Mortgage and Countrywide Comprehensive Home Essay Example

variable rate after a certain period.

The adjustable rate mortgage (ARM) is commonly used in subprime loans to allow borrowers to bear the risk of changing interest rates, leading to lower initial payments. These ARMs often have short periods with fixed interest rates that are much lower than current average rates. Unfortunately, despite being seen as ethical financial tools, unscrupulous individuals in banking took advantage of subprime loans. Countrywide, in their quest for higher profits, convinced eligible individuals who qualified for regular loans to choose subprime loans instead.

Moreover, they created the liar loans, an incredibly immoral instrument that were mortgages lacking the requirement for borrowers to verify income or asset thresholds. The severity of the financial crises from 2008-2009 has clearly demonstrated that unscrupulous subprime loans can result in disastrous outcomes, not only for consumers but also for the global economy. Examine the ethical quandaries that contributed to Countrywide Financial's downfall. Once at its peak, Countrywide enjoyed all the benefits until an unexpected incident happened...the United States economy began to slow down.

Countrywide faced significant financial challenges in 2007, with a loss of more than $1 billion and a depreciation exceeding $20 billion. By the next year, their subprime loan portfolio had grown to over $8 billion, resulting in a delinquency rate of 7 percent. At the same time, Alphonso Jackson, the Secretary of Housing and Urban Development, expressed concern for over 500,000 Countrywide customers who were at risk of foreclosure. The main reasons cited for this situation were subprime lending and adjustable rate mortgages. However, Countrywide challenged these allegations by suggesting that there were additional factors contributing to the high number of

delinquencies and foreclosures.

In the same year, Countrywide experienced a rise in foreclosures and had to let go of numerous employees. To help homeowners, they introduced the Countrywide Comprehensive Home Preservation Program. The program aimed to aid consumers in refinancing or modifying loans with adjustable rate mortgages so they could acquire lower interest rates or switch to fixed-rate mortgages. Nevertheless, Countrywide received backlash for providing "liar loans," which are mortgages that do not mandate evidence of the borrower's income or assets.

The financial crisis caused individuals with liar loans to be unable to repay their mortgages or refinance their homes because of the sharp decline in housing prices. The main problem is the unethical behavior of corporations, which reward their executive personnel for taking risky business ventures with high salaries and appealing bonuses. Angelo Mozilo, CEO of Countrywide, was motivated by greed and used his influence within the company to secure higher wages, improved bonus packages, and greater compensation despite his poor performance.

Bank of America, a significant US financial institution, offered to acquire Countrywide Financial in 2008 amidst its financial crisis. Countrywide might have had other reasons for accepting the acquisition. To satisfy their greed, they were involved in creating liar loans or loans that didn't require documentation. Additionally, Countrywide aggressively promoted subprime loans to borrowers who would normally qualify for prime loans because subprime loans yield higher interest rates. How should Bank of America address the possible uncovering of ethical and legal misconduct at Countrywide?

Countrywide may have believed that Bank of America was more capable of managing the ethical investigations related to Countrywide. Bank of America chose to

keep David Sambol as the Executive Managing Director of Business Segment Operations at Countrywide and awarded him a substantial compensation package. This decision caused widespread public outrage due to Sambol's involvement in questionable business practices by Countrywide.

The United States Congress conducted hearings in 2008 to address concerns regarding companies like Countrywide using subprime mortgages. As a result of these hearings, Bank of America announced the replacement of David Sambol with Barbara Desoer. Currently, the Securities and Exchange Commission (SEC) is investigating Angelo Mozilo, co-founder of Countrywide, for potential stock fraud. This investigation is linked to Mozilo's earnings exceeding $400 million from selling company stocks between 2002 and 2008. Additionally, upon acquiring Countrywide, Bank of America assumed responsibility for the associated issues.

Bank of America can implement several measures to comply with The Sarbanes-Oxley Act. Firstly, any employees involved in unethical or illegal behavior should be terminated. The Act requires top management to personally verify the accuracy of financial information and imposes stricter penalties for fraudulent activities. Furthermore, it enhances the independence of external auditors who validate corporate financial statements and strengthens the oversight responsibility of boards of directors.

According to Ferrell, O. C., Fraedrich, J., & Ferrell (2013), the ideal solution would have been to collaborate with homeowners regardless of the cost in order to ensure they can continue living in their homes. This approach would have been more favorable than dealing with negative publicity and legal consequences (Tarbox, K., 2012, February 10) mentioned in Who Qualifies for the $26 Billion Foreclosure Settlement?

The information in this paragraph is sourced from Time.com, a Reuters article by J. Lagorio discussing the

rise and fall of Countrywide and Mozilo, a book titled "The Foreclosure of America: Life Inside Countrywide Home Loans and the Selling of the American Dream" by A. Michaelson, as well as Wikipedia's page on Bank of America Home Loans.