The Mortgage Meltdown from an Ethical Perspective - Research Paper Example

The current global financial crisis that has erupted as the result of defaults on subprime mortgages. The origins of the crisis lay in deregulation of the financial industry, which allowed excessive speculation by banks (Chossudovsky, 2008). The unregulated growth of leveraged operations produced an increase in mortgage-based bonds and the securitization of mortgage loans. Earlier, banks were more conservative in their lending because they could only rely upon the deposits of investors in order to fund the loans that they dispersed.

As a result, banks carried out extensive checks on the individuals who were being given loans, including their income history and capacity to repay.But mortgage bonds provided banks with an additional source of funds, and this encouraged them to engage in risky speculative behavior. Individuals who had poor credit histories and no income were also provided with loans. But there was a rider attached, interest rates were not fixed and generally rose very high after the initial six months of taking on the loan.

Since the home buyers were initially individuals with poor credit histories and insufficient incomes, many were unable to keep up with the higher monthly payments and defaulted on their mortgages. Due to the successive defaults on mortgages which occurred during the early part of 2007, this resulted in a tightening of credit and placed financial institutions in a difficult position, leaving banks struggling with a liquidity crisis that assumed alarming proportions.