Part II-Examining the Financial and Ethical Issues Surrounding Subprime Loans by Slemo Warigon

Part II – The Leadership Decision-Making and Subprime Mortgage Crisis

Studies show that demographics such as race and ethnicity played a significant role in subprime mortgage lending decisions than risk factors (Deloughy, 2012), with adverse effects on predominantly African-American and Hispanic borrowers (Deloughy, 2012; Ghent et al., 2014; Gabriel et al., 2015). Empirical research results also show that borrower represented by Congressional representatives received more favorable subprime mortgage lending decisions in terms of larger loan amounts at discounted interest rates (Gabriel et al., 2015). Further, empirical studies show that subprime loans increased in states with lender-friendly foreclosure laws, and decreased in states with laws that are friendly to defaulting borrowers (Cao & Liu, 2016).

The subprime mortgage crisis began in 2007 (Cao & Liu, 2016; Agarwal et al., 2014;), Housing prices started a steady decline in 2008, causing 45 percent of borrowers to default their subprime mortgage loans (Gabriel et al., 2015), and FHA loan to capture 19 percent of the mortgage market share (Cao & Liu, 2016). By 2010, another 45 percent of borrower defaulted on their subprime mortgages (Gabriel et al., 2015), thereby worsening the crisis for the economies of numerous countries, including the United States (Mayer et al., 2014). The mortgage borrowers, brokers, lenders, securitizers, rating agencies, investors, governments, academia, and other stakeholders contributed to this global financial crisis (Gilbert, 2011; Seto-Pamies & Papaoikonomou, 2016; Watkins, 2011; Ludescher et al., 2012). Some researchers asserted that predatory and reckless subprime lending decisions created and fed the housing bubble that ultimately led to the financial crisis (Agarwal et al., 2014; Gilbert, 2011; Watkins, 2011).

Many stakeholders were responsible for the financial crisis. Government leaders were blamed for improper regulation that mandated lenders to offer loan to low-income individuals, and deregulation that encouraged banks to engage in predatory lending practices without regard to harmful impacts on both borrowers and financial market (Ludescher et al., 2012). Corporate leaders, managers, and employees were also blamed for not making ethical decisions that considered the welfare of borrowers, awareness of their moral obligation to society at large, and potential consequences of their unethical decisions on our interconnected economic systems (Gilbert, 2011; Thiel et al., 2012; Ludescher et al., 2012). The banking institutions were blamed for failing to provide their leaders with a holistic framework (e.g., sensemaking model) for making ethical decisions in a complex and fluid business environment (Thiel et al., 2012), and promoting corporate cultures that reward greed and profit maximization at the expense of expense of ethical and moral considerations (Gilbert, 2011; Ludescher et al., 2012). Borrowers were also blamed for knowingly accepting high-risk mortgage loans that forced them to live beyond their means (Ludescher et al., 2012).

The following sections discuss the consequences of these unethical actions, measures taken prevent reoccurrence of the financial crisis.

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