Sub-Prime Mortgage Lenders

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Ethical and legal issues concerning sub-prime mortgage lenders

Ethical and legal issues concerning sub-prime mortgage lenders

Subprime lending became popular in the U.S. in the mid-1990s, with outstanding debt increasing from $33 billion in 1993 to $332 billion in 2003. As of December 2007, there was an estimated $1.3 trillion in subprime mortgages outstanding. 20% of all mortgages originated in 2006 were considered to be subprime, a rate unthinkable just ten years ago. This substantial increase is attributable to industry enthusiasm: banks and other lenders discovered that they could make hefty profits from origination fees, bundling mortgages into securities, and selling these securities to investors.

These banks and lenders believed that the risks of subprime loans could be managed, a belief that was fed by constantly rising home prices and the perceived stability of mortgage-backed securities. However, while this logic may have held for a brief period, the gradual decline of home prices in 2006 led to the possibility of real losses. As home values declined, many borrowers realized that the value of their home was exceeded by the amount they owed on their mortgage. These borrowers began to default on their loans, which drove home prices down further and ruined the value of mortgage-backed securities (forcing companies to take write downs and write-offs because the underlying assets behind the securities were now worth less). This downward cycle created a mortgage market meltdown.

The practice of subprime lending has widespread ramifications for many companies, with direct impact being on lenders, financial institutions and home-building concerns. In the U.S. Housing Market, property values have plummeted as the market is flooded with homes but bereft of buyers. The crisis has also had a major impact on the economy at large, as lenders are hoarding cash or investing in stable assets like Treasury securities rather than lending money for business growth and consumer spending; this has led to an overall credit crunch in 2007. The subprime crisis has also affected the commercial real estate market, but not as significantly as the residential market as properties used for business purposes have retained their long-term value.

If you're following the news coverage on today's primary elections in Florida, you've likely noticed that the subprime mortgage crisis is one of the big issues for voters in the Sunshine State. According to the Washington Post, Florida has the third highest foreclosure rate in the nation. Of course, Florida's crisis is reflected in spiking foreclosure rates across the country that have spooked financial markets around the world. At the annual meeting of the World Economic Forum last week, the CEO of Moody's Investor Services said that part of the reason that we're now scrambling to forestall a global recession is because companies in the housing sector lied about their financial health.

Given all of that, it's not surprising to learn that several US federal and state law enforcement agencies have launched criminal investigations involving corporations, hedge funds and other parties accused of lying about the risks attached to their subprime ...
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