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 Alans 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 substantialas 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 cant afford conventional mortgages to buy houses today that they otherwise couldnt 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).