Bank of American and Countrywide MistakeBofA has officially acquired Countrywide Financial - but not without taking on a surprisingly large amount of risk in times like these.

It’s official: Bank of America has acquired Countrywide Financial, marking the completion of an audacious rescue of one of the most troubled lenders in the United States. The deal will expand Bank of America’s reach in the mortgage business — but, in the current environment of rising defaults and delinquencies among American homeowners, the expansion obviously comes with serious risks.

Countrywide was among the largest lenders in California and Florida, two states hit especially hard by the housing downturn. Both states have sued Countrywide alleging it engaged in unfair and deceptive lending practices. What’s more, Countrywide has a big portfolio of home equity lines of credit, which some fear will be hit with a rash of defaults as borrowers run short of cash.

Some analysts had urged Bank of America to abandon the deal. And judging from the swings in Countrywide’s stock in the six months since the deal was announced, the markets have been questioning Bank of America’s commitment to buying it.

And yet Kenneth Lewis, Bank of America’s chief executive, has been resolute that the purchase would go through.

One of the biggest problems is that while Bank of America has said that the combined mortgage branch will no longer originate subprime mortgages and stop making Option ARM loans (which can be deadly), the amount of those existing loans it absorbs from Countrywide put BofA at considerable risk.

Wachovia recently made an unexpected announcement that they were removing the pre-pay penalty from ALL Option ARMs implying that they see the massive liability to be great enough to forgo profits that can be made on it.

It may seem like a small step, but it’s a rather significant one for a bank like Wachovia.

With BofA mum on any details of it doing the same, we’re lead to believe that they’re chasing the dollar, even if the dollar is veering every close to that gigantic cliff off in the distance. Bank of America might be wise to consider evaluating its footing before getting too close.

The tremors from the existing banking and economic crisis are enough to move giants and it’s not a time to be caught with your pants down.

Bank of America is assuming that losses from lawsuits, now worthless Home Equity Lines of Credit, and Option ARMs, will be much less than they can make for the bank, so we’ll see if their bet pays off.

Tags: , , , , ,

Check Out Some Related Posts

RSS feed | Trackback URI

Comments »

No comments yet.

Name (required)
E-mail (required - never shown publicly)
URI
Your Comment (smaller size | larger size)
**If you haven't posted before, your comment may require approval before it's displayed**
You may use <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <code> <em> <i> <strike> <strong> in your comment.