Subprime Restrictions that Helped You

Indicate the measures that have been taken since that time to assure this will not happen again.

The last two blogs talked about what subprime loans where and how they affected borrowers and a leader’s social responsibility.  In this blog, I will discuss how lenders were regulated to prevent issues like this from happening in the future.  The first thing that happened is that the public was made aware of this problem.  This gave the borrower a chance to make smarter decisions on what they were intending to purchase. Banks where now restricted from proprietary trading and other forms of investments through The Volcker Rule which was called section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Schaefer, 2012).  This was a very important action that took place Banks were notified through law that they could be regulated if they continued to my poor business and ethical decisions in the pursuit of financial gain.  This law that was passed helped borrowers in the long run because it forced leaders to do the socially responsible thing and protect the borrowers from reckless loan purchases that they could not pay back with high interest rates.  The next update to subprime loans will discuss an interesting notion that was explained in a paper written by Ernst, Bocian, and Li, 2008 who suggest ways that borrowers can protect themselves from loans with high interest rates, and what lenders could do to protect themselves from another crisis. According to Ernst et al., both parties should adjust their agreements to three things:  1. Eliminate yield spread premiums and prepayment penalties on subprime loans; 2. Strengthen accountability of lenders and investors; and 3. Establish fiduciary responsibilities for brokers.  In my opinion, these things mentioned will help lower interest rates so that borrowers could maintain their monthly payments. These methods can help strengthen a lender’s brand by making them socially responsible through accountability of their actions.  Most importantly, it is my opinion, that these methods could potentially bridge the gap between an ethical leader and his ethical decisions making that must be done in business.

Subprime CSRBad Loans…Baaad Loans

Ernst, K., Bocian, D., & Li, W. (2008). Steered wrong: Brokers, borrowers, and subprime loans. Center for Responsible Lending, 8.

Schaefer, S. (2012, April 19). Regulators: Banks have until July 2014 to comply with Volcker Rule we haven’t written yet. Forbes. Retrieved from http://www.forbes.com/sites/steveschaefer/2012/04/19/regulators-banks-have-until-2014-to-conform-to-unwritten-volcker-rule/

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Social Responsibility not a part of Subprime Lending

Critique the role of leadership decision-making in the subprime loan financial crisis.

Evaluate subprime loans with the notion of social responsibility. Compare and contrast the resulting consequences for these actions

In the last blog, I explained what the subprime crisis was, the cause, and effects of this unethical issues in the financial market.  This post will discuss the leadership roles in this problem, and their decision making in pursuit of the golden rule.  According to Watkins (2011), the recession began with Subprime loans defaulting.  Though a fourth of loans were subprime, there was over 50 percent of foreclosures, or 1.5 million homes in 2006 (Glibert, 2011, p. 87).  Banks, brokers, and lenders were bought by other banks, or defaulted on their investments or were a part of the government bailout.  During the crisis, the leaders’ decisions were discussed because the critics believed that unethical decisions were made in pursuit of money.  The problem is that the crisis included everyone.  1.jpgAccording to Gilbert, borrowers potentially lied on their applications, lenders and brokers were potentially inexperienced enough not to ask pertinent questions, or investors bought the collateral without understanding the details of the investment (Gilbert, 2011, pg. 91).  There are many who disagree; however, the bailout of big businesses was a necessity that would prevent America’s economy from falling into another depression (Thiel, Bagadasarov, Harkrider, Johnson, & Mumford, 2012).  This issue was wide spread.  Even government employees, to include the military were threatened by a freeze on pay for service.  The argument of what was fair or morally right is sometimes misplaced (Prager, 2013).  The banks should have fallen in opinion, but America’s buying power and place as a super economy would have been next.  What I have found through experience as a leader is that there has to be an acute distinction between ethical leadership and ethical decision making. According to Thiel et al., ethical decision makers are bound to identifying and responding to ethical issues or problems.  The difference is that an ethical leader is perceived by his behavior.  Where they relate is that an ethical leader must make decisions based off his character; or good decisions are made by ethical leaders.  Because of this problem, thousands of layoffs and billions in write offs of assets happened since 2007.  In my opinion, ethics was not as important as legally making a profit on high interest rates and fees paid by the borrowers.

Bank Loan RestrictionsBad Loans…Baaad Loans

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

Prager, J. (2013). The financial crisis of 2008/8: Misaligned incentives, bank mismanagement, and troubling policy implications. Economics, Management, and Financial Markets, 8(2), 11-56.

Theiel, C. E., Bagdasarov, Z., Harkrider, L., Johnson, J. F., & Mumford, M. D. (2012). Leader ethical decision-making in organizations: Strategies for sensemaking. Journal of Business Ethics, 107, 49-64. doi:10.1007/s10551-012-1299-1

Watkins, J. P. (2011). Banking ethics and the Goldman Rule. Journal of Economic Issues,45(2), 363-372. doi:10.2753/JEI0021-3624450213

 

Not Every Low Interest Loans is a Good Investment

Summary of Subprime Loans, Their Lender Risks, and Threats Posed to Borrowers

Every wondered how awesome a bank was for giving you a loan for a house or car, even though you had low or lower than average credit?  Ever wondered why they were so generous to make you payments so low that you could afford to pay them back?  The payment back might be over a long period of time; however, you have the ability to do so and afford other things.  The issue with that is chances are, you might have been a victim of a subprime loan.  Banks extend credit to individuals that do not qualify for prime rate credit.  This is because the interest rates were supposed to rise gradually throughout the life of the loans.  A trick to this loan was the initial interest rates.  They appeared doable, low interest rates in the beginning of the subprime loan attracted these targets, only to receive a higher interest rate throughout the maturity of the loan.  This caused buyers to refinance and pay more.  Fees, refinancing, and higher interest rates made subprime loans unethical.  This is very legal, however, very unethical.  The reason being is that this loan targeted specifically genres of people that would not be able to pay this loan of the first time without refinancing the loan.  On top of this, the loans were sold to Wall street after the banks have peaked on the profits of the loan. CT-subprime1.gif According to Thibodeaux (2008), this problem began in the 1990’s, however, the crisis was noted in the early 2000’s.  So, what does this mean to the home owner or the borrower?  Debt.  The borrower would always be in debt.  Another problem is that the same borrower could possibly lose their homes, cars, and be in more debt because they had to default on their loans (Watkins, 2011).  The problem happened after in 2007, with a decline in mortgage lending, here lenders and brokers invested greatly in homes that they planned to sell through the subprime market to which no one was now buying. They had substantial loses and raised interest rates to tried and gain some financial loses back. The effects of subprime loans became a financial problem for all globally.

Loan RestrictionsSubprime CSR

Thibodeaux, W, (2008), What are the Effects of Subprime Mortgages on GAAP?

Watkins, J. P. (2011). Banking ethics and the Goldman Rule. Journal of Economic Issues,45(2), 363-372. doi:10.2753/JEI0021-3624450213