So… for the past couple of posts, we have been discussing the subprime loan crisis that occurred in the early 2000’s. Banks were approving millions of primary and secondary mortgages and refinancing mortgages for individuals with subpar credit history and unsubstantiated income left and right. Billions of dollars were handed out with these subprime mortgages, and when ARM interest rates increased, borrowers found higher payments that they couldn’t make and lower home equity that they couldn’t sell to get out from under the mortgage. By 2007, over 20% of the loans were seriously delinquent. (Gilbert, 2011, pg 90) Additionally, the loans were sold to secondary markets, leaving a borrower dealing with an unknown lender who only cared about getting their money.
The banks were fortunate in that the government bailed them out of the debacle. However, the homeowners were left with devastated lives and destroyed credit. Something had to be done.
Firstly, it must be understood that it’s the financial institution that makes the mortgage loan, but “the authority to decide whether or not to make a loan is vested not in the institution as a whole but in a cred or loan officer or committee” (Gilbert, 2011). Furthermore, giving a loan to someone who may be questionable in the ability to repay is not necessarily against the law and may even be in accordance to a banks’ standards if it is that lenient. But there are times the potential borrower should be told “no” by the loan officer. Therefore, it is up to the institution to set the standards and tighten the requirements. Additionally, potential borrowers should be required to prove their personal income through verifiable documentation such as payment stubs, W-2s or income tax returns. These types of checks and balances help eliminate careless lending.
As for federal government involvement, in 2008 the U.S. Treasure Department announced proposed regulatory reforms. These reforms involved both short-term as well as long-term suggestions which included “federal oversight functions and the creation of new federal agencies to carry out these functions” (Dickey & King, 2008).
Investigations into what really happened and who caused the crisis was also a focus of the federal government. To better understand the collapse would inevitably assist with preventing it from happening again as well as holding the right people accountable. The Enforcement Division of the Securities and Exchange Commission (SEC) called the “Subprime Task Force.” Additionally, the Department of Justice (DOJ) and the Federal Bureau of Investigation (FBI) became involved with investigating “potential criminal aspects of the subprime meltdown” (Dickey & King, 2008).
So the repercussions were great, reaching from the individual loan officer all the way up to multiple federal government agencies involved with investigations and reform. Through self-imposed standards at the organization level to governmental developed and enforced standards, hopefully the banking industry will not see such a mishap in the future. And hopefully, individual borrowers who are approved for mortgages will be able to handle the payments and maintain equity in their home. Through these steps, the economy will see an improvement both financially and ethically.