Ethical Issues with Subprime Loans

The U.S. subprime mortgage crisis was a set of events and conditions that led to a financial crisis and subsequent recession that began in 2008. It was characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages. These mortgage-backed securities (MBS) and collateralized debt obligations (CDO) initially offered attractive rates of return due to the higher interest rates on the mortgages (Watkins, J.P 2011)

Subprime loan was created to help people or households with less than perfect credit records, moderate incomes, or limited wealth to have the opportunity to buy a house or refinance an existing home. There are so many ethical issues surrounding subprime loans which are simply the kind of loan that were offered to borrowers whose credit scores were below the acceptable rating of 570. (Gilbert, J. 2011). Through this type of loan mortgage companies and their lenders had an increase in their earnings by lending to this type of borrower. However, after a short period of time the borrowers were unable to repay what they borrowed and this led to the drastic and significant fall in the mortgage industry.

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

The decision making process in the financial world is a very critical issue; this is because any decision that are reached will definitely affect other institution, or other people. It is therefore important that whoever that is in a financial decision making position must be required to be responsible, accountable, and honest.

Because these three factors were lacking in the decision making process in subprime loan cases that was why many corporate and financial misconduct amidst in subprime lending left many people to wonder whether ethics in leadership should be of greater focus. Government and public officials including the Securities and Exchange Commission and the United States Senate questioned organizational leaders over their dubious, seemingly, and misguided decision-making. They wonder how such gross misconduct could occur even when organizational policies and guidelines exist to safeguard against unethical practices. (Thiel, 2012)

The risk of sub prime loan and what measures have been taken to deter this from occurring in the future?

The risks of subprime loan to the lenders indicated that lenders have higher delinquency rates compare to standard prime mortgage. Beside higher delinquency rate, the lenders also have higher loss rate risks. The combination of high delinquency rates and high loss rates caused the lenders out of businesses because they could not manage the loss. American Psychological Association (2010) a number of institutions have incurred significant losses and other problems because of poorly structured subprime lending program. Generally, these institutions underestimated the higher default rates and loss on default rates involved with subprime lending as well as the higher overhead costs. Moreover, they frequently lacked the management expertise, business planning processes, and risk management processes necessary to manage these risks in a safe and sound manner (Turano, 2006)

With the overall financial crisis of 2007-2008 which indicated what went wrong and how to prevent anything like that from happening again. In response to the problem in subprime loan, the government already took several steps to provide limited relief to deter foreclosures and allow those with good credit opportunities to refinance and adjust payments to keep their homes and stay current on their payment. Politician and financial regulators tightened lending rules to offset the incentive created by mortgage-backed securities and prevent loans from being issued to people who are unlikely to be able to make the required monthly payments. (p.23) they also passed legislation to help homeowners who were underwater on mortgage loan remain in their home. The Wall Street Reform and Consumer Protection act was passed by Congress and signed by president Obama in 2010. (p.811). this act regulates the following:

The risk of subprime loan and what measures have been taken to deter this from occurring in the future cont.

  • Eliminate the office of the Thrift supervision and give broader authority to the Federal Reserve to regulate all large financial institutions.
  • Establish a process for the federal government to liquidate the asset of large failing financial institutions.
  • Create a financial stability oversight council to be on the lookout for risks to the financial system.
  • Required companies selling asset backed securities to retain a portion of those securities so the sellers share part of the risk.
  • Provide federal regulatory oversight of mortgage-backed securities and other derivatives and require that they be traded on public exchanges.
  • Establish a stronger consumer financial protection role for the Fed through creation of the Bureau of Consumer Financial Protection.

This new act was designed to send a strong message to stockholders, bondholders, and executives of large financial corporation that they will suffer unavoidable and extremely high personal financial losses if they allow their corporations to ever again get into serious financial trouble. Thiele, C. (2012)


American Psychological Association. (2010). Publication manual of the American Psychological Association (6th ed.). Washington, DC: Author

Board of Governors. 2011. “Does the Federal Reserve Ever Get Audited?” Current FAQs: Informing the public about the Federal Reserve, updated October 20.

Cone, E. (2008). Social responsibility: doing the right thing. CIOInsight. Retrieved from:

Gilbert, J. (2011). Moral Duties in Business and Their Societal Impacts: The Case of the Subprime Lending Mess. Business and Society Review. 116:1 87-107. Center for Business Ethics at Bentley University. Published by Blackwell Publishing. MA 02148, USA.

Thiel, C. (2012) Leader Ethical Decision-Making in Organizations: Strategies for Sense making  Vol. 107 Issue 1, p49-64. 16p.

Watkins, J. P. (2011) Banking Ethics and the Goldman Rule Journal of Economic Issues (M.E. Sharpe Inc.) Vol. 45 Issue 2, p363-372. 10p. 3 Charts.