Arrow Case

1204 words 5 pages
1. What are the two ways Countrywide – or any mortgage lender - made money? In the beginning, Countrywide started making money by offering people mortgages that had very low rates. That didn’t make them #1 in the industry and when Angelo Mozilo became the only owner and the CEO of Countrywide, he decided to enter the risky-mortgages business so that he has the biggest share in the industry. This is how Countrywide started making the big money. Angelo’s theory was that all people should have the equal right to get mortgages so Countrywide started giving mortgages to everyone no matter their credit history or other mandatory requirements. The problems were that, “Minimal FICO scores were often ignored”; "Many mortgages were made based …show more content…
This type of loan can be very risky to the company because the borrowers’ bad credit record can result in a higher risk of default. Borrowers with blemished credit are more prone to not pay back the interest and loan on time. b) ARM (also called Adjustable Rate Mortgage) loans ARM Loans are loans with the interest rate which fluctuates periodically. As a result, interest payments from the borrowers could vary greatly. The Adjustable rate mortgage will be affected by the fluctuation of the interest rate which can cause a higher interest risk, creating an uncertainty in the amount of the interest revenue to the company. c) Pay option ARM loans Pay option ARM loans permit payers not to pay back interest due or pay only the minimum amount in the short period, but gradually the total amount of principal and interest owed by the borrowers became larger and it is negatively amortized. This type of loan did give flexibility to the borrowers but greatly increase the default risk. Once the house prices go down instead of up and the borrowers could not gain an appreciation value in the house. So they are unable to pay back the accumulated principal and interest owed. d) HELOC (also called Home Equity Line of Credit) loans A home equity line of credit loan is a type of adjustable interest rate loan with a maximum amount you can borrow instead of a fixed amount and the home’s equity value serve as collateral. Low monthly interest repayment may be required

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