Lessons Learned in Management, Marketing, Sales, and Finance Incentive Practices a Decade after the Subprime Mortgage Crisis

Jason Earl Thomas

doi:10.5539/ijbm.v12n3p19

Abstract

The subprime mortgage crisis was the most devastating financial crisis since the Great Depression. The steady rise of housing purchases and seemingly limitless increase in home values drew many investors to the United States real estate market. The business growth in this sector was so compelling that financial firms created new secondary markets that were perceived as diversifying risk, which in turn prompted lenders to create innovative funding vehicles and loose and fast loan qualification processes. The federal government was ill prepared to deal with this shift in the financial world to market-based demand, and the results were disastrous. Lenders embraced predatory lending practices, borrowers with bad credit overextended themselves beyond their means, and foreclosures occurred at startling rates as home values plummeted, resulting in a world-wide economic depression. Ten years later, we reflect on the events that led up to and caused the subprime mortgage crisis for lessons learned to improve management, marketing, and finance incentive practices.

Highlights

In a world where technology has eliminated barriers in global commerce and consumers and businesses are connected from the far reaches of the globe with smart phone applications, George Santaynana’s aphorism regarding the consequences of ignoring the past takes on a hair-raising, prophetic quality
The crisis, which began at end of the 20th century, came to a head in 2007 and has highlighted systematic weakness in the regulation and deregulation of United States and world financial systems, as well as the potentially destructive impact of incentives used in the financial industry (Bernanke, 2009)
The negative consequences experienced during the subprime mortgage crisis can be largely attributed to incentives and the inability of government to adapt to market changes occurring because of those incentives (Jaffee et al, 2009; Purnanandam, 2011)

Summary

Introduction

In a world where technology has eliminated barriers in global commerce and consumers and businesses are connected from the far reaches of the globe with smart phone applications, George Santaynana’s aphorism regarding the consequences of ignoring the past takes on a hair-raising, prophetic quality. It’s been a decade since the financial crisis wreaked havoc on the United States real estate market and the global economy. The subprime mortgage crisis had major negative effects for banks and the world financial market and developed into the most devastating financial crisis in the United States since the Great Depression (Blinder, 2010; Bernanake, 2009). The real estate market was devastated by sharp increases in mortgage foreclosures and delinquencies in North America, especially in the United States (Bernanke, 2007a). The crisis, which began at end of the 20th century, came to a head in 2007 and has highlighted systematic weakness in the regulation and deregulation of United States and world financial systems, as well as the potentially destructive impact of incentives used in the financial industry (Bernanke, 2009). Many believe the subprime mortgage crisis to be a root cause of the 2008 economic downturn that negatively affected the entire world economy

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