Subprime Mortgaging
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The United States of America is currently involved in what is called the “subprime mortgage crisis.” During the years of 2006-2007 the price of real estate began to drop at a steady rate making it difficult for the average person to refinance. This in turn caused the global financial catastrophe that we are in now. The mortgage company is a disarray and too many innocent families are being forced into a foreclosure fiasco because of it. Just two years ago there were only two ways to get a home loan: a fixed rate, or a basic adjustable rate mortgage. It is now estimated that there are 200 different types of loans. This paper will explore, identify, and discuss the ethical issues surrounding the subprime mortgage crisis.
The main problem with subprime mortgages is that most average people do not understand the terminology involved with it, therefore causing them to fall into a disaster that they did not see coming. The subprime mortgaging crisis has brought about many ethical issues. These four main ethical issues involve: 1) the mortgage companies, banks, and other financial institutions over the mortgage products they offered and marketed to consumers, 2) the mortgage brokers who arranged mortgage loans for home buyers, 3) institutions and individuals that invested in sub-prime mortgage backed investments and finally perhaps the most hurt throughout the crisis, 4) the home buyers and home owners who signed up for these mortgages.
The mortgage companies, banks and other financial institutions are possibly most at fault for this disaster. They were basically giving mortgages out to borrowers who they knew would eventually be unable to make the payments in the long run. The banks began to use a strategy involving “teaser” rates, within adjustable rate mortgages. A “teaser” is a special low rate that would last for the first year or two of a mortgage and then skyrocket in three, five or seven years. This can be seen as unethical because many homeowners were lured into this trap, without being informed of all the details. Most people would just go along with the rate that the broker was offering because they made it sound so simple and easy, while intentionally skipping over explaining to the homeowner that their initial rate would eventually rise to another rate in a matter of years. Some might argue that marketing the subprime mortgages in this manner can be seen as fraudulent because, they are in actuality misrepresenting the product to the buyers, or just plain lying (Barnes 2).
In the article “The Fall of a Fund Whiz” Mollenkamp and McDonald explain how 61 year old Mr. Rodriguez fell into this trap. Mr. Rodriguez already had a low credit score so this means it is already difficult for him to obtain a prime loan. The mortgage broker offered him an ARM (adjustable rate mortgage) with an introductory rate of 6.3%; little did he know that the ARM he was applying for would only last for two years and then increase to 12.3%, a rate he would not be able to afford. The broker knew by looking at Mr. Rodriguez’s credit history and occupation that this decision would ultimately cause him more harm than good but nonetheless advised him to go this route anyway (McDonald, Mollencamp 1-4)
The mortgage brokers can also be accused of taking part in “predatory lending” which is mainly taking advantage of easy targets.