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…show more content…
Loans at the time were nonamortizing and required a balloon payment at the expiration of the term. Mortgages were available to a limited client base, with home ownership representing about 40 percent of U.S. households. Many of these short-term mortgages went into default during the Great Depression as homeowners became unable to make regular payments or find new financing to pay off balloon payments that became due. The United States government intervened in the housing market in 1932 with the creation of the Federal Home Loan Bank (FHLB). The FHLB provided short-term lending to financial institutions (primarily Savings and Loans) to create additional funds for home mortgages. Congress passed the National Housing Act of 1934 to further promote homeownership by providing a system of insured loans that protected lenders against default by borrowers. The mortgage insurance program established by the National Housing Act and administered by the Federal Housing Administration (FHA) reimbursed lenders for any loss associated with a foreclosure up to 80 percent of the appraised value of the home. With the risk associated with default on FHA-backed mortgage loans reduced, lenders extended mortgage loan terms to as long as 20 years and LTVs of 80 percent. In 1938, Federal National Mortgage Association (FNMA) was established
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