Subprime Loans And Its Overview

Question: Develop a blog aimed at allowing participants to interpret ethical issues surrounding subprime loans. Be sure to address the following in establishing your blog: Summarize the concept of subprime loans and the risks they pose to the lender and borrower. 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. What measures have been taken since that time to assure this will not happen again? Answer: Subprime Loans And Its Overview Introduction Subprime Loan is the type of loan in which the lender offers the loan to the borrower at a higher interest rate as compared to the prime borrowers. This is given mainly to those individuals who have a weak credit history and have a chance of not paying the loan in the required time. The rate of interest of the subprime loan varies from one lender to another. Thus, borrowers who are unable to pay the loans in regular interval of times, for whom sometimes the time period is extended, for whom there is inability to pay the debt amount completely and who often end up making huge debts but fail to pay those debts are characterized as subprime borrowers. The subprime borrowers have the risk of default or foreclosure and which results in the lender acquiring the defaulted properties. The lender expected that there will be increase in the value of the foreclosed properties but this expectation was short lived as the value of these properties decreased which resulted in huge losses incurred b y the lenders. The subprime loan financial crisis affected both the lenders and borrowers. This crisis mainly started in the US and gradually affected the rest of the world (Arnold, 2013). Subprime Loan Crisis The subprime loan crisis hit the US economy mainly during the recession period of 2007-08. A huge amount of money flowed into the US market from investors all over the world. This availability of money, made the banks and other financial institutions easier to grant loan to the borrowers at lower interest rate (Bocian, Ernst and Li, 2008). It became such a trend that the lending institutions did not check the credit worthiness of the borrowers while the borrowers started taking loans more without checking their affordability of repaying those loans. Along with this, everyone started assuming that the value of the housing properties will increase with time which proved to be wrong later. The wrong and miscalculated assumption increased the level of housing construction drastically. After a certain time it seemed that the number of houses outnumbered the number of buyers (Brooks, R., 2013). The people who thought to sell their houses and repay the loans were unable to do so which resul ted in widespread defaults. Home loans were converted into financial products (mortgage backed securities). These securities were sold to the investors all over the world who bought those securities without checking the authenticity of the assets actual market value. Gradually, the entire US economic condition faced a major breakdown. The subprime loan rates gradually increased and the borrowers defaulted on their mortgages. Even the investors all over the world holding the mortgage backed securities faced huge losses, which in turn caused a worldwide financial crisis (Bhardwaj, G. and Sengupta, R. 2014).. The major reason for this crisis was the failure on the part of leadership in exercising effective decision-making. Also the failure on the part of the banks and financial institutions in checking the financial capability of the lenders, giving incomplete information to global investors and wrong decision making on the housing industry showed the failure in implementing proper and ethical leadership by the world leaders. This mainly happen because leaders does not possess the finest leadership qualities (Danis, M. and Pennington-Cross, A. ,2005). They lack the values, principles and morals which results in ethical misconduct on the society. The lack of accuracy of understanding the financial situation and also to perform in big conditions puts more pressure on the leaders in taking the correct decision. The leadership needs to decipher the problem and take a right decision to solve the problem. But if any wrong decision is taken and the leadership fail to solve the situation then it may led to subprime loan crisis. The subprime lending did offer a new source of profits to the lenders and a new scope for the less credit worthy borrowers to get loan ,as they would not get any loan on the prime rates due to lack of credibility. Although this method is permissible by law but it is dishonest and inappropriate. New rules and standards were made to make way for subprime loan which did make profit for the lenders but at the expenses of the borrowers who had the risk of default or foreclosure of their housing properties. The notion of social responsibility stresses on the fact that organizations should act in the best interest of the society along with the objective of creating wealth for their stakeholders. But with the consequences of subprime lending method, organizations have failed to perform their social responsibility to the society. They failed to create wealth to their stakeholders and also their actions led to severe consequences on the society that includes, massive employee layoffs, foreclosure and other huge losses. A small situation of subprime lending process created a huge disturbance in the society (Santos, J. 2010). Conclusion After this meltdown, the Federal and the State regulatory agencies have come up with a series of reformative measures which strengthen the loan making process . The Housing and Economic Acts of 2008 introduced national standards for mortgage origination, to protect borrowers from getting misled by deceptive lending and servicing practices and the Truth in Lending Act imposed the duty of full disclosure on the lender and borrower (Silipo, D. ,2011). The Home Ownership and Equity Protect Act helped to control the underwriting process, provide full disclosure to both lender and borrower and ensure the integrity of the entire loan procedure to avoid any kind of reoccurrence of the subprime loan crisis. The US government has also taken measures to avoid any kind of crisis in the future, which is to provide limited scope to deter foreclosures, and allow those with good credit opportunity to refinance and keep their homes. Several other measures like analyzing the condition of the borrowers, size of the loan taken and also the loan structure and repayment plan should be made carefully. Thus, it is concluded that subprime loan crisis do changed the financial scenario of the world economy and its better to avoid it (Zibel, A. and Andriotis, A. ,2015). References Arnold, G. (2013).Corporate financial management. Harlow, England: Pearson. Bhardwaj, G. and Sengupta, R. (2014). Subprime cohorts and loan performance.Journal of Banking Finance, 41, pp.236-252. Bocian, D., Ernst, K. and Li, W. (2008). Race, ethnicity and subprime home loan pricing.Journal of Economics and Business, 60(1-2), pp.110-124. Brooks, R. (2013).Financial management. Boston: Pearson. Danis, M. and Pennington-Cross, A. (2005). A Dynamic Look at Subprime Loan Performance.The Journal of Fixed Income, 15(1), pp.28-39. Santos, J. (2010). Bank Corporate Loan Pricing Following the Subprime Crisis.Review of Financial Studies, 24(6), pp.1916-1943. Silipo, D. (2011). It happened again: A Minskian analysis of the subprime loan crisis.Journal of Economics and Business, 63(5), pp.441-455. Zibel, A. and Andriotis, A. (2015).Lenders Step Up Financing to Subprime Borrowers. [online] WSJ. Available at: https://www.wsj.com/articles/lenders-step-up-financing-to-subprime-borrowers-1424296649 [Accessed 24 Mar. 2015].