Ethical Problems in Subprime Mortgage Crisis - Essay Example

According to USA Today, US $300 billion in subprime Adjustible Rate Mortgages (ARMs) will reset before the end of the year to higher interest rates. This means higher interest payments and a harder time for refinancing by the borrowers. Many middle-class Americans have been hit the hardest in the subprime crisis and these homeowners have already prepared and submitted their foreclosure filings. The main issue on the subprime mortgage crisis is the lack of transparency and accountability in the conduct of the financial transactions from the lender to the borrowers.

Transparency and accountability helps speed up business transactions and assures the continued growth and profitability of the mortgage housing sector. The lack of transparency and accountability had distorted the decision-making process for granting the loans, weakened the banking and finance system and allied industries and eroded public confidernce in the subprime lending sector. First, the international credit rating agencies gave investment-grade ratings to the securitization transactions holding the subprime mortgages.

This consistent high ratings misled the corporate and individual investors and large banks to invest heavily in subprime stocks since the ratings did not reflect the high default rates and foreclosures which were beginning to show in this sector. This is highly unethical since many international banks were duped into investing in housing stocks which did not reflect real market values or in some cases were actually worthless. Second, the mortgage brokers failed to be transparent enough to determine if the prospective borrowers really had the capacity to pay the debt.

They were more concerned about earning their financial commissions from the sales of homes. This is unethical since they were giving a resource (asset) to persons who cannot afford it. There is a need to link their compensation to the financial performance of their respective loan accounts. Third, the mortgage lenders did not follow the lending process of determining the credit history, the capacity to pay and the collateral of the borrowers. They did not also explain about the mortgage products they offered and marketed to consumers.

There was lax controls regarding the supporting financial documents and inappropriate mortgage incentives such as buydowns and short fixed term adjustable mortgages. This is highly unethical since a business must strive to give a high consumer satisfaction to its clients and explain the nature of its service to consumers. Many middle-class consumers lost their savings and money when they were hit by housing foreclosures. This phenomenon is also unfair to them since the complete details of the mortgage service had not been adequately explained to them.

Moreover, they did not clearly, honestly, and accurately represent the mortgage products and its rising adjustable rate mortgages. They did not delivers the mortgage service as represented to the consumers. Fourth, the borrowers did not reveal their real capacity to pay, employment history, health issues and their respective credit history. They were just happy to take on mortgages without doing an extensive financial planning on their possible income from their future earnings that they will channel to housing loan payments.

In sum, the mortgage industry did not meet its obligations under corporate social responsibility. The recommended alternatives to these unethical practices are two-pronged. Force the banks to be transparent and accountable in their transactions by requiring them to report regularly to the Federal Reserve Board. The second alternative is to put up a privately run consumer rating agency that is focused on housing loans. In this way, the mortgage lenders and bankers can verify and check the capacity to pay of a prospective borrower.

The mortgage banks can also veer away from consumers with poor credit history. Conclusions The subprime crisis has two conclusions. One, transparency and accountability is important at all times in any business. Any violations to these ethical principles will lead to a financial disaster as proven by the subprime crisis. Second, honesty is important in all financial transactions. Banks, mortgage brokers and borrowers must be honest in their financial dealings with each other.