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The housing market was already strong, but the elimination of practical reasons for validating lender information opened several doors very wide, each with an unpleasant surprise hidden behind it. First, because realtors earn their commissions based on sales and on the relative value of property, they have little incentive to disqualify bad risks of eventual mortgage default. Second, banks became equally unconcerned with the veracity and accuracy of the financial information provided by prospective home buyers and it was no longer in anybody's interest to curb increasing home values. Third, the reliance on credit on the part of so many Americans fueled a housing and property development boom in many areas. Multiple Ethical Violations Provide the Ignition for Economic Disaster:
Lack of concern for verifying lender qualifications became so rampant in the first part of the 21st century that lenders offered "no-doc" loans that required no formal documentation of income or assets. Within the industry, the term "liar loans" arose as well, by virtue of the common awareness that many new home buyers were grossly inflating their ability to satisfy mortgage obligations (Markels, 2007b).
Making matters even worse, mortgage brokers and realtors actually provided assistance for prospective home buyers who failed to exaggerate their qualifications enough. In many cases, the continually rising price of homes enabled individuals to acquire ownership rights and occupy a piece of property for a matter of a year or less, sell it for its appreciated value, and pay off their mortgage at a profit. In other instances, homeowners borrowed more money against their homes as values rose.
Compounding the problem were the efforts of mortgage brokers who obligated thousands of Americans with modest incomes into mortgages for homes that were completely out of their price range by playing on their underlying desires to live "better" than they could actually afford. Using a combination of greed or "wishful thinking" of buyers and complicated mortgage terms that provided disproportionately low ("affordable") monthly payment for an initial period, followed by dramatic increases that corresponded more closely to the appraised value of the property, many lenders lulled buyers into a false sense of security.
Eventually, over-development and increasing default rates oversaturated the housing market and prices began to drop quickly. Many of the homeowners found themselves owing substantially more on their mortgage obligations than the reduced (actual) value of their homes. Similarly, many of those who had hoped to "flip" their houses at a profit and escape their mortgage obligations were no longer able to do so at all (Markels, 2007b). In worse shape, still, were those who obligated themselves to homes outside their price range who also took out additional loans against the increased equity of their homes' inflated value.
Once mortgage default rates increased, the corresponding value of their original mortgages - and therefore, of all the derivative securities that represent thousands of repackaged individual mortgages - began to fall as well. Finally, the inability of the financial investment firms and banks who owned billions and billions of dollars of those mortgage-backed securities lacked the capital resources to make good on those over-rated securities led to their collapse in much the same way as banks collapsed in the Great Depression.
Considering the Damage Caused by Unethical Business Strategies and Credit Practices: Whereas the unscrupulous retailers who targeted poor communities for unfair lending practices damaged relatively small communities of victims, the mortgage and loan shenanigans affected millions of home owners directly. Indirectly, they affected many millions more by virtue of the connection between those unqualified mortgage loans after they were repackaged on Wall Street into securities that impact the pension and investment interests of the entire country. According to the latest evidence, so much of the global trade market is dependent on the U.S. economy that the failure of the mortgage and loan industry and the collapse of the mortgage-backed financial securities market actually threatens the economies of many countries outside the U.S.
A distinct possibility exists that this nation still faces a worsening economy and a "recession" of worse proportions than anything since the Great Depression. Various mechanisms protect the modern American banking system from the same type of catastrophe that occurred during the Great Depression, but in other respects, the situation could further destabilize business with devastating ripple effects throughout the country.
American consumers are not guilt-free in this, because living beyond one's financial means, especially for the sake of maintaining appearances, is a completely irresponsible choice. Likewise, most of those who obligated themselves to mortgages they could not afford were not "duped" into doing so by mortgage brokers who took advantage of their lack of sophistication; in most cases, buyers were complicit in the efforts necessary to acquire a mortgage. Some of them hoped to profit over the short-term; others simply planned on continuing to live beyond their financial means, even if it meant living hand-to-mouth despite a healthy household income.
Nevertheless, the biggest culprits were the directors and managers at the investment banks and securities firms who were fully aware of the frailty of the mortgage-backed security industry. In the interest of accumulating personal fortunes, they jeopardized the retirement pensions of millions of aging Americans, not to mention the accounts of everyone whose equity is determined by the market value of their firms' capital stock.
Likewise, the mortgage lenders and brokers who pursued inflated commissions through the sale of homes they fully anticipated were at much higher than acceptable risk of eventual foreclosure by virtue of their failure to satisfy their moral, ethical (Wiley, 1995), and legal (Halburt & Ignulli, 2000) obligation to ensure that the mortgage loans they issued did not reflect unacceptable risks camouflaged by official ratings they knew they never deserved.
Chances are, the current economic crisis could have been avoided in many different ways and at several different points. American culture could have avoided promoting acquisitive success as a measure of self-worth. Securities traders could have fulfilled their most basic ethical obligation to understand their commodities. Mortgage lenders and brokers could have continued satisfying their respective ethical obligations to ensure the safety of their loans despite their knowledge that failure to do so no longer threatened their financial interests directly. Finally, the directors and managers of mortgage securities firms could have questioned the practices the instant it became apparent that the economic viability of the entire country, and of hundreds of millions of Americans, were threatened by the inherent flaws in the concept of mortgage-backed securities issued on the basis of fraudulently issued mortgage loans. In time, the American economy will likely recover, although not without many casualties in the meantime.
However, avoiding similar disasters in the future will require a re-examination of corporate ethics. Specifically, business practices that result in profit must be scrutinized no less carefully, particularly from ethical perspectives, as those that result in financial losses. Fundamentally, this effort should also include a re-evaluation of so-called middle class values of contemporary Americans.
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