NEW YORK (Reuters) - Bank of America Corp BAC.N said on Friday it would buy battered mortgage lender Countrywide Financial Corp CFC.N for $4 billion, a move that could avert one of the biggest collapses in the U.S. housing crisis.
The purchase marks another major but risky 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 by far.
It would also provide a lifeline for Countrywide, which had become a poster child for what critics say were lending excesses that fueled the housing and credit crunch.
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 roughly $1.3 billion paper loss on the $2 billion it injected into Countrywide in August as the global credit crisis deepened. 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.
In late-afternoon trading, Countrywide shares fell $1.18, or 15.2 percent, to $6.57, after having risen 51.4 percent on Thursday in anticipation of a merger. Bank of America shares fell 38 cents to $38.92.
Shares of Washington Mutual Inc WM.N, the largest U.S. savings and loan and also a troubled mortgage lender, rose Friday after CNBC television said it had held "very preliminary" merger talks with JPMorgan Chase & Co JPM.N.
Combining Bank of America with Countrywide would create a company that makes about one in four U.S. mortgage loans, roughly twice as many as Wells Fargo & Co WFC.N, the nation's second-largest mortgage lender. Bank of America alone ranks fifth, the Inside Mortgage Finance newsletter said.
On a conference call, Bank of America’s Lewis acknowledged near-term challenges in mortgages, saying he expects loan volumes to fall as housing remains weak through 2008.
Still, he said Charlotte, North Carolina-based Bank of America conducted “extensive” due diligence on Countrywide.
He called the purchase of the Calabasas, California-based lender a “one-time opportunity (to buy) when the value is very attractive.”
It wasn’t immediately clear how many jobs might be lost. Countrywide ended December with 50,600 employees after eliminating about 11,000 in the previous five months.
Rep. Barney Frank, a Massachusetts Democrat who chairs the House Financial Services Committee, said the purchase could be a “positive development” in the subprime mortgage crisis. He also urged Mozilo to donate some of his recent pay to nonprofit groups trying to help subprime borrowers avoid default.
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 receive $36.4 million more if the merger goes through, according to regulatory filings and compensation experts.
Joe Price, Bank of America’s chief financial officer, 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 AAH.AS in October gave it control of about 9.88 percent of U.S. deposits.
The U.S. Office of Thrift Supervision, Countrywide’s regulator, did not have an active role in the merger talks, OTS spokesman Kevin Petrasic said.
Not everyone considers the timing ideal.
“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.
Asked about the prospect of further credit losses, Lewis said: “That would be embedded in the purchase price, and in our assumptions on earnings going forward.”
Yet 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 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.
The bank expects by 2011 to realize $670 million of after-tax cost savings, or 11 percent of the combined company’s mortgage expenses. It expects the purchase to add 3 percent to 2009 earnings per share, excluding items.
TIME TO HAVE FUN
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 the 69-year-old Mozilo to stay with Countrywide 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 Bronx, New York, co-founded Countrywide in 1969. He had planned to retire in December 2009. Countrywide did not immediately return requests for comment.
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, after tight credit markets forced it in August to draw down an $11.5 billion credit line.
Countrywide’s changes came too late for the company to avoid a $1.2 billion third-quarter loss. And on Wednesday, Countrywide said defaults and late payments in its servicing portfolio reached record levels in December.
Bank of America has not offered subprime mortgages since 2001, and said the combined company won’t make them either.
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, John Poirier and Caroline Valetkevitch; Editing by Lisa Von Ahn, Derek Caney, Dave Zimmerman, Richard Chang
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