Countrywide Financial Corporation - Case Study Example

? 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). All these worked, with each depending on the other, to make the corporation grow into, among others, the leading in the States, with offices in most states. 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). Opportunities that occur to an entrepreneur make all the difference if keenly observed and made use. Earlier on, in 1934, the passing of the National Housing Act by the Congress provided the CFC with a tremendous opportunity of doing profitable business (Eastburn, 2011). The proposal that money given out as loans and mortgages could be insured ensured and promoted investment security. This provided security in case of defaulting by the borrowers. The incorporation of the middle class into the CFC mortgage development plan further increased the customer base, enhancing profits. This presented the start of the rise in profits of the corporation. Threats to entrepreneurs present the greatest headache since they tend to bring out, and in most cases, exploit the business set up (Eastburn, 2011). The inability of homeowners to make their payments in regular and frequent installments, or failure to get new means of financing the mortgages threatened to derail the CFC setup. This mostly affected the mortgages made in the short-term modes. Loss of jobs, retrenchment of staff or other means of incapacitating the homeowners contributed to the inability of making balloon payments required earlier. Further, the large incentive packages offered to the partners and other executive members threatened the financial stability of the corporation, more so when profits started dwindling. PORTER’S FIVE FORCES ANALYSIS Rivalry in the market affects the profit margins. It highlights attributes like intense, cutthroat, moderate or medium. The rivalry occurring between CFC and its competitors exhibits a medium one. The winning of the competition involved the introduction of the subprime mortgaging (Eastburn, 2011). The favorable terms packaged into the scheme attracted, and hence won over the customers. Improvement of the already differentiated mortgage product, proper use of distribution channels and the proper use of customer relationships gave the CFC the ultimate advantage of the market. The availability of products in the market that serve the same, or familiar, purpose as the existing product promotes product substitution. CFC substituted the prime mortgage in the market with the subprime mortgage package (Eastburn, 2011). This gave the corporation an edge over the other competitors. It further endeared the CFC Corporation to the customers since the package seemed to suit both the middle and low-income populations. These populations were the targeted groups since they wanted to own their homes. Buyer power dictates the prices of products in the market. If meeting customer preferences proves evasive by one product, they can seek satisfaction from similar products or substitutes. In the CFC case, the ability of the mortgage customers to afford the subprime products in the market boosted the growth of the corporation. The ability to start owning a home with minimal down payment and manageable installments encouraged accepting the terms of the subprime mortgages by the majority of the population. An option of selling the home to repay the mortgage, at the same time making a profit seemed irresistible to housing and real estate firms (Eastburn, 2011). Supplier power refers to the ability of a business set up to provide sufficient and efficient services to its clients. The supplier requires labor, implements and raw materials in order to supply required services. The CFC Corporation had branches in most states, and, therefore, enough labor to serve and attend to the customers (Eastburn, 2011). Opening up of the many offices further enhanced the closeness of the corporation to the grass root levels, thereby putting it in touch with the changing needs of the people. This strategy enhanced its acceptability to the people, thereby promoting business. The danger of entry of new competitors into the market that receives goods or services from any given company exists. The new competitor may deal in the same services as the established market suppliers of similar ones. In most cases, the bypassing of the company’s entry barriers by the competitor brings to the fore this danger. These barriers can be product pricing or secrecy on the true formula of the products on offer. The entry of new competitors into the CFC market seems not contained by the corporation, thereby encouraging entry of competitors into the market (Eastburn, 2011). This affected the profits considerably. FINANCIAL ANALYSIS Under the Charter signed by the Federal States, CFC expectations involved the provision of finances, in mortgage form, to prospective homeowners. This had the intent of covering families with low to moderate incomes, ensuring proper distribution in a geographical sense to eliminate any discrimination. Economic growth received a further boost by standardizing all procedures involved in mortgage underwriting, thereby ensuring market uniformity. The Charter provided a level playing ground to the mortgage industry players (Eastburn, 2011). This left the industry players to compete in innovations, product variations and diversification of services. The issuance of the subprime Mortgages to the market involved loans that had a credit score that was low, making of small down payments or a low income-debt ratio. In addition, the relaxation of the standards of the underwriting processes favored CFC (Eastburn, 2011). They further involved the borrowers not indicating their sources of incomes to use for offsetting the mortgages. All this spurred the growth of the subprime mortgage numbers against prime mortgages. On the other hand, the risk involved could haunt the Corporation in cases of defaulting in payment (Eastburn, 2011). The introduction of low mortgage rates into the market promoted further growth. This mostly involved payment of low monthly installments during the first or early years of the mortgage, then adjusting the same rates to be in line with current market rates as time went by. This allowed owners to have access to homes, and since the land and housing rates were always on the rise, they could often sell the houses at higher prices to repay the mortgage at the same time make a profit (Eastburn, 2011). Exploitation of this by real estate and housing agencies promoted home ownership by the citizens. The running of the CFC under different business segment; Mortgage financing, banking, global operations, insurance and involvement in capital markets promoted a unified entity (Eastburn, 2011). The retail deposits collected by the banking sector promoted the running of the mortgage sector. The capital markets segment ran the disposition and acquisition of the mortgage loans while insurance dealt with provision of reinsurance to insurers of mortgages. The global operations segment promoted the whole set up internationally (Eastburn, 2011). As such, the CFC was a self and closely-knit enterprise that could run depending on its different segments. In the duration spanning, about five years, 2002-2007, CFC’s assets and revenues experienced a growth from 58-211 million and $1.3 - 4.3 million respectively (Eastburn, 2011). This presented a five-year- record-breaking profit in sequence. The reporting of the first loss in the year 2007 marked a turning point in fortunes since there was no recovery until the Bank of America bought CFC in 2009. The issuance of unsecured loans, risks involved but overlooked and incentive compensations involved emerged as some of the probable reasons for the fall (Eastburn, 2011). Some of the incentive compensations were so high but went almost unquestionable to the executives of CFC. The issuance of predatory loans to persons seeking mortgages dragged the CFC Corporation into the courts (Eastburn, 2011). These types of loans tended to hide the full and comprehensive terms to the clients. This amounted to deceiving the clients, manipulation and defrauding them, since the clients got loans whose real terms were extremely beyond what they could afford. Leveling of charges for the financial crimes committed by the Corporation did not help matters. Further, the Corporation tended not to follow the underwriting procedures established and applicable to all mortgage industry players (Eastburn, 2011). Further, the pay to Angelo and the salary and other allowances accorded to him tended to be high (Eastburn, 2011). The getting of a fat paycheck by Angelo, while the Corporation profits exhibited a decline, defeated logic. The final settlement that he was to receive after the take-over by the Bank of America further confirms the self-centeredness of the individual. Reference Eastburn, R. W. (2011) Countrywide Financial Corporation and the Mortgage Debacle. Western University. New York: McGraw-Hill publishers. Read More