Evaluation of subprime loans with the notion of social responsibility.

The housing industry has gone through a rough patch for a while. In the early 2000’s the industry experienced a boom where homeowners’ experienced a rapid increase in the value of their homes. With the boom in full swing an increase in subprime lending began. People with lower incomes and high debt as well as people with poor credit ratings were able to buy homes at variable interest rates. As the rates increased borrowers no longer could pay their mortgages with most houses foreclosed on. Adding to the industry’s woes was the decline in property values leaving many homeowners owing more than what their homes were worth creating more foreclosed upon properties. Many questioned who was at fault, the lenders or the borrowers (Gilbert, 2011). Basically the question of who was at fault did not matter as much as the fact that when the bubble burst it not only affected many families and communities but in addition, the meltdown affected other industries both nationally and internationally. The result of ethically questionable lending practices created a subprime market that eventually failed and resulted in an eventual global economic crisis. Not only did families lose their homes and credit ratings, the economic crisis affected employment. As the unemployment rate climbed the personal wealth of individuals and families declined. Communities and states experienced a decline in income tax revenue forcing those in charge to make tough decisions that further affected individuals and families.

What measures have been taken since that time to assure this will not happen again?

The federal government took over Fannie Mae and Freddie Mac, which help keep the housing market alive in 2008 by calming fears that the undercapitalized entities could default on their bonds (McCoy, 2013). The federal government established Troubled Asset Relief Program, (TARP) which enabled Treasury to move quickly in restoring confidence in the nation’s banks. TARP was later extended to insurance and auto companies (McCoy, 2013). A long-term financial cure is in question. While measures have been taken to assure this will not happen again it appears that the Wall Street debt repackaging machine is back and that giant banks have descended on Washington lobbying to fight the financial reforms that would keep this from happening again (McCoy, 2013).

Links

Fannie Mae: http://www.fanniemae.com/portal/about-us/company-overview/about-fm.html
Freddie Mac: http://www.freddiemac.com/corporate/company_profile/?intcmp=AFCP
TARP: http://www.federalreserve.gov/bankinforeg/tarpinfo.htm

References

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

McCoy, K. (2013, September 9). 2008 financial crisis: Could it happen again? [Web log post]. Retrieved from http://www.usatoday.com/story/money/business/2013/09/08/legacy-2008-financial-crisis-lehman/2723733/

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