BofA invests $2 billion in Countrywide
Bank of America Corp. threw home-loan colossus Countrywide Financial Corp. a $2-billion lifeline Wednesday in a vote of confidence that could stabilize the reeling mortgage company.
The deal came as cash-starved sub-prime mortgage lenders across Southern California announced more than 4,000 layoffs nationwide.
Bank of America, which has the largest retail banking operation in the country, for some time has wanted to expand its mortgage business and has been seen as interested in acquiring all of Calabasas-based Countrywide. Wednesday’s deal puts BofA, based in Charlotte, N.C., in a strong position to accomplish both goals.
The transaction, which was announced after the stock market closed, also gives BofA a chunk of the country’s largest mortgage lender at what some might consider a bargain price.
For its $2 billion, Bank of America received preferred stock that pays a 7.5% annual dividend and can be converted into Countrywide common stock at $18 a share. If the stock is converted, BofA would own 16% of the mortgage company.
Countrywide’s stock soared 21% on the news to $26.30 a share in after-hours trading after finishing the regular market session at $21.82, up 3 cents for the day. The shares ended 2006 at $41.93.
BofA, the sixth-largest U.S. home lender in 2006, recognizes that “once the dust settles the survivors [in the mortgage industry] will have much less competition and will thrive,” said John Buckingham, head of Al Frank Asset Management in Laguna Beach and a Countrywide shareholder. “It looks like BofA got a very nice deal.”
Angelo R. Mozilo, chairman and chief executive of Countrywide, said in a statement that the deal positioned the company for “future growth and success” with help from BofA.
His counterpart at Bank of America, Kenneth D. Lewis, said the deal recognized Countrywide’s importance in financing home purchases.
“We hope this investment will be a step toward a return to a more normal liquidity in the mortgage markets,” he said.
Countrywide has been badly squeezed by the credit crunch ravaging the mortgage industry, as Wall Street lenders have cut off funding and investors around the world who once eagerly gobbled up mortgage-backed bonds have turned up their noses at anything but securities issued by government-sponsored mortgage buyers Fannie Mae and Freddie Mac.
Countrywide had been reeling since reporting Aug. 9 that credit-market disruptions could hurt its financial condition.
Last week a Merrill Lynch & Co. analyst warned that the company could face insolvency if the credit crunch worsened. That helped trigger a violent sell-off in the stock market overall, drove Countrywide shares down 23% for the week and caused some savers with deposits at Countrywide’s bank to pull their funds.
With Bank of America’s investment, Wall Street is likely to put aside fears that the company could fail, analysts said.
“Countrywide is no longer on the endangered company list,” Punk Ziegel & Co. analyst Richard X. Bove said in a note to investors.
“Clearly Mozilo does not want to sell yet,” Bove wrote in an e-mail to The Times. “But when he does it looks like [BofA] will win the prize -- and it is a prize despite what has been said recently.”
The preferred shares that BofA acquired are nonvoting. If BofA converts them to common shares, it can’t sell them for 18 months.
BofA’s shares rose to $52.60 after hours. They had closed at $51.65, up 35 cents, in regular trading.
The deal could mean big losses today for traders who have “shorted” Countrywide shares -- betting that their price would continue to slide. The number of shorted Countrywide shares surged to a record 83.6 million on Aug. 10 from 51.4 million a month earlier, according to New York Stock Exchange data. The short sellers of Countrywide stock may rush today to close out their wrong-way bets, adding fuel to any rally in the shares.
The widening credit crunch has stemmed from a wave of defaults on sub-prime mortgages -- loans made to people with poor credit. And there was little good news Wednesday in the sub-prime business, where the layoff tide became a tsunami:
* San Diego’s Accredited Home Lenders Holding Co., whose planned sale to a Texas buyout firm collapsed last week, said it would accept no more new loan applications and would close 60 retail offices and half of its 10 wholesale divisions. Afterward, the company would have about 1,000 employees, down from 2,600 at the end of June.
* Wall Street powerhouse Lehman Bros. Holdings said it was closing BNC Mortgage, its Irvine-based sub-prime unit, eliminating 1,200 jobs in 23 U.S. offices.
* Impac Mortgage Holdings Inc. of Irvine announced the layoff of 350 employees nationwide, the latest in a series of job cuts.
* Sub-prime specialist Delta Financial Corp. of Woodbury, N.J., said it cut 300 jobs, 20% of its workforce, closing offices in California, Texas and Florida.
* London-based HSBC Holdings closed an Indiana sub-prime mortgage office that had employed 600 people.
* Agoura Hills-based Quality Home Loans filed for Chapter 11 bankruptcy protection, along with three affiliates that also specialized in sub-prime loans.
Since the start of the year, more than 40,000 workers have lost their jobs at mortgage lending institutions, according to outplacement firm Challenger, Gray & Christmas Inc.
In a piece of good news for the industry, Pasadena thrift IndyMac Bancorp Inc. said Wednesday it would resume making “jumbo” loans to home buyers with solid credit and 15% to 25% down payments -- but would keep the loans on its books. Fannie Mae and Freddie Mac are barred from buying such loans because they exceed the $417,000 limit set by the government. Lenders have found it difficult of late to sell jumbo loans to private investors.
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elizabeth.douglass@latimes.com
tom.petruno@latimes.com
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