Reference no: EM133491086

Question: As a loan officer for FIFO, Alan's job is to sell loans that generate revenues for the company. Alan has been charged with increasing the total amount of mortgages sold by FIFO. One of the loans FIFO wants to emphasize is a new mortgage called an option ARM. The primary benefit to the borrower is that the monthly amount paid in the early years of the mortgage can be set so he or she can afford to purchase a house.

However, this benefit leads to the primary disadvantage associated with an option ARM. The difference between the principal and interest that would be paid on an equivalent conventional mortgage and the amount paid on the option ARM is added to the amount owed by the borrower. As a result, the borrower generally owes more than the original principal amount when the option ARM converts to a conventional mortgage. When the option ARM becomes a conventional mortgage in three to five years, the monthly payments can increase more than fivefold, which becomes a significant burden to the borrower.

If the borrower cannot afford the new, substantially higher payments, then he or she will default on the mortgage and lose the house.

Discussion questions: Is there an ethical problem? If so, what is it? Is FIFO's policy about disclosing information to borrowers appropriate? What would you do if you were Alan? Mentions at least 2 specific points from the article or reading. Relation of new information to old information learned in the course to date. Relation of information in article or reading to personal experience.