Countrywide Financial September 26, 2013 “Countrywide Financial,” expounded by Angelo Motion, was known as one of the most successful financial companies in the beginning of the 21st century.
The expounder had a solid business philosophy; to help low-income individuals and minorities. “Countrywide Financial” was the largest home loan provider in the United States, with one out of six loans provided by the company. Angelo Motion believed that every American had the right to own a home (Stewart, 2013).
Financial institutions saw a great opportunity to create an investment after the overspent passed significant legislative acts from the sass’s to the sass: Community Reinvestment act, Depository Institutions Deregulation and Monetary Control Act. This required banking institutions to loan money for low rates and low down payments (Overmanned, & Boyd, 2013). In 1995 President Bill Clinton revised the Community Reinvestment Act to prevent banking institutions from denying loans or increasing costs based on race.The revising of this act helped individuals with low to moderate income meet the standard credit requirement to obtain a loan (CRA, 2012). These acts helped to change standard loan processing by lowering the acceptable credit score and debt-to-income ratio.
This led to the formation of a strategic lending method known as supreme lending. This is a form of lending that targets people who would not normally be approved for a traditional loan. These types of loans required little or no money down, however the interest rates were much higher.It was a very risky financial instrument because it did not require any verification of an applicant’s information.
The interest rate would be based upon on the clients credit core, down payment, debt-to-income ratio, and payment defaults. Most of the individuals had poor credit ratings and payment delinquencies, leading to a higher interest rate. In many cases, however, people who were approved for supreme loans were unable to pay it back. (Frederica et. Al, ???? The idea of utilizing supreme lending was seen as a great opportunity to many investors and those with middle to upper class income. From 2004 to 2006 there was however this is not who this type of loan was meant to be approved for. Also, many rowers were fabricating information and lying about their income in order to obtain a mortgage.
Even though most of these loans were designed to help finance first time buyers, most of supreme loans were made not to finance individual homes, but to refinance already existing ones in order to get cash.Some borrowers would refinance their home multiple times, while overstating their income and assets every time. The money from refinancing was used to purchase different items such as cars, boats and etc. However, when borrowers could not make their payments on their retrogress, they would simply walk away leaving banks and tax payers to cover their debt (Overmanned, & Boyd, 2013). This is what led to the downfall of Countywide Financial in 2007 and, ultimately, the financial crisis in 2008-2009.
The idea behind supreme lending, if utilized in the proper manner, could be considered an ethical tool that was misused and abused by Countrywide Financial and their clients. These types of loans were created to supply housing to individuals that could not get approved through normal processing standards. Ethically, this is a DOD practice in order to give low income individuals an opportunity to strive in the housing market. However, it seems highly unethical to raise the interest rate to such a high amount that these people could not afford the payments.
It does not seem ethical to approve an individual for a loan, while knowing they could not afford the payments. Ethical issues played a major role in the downfall of Countrywide Financial. The financial experts at Countrywide Financial, unethically, convinced potential borrowers that they would be able to afford the payments, even if they were to increase, cause their homes would increase in value, which would provide them with more income.