Countrywide Financial Case

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Gamble−Thompson: Essentials of Strategic Management: The Quest for Competitive Advantage, Second Edition

II. Cases in Crafting and Executing Strategy

15. Countrywide Financial Corporation and the Subprime Mortgage Debacle

© The McGraw−Hill Companies, 2011

Case

15

Countrywide Financial Corporation and the Subprime Mortgage Debacle Ronald W. Eastburn
Case Western Reserve University
Angelo Mozilo, founder and Chairman of Countrywide Financial Corporation, was the driving force behind the company’s efforts to become the largest real estate mortgage originator in the United States and, according to some, was also the driving force behind the company’s eventual collapse. Mozilo and partner, David Loeb, founded Countrywide in 1969 in New York with the strategic intent of creating a nationwide mortgage lending firm. The company opened a retail branch in California in 1974 and, by 1980, had 40 offices in eight states. Mozilo and Loeb launched a securities subsidiary in 1981 that specialized in the sale of mortgage-backed securities (MBSs).1 The company’s annual loan production exceeded $1 billion in 1985 and began to grow at dramatic annual rates on the back of the U.S. housing market bubble which began in 1994 and ended in 2006. The company’s greatest number of annual loan originations had occurred by the time of David Loeb’s death in 2003, with more than 2.5 million mortgage originations that year. Countrywide Financial Corporation originated more than 2.2 million loans totaling $408 billion in 2006. By 2007, the company had 661 branches in 48 states and, in July 2008, was acquired by Bank of America (BoA) for $4 billion in an all-stock transaction. The market value of the company had reached $24 billion in 2006, but fell rapidly in 2007 when it became evident that many of Copyright © 2010 by Ronald W. Eastburn. All rights reserved.

the mortgages Countrywide made during the housing boom were overly risky and likely to go into default. Problems with Countrywide’s loan portfolio and lending practices were evident to BoA management even before the acquisition was consummated, with BoA investing over $2 billion in Countrywide in return for a 16 percent stake in the company in August 2007 to stabilize the troubled mortgage firm’s balance sheet. Shortly after the acquisition BoA management agreed to enter into an $8.7 billion settlement with a group of state attorneys general over Countrywide Financial Corporation’s (CFC) predatory lending practices. BoA allowed Mozilo to retire from the Countrywide’s management team and, in June 2009, the Securities and Exchange Commission (SEC) indicted Mozilo and two other key CFC executives for fraudulent misrepresentation of the credit and market risk inherent in CFC’s loan portfolio. Investigation of Countrywide’s business practices disclosed how the real estate market supported by U.S. federal legislative and regulatory decisions fostered an environment that resulted in the collapse of Fannie Mae and Freddie Mac, major banking institutions, Wall Street investment firms, and mortgage brokerage firms. The financial crisis of 2008 had at its foundation subprime mortgages, mortgagebacked securities, and capital markets activity, and as the nation’s largest mortgage lender, CFC was a significant contributor to the subprime 527

Gamble−Thompson: Essentials of Strategic Management: The Quest for Competitive Advantage, Second Edition

II. Cases in Crafting and Executing Strategy

15. Countrywide Financial Corporation and the Subprime Mortgage Debacle

© The McGraw−Hill Companies, 2011

528

Part Two:

Section D: Business Ethics and Social Responsibility

mortgage debacle. As the financial and credit crisis continued to play out into 2009, BoA executives would need to ensure that lending practices at all of its subsidiaries would promote homeownership in a manner that was in the best interest of borrowers, investors in the secondary mortgage market, and the...
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