Countrywide Financial and the subprime meltdown

Business Ethics -- Countrywide

What is the overall point of the chapter?

The overall point of this chapter is that Countrywide, as the nation's largest home mortgage lender before the collapse of the housing bubble, engaged in such rampant fraud that it substantially contributed to the problem that lead to the collapse of the industry, and very nearly, the entire national economy. Because the company made a profit on every mortgage sold, it had a natural incentive to sell as many as possible. To do that, Countrywide stopped exercising any kind of diligence or good faith in its lending criteria, and sold hundreds of thousands of bad loans to homeowners who should never have qualified for those loans. The firm's CEO, Angelo Mozilo, established an organizational culture in which he provided the model for wealth by any means, entitlement, and complete lack of any ethical concern in business practices.

What are the main facts of the case? (Not all the facts/the main facts)

Toward the end of the Clinton administration, new rules to the mortgage banking industry removed any natural incentive for home mortgage lenders to reject unqualified borrowers. Previously, banks issuing mortgage loans had to keep those debts on their books; and if a lender defaulted, the lending institution lost money. Instead, legislative changes no longer prohibited those institutions from selling off that debt right after issuing it. Since defaulting borrowers could no longer hurt the banks, they and their brokers started selling as many mortgages as possible to anybody and everybody, irrespective of credit history and income potential. In most cases, Countrywide assisted homebuyers who knew they had to lie to qualify for a loan but in many cases, aggressive realtors and brokers pushed irresponsible loans onto people and guided them in crafting the necessary lies to secure the loans fraudulently. Very often, they trapped people into variable-rate loans and other forms of high-risk loans because the higher the interest rate, the more money Countrywide made on the loan. They also helped wealthier buyers qualify for larger loans than they could really have qualified for, to purchase larger homes or to take equity out of the property in a booming housing market. When many of the unqualified and under-qualified borrowers began defaulting, the entire industry collapsed. The situation threatened the entire national economy because the wealth of some of the nation's largest banks and investment firms depended on the quality of those mortgage loans. Billions of dollars in stock value were based on complex mortgage-backed securities based on those bad mortgages sold by Countrywide and others.

3. What are the ethical issues that need to be addressed (be specific; cite examples)?

Countrywide violated ethical rules and the law almost every time they sold a mortgage in the years leading up to the housing market collapse. They knew that many of the buyers would probably end up defaulting and they tricked many of them into thinking otherwise by emphasizing the monthly cost of variable-rate loans and temporary interest-only loans. They also knew that those bad loans were being sold to Wall Street firms misrepresented as safe "AAA-rated" debts and that those bad debts were being used to back stocks and the retirement pensions of millions of people.