NEW YORK (Reuters) - Bank of America Corp said on Friday it would buy mortgage lender Countrywide Financial Corp for $4 billion in a move that could avert one of the biggest collapses in the U.S. housing crisis.
The purchase marks another acquisition for Bank of America Chief Executive Kenneth Lewis, who has spent more than $100 billion since 2004 to create the second-largest U.S. bank and the nation's largest consumer bank.
It also provides a lifeline for Countrywide, which became a poster child for what critics say were lending excesses that fueled the housing and credit meltdown.
The largest U.S. mortgage lender has been convulsed by mounting losses and defaults, a loss of access to credit markets, and a slew of lawsuits and regulatory probes into its lending practices and Chief Executive Angelo Mozilo's pay. On Tuesday, it denied rumors that it might go bankrupt.
Before Friday, Bank of America had a paper loss of more than half the $2 billion it injected into Countrywide in August. Countrywide's market value has slid by about $22 billion in the last year.
"I'm breathing a big sigh of relief," said Nancy Bush, managing member of NAB Research LLC in Aiken, South Carolina. "This takes out a major point of uncertainty in the industry."
The purchase calls for the exchange of 0.1822 of a Bank of America share for each Countrywide share. It values Countrywide at $7.16 per share, a 7.6 percent discount to its Thursday closing price, and at just 0.31 times tangible book value.
Countrywide shares closed down $1.42, or 18.3 percent, at $6.33, after rising 51.4 percent on Thursday in anticipation of the merger. Shares of Bank of America dropped 80 cents, or 2 percent, to $38.50.
Shares of Washington Mutual Inc rose 3.7 percent after CNBC television said the mortgage lender had held preliminary merger talks with JPMorgan Chase & Co. The largest U.S. savings and loan was one of several depressed financial stocks helped by merger speculation.
Countrywide and Bank of America together would make about one in four U.S. mortgage loans, roughly twice as many as Wells Fargo & Co, the nearest rival. Bank of America alone ranks fifth, the Inside Mortgage Finance newsletter said.
Bank of America's Lewis acknowledged on a conference call the near-term challenges in mortgages, saying he expects loan volumes to fall through 2008. Still, he called the purchase of Countrywide a "one-time opportunity ... when the value is very attractive."
It was not clear how many jobs might be lost. Countrywide, based in Calabasas, California, ended December with 50,600 employees after eliminating about 11,000 jobs in the previous five months.
In a memo to employees on Friday, Mozilo said: "We have come to recognize that those companies with reliable sources of capital and liquidity and significant scale will be the ultimate winners in this environment and in the longer term."
Mozilo has been faulted for collecting some $387 million from pay and stock option gains from 2002 to 2006 and millions more this year after it was clear the housing crisis had begun. He could get $36.4 million more if the merger goes through, according to regulatory filings and compensation experts.
Rep. Barney Frank, a Massachusetts Democrat who chairs the House Financial Services Committee, called on Mozilo to donate some pay to nonprofit groups trying to help subprime borrowers avoid default.
Bank of America Chief Financial Officer Joe Price said the bank could add Countrywide's $61 billion of deposits without breaching a 10 percent federal cap because of the thrift status of Countrywide's banking unit. Bank of America's $21 billion purchase of LaSalle Bank Corp from Holland's ABN AMRO Holding NV in October gave it control of 9.88 percent of U.S. deposits.
Not everyone likes the timing of the merger.
"We don't feel like we're anywhere near out of the woods in this whole mortgage market, housing market, subprime morass," said Michael Mullaney, who helps invest about $10 billion at Fiduciary Trust Co in Boston.
Lewis said the purchase price incorporated Bank of America's expectations for future credit losses.
But Paul Miller, an analyst at Friedman, Billings, Ramsey & Co, wrote: "If credit losses exceed Bank of America's expectations, we believe the deal could be renegotiated."
Bank of America, based in Charlotte, North Carolina, expects a $1.2 billion restructuring charge from the transaction, and said it would need a couple of billion dollars of new capital to help preserve its capital ratios.
It expects the purchase to result in $670 million of cost savings, or 11 percent of combined mortgage expenses, by 2011, and add 3 percent to 2009 earnings per share, excluding items.
Lewis, 60, said he wanted to retain a number of senior Countrywide officials who are "very, very good operators." He also said he would like Mozilo, 69, to stay on until the merger closes, after which "I would guess he would want to go have some fun."
Lewis said he planned to meet with Mozilo next week.
Mozilo, a butcher's son from The Bronx, New York, co-founded Countrywide in 1969. He had planned to retire in December 2009.
In 2007, Countrywide made $408 billion of mortgages, or roughly one in six U.S. home loans. It also handles billings on some $1.48 trillion of mortgages in its servicing portfolio.
The company cut lending nearly in half late last year and stopped making most of the variable-rate and subprime mortgages that caused many of its problems.
Bank of America has not offered subprime mortgages since 2001 and said the combined company will not make them.
Moody's Investors Service said it might downgrade Bank of America's credit ratings, citing the need for capital and risks from potential write-downs and lawsuits.
(Additional reporting by Tim McLaughlin, Mark McSherry, Christian Plumb, and Caroline Valetkevitch and John Poirier in Washington; Editing by Lisa Von Ahn, Derek Caney, Dave Zimmerman, Richard Chang, Toni Reinhold)