Daryl L. Young
Thomas Edison State College
Strategic Management Module 7 Case Study
Housing Bubble and Its Burst
Case Study Question 1: Explain the cause of the housing bubble and its burst in the mid-2000s. To what extent is this problem the result of ethical failure? Housing Bubble
No single cause can fully explain the crisis but, in my opinion, the two major bases were legislation that promoted homeownership and subprime mortgages. To fully understand the environment that spawned the housing bubble, we’ll have to travel back to the 1930s, when the country was in the midst of the Great Depression. During this time frame, homeownership represented only about 40 percent of the U.S. households (Thompson, Peteraf, Gamble, Strickland, 2012, p. c-423). Following severe mortgage market disruptions, widespread foreclosures, and sinking homeownership rates, the government created the Federal Housing Administration (FHA), Fannie Mae, the Federal Home Loan Bank (FHLB), and several decades later Freddie Mac to help promote secure and sustainable homeownership for future generation of Americans (Reforming America’s Housing Finance Market, A Report to Congress, 2011, P. 5). A Subprime Mortgage is a type of mortgage that is normally made out to borrowers with lower credit ratings; a conventional mortgage is not offered because the lender views the borrower as having a larger-than-average risk of defaulting on the loan; lending institutions often charge interest on subprime mortgages at a rate that is higher in order to compensate themselves for carrying more risk, as defined by Investopedia.com, 2013. In 1994, subprime mortgages represented approximately 6 percent of total mortgage loans originated but by 2005 the percentage grew to 37.6 (Thomson et al., 2012). Private firms like Countrywide, and others, issued more than 84 percent of the subprime mortgages in 2006 (Swift, 2011). Fast-forward to the 2000s and the...