Ethics of Sub-Prime Lending

As a topic for this research paper, I decided to analyze the ethics behind the recent mortgage crisis in the United States. Banks were approving people for loans very easily, to people they knew would not be able to pay them back. Thus, many people were buying homes, missing payments, getting foreclosed on, and ruining what credit they had. Throughout this paper I intend to show how the practices that the banks were using were unethical. I will show who stakeholders were, and analyze them through Utilitarian and Kantian standpoints. A Utilitarian standpoint weighs the hedons and dolors in a situation.

Ultimately it says that the most ethical thing to do is whatever is for the greater good. The hedons are people that are positively impacted from a situation, while the dolors are the people that are negatively impacted from a situation. Determining if a situation is ethical or not is decided by assessing the impact on hedons and subtracting them by the impact dolors. According to a Utilitarian standpoint, if the impact to the hedons outweigh that of the dolors, then said practice is ethical. A Kantian standpoint does not look into consequences like the Utilitarian standpoint; instead it looks at categorical imperatives.

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According to founder Immanuel Kant, “the rightness or wrongness of actions does not depend on their consequences but on whether they fulfill their duty. ” A Kantian belief is not based solely on what is for the greater good, but if something is seen as right or wrong to do. A good person is good because of the intentions that they have, whether enjoyable or not. Background of U. S. mortgage crisis The mortgage crisis in the United States over the past few years has been a very traumatic experience for many people. During the mortgage crisis, many lenders were not following the normal government guidelines for issuing mortgages.

These include checking a borrower’s debt to income ratio, running a credit history check, and making sure the borrower is employed. During this time many lenders were not using these guidelines and allowed people with an impaired credit history to take out a sub-prime mortgage. A sub-prime mortgage is one that does not meet government funded organizations guidelines; it is a riskier loan for the lender because it is generally given to borrowers that have a lesser ability to repay. Generally, sub-prime mortgages are given to people with higher debt, low credit scores, and low incomes.

This allows more people the opportunity to own a home. This is generally good for the lenders because it allows them to charge higher prices for loans because of the risk associated with dealing with the borrower. Also, lenders see the ability to charge late fees for late payments, and ultimately repossess a home, because until the last payment of a loan is paid, the lender is the one who holds the title to the property. As a result of sub-prime mortgages, many people have found themselves with a large amount of debt that they are unable to pay.

With this, banks have repossessed many homes and borrowers are losing out. What banks did not foresee happening though, was the drastic drop in home values. There for, while the borrowers were being hurt as they were losing their homes, so were the lenders. Because of this, many financial institutions started to go bankrupt because the homes they now owned were not worth nearly as much as what was paid for them. As a result of this, the government started to issue large amounts of bailouts in order to help keep some of these financial institutions from going bankrupt.

Utilitarian Standpoint In the mortgage crisis there are many hedons and dolors to be named. The hedons are people such as the mortgage bankers/companies, real estate agents, people selling homes, the people buying homes, and the United States government. The mortgage bankers/companies benefit from it because of the income that they receive in the transaction. Real estate agents were able to sell more homes, since more people were able to obtain loans. People able to sell their homes more easily, since the people buying homes were able to obtain loans with more ease.

The government also benefited because with more people owning homes they have the ability to earn more revenue through property taxes. The dolors in this situation were the mortgage bankers/companies, the people borrowing money who defaulted, the United States government, and the tax payers in the United States. The mortgage bankers/companies benefited from this for a while, but also lost when people defaulted on loans and house prices dropped. The people borrowing money who defaulted are dolors because they ended up losing their homes and ruining their credit.

The United States government and tax payers are dolors because when financial institutions went under and bail-outs were given that money came from the government, which in turn came from the taxpayers. A Utilitarian would look at this situation and weigh the hedons and dolors to decide if sub-prime lending is considered an ethical practice. They would see that, initially, the lender is trying to help a person who normally would not be able to afford a home, have the opportunity to purchase one.

In doing so, they were also doing themselves good because it helped them increase their sales, and businesses became more profitable. This also helped real estate companies and people selling their homes because it allowed more people to purchase homes. A Utilitarian would see the good in this, since everyone had the ability to be happy and own something themselves. A Utilitarian would also look at the negative consequences that came along with this practice of sub-prime lending. With this, they would find people losing their homes and ruining their credit; lenders would go bankrupt and people would their jobs.

Ultimately a Utilitarian would weigh the good and bad and find that in this situation, sub-prime lending to be an unethical practice. Kant Standpoint A Kantian standpoint believes in doing what is good, and considers the categorical imperatives associated with it. They would look at the intentions of the people involved in sub-prime lending, not only the lenders but the borrowers as well. Kantian believers would look at the criteria that a sub-prime lender requires in order to lend the capital to a borrower.

They would then look at what other lenders giving prime mortgages require, and see if it were at all possible for a lender to require their criteria. They would check whether or not the lender was doing the research required to see if a particular person had the ability to repay the capital borrowed. Kantian believers would look at the borrower and their intentions as well. They would check if the buyer had intentions of paying the lender back, and if they knew whether or not they were able to pay them back.

The CEOs of the financial institutions would also be looked at by Kantian believers. They review if the CEO has provided their loan officers with proper knowledge of the loan process, and what traits a fit borrower portrays. Also, they would see if a CEO was just using their loan officers and borrowers as a mean to an end, meaning they were using them as just a way to make a profit, and not really caring about their possible outcomes. The United States government could also be looked at when deciding the ethics behind sub-prime lending.

At the time, the government had its own set of guidelines for the mortgage process used by government funded agencies such as Fannie and Freddie Mae. However, the government did not regulate the mortgage industry as a whole. It allowed financial institutions to come up with their own set of rules and regulations, and did not intervene. Since the government was negligent to react, it could be looked at as using people as a mean to an end. With more people owning homes, the government would effect an increase in taxes, and it would earn larger revenues.

Kant would also look at the possible intention of the government having the intentions of giving more people the opportunity to own their own home and have a chance to live “The American Dream”. In this case, it would be seen as being ethical. Since Kantian believers would find that the lender has not done everything reasonable to make sure that a borrower is able to pay a loan back, they would deem the actions of the lender unethical. They would also deem the actions of the borrower unethical as well, since the borrower would also know the stipulations of the loan and the payments required.

Since the borrower would know they do not have enough/make enough to pay the loan back, in most cases, they are also being unethical. Furthermore, since the United States government and CEOs of the financial institutions could be seen as using lenders and borrowers as a mean to an end, and were negligent about acting on the potential results, they would also be looked upon as being unethical. Since all parties could be at fault, a Kantian would see that sub-prime lending is an unethical practice. Conclusion While sub-prime lending was very popular, recently it ended up having negative results.

In 2006, sub-prime mortgages in the United States totaled 600 billion dollars. Although it was good for a period of time while it allowed people to live the “American Dream”, and own their own homes, in the end it caused more problems than it was worth. After looking at sub-prime lending from Utilitarian and Kantian viewpoints, you can see that the dolors outweigh the hedons, and that both parties’ involved intentions were not for the best. Both standpoints would deem sub-prime lending an unethical practice.

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Ethics of Sub-Prime Lending. (2017, Mar 25). Retrieved from