Countrywide was founded in 1969, during a time when it was much harder to get a mortgage than it was in the early 2000’s. To acquire a home, you typically needed to have good credit, money to put down on the home showing that you had a vested interest, and you had to prove to the lender that you could pay for the home. Countrywide rose to the top because of its conservative loan practices. They invested in homebuyers with good credit scores and those who had the ability to pay a mortgage. However, as housing prices rose and more people wanted a piece of that American dream, to own their own home, greed set in and the blinders went on.
In the early 2000’s during the housing boom, Countrywide began to loosen their borrowing standards by lending to people with weak/poor credit, and sometimes to those who did not have a job (CNN, 2018). This was the beginning of the end for Countrywide. It amazes me that such a smart businessman like Mozilo could not see the problems with these risky loans. How do you expect people to pay back their loans when they have little to no income, and poor credit?
Unlike New Century, Countrywide’s business model was not built on risky mortgage loans. Countrywide did not make it to the top by always investing in risky business and had the housing prices not fallen as quickly and as steeply as they did, perhaps these loans would have paid off in the long run. However, I doubt that because even if the housing market leveled off, you still had people who borrowed more than they could afford. I think the difference between New Century and Countrywide was the business models.
Investors knew that New Century’s business model was signing subprime loans, whereas Countrywide had consisted of a mixture of conservative and subprime loans. New Century had too many bad loans on its hands, so no investor wanted to step in. Bank of America (BOA) saw Countrywide’s failure as an opportunity to increase its presence in mortgage lending. In August 2007, BOA had invested $2 billion in preferred stock of Countrywide so purchasing the company was also a way of salvaging that investment (NY Times, 2008).
References:
https://money.cnn.com/2018/06/06/news/companies/angelo-mozilo-countrywide-2008/index.html (Links to an external site.)