The first official glimpse inside Bank of America's controversial Countrywide Financial acquisition provides a more upbeat outlook than originally expected.
The $2.5 billion deal, announced in January, will add to earnings immediately rather than next year, the bank said Monday. The bank also said it expects $900 million in savings, up more than one-third from initial estimates.
“Countrywide is on track and adding to the profit,” Bank of America CEO Ken Lewis said Monday during a conference call with analysts.
Buying Countrywide, the nation's largest mortgage lender, vaults Bank of America to a leading role in home lending. The bank, already huge in consumer services, could add new customers and sell more to existing ones. And the deal rescued a troubled company.
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But it comes a year into a mortgage meltdown fueled by lax lending that led to waves of foreclosures. Countrywide was a key player in the subprime markets. The company faces lawsuits in North Carolina and nationwide from borrowers claiming lending abuses and poor loan servicing, as well as federal and state investigations.
The acquisition means Bank of America shareholders could end up footing the bill for Countrywide problems. Joe Price, the bank's chief financial officer, said Monday that it has worked with outside lawyers and others to assess the extent of potential legal claims. They have concluded the exposure is “manageable,” he said.
“I was really surprised,” analyst James Early, an analyst with The Motley Fool, said of the bank's revised earnings timeframe.
He said the revision likely comes as the bank has had more time to learn about Countrywide operations. He also said Countrywide, which the bank said had a second-quarter loss of $2.3 billion, probably “cleaned house” financially prior to completing the sale on July 1. Countrywide results will be part of the bank's earnings reports going forward.
“It's a bit premature to celebrate,” he said. “We still don't really know how well it's going to end up. We'll know 3 years out, 4 years out.”
Uptown rival Wachovia has been suffering from its 2006, $24 billion acquisition of mortgage specialist Golden West Financial. The deal has been criticized as costly and poorly timed. Losses led to the ouster last month of CEO Ken Thompson, a Wachovia veteran.
Bank of America's Countrywide deal has been compared as a bargain with better timing.
“Within Bank of America, Countrywide should work well,” said Bernie McGinn of McGinn Investment Management in Alexandria, Va. “When the history is written of this period, the purchase of Countrywide will go down as a very profitable acquisition for Bank of America.”
Consumer advocates hoped the deal would stem Countrywide's foreclosure tide and said it was preferable to a potential bankruptcy filing.
The bank has said it would end exotic loans that were Countrywide staples and generally lend under its guidelines, using its products, which have had better performance records. The bank estimates it will restructure about $40 billion in loans during the next two years, enabling more than 265,000 families to keep their homes.
That's not enough for Mal Maynard, a Wilmington attorney and director of the Financial Protection Law Center.
“We see no sign of improvement in Countrywide's servicing misconduct,” said Maynard, whose clients include Countrywide mortgage holders. “We think Bank of America ought to declare an immediate foreclosure moratorium.”
Margaret Hart, a Countrywide borrower since 2002, has tried for months to negotiate a more affordable mortgage. Hart, a teacher's assistant living south of Fayetteville, says no one explained the loan terms that have driven her payments, before taxes and insurance, from about $555 a month to over $900. Countrywide, she said, offered a temporary payment reduction to $597.
“But then I'd be back in the same situation,” Hart said on Monday. “Now, on July 31, I have to go to court because they're trying to foreclose.”