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And I can’t rationalize it, quite. Bank of America completed its controversial purchase of failed mortgage lender Countrywide. The final purchase price came in at about $2.5 billion, down from the estimated $4 billion at the time of the announcement. Questions about pending lawsuits, worthless home equity lines and exploding option ARMs all seemed to be answered to the satisfaction of BofA’s leadership to complete the purchase.
From the New York Times:
It’s official: Bank of America has acquired Countrywide Financial, marking the completion of an audacious rescue of one of the most troubled lenders in the United States. The deal will expand Bank of America’s reach in the mortgage business — but, in the current environment of rising defaults and delinquencies among American homeowners, the expansion obviously comes with serious risks.
Countrywide was among the largest lenders in California and Florida, two states hit especially hard by the housing downturn. Both states have sued Countrywide alleging it engaged in unfair and deceptive lending practices. What’s more, Countrywide has a big portfolio of home equity lines of credit, which some fear will be hit with a rash of defaults as borrowers run short of cash.
Some analysts had urged Bank of America to abandon the deal. And judging from the swings in Countrywide’s stock in the six months since the deal was announced, the markets have been questioning Bank of America’s commitment to buying it.
And yet Kenneth Lewis, Bank of America’s chief executive, pictured above, has been resolute that the purchase would go through.
Why didn’t Bank of America learn anything from Wachovia?
Why would Bank of America want all of those worthless Option ARMs? Wachovia’s recent precedent-setting announcement that it’s waiving pre-pay fees on all Option ARMs implicitly confirms that those loans are a massive liability to the future of the bank. And while Golden West/World Savings was a major originator of the exploding loans, there was none bigger than Countrywide.
Can Bank of America afford the loan loss reserves that will be needed to insure the risk of this acquired portfolio? Will risk become too expensive moving forward? Will it threaten the solvency of BofA? Will they need to dilute shares, raise equity and cut dividends in the short-term to make it through the continued deterioration of the Countrywide-originated loans?
Bank of America is assuming that losses from Option ARMs, lawsuits and worthless HELOC’s will be far less than the long-term profiability of the combined unit. That’s a big assumption and a tough one to make in a terrible economy.
