Explain Ethical Issues with Subprime Loans

Summarize the concept of subprime loans and the risks they pose to the lender and borrower.

The subprime mortgage calamity of 2007 to 2010 arose from a rise in subprime lending, with lenders funding mortgages by combining them and then selling them to investors(How much risk, n.d.). The major reason behind this crisis happened was due to loans being given to those who could not afford them.  There was quite a bit of unethical behavior taking place on both the borrower and lender. So, now let’s get a better understanding of the concept of Subprime lending.   This type of lending can also be referred to as near-prime, non-prime, and second-chance loan which is a concept of providing loans to consumers who could have trouble continuing the repayment schedule, due to unexpected and unfortunate events (Best Things,n.d.).  Traditionally, subprime borrowers qualification are based on many factors including earnings, properties, and credit score. In most cases, subprime borrowers have problems with one or more of these factors, and in conjunction with a poor credit rating or an inability to substantiate earnings (Subprime Lending,n.d.).  These customers usually have a FICO score below 640, which can vary over time and depend on events in their lives (Summarize the concept, n.d.). The U.S. Department of Housing views this type of lending as loans that are for consumers with bad or no credit history. These loans have very high rates, which is a tool to offset for increased credit risk (Loan mods, n.d.). The varieties of subprime mortgages comprise of flexible rate mortgages, fixed-interest mortgages with 40- to 50-year periods and interest-only mortgages(What are the different, n.d.).   A significant amount of risk is associated with subprime mortgages for both the borrower and the lender.  The risk to the lender is that the borrower may not be able to repay the loan.  On the other hand, the risk of the borrower for this type of loan includes prepayment penalties that prevent the payment of loan earlier (Subprime Loans,n.d.). Furthermore, when looking beyond the risk factors from subprime lending, we can only hope that Bankers, regulators, auditors and rating organizations learned some valuable lessons from this calamity(Subprime Consumer, n.d.). Finally,  we can hope in the future that they proceed with more common sense and ethics.