Countrywide and the Subprime Mortgage Crisis

Countrywide and the Subprime Mortgage Crisis

Countrywide Financial Corporation was a giant in the financial industry in the United States for several decades until the financial crisis in the year 2008. Under Mozilo’s stewardship, the company’s growth had been incredible. It had employees tripled to more than thirty-four thousand. Initially, it was called countrywide credit industries but changed to the countrywide financial corporation. It is an assertion that it was no longer a sheer mortgage company. As a complete commercial company, it owned banks, sold title insurance, and traded in shares. However, the mortgage remained its principal business as was ranked third largest home provider in America by inside mortgage finance. Efforts put in place by the company during the fast-growing period were to command a market share of about forty percent, which would have been the highest ever witnessed in the industry. If achieved, this would have proved the dominance of countrywide corporation for more than a century. When the real estate market in the US fell due to the financial crisis in 2008, it left the company exposed as a result of ambitious expansion strategies into subprime mortgages (Gale, 2014). During the early years of growth, countrywide efforts to dominate the market saw it deviate from conventional lending practices. The decision to loosen lending standards for borrowers with less or no credit history was employed. Initially, this saw a rise in a number of borrowers, and the signing of fair lending deals with the department of housing and urban development.

The attractiveness of subprime made countrywide to venture into it, though initially cautiously. Later, it expanded rapidly over more than seventeen states, and as a result of market response and returns decision to merge prime and subprime was necessitated (Wilmarth, 2015). The strategy worked well with countrywide towards its goal achievement of being closer to big rival companies. Amongst the changes that countrywide introduced and saw it propel in the industry, including the target market, which was low and middle-income earners and flexible lending terms to the borrowers. Additionally, placing clients in categories in terms of riskiness by checking debt to income ratio made high income for company and mortgage accessible to borrowers.

Several years of ensuring a balanced portfolio among loans originating, financing services, and swift response on interest rates and market needs enable its prosperity. In spite of the excellent market command, the walls came grumbling mid-year of 2007; the same propelling factors brought it down (Gale, 2014). Its departure from strict lending regulations saw a hard hit with a high rate of default in subprime. When the economy fell, housing prices dropped, and foreclosure and felonies shoot up. As a result, the company was down due to a crisis, and this led to a falling in revenue and increased mortgage default. The reliance on the secondary market and tightening of credit worsen the situation. Countrywide had to sale 16% of its stake to Bank of America, which observers read malice as for the $ 2 billion the bank got preferred shares changed to ordinary shares worth $ 2.4 billion at that time transaction and paying twice as many dividends as ordinary. Additional capital to countrywide did not solve the hard time they were undergoing, had to lay off 12000 employees, and abandon the subprime market.

On January 11, 2008, countrywide was bailed out by Bank of America in partnership. This was to help the company restore its original self; it worked well initially, but later refinancing boom overcome the bank and countywide delaying the amalgamation of the companies. With the continued crisis, the change of name could not save the once giant; its reputation was tainted as involved in financial dishonesty and falsification of information. Several lawsuits and probes from state and federal agencies made accusing the company of giving false information to the client and also a failure to state the real state of affairs of its books while disposing of the company (Wilmarth, 2015). It also seems that the collapse of the company can be traced back to times of Mozilo’s chairmanship, where is lifestyle was extravagant using us $470 million within five years alone. If not enough, he was involved in insider trading, which further brought down the company.