Countrywide Vote on Merger to End Mortgage Era

[Steve Hillen]

June 24, 2008 12:39 PM ET

BANGALORE (Reuters) - Countrywide Financial Corp shareholders vote on Wednesday to approve the largest U.S. mortgage lender's purchase by Bank of America Corp, marking the demise of the company perhaps most closely associated with the nation's housing bubble and subsequent collapse.

The vote will be held at Countrywide headquarters in Calabasas, California. A Countrywide spokesman said the meeting is closed to the press and is not being webcast.

While the outcome is not in doubt, the proceedings lend an aura of secrecy to the final days of Countrywide, which in 2007 made one in six U.S. mortgage loans -- many of which would not get made today.

They also provide a contrast to last year, when Chief Executive Angelo Mozilo would spend three hours on earnings conference calls, proclaiming the company he co-founded in 1969 had a "much better chance of success" than any rival to survive the shakeout in housing and credit markets.

It won't.

"Countrywide joined the crowd in participating in untested lending standards," said Gary Gordon, an analyst at Portales Partners in New York. "It was also Countrywide's mistake to retain substantial amounts of credit risk. It should have stayed a mortgage banker rather than become a mortgage investor."

The merger may close by July 1. Mozilo, the son of a Bronx, New York butcher, faces a U.S. Securities and Exchange Commission probe into his sales of Countrywide stock before it cratered. He now also faces allegations that politically connected "Friends of Angelo" got favorable loan terms from Countrywide.

Countrywide investors got their own final kick in the stomach as the credit crunch began hurting Bank of America's own shares.

Through Monday, Bank of America shares had dropped by a third since the all-stock takeover was announced on January 11. This cut Countrywide's merger value to about $2.7 billion from $4 billion.

Charlotte, North Carolina-based Bank of America also has not said whether it will assume all Countrywide debt. Barbara Desoer, the bank's technology and operations chief, will run the combined mortgage business. Countrywide's name, meanwhile, will disappear.

Kenneth Lewis, Bank of America's chief executive, is no stranger to big mergers, having spent $48 billion for FleetBoston Financial Corp, $34.6 billion for credit card issuer MBNA Corp and $21 billion last October for LaSalle Bank Corp.

Yet Countrywide might be his riskiest purchase, given the difficulty of valuing the loans on its books and the uncertain levels of credit and litigation losses the second-largest U.S. bank might ultimately face.

BIG PURCHASE, BIG RISKS

Countrywide lost $2.5 billion in the last three quarters. Of the $15.6 billion of mortgage loans it hoped to sell at the end of March, two-thirds were "Level 2," making them harder to value than if they were actively traded. The rest were "Level 3," valued at Countrywide's discretion based on internal models.

The lender said it also had about $95.3 billion of loans held for investment, but valued them at just $87.4 billion. It also had $6 billion of loans in foreclosure or where borrowers had stopped making payments, up almost fivefold from a year earlier.

Countrywide also has a $1.48 trillion loan servicing portfolio, the nation's largest. Even that business lost $817.5 million before taxes in the first quarter, as delinquencies rose 60 percent and loans heading for foreclosure nearly doubled.

"They fell in love with subprime lending and didn't manage the risks," said Christopher Marinac, managing principal at FIG Partners LLC in Atlanta. "It remains to be seen what the franchise value really was. It has a great servicing platform, but has had losses elsewhere that have offset that value."

Ken Thompson, who ran Charlotte-based Wachovia Corp , himself bet big on mortgages when he paid $24.2 billion in 2006 for Golden West Financial Corp. This month, Thompson paid more for that -- and for other problems at Wachovia -- with his job.

Countrywide also faces many lawsuits over its falling stock price, and litigation accusing it of abusing the bankruptcy or foreclosure processes. At least three lawsuits were filed by offices of the U.S. Trustee, part of the Department of Justice.

But the mortgage portfolio remains perhaps the main risk.

Analysts, including Friedman Billings Ramsey & Co's Paul Miller and Merrill Lynch & Co's Edward Najarian have said Bank of America could face $10 billion or more of added losses or write-downs from that portfolio.

Some analysts have also suggested the bank might need to cut its dividend, ending 30 years of increases. The bank this month said not cutting the dividend was its most likely option.

"They're taking on a challenging portfolio, that's the main issue," said Portales' Gordon. "It's a messy-looking portfolio."

(Editing by Andre Grenon)

Copyright 2008 Reuters