A lifeline for Countrywide
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News item from the L.A. Times: ‘Calabasas-based Countrywide announced in late afternoon that Bank of America made a $2-billion investment in the company in the form of preferred stock. Countrywide will pay B of A an annualized yield of 7.25% on the investment.’
The preferred stock can be converted into Countrywide common stock at $18 a share -- a discount of roughly 18% below Countrywide’s closing price Wednesday. L.A. Times: ‘It looks like BofA got a very nice deal,’ said money manager John Buckingham.
The Wall Street Journal writes that the deal ‘is likely to persuade investors that (Countrywide) has a powerful ally ready to help in any crisis. And it removes a major source of uncertainty hanging over the nation’s credit markets at a time when investor confidence has been shaky.’
The New York Times, meanwhile, explores an interesting angle of the Countrywide crisis that’s worth watching: When it sold mortgages to investors, Countrywide Home Loans agreed to buy the loans back if they were ever modified in the future to help borrowers make payments. Politicians are clamoring right now for exactly those kinds of modifications, to help struggling homeowners avoid foreclosure. N.Y. Times: ‘But Countrywide’s servicing unit may have less incentive to help troubled borrowers who are interested in working out their loans, analysts said, because doing so could put the parent company on the hook to buy back a loan.’
The N.Y. Times reports those agreements cover $122 billion worth of loans. If, say, 3 percent are troubled, buying those loans would cost Countrywide $3.7 billion -- a tall order for a company short on cash.
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