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Financial Engineering: The Evolution of a Profession by Cara M. Marshall, Tanya Beder

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Chapter 18

Mortgage Case Studies: Countrywide and Northern Rock

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CASE STUDY ONE: COUNTRYWIDE FINANCIAL1

Event Summary

Countrywide Financial, the largest home lender in the United States, found itself under liquidity pressure in August 2007 when the markets experienced extreme volatility as a result of rising defaults in the subprime mortgage market. Countrywide first tapped into an $11.5 billion credit line and then accepted $2 billion in financing from Bank of America. The lender later announced, on January 11, 2008, that it had agreed to be fully acquired by Bank of America for about $4 billion in stock, or approximately $6.90 per share. Countrywide's shares had been selling for $42 per share in January 2007. The value of the deal was later reduced to $2.8 billion.

Countrywide's troubles triggered a class action lawsuit that contends that the lender issued “materially false and misleading statements regarding the company's business and financial results” during the period from January 31, 2006, through August 9, 2007. In addition, the firm was accused of perpetuating predatory business practices in its emphasis on selling loans with high associated fees to consumers. Countrywide announced a $1.2 billion third-quarter loss on October 26, 2007; this was its first reported loss in 25 years.

Event Details

In 2007, Countrywide had $408 billion in mortgage originations and a servicing portfolio of about $1.5 trillion with 9 million loans. Rumors that Countrywide ...

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