Business Ethics (Essay Sample)

Business Ethics # F900329620 Institution Name Date Thesis Statement This report asserts that it is considered unethical to package subprime mortgages into securities and sell them to clients with the knowledge that the securities are bound to fail. Introduction In justifying the intent of this paper, it is imperative to acknowledge that it is ethical to offer subprime mortgages to clients with variable needs. However, these practices may be considered unethical in the event that unscrupulous methods are employed in selling the securities. Fraudulent practices that compromise the validity of financial institutions have been on the limelight in regards to the offering of these products to consumers. It is against this backdrop that an argument is derived in view of the current practices that are inherent in subprime mortgage lending. In this, a balance should be stricken to orchestrate a necessary degree of fairness in sustaining a marketplace. Ethical concept in offering Subprime Mortgages As stated earlier, it is in all reasons ethical when proper structures are created in the sales of subprime mortgages. In this account, the interest rates surcharged on prime mortgages articulate the rates at which financial institutions provide loan products to clients who have good great histories in financial institutions. Subprime mortgages when offered to such customers accrue higher interest rates than the normal rates of prime mortgages since they are only offered to credible clients who have good names in the financial sector. It is significant to understand that the reason behind such high interest rates is purely aimed at compensating the lenders for taking the risk of lending funds to credible borrowers (Grace & Cohen, 2013). In the year 2007-2009, a situation was witnessed in the financial institutions that offer such products to customers. It is alleged that aggressive lenders who had the capacity to underwrite more loans, discarded the underwriting procedures and criteria and rather offered ‘teaser rates', a factor that extended credit to customers who low income levels and poor credit history. Teaser rates according to Grace and Cohen are in away lower in market value or rather short termed. When offered, they entice customers to take mortgages to purchase homes. However, the lending institutions knew that once the rates expired and returned to the market, the consumers would be in a position that incapacitates them to service the loans. This leads to the expiry of the teaser rates that in turn lead to a default in the mortgages decreasing at an alarming rate with the housing market going into free-fall (Pg.106). In determining the cause of this malady, it is imperative to consider the fact that an ethical concept has to be directed in achieving fairness needed in the sustainability of a marketplace. The practice of offering subprime mortgages to clients with an intent of getting clients into credit risk through the accrued high costs of the mortgages as purported in this case study is however considered a breach of the statutory provisions and legal standards, and thus considered unethical. Financial institutions that practice these vices take chances in employing unfair and unprincipled advertising procedures with the solid aim of attracting wealth towards them from the minority communities and well as those communities having low income earners (Grace & Cohen, 2013). Subprime lenders as seen in the case study mainly target prevalent localities that are traditionally underserved by other conventional lenders. They also target neighborhoods inhibited by a minority people groups who have for a long time suffered the consequences of redlining and have been sidelined from approaching savings and loaning institutions or even banks over their credit unreliability. Redlining in the banking and financial sector is considered as a practice whereby mortgage lenders blacklist or refute applications of loans or mortgages to individuals or institutions who are considered unreliable credit wise. The subprime lenders also target localities that have aging housing stock and need repairs for their units. That is in other words, neighborhoods in which home improvement loans can be easily marketed. In this viewpoint, subprime lending is essentially another episode in the sad history of exploitation, redlining, as well as discrimination. Thus due to their unfair practices, lenders do not exhibit the minimum necessary degree of fairness essential in maintaining the marketplace. Justification of Ethical Approaches in Subprime Mortgages It is imperative that customers are treated fairly and not harmed by the functions of markets through the regulation of certain aspects. Fairness in this instance suggests a leveled playing ground that cuts across all investors on making informed decisions about mortgages. Fairness therefore required that proper directives are enacted to combat fraud, unbalanced access to information and manipulation. Falsified information given to customers to woe them into making haste decisions is considered unethical and should be defined by proper rules. Moral responsibility should therefore be displayed in this sector. Subprime loaning institutions have developed features which can be regarded as predatory in nature. Predatory lending is something is considered a preventive approach in mitigating the major problems experienced in this sector. Predatory lending is when a mortgage lender engages in fraud or deception, manipulating borrowers using aggressive sales tactics, or taking unfair advantage of a borrowers' lack of understanding regarding the terms of the loan. According to Agarwan; Predatory lending as applied by sub-prime mortgage lenders is unfair since the borrower is harmed by the high interest rates and it serves to promote poverty and inequality. Predatory mortgage lending serves to drain wealth from families. It also destroys the benefits of homeownership and in most cases brings about foreclosure. It is against this vice that lending institutions should develop structures that enlighten the public on their products and services in order to avoid such fraudulent actions. (Agarwal, 2013). It is vital to realize that predatory mortgage lending includes various abusive practices as explained herein. Exorbitant fees – fees and points are the costs which are not reflected directly in the interest rate of a mortgage. Given that these costs could be financed, they can be easily downplayed or disguised. On predatory home loans, fees in most cases total over 5 percent of the loan amount, which is very high compared to less than 1 percent on competitive loans. Abusive prepayment penalties on the other hand points to consumers who have high...