1. Ethical Implications of the Subprime
and Predatory Lending
Mortgage Industry
Bambie Hayes
Northcentral University
MGT7019

2. INTRODUCTION
• Historical Summary of Mortgage Lending
• Ethical & Unethical Behavior of Mortgage
Industry
• Code of Ethics & Standards
• Leadership Influence
• Stakeholder Impact & Social Response
• Outcomes, Consequences & Punishment
• Implications for Further Research & Conclusion

3. HISTORICAL SUMMARY
•History of mortgage lending
•Push for homeownership and wealth building
(The White House, 2003)
•Ease of lending requirements
•Loan types
•Down payment
•Refinance
Source: United States Department of Housing and Urban Development U.S. Market
Conditions

4. ETHICAL LENDING BEHAVIOR
• Increased homeownership to diverse populations
(The White House, 2003)
• Debt consolidation
• Home Appreciation
Source: Design and Georgraphy.com

5. UNETHICAL LENDING BEHAVIOR
• Teaser interest rates and adjustable rate mortgages
(Pajarskas & Jociene, 2014)
• 80/20 loans
• No documentation and Stated loans
• Lender influence on appraisals

6. ILLEGAL LENDING BEHAVIOR
• Property flipping
• Straw buyers
• Chunking
• Foreclosure ‘rescue’
• Reverse mortgage (The Financial Roundtable,
2009)

7. HOUSING DISCRIMINATION
• Steering
• Blockbusting
• Redlining
• Disparate impact (HUD, 2016)

8. REFLECTION OF ETHICAL STANDARDS
• Real estate and industry code of ethics (NAR,
2016)
• Code of ethics effect on unethical behavior
• Ethics as a part of company culture
• Profit! Profit! Profit! (Watkins, 2011)

9. INFLUENCE OF LEADERSHIP
• The Goldman Rule (Watkins, 2011; Thiel, et al.,
2012)
• Washington Mutual (CNN Money, 2010; Weick,
n.d.)
– https://www.youtube.com/watch?v=XvFBJVhNpiM
• Countrywide Mortgage (Gzfraud, 2008; Johnson,
2010)
– https://www.youtube.com/watch?v=uO9FugXRFuc

10. SOCIAL RESPONSE
STAKEHOLDER IMPACT
• Public outcry
• Firms and shareholders lost revenue (Gilbert,
2011)
• Neighborhood blight
• Decreased local ad valorem revenues
• Lenders as landlords
• Racial/ethnic disparities

11. OUTCOMES COMPARISON OF
CONSEQUENCES
• Subprime vs. predatory lending (Gilbert, 2011;
Agarwal, et al., 2014)
• Depreciating home values
• Foreclosures
• California and Florida hardest hit areas
• 30310 Task Force - Georgia

12. OUTCOMES COMPARISON OF
CONSEQUENCES
• Change in legislation (Karikari, et al, 2011; Taft,
2007; Ornstein, et al., 2006; Lehe, 2010)
– Consumer Financial Protection Bureau
– Real Estate Settlement and Procedures Act
– Training
• Loan officers
• Real estate professionals
• Appraisers

13. CONSEQUENCES &
PUNISHMENTS
• Federal and State fair housing (HUD, 2016)
• Federal and state violations (GREC, 2016)
– Civil (actual and punitive)
– Criminal
• Additional training
• Federal debarment list

14. RECOMMENDATIONS
• Consumer Financial Protection Bureau
• Fair housing outreach
• Georgia Equal Opportunity Commission
• Continuing education/training (GREC, 2016)

15. RECOMMENDATIONS
• HUD-approved housing counseling
– Certify counselors and agencies
– Require homebuyer/owner counseling
– Workshops and one-on-one counseling
– Minimum time: 8 hours

16. LOAN ALTERNATIVES
• Federal Housing Administration
• Alt-A (Mitigating circumstances only!)
• Hope for Homeowners/HAMP/HARP
• HOMESafe Georgia
• Habitat for Humanity
• Federal/State down payment assistance

17. STUDENT RECOMMENDATIONS
• Impact of homeownership in your community
• Number of cost-burdened households
• Alternatives for borrowers
• Disparate impact
• It is ok to rent!

18. STUDENT RECOMMENDATIONS
• Responsible lending choices
• Community Reinvestment Act requirements
• Regions Bank and Crisp County High School

19. CONCLUSION

20. REFERENCE
Agarwal, S., Amromin, G., Ben-David, I., Chomsisengphet, S., & Evanoff, D.
D. (2014). Predatory lending and the subprime crisis. Journal of Financial
Economics, 11329-52. doi:10.1016/j.jfineco.2014.02.008
CNN Money. (2010, April 13). Former WaMu exec gets grilled. Retrieved
from https://www.youtube.com/watch?v=XvFBJVhNpiM
Georgia Real Estate Commission (2016). Real Estate License Law & Rules
and Regulations. License Law. Retrieved from
http://www.grec.state.ga.us/about/relaw.html
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
Gzfraud. (2008, April 17). Countrywide Mortgage and subprime mortgages.
Retrieved from https://www.youtube.com/watch?v=uO9FugXRFuc

21. REFERENCE
Johnson, C. (2010). The Foreclosure of America: The Inside Story of the Rise and Fall of
Countrywide Home Loans, the Mortgage Crisis, and the Default of the American
Dream. Academy of Management Learning & Education, 9(1), 150-152.
doi:10.5465/AMLE.2010.48661200
Karikari, J., Voicu, I., & Fang, I. (2011). FHA vs. Subprime Mortgage Originations: Is FHA
the Answer to Subprime Lending? Journal of Real Estate Finance & Economics, 43(4),
441-458. doi:10.1007/s11146-009-9218-7
Lehe, K. M. (2010). Cracks in the Foundation of Federal Law: Ameliorating the Ongoing
Mortgage Foreclosure Crisis through Broader Predatory Lending Relief and
Deterrence. California Law Review, 982049.
Mulbrandon, M. (n.d.). Change in U.S. Housing Prices: 2000-2010. Design & Geography.
Retrieved from http://i.huffpost.com/gen/271041/HOUSING-PRICES.jpg
National Association of Realtors. (2016). Code of Ethics and Standards of Practice of the
National Association of Realtors ©. The Code of Ethics. Retrieved from
http://www.realtor.org/governance/governing-documents/the-code-of-ethics

22. REFERENCE
Ornstein, S. J., Tallman, D. A., & Holahan, J. P. (2006). Predatory Lending and the
Secondary Market. Journal of Structured Finance, 12(3), 54-64.
Pajarskas, V., & Jociene, A. (2014). Subprime Mortgage Crisis in the United States In 2007-
2008: Causes and Consequences (Part I). Ekonomika, 93(4), 85-118. Retrieved from
http://search.proquest.com.proxy1.ncu.edu/docview/1644448172?accountid=28180
Taft, J. (2007). The Latest Attempt To Regulate Subprime Mortgage Lending: The Federal
Banking Agencies Issue The Subprime Mortgage Lending Guidance. Real Estate
Finance (Aspen Publishers Inc.), 24(3), 10-14.
The Financial Roundtable. (2009, August). Be Your Own Best Advocate: Mortgage Fraud
Prevention. BITS. Retrieved from https://www.fanniemae.com/content/tool/mortgage-
fraud-prevention-consumers.pdf
The White House. (2003, December 16). President Bush Signs American Dream
Downpayment Act of 2003. Retrieved from https://georgewbush-
whitehouse.archives.gov/news/releases/2003/12/20031216-9.html

23. REFERENCE
The Financial Roundtable. (2009, August). Be Your Own Best Advocate: Thiel, C., Bagdasarov,
Z., Harkrider, L., Johnson, J., & Mumford, M. (2012). Leader Ethical Decision-Making in
Organizations: Strategies for Sensemaking. Journal of Business Ethics, 107(1), 49-64.
doi:10.1007/s10551-012-1299-1
Watkins, J. P. (2011). Banking Ethics and the Goldman Rule. Journal of Economic Issues (M.E.
Sharpe Inc.), 45(2), 363-372. doi:10.2753/JEI0021-3624450213
Weick, K. (n.d). The Lost Bank: The Story of Washington Mutual, the Biggest Bank Failure in
American History. Academy of Management Review, 38(2), 318-323.
U.S. Department of Housing and Urban Development (2016a). Fair Housing and Equal
Opportunity. Retrieved from
http://portal.hud.gov/hudportal/HUD?src=/program_offices/fair_housing_equal_opp
U.S. Department of Housing and Urban Development (2016b). National Housing Market
Summary and Data. Ownership and Vacancy – Homeownership Rate. U.S. Housing Market
Conditions. Retrieved from https://www.huduser.gov/portal/ushmc/hi_HOR.html