Bank of American (NYSE:BAC) announced that is investing $2 billion in Countrywide Financial (CFC), a move that makes the future of the nation’s largest mortgage lender a little brighter. B of A is buying preferred stock in Countrywide that yields 7.25% and is convertible at $18 per share, subject to trading restrictions over the next 18 months.
If B of A chooses to convert the full amount, the bank will own about 16% of Countrywide. B of A’s CEO, Kenneth Lewis, got the company out of the subprime business in the early part of the decade. He believed that those loans were too risky and too volatile. However, the company has wanted to get into the prime mortgage business, as the portion can be very profitable. Bank of America had about a 7% share of the mortgage market in the first half of the year. This investment helps Bank of America get a sizeable stake in the mortgage business.
This is going to be an incredible deal for Bank of America. B of A’s Lewis believes that the market has overreacted, and is undervaluing the Countrywide’s assets. He also believes that this investment will help restore confidence in the credit markets. This investment should also be reassuring to investors in general, and signal to them that the people “in the know” believe there is value to be had in financial services at current prices.