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• W47593115 abstract "CASE DESCRIPTION Students face a bank's decision to enter or not enter the subprime home lending market. The situation is set just prior to the problems that arose in 2007-2008. The case provides aggregate economic data available at the end of 2006 and asks students to utilize this data in recommending whether or not to enter this market. The case has a difficulty level of three and is designed for a junior level course. Including student presentations, the case is covered in three class hours. It is expected that students will spend 3-5 hours outside of class preparing this case. CASE SYNOPSIS A Senior Vice President for a midsized commercial bank is contemplating getting her bank to move forward in extending subprime loans. She has observed her competitors' profits rise following their entry into this market. The two percent lending premium on subprime loans is an attractive addition to bank income. In addition she wants to help those customers who do not qualify for traditional, prime home loans obtain the American dream of home ownership. With financial advice and counseling, the vice president believes that customers who have low credit ratings due to a few late payment, difficulty in documenting their income, or, perhaps, a prior bankruptcy deserve another chance and given the opportunity to move into their own home. In making recommendations to the bank, the analysis is divided into three parts: a statistical examination of delinquency potential and credit ratings, an examination of aggregate economic implications (with statistical analysis) for the home loan market, and an evaluation of the ethical aspects of lending to subprime customers. INSTRUCTORS' NOTES This case is designed to elicit a discussion on the ethics of lending in the subprime market. Real world data is provided to give substance to the discussion. The case is positioned just prior to the melt down in the subprime market. We wanted to avoid an ethics discussion that quickly broke down into a reaction to people losing money and a quick conclusion that it must be unethical. The case is structured around the question of entering the subprime market in its early form. Initially the market restricted the risk by requiring, usually, a minimum down payment of at least 10 percent. As financial institutions observed this market's profitability, largely resulting from a rising housing market, they increased their risk exposure. This reduction came through lower down payments required and granting secondary subprime loans. With lower down payments and secondary loans, the moral hazard problem increases. With little or no equity in the home, the borrower's incentive to continue making payments is reduced. An interesting discussion topic revolves around how aware the secondary market was of the increase in risk. Data is provided going back sixteen years. A question that should be address is whether or not the market should have been functioning on a seeming belief that housing prices would continue to rise. The case includes a number of questions that we believe students should address in developing their conclusions on entering or not entering the subprime market. Suggested answers to these questions follow. 1. Mary is concerned over how she should use credit ratings in making these loans. She has gathered sample data on credit rating and loan delinquencies which are provided for your use. Loans delinquent beyond 90 days are likely candidates for foreclosure. Mary believes that the bank is willing to accept a minimum credit score that has an expected foreclosure rate of ten percent. a. What is the relationship between days delinquent for a given credit score? b. What credit score is expected to yield an average delinquency of 90 days? c. If Mary used that credit score as a minimum for extending these subprime loans, what proportion of loans to individuals with that score would you expect to be 90 or more days delinquent? …" @default.
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• W47593115 date "2010-02-01" @default.
• W47593115 modified "2023-09-24" @default.
• W47593115 title "To Loan or Not to Loan: A Subprime dilemma.(Instructor's Note)" @default.
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