Countrywide Financial Corporation and the Subprime Mortgage Debacle Case Study

The foundation date of Countrywide Financial Corporation can be cited back in 1969 when the organization was co-founded by Angelo Mozilo who partnered with David Loeb (Eastburn, 2016).  It can be asserted that Mozilo has contributed significantly in the domination of the institution as the biggest real estate loan provider in United States. On the other hand, citing from the collapse of the company, it can be asserted that he promoted to the fall of Countrywide Financial Corporation back in 2006. Before the fall, Countrywide Financial Corporation valued at $24 billion and more than $200 million in terms of assets (Eastburn, 2016). The recognition of the business was promoted by the fact that it lowered homeownership barriers to a large number of U.S citizens (Ferrell et al, 2010). Additionally, the business lowered the financial barriers to the low-income earners in the country.

 Countrywide Financial Corporation possessed five major business segments which included mortgage banking, capital markets, banking, insurance and worldwide operations. Precisely, mortgage banking included sale mortgage loans which generated approximately 48% profits (Eastburn, 2016). On the other hand, capital markets segment involved sale of mortgage backed securities through broker trading. Lastly, the global operation segment of the business involved licensing of proprietary business to other mortgage firms in international markets. It is noteworthy that prior to the subprime mortgage crisis, the company was suffering from different other crisis incidents such as complains from the employees on racism, being overworked and favoritism particularly on offering concessions (Ferrell et al, 2010).

After the government reduced the lending regulation, Countrywide benefited significantly as they were able to extend their credit over the breakeven level of their borrowers. Additionally, as the demand for the mortgage backed securities increased, Countrywide was able to shift liabilities away from the financial books and records to the investment banks (Eastburn, 2016). This means that they realized huge profits in the short run which made them overlook the future consequences. However, by the turn of the new millennium, a significant number of the banks and brokers were employing this strategy of keeping their liabilities off-record (Eastburn, 2016). A good example of one company that collapsed from this strategy is Enron Company which went bankrupt back in 2001. In Countrywide’s case, it was exhibited that the incentives paid on the loans originations where the defaults were not recorded. Additionally, it was noted that Mozilo invested approximately $121 million in Bank of America and received up to $115 million after the sale back in 2007 as an executive compensation (Eastburn, 2016).   

 

 

 

 

SWOT Analysis

Strengths	Weaknesses
·         Market entry barriers based on the nature and size of the market ·         Monetary support offered by Bank of America ·         Economies of scale in terms of profitability	·         Inappropriate financial recording ·         Cost structure ·         Ineffective budgeting
Opportunities	Threats
·         Increasing demand in the market ·         Developing market economy ·         Availability of venture capital ·         Global expansion ·         Product and service line extension	·         New entrants ·         Tax rate changes ·         Changing interest rates ·         Stiff competition ·         Changes in technology

 

Under the technological factors, Countrywide Financial Corporation can be affected both positively and negatively though the magnitude of the negative effect appears to be more detrimental. For instance, the rise of the internet increases chances of cyber hacking which can affect the competitive advantage of the organization. However, it is factual that the organization will benefit from the increasing demand in the market particularly as the home ownership increases rapidly in United States.

References

Oppel, R. A, & Sorkin, A. R., (2001). Enron’s Collapse: The Overview; Enron Collapses as Suitor Cancels Plans for Merger. The New York Times. http://www.nytimes.com/2001/11/29/business/enron-s-collapse-the-overview-enron-collapses-as-suitor-cancels-plans-for-merger.html?pagewanted=all

Ferrell, O. C., Fraedrich, J., & Ferrell, L. (2010). Business ethics: Ethical decision making and cases : 2009 update. Mason, OH: South-Western Cengage Learning.