When Bank of America (BoA) reached a $4 billion agreement in early January to buy Countrywide Financial Corp., calling the latter a ‘troubled’ lender and servicer sounded like a major understatement.
At the time, the subprime-saddled firm was facing mountainous losses and – in response to pervasive rumors of its demise – had even recently issued a press release to calmly state that it was not, in fact, going bankrupt.
A natural, if perhaps na·ve, question is why anyone would want to get involved with the company – especially a giant like BoA, which, until it was hit with mortgage-security write-downs, seemed to be doing well, growing ever-larger and more influential. Wouldn't taking on one of the companies that has become nearly synonymous with subprime disaster be a risky move at best?
According to a recent story by E. Scott Reckard in the Los Angeles Times, BoA chairman Kenneth D. Lewis might have felt the same way at one point.
The executive 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,’ the article notes.
How quickly things can change: ‘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 the statement accompanying BoA's announcement of the purchase.
Lewis and his colleagues may believe that the life rafts that can pluck Countrywide out of its choppy economic waters – before it pulls down BoA with it – will arrive in the form of a far-reaching series of mortgage refinancings.
Investors have agreed to allow Countrywide to modify loan terms 95% of the time without seeking permission, Reckerd's article reports, and executives are said to be ‘optimistic’ about a plan to convert billions' worth of exotic loans into versions more palatable to Fannie and Freddie (which may, of course, be needing life rafts of their own soon).
However, some prominent groups, including the Service Employees International Union (SEIU), which called for further federal review of the deal, are not buying the purchase's portrayal as a benign rescue effort.
‘Far from operating as 'white knights' for the common good, the nation's biggest banks are taking advantage of a perceived crisis to grow their market share free from the tough questions they might have faced in a steadier economy,’ writes SEIU secretary-treasurer Anna Burger in a letter sent to members of Congress and the Federal Reserve.
The letter further cites Countrywide's alleged failure to adequately address its subprime crisis and specifically criticizes a $115 million severance package that Countrywide CEO Angelo Mozilo is said to be slated to receive.
And on a far broader scale, ‘Combining the nation's largest depository bank and credit card issuer with the largest mortgage originator would result in an unprecedented concentration of risk and potential taxpayer liability,’ Burger writes. ‘The failure of a bank of this size would likely result in a federal bailout.’
As it turns out, SEIU and other deal opponents could see their wishes granted. Financial fears seem to already be threatening the purchase before it is even completed.
Following a 95% drop in net income in the fourth quarter of 2007, BoA has predicted challenging times ahead for the first half of 2008, writes Julie Creswell in a recent New York Times article. In particular, the bank's falling credit ratios must be fixed before the Countrywide deal can proceed.
Meanwhile, the article adds, new rumors swirl: Despite BoA's reportedly ‘extensive’ due diligence and valuation work, the firm may now be considering an attempt at repricing the purchase – or even heading for shore and leaving Countrywide to sink or swim on its own.
–Jessica Lillian, Commercial Mortgage Insight
