The Housing Financial Crisis, part 2: Role of Leadership Decision-Making

Housing-Crisis

(Rodriguez, Housing crisis)

 

 
Subprime Loans: The Under-the-Radar Loans that Felled a Market

Role of Leadership Decision-Making

So, which of the ‘five culprits’ are to blame for the housing bubble? Is our problem unique to the U.S.? If so, what can we learn from other countries in our decision making process? Is our ‘ethical’ decision making process doomed for failure because of possible internal and external constraints and less defined mishaps? Thiel, Bagdasarov, Harkrider, Johnson, & Mumford state that today’s “organizations are defined by less structure and are generally more fluid and transitional” and that leader face more difficult challenges (2012, p. 50). But, what about the lending system itself? A subprime mortgage “is designed to essentially force a refinancing after two or three years” so the “market rested in part on the desperation of households[,]…appreciation of housing prices,…declining interest rates[,]…and less creditworthy homeowners…[who borrowed against] whatever equity they had in the house they already owned” (Watkins, 2011, p. 366). Mr. Watkins also highlights the Goldman rule “which is to pursue profitable opportunities regardless the effects on others” (2011, p. 363).

The organization makes ethical rules based on moral positions and legal doctrine. However, it is the leader placed in the position of authority who drives this effort home. In this case, the “money is the institution’s, but the decision is the individual’s” (Gilbert, 2011, p. 92). Did Americans bite off more than they can chew? Did lenders turn a blind eye to less qualified applicants? Did bundlers lean too heavily on irrational exuberance? Did rating agencies get greedy and overrate bad loans because they were bundled? Did investors rely too heavily on the strength of the American dollar or America’s credit score? Matthew Dalton reports that “Dutch banks routinely wrote mortgages that exceeded 125% of the value of the home—covering closing costs, taxes, renovations and even new-car purchases” (2011). Mr. Watkins details how aggressive some of the consumer lenders were in regards to acquiring subprime loans (2011). Mr. Watkins concludes that society, should not limit profitable opportunities, but that “excessive profit provokes excessive behavior” (2011, p. 370). But, there is one thing many fail to mention; the fact that the country was in a deep recession at the time the housing bubble burst. Leadership and ethical decisions play a huge part, but the ability to pay is the greatest factor of all.

Reference List
Dalton, M. (2011). Mortgage burden looms over Dutch. The Wall Street Journal, Retrieved from http://online.wsj.com/article/SB10001424052970203752604576640662346325544.html

Gilbert, J. (2011). Moral Duties in Business and Their Societal Impacts: The Case of the Subprime Lending Mess. Business & Society Review (00453609), 116(1), 87-107. doi:10.1111/j.1467-8594.2011.00378.x

Rodriguez, K. (Photographer). (2011, February). Housing crisis [Web Graphic]. Retrieved from http://www.buckheadhighrisecondos.com/are-we-seeing-the-end-of-the-atlanta-condo-housing-crisis/

Thiel, C., Bagdasarov, Z., Harkrider, L., Johnson, J., & Mumford, M. (2012). Leader Ethical Decision-Making in Organizations: Strategies for Sensemaking. Journal Of Business Ethics, 107(1), 49-64. doi:10.1007/s10551-012-1299-1

Watkins, J. P. (2011). Banking Ethics and the Goldman Rule. Journal Of Economic Issues (M.E. Sharpe Inc.), 45(2), 363-372. doi:10.2753/JEI0021-3624450213

The Housing Financial Crisis, part 3: Subprime Loans, Social Responsibility, and Preventive Measures

obama-housing-crisis

(Gottesdiener, Obama housing crisis)

Subprime Loans: The Under-the-Radar Loans that Felled a Market

Subprime Loans, Social Responsibility, and Preventive Measures
Looking beyond who’s at fault for the housing crisis. Should there have been provisions available to assist homeowners with preventing default or should there be incentives to reduce the possibility of default? Hooker states that many banks did not perform due diligence in awarding the loan nor did they pass along pertinent information with the loan packages (2012). Hooker goes on to state (through a series of tests) that and that lenders should renegotiate terms as it is most likely in the best interest of all parties (2012). From a macro perspective, disruptions in financial markets create a domino effect. Jerome Stein details the European debt crisis and the relationship between the dollars owed to various countries (2011). For instance, [i]f Spain defaulted, then [this affected] assets of the British, French, and German banks…[i]f the Irish defaulted, the British and German banks…[are] affected” (Stein, 2011, p. 212-214)

Leaders have a responsibility to consider impending effects of the status quo. Decisions made from internal or external constraints may not necessarily follow current ethical frameworks (Thiel, Bagdasarov, Harkrider, Johnson, & Mumford, 2012). Decision making should be made with profit (or self-preservation) in mind, but organizations are held to a higher standard to include corporate social responsibility.

Changes have been made to strengthen the lending system; with some of the latest just taking effect this past June (Hansen, 2013). Some changes for Federal Housing Adminstration loans include increased mortgage insurance premiums, mandatory insurance for the life of the loan, and required ‘manual’ underwriting for borrowers with lower credit scores (Hansen, 2013). To assist with past foreclosures, Congress initiated the Mortgage Forgiveness Debt Relief Act of 2007 to offer an exception to taxation on forgiven loans that were not foreclosed (Carlton, 2008). These changes, as well as, a basic understanding of contributing factors towards the housing crisis and an emphasis on intrusive leadership can help prevent or reduce the next possible housing bubble.

Reference List

Carlton, R. (2008). Mortgage forgiveness debt relief act of 2007. Harvard Journal on Legislation, 45(2), 601-618. Retrieved from http://www.harvardjol.com/wp-content/uploads/2009/08/601-618_Carlton.pdf

Hooker, J. (Performer) (2012). Business case studies part i [Web]. Retrieved from

Gottesdiener, L. (2013, May 2). Obama housing crisis [Web Graphic]. Retrieved from http://znetitaly.altervista.org/art/10676

Hansen, K. (2013). Higher mortgage insurance creating headache for borrowers. Phoenix Business Journal, Retrieved from http://www.bizjournals.com/phoenix/news/2013/02/14/ higher-mortgage-insurance-creating.html?page=all

Stein, J. (2011). The diversity of debt crises in Europe. Cato Journal, 31(2), 199-215. Retrieved from http://www.cato.org/pubs/journal/cj31n2/cj31n2-2.pdf

Thiel, C., Bagdasarov, Z., Harkrider, L., Johnson, J., & Mumford, M. (2012). Leader Ethical Decision-Making in Organizations: Strategies for Sensemaking. Journal Of Business Ethics, 107(1), 49-64. doi:10.1007/s10551-012-1299-1

The Housing Financial Crisis, part 1: Subprime Loans and Associated Risks

housing-crisis-prices-fall-in-the-us-market

(Silva, Housing crisis prices fall in the US market)

Subprime Loans: The Under-the-Radar Loans that Felled a Market

Subprime Loans and Associated Risks

     The housing crisis beginning in 2007 resulted in approximately 1.5 million foreclosed homes that year and at the time predicted increases in future years according to Joseph Gilbert (2011). Mr. Gilbert also states that “[a]lthough subprime mortgages accounted for less than 20 percent of all mortgages outstanding, just over half of these foreclosure initiations were on subprimes (2011, p. 88). A subprime loan is a loan given to “individuals who do not qualify for prime rate loans” under normal circumstances (Gilbert, 2011, p. 89). Many attribute owning a home to be the most central element towards obtaining ‘The American Dream’, but there were many elements that contributed to…and resulted from the Subprime Loan Housing Crisis.

     Jeff Holt summarizes the contributing factors of the housing crises in 4 primary causes. They are low mortgage interest rates, low short-term interest rates, relaxed mortgage loan standards, and irrational exuberance (2009). Low mortgage rates gradually occurred over a span of 20 years when high interest rates were implemented to combat inflation (Holt, 2009). Low short-term interest rates were introduced as a result of the smaller recession of 2001 to support an economic recovery (Holt, 2009). According to Mr. Holt, there were no signs of significant inflation present at the time (Holt, 2009). Relaxed mortgage standards were primarily the result of “new governmental policies aimed at fostering [lower-income] home-ownership,…greater [internet] competition, increasing [debt] securitization,…and the irrational exuberance” (Holt, 2009).

     As the crisis bubble began to burst, blame was issued to many, assistance given to some, and losses incurred by most involved. Mr. Gilbert list five possible “culprits” to the housing crisis: Borrowers; Lenders; Securitizers (bundlers); Rating Agencies; and Investors (2011). Mr. Holt lists lender, investment banks, foreign investors, and insurance companies as those who have incurred large losses (2009). In my next posts, I investigate more into the causes of the crises as well as what could be done to reduce the effects in the future.

                                                                                                                         Reference List

Gilbert, J. (2011). Moral Duties in Business and Their Societal Impacts: The Case
of the Subprime Lending Mess. Business & Society Review (00453609), 116(1), 87-107. doi:10.1111/j.1467-8594.2011.00378.x

Holt, J. (2009). A summary of the primary causes of the housing bubble and the
resulting credit crisis: A non-technical paper. The Journal of Business Inquiry, 8(1), 120-129. Retrieved from http://www.uvu.edu/woodbury/jbi/volume8

Silva, R. (2010, July 25). Housing crisis prices fall in the us market [Web Graphic].
Retrieved from http://www.economiabr.com.br/index.php/25/07/2010/a-economia-dos-eua-tornou-se-o-grande-problema-do-mundo-atual

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