Subprime Mortgage Crisis

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What role did the Accounting profession play in the recent sub prime mortgage crisis? What could they have done differently?

What is a subprime loan? Subprime loans are unconventional loans designed to put as many people as possible in a home or to refinance an existing home regardless of the borrowers’ credit history. A subprime loan allows lenders to make loans whether or not the borrower has poor credit, no credit or even a very low Fair Isaac Corporation (FICO) score. Basically, subprime loans are creative ways to convenience someone that they can afford more than they should.

Listed below are just some examples of subprime loans.
1. Fixed Rate Mortgage (FRM). A FRM has a fixed rate mortgage but the borrower usually has a much
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Whether internal or external, auditing need to be truly independent. As global as the US housing market is, when auditors and business don’t play fair the world economy can crumble.

While I personally don’t believe that accounting played a part in making the loans to people who could not afford them and in many instances didn’t understand or were blatantly lied to about the terms of the loans. I do believe accountants played a very big roll in not preventing the crisis. There were several warning signs that the economy was on its way to crisis and it was ignored because in my opinion greed is more important than following rules and regulations. Banks were making record profits making loans and then reselling them to investors that they didn’t worry about the ramifications of the highly risky loans.

What could have been done differently? The requirements necessary to get a loan such as FICO scores, debt to income ratios needed to consistent between and among lenders. A cap on the percent of subprime loans a lending institution needed to be in place. Also, stringent guidelines need to be in place to accurately estimate the loan loss allowances. As the amount of a mortgage lender’s portfolio increases so should their loan loss allowances.

Better regulations need to be put in place that make it necessary to examine and reexamine the procedures used to determine the loan loss allowance values and then to report the results
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