Case Study
Case Study 6
One of the main causes of the housing bubble “bursting” in the mid-2000’s was largely due to the sub-prime mortgages. A sub-prime mortgage is generally classified as a mortgage loan to a borrower with a low credit score, with a small down payment, or high debt to income ratio. The market for sub-prime mortgages was 37.6 percent of total mortgages by the end of 2005. In 1994 sub-prime mortgages accounted for only 6 percent of total mortgages. To a great extent the “bubble burst” is the result of ethical failure. Mortgage brokers relaxed documentation requirements and impaired or limited credit histories. Many loans were provided as “stated income loans”, whereby the borrower did not have to prove income. Additionally, mortgage brokers gave new homeowners “adjustable rate mortgages which often included introductory below market rates. Below market “teaser: rates allowed for a low monthly payment in the first few years of the loan and then were adjusted in line with market rates thereafter.” “Countrywide’s conduct was deemed illegal in the case Department of Legal Affairs (Florida) v. Countrywide Financial Corp. et al. filed June 30, 2008. Specific illegal practices alleged in the case included:
1. CFC did not follow its own underwriting standards.
2. CFC did not follow industry underwriting standards.
3. CFC placed borrowers into loans they knew they could not afford.
4. CFC failed to properly disclose loan terms including: a. misrepresenting duration of “teaser rates” b. Misrepresenting adjustable rates as fixed rates. c. Misrepresenting the manner and degree of payment increase after initial fixed rate period. d. Not disclosing that low teaser rates would expire and dramatically increase resulting payment that might be far beyond borrower’s means.
5. CFC knowingly placed borrowers in inappropriate mortgages.
6. CFC provided underwriters with bonuses based upon volume of mortgages approved.” Countrywide originated the pay-option
One of the main causes of the housing bubble “bursting” in the mid-2000’s was largely due to the sub-prime mortgages. A sub-prime mortgage is generally classified as a mortgage loan to a borrower with a low credit score, with a small down payment, or high debt to income ratio. The market for sub-prime mortgages was 37.6 percent of total mortgages by the end of 2005. In 1994 sub-prime mortgages accounted for only 6 percent of total mortgages. To a great extent the “bubble burst” is the result of ethical failure. Mortgage brokers relaxed documentation requirements and impaired or limited credit histories. Many loans were provided as “stated income loans”, whereby the borrower did not have to prove income. Additionally, mortgage brokers gave new homeowners “adjustable rate mortgages which often included introductory below market rates. Below market “teaser: rates allowed for a low monthly payment in the first few years of the loan and then were adjusted in line with market rates thereafter.” “Countrywide’s conduct was deemed illegal in the case Department of Legal Affairs (Florida) v. Countrywide Financial Corp. et al. filed June 30, 2008. Specific illegal practices alleged in the case included:
1. CFC did not follow its own underwriting standards.
2. CFC did not follow industry underwriting standards.
3. CFC placed borrowers into loans they knew they could not afford.
4. CFC failed to properly disclose loan terms including: a. misrepresenting duration of “teaser rates” b. Misrepresenting adjustable rates as fixed rates. c. Misrepresenting the manner and degree of payment increase after initial fixed rate period. d. Not disclosing that low teaser rates would expire and dramatically increase resulting payment that might be far beyond borrower’s means.
5. CFC knowingly placed borrowers in inappropriate mortgages.
6. CFC provided underwriters with bonuses based upon volume of mortgages approved.” Countrywide originated the pay-option