Countrywide Financial Corporation And The Subprime Mortgage Crisis

The mortgage crisis of 2007 marked catastrophe for millions of homeowners who suffered from foreclosure and short sales. Most of the problems involving the foreclosing of families’ homes could boil down to risky borrowing and lending. Lenders were pushed to ensure families would be eligible for a loan, when in previous years the same families would have been deemed too high-risk to obtain any kind of loan. With the increase in high-risk families obtaining loans, there was a huge increase in home buyers and subsequently a rapid increase in home prices. As a result, prices peaked and then began falling just as fast as they rose. Soon after families began to default on their mortgages forcing them either into foreclosure or short sales. Who was to blame for the risky lending and borrowing that caused the mortgage meltdown? Many might blame the company Fannie Mae and Freddie Mac, but in reality the entire system of buying and selling and free market failed home owners and the housing economy.

The bursting of the housing bubble, known more colloquially as the 2008 mortgage crisis, was preceded by a series of ill-fated circumstances that culminated in what has been considered to be the worst financial downfall since the Great Depression. After experiencing a near-unprecedented increase in housing prices from January 2002 until mid-2006, a phenomenon that was steadily fed by unregulated mortgage practices, the market steadily declined and the prior housing boom subsided as well. When housing prices dropped to about 25 percent below the peak level achieved in 2006 toward the close of 2008, liquidity and capital disappeared from the market.

Even though Countrywide stopped offering subprime loans 4 months ago, the company is still in the forefront of the subprime mortgage lending and foreclosure crisis.

The recent mortgage crisis in the US was unprecedented. It led to a massive clampdown of financial institutions, occasioning one of the worst financial melt-downs the US has ever faced (Jaffe, 2008). Quite naturally, it would be necessary to examine the cause of the crisis in order to draft prophylactic measures that would prevent the same financial disaster in the future. This paper will discuss the events that led to the mortgage crisis.

The financial crisis emerged because of an excessive deregulation of business operation of financial institutions and of abusing the securitization mechanism in the absence of clearly defined rules to regulate this area in the American mortgage market (Krstić, Jemović, & Radojičić, 2013). Deregulation gives larger banks the opportunity to loosen underwriting lender guidelines and generate increase opportunity for homeownership (Kroszner & Strahan, 2013). After deregulation, banks utilized many versions of mortgage loans. Mortgage loans such as subprime and Alternative-A paper loans became available for borrowers challenged to find mortgage lenders before deregulation (Elbarouki, 2016; Palmer, 2015). The housing market has been severely affected by fluctuating interest rates and the requirement of large down payment (Follain, & Giertz, 2013). The subprime lending crisis has taken a toll on the nation’s economy since 2007. Individuals who lacked sufficient credit ratings or down payments resorted to subprime mortgages to finance their homes Defaults on subprime and other mortgages precipitated the foreclosure crisis, which contributed to the recent recession and national financial crisis (Odetunde, 2015). Subprime mortgages were appropriate for borrowers with substandard credit and Alternate-A paper loans were

The mortgage crisis we are experiencing in the United States today is already ranking as among the most serious economic events since the Great Depression of the 1930’s. Hardly a day goes by without a story in the newspaper or on the cable news stations reporting about the increase in the number of foreclosures across the United States. The effects of this crisis have spread across all financial markets, where in the end all of us are paying a price for this home mortgage crisis. When the housing market collapsed, so did the availability of credit which our economy depends upon. The home mortgage crisis, the financial crisis and overall economic crisis all need to address by the

During 2007 through 2010 there existed what we commonly refer to as the subprime mortgage crisis. Through deduction of readings by those considered esteemed in the realm of finance - such as Ben Bernanke - the crisis arose out of an earlier expansion of mortgage credit. This included extending mortgages to borrowers who previously would have had difficulty getting mortgages; this both contributed to and was facilitated by rapidly rising home prices. Pre-subprime mortgages, those looking to buy homes found it difficult to obtain mortgages if they had below average credit histories, provided small down payments or sought high-payment loans without the collateral, income, and/or credit history to match with their mortgage request. Indeed some high-risk families could obtain small-sized mortgages backed by the Federal Housing Administration (FHA), otherwise, those facing limited credit options, rented. Because of these processes, home ownership fluctuated around 65 percent, mortgage foreclosure rates were low, and home construction and house prices mainly reflected swings in mortgage interest rates and income.

The crisis that stressed lots of economies and financial systems originated in US mortgage lending markets. First signals of possible problems came in early 2007, when the Federal Home Loan Mortgage Corporation announced about its inability of purchasing high-risk mortgages, after what New Century Financial Corporation - a leading mortgage lender to riskier customers - filed for bankruptcy (John Marshall, 2009). In the research paper of 2009 he claims that source of the crisis emanated from the rise of house pricing, called housing bubble. “US house prices rose dramatically from 1998 until late 2005, more than doubling over this period, and far faster than average wages. Further support for the existence of a bubble came from the ratio of house prices to renting costs which rocketed upwards around 1999..” (John Marshall, 2009, p 10). Housing bubble was also fully analyzed by Dean Baker in his research “The housing Bubble and the financial crisis” in 2008. Dean noticed that, by the middle of 2007, house prices had peaked and began to head downward.

Where do you begin with covering one of the greatest economic crash of our time, and the worst recession since the Great Depression? Michael Lewis takes us to the very beginning, covering the story of how cynical mortgage brokers and CDO managers were playing fraudulent roulette. A rigged system that was doomed from the beginning but that very well needed every piece to be in place for 2008 to happen. Credit rating agencies S&P and Moody’s had to be completely oblivious in properly rating the CDO tranche system, mortgage lenders had to be eager to write down sub-prime loans, and . Yet, through all the dust came a story of the underdogs; Steve Eisman, Michael Burry, Greg Lippmann & his Chinese side kick Eugene Xu, and Cornhole Capital

Bank of America, under the impression they had made an excellent business decision was unaware of the totality involving Countrywide’s loan practices. Only a small group of Bank of America’s employees were involved in the assessment of Countrywide’s books and operations techniques, yet had no input in the acquisition (Rothacker, 2014). Only a matter of time, Bank of America would realize the magnitude of legal issues it had acquired from Countrywide. However, Bank of America, which was much larger, had the ability to manage the negative media and confront the rising legal troubles better than Countrywide. Ironically, in 2001, Bank of America discontinued subprime mortgages and higher priced loans to riskier consumers (Rothacker,

“Those who cannot remember the past are condemned to repeat it.” These words were first written by Italian philosopher, George Santayana. The meaning is all but spelled out for the reader, the past is important, it deserves its due - don’t brush it aside, don’t pretend it didn’t happen – to better build the world of tomorrow, you need to remember (and account for) the mistakes of yesterday. The mortgage crisis, and all that it lead too for our economy, back in 2007, is an event that should never be forgotten… lest we inadvertently doom ourselves by going through it all over again. Today, of course, the situation has significantly improved; our nation managed to get over this rather sizable hump and bounce back from it (not fully healed, but certainly better than we were only a few years ago). That’s not good enough for me though; in order to truly overcome this event (that many have already put behind them and forgotten about, myself included, prior to writing this essay) and push ahead, we need to go over how it happened in the first place. Therefore, today I’ll be talking about the mortgage meltdown crisis, suffered by the United States and felt around the world, of 2007; I will cover how the crisis actually happened, the lessons learned from the collapse / the silver linings of the collapse, and how real estate buyers are intelligently learning from the past in order to benefit today.

Countrywide was fueled by several incentives to write subprime loans. Over 28 percent of Countrywide’s earnings are related to subprime loans offered by the business to assist low income families obtain a home (Ferrell, et al, p. 387). With this said, Countrywide evolved their financial earnings through utilizing subprime loans. The most powerful incentive Countrywide obtained was being acknowledged as America’s leading home lender. Countrywide became so large and strong that they felt impregnable (Olster, 2010). With impeccable profits comes the desire to expand. Expansion incentives radiated throughout the housing market. Countrywide sought to expand their subprime loan offerings to contractors and those outside of the low income market

The U.S. subprime mortgage crisis was a set of events that led to the 2008 financial crisis, characterized by a rise in subprime mortgage defaults and foreclosures. This paper seeks to explain the causes of the U.S. subprime mortgage crisis and how this has led to a generalized credit crisis in other financial sectors that ultimately affects the real economy. In recent decades, financial industry has developed quickly and various financial innovation techniques have been abused widely, which is the main cause of this international financial crisis. In addition, deregulation, loose monetary policies of the Federal Reserve, shadow banking system also play

Countrywide’s tactics often led borrowers to expensive and sometimes unfavorable loans that resulted in richer commissions for Countrywide’s sales forces, fees to company affiliates providing services on the loans, and a roaring stock price that made Countrywide executives among the highest paid in America. Countrywide’s entire operation, from its computer system to its incentive pay structure and financing arrangements, was intended to wring maximum profits out of the mortgage lending boom no matter what it cost borrowers (Morgenson, 2007).

One of the first indications of the late 2000 financial crisis that led to downward spiral known as the “Recession” was the subprime mortgages; known as the “mortgage mess”. A few years earlier the substantial boom of the housing market led to the uprising of mortgage loans. Because interest rates were low, investors took advantage of the low rates to buy homes that they could in return ‘flip’ (reselling) and homeowners bought homes that they typically wouldn’t have been able to afford. High interest rates usually keep people from borrowing money because it limits the amount available to use for an investment. But the creation of the subprime mortgage