Bank of America and Foreclosures

In January 2008, Bank of America, the second biggest bank by assets, agreed to pay $4.1 billion in stock to acquire Countrywide Financial, the troubled lender that became a symbol of the excesses that led to the subprime mortgage crisis and the current foreclosure epidemic.

The acquisition — which is expected to close in the third quarter of 2008 — would make Bank of America, based in Charlotte, N.C., the nation’s largest mortgage lender as well as its largest consumer bank. The deal will significantly bolster Bank of America’s position in the mortgage market while rescuing Countrywide from the jaws of possible bankruptcy. Bank of America’s takeover of Countrywide, based in Calabasas, Calif., would give the bank a role in one of every four U.S. home loans.

Countrywide is among the dozens of mortgage lenders that have faced an increase in mortgage defaults and foreclosures, especially in subprime loans — those made to borrowers with weak credit. Its lending practices have been questioned, and the company faces numerous investigations and lawsuits related to them.

Started as Countrywide Credit Industries in New York City in 1969 by Angelo R. Mozilo, a butcher’s son from the Bronx, and David Loeb, a founder of a mortgage banking firm in New York who died in 2003, the company became the nation’s largest lender in the early 1990s. By 2007, it had become a $500 billion home loan lender with 62,000 employees, 900 offices and $200 billion in assets.

But Countrywide stumbled in 2007. After years of spectacular growth fueled by increasingly loose lending practices, the company was slow to recognize that it needed to change its business practices and lend more conservatively. By August 2007, as financial markets froze on fears that the subprime mortgage woes were spreading into other parts of the economy, Countrywide was forced to draw down all of its $11.5 billion credit line. By suddenly draining a huge credit line, Countrywide sent a signal that it had serious problems and that the company was at the brink.

Then, fending off reports that bankruptcy could be looming, Countrywide’s stock price collapsed in December of 2007, falling 90 percent and wiping out $20 billion in market value. As the rumors of bankruptcy grew, Countrywide agreed to a takeover by Bank of America in January. BofA plans to scrap the Countrywide name.

Traditionally, banks made mortgages by lending the money that they took in as deposits, and they held the loans until they were repaid. Countrywide and most rivals do not operate that way. They borrow money from banks and investors on Wall Street, and when they close a mortgage they quickly sell it on the secondary market, repeating the cycle over and over. Until recently, the relationship has been extremely profitable for both sides. But as defaults on mortgages made in recent years have surged, the system has started to break down.

Meanwhile, Bank of America was transforming itself into a national powerhouse — mainly through acquisitions. In 2003, for example, it paid $48 billion for FleetBoston Financial, which gave it the most branches, customers and checking accounts of any United States bank. In 2005, Bank of America became the biggest credit card issuer when it bought MBNA for $35 billion.

By purchasing Countrywide, Bank of America would combine its 5,800 branches in 31 states with the mortgage lender’s coast-to-coast network of 700 loan offices and 200 banking centers, helping Bank of America achieve its goal of becoming the biggest player in every major consumer finance category.

As thousands of homeowners lose their homes to Countrywide foreclosures, the BofA purchase is great news for Countrywide’s top executives. Mozilo is expected to remain as chief executive of Countrywide until the deal closes later this year. He is under scrutiny for accelerating the rate at which he was selling stock in 2006-07. He could be entitled to an exit package of roughly $72 million. Since he became Countrywide’s chief executive in 1999, Mozilo has taken home an additional $410 million in pay, including $285 million in option gains. And Countrywide’s president, David Sambol, is being paid a retention bonus of up to $28 million if he stays with Bank of America.

Bank of America, seeking regulatory approval of its Countrywide takeover, plans to modify at least $40 billion of mortgages during the next two years to keep customers in their homes — avoiding both Bank of America foreclosures and Countrywide foreclosures. The move will help as many as 265,000 homeowners stay in their homes. Countrywide foreclosures are growing because the lender made risky loans to many subprime borrowers. But declining home values in California and many other states could prevent foreclosure assistance for Countrywide borrowers.