Lender is good bet, says BofA
As Countrywide Financial Corp.’s stock price cratered and bankruptcy rumors swirled, Bank of America Corp. remained convinced that the largest U.S. home-loan company had a valuable franchise despite years of aggressive lending that left it buried in losses.
Kenneth D. Lewis, chairman of the nation’s largest consumer bank, had been well-disposed toward Countrywide since the summer, when teams of his employees first examined the operations and books of the Calabasas-based mortgage colossus.
“People kept coming back and saying, ‘This is really -- at the grass-roots level -- a very well-run mortgage company,’ ” Lewis said in an interview last week in Westlake Village, where he had flown from his bank’s Charlotte, N.C., base to meet with Countrywide employees. “Its systems are good and its people are good.”
Countrywide agreed last week to a $4-billion takeover by Bank of America. Countrywide would become a Bank of America unit and could retain its name depending on a review of how the public perceives the brand, bank officials said.
Talking optimistically about his troubled takeover target, Lewis said Countrywide was successfully reshaping itself as a more prudent lender, one poised to benefit from refinancings as interest rates fall.
The deal, expected to close in the third quarter, marks a reversal for Lewis, who had often expressed distaste for the mortgage industry’s potential for questionable lending and unwieldy accounting. He had vowed repeatedly not to buy a home lender.
When Lewis became Bank of America’s boss in 2001, the company quit making sub-prime mortgages to shaky borrowers (although its investment banking arm recently lost billions of dollars on sub-prime-related securities).
The bank also recently stopped making mortgages, even prime ones, through brokers, and instead became No. 1 in retail, or direct-to-consumer, mortgages by pushing no-fee loans through its vast branch system.
By contrast, working through brokers has been Countrywide’s biggest revenue producer. Countrywide will remain in that “wholesale” end of the mortgage business as well as the retail side but will no longer fund the sub-prime loans whose meltdown toppled the company, Lewis said.
“It’s going to be a more conservative and a more simple world going forward,” he said.
Having shifted its strategies to making more traditional loans, which it can sell to government-sponsored mortgage investors Fannie Mae and Freddie Mac, Countrywide already has largely realigned its operation with his vision, Lewis said.
If the takeover wins the approval of regulators and Countrywide shareholders, as expected, it would make Lewis top dog in what he calls the three anchor products of consumer banking, deposits and credit and debit cards.
Despite past blow-ups in the business, mortgages are attractive “as an anchor product,” Lewis said. “And it does make us No. 1 in every anchor product in America.”
Bank of America, a major lender to Countrywide since the latter started up 39 years ago, invested $2 billion in its old customer in August, after the home lender’s Wall Street funding dried up.
Countrywide paid 7.25% interest to the bank and gave it an option to buy 16% of the company for $18 a share -- a deal critics questioned as the stock fell to single digits.
Defaults on sub-prime and other risky loans intensified the pinch. Buyers shunned the nontraditional loans that had become Countrywide’s specialties. Without being able to sell them, it kept running short of new funds to lend.
Still, as the situation worsened, Bank of America maintained that it was a passive investor -- until late last year, when Countrywide’s chairman and chief executive, Angelo Mozilo, called.
“Angelo called sometime in December -- I’ve forgotten the exact date -- and basically said, with all the turmoil in the marketplace, would we at least look at the company and determine if we would want to buy it?” Lewis said.
He sent a team of 60 employees to again sift through Countrywide’s books and operations. Based at the Four Seasons Westlake Village, where Lewis was interviewed Thursday, the team took a month to satisfy Lewis that he would come out ahead, even after billions of dollars in charges for loan losses and lawsuits.
For Countrywide workers, the deal traded one set of uncertainties for another. Lewis said it was too early to talk in detail about job cuts, although the ax is expected to fall heavily on headquarters employees.
Meanwhile, the company’s stock has been trading as if the deal might not go through as planned. The takeover calls for Countrywide stockholders to exchange each share for 0.1822 of a share of Bank of America. At Bank of America’s closing price of $35.97 on Friday, that works out to $6.55 a share of Countrywide stock.
But Countrywide shares, which had closed as high as $43.99 in February, ended Friday at $4.96, reflecting speculation that the company’s troubles might prove deeper than expected and the final price might drop.
If market conditions worsen and Countrywide’s losses exceed its suitor’s expectations, “there is a high likelihood that the deal price will be renegotiated,” Paul Miller, an FBR Capital Markets analyst, wrote in a recent note to clients.
If the deal falls through, Countrywide could be forced, depending on the reason, to pay Bank of America a $160-million termination fee, according to the agreement.
Until the deal closes and Bank of America can become more hands-on, Lewis said, the Calabasas lender will be left on its own as it tries to refinance or modify tens of billions of dollars in problem loans.
Under agreements with the investors who have bought into its pooled loans, Countrywide can now modify mortgage terms 95% of the time without the investors’ permission, Lewis said.
And he said Countrywide executives were optimistic about an initiative to refinance billions of dollars in exotic loans into old-school mortgages that can be sold to Fannie Mae and Freddie Mac or guaranteed by the federal government.
In that effort, Countrywide may get an assist from falling interest rates. The average rate on a 30-year fixed-rate mortgage last week was 5.69%, down from 6.23% a year ago and the lowest since July 2005, according to Freddie Mac.
Freddie Mac said 15-year fixed-rate mortgages averaged 5.21%, down from 5.98% a year ago.
As a result, applications to refinance loans are at their highest level since April 2004, said Carolyn Kemp, a spokeswoman for the Mortgage Bankers Assn.
That trend has produced higher loan volume at Countrywide, Lewis said, and talk of a refinance boom.
“Someone said today it’s looking more and more like one,” he said.
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