Countrywide

Question 1

Describe Countrywide prior to the Global Financial Crisis

Answer 1

1. Largest home mortgage firm, over $1T in loan transactions
2. Originated over 15% of all U.S. Home Mortgages
3. Diversified into insurance, banking, and securities
4. Outperformed Walmart, Berkshire Hathaway

Question 2

Describe subprime loans

Answer 2

1. Interest only, adjustable rate (ARM)
2. Much more risk
3. Many investors would use this as a vehicle to profit of the differences between principals and inflated selling prices
4. Created a market for liar loans
5. Risk was reduced because of rising home prices

Question 3

Describe factors that influenced the recession

Answer 3

1. Realtors, mortgage officers, and appraisers are incentivized by home sales
2. Gov encouraged firms to make loans to low income borrowers
3. Slowing of US economy reduced incomes and lending capacity
4. Demand for subprime loans increased
5. Appreciating home prices and cheap capital produced an oversupply of homes
6. Baby boomers retired and sold homes increasing supply
7. subprime market collapsed - was 6% of the mortgage market
8. Financial institutions failed which caused a ripple effect

Question 4

Moral hazard exists when the financial incentives to behave unethically are greater than the inverse

Answer 4

True

Question 5

Subprime loans, especially liar loans, illustrate adverse selection. They are more
attractive to less credit-worthy individuals.

Answer 5

True

Question 6

Unethical behavior in subprime markets attracted unethical business people

Answer 6

True

Question 7

The booming economy and growing tax base, both of which depended on the housing
market, dis-incentivized government from tackling the emerging subprime crisis.

Answer 7

True

Question 8

Ordinary citizens had financial incentives to participate as well. Many, for example, used
subprime loans to buy more expensive homes or refinance existing homes.

Answer 8

True