Good morning! The Bank of America/Countrywide merger announced yesterday didn't surprise me. In fact, I think it had been in the works for a while now. I think it's a good thing although there will be quite a bit of pain involved.
Without BofA stepping in, Countrywide probably wouldn't have survived. They had dug themselves too deep a hole. And I think a Countrywide failure would have really dealt the market a crippling blow. The last time there was a big failure in our business (America's Home Mortgage went under last summer), every other lender reacted and started tightening their lending guidlines. If Countrywide had failed, I believe the reaction would have been similar to what happened last summer.
With the Bank of America/Countrywide merger, the healing can begin for the mortgage industry. It's been tough now for several months up here (Seattle area) and I'm aware it's been even tougher in other parts of the country. It's going to take some time to get back to normal. My prediction is either the second half of this year or the start of 2009. The downside to the merger is people will lose their jobs. I'm sure Countrywide employees will be offered positions with BofA if they exist. Usually mergers involve cost-cutting as there are redundancies. I was on the phone with a reporter from Inman News yesterday (www.inmannews.com) as he had read my blog last summer about a Bank of America/Countrywide merger. I told him eventually Countrywide will cease to exist. It will all be Bank of America and in five years, unfortunately, the public will have forgotten what Countrywide did. That's the nature of our world these days. Remember Enron? How many people can remember exactly what they did?
I think this merger provides a needed shot in the arm to an ailing industry right now. I'm not sure how good a buy Bank of America got (remember they bought Countrywide stock initially at $18/share and now it's trading at roughly $6) although they were probably attracted to 1) the loan servicing aspect and 2) the ability to sell their other products to all the new customers they acquired. Time will tell how this merger plays out.
If you're a consumer and your loan is presently with Countrywide, don't worry. It's guaranteed and will be serviced. Keep in mind you still need to make your payments. If you're considering Countrywide as a loan provider for your purchase or refinance, it may go smoothly and it may not. Ultimately, it's more about the loan officer you work with. If they know how to get a loan done and communicate with you throughout the loan process, you should have a good experience. I hope this helps. You're always welcome to contact me. Have a great day!
Paul
Paul McFadden
Paul,
To me it means a mega monoploy for BOfA.Which will hurt our industry badly...
Paul.
Major problem for those who will be "Choked' by new lending procedures...
Thanks, Joe. I appreciate it. I always urge caution. Your client should shop around anyway. Have them contact me if I can be of help. I do correspondent lending but would also be happy to refer or partner up with someone closer to home. There are some great folks here atActive Rain. Take care.
Paul
Taunya: You're very welcome! Bozeman, Montana, huh? That's beautiful country. Take care.
Do YOU all realize YOU helped Fund the Deal with Bank of America and Countryide?
Bank of America (BAC, Fortune 500) is able to use some of Countrywide's losses to offset its own taxable income.
The tax break could total about half a billion dollars over the first five years, according to an estimate by tax guru Robert Willens, who left Lehman Brothers Friday after a 20-year run and will be in business as Robert Willens LLC starting next week.
Bank of America can use a total of $1.35 billion of Countrywide's losses to shelter its income. (That's five years of $270 million annual losses.) If Countrywide's embedded losses when Bank of America buys it exceed $1.35 billion, Willens says, the bank will be able to deduct the rest of the losses, without limit, starting in the sixth year. The losses could be worth considerably more to Bank of America starting in the sixth year, depending on how big Countrywide's losses are when Bank of America formally acquires it.
As part of the deal, the government likely agreed to guarantee BofA against Countrywide-related losses. (There was nothing in the press release about that, so let’s give them the benefit of the doubt and say BofA is shouldering all of the risk and at this price it believes the risk is worth the reward.)There has been wide speculation for the last several months that the government is behind the scene to urge BAC to rescue CFC. The government would not allow CFC to fail, since it would create a domino effect much worse than the S&L crisis and LTCM. The failure of CFC would have triggered many counterparties conducting OTC derivative trades with CFC to fail, which would have brought the whole OTC derivative market including all large investment banks into their knees, similar to the LTCM situation in 1998.
The failure of CFC would also transfer all the credit risks to semi-government agencies of Fannie Mae and Freddie Mac, which would force Fed and federal government to bail them out by using taxpayer's money, similar to the S&L crisis in the late 1980s - except this time the amount is probably 10 times larger. I don't even need to mention what that would do to other fixed income products, the general credit market, equity market and the US economy.
Great news for many people at the other side of the trade with CFC and all levels of government, with BAC now catching the falling knife, and holding the bag for many years to come until the deep pocket becomes much shallower.
What does it mean-"catch a falling knife"?It's meaning should be obvious...This is the phrase used to describe the habit of buying stocks that are in “freefall”, and If you are not very, very careful you could get cut. Don't get me wrong, there's money to be made from catching falling knives. The challenge is doing it without losing a finger or more!
Countrywide faces numerous borrower lawsuits, and is under investigation by federal and state regulators for alleged lending abuses, issues which are normally assumed by the acquiring company in a takeover.
The bulk of the actions against Countrywide are individual claims connected to foreclosure cases across the country, with assertions ranging from violations of federal lending laws during loan origination to duping elderly borrowers into taking out high-interest loans to mishandling loan payments, according to Ira Rheingold, executive director of the National Association for Consumer Advocates, whose members represent homeowners facing foreclosure lawsuits.
There are a number of other suits that could blossom into costly headaches for the company. In California, shareholders filed six suits this past fall against the company, Chief Executive Officer Angelo Mozilo and other executives in federal court, claiming they issued false and misleading statements about the company's health. The suits have been consolidated, and the company hasn't responded.
Furthermore, the company faces at least 12 class-action suits alleging borrower abuse. B of A must also take care that plaintiffs don't try and bilk its deep pockets.
In the end do you think the BAC will have been a good one for them?
What if the stock continues to fall?
What do the Countrywide investors get?
Thanks, Paige, for your comments. Very well thought out! I enjoyed reading them. I believe Countrywide was a victim of its own success and arrogance. When you get too big for your britches, watch out. Have a great day!
Paul