Bank of America to Purchase Countrywide Home Loans

Last week was a very unstable one for Countrywide Home Loans. The largest mortgage originator in America saw its stock drop off a cliff, had its stock halted amid bankruptcy concerns, and had to hold a press conference to deny that they were going to file for bankruptcy. Then, at the 11th hour, Bank of America came to their rescue and stepped up to purchase Countrywide Home Loans for $4B. In my opinion, B of A did this for multiple reasons. The simplest is that they understand the mortgage business and can pick up Countrywide for a cheap price. They understand all the facets of the business, and will be able to assist Countrywide out of their troubles. In the end, Bank of America will become the largest mortgage originator in America by a long shot. Secondly, back in August, Bank of America injected two billion dollars into Countrywide to help keep the company solvent. They purchased the 2 billion dollars worth of stock at around $18/share. When Countrywide’s stock dipped to the low $5/share mark, it only made sense for Bank of America to spend another $4 billion to buy the entire company and ensure their initial 2 billion dollar investment did not get lost if Countrywide did proceed to file bankruptcy. Finally, the real estate market and the mortgage market are in shambles. Bank of America realizes this and has the cash to buy when everyone is selling. In the long term, buying Countrywide may prove to have been an amazing business deal once the real estate and mortgage markets have stabilized and pulled out of their downturn.

No one is certain how Bank of American will incorporate the Countrywide brand into its business model, and if/how many people will be laid off or which assets will be sold from Countrywide. I am sure Bank of America already has things planned out because they have had a team of accountants and other employees going through the books at Countrywide, examining everything the mortgage company has and does. This has been going on since Bank of America became interested in buying their initial 2 billion dollar stake in Countrywide in mid 2007. As the general real estate market goes through the last of this major restructuring, look for more of these types of deals and arrangements to occur. My feeling is that when some of the largest companies in America have to deny bankruptcy rumors, the market is getting as bad as it can get. Only if Countrywide had truly gone bankrupt would things have gone worse for them this week. As it is, they stay in business and it looks like Bank of America bought a great business (even if times are extremely tough for them) and will most likely be very satisfied with the deal looking back at it in 5-10 years.

This entry was posted on Monday, January 14th, 2008 at 5:31 pm and is filed under Financing, Miscellaneous. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.