Countrywide Financial Corporation - Assignment Example

Once the mortgage industry’s leader in home loan originations, Countrywide Financial Corporation slid into infamy as one of the major contributors to the mortgage meltdown.  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 effects the acquisition of Countrywide by Bank of America possibly had on the mortgage industry, and what has happened in the aftermath of the transaction.

Role in the Subprime Mortgage Meltdown

            Countrywide’s original creation of the practice of service-oriented architecture (SOA) was heralded as revolutionary and became an industry standard (Gruman, 2005).  The company was the leader in loan origination with others in the industry following suit, however, what is unclear and unknown is when the company’s internal operations began to deviate from sound business practices (Jacobs, 2009; Mokhiber & Weissman, 2007).                                                                        Gearino (2011) uses the example of the chaos theory to describe the effect and the influence Countrywide had on the subsequent mortgage meltdown (p. 40).  He summarizes the chaos theory as “small deviations from the original intent or purpose of something causing varying results” (2011, p. 40).  Subsequently, Countrywide’s business practices were small deviations from the standard ways in which mortgages were created and sold as mortgage-backed securities (Jacob, 2009, pp. 17-25).  What began as a revolutionary way of originating, underwriting, funding, and packaging mortgage loans for sale became the uncertainty of the deviations as hypothesized by Gearino (2011, p. 40).                                                     Realizing that the innovative business model had flaws Countrywide attempted to cover up the mounting losses and loan defaults by securitizing and packaging what amounted to loans in disguise as securities backed by mortgages made to high-risk borrowers (Mokhiber & Weissman, 2007, pp. 18-20).  The attempt proved damning costing the corporation its reputation, the loss of billions of dollars, and accusations of fraud and predatory lending practices (Mokhiber & Weissman, 2007).            

Bank of America: Savior or Substitute

            The first effort to delay the death of Countrywide and stop the hemorrhaging of millions of defaulting home loans was a 2 billion dollar investment made by Bank of America Corporation to Countrywide in the summer of 2007.  The second attempt to salvage Countrywide was the acquisition of the mortgage giant for the sum of 4.1 billion dollars in 2008 (Associated Press, 2008; Powley, 2008).  Because Countrywide Financial was the largest loan servicing company in America the earlier investment was an attempt to prevent the failure of Countrywide and potentially save a million homeowners from the effects of the company’s demise.  Crafting the acquisition eliminated the imminent danger of Countrywide’s impending demise however the transaction was not without fallout (Knox, 2008).  

After the Acquisition

            The transaction to acquire Countrywide Financial may have averted immediate destruction had the mortgage giant failed, however the cost to do so by Bank of America is estimated at approximately 14.1 billion dollars (Associated Press, 2008); a sum which included the price for the company, the regulatory penalties Bank of America paid for Countrywide, lawsuits, and insurance premiums to cover the avalanche of defaulting loans previously sold by Countrywide to investors.   Whereas the intervention of Bank of America potentially delayed the impending collapse of the subprime mortgage industry the acquisition of Countrywide Financial positioned Bank of America as the nation’s largest mortgage lender and loan servicer in with a 25% share of the market (Powley, 2008). 

Efforts to understand how a multi-billion dollar industry could literally go up in smoke and crash in rumble is perplexing, but the certainty is that the choices of a few affected the lives of millions of families, toppled several industries destroyed consumer confidence in the process.