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Lala Essay

2098 words - 9 pages

The actions of mortgage lenders in the mid-2000s led to the most economically devastating financial crisis since the Great Depression. We believe mortgage lenders should shoulder much of the responsibility for creating such a crisis. The lenders took several specific unethical actions, which will be defined in this report. First, the lenders failed to act in good faith. Conflicts of interest were created when they sold pre-packaged mortgages as securities to investment banks at a profit. Complications arose when borrowers began defaulting on their loans, and the investment banks faced little or no consequences. Next, the lenders used predatory practices to attract potential borrowers. The types of loans made available included: originate-to-sell, adjustable-rate, NINJA, and interest-only. Borrowers were either not completely informed of all the potentially harmful terms and conditions of their mortgages, or they were informed, but not in a way they could fully comprehend. The lenders also failed to faithfully represent the borrowers by manipulating loan application information or not verifying that the information was accurate and complete. Mortgages were being approved for applicants with poor credit history. Lenders had no right to approve loans for applicants in such feeble financial circumstances. All of this led to lenders failing to live up to their fiduciary responsibilities. As professionals in the financial industry, the lenders, or fiduciaries, are bound by law to put needs of their beneficiaries ahead of their own self-interests. They failed to carry out the fiduciary duties of loyalty and care and did not act in the best interest of the borrowers.

Moral Hazard
The first factor, that contributes blame to the lenders, is the concept of the moral hazard. Moral hazard is the idea that individuals will modify their behavior and take more risks if they do not bear the consequences. In the case of the subprime mortgage market, every party involved, in mortgage lending process, collected profits while believing they were passing on the risk. Basically, everyone was gambling with someone else’s money. Since mortgage brokers were not using their own money to fund the loans, there were no consequences if individuals could not repay their loans. Instead of worrying about consequences, brokers were incentivized by commissions to get as many individuals as possible approved for loans. In a like manner, banks took the high-risk loans and sold them to investment banks. Banks assumed they found a way to profit from risk. Normally, a form of checks and balances exists within banks. It is in the lenders’ best interest to approve borrowers that can repay the loan, because lenders could not profit when borrowers could not pay their mortgages. However, brokers and lenders found a loophole by selling the loans to secondary markets. Basically, the way the industry is structured, all of the risk associated with subprime lending rest upon the borrowers....

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