By Bradley Keoun
Aug. 23 (Bloomberg) -- Bank of America Corp. bought $2 billion of preferred stock from Countrywide Financial Corp. to stabilize the nation's largest mortgage lender as fallout from the U.S. housing slump paralyzes credit markets worldwide.
``Countrywide is no longer on the endangered company list,'' Punk Ziegel & Co. analyst Dick Bove wrote in a note to clients yesterday. ``This investment makes sense for both companies. Bank of America will now presumably be the preferred lender to Countrywide.''
Bank of America, the second-biggest U.S. bank, gets shares that yield 7.25 percent and can be converted into common stock at a price of $18, Calabasas, California-based Countrywide said yesterday in a statement. Countrywide shares climbed 21 percent in extended trading following the announcement.
While Countrywide gets cash needed to keep making loans, the infusion also may help to reassure investors that the mortgage market is safe after rising default rates sparked a global credit crunch and forced the U.S. Federal Reserve to cut borrowing costs for banks. The Fed's Aug. 17 move, designed to direct more cash to companies starved for short-term financing, came a day after Countrywide tapped $11.5 billion of emergency credit lines.
``With last week's Fed action and today's announcement, it appears that the mortgage capital markets will return to more normal levels of activity and liquidity sooner than we thought,'' Fox-Pitt Kelton Inc. analyst Howard Shapiro wrote in a note to investors yesterday.
The announcement sent Countrywide shares to $26.33 as of 7:07 p.m. yesterday, after they gained 3 cents to $21.82 in New York Stock Exchange composite trading. Countrywide had dropped 49 percent for the year, including the decline that followed the Aug. 15 Merrill Lynch & Co. report predicting the company's cash shortage might force it into bankruptcy.
Off the List
Converting the preferred stock would give Bank of America 111 million common shares, or a 16 percent stake in Countrywide, Bove estimated. The transaction will be ``additive'' to Bank of America's earnings, he said.
``We were able to go to California, look at their operations and their books,'' said Robert Stickler, a spokesman for Charlotte, North Carolina-based Bank of America. ``We determined the value is greater than what the market was giving them credit for.''
The vote of confidence sent shares of mortgage lenders up in after-hours trading. Thornburg Mortgage Inc. gained as much as 10 percent, IndyMac Bancorp added 7 percent and Washington Mutual Inc. advanced about 2.5 percent. Accredited Home Lenders Holding Co., which slashed 1,600 jobs yesterday in an effort to ride out the mortgage meltdown, rose almost 9 percent.
Countrywide, which made $421.1 billion of loans last year, has struggled to keep its footing after investors stopped buying mortgages and short-term debt investors refused to refinance its commercial paper.
The company may need to raise more capital because falling prices for home loans in the secondary market, where they're bought and sold by Wall Street traders, have pared the value of its mortgage portfolio, according to Sean Egan, managing director of Egan-Jones Ratings Co. in Haverford, Pennsylvania.
The assets are probably worth ``less than its outstanding obligations,'' he said.
In January, Countrywide shares were buoyed by speculation that it might be acquired by Bank of America. The stock tumbled after Bank of America Chief Executive Officer Kenneth Lewis said he had reservations about the practice of lending through mortgage brokers, as Countrywide does.
``We like the product, but we don't like the business,'' Lewis said Jan. 31. Six months later, in a June 19 interview, he said the slowdown in home sales was ``just about over'' and predicted that the economy would pick up in the second half of this year.
Back to Normal
In yesterday's statement, Lewis said Bank of America's investment in Countrywide ``will be a step toward a return to more normal liquidity in the mortgage markets.''
Countrywide CEO Angelo Mozilo said the bank's investment ``strengthens our balance sheet, enabling us to position Countrywide for future growth.''
Bank of America won't get any Countrywide board seats in connection with its investment, Stickler said.
Lehman Brothers Holdings Inc., the biggest underwriter of U.S. bonds backed by mortgages, announced yesterday that it will close its subprime-lending unit and fire 1,200 employees. Accredited Home announced 1,600 job cuts, and HSBC Holdings Plc said it would eliminate 600 jobs in the U.S. and close a mortgage office in Indiana.
To contact the reporter on this story: Bradley Keoun in New York at email@example.com .
Last Updated: August 23, 2007 00:09 EDT