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    This post addresses the Countrywide Financial case study.

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    Discuss the key facts and critical issues presented in the case.

    1. What were the incentives for Countrywide to write so many subprime loans?

    2. What was Countrywide's logic in thinking that originating loans for people with poor credit ratings would result in positive outcomes?

    If you were CEO of Countrywide Financial, how would you have structured the evaluations of salespeople to prevent them from making loans to anybody without following specific guidelines on income, appraisals, and documentation?

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    Solution Preview

    Here is how I would structure your project, and the main issues I would include for each question:

    1. What were the incentives for Countrywide to write so many subprime loans?
    Countrywide had many incentives for writing as many subprime loans as they possibly could. One of the most interesting points about the Countrywide case is that the company learned once they were able to start securing subprime loans that they could secure more. What the public then witnessed was similar to a snowball effect. Once they started securing the loans, they continued to do so because their practices went undetected. As they secured loans, they were able to take in money from homebuyers, at least while the money was there. Not being able to foresee the crisis that was building because of their practices, which was later referred to as the "housing bubble," Countrywide gained market share in the housing industry quicker than any other lending company in history.

    Because the company was doing so well, their investors saw an unprecedented increase of 23,000% on their investment. This attracted additional investors and larger investments from current investors, which gave Countrywide additional motivation to continue securing the subprime loans that were making them so profitable, so quickly. The executives were reaping the benefits of increased sales also. As sales growth exploded in home loans, the executives were able to award themselves larger bonuses and additional compensation in the form of stock options on a performance-based appraisal system.

    As each of the factors mentioned gave the company an incentive to write more loans, another issue was forming quickly, and was larger than anyone thought possible. Countrywide wanted their loans to keep growing, and they realized that the brokers/loan agents were big factors in securing the initial loans. It was later discovered that the consumers were not the largest group of people falsifying customer information on loan applications. The loan officers were responsible for a higher percentage of misstatements in loan applications than the customers. The customers, in many cases, reported actual income, asset, liability, and other amounts on their loan applications. The loan officers were then inflating the amount of revenue on customer applications. A common ...

    Solution Summary

    The solution provides detailed explanations for each question listed in the Countrywide Financial case study.