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Ethical Issues Surrounding Subprime Loans

Develop a blog aimed at allowing participants to interpret ethical issues surrounding subprime loans. Be sure to address the following in establishing your blog:

• Summarize the concept of subprime loans and the risks they pose to the lender and borrower.
• Critique the role of leadership decision-making in the subprime loan financial crisis.
• Evaluate subprime loans with the notion of social responsibility. Compare and contrast the resulting consequences for these actions.
• What measures have been taken since that time to assure this will not happen again?

Support your blog with at least five (5) scholarly resources. In addition to these specified resources, other appropriate scholarly resources may be included.

Length of blog: 3 entries (approximately 350 words per entry)

Your blog should be located at a web site that can be easily accessed by Faculty (e.g., http://wordpress.com/). It should contain text that is readable, links that work, a display of at least one graphic, and content information that supports the assignment requirements.

Attachments

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A Layperson's Discussion of the Ethics of Subprime Loans in Mortgage Lending

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Blog Article #1 What is a Subprime Loan, Anyway?

The Concept
According to Investopedia, a subprime loan is one which is offered to someone who, because of their credit status, cannot get the best interest rate for the loan. (Investopedia, 2015) The rate on that loan is higher than that for a borrower with a high credit rating.

Why do it?
People who have a low credit score are most likely to default, or fail to pay back, the loan. However, by providing the loan at a higher interest rate, the bank will minimize the chance of their not getting their money back. For some borrowers, this is the only way that they could get the money needed to buy big ticket items such as cars or houses.

Risks to the Lender
The lender does, however, have to take the chance that the borrower who is given a subprime loan will become unable to repay the loan. If there is no collateral - an item of value that the borrower has or uses that will have to be given up if the borrower cannot pay off the the loan, like a house - then the risk would be that the lender would have to lose the loan money. For this reason, most lenders do require collateral on a loan, and mortgages are more readily loaned at a sub prime rate, since the lender can take possession of a house if the borrower cannot pay.

Risks to the Borrower
The borrower may fall under hard economic times, and cannot pay the loan back at the higher rate. Raising the rate to an exorbitant amount will not help the lender to get the loaned money back, but it can shorten the time before the lender can re-possess the house.

In his scholarly paper "Banking Ethics and the Goldman Rule", J.P. Watkins summarized a rule that many banks and businesses tend to comply with. In short, it is to "pursue profitable opportunities regardless of the effects on others." (Watkins, J, 2011, p 363). This attitude is based on a long standing principle that was expounded upon by Adam Smith, who is considered by many to be the father of modern economics. He felt that if a business pursued success by promoting a good or service that people desire, then this "laissez faire," or "let them do that" policy will cause society as a whole to benefit. However, this principle does not always benefit those who lose money, or, a home, as a result of the gains of the business. Promoting subprime loans and their associated banking practices seem to encourage predatory behavior toward those who are least able to recover from it.

Questions to Discuss - What is YOUR OPINION?

Do you think that it is a good idea for the borrower who wants a mortgage loan?

Do you think it is ok for the lender to recommend them to the ...

Solution Summary

This is a blog that examines the ethical issues related to subprime lending, and measures that can be taken by the borrower and the lender in order to prevent or minimize a repetition of the subprime mortgage crisis in 2004 to 2007.

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