...Subprime Lending Discuss in detail the event, the people involved, and its background and impact of America. Before 1930, features of Housing loans presented significant challenges. To obtain a home loan a down payment of half the value the house was required. Further issues with these loans were large balloon payments and short maturities. The pricing for mortgage loans varied widely due to no nationwide housing market. The main funding for these loans was provided by life insurers, thrifts, and commercial banks. By 1932, a housing crisis was wreaking havoc on home loans. The estimated defaulted loans were rising to twenty –five percent. In response to this crisis, the FHL Bank System was designed to provide relief to lending institutions and homeowners. In 1933, President Roosevelt birthed two Acts regarding the housing market. The first was the Home Owners Loan Act. This act established the HOLC, which was designed to slow down the quickly rising foreclosure rate. Under this act, long-term self-amortizing fixed rate mortgages became the new norm. The second act in the New Deal was the National Housing Act. The FHA was created in this act. This protective measurement was used to help the lenders maintain foreclosed homes by adding automatic insurance payments to active loans. The FHA also expanded the use of a fixed rate long-term home loan. In 1938, the American government formed Fanny Mae to provide a secondary market for home mortgages. This secondary market gave...
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...Unit VII Case Study Columbia Southern University Citigroup and Subprime Lending 1. Are there moral concerns associated with subprime lending? Are those moral concerns based on utilitarianism, rights, or justice considerations? Sub-prime lending is a process of giving loans to those who otherwise would not qualify for conditional loan because of poor credit history. There is high risk involved in such loans and therefore, it is offered at high interest rates. It is risky both for the lender and the borrower. There's certainly a private responsibility with regards to a person taking on commitments that will require repaying money borrowed from a person or from an institution. A significant requirement for the borrowers’ part to understand what he or she is getting into to. However, sub-prime lending does have moral concerns. The borrowers are not qualified for regular loans, but they may need it. They are ready to take loans at higher interest rate because they need it and sub-prime lending seems to be a better option to them. The mortgage crisis in the United States was viewed as having good intended utilitarian motives by the corporate world and public policy makers to provide mortgage loans to at risk customers. Utilitarianism is defined by Velasquez (2006) as that initiative that place goodwill the behalf as many people possible. It does well to both lender and the borrower and consequently...
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...HSBC’s Mortgage Lending Decisions and the Big Melt It isn’t often that the American financial system, and its world counterpart, has a near- death experience. The last time was the 1930s. Beginning in 2007 and extending through 2009, American and global financial systems failed, melted down, and were rescued only by concerted central bank interventions in all the major industrial countries. The United States directly invested about 1 trillion dollars in U. S. financial institutions, and guaran-teed an estimated $ 14 trillion dollars in private debt. The complete history of this period has not been written. Many causes, involving many different actors, have been identified. Some have likened the big melt to a “ perfect storm” where a number of storm systems just happened to combine to form a much larger, lethal storm. But one cause was the failure of decision- making models, both the model builders and the financial man-agers who relied on those models. One of the major players in this crisis was HSBC Holdings PLC, the third largest bank in the world based on market value, and the largest bank in Europe. In the financial meltdown of 2008— 2009, HSBC joined the other major money center banks in a collective failure. HSBC weathered the turmoil in the financial markets better than most of its rivals, mainly because it had profited from continuing growth in Asia, where it generates about 65 percent of its pretax profit. But the company’s stock prices have fallen by half from their...
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...Subprime Special The term "subprime" refers to the credit status of the borrower, which is being less than ideal. Subprime lending is a general term that refers to the practice of making loans to borrowers who do not qualify for the best market interest rates because of their deficient credit history. According to the U.S. Department of Treasury guidelines issued in 2001, "Subprime borrowers typically have weakened credit histories that include payment delinquencies, and possibly more severe problems such as charge-offs, judgments, and bankruptcies. They may also display reduced repayment capacity as measured by credit scores, debt-to-income ratios, or other criteria that may encompass borrowers with incomplete credit histories." Subprime lending is also called B-Paper, near-prime, or second chance lending. Subprime lending encompasses a variety of credit instruments, including subprime mortgages, subprime car loans, and subprime credit cards, among others. A subprime loan is offered at a rate higher than A-paper loans due to the increased risk. Subprime lending crisis, which began in the United States has become a financial contagion and has led to a restriction on the availability of credit in world financial markets. Hundreds of thousands of borrowers have been forced to default and several major subprime lenders have filed for bankruptcy. Types of subprime lending Subprime mortgages Subprime mortgage loans are riskier loans in that they are made to...
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...Giant Pool of Money Analysis The awful subprime lending crisis is truly one of the most convoluted, wreaking messes conjured by the financial industries in the 20th century. There are so many layers of bad choices and megalomaniacal errors intertwined into this ugly event that picking out just two biases/heuristics to analyze and discuss will surely fail from being a complete analysis. Nonetheless, this is a the task at hand and, though we will not but scratch the surface of this behemoth, teasing out a couple biases will make for a viable illustration and application of the concepts and issues we have discussed thus far in class. The bias that caused the most havoc in this lending crisis scenario was articulated beautifully by Bazarman and Moore as The Confirmation Trap. The Confirmation Trap boils down to whether or not a person merely searches for data that supports the decision they wish to make rather than looking for proper, empirical data to prove the assumption correct. In other words, does a person looking to make a decision actually look to prove their assumption incorrect. Sadly, at nearly every stage and at every level of the subprime lending fiasco there is evidence that all the players fell victim to The Confirmation Trap. Wason writes, “ . . . that obtaining the correct solution necessitates a willingness to attempt to falsify hypotheses, and thus to test those intuitive ideas which so often carry the feeling of certitude.” None of the characters in our...
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...Bank of Cleveland. The city's only bank at the time opened its doors to the public at No. 52 Superior Street. The company operated through an extensive banking network primarily in Ohio, Illinois, Indiana, Kentucky, Michigan, Missouri, Pennsylvania, Florida, and Wisconsin, and also served customers in selected markets nationally. Its core businesses included commercial and retail banking, mortgage financing and servicing, consumer finance, and asset management. The bank reached out to customers primarily through mass advertising and offered comprehensive banking services online. In the late 1990's National City began a strategy to increase the yields on it assets. In 1999, the company purchased First Franklin Financial Corp., a large subprime mortgage lender. Instead of selling the loans, as most mortgage companies do, National City retained many of the loans to enhance its net interest spreads. It also aggressively originated loans brought to the company by third-party mortgage brokers, as well as originating a large number of home equity loans. The amount of residential mortgage loans grew rapidly and came to exceed the level of commercial loans. It was once one of the ten largest banks in America in terms of deposits, mortgages and home...
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...Printer Version - Board of Governors of the Federal Reserve System http://www.federalreserve.gov/newsevents/speech/bernanke2008041... 1 of 6 4/26/2008 8:02 PM Speech Chairman Ben S. Bernanke At the World Affairs Council of Greater Richmond's Virginia Global Ambassador Award Luncheon, Richmond, Virginia April 10, 2008 Addressing Weaknesses in the Global Financial Markets: The Report of the President's Working Group on Financial Markets In recent months, the Federal Reserve has been intensely focused on the continuing strains in financial markets. Healthy, well-functioning financial markets are essential to sustainable growth. In particular, much experience shows that economies cannot perform at their full potential when financial conditions are such as to restrict the supply of credit to sound borrowers. We are addressing these financial strains and their potential economic consequences with a number of tools, including the provision of extra liquidity to the system and reductions in our target for the federal funds rate. Even as we have worked to resolve the current crisis, however, the Federal Reserve has also been part of a national and international effort to draw at least some preliminary conclusions about the sources of the current turmoil as well as the implications for public policy. In my remarks today I will discuss some of these conclusions and, in the process, identify some measures that should be taken to strengthen the global financial system in...
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...Capital One 1 Running head: CAPITAL ONE Capital One: The American Credit Card Company’s Growth Strategies Alicia Holden BUS499 Capital One 2 1. Identify and describe the key environmental forces that have immediate strategic implications for Capital One. There are many key environmental forces that have an immediate strategic implication for Capital One. First, the credit card industry has reached a high level of competition. This is a period of mergers and consolidations. Some institutes are selling off their credit card portfolio, others merging operations you might say that the industry is undergoing a period of flux. Secondly, the rise of personal bankruptcies has a direct barring on the credit card portfolio of Capital One. Thirdly, the economy; when the economy is in recession many things have a direct bearing on Capital One. Employees lose their jobs and fall behind on their credit card payments, this directly affects cash flow. Credit card holders may file for bankruptcy thus resulting in a bad loan discharge or times are just hard and are late paying their credit card payments. Capital One also faces a potential risk from its practice of funding from securitization. Capital One had to shift away from sub prime loans to a larger portion of prime loans as a result of federal regulations and many...
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...Findings At this point it would be very difficult to approve a loan of $100,000 to Ajax Electronics. Borrowing money to meet cash flow needs demonstrates that cash generated from operating activities is not generating sufficient working capital. There are several issues affecting this company¶s cash flow that need to be addressed immediately. There are several suggestions that can be made to Mr. Roberts to begin improving his company¶s cash flow situation and lower risk. Shorten Account Receivable Turnover ± this company is taking way too long to collect on outstanding receivables. The company currently has $23,000 in receivables already exceeding the industry average for collection. They should put more effort into collecting on old receivables and possibly changing their credit policy to a net 30. This would provide an immediate influx of cash needed. Shorten the production cycle ± currently Mr. Roberts has to modify each unit during production for each customer. This creates a bottle neck in production causing the average unit manufacture time to be greater than 3 months. Consider training other employees to make these engineering modifications allowing a faster output rate for each unit. Improve inventory management ± continue to work on the inventory system to tweak it for maximum efficiency. Cut current inventory to levels needed to meet sales forecasts without maintain all the excess. Consider selling some excess inventory that surpasses what you would...
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...Business Research Ethics Res/351 Ben Millard Daliah Adams January 23, 2012 The business I researched was Countrywide Financial, the long time biggest sub-prime mortgage lender who saw their demise in the midst of its shareholders voting the company out of existence. Countrywide faced business practices prosecution in June of 2008 ranging from deceitful conduct, very lax standards that were provided to the sub-prime borrowers, misleading marketing to sell mortgages that had hidden fees as a way to dominate the home loans industry. A lawsuit was brought against Countrywide that they used unfair and deceptive practices to steer borrowers into loans that were inevitably going to fail. A public prosecutor represented thousands of people in the Chicago area that were going to lose their homes. Approximately 35% of Countrywide’s home loans were in default. Countrywide was accused of knowingly putting borrowers in homes they could not afford by exaggerating their income and finances. Countrywide was reportedly responsible for overcharging more than 450,000 homeowners, it is also stated that they harmed American consumers on a massive scale. The company collected excessive fees from borrowers who were struggling to maintain their homes. According to the FTC, homeowners who were in default on their loans were charged excessive fees for services such as property inspections, lawn mowing, and other services meant to protect the lender’s interest in the property. Rather than simply...
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...and Subprime Lending Unit 7 Case Study Pg 714 -716 1. Are there moral concerns associated with subprime lending? Are those moral concerns based on utilitarianism, rights, or justice considerations? Before we discuss the first question let’s get a working description of what subprime leaning is. A subprime lender is financial entity that has an inclination to lend to consumers that are not qualified for traditional loans due to their poor credit status and history of repayment difficulties. Lending to subprime candidates helped lead to secondary mortgage market issue sin 2008 (“Subprime lender,” 2011). A subprime loan is a loan with elevated fees and interest, given to someone with a lower credit score (“Subprime loan,” 2011). A major profit source for CitiFinancial and the Associates was subprime lending, this is lending to people who did not meet the customary credit requirements of banks. In the 90’s this lending had provided access to credit to many people who would not have qualified for prime loans because of their credit history. In one study the researchers found that 35 percent of the subprime borrowers were over 55 years and African Americans were twice as likely to borrow in the subprime market as in the prime market (Baron, 2010). There were a few forms of subprime lending that CitiFinancial and the Associates dealt with. One of those forms was home equity loans marketed to borrowers to consolidate their bills. Another aspect of subprime lending...
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...any others that enter into contracts with consumers are generally to blame for this type of behavior. This behavior can come in many different forms. A few examples are: predatory lending, subprime mortgages, and unsolicited credit cards. Because these practices tend to harm consumers, more legislation has been put into place in recent years. Unsolicited credit cards are an example of a predatory practice. In this case, credit card companies would send out credit cards to consumers who had not applied for them. This led to an increase in identity theft. It is now illegal to send unsolicited credit cards through the mail. Predatory lending is probably the most common type of predatory business practice against consumers. According to Wikipedia, “an audit report on predatory lending from the office of inspector general of the FDIC broadly defines predatory lending as imposing unfair and abusive loan terms on borrowers” (Wikipedia, n.d.). Or the practice of a lender deceptively convincing borrowers to agree to unfair and abusive loan terms, or systematically violating those terms in ways to make it difficult for the borrowers to defend against. Predatory lenders are most likely to target the “less educated, the poor, racial minorities, and the elderly but victims of predatory lending are...
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...How Business Ethics Relates to Subprime Mortgage Market By Wanda Thibodeaux, eHow Contributor Many people have lost their homes as a result of unethical suprime mortgage practices. The ability to have a home of your own in the United States typically depends on your ability to repay a mortgage, since most Americans don't purchase their homes outright. Because not everyone has perfect credit, a section of the mortgage industry involves subprime loans. In the wake of the mortgage and foreclosure crisis that began in 2007, the ethics of those in the industry is under scrutiny. Other People Are Reading How Do Subprime Loans Affect Business Growth? Code of Ethics for Business in the Philippines Print this article Subprime Mortgage Definition A definition of subprime mortgage is necessary to understand the relationship between the industry and ethics. Subprime mortgages are mortgage loans lenders provide only to those whose credit disqualifies them from receiving the best (prime) interest rates a lender can offer. A subprime mortgage by definition means that lenders work with those with a lesser ability to pay. Roughly 25 percent of all mortgages are subprime, according to Thomas Kostigen of the Wall Street Journal's MarketWatch website. Fiduciary Duties and Ethical Problems Businesses typically operate under fiduciary duties, or obligations. These fall into two broad categories of loyalty and care. These duties essentially stipulate that a businessperson should...
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...interest rates low and encouraged high levels of consumer spending in US. It encouraged a large current account deficit in the US. It also encouraged an asset bubble, because it was cheap to borrow and this encouraged unsustainable lending. • US interest rates kept too low for too long around 2003-2005. This encouraged an asset bubble, especially in US. The problem was that inflation was low and people felt this was the most important target. In targetting inflation, people ignored the asset bubble. (see: Mistakes of Alan Greenspan) • Bad Loans. Probably the biggest cause of the current credit crisis. Banks and mortgage companies made a serious of bad loans especially for subprime mortgages. Basically, people were lent mortgages they had no realistic chance of repaying. Mortgage companies and banks were left with a series of bad debts they had to write off. (see: Subprime crisis) • Lack of Capital reserves. In the boom years, banks pursued a reckless dash for growth. This meant lending a high % of deposits. Therefore, when they suffered bad losses. They had no reserves to call upon. This led to a dramatic drop in bank loans which had ripple effects throughout the economy. • Reselling of Bad Loans. Most of the bad loans originated in the US subprime mortgage market. However, these were rebundled and repackaged into collaterised debt obligations. They were given triple a ratings and bought by banks around the world. Therefore, when mortgage defaults occured in the US, the losses...
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...sub-prime mortgage lenders Outline I. Introduction II. Subprime History III. What lead to subprime lenders making unethical and illegal decisions IV. What safe guards are in place V. Conclusions VI. Works cited page Introduction When most people hear the phrase “subprime lending”, the first thoughts that come to mind are the mortgage meltdown; predatory lenders, high interest mortgages for borrowers who have poor credit or low incomes. All of these thoughts may be true to a certain extent, but contrary to popular belief subprime mortgage lending has helped expand homeownership for all borrowers regardless of credit or income level in the US between 1995 and 2006 (Favro, 07). The problem is that this ethical and legal lending market took an unethical and illegal turn and has been cited as one of the contributing factors that aided in many Americans defaulting on their home loans that resulted in sending this country and many others into one of the biggest recessions since the Great Depression. It has been almost six years since the subprime meltdown and this country, the housing markets, and the economy have yet to fully recovered. In this research paper I will cover the history and original purpose of subprime lending, what lured the subprime lending market to take an unethical and illegal turn, and what safeguards have been put in place to lessen the likely hood of subprime mortgage lenders making unethical and illegal decisions in the future...
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