BofA Left to Clean Up Countrywide's Mess

Wachovia (WB) effectively threw in the towel yesterday with respect to making a return on their purchase of Golden West when they decided to stop offering option-ARMs. When you consider the fact that Countrywide (CFC) has even larger numbers of exotic mortgages on its balance sheet not to mention being a major subprime player, you have to wonder if Countrywide will become Bank of America's (BAC) Golden West.

Don't get me wrong, I understand the value in acquiring a mortgage lending network as large as Countrywide's, and Bank of America did need to act in order to protect its investment in the company. However, it’s going to take a significant investment well in excess of the acquisition price to clean up Countrywide, and I have to wonder if it would’ve been cheaper for BAC to eat their investment, buy pieces of the company via bankruptcy auctions and/or build their own lending network to replace the void left by CFC. Looking at the likely banking environment over the next 2-4 years, I wonder if it’s even smart to take on a rehab project like Countrywide. 

Consider just some of the issues Countrywide has faced over the past year or so:

• The CEO Angelo Mozilo declared a bottom in the housing market late last spring, and we all know how off that prediction was.
• The company went on a hiring and acquisition binge last summer only to turn around and sack many of those same people barely a month later.
• After having a disastrous Q3 of last year that included $1.2 billion in losses and negative revenue of $50 million, Mozilo declares that the company will be profitable in Q4.
• The suspicious stock sales and CFC’s very suspect balance sheet.

Now if the above were the only bad things going on/wrong with Countrywide, the company would look like a bad investment; instead, the above barely scratches the surface of a train wreck of a company. At the end of the day, CFC has shown itself to be out of touch with reality, woefully mismanaged and not particularly truthful with investors. I may not be a big time banking executive, so maybe BAC knows something I don’t, but CFC isn’t exactly the type of company I want to put MY hard earned money into.

Better yet, if Bank of America hadn't already invested two billion dollars into CFC back in August, would they have even tried to buy the company, would anyone for that matter? Only time will tell if BAC’s gamble will work out, but if I were an investor in BAC I would be more than just a little nervous right now. Between the lawsuits and balance sheet issues, BAC is going to be cleaning up the mess left behind by Mozilo and company well into the next decade.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article.

Comments

[seriously ?]

It seems to me that BAC would have had an idea of what they were getting into. I hope I am right. It seems like they would have a much better idea of what they were doing than speculators looking on from the outside.

Again I hope I am right because there doesn't seem to be a clear way of knowing what BAC is getting into. Maybe they are getting an incredibly good deal, or maybe untold debt ?

BAC is getting hammered right now and I am betting that they are in a better situation than JP , CITT due to less exposure ergo the sector is just very unpopular right now so BAC might be a very good deal for the long-term investory.

[jimmy46]

I think the major cost of taking over CFC will be that BAC won't be able to pursue other opportunities that will come available this next year.
CFC will keep them to busy.

[User 197175]

Old news.....nothing new here.

[W. Eichler]

For those worrying about the BAC or Countrywide mortgages you should check out the FHA Housing Stabilization and Homeownership Retention Act of 2008 (still to be voted on). Especially Sec.257 (c) (6)(A)(i) which provides for the refinancing of such existing mortgages in an amount not greater than 90% of the current appraised value of the property involved.

A mortgage was obtained at $200,000 to cover the original appraisal.
Time passes and it drops 25% to $150,000. Take 90% of 150K and
the FHA will buy it for $135,000; for a 32.5% loss for the bank.

The bank was stuck with a non-performing loan or, a very hard to resell house. Now it has capital. Sound good to me.

[squashnut]

"They must know what they're doing." Like Bear Searns which was a Wall Street institution filled with high priced talent. Like GM which has been an industry giant for years...

[squashnut]

Yes, the Countrywide Dodd bailout. It might not get through. Bush may veto. Does BAC have enough cash to buy Bush?

[ubuy2]

BAC paid less than zero for CFC. The mortgage servicing business has a value north of 20 billion. If the credit losses ,severance and law suits are less than 15 billion they got a bargain. I absolutely believe that this will be looked upon as a bargain purchase in 1 years time.They have an insurmountable lock on the most important consumer credit market going forward .

[helplessobserver]

Well, I think we can evaluate BAC judgement by noting they thought CFC was worth $20+ per share when they spent $2B of shareholders money last year.

[Mindstorms2002]

In addition to the mortgage servicing business, there are other assets within CFC that can be readily sold (i.e. P&C business) for considerable dollars. As for the FHA Housing Stabilization and Homeownership Retention Act of 2008, Congress will easily override any veto from Bush. Finally, and optimistically, the early $2B could be considered call premium for time to do due diligence and make a decision.