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Bank of America Enlarges Its Credit Opportunities

One of the US financial leaders, Bank of America, agrees to buy the country's dominant mortgage lender, Countrywide Financial Corp. for $4.1 billion in stock. That deal will rescue Countrywide, which seem to be approaching to bankruptcy caused by the slump in the housing market. The transaction is a signal that the things in the mortgage and financial sector are going better. However, as analysts say, the threat to homeowners hasn't been ended yet, because 1.8 million subprime mortgages lent to borrowers with poor credit are planned to shift to higher rates in 2008-2009.

During the housing boom, a lot of people took out mortgages to benefit from lower APR. But when the interest rates rose, many borrowers failed to pay their monthly loans. That caused considerable defaults and repossessions which affected the entire US housing market.

In August, 2007 the company got invested $2 billion from Bank of America, but it didn't help to improve the financial situation. Countrywide had to borrow $11.5 billion of credit to support itself. In the third quarter of 2007 the company's losses amounted $1.2 billion which caused stuff reduction. Trying to stop losses, in summer 2007 Countrywide stopped giving loans to customers with bad credit history or unpredictable incomes. It also shortened its credit guidelines and stopped lending some types of adjustable interest loans.

The Countrywide's troubles have allowed Bank of America to add a major credit line to its supermarket of business products on the cheap. The bank bought Countrywide shares at $7.16 per one, down 7.6% on Thursday's closing price. According to the terms of the transaction, Countrywide shareholders are going to get 0.1822 of a Bank of America share for each Countrywide share. The deal will extend the reach of Bank of America in the mortgage business by making it the nation's biggest lender.

When the transaction was announced, the chief executive of Bank of America Kenneth Lewis said that the takeover deal reflects their challenges in the housing and mortgage industries. He thinks that the deal gives them a unique opportunity to join a new product to its variety of credit cards and other loans. Bank of America says it plans to save Countrywide brand and operate the company separately till the end of integration which will happen no sooner than 2009. The bank plans to spend $1.2 billion for Countywide restructing and get after-tax savings of $670 billion from the united company by 2011.

Mr. Angelo Mozilo, the chief executive of Countrywide Financial and the company's co-founder, was asked to remain his management position until the transaction is completed though he is often criticized for his lending policies. It is supposed that giving risky credits to borrowers was the reason for the housing collapse.

Comments

David M. Baker
11:10 PM, June 15, 2008
The economic climate seems to have become better
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