Discussion of ethics is intensified as far as subprime mortgage breakdown is concerned. The major objective of the Wall Street bankers was to gain as much profit as possible, holding no responsibility for the outcomes, as well as for the stakeholders involved into the credit crisis. According to Hirsch and Morris (2010), aside from financial and economic challenges faced by both investors, bankers, and borrowers, ethics issues related to the case have also come to the forth. The fact that credit procedures involved a great number of risks and failures was undeniable. However, subprime mortgage brokers’ actions were mainly guided by self-interest and greed rather than by a desire to provide people fair credits. With regard to this, Jeffers and Mogielnicki (2010) suggest that a three tiered structure consisted of senior, junior and equity grade levels was created to offer mortgage with no income checking and down payment. As a result, no system required subprime mortgage brokers to verify information on the applicants. Hence, brokers were not confined to control and restriction and their actions were primarily based on gaining higher percentage rates, with no moral and ethical obligations.
Another ethical problem concerns the influence of selling collateralized debt obligations on the stock market. Jeffers and Mogielnicki (2010) state that isolation of ethical choice was due to activities of the rating agencies whose role was “to add credibility to the available information and determine its sufficiency” (p. 160). Many bankers and investors took advantage of this information to sell obligations to individuals who were not aware of all risks. The stock market lost significant share of value, which led to the financial crisis.
Evaluating the Effects of Incentives on Lenders
The lenders providing different types of loan products were sure that they were fully insured in terms of risks because subprime borrowers had to provide payment with higher interest rates. In case the borrowers are not able to pay the loan, the lenders can either foreclose or repossess the loan by selling the property. As a result, different types of mortgages – from prime to subprime – could provide lenders with high profits and protect them from financial losses. In addition, lenders providing credit to subprime category of borrowers enjoyed tax incentives from the government (Hill & Kozup, 2007). In reality, lenders were not able to predict that foreclosing rates could influence decrease in price for the real estate, which was another effect of lenders’ incentives.
The Role and Place of Subprime Mortgages
The period between 2004 and 2007 was marked by the spread of loan papers to all borrowers irrespective of their credit history. Lenders failed to consider their ability to repay after the initially established rates went upward. Instead, they could have based those on the introductory rates and allow the borrowers reimburse all money borrowed by the creditors (Gerardi et al., 2008). The changed scenario, therefore, could provide the Wall Street bankers with higher opportunities to continue their subprime mortgage campaign. First, in order to understand how benefits can be obtained from subprime mortgages, it is necessary to make sense of the previous experience. In particular, the focus should be made on home price expectations, which, according to investors, should have had larger rates (Gerardi et al., 2008, p. 70). Second, the subprime mortgage can play significant role in developing and advancing economies if certain limits were imposed on interest rates and borrowers. At this point, restrictions should be specifically connected with the interest rates on residential mortgage loans, commissions to the third parties, verifications procedures, and increased rates in later periods of repayment (Jennings, 2008, p. 459). Overall, making sense of the subprime mortgage can contribute to building consistent economic and financial frameworks in the field of business and finance. In addition, it can also promote new codes of ethics that would protect consumers’ rights.
Systemic Effects of Subprime Market on Stakeholders
Because subprime mortgage crisis had a direct impact on banks rather than on markets, financial market regulation faced a serious systemic risk. While analyzing the relationship between lenders and borrowers, attention should also be placed to other stakeholders taking part in credit distribution. This is of particular concern to subprime mortgage brokers and investors who were also under the direct influence of conducted operations. Hence, brokers were hired to search for applicants who wanted to get a credit for the property whereas investors were buying mortgage securities of different risk levels. When number of subprime borrowers significantly decreased, lenders were attempting to sell high-risk assets to other financial institutions that, in their turn, suffered from default. Mortgage brokers experienced failure as well because they could not find potential borrowers. However, subprime mortgage had a greater impact on investors that also included foreign countries, such as China (Griffin, 2010). As a result, foreign economies were also put under the threat of financial disaster. Because financial institutions went to bankruptcy, as well as the banking system, the entire financial system faced a serious economic crisis.
References
Gerardi, K., Lehnert, A., Sherlund, S. M., & Willen, P. (2008). Making Sense of the Subprime Crisis. Brookings Papers on Economic Activity, (2), 69-145.
Griffin, E. L. (2010). Schemes and Dreams: Dealing With the Economic Crisis and Cultural Condition in the United States. Review of Human Factor Studies, 16(1), 63-86.
Hill, R., & Kozup, J. C. (2007). Consumer Experiences with Predatory Lending Practices. Journal Of Consumer Affairs, 41(1), 29-46.
Hirsch, P., & Morris, M.-H. (2010). Immoral but not illegal: Monies vs mores amid the mortgage meltdown. Strategic Organization, 8(1), 69-74.
Jeffers, A.E., & Mogielnicki, M. S. (2010). The Line between Illegality & Unethical Behavior in the Goldman Sachs Subprime Mortgage Securities Case. International Journal of Business Research, 10(4), 159-170.
Jennings, M. M. (2008). Business Ethics: Case Studies and Selected Readings. UK: Cengage Learning.