Countrywide: Legal and Ethical Issues
The American dream which included owning a home became a reality for many Americans. The economy was fueled by the housing market. People who did not qualify for conventional loans because of various factors including low income, low credit score, and insufficient assets were given a chance to obtain home loans. The economy was robust as financial institutions were able to rake in profits by the millions. Americans as well as foreign investors were also benefiting from this housing “boom”. Banks loosened their belts in lending, thus credit flowed from the lender to the borrower with ease. One of the banks that played a role in the financial crisis was Countrywide. It was the leader of subprime loans, which I believe are unethical financial instruments.
Deregulation by the government allowed not only Countrywide to catch fire, but also other lenders such as Option 1 and Quick loan Funding. As the economy slowed after September 11, there was a fear of economic collapse. Retail sales were down and Wall Street was incurring losses. In 2001, the economy was still reeling after the dot com bust. Alan Greenspan and the Feds dropped interest rates as a result, so the cost of borrowing was cheaper than ever before. Freddie Mac and Fannie Mae had strict rules and when they were involved in an accounting scandal, mortgage companies such as Countrywide sprung up to provide home loans to the unworthy borrower.
It was definitely more difficult to obtain loans in the past as the banks needed reassurance that the applicant will be able to pay back the loan. It would take 90 days in some cases for the loan to be approved. Income, assets, and debts among other things had to be verified and everything had to be well documented. The average American did not foresee the negative ramifications of subprime mortgages. Liar loans were offered as mentioned in the case study where one’s income was overstated. Obviously, this is unethical...