ethical and legal issues regarding sub-prime mortgage lenders. Unfortunately, the focus has been inordinately upon the poor individuals who were exploited by accepting these predatory and exploitive loans o highlight & copy (Goolsbee, 2007) . Simplistically, they have been blamed for the recent U.S. financial meltdown. The emphasis needs to be focused upon the mortgage lenders themselves. While exploitation of such individuals is bad enough, to make matters worse, they are having the entire economic collapse based upon them. This is not only unfair, but inaccurate. The holders of subprime loans did not come up with the system of bundling whereby their loans were wrapped with other regular loans and with risky no-mortgage products. Needless to say, the regular mortgage loans camouflaged the risky assets. However, worst of all, the victims of subprime loan exploitation who lost their homes and their jobs will now have their government benefits taken away while the very investment bankers that exploited them are bailed out at taxpayer expense.
Beginning of the Meltdown
The harbinger of the U.S. financial meltdown was the collapse in the subprime real estate mortgage market. The reason that it hit the U.S. economy so hard was that it was the engine of recovery from the recession brought on by the collapse of the 1990s high tech bubble in 1999 and 2000. Beginning in 2005 and 2006 though, delinquencies and foreclosures doubled in the subprime market the loan market. As the tide of red ink increased, the securities that were backed up by these investments also plummeted (The state of, 2008, 4).
Lower-quality mortgages that were subprime rose from a historical low of 8% or lower to about 20% in 2004-2006, although some parts of the U.S. were much higher than this. Subprime mortgages were linked up with an inordinate percentage of adjustable rate mortgages (ARMs) (over 90% in 2006). These two changes were part of a much broader trend of lowered lending standards and higher-risk mortgage products that infected the entire U.S. real estate market (Zandi, 2008, 255) .
United States capital markets in particular and capitalism in general works on the basic premise of risk balance off against reward. Investors take a risk on a stock offering, expecting a rate of return than they would have in lower yield, risk-free U.S. Treasury bills that are backed by the full faith and credit of the United States. Loans are no exception. Less than prime borrowers (hence the term subprime) represent a bigger gamble. To counter this risk, creditors charge them higher interest rates than a prime borrower would pay for such a loan (Gad, 2007).
Weak borrowers who make up the population of subprime borrowers frequently elect to avoid the initial hit of higher payments, they take out ARMs that give them an initial teaser rate of 4%. However, annual adjustments can ad up to 2% more per year, with such loans typically in the end charging up to 10%. As an illustration of this, a $500,000 loan at 4% interest for 30 years equals a monthly payment of about $2,400 a month. However, an equivalent loan at 10% for 27 years (after the ARM kicks in) translates into a payment of $4,470. The 6% increase brought about a an increase in payment of slightly less than 100%. Profits are obscenely good, so it lures investors (ibid, 2007) .
While housing rates are going up, the system functions. However, once the housing market went down, it sent the entire U.S. credit market and economy along with it into a tail spin. After U.S. housing prices peaked in 2006 and the began their precipitous decline, refinancing became more and more difficult. As ARMs reset for higher interest rates, thereby causing higher monthly payments. In the wake of this, delinquencies and foreclosures soared. Securities backed with mortgages, including subprime mortgages, widely held by financial firms, lost most of their value. Global investors also have drastically reduced purchases of mortgage-backed debt and other securities as part of a decline in the capacity and willingness of the private financial system to support lending. Concerns about the soundness of U.S. credit and financial markets led to tightening credit around the world and slowing economic growth in the U.S. And Europe (Zandi, 2008, 9-10).
In popular parlance, they typical "poster child" for subprime loans is the poor borrower with little or no income and horrible credit. However, this is just not the case. In fact, subprime loans became more and more a facet of the U.S. Mortgage loan market as people who would not have pursued such mortgage options before now got into this market due to their overall indebtedness. The ratio of personal debt to disposable personal income rose from a 1990 rate of 77% in 1990 to 127% by the end of 2007. Most of the increase was mortgage-related, particularly in the subprime sector (Jeffries, 2008). However, it is true that minorities were overrepresented in the subprime market. According to information from the U.S. Department of Housing and Urban Development even individuals in upper-income African-American neighborhoods were one is one-and-a-half times more likely to have a subprime loan than those in low-income white areas. Blacks were not the only group that was hard hit. Hispanics were 1.5 times as likely than the nation as a whole to possess a subprime mortgage loan. This trend has been attributed to subprime lenders engaging in deliberate marketing to minorities such as African-Americans with what has been called reverse redlining ("Subprime lending," 2010) .
The Issue of "Sovereign Debt" and Cuts in Government Services to the Poor
As alluded in the introduction, the most ethically problematic issue for this author is not just the systematic exploitation of people (in particular minorities) who were victimized in the subprime credit crisis. What is even more outrageous is that these victims are doubly so victimized when the companies that brought about their suffering can now command the U.S. taxpayer to bail out those speculative institutions when they are going bankrupt such as Bear Stearns (Morgenson, 2008). In other words, To pay this "sovereign debt," draconian cuts are to made in social programs. These social programs, including social security, welfare and unemployment are usually the only barriers that these toilers have keeping them from complete destitution.
Subprime Redux and Expansion?
Amazingly, the exploitation is apparently set to start again. It is amazing to this author, but in researching the research topic, they found out that the subprime market is getting back into the act of lending to the same groups of exploited people (Eichler, 2011). Unfortunately, when one explores subprime mortgage loans and ponder its their future, the shocking reality is that mortgages and the real estate market seems to be going the way of other types of subprime loans, such as the subprime market for used cars and credit cards. It is amazing that five years into an economic crisis, basic moral and legal violations are allowed to not only go unpunished, but indeed to reinfect the economy and possibly harm it again.
Obviously, there is a need to examine the ethical side of subprime loans for one very good reason: our country and society does not seem to think that there is anything wrong with this predatory system. Hopefully, the stakeholders themselves on all sides can be convinced from self-interest to maintain a level of morality that will allow capitalism to function. Unfortunately, due to the lack of ethics at present, the system is now highly dysfunctional. First of all, this is very shocking because it was the subprime meltdown that started our present downward economic spiral. Secondly, guilty parties not only made obscene profits when they had a chance, they were largely bailed out by the U.S. taxpayer when their investments went bad. Thirdly, they are looking to do it again.
Of course, one can ask, what's stopping them? What else would any society expect from morally despicable individuals and companies except that they expect to come back to the very same individuals and communities, victimize them again at a profit and then expect another federal bailout in case things go bad. Also, considering the amount of law breaking and fraud involved, passing laws and putting people in jail is ultimately not the solution either. Obviously, law breakers must be punished and predatory lending practices need to made illegal or at least more difficult. However, we need to also emphasize morality. Indeed, teaching business ethics has never been more important than now.
In this vein, David S. Steingard and George Webster of Saint Joseph's University used the crisis for what they described as a golden opportunity for teaching business ethics. In analysis, they argue that the crisis provides a perfect ethics laboratory to morally analyze accountability, responsibility, and repairs to the system.
The brevity of this essay prevents a more detailed examination of the entire report. However, the scholars point to some basics that seem to have been lost in the process. Indeed,…