Countrywide Financial: The Subprime Meltdown
- Are subprime loans an unethical financial instrument, or are they ethical but misused in a way that created ethical issues?
Countrywide Financial was co-founded in the 1969 and it was the largest provider of the home loans in the United States, after few decades. As mentioned in the case study, Countrywide launched many programs for providing loans to people for building their homes and these programs included House America and We House America etc. By the year of 2000, the concept of Subprime loans emerged in the company where Countrywide started to lending to borrowers, generally people who would not qualify for traditional loans, at a rate higher than the prime rate (market rate), although how far above depends on factors like credit score, down payment, debt to income ratio, and payment delinquencies. Subprime lending is risky because clients are less likely to be able to pay back their loans.
As it is quite clear that these loans are offered to clients who are high risk clients and they cannot qualify for conventional clients. In this way, it can be said that Subprime loans are an unethical financial instrument. These are unethical because the company was well aware at the time of lending them the loans that they will not be able to pay back the amount they generally fall in the low income bracket (Fraedrich, Ferrell, & Jackson, 2011). Different financial experts of the company also contributed significantly to these ethical issues where they kept on telling the clients that in the future they would certainly have more income because their property prices would increase.
Hence, as a general analysis, it is clearly evident that Subprime loans are actually the unethical financial instruments which were used improperly by the company to increase its market share and to maximize the profit ratio.
- Discuss the ethical issues that caused the downfall of Countrywide Financial.
There were different ethical issues that caused the downfall of Countrywide Financial. These are as:
- Company started giving Subprime loans to the borrowers whom they were sure about that they will not be able to pay back. This thing resulted in company losing its market image and reputation.
- In addition, even real estate appraisers began to inflate the value of homes to ensure loans would go through. This was to become one of the chief accusations against Countrywide during the financial crisis(Clark, 2008).
- Besides, Countrywide Financial was one of the top providers of the liar loans and it kept on carrying out the financial practices which were highly unethical and were based on misguiding the clients and loan takers.
- How should Bank of America deal with potential ethical and legal misconduct discovered at Countrywide?
As the case study reports, the Bank of America bought the Countrywide Financial in 2008 and after that it has focused on profit instead of growth. In order to deal with potential ethical and legal misconduct discovered at Countrywide, the Bank of America will have to manage its debts and will have to achieve consistent and above average shareholder returns. Bank of America also needs to handle the stream of lawsuits being filed against the company (O’Brien, 2010).
In addition, Bank of America will also have to focus on adjusting the terms and conditions of ARMs as per the income of borrowers. The bank will have to develop a new ethical and moral framework policy for the company to make it more attractive for the clients and to deal with potential ethical and legal misconducts discovered at Countrywide.
Clark, A. (2008). Countrywide Financial faces unethical business practices prosecution . Retrieved from The Guardian: https://www.theguardian.com/business/2008/jun/25/countrywide.subprime
Fraedrich, J., Ferrell, O., & Jackson, J. (2011). Countrywide Financial: The Subprime Meltdown. In J. Fraedrich, L. Ferrell, & O. C. Ferrell, BUSINESS ETHICS: Ethical Decision Making and Cases (pp. 338-346). Mason, Ohio: South Western Cengage Learning.
O’Brien, G. (2010). Countrywide: How Artificial Reality Trumped Leadership . Retrieved from Business Ethics: http://business-ethics.com/2010/10/31/1739-countrywide-financial-how-artificial-reality-trumped-leadership/