Running head: MORTGAGE ETHICAL PRACTICES

Mortgage Ethical Practices

Sheila M. Everts
604 LDR Siena Heights
February 10, 2016

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Mortgage Ethical Practices
In mid-2002 to 2006, homeownership was on the rise, and mortgage rates were at an alltime low many homeowners were refinancing their homes or purchasing a new home. During
this time, many practices were unethical when dealing with the public, and was not a win win
situation. This is unfortunate because refinancing a home, is the biggest investment of someones
life. There were banks and mortgage companies giving the mortgages to anyone with a heartbeat,
therefore the industry was not looking out for the greater good of society (Collins & Harvey,
2007).
Sarbanes-Oxley (SOX)
Sarbanes Oxley also known by the shorten name of SOX was signed and passed by the
U.S. Congress in 2002. This Act Designed by Sarbanes-Oxley to protect consumers, and the
shareholders from accounting mistakes, and the accuracy of disclosure forms from financial
organizations of conflict of interest (Jennings, 2007).
Parts of Sarbanes - Oxley Act, required that when organizations are working with other
contactors or companies that may influence the outcome of the mortgage loan. Those parties are
be disclosed, then reviewed that all parties are aware of the affiliation (Jennings, 2007).
During the mortgage boom, a loan officer may receive the appraised value on a home
while working with a certain appraiser, and working with other licensed appraiser the true value
was provided for the refinance or purchase of the home. In some cases a loan officer and
appraiser, would receive a bonus if the mortgage closed using the value given, this practice is not
legal. Therefore, giving too much of the equity of a home that would overextend the value or

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known as the home being underwater, by where owing more on the home then it is worth
(Jennings, 2007).
Many subprime lenders such as New Century Financial made loans easy for customers to
obtain, with little to no documentation and time of the customers. New Century Financial had a
one-stop shop organization, and the customer only needed to show up and sign and the money
was theirs. New Century Financial as some other lenders encouraged high revenues to flow
during this time the real estate market rose (Jennings, 2007).
New Century Financial was under federal investigations for accounting differences for
$39.4 billion in subprime loans. The subprime market was accused of equity stripping, having
marginal credit worthy customers, and not having clear terms of the loan receiving from the
lending intuition, thus why Sarbanes - Oxley Act was passed in the U. S. Congress in 2002, to
reform such acts upon customers (Jennings, 2007).
Default Turns to Foreclosure
Some practices of subprime, and convention lenders created a higher than normal rate of
foreclosures of homes in many states somewhere hit harder than other such state includes
Michigan, Florida and Indiana. The lending industry processed loans to customers that stated
how much money they made, and then matched them with a home that was out of the household
budget. These loans given where based on high credit scores and low debt to income ratios, this
type of loan referred as low and no documentation loans. This type of loan product was illegal,
however known as white-collar crime (Carswell, 2007).
An example of a no or low documentation loan: Family of four with two working adults
annual income was $50,000 with car payment and credit card debts was normally be approved

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for a $650 monthly housing payment, now was approved for $1,200 month payment. The
mortgage payment is almost twice as much as the customer could afford, leading them into
foreclosure. When a home was in foreclosure and turned back into the bank, or sold at the sheriff
sale, the home was in despair and left neighborhoods with vacancy, and increases squatters. In
addition, it was not a win win situation, the customer loses their home and has now damaged
their credit and opportunity to purchasing another home over the next 5 year after a foreclosure
(Carswell, 2007).
Subprime Market
According to Hill & Kozup (2007), the subprime market opened up several
homeownership options that included expanding credit access. When the subprime market
expanded the credit score and debt to income ratios, it gave more approvals for a new home
purchase or refinance. In 2004, the data showed more African Americans were two to three times
more than whites that received higher priced homes. However, a high percent of the subprime
mortgages given were high cost loans, credit insurance, and high interest rates compared to the
last 1990s.
While most new mortgage owners are living pay check to pay check, with no disposable
income, or can barely make the minimum payment required, and have less then prefect credit.
The subprime lenders would approve the mortgage and have the customer feeling too good to not
sign for the loan. Most of the mortgages had a very low payment and would increase over the
next two to five years, when the consumer could refinance the home into a fix low cost payment;
this was very attractive to customers that have not been homeowners in the past (Hill & Kozup,
2007).

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In addition, a second mortgage was sold to the customer at no or little cost, and available
for just interest payment for 10 years, and the customer would have to pay off the balance and
the end of its term. This product was sold as if the client needed to have extra disposable income
in the future. Most of the customer that chose the second mortgage option was not able to pay
off the balance and their home went into foreclosure (Hill & Kozup 2007).
The availability of a mortgage during the mid to late 2000s where plenty, past customers
that have heard in the past of denial were now being approved for a mortgage. Therefore,
customers did not want to ask questions or challenge the lenders, and received a mortgage
without knowing the terms. Customers were receiving in the mail or seeing TV offers to
purchase a new home or refinance their current home, most had the thought if the lender gives
me the money I should be able to pay for the payment (Hill & Kozup, 2007).
In the past when applying for a mortgage, the time from application to closing was
approximately eight to ten weeks. However, during this period it was typical to close in 30 days
from application. Most closing were last minute; often a few hours lead time before closing.
This type of closing of fast did not give the customer the time to read the documents prior to the
closing. Therefore, causing rates, fees and other number to be incorrect, but the customer signed
because they felt, as they need to and had no other option, and did not want to walk away from
the new home or cash that was waiting for them after closing (Hill & Kozup 2007).
Mortgage Brokers are an organization that originates the home loan then sells the
mortgage to the services or bank and receives a margin spread. A mortgage spread when the bank
pays the mortgage broker for underwriting and processing the loan in accordance with the banks
guidelines. Normally, the fee is based on the interest rate sold to the customer. When the bank
provides a rate of 4% base, and the mortgage broker sells the rate of 4.5% the bank will pay a fee

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of 1%, therefore on a $100,000 mortgage the bank would pay $1,000 to the broker in addition to
other cost charged to the customer. The bank uses mortgage companies to originate mortgage
loans on their behalf to save on overhead and other bottom line cost of its organization (Collins
& Harvey, 2007).
With each credit risk from A D was a matrix for a fee from the customer. In the
industry, they call them paper. Therefore, if a customer credit was an A paper, they received the
best interest rate and closing fees. Although, if a customer was D paper there was a higher risk
which means higher interest rates and fees. When a bank was caught with predatory lending a fee
was assigned. Citigroup was fined $27 million dollars for their role in poor lending practice;
once the fine is paid, they can go back to business as usual (Smith, 2002).
In 2005, mortgage brokers made up more than 50% of all new loans and 71% of
subprime mortgages. The banks that used the mortgage brokers tend to have more fraud and
misrepresentation of customers of their credit or income. Since a loan officer works on
commission, they have incentive to look the other way, or not asking relevant questions that they
should be asking. Some good mortgage brokers followed the code of conduct. All mortgages
companies where licensed in each state, in addition loan officers were required to become
personal licensed (Collins & Harvey, 2007).
According to Weiss (2014), there are two types of decision-making styles: Pragmatists
are concerned with the issue or situation that they are faced with, and Idealists are concerned
with principles and rules. In the mortgage industry like most organizations, you have different
types of decision-making styles. When loan officers processed the loan, they could have asked
themselves. Is this right? Is this fair? Moreover, would do this to your child?

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Conclusion
Residential mortgages are given to customers who do not have enough cash on hand to
purchase a home, or when equity is wanted from their primary residence. The mortgage is
recorded with the legal description to ensure collateral if the note is not paid back as agreed.
During the mortgage crisis years, many bank conventional, and ethic banks used low or
no documentation loans to customers to purchase or refinance a home. These types of mortgages
were based on credit score, and the customers income was stated high enough to appear the
customer could make the new mortgage payment.
The Sarbanes - Oxley Act signed by the U.S Congress in 2002, was passed in order to
help protect customers against bad accounting practices in the financial industry. However,
banks and lending intuitions like CITI were fined for their role in predatory lending practices.
They paid the fine and continued with their same practices, because the revenues they were
receiving out-weighted the fines assessed.
With any financial dealings in the future, I would recommend reading what your signing
and asking question. The old saying if it sounds too good to be true then it probably is.

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Reference
Carswell, A. T. (2008). Protect yourself from real estate and mortgage fraud: Preserving the
American dream of homeownership. Journal of Real Estate Literature, 16(3), 429-431.
Retrieved from http://search.proquest.com/docview/200048877?
accountid=28644Jennings, M. M. (2008). SOME THOUGHTS ON ETHICS,
GOVERNANCE, AND MARKETS: A LOOK AT THE SUBPRIME SAGA. Corporate
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pricing influence depends on neighborhood type. Journal of Housing Research, 19(2),
153-170. Retrieved from http://search.proquest.com/docview/846925624?
accountid=28644
Hill, R. P., & Kozup, J. C. (2007). Consumer experiences with predatory lending practices. The
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Smith, S. (2002). Predatory lending, mortgage fraud, and client pressures. The Appraisal
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accountid=28644Weber, J. A., & Chang, E. (2006). THE REVERSE MORTGAGE AND
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Weiss, J. (2014). Business Ethics: A Stakeholder and Issues Management Approach. San
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