The Failure Of Countrywide Financial

At the company’s inception, Countrywide Financial Corporation’s founders had a broad vision for the mortgage company (Eastburn, R., 2010). Even though Countrywide Financial Corporation started out as a small operation, within a few years, it began to flourish (Eastburn, R., 2010). The founders had a plan to expand Countrywide past the competition. Not only would Countrywide operate local offices, similarly as other mortgage lenders, but also Countrywide would expand to cover the nation (Eastburn, R., 2010).

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.

Countrywide, co-founded in 1969 by Angela Mozillo had become the largest home loan provider in the U.S. with decades (Ferrell, Fraedrich, & Ferrell, 2013). During the 90’s, Countrywide’s loans reached $1 trillion and were known as the number one loan provider that help qualify people with low incomes to purchase a home. Countrywide also created a program called ‘House America” which was to assist people to get a home with lower down payments. By the year 2000, Countrywide provided one in six of the loans provided to consumers in the U.S. During 2003, Countrywide had formed another program called ”We House America”, which was put in place for low-income consumers as well as the minority consumer. Countrywide goal for the program was to provide

Countrywide is a company that was known as one of the largest mortgage lenders in the country. The only way Countrywide could stay competitive, as the housing bubble grew, was to create an offer that the borrowers could not turn down. The offer allowed the borrowers choose how much they wanted to pay each month for their loan. Eventually, that was not enough to keep them competitive, and the firm had to create another option. Soon they were giving loans with no money down. The company eventually was not making most of their money from these loans and started to sink and Mozilo knew it. Over a five-year period, 2001 to 2006, he managed to arrange for himself to make $470 million compensation by looting the company he

market began to slow and consumers began to spend less of their disposable income. Contractors continued building homes and Countrywide continued loaning money (Ferrell, et al, 2013). Accordingly, many homes were on the market for sale with a decreased number of buyers. By late 2007 and early 2008, foreclosure rates were rising and borrowers and investors were dealing with the aftermath of high-risk loans (Ferrell, et al, 2013). New homes sat vacant with no buyers in sighy, homeowners were unable to continue paying, some in part due to increased payments accrued from variable interest rates, and banks were feeling the strain. By 2008, Countrywide accrued over $8 billion in subprime loans with seven percent delinquent, while the industry average was nearly five percent deliquent (Ferrell, et al, 2013). By this time, Countrywide was facing a serious trouble.

The stock market is what one would know as a collective group of buyers/sellers that trade stocks, also known as shares on a stock exchange. These securities are listed on the exchange itself and trade freely each and every day. On the exchange, stocks move hands day in and day out. Companies are able to get their stock listed on the exchange at any time that they want. There are other stocks, too...known as OTC stocks or over the counter stocks that go through a specific dealer. Larger companies tend to have their stocks listed on exchanges all throughout the world. Participants in the market can be anyone from your grandma, to retail investors, day traders, institutional investors, and so forth. One notable exchange is the NYSE; also known as The New York Stock Exchange. Moving forward, a stock market crash is when a decline of stock prices takes place throughout the stock market that results in a catastrophic loss of wealth via paper. The crashes are driven strictly by panic 9 times out of 10 a crash takes place. As a crash is happening, panic occurs; the panic keeps evolving and ends up like the snowball effect before you know it. A crash occurs when economic events take place. These events are always bad news... The behavior of traders follows, which leads to a crash when panic ensues. Crashes normally occur of a seven day period and may extend even further. Crashes happen in bear markets as the market is already weak to begin with. Once traders see a drop in prices,

The Meltdown is a PBS special on the events of the financial crisis of 2008, in a timeline format, revealing the thinking behind decisions made during the fateful months before the stock market crash in August of that year. Some financial gurus on Wall Street devised a plan to bundle several mortgages together into a group, and then selling that bundle to another group of investors looking to invest in securities. The lender did not need to earn money from the loans he was giving out, he merely gained enough of a profit from the bundling operation that billions were being made on Wall Street from 2005-2008. The problem is that these bundles were risky, and as credit unworthy individuals defaulted on their mortgages, the entire system crumbled into what is now known as the Stock Market Crash of 2008, and have subsequently lived during the Great Recession.

Countrywide Financial lead the nation in the 1990s, by catering to the lower-income consumers. The company set up loan transactions for these individuals and became a leader of the nation while doing so. The company's small down payments and simpler terms of payment helped lower-income consumers. Although by catering to lower-income consumers, the potential risk is much higher, thus the interest rate is much higher for loans. These individuals that were taken advantage of, became the victims of the company. Customers began to lose their homes. Foreclosures increased rapidly across the country, people could not afford their homes. An ethical audit could have saved Countrywide Financial, if all the risky business and unethical behavior could

As CEO of Countrywide Financial I believe CEOs hold the responsibility of the company they are over. Executives of companies should not be compensated for failure, if their company falls, then the chief executives should submit with the failure of the company. The structure would be different in my case as CEO, interviews would be conducted monthly to ensure individuals are following through with their payments. If there are delinquencies, it would followed up on and address the issues at hand. These delinquencies would not fall through the cracks. A checklist would be issued in order to ensure all sales staff have conducted the right evaluations for all loan applications. It would not be overlooked, if a traditional loan was possible for the

IndyMac was created by David Loeb and Angelo Mozilo in 1985 and was originally called Countrywide Mortgage Investment. It was built to collect Countrywide Financial loans that were too large to be sold to Fannie Mae or Freddie Mac. IndyMac Bank was the largest savings and loan association in the Los Angeles area and the seventh largest mortgage originator in the United States (“Too Good to Be True: The Fall of IndyMac”, 2008).

On September 15, 2008, Lehman Brothers filed for bankruptcy. With $639 billion in assets and $619 billion in debt, Lehman 's bankruptcy filing was the largest in history, as its assets far surpassed those of previous bankrupt giants such as WorldCom and Enron. Lehman was the fourth-largest U.S. investment bank at the time of its collapse, with 25,000 employees worldwide. The consequences for the world economy were extreme. Lehman’s ' fall contributed to a loss of confidence in other banks, a worldwide financial crisis and a deep recession in many countries. Lehman 's collapse roiled global financial markets for weeks, given the size of the company and its status as a major player in the U.S. and internationally. Many questioned the U.S. government 's decision to let Lehman fail, as compared to its tacit support for Bear Stearns, which was acquired by JPMorgan Chase & Co. (JPM) in March 2008. Lehman 's bankruptcy led to more than $46 billion of its market value being wiped out. Its collapse also served as the catalyst for the purchase of Merrill Lynch by Bank of America in an emergency deal that was also announced on September 15.

1.  What are the two ways Countrywide – or any mortgage lender - made money?

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).

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

Before the firm became bankrupt, they had more than $275 billion in assets under management. Furthermore, since the time the bank went public in 1994, the firm had increased net revenues over 600% from $2.73 billion to $19.2 billion and increased its employee headcount over 230% from 8,500 to almost 28,600 (Demyanyk, Y. S. and Hemert, O. V. 2008).