Subprime Loans: The Under-the-Radar Loans that Felled a Market
Ethics In Business Dr. Jennifer Scott Abstract The problem to be investigated is the ethical challenges that became apparent for lenders and borrowers as a result of the rapid growth of the subprime loan market. Between 1994 and 2004, the subprime mortgage market experienced a growth from $34 billion to $401 billion (Jennings, 2012, p. 434). During the late 2000s, the U.S. subprime mortgage market then entered a financial crisis period due to a large number of record mortgage delinquencies and home foreclosures which also resulted in the subsequent collapse of mortgage-based securities and collateralized debt obligations (CDO’s). This paper will attempt to examine the impact of the subprime mortgage crisis and its effect on society and also will discuss the roles comprising those of the government and corporations. Additionally, this paper will also offer suggestions on responsible behavior to prevent such a recurrence. The Global Impact of the Subprime Mortgage Crisis The impact of the subprime mortgage crisis that occurred in the late 2000’s was felt worldwide, mostly because many financial markets are linked in one form or another on a global scale. One of the biggest casualties from this period was the United States, although other countries such as Germany, Switzerland, and Scotland (to name a few), also had companies based in their countries reporting significant losses as a result (Paulson, 2010). Overall, the entire crisis impacted society as a whole as major companies either collapsed and or were on the brink of collapsing and hundreds, if not thousands of individuals, lost their jobs, homes, or both. Regardless of what an individual’s role was in society during this time, the impact was felt by many and confidence in corporations and government suffered a heavy blow.
Implications of Ethical and Social standards in Government For most of the subprime mortgage crisis, the U.S. government contributed greatly to its recovery and fall. Beginning during the late 1980 the process of deregulation allowed many of the companies in the financial services industry to become more liberalized. This action allowed Banks to expand and offer more services such as brokerage and securities lending where they had previously not been allowed to do and lobbyists also began to influence legislators to relax current lending laws (Paulson, 2010). Mortgages that were prepared were often comprehensive and sophisticated in their language resulting in individuals not being able to truly comprehend what they were signing, including those that were financially experienced. Mortgage applications also contained basic loan application information that was verified very little and applicants possessed credit scores of such low ratings that they should never have qualified for mortgages. Other companies that contributed to the crisis included two organizations that were sponsored by the government and chartered by Congress, Freddie Mac and Fannie Mae. Not only were these organizations complacent, but it was later determined that they were ignoring the rampant corruption that was evident in the mortgage and housing industries and even had created policies that seemed to encourage mortgage lending practices that should have been deemed inappropriate. As a result of these types of practices, both Freddie Mac and Fannie Mae were left retaining rights to bad mortgages that were written by many banks, thrifts, credit unions and other financial service companies under standards that were highly unethical....
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