Countrywide & Subprime Lending Crisis

Executive Summary

Even though Countrywide stopped offering subprime loans 4 months ago, the company is still in the forefront of the subprime mortgage lending and foreclosure crisis.

Lawsuits seem to be coming from all directions, federal and state investigative probes are launched against them, stock price tumbled to 1/5 of its value, even desperate lenders demonstrated outside their offices. 2007 has definitely not been Countrywide's year.

The company has lost its place as America's Home Lender and has been quoted by few as America's Home Wrecker.

Countrywide reacted to the crisis, but reacted slowly. Originally Countrywide denied the existence of the problem and downplayed its importance. As the problem developed into a crisis, company's reactions seemed obligatory and sometimes spasmodic. To the defense of Countrywide, the social issues and implications of the crisis are much larger than them, and the whole U.S banking industry has not yet been able to deal with its domino effects.

Last week the federal government intervened with a comprehensive plan attempting to defuse the crisis. This long term plan, combined with changes in the monetary policy appears promising, and will probably bail out the homeowners and the mortgage lending industry.

Has Countrywide reacted through the whole crisis in a responsible way so that they can take advantage of the recent events and proceed with only "scratches" in the future? Or their reaction does not guarantee them a future position within the U.S lending industry?

Introduction & Brief Company History

Countrywide is a diversified financial services company focused primarily on real estate finance and related activities. Since its founding in 1969, Countrywide's mission has been to help individuals and families achieve and preserve the dream of homeownership.

"Leadership: Countrywide is America's #1 home loan lender. In fact, they are the leader in nearly every aspect of real estate finance.

Diversity: Countrywide is America's #1 Lender to Minorities. The company is commited to the Hispanic, Asian, and African American markets and continues to build a diverse workforce and management team.

Performance: Countrywide has been one of the best performing financial services companies in the past 25 years and is ranked #91 in the Fortune 500. "

A summary of the company's history can be divided into the following eras:

1969-1984 "Countrywide as a Lender, a vision realized": Offices without sales people. A mortgage company that operates like a bank. Developed the industry's first PC based loan servicing system. 40 offices in 8 states.

1984-1989 "Countrywide Hits Major Milestones": Company listed in NYSE, reached the $1 billion milestone, started building its Wholesale Lending Department.

1990-1999 "Countrywide The #1 Mortgage Lender": Company listed in the S&P500, begins the offering of diversified financial services (Home Equity Division, Full- Spectrum Lending, Institutional Lending, Loan Closing, Insurance, Capital Market services). Global Expansion

2000-2006 "A Financial Services Powerhouse": Countrywide is a diversified financial services company serving consumers and institutions, with mortgage origination and servicing at its core. Countrywide's culture of continuous improvement, individual accountability and respect for diversity in the workplace and the marketplace ensures its success as a financial services powerhouse.

Countrywide's social responsibility can be summarized in the statement that it takes its "corporate and ethical responsibilities very seriously". The company states that it tries to constantly provide value to its investors, customers, and workforce, and that the company's commitment to workforce diversity, supplier diversity, ethics, lending, and philanthropy illustrates the company's reputation for responsibility and integrity. Furthermore, the company states that "conduct and legal compliance are the foundation for our position of industry leadership." One example is the lending program called House America that was launched in 1992. The goal of this lending program is to reach minorities and groups with low- and moderate income.

Subprime lending

Subprime mortgage lending is the origination of residential mortgage loans to customers with impaired credit histories. Typically, these borrowers have lower credit scores and/or other credit deficiencies that prevent them from qualifying for prime mortgages. Subprime borrowers pay premium above the prime market rate in order to compensate the lender for bearing greater default risk. In addition, subprime borrowers pay higher origination and continuous costs, such as applications fees, appraisal fees, mortgage insurance payments, late fees and fines for delinquent payments.

Subprime Mortgage market

Since mid 1990s, the subprime mortgage market has grown rapidly experiencing a phenomenal 23% compound annual growth rate to 2006. The total subprime loan originations increased from $65 billion in 1995 to $613 billion in 2006. The subprime sector has become a significant sub-sector of the total residential market accounting for 21% of all residential mortgage originations in 2006. Similarly, by year-end 2006, total outstanding balance of subprime loans grew to $1.2 trillion, approximately 12.6% of all outstanding mortgage debt.

A number of legislative and economic factors contributed to the growth of the subprime market:

* In 1980 the Congress passed Depository Institutions Deregulation and Monetary Control Act (DIDMCA) allowing lending institutions to charge high interest fees and rates to borrowers. Before that, only prime homebuyers had access to the mortgage market. Furthermore, in 1982 The Alternative Mortgage Transaction Parity Act (AMTPA) allowed the use of variable interest rates and balloon payments on mortgage products.

* The Tax Reform Act of 1986 (TRA) eliminated interest rate deductions on non-mortgage consumer debt but allowed interest deductions on mortgage loans. The demand for mortgage debts increased since borrowers found them financially attractive to consolidate other forms of consumer debt.

* The development of the securitization market and the growing investors' acceptance of Mortgage Backed Securities and Collateralized Debt Obligations provided liquidity essential for the growing mortgage market.

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