Closing the book on Countrywide

Shareholders of the mortgage lender approved the sale to Bank of America Wednesday. But it remains to be seen if the deal will pan out for BofA.

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By David Ellis, staff writer

Countrywide Financial shareholders approved Bank of America's proposed all-stock buyout offer on Wednesday.

NEW YORK ( -- Time will tell if Bank of America's purchase of Countrywide Financial Corp. winds up being a bargain or a boondoggle.

Shareholders of the troubled mortgage lender approved Bank of America's (BAC, Fortune 500) all-stock offer by a majority vote Wednesday, removing the final hurdle to the deal and ending Countrywide's days as an independent. Countrywide said it expected the deal to close on July 1.

But lately, some analysts have suggested that Bank of America may suffer a classic case of buyer's remorse once it absorbs Countrywide's (CFC, Fortune 500) $95 billion loan portfolio.

Last week, equity analysts at Standard & Poor's slashed their rating of Bank of America stock to "sell" from "hold." They fear the Charlotte, N.C.-based bank may be underestimating the impact of rising consumer defaults and delinquencies at Countrywide, especially with option adjustable rate mortgages (ARM).

Last month, Paul Miller, an analyst with Friedman, Billings, Ramsey & Co., warned that Bank of America's purchase could prompt it to take anywhere between $20 billion to $30 billion in writedowns.

"BAC [Bank of America] should completely walk away from the CFC [Countrywide] deal, as CFC's loan portfolio will prove a drag on earnings and could force BAC to raise additional capital," Miller wrote in a note.

Countrywide, the nation's largest mortgage lender, was struggling in the months leading up to the deal's completion. The company reported losses in its last three quarters due to soaring mortgage delinquencies and defaults by borrowers. The stock plunged from about $30 per share last August to less than $6 a share just before BofA announced the deal.

Bank of America's concerns, however, don't just end at Countrywide's balance sheet.

The Senate Ethics Committee is looking into charges that top lawmakers including Senate Banking Committee Chairman Christopher J. Dodd, D-Conn. and Sen. Kent Conrad, D-N.D. got deals on their mortgages through a program for friends of Countrywide CEO and co-founder Angelo Mozilo.

Mozilo, who grew Countrywide from its modest beginnings, will leave the company but will still receive $10 million in stock from Bank of America. That's on top of the $115 million he stood to gain after the deal was announced. He later forfeited $37.5 million in payments tied to the deal.

So far this year, Countrywide has also become the target of numerous government investigations into the company's lending practices, including the U.S. Trustee's office, a division of the Justice Department. Earlier Wednesday, both the state of Illinois and California filed lawsuits against the mortgage lender for misleading and deceptive practices. And that's not to mention the glut of lawsuits brought by borrowers.

Some analysts think Bank of America most likely took litigation expenses into account when it drafted its offer for Countrywide though.

Still, Bank of America is also going to need to drastically cut back its combined mortgage operations once the two firms are finally integrated.

To that end, the company has hinted that job cuts lay ahead, saying in January that it planned to trim 11% of the combined mortgage companies' expenses.

"It will be a long time before they need people on the servicing side and they probably will cut a substantial amount on the mortgage origination side," said Malcolm Polley, president and chief investment officer at Stewart Capital Advisors in Pittsburgh, which owns approximately 23,000 shares of Bank of America.

Long-term benefits

When Bank of America first proposed the deal back in January, Wall Street was evenly split about its merits.

Some analysts speculated that the company offered too high an asking price -- the deal originally valued Countrywide at just over $4 billion and is now worth about $2.8 billion as BofA shares have fallen along with the broader financial sector in the past few months.

In addition, the deal would mean that Bank of America, which had largely avoided the subprime mess unlike many of its peers, would now be exposed to Countrywide's risky mortgage portfolio.

Others cheered the tie-up, noting it put Bank of America in a position to expand its already vast footprint in the financial services sector, by making it the nation's biggest mortgage lender and loan servicer.

And some large institutional shareholders in Countrywide, such as the Monaco-based hedge fund SRM Global went so far as to attack top Countrywide management, claiming that the buyout price of $4 billion was not high enough.

So is Bank of America getting Countrywide on the cheap?

Despite all the doubts regarding the deal, Bank of America's management has stood firmly by the transaction since it was first announced.

"I think it could be a combination that really turns out to be very good strategically," said Bank of America chairman and CEO Kenneth Lewis earlier this month at an investor conference.

Lewis added that if his company correctly estimated the number of markdowns they would have to take, the acquisition "could be a very compelling financial transaction."

But if Bank of America expects any payoff from the Countrywide deal, it should be patient, noted David George, senior research analyst at Robert W. Baird & Co. Inc.

When the housing market finally turns around -- and most analysts expect it will at some point -- Bank of America will have a nice head start with Countrywide's well-trained sales staff and mortgage lending technology platform.

"Over the near term, I think the Countrywide deal adds increased credit risk to BofA's balance sheet," said George. "Longer term, it could be a positive transaction." To top of page

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