Bank of America Bags Countrywide

The $4 billion acquisition of Countrywide Financial rescues the U.S.'s largest mortgage lender. BofA chief Ken Lewis calls it a "rare opportunity"

by Christopher Palmeri and Dean Foust

Bank of America CEO Ken Lewis Getty Images

Every go-go period on Wall Street has a spectacular flame-out that comes to symbolize the excesses of the day, from Sam Insull's Middle West Utilities during the Great Depression to Pets.com in the dot-com era. Now it's Countrywide Financial's (CFC) turn.

Bank of America (BAC) announced Jan. 11 that it is buying Countrywide in a deal that values the nation's largest mortgage broker at just $4 billion, or roughly $6.90 per share. Even that was a bit of a gift for Countrywide investors, who had seen their stock slip to just $5 a share in the past week as the company denied rumors it would seek bankruptcy protection. As recently as January, 2007, Countrywide's shares were selling for $42.

Bank of America Chairman and Chief Executive Kenneth Lewis said he did not plan on having Countrywide Chairman and Chief Executive Angelo Mozilo head the combined operations. "I would want him to stay until the deal gets done and then probably I would guess that he would want to go have some fun," Lewis said in a conference call announcing the deal.

Assets and Challenges

The deal brings Charlotte (N.C.)-based Bank of America assets on a grand scale. Even in these troubled times for homeowners and credit markets, Countrywide originated $408 billion in new mortgages last year. The company collects and processes payments on a $1.5 trillion portfolio, nearly one-sixth of all mortgages in the U.S. Countrywide has more than 1,000 offices and 15,000 salespeople. Lewis called the transaction a "rare opportunity to add what we believe is the best domestic mortgage platform at an attractive price."

The deal also presents great challenges for Lewis, an aggressive acquirer who's snapped up regional giants such as FleetBoston and LaSalle Bank as well as credit-card operator MBNA in recent years. Countrywide's loans in foreclosure have doubled over the past year. Its past-due loans have climbed 50% and now stand at more than 7% of the company's overall portfolio. Countrywide lost $1.2 billion in last year's third quarter. It is due to report results for the full year Jan. 29.

Easing Concerns

In his announcement, Lewis tried to ease concerns that he may be running headlong into a mess. He said Bank of America has had more than 60 people at Countrywide's offices for weeks, investigating its business. At the same time, Lewis acknowledged that things could get worse in the mortgage business before it turns around and that he wasn't claiming to have bought at the absolute bottom. Indeed, last summer Bank of America invested $2 billion in new preferred stock, convertible into 17% of Countrywide's equity. That transaction now looks overpriced.

Lewis said he planned to keep Countrywide's brand name for the time being, even putting Countrywide loan officers in Bank of America branches. He said he wants to do more research to figure out whether Countrywide is still a brand that consumers seek out when they're getting a mortgage, or whether it's tarnished. Lewis said he would also likely sell Bank of America products such as credit cards in Countrywide offices. Even before this transaction, Bank of America was the nation's largest consumer banking franchise, with more than 6,100 branches.

Mozilo's Stamp

Noticeably absent from the conference call was Mozilo, a normally outspoken executive who rarely missed an opportunity to promote Countrywide and take potshots at the competition. The son of a butcher who started out in the mortgage business as an errand boy, Mozilo co-founded Countrywide in 1969. He took advantage of the trend toward securitization of loans, serving as the largest conduit between Wall Street and thousands of independent mortgage brokers.

At the peak of the housing boom several years ago, brokers cranked out more exotic loan products, extending money to people with poor credit histories often at low teaser rates that adjusted upward. In many cases these subprime borrowers were not required to put any money down when purchasing their homes, nor demonstrate they had enough income to pay off the loans. Although Countrywide was rarely the first to offer such products, the company quickly copied them in a bid to maintain its dominant market share. Mozilo said in a conference call last year that it "would have been an insight that only a superior spirit could have had" to not follow others in the industry in making such loans.

As defaults rose, housing prices sunk, and Wall Street credit dried up, Countrywide became the target of shareholder lawsuits and an investigation by the attorney general in Illinois. Mozilo became the poster child for mortgage industry greed, having sold tens of millions in Countrywide stock before the industry downturn. The Securities & Exchange Commission is investigating insider stock sales at Countrywide. Mozilo has maintained that he sold only to exercise options that were expiring.

During the housing bubble, Bank of America avoided subprime loan business. Lewis said Countrywide would exit that business and throttle back on transactions involving independent mortgage brokers and what Lewis called the "cocaine of bulk [mortgage] purchases." Indeed, Peter Ogilvie, president of the California Assn. of Mortgage Brokers, said Bank of America was known for having more stringent requirements for the independent brokers it did business with. "They weren't entirely driven by taking in mortgages and selling them in order to survive," he said. "That may have done them well."

Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau . Foust is chief of BusinessWeek's Atlanta bureau .