How Business Ethics Relates to Subprime Mortgage Market
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.
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Subprime Mortgage Definition
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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
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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 act truthfully, in a timely fashion and in the best interest of the consumer. Prior to the subprime mortgage and foreclosure meltdown, lenders ignored these fiduciary duties, engaging in unethical practices such as misleading shareholders about the diversity of mortgage portfolios and not verifying the ability of the applicant to repay (applicants notedly could withhold income data by law by choice). They also took advantage of consumers through adjustable or teaser rates and failed to keep proper documentation.
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Collapse of Companies
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The subprime mortgage market remained relatively stable despite ethical problems prior to 2007 because interest rates in the market, as well as debt, had not risen substantially. However, as American debt increased, many subprime mortgage holders no longer could make their mortgage payments. Attempts by mortgage lenders to compensate for losses by raising interest rates on adjustable rate mortgages only worsened the problem. Eventually, this revealed the ethical issues that had been present, and major companies in the industry collapsed, most notedly Freddie Mac and Fannie Mae.
Legal Modifications
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The impact of the ethical problems within the subprime mortgage industry are far reaching, delving into other branches of the U.S. economy. For this reason, the government has made major changes to mortgage and lending laws in an attempt to prevent further abuses, as reported by Nick Timiraos of the Wall Street Journal. For instance, lenders must take steps to get documentation that shows that the applicants can afford to repay the mortgage loan.
Bottom Line
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In short, as has become evident by the mortgage and foreclosure crisis, strong business ethics in subprime mortgage lending protects both the applicant and the lender. A failure to adhere to proper ethics, by contrast, eventually comes back to haunt lenders, as it provides a business foundation that is too shaky to provide consistency for the industry. Abandoning ethics means putting the entire economy on unstable ground.
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References
- Photo Credit house image by Earl Robbins from Fotolia.com
