The Case of Countrywide Financial: the Subprime Meltdown

Name: Zheyuan Xiong

Date: 02/25/2011

The Case of Countrywide Financial: The Subprime Meltdown

Introduction:

On its way to becoming the nation’s largest mortgage lender, Countrywide Financial became one of the nation’s largest business failures in recent decades. Founded in 1969 in part by Angelo Mozilo, it had become the largest provider of home loans in the United States, with one in every six U.S. loans being originated with Countrywide. However, Countrywide’s entire operation, from its computer system, to its incentive pay structure and financing arrangements, was intended to obtain maximum profits out of the mortgage lending upswing no matter what the cost was to its primary stakeholders. Countrywide’s primary stakeholders consisted of employees, investors, regulators, clients, communities, as well as shareholders. However, because of its ethical and operational issues, Countrywide caused adverse conditions for all stakeholders involved.

Countrywide’s troubles and ethical issues can be traced back to the understanding of the concept of subprime mortgage lending. Subprime lending has been both a blessing and a burden to the housing industry for numerous years, which guaranteed lenders to make huge profits while taxing consumers with extreme loan terms and exorbitant interest rates. Through the mid 90’s and 2000’s, the number of subprime mortgage loans rose dramatically. Subprime lending means lending at a higher interest rate higher than the prime rate, often a 1 percent higher interest rate, although how far above depends on factors like credit score, down payment, debt-to-income ratio, and recent payment delinquencies. However, Countrywide’s failure to recognize the needs and consequences of employees, suppliers, regulators, special-interest groups, communities, and media, lead to the company failing and its eventual purchase by Bank of America Corporation.

Countrywide’s reputation in the industry was stellar,...