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

The third and final entry in this blog, we will evaluate subprime loans with the notion of social responsibility, compare and contrast the resulting action, and touch on the measures that have been implemented to prevent this crisis from occurring again(Leading To Significance, n.d.).  Subprime lending is closely associated with social responsibility.  There is a sound conviction that subprime lending offers credit to those borrowers who would then not have access to credit. Next, we understand that social responsibility is beyond just seeking profit, but being a concern with social and environmental concerns.  However, based on what we have seen, we can view the subprime mortgage loan as a rip-off and away to take advantage of people (What is this, n.d.).   Leaders in this scenario were more concern with earning a profit, than ensuring those who could afford home got one. These leaders did not take care of customer’s in an appropriate manner. Therefore it became detrimental for and lending organizations and a major stumbling block to stockholders.  The most important takeaway from this is that social responsibility is not just following the law, but it is ethically and morally taking care of buyers, stakeholders and employees interest (MBA Admissions, n.d.).   Finally, subprime lending may have attended to be socially responsible, but have after the housing bubble crash; it is far from being that.

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

When we consider steps taken to prevent another subprime mortgage crisis; we can take a look at the Bear Stearns and Federal Reserve actions.  Secondly, we can also look at how Congress ratified legislation to aid homeowners who were behind on their mortgage loan keep their homes. Thirdly, President Barack Obama on July 21, 2010, legislations signed the Wall Street Reform and Consumer Protection Act (Board of Governors, 2012). The legislations caused the most substantial differences in financial regulation in the United States since the regulatory reform that followed the Great Depression.  Finally, stockholders, bondholders, and executives of the large financial corporation now understand that they will undergo obvious and exceedingly extreme individual monetary losses if they permit their corporations ever again to get into severe financial disorder.

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

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

As a leader, the buck stops right there as decision making is a fundamental managerial function.  The subprime mortgage calamity was due to Wall Streets greed, and the Governments desire to increase home ownership.  Many leaders failed to adhere to their moral and ethical duty which resulted in loans being given to those who could not afford them.  Cleary, along with greed; pride, arrogance and flawed decision-making had a significant role in the subprime mortgage calamity as well.  To get a better understanding of the Subprime Mortgages crisis, please take a look at the graph below:

 

                      Figure 1, House.org @AtifRMian & @profsufi, Data source: Census retail sales Retrieved from

                       http://houseofdebt.org/2014/06/13/subprime-lending-drives-spending.html

The Role of leadership and the subprime loan decision-making procedures, the lenders, selected to adhere to has resulted in many homes being lost.  The wrong doing of the lending institutions goes against what ought to have been recognized as unethical behavior.  Over, the last few years, the federal government has employed guidelines to help defend against the unethical behavior and decision-making of the lenders (National Debt, n.d.).  The goal of these guidelines is to minimize unethical behavior in the financial industry. As concern citizens, we must concentrate on the ethical practice and decision making of leaders, while ensuring are government leaders have policies in place to prevent unethical practices and regulating actions of lending institutions leadership. Unethical decision making has resulted in legal consequence for the organization.  The leaders are making the decisions regarding subprime loans focused on the profits and not the consequences of their actions and how they would affect homeowners.  Furthermore,  leaders are more directly impacted by difficult decision-making and more at risk to face unethical problems due to the ambiguous nature of business selections in regards to lower standards in business models that are believed acceptable until they are caught (Thiel et al., 2012).  Regrettably, “individual decisions that put a substantial amount of money at risk in situations”, violated ethical values (Gilbert, 2013). To battle this, organizations must build a strong strategy to promote ethical decision making.  Finally, one of the most obvious mechanisms for accomplishing this goal is training leaders on a focus with ethical decision-making with sense making as an underlying framework (Thiel et al., 2012.).  

Explain Ethical Issues with Subprime Loans

Summarize the concept of subprime loans and the risks they pose to the lender and borrower.

The subprime mortgage calamity of 2007 to 2010 arose from a rise in subprime lending, with lenders funding mortgages by combining them and then selling them to investors(How much risk, n.d.). The major reason behind this crisis happened was due to loans being given to those who could not afford them.  There was quite a bit of unethical behavior taking place on both the borrower and lender. So, now let’s get a better understanding of the concept of Subprime lending.   This type of lending can also be referred to as near-prime, non-prime, and second-chance loan which is a concept of providing loans to consumers who could have trouble continuing the repayment schedule, due to unexpected and unfortunate events (Best Things,n.d.).  Traditionally, subprime borrowers qualification are based on many factors including earnings, properties, and credit score. In most cases, subprime borrowers have problems with one or more of these factors, and in conjunction with a poor credit rating or an inability to substantiate earnings (Subprime Lending,n.d.).  These customers usually have a FICO score below 640, which can vary over time and depend on events in their lives (Summarize the concept, n.d.). The U.S. Department of Housing views this type of lending as loans that are for consumers with bad or no credit history. These loans have very high rates, which is a tool to offset for increased credit risk (Loan mods, n.d.). The varieties of subprime mortgages comprise of flexible rate mortgages, fixed-interest mortgages with 40- to 50-year periods and interest-only mortgages(What are the different, n.d.).   A significant amount of risk is associated with subprime mortgages for both the borrower and the lender.  The risk to the lender is that the borrower may not be able to repay the loan.  On the other hand, the risk of the borrower for this type of loan includes prepayment penalties that prevent the payment of loan earlier (Subprime Loans,n.d.). Furthermore, when looking beyond the risk factors from subprime lending, we can only hope that Bankers, regulators, auditors and rating organizations learned some valuable lessons from this calamity(Subprime Consumer, n.d.). Finally,  we can hope in the future that they proceed with more common sense and ethics.