When the housing bubble started to burst in 2005, interest rates started to rise as well. This caused borrowers with adjustable rate mortgages to have difficulty in making their newly adjusted mortgage payments. However, the bursting of the housing bubble was actually facilitated due to the rising numbers mortgage defaults and foreclosures that spilled over into the general economy which caused the housing bubble transit into the housing problems. During this period, the economy worsened which lead to more people losing their jobs; making it difficult for people to keep up with their mortgage payment. As a result of financial hardship, caused by the housing and subprime lending markets, this made banks to pullback on their lending. There was an economic state of recession. A lot of financial institutions had problems due to the reduction in bank capital. This routine of bank reduction in capital continued to cause more foreclosures among large number of people already holdin...
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...ave incurred significant losses and other problems because of poorly structured subprime lending program. However, these institutions underestimated the higher default rates and loss-on default rates involved with subprime lending, and higher overhead costs. Also they “frequently lacked the management expertise, business planning process, and risk management processes necessary to manage these risks in a safe and sound manner (Turano, 2006, p. 38).
Critique the Role of Leadership Decision-Making during the Subprime Loan
According to Gilbert (2010), the possible parties to the subprime loan crisis are:
• “Borrowers who may or may not have lied to lenders in their application,
• Mortgage brokers and lenders who may or may not have asked the right questions or enough of the right questions or checked on the answers to these questions to justify the loans that they made,
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