Why the Bank of America acquisition could be good for borrowers who have their mortgages serviced by Countrywide.
By David Goldman
NEW YORK -- If you're struggling with a mortgage you got from Countrywide Financial, you may be wondering what Bank of America's takeover plan bodes for your loan.
The short answer is that you could come out ahead.
"I think it's positive for the borrowers," Bruce Marks, chief executive of Neighborhood Assistance Corporation of America said. "There are millions of home owners with unaffordable mortgages. The deal will allow Bank of America to restructure loans to what homeowners can afford."
Marks suggested that Bank of America will be able to help current Countrywide customers where Countrywide can't, because it doesn't give risky subprime mortgages, so it plans to convert them into prime loans.
When the housing crash began, Countrywide found that an increasing number of customers with subprime loans were delinquent with their mortgage payments or facing foreclosure. Bank of America insulated itself from the housing crisis by not participating in subprime mortgages.
According to a Bank of America press release, the company does not plan to originate any subprime loans after the merger is completed.
BofA to buy Countrywide for $4B
John Taylor, President and CEO of National Community Reinvestment Coalition, agreed that the merger would pay off for Countrywide customers: "Bank of America can be flexible because they are the biggest retail bank in country, have liquidity, and a great financial track record," he said.
"Countrywide has a liquidity problem, but Bank of America doesn't, so it has the capacity to handle the volume of Countrywide loans that are coming in from this deal," Taylor added.
Though Taylor believes that Countrywide borrowers should be happy because Bank of America offers a great deal of accountability, others like George Hanzimanolis, president of the National Association of Mortgage Brokers, are not so sure.
"[This deal] doesn't make any difference to the home owner," said Hanzimanolis. "The only difference will be where you pay your bill to. Just because Bank of America is buying your Countrywide subprime loan, it doesn't change [into a prime loan] when they buy it."
Despite its struggles, Countrywide did $408 billion in mortgage originations in 2007 and serviced about 9 million loans worth $1.5 trillion. "Bank of America has said in the past that they didn't like how mortgage lending has been done," said Marks. "But Bank of America realized that this deal is too good an opportunity to turn down."
Marks believes that the the $4 billion price tag is in essence a liquidation for Bank of America. "With that acquisition, Bank of America has written off a huge amount of loans that Countrywide services," he said.
"Both companies share the goal of keeping distressed mortgage borrowers in their homes when possible," Bank of America sad in a press release. "Bank of America plans to expand the ... internal capacity and flexibility for loan modifications for loan workout teams following the purchase of Countrywide."
Hanzimanolis did concede that since Bank of America wants to be viewed positively in the public eye, it may try to modify some loans in cases of need. "If it sees people in trouble, it will be willing to help. [Bank of America] wants to send a message that 'we're strong and willing to work for our customers.'"
Taylor noted that restructuring loans also makes financial sense for the bank. "Bank of America may very well intend on having loans restructured to ones that are closer to prime loans and performing assets, because they would rather have the homeowners stay in their homes and pay their mortgages than face the alternatives."
In doing so, Bank of America may be able to recoup some of the losses it incurred from purchase of Countrywide, said Marks. Since the bank has already written off the value of many of those loans, it plans on getting strong returns by restructuring customers' loans.
"Customers should absolutely contact Bank of America to restructure their loans into something they can afford," Marks said.
As for investors in mortgage-backed securities, restructuring of loans may help those investments as well. Taylor suggested that with portfolios "crashing and burning" now, some modifications of the loans may be able to help investors retrieve some return on the investment.
"Investors are happy about this," Taylor said, "If Bank of America can modify the loans, at least the investment [in mortgage-backed securities] is not a total loss."
Showing posts with label COUNTRYWIDE. Show all posts
Showing posts with label COUNTRYWIDE. Show all posts
Saturday, January 12, 2008
Friday, January 11, 2008
Bank of America to acquire Countrywide
Deal for country’s largest mortgage lender valued at $4.1 billion
CHARLOTTE, N.C. - Bank of America said Friday it will buy Countrywide Financial for $4.1 billion in stock, a deal that rescues the country’s biggest mortgage lender and expands the financial services empire of the nation’s largest consumer bank.
The acquisition will make Charlotte-based Bank of America Corp. the nation’s biggest mortgage lender and loan servicer.
Bank of America said it initially plans to operate Countrywide separately under the Countrywide brand, with integration occurring no sooner than 2009.
The transaction represents a 7.5 percent discount to where Countrywide shares ended Thursday after they soared on news that a rescue plan was in the works. It also effectively leaves Bank of America with a big loss on its $2 billion August investment in Countrywide Financial Corp. during the height of the summer’s global credit crisis.
An aggressive dealmaker who has already snapped up behemoths FleetBoston Financial and MBNA, Bank of America chief executive Ken Lewis this time isn’t buying a financial winner. Delinquencies and loans in pending foreclosure are rising in Countrywide’s loan portfolio, and Lewis said Friday “there are near-term challenges” in the nation’s housing market.
But Countrywide’s troubles have allowed Lewis to sweep in and add a major business line to his supermarket of financial products on the cheap.
“Countrywide presents a rare opportunity for Bank of America to add what we believe is the best domestic mortgage platform at an attractive price and to affirm our position as the nation’s premier lender to consumers,” Lewis said in a statement.
It also places Lewis in the position of a market savior. By buying Countrywide, he’s keeping the industry and regulators from the messy task of figuring out who would take on the responsibility of collecting payments for the 9 million U.S. home loans serviced by the Calabasas, Calif.-based lender. Lewis said Friday there was no government support for Countrywide’s loan portfolio.
“There’s still plenty of risk involved,” said Bart Narter, senior analyst at Celent, a Boston-based financial research and consulting firm. “He’s brave to do it. But I think that it’s very likely down the road to be profitable, maybe not immediately, but long-term.”
There was no immediate word on job cuts, but analysts said they expect some among the ranks of Countrywide’s 15,000 employees. Lewis said he would like Countrywide chairman and chief executive Angelo R. Mozilo to stay with the combined companies until the deal is done.
“Angelo has told me that he will do anything that we want him to do,” Lewis said. “I would guess that he’ll want to go have some fun. I will talk with him next week about his personal desires. Many of the senior people will have big operating roles in this company.”
Shareholders of Countrywide will receive 0.1822 of a share of Bank of America stock in exchange for each share of Countrywide. The deal is expected to close in the third quarter and to be neutral to Bank of America earnings per share in 2008 and lift earnings per share in 2009, excluding buyout and restructuring costs.
Bank of America expects $670 million in after-tax cost savings in the transaction, or 11 percent of the expense base of the two companies’ mortgage operations.
The agreement has been approved by both companies’ boards and is subject to regulatory and Countrywide’s shareholders approval.
Shares in Countrywide hit record lows in recent days on persistent rumors that a bankruptcy was imminent, a condition brought on by the widespread spike in mortgage defaults and foreclosures, especially in subprime loans — those made to borrowers with weak credit.
Countrywide shares plummeted more than 13 percent, or $1.04, to $6.71 at the open of trading Friday. Bank of America shares fell 19 cents to $39.11.
Countrywide shares have fallen 57 percent since Bank of America made its $2 billion deal in August at $18 per share. That purchase of preferred stock was convertible into a common shares of Countrywide at $18 per share, for roughly a 16 percent stake in the company.
Along with the $2 billion investment from Bank of America, Countrywide was forced to draw on an $11.5 billion line of credit to steady itself in August. It also tightened its credit guidelines and stopped selling some types of adjustable rate loans. But analysts said it wasn’t enough, with one noting this week that Countrywide needed an infusion of $4 billion in capital within the next two weeks to save itself.
Lewis’ bank holds $1.5 trillion in assets and is the nation’s largest bank by market capitalization.
“Their balance sheet can take a shock much better than Countrywide,” said CreditSights senior analyst David Hendler. “When you take the shocks at Countrywide, they have a big, busting consequence that’s negative.”
While Lewis downplayed the prospect of a major deal last month, it fits with an established pattern of building Bank of America through acquisition. In the past few years, Lewis has expanded the bank’s retail operation with multibillion purchases of FleetBoston Financial Corp., bolted on a credit card business by adding MBNA Corp., and grabbed a wealth-management business in U.S. Trust Co.
The result of all the dealmaking is a widely diversified financial services company that does business with nearly one out of every two American households.
In the past year, Bank of America has boosted its market share of prime mortgages, or those offered to borrowers with a solid credit history, and was the top retail mortgage originator in the U.S. during the first nine months of 2007.
“We are aware of the issues within the housing and mortgage industries,” Lewis said. “The transaction reflects those challenges. Mortgages will continue to be an important relationship product, and we now will have an opportunity to better serve our customers and to enhance future profitability.”
In Countrywide, Lewis gets the “best, total mortgage-banking company in the U.S. by far,” Hendler said. Countrywide’s sophisticated back office is a valuable asset that makes Bank of America a much bigger competitor with Wells Fargo & Co., Washington Mutual Inc. and others, he said. In 2007, Countrywide had $408 billion in mortgage originations and has a servicing portfolio of about $1.5 trillion with 9 million loans.
“The technology platform, the people who run it, the hedging, the facilities, the mortgage servicing rights, the origination platform, you know, they are all state of the art,” Hendler said.
While there are some regulator hurdles to close the deal, they are hardly insurmountable. The buyout would require approval from the Federal Reserve, and possibly other agencies, but analysts believe regulators are more concerned about a Countrywide collapse than industry consolidation.
A Countrywide failure would be a huge blow to government-sponsored mortgage finance companies Fannie Mae and Freddie Mac, which are major buyers of Countrywide’s loans.
Federal law also bars banks from acquisitions that would increase market share above 10 percent of U.S. deposits, a limit that Bank of America is nearing. Bank of America chief financial officer Joe Price said because Countrywide Bank us a federally regulated thrift, it “doesn’t play into the deposit cap.”
In addition, banking industry experts say Bank of America could easily lower the total amount of money held in deposits by decreasing interest rates and shedding deposits.
CHARLOTTE, N.C. - Bank of America said Friday it will buy Countrywide Financial for $4.1 billion in stock, a deal that rescues the country’s biggest mortgage lender and expands the financial services empire of the nation’s largest consumer bank.
The acquisition will make Charlotte-based Bank of America Corp. the nation’s biggest mortgage lender and loan servicer.
Bank of America said it initially plans to operate Countrywide separately under the Countrywide brand, with integration occurring no sooner than 2009.
The transaction represents a 7.5 percent discount to where Countrywide shares ended Thursday after they soared on news that a rescue plan was in the works. It also effectively leaves Bank of America with a big loss on its $2 billion August investment in Countrywide Financial Corp. during the height of the summer’s global credit crisis.
An aggressive dealmaker who has already snapped up behemoths FleetBoston Financial and MBNA, Bank of America chief executive Ken Lewis this time isn’t buying a financial winner. Delinquencies and loans in pending foreclosure are rising in Countrywide’s loan portfolio, and Lewis said Friday “there are near-term challenges” in the nation’s housing market.
But Countrywide’s troubles have allowed Lewis to sweep in and add a major business line to his supermarket of financial products on the cheap.
“Countrywide presents a rare opportunity for Bank of America to add what we believe is the best domestic mortgage platform at an attractive price and to affirm our position as the nation’s premier lender to consumers,” Lewis said in a statement.
It also places Lewis in the position of a market savior. By buying Countrywide, he’s keeping the industry and regulators from the messy task of figuring out who would take on the responsibility of collecting payments for the 9 million U.S. home loans serviced by the Calabasas, Calif.-based lender. Lewis said Friday there was no government support for Countrywide’s loan portfolio.
“There’s still plenty of risk involved,” said Bart Narter, senior analyst at Celent, a Boston-based financial research and consulting firm. “He’s brave to do it. But I think that it’s very likely down the road to be profitable, maybe not immediately, but long-term.”
There was no immediate word on job cuts, but analysts said they expect some among the ranks of Countrywide’s 15,000 employees. Lewis said he would like Countrywide chairman and chief executive Angelo R. Mozilo to stay with the combined companies until the deal is done.
“Angelo has told me that he will do anything that we want him to do,” Lewis said. “I would guess that he’ll want to go have some fun. I will talk with him next week about his personal desires. Many of the senior people will have big operating roles in this company.”
Shareholders of Countrywide will receive 0.1822 of a share of Bank of America stock in exchange for each share of Countrywide. The deal is expected to close in the third quarter and to be neutral to Bank of America earnings per share in 2008 and lift earnings per share in 2009, excluding buyout and restructuring costs.
Bank of America expects $670 million in after-tax cost savings in the transaction, or 11 percent of the expense base of the two companies’ mortgage operations.
The agreement has been approved by both companies’ boards and is subject to regulatory and Countrywide’s shareholders approval.
Shares in Countrywide hit record lows in recent days on persistent rumors that a bankruptcy was imminent, a condition brought on by the widespread spike in mortgage defaults and foreclosures, especially in subprime loans — those made to borrowers with weak credit.
Countrywide shares plummeted more than 13 percent, or $1.04, to $6.71 at the open of trading Friday. Bank of America shares fell 19 cents to $39.11.
Countrywide shares have fallen 57 percent since Bank of America made its $2 billion deal in August at $18 per share. That purchase of preferred stock was convertible into a common shares of Countrywide at $18 per share, for roughly a 16 percent stake in the company.
Along with the $2 billion investment from Bank of America, Countrywide was forced to draw on an $11.5 billion line of credit to steady itself in August. It also tightened its credit guidelines and stopped selling some types of adjustable rate loans. But analysts said it wasn’t enough, with one noting this week that Countrywide needed an infusion of $4 billion in capital within the next two weeks to save itself.
Lewis’ bank holds $1.5 trillion in assets and is the nation’s largest bank by market capitalization.
“Their balance sheet can take a shock much better than Countrywide,” said CreditSights senior analyst David Hendler. “When you take the shocks at Countrywide, they have a big, busting consequence that’s negative.”
While Lewis downplayed the prospect of a major deal last month, it fits with an established pattern of building Bank of America through acquisition. In the past few years, Lewis has expanded the bank’s retail operation with multibillion purchases of FleetBoston Financial Corp., bolted on a credit card business by adding MBNA Corp., and grabbed a wealth-management business in U.S. Trust Co.
The result of all the dealmaking is a widely diversified financial services company that does business with nearly one out of every two American households.
In the past year, Bank of America has boosted its market share of prime mortgages, or those offered to borrowers with a solid credit history, and was the top retail mortgage originator in the U.S. during the first nine months of 2007.
“We are aware of the issues within the housing and mortgage industries,” Lewis said. “The transaction reflects those challenges. Mortgages will continue to be an important relationship product, and we now will have an opportunity to better serve our customers and to enhance future profitability.”
In Countrywide, Lewis gets the “best, total mortgage-banking company in the U.S. by far,” Hendler said. Countrywide’s sophisticated back office is a valuable asset that makes Bank of America a much bigger competitor with Wells Fargo & Co., Washington Mutual Inc. and others, he said. In 2007, Countrywide had $408 billion in mortgage originations and has a servicing portfolio of about $1.5 trillion with 9 million loans.
“The technology platform, the people who run it, the hedging, the facilities, the mortgage servicing rights, the origination platform, you know, they are all state of the art,” Hendler said.
While there are some regulator hurdles to close the deal, they are hardly insurmountable. The buyout would require approval from the Federal Reserve, and possibly other agencies, but analysts believe regulators are more concerned about a Countrywide collapse than industry consolidation.
A Countrywide failure would be a huge blow to government-sponsored mortgage finance companies Fannie Mae and Freddie Mac, which are major buyers of Countrywide’s loans.
Federal law also bars banks from acquisitions that would increase market share above 10 percent of U.S. deposits, a limit that Bank of America is nearing. Bank of America chief financial officer Joe Price said because Countrywide Bank us a federally regulated thrift, it “doesn’t play into the deposit cap.”
In addition, banking industry experts say Bank of America could easily lower the total amount of money held in deposits by decreasing interest rates and shedding deposits.
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