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Q&A: Bank of America buys Countrywide

The buyout comes amid growing loan defaults and losses.

By HELEN HUNTLEY, Personal Finance Editor
Published January 12, 2008

ADVERTISEMENT [AP photo] Bank of America said it will buy Countrywide Financial for $4.1-billion in stock, a deal that rescues the country's biggest mortgage lender.

Bank of America said Friday it will buy Countrywide Financial Corp. for $4-billion, saving the troubled mortgage lender -- the nation's largest -- from collapse.

The deal will make Bank of America, based in Charlotte, N.C., the biggest mortgage lender in the country. Despite rising defaults, financing homes is "the best business for any bank," said Richard Bove, an analyst in Lutz for Punk Ziegel & Co. "It's a very profitable product and it's the way you get your customer relationships."

Countrywide, based in Calabasas, Calif., made $408-billion worth of loans last year and services 9-million loans worth $1.5-trillion. Bank of America wanted the company's mortgage technology and its extensive sales network, which includes a sales force of nearly 15,000.

However, Countrywide has struggled under the weight of mounting loan defaults and losses. Earlier this week, rumors were circulating that the company was on the brink of bankruptcy. Whether the acquisition proves to be brilliant or disastrous for Bank of America depends on how accurately it assessed the problems in Countrywide's loan portfolio.

The deal faces extensive regulatory review and is expected to close in the third quarter. Bank of America said the two companies would not combine operations before 2009.

I have a Countrywide mortgage. Will I notice any changes?

You shouldn't. "If you have to make a mortgage payment, you still have to send it in," said Greg McBride, senior financial analyst for Bankrate.com. "If you're behind on your mortgage, you still have to pick up your phone and call the lender."

Countrywide pays some of the best CD rates in the country. Will that continue?

Not likely, analyst Bove said. Bank of America pays below-average deposit rates. "They think low-cost deposits are far more important than a great deal of deposits," he said. At Barnett Bank and other banks acquired by Bank of America, rates dropped after the acquisition, he said. Your current rate remains in effect until your CD matures.

I have CDs at both Bank of America and Countrywide that put me over the FDIC insurance limit. What happens now?

When two banks merge, CDs continue to be insured separately until they reach maturity. For checking, savings and other types of accounts, there is a six-month grace period during which separate FDIC insurance continues. You can extend coverage if a CD comes due during the grace period and you renew it for the same amount and the same term.

Who benefits by keeping Countrywide out of bankruptcy?

The U.S. government for one. Countrywide was losing money and the FDIC could have been forced to pay out big bucks to cover shareholders with insured deposits.

Uninsured depositors also are huge winners; they could have lost millions. That category includes Florida cities and counties that invested money with the state Board of Administration. The board's Local Government Investment Pool holds $650-million in Countrywide CDs, with another $110-million in other state SBA-managed portfolios.

Countrywide's shareholders will get 0.1822 of a share of Bank of America stock for each Countrywide share they own. That's worth about $7, a far cry from last year's high of $45 a share, but more than shareholders would have gotten in bankruptcy. Countrywide CEO Angelo Mozilo is expected to walk away with a package worth more than $60-million.

Helen Huntley can be reached at hhuntley@sptimes.com or (727) 893-8230.

[Last modified January 12, 2008, 00:10:25]