Systems thinking and general systems theory are major components of basic system strategy. Limited cooperation among the different stakeholders in the design procedure makes it hard to balance the needs of participants with the system design and results (Aalberus, 2016). The limited cooperation among participants has led to many unexpected consequences like the 2008 financial crisis. The financial crisis was caused by lending risks that were spread throughout the financial system worldwide. An exhaustive comprehension of the whole system will help to generate a viable change in the mortgage finance system. The feasible change in the mortgage system will include changes in the design of processes, policies, regulations, products, markets, and consumption to help in restructuring the split system (Aalberus, 2016).
Congress was a major contributor to the mortgage issues due to the policies that were set to generate a necessary societal change. Policies like the reviewed Community Reinvestment Act focused on ensuring even the less fortunate populations owned homes (Simkovic, 2013). The policy required banks to meet the needs of the whole community around them despite their financial status. Government agents like Fannie Mae and Freddie Mac were instructed to make credit more accessible to help the poor to own homes. The easy access to credit created new products and services in the mortgage sector like the subprime loans. Similarly, the credit policy ensured that banking institutions were ranked according to how helpful they were to their communities (Simkovic, 2013).
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Edward Demings had advised people to avoid altering a system they barely understood and making decisions that are not solving the underlying problem. However, Congress and its agents ignored the warning and went ahead to interfere with the system (Roberts, 2013). Similarly, Congress did not do thorough research to envisage the long-standing undesirable impacts. Consequently, policies have been unsuccessful when it comes to increasing home proprietorships among low-income earners. The rash decisions made by Congress made the situation worse. Fannie and Freddie instructed mortgage financiers to come up with efficient and advanced products to help their societies. However, the government agents did not advise mortgage financiers on how to guarantee a viable system that is error-free (Roberts, 2013).
Mortgage financiers developed a range of new products to raise the number of loans advanced to clients who were low-income earners. The move was to respond to the policies set by Congress concerning the mortgage industry (Bakir, 2015). The subprime products developed include loans without income authentication, loans with negative amortization loans that had low down payments in the first years of the mortgage, and loans characterized with balloon payments. Similarly, the Federal Reserve ensured that the mortgages accrued low interests for an extended duration. Mortgage financiers did not foresee the effects of these new products on the system design and the financial system as a whole (Bakir, 2015). The mortgage finance system has a weakness when it comes to associated incentives, transparency, and well-adjusted risks. Similarly, the mortgage finance system experienced regulatory failures that led to the emergence of illegitimate evaluators and brokers. However, most of these fraudsters were later caught although they paved the way for illegal behavior in the mortgage sector (Simkovic, 2013).
One effective method to solve the problem in the mortgage industry is government regulation. The government should establish the limits that mortgage financiers can offer to their clients (Annappindi, 2014). Similarly, the government can control the types of loans issued, and the ways mortgages are sold. The method requires the government to understand how the mortgage finance system works for it to be effective (Annappindi, 2014). Moreover, the government would also have to predict the effect of the developed products overall system. The government will be able to control the mortgage sector and avoid cases like the subprime mortgage. Government regulation will also prevent the reemergence of illegal brokers and appraisers in the mortgage sector (Simkovic, 2013).
Another method that will help to solve the problem in the mortgage industry is transparency in the whole system (Simkovic, 2013). The mortgage finance system should be transparent to allow clients appreciate the products they are purchasing. An efficient mortgage market requires well-adjusted risks and transparency among shareholders, consumers, and financiers. Transparency will ensure that clients understand every aspect of mortgages before they make a decision (Aalbers, 2016). Similarly, transparency will enable mortgage brokers and appraisers to provide accurate information and avoid fraudsters in the mortgage sector. Equally, clients should be informed of the potential long-term effects of taking the loans. Transparency will help to improve the mortgage sector significantly and restore its reputation (Aalbers, 2016).
References
Aalbers, M. B. (2016). The financialization of home and the mortgage market crisis. In The Financialization of Housing (pp. 40-63). Routledge.
Annappindi, S. K. (2014). U.S. Patent No. 8,799,150 . Washington, DC: U.S. Patent and Trademark Office.
Bakir, C. (2015). Fragile by design: The political origins of banking crises and scarce credit. Public Administration , 93 (3), 828-830.
Roberts, A. (2013). Financing social reproduction: the gendered relations of debt and mortgage finance in twenty-first-century America. New Political Economy , 18 (1), 21-42.
Simkovic, M. (2013). Competition and crisis in mortgage securitization. Ind. LJ , 88 , 213.
