business ethics Class 8 Ethical Issues in the Real Estate Industry – Part 1

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business ethics Class 8 Ethical Issues in the Real Estate Industry – Part 1
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Class 8 Ethical Issues in the Real Estate Industry – Part 1
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  1. On p. 67, the chapter opens with a basis description of subprime lending and the following quote from a nonprofit consumer advocate: “No one can debate the need for legitimate non-prime (subprime) lending products.” Do you think there is anything inherently unethical about subprime mortgage lending?
    I don't believe there is nothing inherently unethical about subprime mortgage lending, because there is a need for borrowers with suboptimal credit to attain financing for a mortgage where they may not qualify for loans from other institutions/

    • > helps them get loans
    • > rebuild their credit
  2. On p. 67, the chapter describes lending using the “four C’s” of credit in the absence of automated underwriting. Describe the four C’s.
    The four Cs: 

    > Credit = Quantity, quality and duration of the borrower's credit obligations

    > Capacity = amount and stability of income

    > Capital = Sufficient liquid funds to cover down payments, closing cost and reserves

    > Collateral = value and condition of the property
  3. As noted on p. 68, were most subprime mortgage loans originated by insured depository institutions?
    subprime lending firms were part of a bank holding company, but most—including Household, Beneficial Finance, The Money Store, and Champion Mortgage—were independent consumer finance companies.
  4. How did these institutions generally fund themselves?
    Without access to deposits, they generally funded themselves with short-term lines of credit, or “warehouse lines,” from commercial or investment banks. In many cases, the finance companies did not keep the mortgages. Some sold the loans to the same banks extending the warehouse lines.
  5. As described on p. 68, describe the growth in the securitization of mortgages by non-GSEs.
    In the 1990s mortgage companies, banks, and Wall Street securities firms began securitizing mortgages (see figure .). And more of them were subprime.

    Salmon Brothers, Merrill Lynch, and other Wall Street firms started packaging and selling“non-agency” mortgages—that is, loans that did not conform to Fannie’s and Fred-die’s standards. Selling these required investors to adjust expectations. With securiti-zations handled by Fannie and Freddie, the question was not “will you get the moneyback” but “when,” former Salomon Brothers trader and CEO of PentAlpha Jim Calla-han told the FCIC.With these new non-agency securities, investors had to worryabout getting paid back, and that created an opportunity for S&P and Moody’s

    •  more familiar with the securitization of these assets, mortgage specialists and Wall
    • Street bankers got in on the action. Securitization and subprime originations grew
    • hand in hand. As figure . shows, subprime originations increased from  billion
    • in  to  billion in . The proportion securitized in the late s peaked at
    • , and subprime mortgage originations’ share of all originations hovered around
    • 
  6. As described on p. 68, what was the importance of rating agencies for the non-agency mortgage securities?
    The importance of rating agencies for the non agency mortgage securities were to rate the securities... With securiti-zations handled by Fannie and Freddie, the question was not “will you get the moneyback” but “when,” former Salomon Brothers trader and CEO of PentAlpha Jim Calla-han told the FCIC.With these new non-agency securities, investors had to worryabout getting paid back, and that created an opportunity for S&P and Moody’s
  7. As described on p. 70 and in figure 5.3 on p. 73, what was the use of “tranches” in private-label securities?
    The first step was to get principal and interest payments from a group of mortgages to flow into a single pool. But in “private-label” securities (that is, securitizations not done by Fannie or Freddie), the payments were then “tranched”in a way to protect some investors from losses. Investors in the tranches received dif-ferent streams of principal and interest in different order

    There were typically two tranches in each deal. The less risky tranche received principal and interest payments first and was usually guaran-teed by an insurance company. The more risky tranche received payments second, wasnot guaranteed, and was usually kept by the company that originated the mortgages
  8. As describe on pp. 74-75, what happened when subprime lenders faced adverse market conditions in the late 1990s?
    >The markets saw a “flight to quality”—that is, a steep fall in de-mand among investors for risky assets, including subprime securitizations.

    >The rate of subprime mortgage securitization dropped from in  to . in .Meanwhile, subprime originators saw the interest rate at which they could borrow incredit markets skyrocket.

    >They were caught in a squeeze: borrowing costs increased at the very moment that their revenue stream dried up. And some were caught holding tranches of subprime securities that turned out to be worth far less than the value they had been assigned.

    • >Mortgage lenders that depended on liquidity and short-term funding had imme-diate
    • problems.
  9. On p. 75 the text states: During the 1990s, various federal agencies had taken increasing notice of abusive subprime lending practices. But the regulatory system was not well equipped to respond consistently—and on a national basis—to protect borrowers.” Describe the gaps in the regulatory system.–
  10. As described on p. 402, what was the number of families affected by the foreclosure crisis?
    Since the housing bubble burst, about four million families have lost their homes to foreclosure and another four and a half million have slipped into the foreclosureprocess or are seriously behind on their mortgage payments. When the economicdamage finally abates, foreclosures may total between  million and more than million, according to various estimates.
  11. As described on pp. 402-403, what are the two events typically necessary for a mortgage default?
    > First, monthly payments become unaffordable owing to unemployment or other financial  hardship, or because mortgage payments increase

    • >  And second (in the opinion of
    • many, now the more important factor), the home’s value becomes less than the debt
    • owed—in other words, the borrower has negative equity.
  12. As described on p. 403, what was the percentage of mortgages with negative equity as of the time of the report?
    Nationwide, 10.8 million households or 22.5% of those with mortgages, owe more their mortgage than the market value of their house
  13. P. 403 describes the practice of “strategic defaults.” What does this term mean?
    homeowners purposefully walk away from mortgage obligations when they perceive that their homes are worth less than what they owe and they believe that the value will not be going up anytime soon
  14. As described on p. 405, what is the track record of loan modification programs like HAMP?
    The track record for loan modification through the HAMP program has had a poor ratings. 

    > Homeowners with substantial equity are unable to get modifications due to the equity built up

    >
  15. On pp. 405-406, the report notes: “Competing incentives may encourage banks to view foreclosure as quicker, cleaner, and often cheaper than modifying the terms of existing mortgages.” Explain why this may be the case.
    foreclosure is a prudent response to default because, the data suggest,many borrowers who receive temporary or permanent forgiveness on their terms will slide into default again. Also, servicers may receive substantial fees for guiding a mortgage through the foreclosure process, creating an incentive to deny amodification.

    Frequently, there’s another complication to attempting a foreclosure or modification: the second mortgages that were layered onto first mortgages. The first mortgages were commonly sold by banks into the securitization machine. The second mortgages were often retained by the same lenders who typically service the mortgage: that is, they process the monthly payments and provide customer service to borrowers.


    If a first mortgage is modified or foreclosed on, the entire value of the second mortgage may be wiped out. Under these circumstances, the lender holding that second lien has an incentive to delay a modification into a new loan that would make the mortgage payments more affordable to the borrower.
  16. As describe on p. 406, explain the potential conflict between first and second mortgages and how this affects loan modifications. What about the loan modification challenges posed by securitized loans?
    Frequently, there’s another complication to attempting a foreclosure or modification: the second mortgages that were layered onto first mortgages. The first mortgages were commonly sold by banks into the securitization machine. The second mortgages were often retained by the same lenders who typically service the mortgage: that is, they process the monthly payments and provide customer service to borrowers. If a first mortgage is modified or foreclosed on, the entire value of the second mortgage may be wiped out. Under these circumstances, the lender holding that second lien has an incentive to delay a modification into a new loan that would make the mortgage payments more affordable to the borrower.
  17. As described on p. 407, what were the “systemic flaws in how lenders documented and processed mortgages for securitization”?
    > Robo signers who substituted speed for accuracy by signing and backdating hundreds of affidivits claiming personal facts about knowledge of the mortgages that they didn't know to be true.

    > court cases involving invalid notarization, forged signatures, backdated mortgage paperwork, failure to have legal standing to foreclose
  18. As described on p. 408, what were the neighborhood spillover effects of the mortgage crisis on non-borrowers (for example renters)?
    Renters, who never bought into the madness, are also among the victims aslenders seize property after landlords default on loans. Renters can lose the roof overtheir heads as well as their security deposits. I

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