Real Estate Lender Implosion

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Countrywide rises as BofA affirms merger

By Stacy-Marie Ishmael in New York

January 29 2008 19:19

Shares in Countrywide Financial rallied on Tuesday after Bank of America re­affirmed plans to buy the lender, which earlier reported a fourth-quarter net loss of $422m.

Ken Lewis, chief executive of the bank, attempted to dispel investor concerns that the merger might not be completed. “Everything is a ‘go’ to complete this transaction,” he said.

Mr Lewis said Countrywide’s results were consistent with its expectations and reflected a “dramatic” improvement in the fundamentals of the mortgage business. “The items driving the loss were consistent with our due diligence and transaction price,” he said.

Shares in Countrywide rose 6.4 per cent to $6.33 by mid-afternoon. Bank of America’s $4bn offer values each share at about $7.19.

Countrywide’s quarterly loss, which compares with net income of $622m in the same period last year, comes in spite of chief executive Angelo Mozilo saying in October that the company would return to “significant” profitability, after reporting a third-quarter loss of $1.2bn. “While considerably improved from the previous quarter, [fourth-quarter results] were adversely impacted by further credit deterioration across the industry and continued illiquidity in the secondary mortgage markets,” Mr Mozilo said.

The lender said it had experienced higher-than-expected increases in delinquency rates during the quarter, while worsening conditions in the housing market forced it to raise estimates of future defaults.

Countrywide said borrowers fell behind on payments on more than a third of the mortgages in its $1,476bn loan-servicing portfolio.

The company increased its reserve for credit losses to $1.9bn at the end of last year, a seven-fold increase compared with the same period in 2006. The lender also recorded an impairment charge of $831m during the quarter, linked to so-called HELOC securities, which are backed by risky home equity lines of credit.

Continued deterioration in the credit markets resulted in a mark-to-market loss of $394m on loans transferred to a held-for-investment portfolio.

Countrywide said that it expected weakness in the housing market would continue to hurt its mortgage business throughout 2008. As a result, the lender said it had cut 11,000 jobs since last July, and incurred restructuring charges of $145m for the year, $87m of which was recorded in the fourth quarter. Countrywide’s board of directors declared a dividend of $0.15 on its common shares, payable on February 29.

http://www.forbes.com/feeds/ap/2008/01/30/ap4591693.html