an opportunity to make money off of subprime and adjustable-rate mortgages, and the fantasy of endless price increases overcame reasonable judgment.
In this essay, the author
- Opines that the united states government must take decisive action to give those with impending foreclosures the ability to keep their homes.
- Explains that misplaced confidence in the bright future of home prices and the attempts of lenders to profit in every way were major causes of the current crisis.
- Analyzes how a national goal of increased home ownership augmented these causes, encouraging financial institutions to make irrational loans and encouraging people to purchase homes they could not afford.
- Opines that the next step in finding a solution is defining what an effective solution ought to accomplish. government must institute new policies that prevent unsustainable housing bubbles from arising in the future.
- Opines that home ownership is a good concept with numerous benefits, but it is not financially wise for every household. this situation is an opportunity for real reform in the housing market.
- Explains that bailouts are short-term fixes that bring many problems of their own and should be used only to prevent the collapse of the entire economic system.
- Argues that government should take well-planned and efficient action to prevent bailouts as short-term fixes.
- Opines that improved financial advice should go hand-in-hand with a better financial information infrastructure. dr. robert shiller suggests many of these reforms in his book the subprime solution.
- Argues that government action to prevent collapse of essential institutions will help restore confidence, and reducing the risks taken by lenders with stricter regulations. real estate agents and financial planners would better help all members of society when paid by hourly fees.
- Explains inflation indexing, home-price futures, continuous-workout mortgages and home equity insurance.
- Opines that these innovations will stabilize home markets and give homeowners ability and incentive to avoid foreclosure. these policies would provide consumers with a drastically improved understanding of mortgages and the risks involved with them.
1840 wordsRead More - Solving the Foreclosure Crisis: Renting to Re-Own as an Option for Homeowners and Lendersanalytical essayAccording to the Bureau of Labor Statistics (2009), more than 2.3 million homeowners faced foreclosure proceedings in 2008. This was a marked increase of 81% over the previous year. During the same time, unemployment rates skyrocketed. From December 2007 through February, 2009, more than 3.5 million payroll employees lost their jobs (Bureau of Labor Statistics, 2009). Increases in unemployment ultimately lead to increases in credit defaults and foreclosures, as borrowers become unable to financially afford payments. In fact, even though predatory lending practices have been repeatedly blamed, borrowe...
In this essay, the author
- Explains that 2.3 million homeowners faced foreclosure proceedings in 2008, a marked increase of 81% over the previous year. increases in unemployment lead to increases in credit defaults and foreclosures.
- Opines that the foreclosure crisis does not appear to be substantially improving yet. government-backed initiatives have provided brief respite for most homeowners facing foreclosure, but there is considerable room for improvement.
- Summarizes quercia, ding, and ratcliffe's research on loan modifications and redefault risk.
- Analyzes how the obama administration has proposed several government-backed programs to help homeowners stay in their homes, and private lenders have tried various approaches to stabilize the economic situation.
- Explains that foreclosure can lead to loss of self-esteem, emotional distress, and poor credit. abandoned properties attract crime and vandalism, which affects community appearances and lowers the value of surrounding properties.
- Explains that the bush administration recognized a dire need to address the problem of borrower insolvency and massive mortgage defaults.
- Explains fannie may's "deed for lease" program, which allows qualified homeowners to rent their properties back from lenders for a period of 12 months following foreclosure.
2115 wordsRead More - 4. "Why Subprime Lenders Are In Trouble." BusinessWeek - Business News, Stock Market & Financial Advice. Web. 29 Dec. 2009. .
In this essay, the author
- Opines that the long-term solution to the housing crisis has nothing to do with housing.
- Argues that the foreclosure crisis calls for a drastic solution because the problem has two specific deep roots.
- Argues that foreclosing is a lose-lose situation, as the owner cannot increase monthly payments due to the economic crisis.
- Opines that barack obama wants jobs to stay in america, but his current plan is not efficient enough to keep companies here.
- Argues that renewable energy is the necessity of the future and could drastically reduce unemployment. obama could forgo taxing these up and coming companies until it becomes more economical for them to stay in the u.s.
- Concludes that the foreclosure crisis is not rooted in housing, but in a broken american economic system. more jobs will come by providing more incentives for companies to stay domestic.
- Argues that banks should partner with owners for a brighter future for both banks and owners. the short-term solution to the housing crisis is not to delay foreclosure, but to completely redo the economic system.
- Analyzes how bill clinton's drive to increase homeownership went way too far — businessweek, the wall street journal, wsj.com, and the white house.
1596 wordsRead More - The American Foreclosure Crisisopinion essayForeclosure is a dreadful aspect of home-owning. The American foreclosure crisis, and its subsequent economic recession, was caused by lateral misguidance on part of private banks, the federal government, and by the millions of people who purchased their homes on credit. Over 900,000 foreclosures have occurred in California alone, making its foreclosure rate the largest and most formidable; as a result of the housing downturn, private banks like JP Morgan and Wells Fargo succumbed to bankruptcy, as the toxic assets they possessed lie curdled and menacing. Stocks tumbled as confidence in our financial system crashed; millions of people lost their jobs in the course of one petrifying year. The lending process was halted, effectively stalling the crediting and lending system that has shaped American consumerism habits since the 1950s.
In this essay, the author
- Explains that the american foreclosure crisis and its subsequent economic recession was caused by lateral misguidance on part of private banks, the federal government, and millions of people who purchased their homes on credit.
- Opines that the process that led to the foreclosure crisis, the sickly details of the economic crash, and the terms of our recovery have been mulled over repeatedly.
- Proposes a solution for the consumer finance protection agency (cfpa), which would be separate from the u.s. chamber of commerce.
- Explains that the federal government will require every bank to include a consumer intelligence certification (c.i.
- Argues that a one-time course created by the cfpa outlines the language of mortgage lending, different loan types, the nature of interest rates and the economic market, as well as the full, arduous process of foreclosure.
- Explains that a c.i. cert is required to take out mortgage loans, which is equivalent to applying for vehicle registration with the dmv.
- Opines that requiring a mortgage-lending course and consumer intelligence certification for all consumers would have two positive effects upon the foreclosure crisis.
- Opines that a c.i. cert will make the mortgage lending process more complex, longer, and take more patience from the consumer and the banks.
- Explains that mandatory classes have been a tactic to ensure the safety of our society. a certification like this ties perfectly with the philosophy of the cfpa, and barack obama himself.
- Explains that the bush administration committed $59,900,000,000 to the bailout of fannie mae and freddie mac in order to "provide needed housing reform"
- Explains that fannie and freddie were fully absolved into the federal government, and their debt has yet to be repaid. the second part of their plan outlines a novel form of repayment to our government.
- Explains that citigroup received 45.7% of the bank industry bailout money, and still owes $25,000,000,000. private banks like this one, along with specialized mortgage lending companies, possessed the largest amount of toxic assets and are the greatest source of increasing foreclosure rates.
- Explains that the government's foreclosure ceiling is a government-mandated limit on foreclosure rates. if citigroup keeps its foreclosure rate below this ceiling, it will be counted toward its repayment and remove 5% of its debt per year.
- Explains that citigroup's debt can be repaid in approximately 20 years, in addition to the interest on its remaining balance per year.
- Explains that citigroup will not be paying the federal government exclusively through dividends, but through the value to the market. if a plan like this was instated, it would effectively end the foreclosure crisis.
- Explains that citigroup is noted for its cooperation with consumers regarding foreclosure, making it an exception in its field. a ceiling program would increase the compatibility of banks with their customers.
- Opines that the second plan is both probable and calculable. it renders responsibility to the consumer, banks, and the federal government, while paving a constructive path towards ending foreclosure.
- Opines that president obama and the united states senate could evolve this two-part plan into legislation to solve the foreclosure crisis. every american citizen deserves a future that encourages smart consumerism, vertical benefits within our economic structure, and lucid loaning processes.
2312 wordsRead More - Financial Crisis Essayopinion essayBy 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. Pooling mortgages was designed to reduce the risk of an single individual defaulting on their mortgage. A majority of people were able to pay their mortgages back, only a small percentage would default, making pooled mortgages a profitable investment. Mortgages can only be pooled if their risks are interpreted as uncorrelated. Big banks claimed that the United States housing market is uncorrelated and housing values would fluctuate independent one another in different housing markets. Large banks went onto sell pooled mortgage debts to inve...
In this essay, the author
- Explains that the 2008 financial crisis started long before the market crash of 2008.
- Explains that by lending mortgages to "subprime buyers," banks created a potentially huge problem if homeowners started defaulting on their mortgage.
- Explains that market consistency encourages investors to make risky higher yielding decisions in the long run, but if interest rates are low and unstable, investors will invest in long-term stable investments.
- Analyzes how the federal reserve's lax enforcement of laws and regulations on banks impacted banks' ability to make risky decisions.
- Explains that the 2008 financial crisis was caused by a series of failures by the government regulate united states financial institutions.
- Opines that the federal reserve should have bailed out lehman brothers before other banks would become subject to the same fate.
- Opines that the federal reserve's lax regulations were one of the biggest mistakes leading up to the 2008 market crash.
1076 wordsRead More - Subprime Crisis Essayexplanatory essayWhat Is Subprime Crisis Subprime crisis, also regularly known as the mortgage meltdown is a financial crisis that occurred between the years 2008 to 2009. It is a result of excessive borrowing to numerous homebuyers who have poor credit scores. This act of lending is called subprime lending. During this period, loads of homebuyers defaulted on their monthly payments as their interest rates increased with time. With that, there was a sharp upsurge in mortgage foreclosures.
In this essay, the author
- Explains that the subprime crisis, also known as the mortgage meltdown, was caused by excessive borrowing to numerous homebuyers who had poor credit scores.
- Explains that subprime lending is targeted at borrowers who don't meet the criteria or cannot afford the normal prime loans. these loans come with higher interest rates and are considered to have higher risks.
- Explains that the subprime crisis broke out when the housing bubble burst without parties realizing the possible occurrence of it.
- Explains that low interest rates kept monthly mortgage payments affordable for borrowers even when the housing price increases. subprime loans such as adjustable rate mortgages and interest only mortgages made it easier for the poor to buy houses.
- Explains that mortgage lenders/banks created mortgages from fixed deposits but it limited the funds that they could lend to the borrowers. they created investment products such as collateral debt obligation (cdo) and mortgage backed security (mbs).
- Explains that the community reinvestment act, which encourages financial institutions to meet the needs of communities, enforces the banks to extend their mortgage lending to lower income families.
- Explains the federal reserve's role in the subprime crisis.
1432 wordsRead More - Causes for the 2007 Recessionanalytical essayBased on this case study, it is clear that a plethora of reasons surrounding the U.S housing market led to the financial crisis, and consequently, the Great Recession of 2007. Most notable among the factors were subprime mortgage lending by mortgage lenders, poor risk management and investment choices by financial institutions and banks, and the ancillary agencies that were ready to transfer credit risk to other parties in order to make the most profit for themselves.
In this essay, the author
- Explains that the trend of lax mortgage processes and risky loan applications caused house prices to shoot up to an all-time high by the year 2006. the danger of adjustable rate mortgages became obvious to buyers when their teaser period expired.
- Explains that more and more houses ending up in foreclosure led to huge losses for the financial institutions, with recovery rates as low as 25% of the amount.
- Explains the concept of asset-backed securities, which became rampant during the housing bubble.
- Explains that the great recession was attributed to the burst of the u.s. housing bubble and the subprime mortgage crisis.
- Analyzes how lax standards on the part of lending organizations led to the financial crisis and the great recession.
1027 wordsRead More