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Countrywide Financial Corporation - Case Study Example

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Countrywide Financial Corporation (CFC), founded by Angelo Mozilo and David Loeb engaged in banking, home financing (mortgage), capital markets, insurance and global operations (Eastburn, 2011). …
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Countrywide Financial Corporation

Download file to see previous pages... Riding on the avowed need to own homes occurring between 1996 and 2006, the mortgage sector of CFC grew tremendously, recording millions of mortgage originations in the years. The shift from prime to subprime mortgages seemed to propel the corporation to greater success. This stemmed from, seemingly, the favorable terms that came with the package. The credit score of the borrower, the down payment and the debt-income ratio were all low, thereby spurring the lower middle and the low-income populations to take advantage of the offer to own homes. These factors significantly contributed to the growth of CFC. The developers of real estate also took full advantage by setting up houses and then selling them later to repay the mortgage, at the equivalent time making a handsome profit (Eastburn, 2011). However, due to the soaring risk involved in lending monies to unsecure and irregular workers in the lower class, cases of mortgage defaulting arose. This was, further, un-helped by the decision of the corporation to offer unsecured loans. The bursting of the housing bubble in 2006 further added to the woes as the prices of houses plummeted and cascaded down, the investment capital and interests following closely behind. The inability to repay mortgages was apparent since further loss of jobs and economic strains set on those who had taken the loans (Eastburn, 2011). Whereas it was profits all through for the corporation as far back as time of establishment, the dawning of reality of registering losses was hard to handle. Attempts to revive the corporation by all measures, including acquiring loans and cutting of staff did not help (Eastburn, 2011). The further collapse of the corporation stemmed from the incentives payable to the partners and the rest of the executives. Issuance of unsecured loans to the financially unstable working class did not help matters due to loss of jobs. Eventually, the Bank of America, ending an era for the CFC, bought it. SWOT ANALYSIS Strengths of a corporation or business setup predominantly show the abilities to stand up to challenges brought about by competitors and any arising changes in the market. Countrywide Financial Corporation, CFC, provided long-term mortgage loans of more than twenty years having a loan-value ratio of over 60 percent, normally 80-85% (Eastburn, 2011). The loans provided to those aspiring to own homes (the loaned) did not need balloon payments when their terms expired; rather the payments spread over the whole life of the loan. The availability of the mortgage across all sections of the population made CFC show a difference from the other mortgage and home financing institutions. The setting up of offices all across the United States further improved accessibility of the corporation by the populations, promoting interactions and selling of mortgages. Weaknesses of a business setup, on the other hand, exhibit the vulnerability to the market changes, competitors and product competition (Eastburn, 2011). The confirmation of discrimination based both on race and income ability tended to taint the CFC image. The discrimination, referred to as ‘redlining’, justified by taking into consideration the extra risk involved in lending to persons with unstable and irregular income. After receiving insurance against such persons, there was no way this discrimination could have surfaced. This presented itself as the case since the expectation for uniform lending in the mortgage industry required that they be so. The protection against market entry by other competitors seemed weak, thereby encouraging the entry of competitors who rubbed the profits the wrong way (Eastburn, 2011). ...Download file to see next pagesRead More
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The purpose of this paper is to review some of the known business practices of Countrywide and determine how those practices affected the mortgage industry. In conclusion discussing what role Countrywide may have had in the unraveling of the subprime mortgage industry; some of the affects the acquisition of Countrywide by Bank of America possibly had on the mortgage industry and what has happened in the aftermath of the transaction.
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