Subprime Loans, Where it all Started

carrying_money_bag_pc_800_clr_2644In regards to business operations, specifically speaking, the financial issues that address many ethical boundaries by corporations. One is exposed to the financial crisis, where subprime loans were a major contributor to the crisis. To further understand how the crisis became, One must first understand what the concept of subprime loans and how there compounded risk created the financial crisis.
The idea of the subprime loans was initiated as an untapped market, a means in which corporate lenders would collectively pay off all of an individual’s loans by issuing the barrower one large loan with a deceitful low rate. The concept of subprime loans is a loan offered with tempting low initial rates. Rates that would subsequently rise and force the barrower to pay off the loan or refinance the loan (Watkins, 2011).
A Model known as “Originate to distribute” mainly created loans that would be packaged and sold to investors, this system diluted the risk on the lenders because it created access to capital markets and enabled risk to be widely shared in the market. Furthermore, in many cases, depending on the terms of sale, the risk is passed on completely to the loan purchaser (Gilbert, 2011). An additional opinion expressed by Demyanyk and Van Hemert, states that one of the elements causing subprime loans to become riskier was the increasing mortgage prices in the market. Additionally, low credit barrowers caused more risk to corporations whom were carelessly approving subprime loans without sufficient information about these barrowers (Demyanyk & Van Hemert, 2011).
Policy Maker Justified the decision to present loans to at risk default barrowers with sufficient collateral. It was also said that the financial crisis, which affected the mortgage loans, is believed to have originated from subprime loans (Gilbert, 2011). One can conclude from this that leadership was willing to overlook ethical boundaries while dealing with customers as long as they were serving company profit goals.


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