The subprime mortgage crisis was due to house prices decline and a crisis in the banking industry due to diminished liquidity at a time was going through a period of recession (Demyanyk & Hemert, 2008). Demyanyk & Hemert (2008) argues that the subprime mortgage crisis had its genesis from the high loan delinquencies and mortgage foreclosures inherited between the years 2001 and 2006 with the year 2006 being the most notorious culprit. Wilse-Samsony (2010) claims that the high cases of delinquency and foreclosure may have been caused by caused by resets in the interest rates, poor consumer loan product information and such effects of the recession as job losses. Other factors that may have contributed to the crisis include diminished loan underwriting measures and use of homes as loan security which upon the decline in prices could not afford to reclaim the original loan amounts borrowed (Wilse-Samsony, 2010).
The principles of the intelligence phase of Simon's decision-making model, stipulates the need to gather information on a situation, note whether there is a problem and then making a solution based decision around the identified problem (Katsikopoulos & Lan, 2011). It would have been important for the industry experts and regulators to have compared the mortgage industry performance especially from the period of the years 2001 to 2006. They would have been able to identify the possible underlying risks posed by the high loan delinquencies and mortgage foreclosures and made deliberate decisions to mitigate on these. There was lack or ignorance of information intelligence and data collection and analysis.
It is very important now especially even for the regulators to know what information is provided to consumers before they access a loan or a mortgage facility. Information intelligence on possible solutions for delinquency mitigation such as underwriting measures will help guide industry procedures and regulations.
The design phase of Simon's decision-making model advises on the need for an alternative approach to the identified problem realized by the intelligence phase while the choice phase decides which best alternative to take (Katsikopoulos & Lan, 2011). The possible alternatives to avert the occurrence of such a situation would be to ensure thorough consumer education so that consumers make an informed decision on which loans they can take and which to avoid. It will also be important to increase loan underwriting measures to mitigate for losses in the event of default.
But most importantly even as these solutions are to be implemented, the very vital thing to consider is always to gather information on the market and industry situations on a continuous basis. It is because market and industry situations are always very dynamic and that what may work at a given point may not work at another. Hence, it is very necessary to research and understand the prevailing trends at any given time.
References
Demyanyk, Y., & Hemert, O. V. (2008). Understanding the Subprime Mortgage Crisis. Federal Reserve System.
Katsikopoulos, K. V., & Lan, C.-H. (. (2011). Herbert Simon’s spell on judgment and decision making. Judgment and Decision Making , Vol 6 (8), pp. 722–732.
Wilse-Samsony, L. (2010). The Subprime Mortgage Crisis: Underwriting Standards, Loan Modifications and Securitization. University of Columbia. University of Columbia.
