September 26, 2013
“Countrywide Financial,” cofounded by Angelo Mozilo, was known as one of the most successful financial companies in the beginning of the 21st century. The cofounder had a solid business philosophy; to help low-income individuals and minorities. “Countrywide Financial“ was the largest home loan provider in the United States, with one out of six loans provided by the company. Angelo Mozilo believed that every American had the right to own a home (Stewart, 2013).
Financial institutions saw a great opportunity to create an investment after the government passed significant legislative acts from the 1970’s to the 1980s: Community Reinvestment act, Depository Institutions Deregulation and Monetary Control Act. This required banking institutions to loan money for low rates and low down payments (Avramenko, & Boyd, 2013). In 1995 President Bill Clinton revised the Community Reinvestment Act to prevent banking institutions from denying loans or increasing costs based on race. The revising of this act helped individuals with low to moderate income meet the standard credit requirement to obtain a loan (CRA, 2012).
These acts helped to change standard loan processing by lowering the acceptable credit score and debt-to-income ratio. This led to the formation of a strategic lending method known as subprime lending. This is a form of lending that targets people who would not normally be approved for a traditional loan. These types of loans required little or no money down, however the interest rates were much higher. It was a very risky financial instrument because it did not require any verification of an applicant’s information. The interest rate would be based upon on the clients credit score, down payment, debt-to-income ratio, and payment defaults. Most of the individuals had poor credit ratings and payment delinquencies, leading to a higher interest rate. In many cases, however, people who were...
References: Avramenko, R., & Boyd, R. (2013). Subprime virtues: the moral dimensions of american housing and mortgage policy. Perspectives and Politics, 11(1), 111-131.
Community Reinvestment Act (CRA). (2013). The Board of Governors of the Federal Reserve System –Key findings and highlights. Retrieved from http://www.federalreserve.gov/communitydev/cra_about.htm
Freudrich, J., Ferrell, O.C., Jackson, J., Sowayda, J. (????). Countrywide Financial: The Subprime Meltdown.
Stewart, K. (2013). Social and ethical responsibilities of business.
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