...mortgage brokers, spurred on by an overzealous government, that have resulted in the collapse of the housing market and the subsequent decline of the American economy. It also reviews the proper role of subprime mortgages in the market as well as an analysis of the systemic effects of the subprime mortgage market on the global economy. Introduction The problem to be investigated is how the subprime loan market influenced the market collapse of 2008. The unethical practices of mortgage brokers, spurred on by an overzealous government, resulted in the collapse of the housing market and the subsequent decline of the American economy. This in turn affected worldwide markets and has led to instability throughout the world as countries scramble to shore up their economies with loans and bailouts. Ethics of Subprime Mortgage Brokers While the ethics of subprime mortgage brokers can certainly be questioned, they cannot take the brunt of the blame for the crisis that befell the economy beginning in 2007-2008. Economist Lawrence White attributes the financial collapse of 2008 with the political effort to expand home ownership to those people who were not qualified under traditional market constraints (Yandle, 2010, p.346). Nevertheless, the attractiveness of the subprime loan market to brokers cannot be denied as the significant growth of that market between the years of 1994 and 2008 was accompanied by an increase in wealth for many lenders. The greatest growth occurred between...
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...Subprime Loans - The Under-The-Radar Loans That Felled a Market The problem to be investigated is the ethical challenges for both lenders and borrowers that were the result of the exponential growth in the subprime loan market. The subprime mortgage market grew from $34 billion to $401 billion between 1994 and 2004 (Jennings, 2012, p. 434). The U.S. subprime mortgage crisis, fueled by record mortgage delinquencies and home foreclosures, and the subsequent collapse of mortgage-based securities followed by collateralized debt obligations (CDO’s), led to the financial crisis in the late 2000s. This paper will explore the impact of the subprime mortgage crisis on society and will discuss the roles government, corporations and individuals played. This paper will also offer suggestions on responsible behavior to prevent a recurrence. – Good introduction The History of Subprime Mortgages-- Good -- use one section heading for each question asked in assignments like this that have questions. The deregulation by the Federal Government of the banking industry starting in the 1980s is identified by many experts as responsible for setting in motion the events that resulted in the subprime mortgage crisis. A collision of unintended and intended consequences – regulation, greed, uninformed consumers. Subprime loans have been around for a long time. However, they were never meant for borrowers with less than stellar credit nor as primary loans – good point. ARM, balloon payment...
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...BA-BHAAI1038U - Preliminary Assignment 1. How is economic development impacted in societies without banks? Economic development is hindered in societies without banks, due to the fact that banks e.g. provide loans for individuals as well as businesses, hence encouraging economic development through an increase of consumer activities and industry growth, which otherwise would not be possible due to a lack of funding. The absence of banks would therefore limit the economic development and growth by preventing individuals from purchasing e.g. houses, cars and other consumer goods, and limiting the businesses’ access to start-up capital or financing of business development activities. Alternatively, a lack of reliable banks could lead individuals to agree to unfavorable loan conditions with extremely high interest rates from for instance loan sharks, possibly leaving them worse off than before and unable to pay the loan back. 2. Historically, how has political instability impacted bond markets? Historically, political instability has caused governments to sell bonds to citizens in order to finance e.g. wars. As the return you get on a bond is highly related to the riskiness of the investment, the price of bonds would typically go down during periods of political instability, due to the decreased credibility of the government and the unwillingness among citizens to invest in bonds, causing the returns to be higher. Furthermore, political instability has previously pressured...
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...Student Loan Debt – Is there a solution to the crisis? Many Americans view college as a rite of passage, a method to securing long term financial stability. With a bachelor’s degree becoming the new standard qualification for entry level jobs, more and more students are seeking them out. Many students resort to expensive loans to cover the cost of their schooling with the hopes that they will be able to quickly pay them off with their swanky out of school job. Student borrowing has become so rampant that it is now the second largest source of household debt behind housing. This research paper will discuss recent changes in student loan market and the potential of a crisis in the near future due...
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...the Federal Reserve decided to cut interest rates drastically with the plan to slowly increase it over time. Banks and other financial institutions saw this as an opportunity to make money and used the low interest rate to capitalize in real estate. Banks began the spiral of offering no money down mortgages with the cheap money interest rates to subprime borrowers, many which had little money and no assets. As the real estate business began to boom the prices of houses increased. Many people felt a false sense of security in the value and asset of owning a home could offset the failing stock market. Banks began to repackage these loans into collateralized debt obligations and sold them out to other financial institutions creating complex chains of debts. As the interest rates increased as planed the risks began to unravel. By 2006 many borrowers were defaulting on mortgages they could no longer afford to sustain and the housing market began to decline. In 2007 feeling the financial effects of the bad loans; many institutions were showing hundreds of millions in losses and expecting more each day as more people defaulted on their loans. It was at that point the public panicked realizing that the economy was spiraling with no hope of recovery. Banks came to a financial halt and many began filing for bankruptcy.(Singh). With no other options available the Federal government was forced to step in and began devising a plan of both conventional and unconventional methods to repair...
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...achievements even through dishonest means. Predatory lending practices have appeared, enticing borrowers with loans to fund home purchases with the attachment of detrimental consequences. While convenient in the short run, borrowers are often left with no equity or prosperity due to predatory lending practices such as equity stripping, loan flipping, packing, and balloon payments. Some lenders have no expectations in their borrowers to repay a loan approved to them in a form of predatory lending called “equity stripping.” In this form of predatory lending, foreclosure on a home is inevitable, yet financing companies will approve these loans. Equity stripping also occurs when lenders charge excessive fees that include money collected in cash up-front, amounts financed into the loan at closing, and fees paid later. (Stein, 2001) The components that facilitate this practice of predatory lending include: 1) financed credit insurance, 2) exorbitant fees, and 3) pre-payment penalties on subprime loans. (Stein, 2001) If the borrower dies or becomes permanently disabled, credit insurance is an offered loan product paid for by the borrower that repays the loan. The premiums of these insurance policies are added to the total loan amount, along with interest for the life of the loan. The consequence to this type of insurance is if the borrower moves or refinances out of the loan after five years, all of the premiums are...
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...En The Economics of Money, Banking, and Financial Markets, 9e (Mishkin) – Global Edition Chapter 8 An Economic Analysis of Financial Structure 8.1 Basic Facts About Financial Structure Throughout the World 1) American businesses get their external funds primarily from A) bank loans. B) bonds and commercial paper issues. C) stock issues. D) loans from nonbank financial intermediaries. Answer: D Ques Status: Revised 2) Of the sources of external funds for nonfinancial businesses in the United States, loans from banks and other financial intermediaries account for approximately ________ of the total. A) 6% B) 40% C) 56% D) 60% Answer: C Ques Status: Previous Edition 3) Of the sources of external funds for nonfinancial businesses in the United States, corporate bonds and commercial paper account for approximately ________ of the total. A) 5% B) 10% C) 32% D) 50% Answer: C Ques Status: Previous Edition 4) Of the following sources of external finance for American nonfinancial businesses, the least important is A) loans from banks. B) stocks. C) bonds and commercial paper. D) loans from other financial intermediaries. Answer: B Ques Status: Previous Edition 5) Of the sources of external funds for nonfinancial businesses in the United States, stocks account for approximately ________ of the total. A) 2% B) 11% C) 20% D) 40% Answer: B Ques Status: Previous Edition 6) Which of the following statements concerning external...
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...oblige will prosper (BP, pg 149). Practicing ethical business operations has been a talked about subject since the eighteenth and nineteenth centuries. Whether it is sustainability or social responsibility, approaches to business ethics have yet to be standardized. At the peak of today’s ethical environmental dilemmas stands Monsanto, the organization that prides itself on the ability to create sustainable agriculture. There are also scandals with regard to scrupulous or fraudulent investors, such as Bernard Madoff, who prosper at the expense of trusting individuals. Lending institutions have also taken advantage of the financially ill-informed consumers who have lost their homes and in some cases their families and lives as a result of subprime lending practices (cite). Toyota, who was once known as one of the world’s fastest growing auto makers (cite) deliberately ignored the safety of its consumers in effort to continue maximizing its profits. Organizations lacking business morals must understand that responsibility does not rest on one source, but rather it should be a collaborative effort between the companies, governments, and individuals (Business Ethics). Until standardized practices are followed at home and abroad, leaders will continue to search for their moral compasses. History and Supporters Social responsibility is about organizations giving back to the communities or countries that contribute to their success. In the twentieth-century it was discovered...
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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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...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 pre- crisis high, and HSBC had to shed over 6,000 employees, close over a thousand branches worldwide, and write off its mortgage generating unit in the United States called Household International. Senior managers at HSBC had observed the incredible rise in U. S. home prices in the period 1990— 2000, and closely followed the subprime mortgage market which drove home sales ever higher in the...
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...Dianne O’Neill Econ. 311 Case Study- Countrywide Financial September 21, 2013 Countrywide Financial was the largest provider of home loans in the United States by the early 2000’s. It was cofounded by Angelo Mozilo in 1969. Countrywide was the primary provider of home loans to minorities in the US and had lowered the barriers of homeownership for lower income families. In 2003 the company launched a campaign designed to provide $1 trillion in home loans to low income and minority borrowers by 2010. Unfortunately, this campaign didn’t come to fruition. Countrywide Financial was known for providing subprime loans, loans made to borrowers whom would not generally qualify for traditional loans, at a rate higher than the prime rate (market rate). Subprime loans are risky because clients are less likely to be able to pay back the loans. For most of the 2000’s Countrywide Financial created an incredibly lucrative profit in the home loan business, but then the US economy began to slow. People were working more and making less money, the result was a surplus of housing that homeowners could no longer afford. In late 2007, the mortgage crisis peaked with foreclosures skyrocketing, which caused investors and borrowers to feel the ramification of subprime loans. In one year Countrywide Financial depreciated over $20 billion and absorbed over $1 billion in losses. In 2008, Bank of America offered to buy Countrywide Financial for $4 billion. Although the offer was substantially less...
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...1. Yes there are moral concerns with subprime leading; they are loans lenders provide to those who have been disqualified from borrowing with prime loan companies (Thibodeaux, n.d.). There is a need for them but care must be taken not to take advantage of those individuals that get them. The moral concerns are the fact that predatory lenders seem to target those groups that are vulnerable and in need of housing and money to make ends meet. Let me make this perfectly clear that there is a place for subprime loans, they give the person that had some issues earlier on in their life to be able to acquire money for bills and buy a home for their family however, using immoral acts as forcing insurance that they may not want and charging very high interest rates are not call for. The moral concerns are based on utilitarian, which chooses the action that yields the greatest good (Baron, 2010). Moral good should be judged on consequences (is harm done by forcing single premium insurance and very high interest) the consequences are evaluated by human well-being (is customer better off before or after the loan) evaluation of individual preference (did the consumer have a choice) the action was aggregate and yielded good (was the customer gaining more from the loan or in the end losing more) the morally justified maximizes aggregate well-being (giving the customer a choice to take insurance and charging a reasonable interest rate). 2. CitiFinancial should stop the practice that the Associates...
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...Ethics Paper The subprime-mortgage crisis began in 2007. It was the result of a slew of societal missteps through the use of toxic assets and caused a large recession to occur. This crisis can be deemed to have been the cause of several sources. I will argue that the players most responsible for this crisis are the homeowners. Taking out money for their mortgage that they knew they would not be able to pay off, the homeowners acted unethically, taking a “rights” approach while they should have taken a “common good” approach. While many may argue that it was in fact the fault of the banks and brokers and lenders who convinced homeowners to make such unethical decisions, I believe in the end it is the end choice that matters rather than the process that brings you to that choice. The homeowners, in taking out a loan they knew they couldn’t pay, were taking a rights approach. They went by the notion that it was their right to freely choose what they do with their lives. However, this choice represents an ethical flaw it that it damages the economy and consequently many people. By taking such money out, the people were not keeping their end of the bargain and were acting selfishly purely to benefit their own needs of acquired land. This however resulted in a large surge of such ethical decisions and all came crashing down. This is due to the fact that everyone deemed it their right to act in a manner most fitting to their lives. However, while the rights approach can be applicable...
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...document outlines the underlying research, model characteristics, data, and validation results for Mortgage Portfolio Analyzer, which is an analytic tool to assess credit risk measures, capital levels and stress scenarios for portfolios of residential mortgages. Mortgage Portfolio Analyzer comprises loan-level econometric models for default, prepayment, and severity. These models are integrated through common dependence on local macro-economic factors, which can be either simulated at national, state, and Metropolitan Statistical Area (MSA) levels or input in the form of stress scenarios. This integration produces correlation in behaviors of loans across the portfolio. The simulation incorporates a multi-step Monte Carlo approach and generates monthly P&I cash flows and losses which enables the model to be used for ALM applications or to be combined with an external cash flow waterfall tool and used for simulation of RMBS transactions. Scenario and stress testing is also done in a multiperiod framework. Furthermore, the model accommodates both loan-level and portfolio-level mortgage insurance. The resulting tool can be used for analyzing the credit risk in both portfolios of whole loans and RMBS transactions. © 2011 Moody’s Research Labs. All rights reserved. Many past and present members of the current research group made significant contributions to the building and implementation of the models underpinning the Mortgage Portfolio Analyzer. Xufeng (Norah) Qian and Weijian Liang...
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...I. Define the problem: 1. The subprime lenders and the prime lenders. 2. The foreclosures rise. 3. The change of the secondary market. II. List any outside concepts that can be applied: 1. Emergency Economic Stabilization Act. 2. Temporary Term Auction Facility. 3. Structured investment vehicles. III. List relevant qualitative data: 1. “Subprime” loans increased from 63 lenders in 1993 to 209 in 2005. 2. The maximum loan for single-family homes was $417,000. 3. In 2005, 73% of mortgages classifies as having a high interest rate were sold. IV. List relevant quantitative data: 1. The value of loans grew from about 1% of new mortgages in 1993 to 20% in 2006. 2. The FHA share dropped from 11% to 1.9%. 3. The average initial rate for subprime mortgages issued in 2006 was 8.5%. V. Describe the results of your analysis: 1. Actually, I think subprime is a fact that we cannot avoid. 2. We need to find a way to reduce its bad effects. 3. People might become delinquent because they do not understand their financial fact. VI. Describe alternative actions: 1. Giver borrower more time when they behind their debt. 2. Let them pay little less than they have to pay. Give the borrower more time to fit in. 3. The broker must have more sense of responsibility for borrowers when they want to buy a house. VII. Describe your preferred action plan: 1. Giver borrower more time when they can’t pay the loan. 2. The secondary market must be more careful and strict for...
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