The housing market and the mortgage arena have been in flux since last year. It has led many mortgage lenders to unprofitability and their exit from the mortgage business. Countrywide, a large financial services company with a large focus on mortgage lending has been on Wall Street’s radar. For months, there was mass speculation that Countrywide wouldn’t survive into 2008. However, that has all changed with the purchase of the lender by Bank of America.
Bank of America (BOA) bought Countrywide for a low-price of $4 billion. BOA’S payment is a pittance for a franchise worth over $20 billion just a year ago. The absorption of Countrywide makes BOA the largest mortgage lender in the nation. The rescue of Countrywide by the country’s largest bank had given new a new lifeline to the company. It was just four months ago when the bank injected $2 billion into the mortgage lender, purchasing upto 111 million shares at $18 per share.
The mortgage loan and mortgage refinance market has been in a state of continual correction since last year as mortgage lenders, mortgage bankers, and mortgage brokers have faced challenging times with the combination of oversupply of home inventories and sliding mortgage application volume.
The mortgage application challenge has been growing constantly since last year. Nonetheless two weeks ago, mortgage application volume rose 32.2 percent, according to the Mortgage Bankers Association's (MBA) weekly mortgage application survey.
In December, Countrywide did about $23.5 billion in home loans, some of the highest volume in the nation.
Nevertheless, Bank of America stocks declined with the news of the purchase. Wall Street views Countrywide as a company with a troubled portfolio, with more than $80 billion in high risk mortgages.
Subprime mortgages make up a big part of the lender’s portfolio. Last year, subprime mortgage loans made up about 9% of Countrywide’s total business, even though it is a prime lender. But BOA got the lender at a great price, even under the criticism of naysayers, who don’t see this marriage good for the bank, BOA disagrees.
While Bank of America's shares reacted disapprovingly to the rescue news, the acquisition by the bank is seen as a good long-term prospect. The bank predicts that earnings from Countrywide will be positive by 2009. BOA wanted this acquisition to enhance its mortgage platform to dominate the home loan market.
Skeptics aren’t confident in Countrywide’s prospects, as the mortgage and housing market has caused many companies to write down losses such as, Merrill Lynch’s $8 billion write down, Morgan Stanley’s $10.8 billion write down, BOA’s $3 billion write down, and Citibank’s $24 billion write down point out that Countrywide is no sure bet. The company’s dicey portfolio may engender further losses in the near future, which may cost BOA much more than they had bargained for. Some experts predict that Countrywide’s hiccups are temporary, as the mortgage market inclines so will the lender’s prospects.