Angelo Mozilo, founder and Chairman of Countrywide Financial Corporation, the driving force behind the company’s zeal to become the largest real estate mortgage originator in the United States. The same zeal leads to the company’s collapse and led to an extraordinary collapse of the US housing market.
Mozilo and partner, David Loeb, founded Countrywide in 1969 in New York with the strategic intent of creating a nationwide mortgage-lending firm. The company opened a retail branch in California in 1974 and, by 1980, had 40 offices in eight states.
In 1981, the pair launched a securities subsidiary, which would, specialized in the sale of mortgage-backed securities (MBSs). By 1985, ...view middle of the document...
By late 2002, many markets were overheating, and lenders sought solutions to keep activity high despite inflated prices. Their “innovative” solutions involved moving away from the thirty-year fixed-rate amortizing mortgage to products with adjustable rates, and either no amortization or negative amortization. Since any terms other than amortizing fixed-rate mortgages are unstable, lenders embarked on a Ponzi Scheme. Each “innovation” was more risky than the last, and only continually rising prices fueled by their own unstable lending kept the system going. (OC Housing News, 2012)
Because the potential to earn money was so great, greed began to take hold of the industry. Lenders began giving loans to individuals who would normally not qualify by using deceptive practices to continue earning billions of dollars in revenue. All of this while not educating homebuyers of the risk in such things as an adjustable rate mortgage.
From 2003 to 2006, prices went up at unprecedented rates with no identifiable underlying fundamentals. Many economists tried to gloss over the price increases with arguments about job growth, low interest rates, and changes in consumer preferences for housing, but they all ignored the obvious distortions readily observable in conventional measures of value and the nearly vertical rise in prices corresponding to the widespread use of unconventional loan products. (OC Housing News, 2012).
Loan programs along with market securitization provided away for money to flow through the housing market. The use of credit default swaps provided a false sense of security, which proved to be dangerous because it allowed for the mitigation of risk. In response, they lowered loan qualification standards to near zero with such “innovative” programs as NINJA loans (no income, no job, no assets) and liar loans (stated income). (OC Housing News, 2012) Between 2007 and 2008, things began to unravel. Three key factors contributed to the housing bubble, unstable loan programs, and the need of investors to fund these only in order to maximize their ROI coupled with pressure on loan originators to meet the high demand for mortgages. When the economy and the job market began exhibiting signs of trouble, the bubble burst. Lax oversight of the industry and access to easy credit also led to the bursting of the bubble.
Countrywide’s Role and its Unethical Conduct
The ethical lapses came from lenders who did not perform their due diligence by fully educating homebuyers of the potential risk of subprime mortgages and qualifying them for loans they could not afford to pay back. Borrowers are already prone to take any loan offered to them, and with the prospect of unlimited wealth in real estate, anyone with a dream and a pulse signed up with a toxic loan to buy houses at ever-increasing prices so they too could make a fortune in real estate. (OC Housing News, 2012)
In the 1970’s the Carter Administration and Congress enacted the Community Reinvestment...