(Recasts, adds Bank of America CEO comments, Countrywide CEO exit package)
By John Poirier and Jonathan Stempel
NEW YORK, Jan 10 (Reuters) - Bank of America Corp (BAC.N) is in advanced talks to buy struggling Countrywide Financial Corp CFC.N, the largest U.S. mortgage lender, several people familiar with the matter said on Thursday.
Countrywide shares soared 51.4 percent, recovering losses posted in the prior two days when investors were speculating the company could go bankrupt even after it specifically rejected that prospect on Tuesday.
Bank of America spokesman Scott Silvestri declined to comment. Countrywide did not immediately return requests for comment, though the New York Stock Exchange said the company declined to discuss market activity in its stock. The Wall Street Journal earlier reported the possible merger.
Even after Thursday's gains, Countrywide's market value is still only about $4.8 billion. That is far below the roughly $26 billion it was worth last February, just as the nation's housing crisis was about to explode.
"From Countrywide's perspective, it is their best chance for salvation," said Sean Egan, managing director of credit rating agency Egan-Jones Ratings Co. "At the end of the chaos that is going to transpire over the next two years, it gives Bank of America a terrific position in mortgage financing."
Countrywide shares closed up $2.63 at $7.75. Bank of America shares closed up 56 cents at $39.30. Both companies' shares trade on the Big Board.
Bank of America in August bought $2 billion of preferred shares convertible into a roughly one-sixth stake in Countrywide. Analysts have said that investment made the bank -- whose own profitability is suffering from rising credit losses -- an obvious candidate to buy Countrywide, eventually.
A purchase would constitute another major acquisition for Bank of America Chief Executive Kenneth Lewis, who has spent more than $100 billion in the last four years on FleetBoston Financial Corp, credit card issuer MBNA Corp, LaSalle Bank Corp and the U.S. Trust wealth management firm.
Bank of America is also a major mortgage lender, and has touted its success winning customers by waiving a variety of closing costs on home loans.
Yet Lewis has been publicly more reticent about growing in mortgages through mergers.
Asked about that issue at a Dec. 12 Goldman Sachs & Co conference, Lewis said: "At some point, you know, arithmetic overcomes all your issues, but if I ever did anything in the mortgage business, I would have to eat about seven years of my words, so it would have to be pretty compelling."
A merger would also end Calabasas, California-based Countrywide's more than 38 years as an independent company, ever since its founding in 1969.
Angelo Mozilo, its co-founder and chief executive, has been a lightning rod for critics who say he encouraged loose lending practices that contributed heavily to the housing crisis. In July he called the slump the worst since the Great Depression.
Mozilo has also been faulted for collecting hundreds of millions of dollars in compensation this decade from pay, bonuses, awards and stock options, including millions of dollars after it was clear the housing crisis had begun.
He could receive another $36.4 million if the Bank of America deal goes through, according to regulatory filings and compensation experts. That, however, is down from the $88 million that Countrywide has estimated in a proxy filing last year, before much of the decline in the lender's share price.
Countrywide overhauled its lending practices this summer, essentially ending subprime and other riskier home loans, after being forced to draw down an $11.5 billion credit line because investors would not buy its mortgages or offer credit.
The mounting problems led to a $1.2 billion third-quarter loss, and led to 11,000 job cuts since the end of July. Countrywide now primarily makes smaller home loans considered less likely to default.
Still, credit problems linger. On Wednesday, Countrywide said December foreclosures and late payments among home loans on which it collects payments rose to the highest on record.
While Countrywide has repeatedly said it has sufficient liquidity to operate, investors have not been convinced.
"Obviously a purchase of Countrywide by Bank of America would solve the company's funding and liquidity problems with a stroke of the pen," wrote Kathleen Shanley, an analyst at Gimme Credit, in independent bond research service.
"The big issue is whether Bank of America can get comfortable enough with the credit quality issues to move forward without any commitments of support from bank regulators," she added.
A Federal Reserve spokeswoman declined to comment.
The cost of protecting debt of Countrywide's home loans unit against default plummeted on Thursday.
Investors demanded $600,000 a year for five years to protect $10 million of debt against default, according to Phoenix Partners. They had earlier Thursday been demanding 31 percent up front, plus $500,000 a year, to protect the debt. (Additional reporting by Martha Graybow, Jessica Hall, Julie Haviv, Tim McLaughlin, Mark McSherry, Neil Shah, Glenn Somerville and Caroline Valetkevitch; Writing by Jonathan Stempel; Editing by Andre Grenon, Phil Berlowitz)