Countrywide Financial Case Analysis
Jessica Reupke
Case 28
10/9/11
1. Did subprime mortgage loans contribute to the housing bubble? Why did the bubble burst? What were the consequences of the housing bust to borrowers, loan originators, and MBS and CDO holders?
Subprime mortgage loans contributed to the housing bubble as they enabled the expansion of homeownership by offering loans to a wider variety of borrowers, particularly those with a low credit score, small down payment, or high debt-to-income ratio. This expansion increased demand for homes, increasing their prices and creating a housing bubble. The bubble eventually burst when the economy weakened in 2007. Decreased demand for housing caused prices to drastically fall and resulted in several homeowners being “underwater” on their mortgages, making it very hard to sell. This especially impacted those that lost their jobs because of the recession, making them unable to make their mortgage payments.
The housing bust led to an overall loss of confidence for consumers and the entire financial system. Borrowers became underwater on their mortgages or faced foreclosure, loan originators
2. How did Federal legislation concerning mortgage loans affect Countrywide Financial Corporation’s (CFC) business strategy? Did the government’s encouragement of subprime mortgages have an impact on the company’s number of loan originations between 1990 and 2007?
3. What effect did the housing boom and the growth in origination of subprime mortgages have on CFC’s financial performance?Did the company’s growth rate vary significantly between 2003 and 2007? Did CFC retain most of the loans originated for investment? What is your overall assessment of CFC’s financial performance between 2003 and 2007?
Case 28
10/9/11
1. Did subprime mortgage loans contribute to the housing bubble? Why did the bubble burst? What were the consequences of the housing bust to borrowers, loan originators, and MBS and CDO holders?
Subprime mortgage loans contributed to the housing bubble as they enabled the expansion of homeownership by offering loans to a wider variety of borrowers, particularly those with a low credit score, small down payment, or high debt-to-income ratio. This expansion increased demand for homes, increasing their prices and creating a housing bubble. The bubble eventually burst when the economy weakened in 2007. Decreased demand for housing caused prices to drastically fall and resulted in several homeowners being “underwater” on their mortgages, making it very hard to sell. This especially impacted those that lost their jobs because of the recession, making them unable to make their mortgage payments.
The housing bust led to an overall loss of confidence for consumers and the entire financial system. Borrowers became underwater on their mortgages or faced foreclosure, loan originators
2. How did Federal legislation concerning mortgage loans affect Countrywide Financial Corporation’s (CFC) business strategy? Did the government’s encouragement of subprime mortgages have an impact on the company’s number of loan originations between 1990 and 2007?
3. What effect did the housing boom and the growth in origination of subprime mortgages have on CFC’s financial performance?Did the company’s growth rate vary significantly between 2003 and 2007? Did CFC retain most of the loans originated for investment? What is your overall assessment of CFC’s financial performance between 2003 and 2007?