BofA is in talks to buy giant lender
In a deal that could buttress the ailing housing market, financial titan Bank of America Corp. was deep in negotiations Thursday to buy loss-battered Countrywide Financial Corp., the biggest U.S. mortgage lender.
A takeover by Bank of America would remove the threat that Calabasas-based Countrywide could fail and wreak more havoc in the mortgage market -- where loan defaults are soaring and federal policymakers have been struggling to limit the spillover in the economy.
A rescue of Countrywide would help calm the âcrisis of confidenceâ that has slammed the financial system as the housing and mortgage markets have crumbled, said Brian Bethune of Global Insight, an economic forecasting firm in Lexington, Mass. âThis will change perceptions.â
Fear that the housing mess could drag the U.S. economy into recession has depressed the stock market in recent months and spurred the Federal Reserve to cut short-term interest rates three times. On Thursday, Fed Chairman Ben S. Bernanke said the central bank was ready to make further âsubstantiveâ moves to ease credit to help the economy.
In the case of Countrywide, policymakers had to be concerned about âa big domino going down,â Bethune said.
The talks between Countrywide and Bank of America, confirmed by a source with knowledge of the discussions, ramped up this week as rumors spread on Wall Street that Countrywide might be forced to seek Bankruptcy Court protection.
The company said the rumors had no substance, but on Wednesday investors pushed the firmâs once-highflying stock to an 11-year low. On Thursday, however, the shares jumped 51% amid expectations of a buyout.
For Countrywide, a takeover by a financially robust suitor âwould be a gift from heaven,â said banking industry analyst Richard Bove of Punk, Ziegel & Co. âThey would get bailed out.â
But the companyâs investors are certain to get only a fraction of the $45 a share their stock was worth at its peak last year. And it isnât clear what would happen to Countrywideâs extensive operations in the west San Fernando Valley and Ventura County, where it is one of the biggest employers.
For Charlotte, N.C.-based Bank of America, buying Countrywide would make the nationâs largest retail bank the top mortgage lender as well. It also could protect a $2-billion investment in Countrywide that the bank made in August, as the housing marketâs woes worsened and Countrywide began to have trouble raising money on Wall Street.
With Countrywideâs stock market value less than $5 billion now, BofA could gain control for ânot a lot of money . . . and theyâve wanted to get into the mortgage business in a bigger way for years,â said Robert Napoli, an analyst who follows mortgage lenders for brokerage Piper Jaffray & Co. in Chicago.
Bank of America declined to comment Thursday. Countrywide, responding to a New York Stock Exchange inquiry about the wild activity in its stock, also declined to comment.
Countrywideâs shares soared $2.63, or 51%, to $7.75 on Thursday. Bank of Americaâs shares rose 56 cents to $39.30, and word of the takeover negotiations helped boost the stock market overall. The Dow Jones industrial average climbed 117.78 points, or 0.9%, to 12,853.09.
Countrywide, founded in 1969, became a leader in financing the housing sector boom in recent years as a lender and loan servicer. The company now collects payments on more than 9 million loans nationwide worth $1.5 trillion.
Its brassy, Bronx-born chief executive, 69-year-old Angelo R. Mozilo, came to personify the spectacular success many housing-related businesses enjoyed during the boom years. He was one of the highest-paid executives in America in 2005 and 2006, taking home $160 million and $120 million, respectively, mostly in stock option gains.
But Countrywideâs fortunes began to turn last year. Loans that the company and other lenders had made to high-risk, âsub-primeâ borrowers in the final years of the housing-market frenzy were defaulting at a fast pace as home sales slumped and prices fell.
Mozilo said at a recent economic conference that the mortgage industry made credit too easily available, giving borrowers a sense that âyou couldnât lose . . . and when you canât lose, people do silly things.â
Yet Countrywide itself has been criticized for loosening lending standards and helping to inflate the real estate bubble.
Failures of lending firms surged in the first half of 2007. Wall Street, which in the fat years had aggressively purchased loans for resale to investors via mortgage-backed securities, quickly cut off credit to the industry and demanded that lenders buy back scads of bad loans they had made.
By August, even giant Countrywide found itself strapped for funds. That attracted Bank of America, which agreed to a $2-billion cash infusion to bolster the firm -- and effectively secured first rights to bid for the entire company.
In recent months, Countrywide increasingly has turned to individual savers for the cash it needs to make loans, offering sky-high yields on federally insured deposits.
This week, for example, the companyâs Countrywide Bank unit was offering an annualized yield of 5.45% on three-month, $10,000 certificates, the highest in the U.S. and well above the national average yield of 3%, according to Informa Research Services.
All along, Mozilo has said Countrywide would take its lumps from the mortgage bust and emerge stronger.
Yet its stock has continued to slide since August as the companyâs loan delinquency rate soared, reaching 7.2% in December from 4.6% a year earlier.
Countrywide recorded a $1.2-billion loss in the third quarter. To cut costs, it has slashed its workforce, which had topped 61,000 in July. The company said this week that its head count had fallen to 50,600 by yearâs end.
Some analysts said a takeover of Countrywide by Bank of America could be a long-term coup for the acquirerâs 60-year-old CEO, Kenneth D. Lewis -- assuming that the housing market recovers in a few years.
âCountrywide has developed top-notch technology for mortgage processing and origination,â said Bart Narter, an analyst at Celent, a Boston-based financial consulting firm. âWhen the mortgage business inevitably picks up, access to these resources will prove to be a valuable asset for Bank of America.â
With $1.6 trillion in assets, Bank of America boasts enormous earnings power thanks to its extensive retail and corporate banking operations. It earned $3.7 billion in the third quarter despite setting aside $2 billion for possible loan losses as the economy has weakened.
The bankâs strength may help it hold on to Countrywide customers. Until Thursday, La Mirada retiree Millie Grisham said she was getting ready to pull her money out of Countrywide Bank, even if it meant paying an interest penalty for early withdrawal of her deposit.
Grisham feared Countrywide could go under, taking her principal with it, despite federal deposit insurance.
But talk of an acquisition by Bank of America reassured her. âNow that Bank of America might be taking over, I donât see why I wouldnât leave it there,â Grisham said. âI would feel like my money was safe.â
Still, Bank of America could be buying trouble in any deal for Countrywide, analysts warned.
Countrywideâs lending practices are under investigation by California Atty. Gen. Jerry Brown and the Illinois attorney generalâs office, and the Securities and Exchange Commission is looking into potentially improper trading by insiders, most notably Mozilo, who sold more than $140 million of stock before the price began tanking last year.
In addition, federal bankruptcy trustees are probing allegations that the company levied inappropriate charges on mortgage holders going through bankruptcy.
Fraud suits against Countrywide, and rising loan losses, could become huge liabilities in the next few years, some experts say.
âIâm stunned that Bank of America, which is a relatively conservative organization that meticulously runs its business, is willing to take on something as problematic as Countrywide,â said Sean Mathis, managing director at Miller Mathis & Co., a New York investment bank. âThey must feel theyâre getting everything at a discount thatâs sufficient to cover up the negative things.â
Times staff writers Kathy M. Kristof and Peter Y. Hong contributed to this report.
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