Countrywide Financial: The Subprime Meltdown 1

Kevin D. Lowther

Dr. Stephen Knights, Jr.

Law, Ethics, and Corporate Governance

Strayer University

Spring 2010
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Abstract

This paper is about the case study of Countrywide Financial and the subprime

mortgage meltdown. Countrywide Financial had become the largest provider of home loans in

the United States before its demise. This paper identifies the key stakeholders and the impact of

the operational and ethical issues they encountered. Secondly, it summarizes the key legal issues

related to federal consumer protection law. Thirdly, it summarizes the key ethical issues that are

presented, and then summarizes the cost of the company’s actions in the case. Finally, it

recommends corrective action for each of the legal and ethical issues outlined.
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On its way to becoming the nation’s largest mortgage lender, Countrywide Financial

became one of the nation’s largest business failures in recent decades. Founded in 1969 in part

by Angelo Mozilo, it had become the largest provider of home loans in the United States, with

one in every six U.S. loans being originated with Countrywide (Ferrell, Ferrell, Fraedrich, p.

384, 2010). However, Countrywide’s entire operation, from its computer system, to its

incentive pay structure and financing arrangements, was intended to obtain maximum profits out

of the mortgage lending upswing no matter what the cost was to its primary stakeholders

(Morgenson, G., 2007). Countrywide’s primary stakeholders consisted of employees, investors,

regulators, clients, communities, as well as shareholders (Ferrell, Ferrell, Fraedrich, 2010).

However, because of its ethical and operational issues, Countrywide caused adverse conditions

for all stakeholders involved.

Countrywide’s troubles and ethical issues can be traced back to the understanding of the

concept of subprime mortgage lending. Subprime lending has been both a blessing and a burden

to the housing industry for numerous years, which guaranteed lenders to make huge profits while

taxing consumers with extreme loan terms and exorbitant interest rates (Bosworth, M., 2007).

Through the mid 90’s and 2000’s, the number of subprime mortgage loans rose dramatically.

Subprime lending means lending at a higher interest rate higher than the prime rate, often a 1

percent higher interest rate, although how far above depends on factors like credit score, down

payment, debt-to-income ratio, and recent payment delinquencies (Ferrell, Ferrell, Fraedrich,

2010). However, Countrywide’s failure to recognize the needs and consequences of employees,

suppliers, regulators, special-interest groups, communities, and media, lead to the company

failing and its eventual purchase by Bank of America Corporation, in an all-stock transaction

worth approximately $4 billion (Ferrell, Ferrell, Fraedrich, 2010). Initially praised for being

inclusive, the subprime concept began in the 1970’s in Orange County, California, with rural
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farmland being converted in the suburbs, and subprime loans were the way for consumers to

afford to buy homes, even with low credit (Ferrell, Ferrell, Fraedrich, p. 386, 2010).
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