Countrywide Financial Corporation and the Subprime Mortgage Debacle
Countrywide Financial Corporation was a mortgage lending giant founded by Angelo Mozilo and David Loeb in 1969. By 1980, the company had 40 offices in 8 states and was on its way to achieving Mozilo and Loeb’s goal of becoming a nationwide mortgage lending firm. The following year, the pair launched a securities subsidiary that specialized in the sale of mortgage-backed securities (MBSs). Riding the wave of the U.S. housing market bubble, the company was at the height of its success between 1994 and 2006. By 2006, the company originated more than 2.2 million loans totaling $408 billion. However, the collapse of the housing market in 2007 drastically changed the future of Countrywide Financial. While the company had a market value of $24 billion in 2006, the value fell rapidly when it became evident that many of the mortgages Countrywide had made during the housing boom were overly risky and likely to go into default. In 2008, the company was acquired by Bank of America for $4 billion in stock. Shortly after the acquisition, Bank of America’s management entered into an $8.7 billion settlement with a group of state attorney general over Countrywide’s predatory lending practices. Mozilo, who collected a severance package valued between $80 million and $115 million following the acquisition, and two other executives were indicted by the SEC for fraudulent misrepresentation of the risk inherent in the company’s loan portfolio. Many issues related to Countrywide’s business practices and lack of ethics resulted in the company’s failure as well as the subprime mortgage market collapse as a whole.
Countrywide made significant changes to its business strategy as the housing market changed between 1994 and 2008. It went from providing mainly prime mortgages backed with high underwriting standards to a relaxed environment of little documentation and risky business practices. The main issue for Countrywide was this dramatic change in strategy that did not encourage adequate evaluation of the risk associated with its business practices and turned a blind eye to unethical business behavior. Risky or unethical business practices engaged in by Countrywide Financial Corporation include the following: * Relaxed underwriting standards that did not require customers to verify income or go through a full credit history check. This allowed customers to be approved for a loan they could not realistically afford or have loans on multiple homes at one time that they could not adequately cover. * Adjustable rate mortgages (ARMs) that increased after the initial low interest rate period allowed customers to purchase homes they could initial afford. Many customers planned on flipping the home or counted on the home value increasing enough that they could sell the home before the rate increased to a point they could no longer afford. * Increase in home values during the housing bubble allowed customers instant equity in their homes to borrow against which was financed by companies like Countrywide. Countrywide did not properly assess the risk associated with this type of loan. * In 2004 Countrywide greatly increased the amount of subprime loans and no-down-payment loans. Customers could purchase a home with no down payment and also receive a home equity loan for 20% of the home’s value. This resulted in inadequate collateral for these types of loans that were dependent on the value of the home to increase. Once the housing bubble burst, these properties were worth considerably less than their value at the time of purchase. If the customer defaulted or went into foreclosure on the property, there was a considerable loss on from the original amount of the loan. * These loans were then sold into the secondary mortgage market as mortgage backed securities. The risk associated with the...