Question

this is an ethical question regarding options ARMs posed by my insturctor:

Alan recently joined Friendly Investment and Financing Options (FIFO) as a loan officer. FIFO is a national company that specializes in mortgage lending. One of Alan’s responsibilities is to increase the amount of mortgages FIFO initiates. In a meeting he had with the CEO yesterday, Alan was told about a new mortgage that FIFO intends to market. The new mortgage is called an option adjustable rate mortgage, or an option ARM for short, and its most attractive feature is that homeowners can choose to make relatively low monthly payments at the beginning of the mortgage period. However, the payments increase significantly later in the life of the mortgage. In fact, depending on the amount the borrower chooses to pay early (hence, the term “option”), the amounts that must be paid later could be substantial—as much as four to five times the initial payments. In many cases, when a homeowner chooses to pay the minimum amount or an amount that he or she can afford, the mortgage turns “upside down,” which means that the amount due on the mortgage grows to an amount that is greater than the value of the house.

The primary benefit of option ARMs to borrowers is that such loans allow those who cannot afford the monthly payments associated with conventional mortgages the opportunity to purchase houses. A borrower with income that is lower than is needed to qualify for a conventional mortgage can borrow using option ARMs, choose an affordable (lower than conventional) payment in the early years of the mrotgage, and then make the higher payments in later years, when their incomes presumably will be higher. Thus, option ARMs permit those who can’t afford conventional mortgages to buy houses today that they otherwise couldn’t afford until years into the future.

Lenders such as FIFO like selling option ARMs because they can recognize as current revenues the monthly payments that would be required if the loans were conventional mortgages, regardless of the amounts that the borrowers opt to pay. In other words, companies can “book” revenues that will not be collected for a few years.

Unlike most people, including many professionals, Alan understands the complexities of option ARMs. He knows that many borrowers who choose such mortgages will lose their houses three to five years after buying them because the payments increase so significantly after the low-payment option period expires that these borrowers cannot afford the new monthly payments. And, although they would like to refinance with conventional mortgages, often these homeowners do not have good enough credit. This scenario is quite disturbing to Alan. He would like to explain to his customers in clear terms the possible pitfalls of option ARMs, but the CEO of FIFO has instructed Alan that he should provide only the information that is required by law and to follow company policy, which states that lending officers should provide basic printed material, give simple advice, and answer questions that might provide negative information only when asked.

Alan has a bad feeling about option ARMs. He knows that they are great lending/borrowing tools when used as intended. He is afraid, however, that FIFO is more concerned about booking revenues than about the financial wellbeing of its customers (borrowers).

Answer 1

The facts of this case clearly indicate that the company is playing foul with the option ARM
mortgage loan in order to just book future revenue. Apparently the CEO and the FIFO company
policy seem to be misguiding its customers(borrowers).

Policy makers are often confronted by conflicting responsibilities. They have specific loyalties to their superiors, but also to society. They have freedom to act on behalf and in the interest of others, but they must also answer to others - their superiors and society – for their actions. The official’s obligation to respect the political process may conflict with his view on how the objects of policy making are treated. in other words, the dilemma of the   official is the clash between his view of the public and requirement of law.
The political factor seems to be the most potent in directing towards a resolution dilemma whether chooses to accept the advice of his supervisors and not to pursue the matter further. by taking this action, alan risks his commitment to an independent public service and to the professional code of conduct governing loan officers. The implication of decision on the department and government is minimal since the practice of misrepresenting funds remains hidden and no blame is apportioned to them. This situation is not the case for the community as the inappropriate use of public funds could have dire implications for community members who may be disadvantaged in some way or another.

Alan should discuss this matter thoroughly with his senior management and describe clearly that misguiding customers is against the practice of code of conduct for him and suggest the modifications required(if any) in the 'option ARM'.