Subprime Loans Case Study

1171 Words3 Pages

Interpret Ethical Issues with Subprime Loans
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

Open Document