Countrywide’s Sambol To Run BofA Mortgage Unit

Bank of America announced that David Sambol, currently Chief Operating Officer at Countrywide, will run the bank’s consumer mortgage business after it acquires the mortgage lender. Sambol is the second highest executive at Countrywide, after the CEO Angelo Mozilo. He doesn’t usually attract much of the media’s attention, probably because he doesn’t spend as much time tanning or cooking scandals, but he seems to be a great executive and BofA must have an eye for talent. Great, get rid of Mozilo and keep Sambol, he’s the smart one.

Just as the soap opera was drawing toward a happy end, a hedge fund called SRM Global, which holds a 5.19% share of Countrywide, announced that it’s not happy with the acquisition price and will vote against the transaction. Hm, doesn’t Countrywide stock trade below the transaction price? And besides, who would pay more for a troubled mortgage lender holding toxic mortgages?

Countrywide Didn’t Keep Its Promise

Countrywide Financial, the nation’s biggest mortgage lender reported its 4^th quarter financial results yesterday. After a $1.2 billion loss in Q3, the company said it expected a profit in Q4, but failed to achieve that, as expected. Countrywide posted a loss of $422 million, much better than the previous quarter, but well, still a loss. However, Bank of America affirmed investors that it is still eager to acquire the mortgage lender, so shares of both businesses went up. Overall, the 4^th quarter results were pretty bad in every sense: loan fundings were almost cut in half compared to a year earlier, and loan-loss provisions increased more than 12 times from $73 million to $924 million for the same period. The delinquency rate on subprime mortgages was 33% in Q4, up from 29.6% the previous quarter. And finally, it currently holds $395 million in foreclosed real estate – now that one’s gonna be hard to get rid of.

Mozilo After Countrywide

Now that it has been officially announced that Bank of America is acquiring Countrywide, the spotlight is on Mr. Angelo Mozilo again. Mozilo, Countrywide’s founder and CEO, is famous for his massive sales of company stock. He’s earned hundreds of millions of dollars since he became CEO in 1999 and is expected to get another hundred million in severance after the closing of the BofA deal sometime in Q3. Some sources value his severance package in tens of millions of dollars, which, while substantially smaller than the number above, definitely ensures Mr. Mozilo a happy retirement. One source said he was planning to retire in 2009, but with this new development he might be leaving the workforce a little earlier. I don’t think that makes much difference to him. Mozilo’s generous compensation, which includes use of the corporate jet, county-club membership and other perks, has often been criticized in the media. Executives at mortgage lenders like Countrywide are believed to have caused the current mortgage crisis by allowing predatory lending, fraud, and other unfair business practices. Well the man founded the company after all…

BofA Might Acquire Countrywide After All

Countrywide stock surged more than 50% on rumors Bank of America may be acquiring the lender. We’ve heard this before, but right now there’s talk that the two companies are “in advanced talks”, although there’s still some possibility that the deal will fall through. Neither company has officially commented on the rumors.

Back in August, Bank of America bought $2 billion’ worth of Countrywide shares, an investment which has by now lost a significant part of its value. Before the stock rally, Countrywide was valued below $3 billion, which makes it an attractive target for BofA. By buying Countrywide, the leading U.S. lender, BofA can expand its client base. The bank currently holds 9.88% of the country’s deposits, just below the 10% federal limit. However, this limit does not apply to federally chartered thrifts, and Countrywide happens to be one, which means that Bank of America could use the loophole and circumvent the growth limitation. Countrywide’s loan portfolio could pose a problem, however, because it contains a lot of “toxic” mortgages which are fast losing value. There is a lot of speculation surrounding the deal. Some say it was encouraged by Washington, the primary reason being that Countrywide, contrary to its own allegations, is indeed close to bankruptcy. It is believed that authorities wouldn’t let Countrywide fail, because, due to its sheer volume, the lender could put the economy at risk.

BofA to lay off 3,000 employees

Bank of America is exiting the wholesale mortgage business, and scaling back its investment banking unit, eliminating 3,000 jobs. It will stop offering home mortgages through brokers, and focus on lending directly to consumers through its banking centers and loan officers. Analysts believe more layoffs may be on the way.

BofA’s third quarter financial results were quite disappointing, with net income dropping 32% compared to the same period a year earlier. Several top executives left shortly after financial results were announced, including the head of global structured products, and the co-head of equities. Other banks saw earnings plummet, too. Wachovia Corp. reported a 10% drop in profits in Q3 and said it will eliminate 200 jobs by year end. Citigroup’s profit fell 57%.

The Fed cuts rates

We had some doubts, but finally the Fed did cut rates – by half a percentage point, to 4.75%. And what we have now is plenty of opinions on what’s next. According to economists, the Federal Open Market Committee (FOMC) is likely to cut rates again before the end of this year, at least by .25%. The next cut could happen as early as October, at the next Fed meeting. Analysts seem to believe that the rate cut will be only a temporary relief to mortgage lenders. For borrowers, interest rates may change little, or not at all, depending on their loan terms and the index their interest rate is pegged to.

For some, however, the new rate may bring a big improvement for their monthly payments. Bank of America, for example, reacted immediately on the news, cutting its prime lending rate. Rates on credit cards are expected to drop, too.

Investors fear that the rate cut will have a negative impact on the dollar and the bond market, potentially driving the economy into a recession. Gold and stocks rose significantly after the cut was announced.

In other news, Accredited Home Lenders and Lone Star have amended their merger agreement. The new price for Accredited stock is $11.75, well above its market value at the moment.

Credit panic and foreclosure bailouts

Brilliant “bright” ideas on how to prevent a looming financial crisis are raining from everywhere. Just in the past few days, the following proposals have been all over the news.

PIMCO’s Bill Gross urged the White House to bail out troubled home owners: “If we can bail out Chrysler, why can’t we support the American homeowner?” I would say that the Chrysler bailout wasn’t a very good idea either, but then the government had its own reasons for it. In my opinion, it would be totally unfair to pay for borrowers’ unsound financial decisions with other taxpayers’ money. According to this blog entry, it turns out Mr. Gross himself is heavily invested in mortgages and further foreclosures would sting him quite badly. So that’s why we need to bail out borrowers.

Another brilliant plan comes from presidential candidate Senator Christopher Dodd (D-Conn). What he suggests is, to allow the Federal Housing Administration (a.k.a. FHA) to refinance troubled loans. He believes that the FHA does not serve its purpose well and needs to be reformed is order to be able to help homeowners-to-be. Dodd suddenly appeared among those “concerned” about housing several months ago, and started criticizing the government and the existing system, proposing some rather dubious solutions. Dodd also supported the idea to lift the investment caps on Fannie Mae and Freddie Mac’s portfolio, a move that would allow an inflow of financing on the market. The idea was rejected.

I really wish all these activists were this creative a couple of years ago and invented an economically sound way of “saving the economy”. Unfortunately, right now we are indeed facing serious problems that need to be solved, and every solution seems to have “unwanted side effects” for the economy, the dollar, or the average consumer. Every foreclosure is a particular family’s tragedy, but many of the loans defaulting now should have never been made, and those who were involved in the process only have themselves to blame. It is true that the entire business was infested with fraudulent activity, but in the end everyone had a choice. Sadly, greed often prevailed.

Meanwhile, the Fed has some “bright” ideas of its own. According to CNN Money.com, the central bank has temporarily exempted Citigroup and Bank of America from limitations on the amount of money they can lend. So this is more of the same – a move to artificially boost cash flow in a market that is essentially stagnant. Sounds good for a short-term solution, but in the end market forces should be allowed to play their part in the whole thing.

Banks won’t borrow at the discount window

The Fed’s offer to lend at 5.75% to banks wasn’t exactly embraced this week, as only a total of $2 billion was borrowed. Most interestingly, the borrowers were four major banks – Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co., and Wachovia Corp., each borrowing $500 million, to show solidarity with the Fed’s attempt to help the financial market. The problem is, the ones in need of financing are smaller companies, such as mortgage originators, hedge funds and their like, who generally borrow from some of the above mentioned, because they can’t borrow directly from the Fed. Banks, however, do not wish to have anything to do with mortgage companies at the moment, because the latter are very much likely to default on any loans extended to them. Therefore, the Fed’s move didn’t help anyone much.

According to an article on Bloomberg.com, all four banks had access to cheaper credit, so it’s definitely not urgent need for liquidity that made them borrow from the Fed.

Bank of America invests in Countrywide

It was announced Wednesday that BofA has invested $2bln in Countrywide preferred stock, which can be converted into common stock at $18 per share. Shares of Countrywide traded at above $25 in after-hour trading, an increase of some 20% on the news. Rumors of a possible acquisition/merger with BofA have been circulating for a whil, but until now none had come to materialize. According to the lender’s CEO Angelo Mozilo, “Bank of America’s investment in Countrywide represents a vote of confidence and strengthens our balance sheet, enabling us to position Countrywide for future growth and success”. For some reason, this sounds like a sigh of relief to me.

Kenneth D. Lewis, BofA’s Chairman and CEO, said that “the stock market has been underestimating the value of Countrywide’s operations and assets” – an interesting thought amid all the turmoil, revaluations and downgrades anything mortgage-related has seen. He also added that “The investment … recognizes the importance of the company in providing home financing across the country”, so would I be right to assume that BofA is making a very risky investment just to bail out Countrywide? I’m probably wrong of course …

Countrywide Foresees a Tough 2007

Countrywide Financial, one of the US leading mortgage lenders, announced its financial results for 2006. While the overall annual results indicate a successful year, the 4th quarter performance was worse than predicted. The company Chairman Angelo Mozilo said he expects a tough 2007 “as mortgage origination volumes decline and industry capacity is rationalized”. The management is also preparing for higher delinquency levels and credit deterioration.

Nevertheless, Countrywide officials hope the company will continue to profit as smaller players leave the market or merge with larger businesses in the tough environment. The company predicts a better 2008, which should mark the beginning of an upward trend for the housing and mortgage market.

In spite of the reports, Countrywide shares went up as rumors of possible merge or acquisition by Bank of America spread late last week.

Countrywide is one of the largest residential mortgage originators in the U.S., holding a 15% market share.