Countrywide
Countrywide Financial Debacle
Countrywide Financial Corporation was a mortgage lending giant founded by Angelo Mozilo and David Loeb in 1969. With a long history, it was at the height of its success during the mortgage boom from 1994 – 2006. The mortgage debacle began in 2007 and drastically changed the future of Countrywide Financial. Many issues related to Countrywide’s business practices resulted in the company’s failure as well as the subprime mortgage market collapse as a whole. Countrywide had an extreme change in its business strategy as the housing market changed from 1994 through 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 adequately evaluate the risk associated with its business practices and turned a blind eye to unethical business behavior. Relaxed underwriting standards that did not require customers to verify income or go through a full credit history check were the beginning of the markets problems. Countrywide 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 that increased after the initial low interest rate period allowed customers to purchase homes they would never be able to pay for. Many customers had 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. 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 depending on the value of the home to increase. Once
Countrywide Financial Corporation was a mortgage lending giant founded by Angelo Mozilo and David Loeb in 1969. With a long history, it was at the height of its success during the mortgage boom from 1994 – 2006. The mortgage debacle began in 2007 and drastically changed the future of Countrywide Financial. Many issues related to Countrywide’s business practices resulted in the company’s failure as well as the subprime mortgage market collapse as a whole. Countrywide had an extreme change in its business strategy as the housing market changed from 1994 through 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 adequately evaluate the risk associated with its business practices and turned a blind eye to unethical business behavior. Relaxed underwriting standards that did not require customers to verify income or go through a full credit history check were the beginning of the markets problems. Countrywide 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 that increased after the initial low interest rate period allowed customers to purchase homes they would never be able to pay for. Many customers had 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. 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 depending on the value of the home to increase. Once
References: http://www.financialfraudlaw.com/lawblog/624-million-countrywide-financial-litigation-one-largest-securities-fraud-settlements-ever/1 http://www.osc.state.ny.us/press/releases/may10/050710.htm http://www.thestreet.com/quote/CFC.html