B of A buys Countrywide Home Loans. Is that good?

By Joel Persinger
YourRealEstateDude.com

It has long been suspected among those in the housing and mortgage industry that Countrywide Home Loans has had one foot in the grave and the other on a banana peal. As far as many were concerned, it was only a matter of time before the company slipped and fell into its tomb, never to be seen or heard from again. In fact, it was only about a week ago that there was wide spread speculation that Countrywide was on the verge of filing bankruptcy.

It all began when the sub-prime lending market started going to pot. The company was quickly overwhelmed by the sudden influx of home-loan delinquencies and foreclosures followed by a loss of investor funds. Money which had previously been available from government agencies and investment firms through the secondary money market began to dry up. This meant that Countrywide did not have money with which to fund new loans and had to incur additional debt in order to stay in business. According to MarketWatch.com, “The company borrowed more than $10 billion from banks and started funding a lot of its loans with retail deposits from its thrift unit, Countrywide Bank. It also borrowed a lot of money from the government through the Federal Home Loan Bank of Atlanta… But those lifelines began dwindling in recent months.” This left Countrywide stripped of support from investors. Stock prices came crashing down by over 80% in the last year, leaving many investors wondering why they had ever chosen to invest in the company in the first place. The only answer seemed to be some sort of “bail-out.”

This past week, Bank of America came to the rescue by purchasing Countrywide Home Loans for an estimated $4 billion in stock. That is less than one third of Countrywide’s estimated book value. It appears to be quite a deal for B of A. But, it is important to remember that along with Countrywide’s assets come its liabilities. Among the baggage that B of A will have to contend with are the many Countrywide loans which have gone bad as well as the tsunami of sub-prime mortgage litigation which may be heading Countrywide’s way.

All that having been said, this seems to be the right acquisition at precisely the right time. B of A swooped in and purchased Countrywide for a song and can easily solve the company’s funding problems. Bank of America’s retail deposit base is the largest in the United States. There will obviously be some bumps in the road for Bank of American, but all in all, this should bode well for all of the parties involved, particularly homeowners and the mortgage and housing industry as a whole. Countrywide is a huge player in the home lending industry. When huge players go down in flames just about everybody gets burned to one degree or another. Keeping the company viable by selling it to a giant like B of A can be nothing but positive.