THE SUBPRIME MORTGAGE MARKET MELTDOWN: How Did It Happen? 1. What were the respo
ID: 2791743 • Letter: T
Question
THE SUBPRIME MORTGAGE MARKET MELTDOWN: How Did It Happen?
1. What were the responsibilities of the mortgage brokers to borrowers? To lenders? To investors? How well did they fulll their responsibilities? Why?
2. Did some subprime lenders behave unethically? If so, how? Whose interests did the subprime lenders have a responsibility to represent? Did they adequately represent those interests?
3. What motivated the investment bankers to get involved in the subprime market? Did they behave appropriately? Why or why not?
4. Should the borrowers (homeowners) share in the blame? If so, how?
5. What about the investors in MBSs? What could they have done differently?
6. What can be done to prevent future blowups like the one that occurred in the subprime market?
Explanation / Answer
1) Some of the primary responsibilities of the mortgage brokers to borrowers were to let them know about the actual worth of the property, the risk associated with it and installments it likely going to have and not to have any hidden terms and conditions which later comes as a surprise for them.
Few other responsibilities of the mortgage brokers towards lenders are to properly do the credit risk assessments of the borrowers so that lenders can reject the application in case a borrower is incapable to pay in future and have a bad credit history.
Mortgage brokers have added responsisbilities towards their investors as well, the default probability and the actual worthiness of the mortgage should be clearly disclosed to the investors. While investing in mortgage instruments, the investors actually are buying the risk associated with it so they should be updated with all the default risks associated.
During the mortgage market meltdown, the mortgage brokers did not fulfill their supposed responsibilities towards borrowers, lenders and investors. They tried to hard sell the mortgage instruments which were highly overprised to investors by showing them as a high return instruments, also influenced lenders to lend more and more to such borrowers who have bad credit history or doesnt have capability to payback.
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