Countrywide Financial Corporation, one of the largest real estate mortgage companies was formed by Angelo Mozilla and David Loeb in 1969. The first very branch of the company was opened in 1974 and the company was in such a great phase of growth that within 6 years in had 40 offices in the United States of America. The growth of the company was although dramatic it was only based on the U.S market which just proved to be a bubble.
From 1974 to 2006 the company never looked back and continued its journey of growth an expansion. As a result by the end of 2006 the company had 661 branches in 48 different states of US. It was such a safe bet for investment that the Bank of America invested $4 billion to take over the company.
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The phase of the remarkable success and growth continued till 2007 when the whole world realized that most of the deals or the mortgages which were made by the company were not appropriate rather were all very risky and were all expected to default in some time. The crisis in 2008 was due to the failure of the capital market as well as the mortgage business in US and the major contributor to such fall was Countrywide Financial Corporation, being one of the largest mortgage companies in the country.
SWOT ANALYSIS OF COUNTYSIDE FINANCIAL CORPORATION
The SWOT analysis of the company enables its management and the executives to make the right decision on a timely basis and to formulate the strategies for the better performance and the working of the company. It also helps the company to forecast the opportunities it will have in future or the threats it will going to face.
Like any other mortgage company the strengths of Countrywide Financial Corporation was the big name of the company. The company had the opportunity to start its new line of business with its name. The new business started should be of such a type which can hedge the negative impacts of the downfall in the housing market of US. Moreover, strength of the company was that it was in the business of mortgage. It could take over the house mortgaged by it and have sold them so that it can recover its amount of advance given.
One of the weaknesses of the company was its strategy and its risk management department. It was the strategy according to which the company went for such an aggressive approach while advancing loans and mortgages. The aggressive approach made its employees to pass loan for every class of the people which were later unable to pay off their loans and the company was collapsed. Another weakness of the company was its risk management department which was not working effectively. If the risk management company had been effectively the company would not have advanced any mounts to those who were likely to default or may be the number of the defaulters would have been decreased remarkably.
The credit based economy of the company leads many opportunities for the company. It was the credit oriented nation due to which the people have this mind set of buying everything on credit. If the company had gone for proper risk analysis and management before granting any loans it would have not collapsed as various opportunities were available to it. The trend of buying everything on credit in US provided the company with the opportunity of extending its product line and moving from house mortgage to other forms of business.
There were two threats to the existence and working of the company. One of the two threats was the dynamism in this world. The world now is so fast changing that what is true for today doesn’t remain true tomorrow. Those customers of the company who were not risky at the time they were given the loan turned out to be risky after sometime and later defaulted. Moreover, the competitors of the company were also a threat to its performance. The more the competitors the more the customers were to be divided between the competitors. Thus, in order to increase its market share the company went for aggressive approach and gave loans to almost everybody without considering their long term strength to pay back the amount amount and the interest due.
PROBLEMS FACED BY THE COMPANY
The problems of the company were inbuilt in its business. As the company was growing so rapidly the world ignore the problems which were always there. The biggest problem of the company was that it was not able to overcome its weaknesses and failed to foresee that which of its customers will be able to remain good in future and how many of them would turn bad. Moreover, the company was a very high risk taker. It kept on putting the investment of its share holders at risk unless all that invest was wasted.
REASONS FOR THE FAILURE OF COUNTRYWIDE FINANCIAL CORPORATION
As the process of the failure was spread over a long period of time, many factors kept on contributing to the failure of this giant from time to time. Following are some of the reasons due to which the company collapsed:
1. Management Strategies
The management strategies of the company played a vital role in the whole major fall and the loss of many. The strategies of the company were not effective and it seems that the management was not updating their strategies with the passage of time and was not keeping them up to date with the changing needs of this world. It will not be wrong to say that the failure was caused due to the negligence of the management.
2. Regulatory Lapses
Not only the management but the regulatory bodies also have contributed to this collapse. If the management was not updating its policies on timely basis and was giving loan to almost everyone while following its aggressive approach, it was the duty of the regulatory bodies to interfere. If they had formed proper regulations and rules especially for the listed companies involved in the mortgage business the investment of so many people would not have been wasted. In fact the whole country would have been saved from the major economic turmoil.
1. Debt Factoring
Another big factor involved in this failure of the company was that the company was involved in the sale of its debts to the factoring companies. The company used to advance amounts to the customers for against the mortgage of the houses they used to buy. After advancing the loans the company instead of recording the debts as assets and showing their aging analysis in the accounts in the form of substandard, doubtful or bad debt it used to sell the debts in the form of the financial assets to the factoring companies. As a result Countrywide Financial Corporation never fell short of the amounts and kept on advancing the amount earned from the sale of those assets. Therefore, the company never had to show that so many of its debts were not paying back even the principal amounts. Hence, the company kept on succeeding and the world did not come to know what was actually going on.
SUGGESTED MANAGEMENT STRATEGIES FOR THE COMPANY
As above discussed the major reasons for the collapse of the company were that the company was not able to deal with its strengths, weaknesses, opportunities and threats. Few strategies are given below which could have helped the company survive if the company had adopted at the right time.
As the business of the company has this inherent risk of default by the customers the company should have adopted the strategies of hedging its losses. Under the strategy of hedging the losses it should have invested in some other business which would grow in case the housing market of the country falls. Thus the loss generated from the housing market would have been recovered from the other business.
3. Conservative Approach
The company should have adopted the conservative approach when it comes to the selection of the customers for the approval of their loans. If the loans are provided only to few selected people were given the loan on the basis of their background and financial stability the chances of default and loss to the company are reduced.
4. Effective Risk Management
The risk management department should be formed in the company which not only analyses the risk currently involved in providing loan to any customer but it should also forecast the ability of the customer to pay back the principal amount and the interest due in future.
5. Different Product Lines
The inherent risk in the nature of the business of the company suggests that the company should not restrict itself to one type of products. It should form a diversified product portfolio which means that along with the housing mortgage t should also deal with car loans, personal loans etc.
The above mentioned strategies are those which if adopted appropriately at the right time could have saved the company from the expedient collapse.
6. Adopting 5 C’s of Credit
The rule of 5 C’s which stands for character, capacity, collateral, conditions and capital should be followed before giving loan to any customer. The companies which apply this rule objectively are able to avoid numerous bad debts and losses.
EFFECTS OF THE FAILURE OF THE COMPANY
The failure of the company had a multiplier effect which was not restricted to the country and hit the whole world as a big economic turmoil. As a result of the failure of the factoring company of Countrywide Financial Corporation the whole world was given this big surprise of the actually condition of the company. Within few months the company which was earning millions till 2006 sustained a loss of millions in 2007. It was when the factoring company collapsed the stock market showed a declining trend. This was the time when everything started becoming clear to the world and not only Countryside Financial Corporation but many other banks and similar financial institutions collapsed. After this phase of failures, as the New York Stock exchange hit down, all the stock exchanges in the world started showing the decline trend. As a result the capital markets all over the world sustained a great loss. Due to the fall in the value of almost all the scripts, loss of millions was borne by all the investment companies. In fact many of the scripts were impaired. Not only the capital market but the monetary market also experienced a fall in the value of many of the financial instruments like term finance certificates etc. Thus the chain continued and the whole world was hit by a financial crunch from which it is still recovering.
The company which was one known as the largest mortgage company of US was collapsed only because of few reasons. The failure of the company was not only because of the company but many other factors including the regulatory bodies also had a role in it. The company might have survived if it had adopted the above mentioned strategies.
Thompson, G. a. (2nd Edition). Essentials of Strategic Management.
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