Countrywide Financial used subprime mortgages to help gain financial success and lead the country to an economic downfall. Through unethical and illegal practices, they brought subprime mortgages to an entire different level. Normally, subprime mortgages are issued to those that do not qualify for conventional mortgages. Countrywide, however found a new use for them that resulted in much success at first and then a crisis. As a result, foreclosures increased, causing the collapse of financial institutions and finally an economic recession.
In 2008, Bank of America acquired Countrywide and all the fall out from their unethical behavior. In order to turn this around, it is imperative that they keep the communication lines open and transparent. In late 2007, foreclosure rates were skyrocketing, banks were failing, and financial institutions were accepting government aide to stay in business. What brought this on? Subprime mortgages. Countrywide Financial was issuing subprime mortgages to anyone that showed even a remote interest. This resulted in the crashing of the housing market.
The following will dig further into exactly what Countrywide did and the ethical issues surrounding it. Traditionally, subprime mortgages were typically offered to high-risk clients who would not qualify for conventional loans. They promoted development and allowed many minorities to own houses. When used correctly subprime mortgages were an excellent financial tool. While not everyone deserves the opportunity to own their own house, there are a lot of people that do, even though circumstances would not let them qualify for a mortgage.
This is where subprime mortgages come in, and when issued to the proper people, there is nothing unethical about them. The problem comes when companies like Countrywide Financial finds ways to manipulate them to their own benefit. According to the case study, Countrywide was issuing subprime mortgages to borrowers that would normally qualify for conventional mortgages. So why issue subprime mortgage? Due to the normal risk associated with subprime mortgages, the fees and interest are generally higher, therefore increasing the profits.
Additionally, they were offering loans to people who normally would not even qualify for subprime loans, by either lying about assets and/or not verifying the accuracy of the reporting of assets. It is the misuse of the subprime loans that created the ethical issues. These ethical issues are what started to downfall of Countrywide Financial. By offering the subprime loans to basically anyone that walked through their doors, Countrywide Financial helped greatly in increased the number of foreclosures.
Mortgages were being offered to people how could not afford them, did not know what they were agreeing to, and/or understand the magnification of what they were doing. As I mentioned previously, the fees and interest rates were higher than with conventional loans, so for even the people that could qualify for conventional loans, they were forced to pay the higher rates and therefore people were running out of money to pay their mortgages and were foreclosing on their properties.
When Bank of America acquired Countrywide Financial the first thing they should have done was fire everyone involved, without offering any packages. The next important thing is communication. They need to make sure everyone is aware the Bank of America had no intentions of following the practices of Countrywide Financial and were cooperating with all the investigations and ramifications that resulted from them. Additionally, they need to place rules and regulations that ensures nothing like this happens again.
Finally, it is most important that there are strong, ethical, and honest people taking the lead to recover from this crisis. Countrywide took full advantage of an ethical subprime market and all that it had to offer and made some very unethical decisions which lead to the downfall of the company. The housing market is finally starting to get on pace again and the economy is slowing recovering from the all the unethical business decisions, from Countrywide and others.
Cite this Countrywide Case Study
Countrywide Case Study. (2016, Sep 29). Retrieved from https://graduateway.com/countrywide-case-study/