False Prophets of Housing: Making Sense of Housing Information Last Week. BofA buying Countrywide Deal.
The timeline goes like this:
Monday: Stock price is hovering around $7.6 and the market awaits for further information regarding the company. It is known that they will be reporting their earnings on January 29th and all eyes are on the largest originator in the country for signs of the housing market.
Tuesday: Stock plummets to $5.12 on news that delinquencies are rising and so are foreclosures. It is becoming clear that the company is not going to have stellar forth quarter earnings. Rumors start circulating that bankruptcy may be the only option for the company.
Wednesday: Continued worries about the company send the stock down to $4.43. It is now only a matter of time before it ends up in the graveyard with other mortgage companies. At least this is what appears to be the case. Most recognize this pattern since they saw it happen with New Century Financial and also American Home Mortgage.
Friday: It is formerly announced that BofA will be buying Countrywide for $4.1 billion in stock. Shareholders of Countrywide will be receiving 0.1822 of BofA stock for the deal. Countywide shares plummeted back down to $6.33 on this news. Something smells fishy about the deal and raises the eyebrows of many according to Seattlepi:
“The aggressive business practices of Countrywide, where employees were encouraged to push borrowers into shaky loans to rake in high fees, stand in sharp relief to the friendly, welcoming image Bank of
“Overcoming all of the trauma of Countrywide employees, and convincing angry Countrywide customers that this company is now kind and benevolent is going to be no small feat,” said John Kanas, who headed North Fork Bank for 35 years, before overseeing its acquisition by Capital One; he left Capital One last year.â€
It is an incredible cultural shift and the two companies couldn’t be further apart. This deal won’t go through so smoothly. Some are questioning the decision for the purchase:
“For instance, Lewis will have to reach out to distressed Countrywide borrowers whose credit profiles would have qualified them for low-cost loans but were steered into expensive mortgages.â€
Couple of things here. First, this is not good for Countrywide employees and does not stop the internal problems that are still ticking within the company. If anything, it looks like BofA is gaining a lion share of the mortgage market and is trying to position themselves as a safe, secure, and diligent mortgage lender. The complete opposite of what Countrywide has been practicing on a large scale over the past few years. Something is going on deeper here and speculation abound is that certain folks simply did not want to see the largest mortgage lender of the country implode at a time when housing is already shaky. Having a large respectable bank like BofA buying up Countrywide may make many investors here and abroad think that we are approaching some sort of bottom in the housing market. The timing is also well suited considering the winter months usually see a drop off in inventory which is seasonal but this will be spun of course. The deal is expected to close by the third quarter and on paper, it looks like it will be neutral to BofA but again there is the law of unintended consequences:
“The first thing to do is come up with an algorithm to figure out who those folks are and how to deal with them,” said Herbert Sandler, who, with his wife, Marion, founded Golden West Financial, the giant California savings and loan bought by the Wachovia Corp. in 2006.
But Lewis has to some degree placed his own bank at risk. He must fix Countrywide while simultaneously absorbing the company’s employees, seeking to cut costs and managing its still-hefty exposure to the troubled mortgage market.â€
Even thinking about the need to revamp their system to streamline these mortgage workouts will cost more than the amount they paid for the company. Yes, they will have write-offs including their $18 stock buy of Countrywide which wasn’t such a smart decision. Given that BofA does not have the magnitude of subprime, Alt-A, and option ARM mortgages that Countrywide has, they are entering into uncharted territory. Why not wait until bankruptcy to pick the company apart? Certainly there are good things with Countrywide but given their massive portfolio of risky mortgages that are set to reset this year and for many more years, something deeper is going on. How aggressive has Countrywide been? Take a look at this data provided by National Mortgage News:
Top Originators Q3 2007:
Countrywide: $94 billion
Wells
Bank of
CitiMortgage: $45 billion
WaMu: $33 billion
Now let us look at the top subprime lenders:
Top Subprime Servicers at 9/30/2007 (by servicing volume):
Countrywide: $120 billion
CitiFinancial: $64 billion
Option One Mortgage: $62 billion
Ocwen Loan Servicing: $51 billion
You would think that with such a large amount of subprime loans already in their servicing portfolio, they would have slowed down but take a look at the amount they originated in Q3 of 2007:
Top Subprime Originators in Q3 2007:
Wells Fargo Home Mortgage: $3.38 billion
Countrywide: $3.32 billion
Option One Mortgage: $3.28 billion
Keep in mind that BofA is nowhere in the subprime world and if they are to acquire Countrywide, they are going to all of a sudden inherit a large portfolio of these loans? There has to be more than meets the eye here. BofA stayed out of the subprime world and almost overnight, they would be one of the leaders of the subprime game. And you’ll love this statistic:
“Countrywide continued to shift away from risky subprime loans to people with shaky credit histories, with fundings totaling just $6 million last month, down from $3.73 billion in December 2006.â€
So basically without subprime, they don’t have much. They originated as many subprime loans in December of 2006 as the price tag BofA is willing to purchase them at. You will also have to wonder what is going to happen with all these loans on the books. How will they blend this into the overall company? What does this mean for the remaining 50,000 employees for the company? Is there some implicit guarantee by the government regarding these loans to BofA? Even by BofA’s own data it looks like we are nowhere out of the water with toxic mortgage products:
Thus concludes another week where the Fed is sacrificing the dollar, bad companies are propped up, and the middle class is once again squeezed and will most likely fit the bill. Joe and Mary main street USA have been diligently saving in their 401(k) and are seeing big hits. Without consumer spending, this economy is coming to a screeching halt and for those to say a recession isn’t likely to happen are simply misleading the public. American Express and holiday sales are not shoring up any further confidence. This deal is also big for California since Countrywide is based out of Calabasas, near Malibu. This isn’t good considering the California budget shortfall and the Governor proposing letting out inmates, closing state parks, and cutting healthcare services to the poorest as a way to balance the problems. But the job losses are signifiant as reported by the LA Times:
“The troubled mortgage lender is a major presence in the business and residential corridor that straddles Los Angeles and Ventura counties on both sides of the 101 Freeway. More than 600 people work at the headquarters complex in Calabasas, with about 4,500 more a few miles to the northwest in Simi Valley.
Thousands more work at sites scattered from the west San Fernando Valley to Thousand Oaks, as well as in offices throughout Southern California.
How many of those jobs will be jettisoned by Bank of America Corp., the North Carolina-based financial giant that has agreed to buy Countrywide for $4.1 billion, is unclear. But when one corporation buys another, it generally expects cost savings, and that usually translates into job cuts.
“You just ruined my day,” dry cleaner Doug Tempo said after learning of Countrywide’s takeover. “Business is slow enough. I don’t need another hit.”
However their is a silver lining offered by the House Financial Services Committee:
“Mr. Mozilo could display some goodwill by donating any severance pay he stands to receive to the nonprofit housing counselors trying to prevent foreclosures,” said Sen. Charles Schumer, a
“Hopefully, this deal will clean up the company’s harmful business practices that victimized homeowners across the nation and fueled the subprime mess,” Schumer said in a statement.
The chairman of the House Financial Services Committee also said Mozilo should surrender some of his wealth to help some of the millions of American homeowners now facing default.
“I am calling on Angelo Mozilo, who will be profiting from this transaction personally, to donate a substantial portion of the $150 million he has collected over the last several years to nonprofits and other institutions that are helping us deal with the problem he helped to create,” said Frank, a Massachusetts Democrat.â€
Anyone want to make a wild guess on how much money is actually going to be donated?
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22 Responses to “False Prophets of Housing: Making Sense of Housing Information Last Week. BofA buying Countrywide Deal.”
I tend to think that Bank of America’s purchase is more straightforward — they think the mortgage servicing rights to Countrywide’s book of business is a gold mine. Not only will they might money off the $1.5 trillion of mortgages, but those millions of customers will also become Bank of America depositors credit card holders, auto loan customers, etc.
They think the loans held for investment and for sale are worth more than the market is giving them credit for. A Wall Street Journal article this morning describe the sequence, with Angelo Mozilo calling Ken Lewis personally back in early December. Bank of America sent a team of 40 analysts to California to go over Countrywide’s books. After a month, they came back with a report that led Lewis to seek a deal.
Personally, I think they’re wrong. I believe they are underestimating the losses that are going to be suffered on Countrywide’s book. Time after time, we have seen supposedly Masters of the Universe/Smartest Guys in the Room underestimate the consequences of falling home prices. They don’t believe that home prices can fall 20, 25 or 30%. In California, they will. At least 30%.
In Countrywide’s case, the next bomb that will be going off will be their book of Option ARMS. They were the biggest originator of these, and have approximately $26 billion worth on their books.
The value of that will be cut in half. That’s $13 billion so far. Add in losses on the rest of their book, which they have lowballed so far, and you’ll see tremendous losses. In fact, the sale of the company had become before the first quarter numbers were announced. Up until now, they’ve been lowballing their loss estimates, and didn’t have to worry about the auditors breathing down their neck. Now that the calendar year in fiscal year have closed, the auditors were coming in to look at the books. No more playing around with the numbers. So the sale had to take place before the earnings announcement.
I’ve heard rumors that there is a covenant in the sale agreement, that allows Bank of America to either lower the price, or escape completely. I hope so, for their sake.
BofA is not buying Countrywide for cash. They are giving shareholders BofA stock currently valued at $4.1 Bil. This is pretty smart. If the financial sector takes more hits that BofA anticipates, then shares of BofA will go down, so that the purchase price of Countrywide will effectively be something short of $4.1 Bil (possibly much less). If the market recovers, then BofA is paying more, but they are also benefitting from a market rebound. So, while the deal can be questioned, doing it with stock, rather than cash, is certainly smarter than the last $2 Bil infusion.
Rational expectations.
Ahh… this is a good one!… I am compelled to say that the money giving to donation has to be enough to prevent a mass foreclosure… still… that is just to much money!… I’m almost sure that it just won’t come to this… but… who am I to say?… Great article.
Someone needs to say something about this! http://www.fakepaycheckstubs.com IS THIS LEGAL? No wonder why we have the subprime mess why have when lenders USE FAKE DOCUMENTATION to help PUSH the loan through and hence MAKE thier commissions illegally! This is SO dispicible and blatent!!! NOW BANKS ARE BAILING OUT THE CROOKS??? SOUNDS LIKE S&L SCANDAL ALL OVER AGAIN!!! see it for yourself at http://www.fakepaycheckstubs.com this is unbelievable!
This deal smells really bad.
Is BofA the straw man? Take over a company with a huge vault full of shaky paper, dissolve it, take the old loans and convert them in to new loans that should have been made in the first place and collect.
Interesting to see if this stays intact.
FYI…
BofA’s awesome Countrywide tax break
Brace yourselves, taxpayers of America. You’re going to help Bank of America finance its $4 billion buyout of Countrywide
A $270 million annual deduction would save Bank of America something more than $100 million a year in federal and state income taxes.
So over the first five years, Bank of America can use a total of $1.35 billion of Countrywide’s losses to shelter its income. (That’s five years of $270 million annual losses.) If Countrywide’s embedded losses when Bank of America buys it exceed $1.35 billion, Willens says, the bank will be able to deduct the rest of the losses, without limit, starting in the sixth year.
What am I missing here? Countrywide made horrible loans that will result in massive foreclosures.
I can see CFC foreclosing on 50,000+ homes. Many of these homes would easily sell for $150-200K so let’s say that BOA does a series of MASSIVE auctions with the reserve set at 100K… They would easily make back the $2B in cash and then some.
If I were Ken Lewis I would assume that the entire book of loans is worthless and that every single home will be foreclosed. If that math works, then the rest is easy…
I think the only real wildcard here would be any class action lawsuits, but my guess is that would be very hard to prove.
money donated will = ZEEEEERROO
A thought provoking article, One commenter mentioned a “Straw Man” in his response and this well may be the key to BOA’s buyout.
Consider this: Consumer and investor confidence is low, if the largest mortgage broker in the country goes under, how stable must the lesser competitors be?
Should the Fed establishes BOA as a temporary shadow GSE (government sponsored enterprise) ie: Ginnie and Freddie. Countrywide,the Fed and BOA would all be satisified.
Just a passing thought !
About site http://www.fakepaycheckstubs.com/ it clearly says that “THIS COMPUTER PROGRAM IS INTENDED TO CREATE NOVELTY PAYCHECK STUBS FOR ENTERTAINMENT, AND AMUSEMENT PURPOSES ONLY!!”.
So I guess there is no reason to be concerned.
😉
Besides the continued stupidity of Charley Shumer, he of the same ilk who a few years ago encouraged lenders to “put the poor into homes”, and now says what a shame it all is, the real point is this: Bank of America, which is technically insolvent (more debt than assets), is buying Countrywide, which is bankrupt. Hmm…..propping up “the economy” so both dems/reps can avoid any problems until the elections, is business as usual, that is, its all fun until someone puts an eye out.
Good luck in the coming social dislocation, food riots, etc.
Good thoughts on the BofA and Countrywide deal. There are clear benefits and risks on both sides but the fact still remains that Countrywide has a large portfolio of 2nd mortgages and option ARMs that are not going away. It looks like BofA’s bet is that the losses in these 2 categories are less than acquiring Countrywide, cutting jobs, writing off losses, and having a large base in the mortgage business. I just don’t think this will go away so easily and see lawsuits coming in the near future. This will be another cost BofA will have to face. Take a look at the lawsuit brought on by Cleveland going after Wells Fargo. This is only the beginning and for BofA to inherit these PR issues doesn’t seem like a smart move.
BofA is catching the biggest falling knife in recent history.
I think #2 was Daimler buying Chrysler….. but that is a whole other conversation.
Looks like BofA will come out winning either way:
“A $270 million annual deduction would save Bank of America something more than $100 million a year in federal and state income taxes. The long-term tax-exempt rate, which is based on Treasury rates and other things so complicated that they make my teeth hurt. The rate changes each year, Willens says, but not by much. When I asked how it’s calculated, Willens, a master of tax arcana, threw up his hands. (Metaphorically, of course.) “It’s like the formula for Coca-Cola,” he said, “no one outside the circle knows it” and it’s so complicated that, “no one else wants to find out.”
So those thinking BofA will sink money into the company to revive or save it may be mistaken. It looks like BofA like most of us is betting on housing declines. The only difference with BofA is that they get to write off losses on their taxes. How this improves the housing market? It doesn’t. In fact, we are now seeing a back door bailout. Give major tax breaks for companies that buy doomed mortgage lenders. The perception is that the companies are saved while the buyers get to slash the workforce and avoid taxes on their profits.
http://money.cnn.com/2008/01/11/news/companies/sloan_countrywide.fortune/index.htm?postversion=2008011115
Interesting…. I never thought I would see a company of this size buy a company of this size in this big of trouble and come out ahead on its failure. BofA has little incentive to revive Countrywide and can just churn its current book out into new BofA paper and write down CW as it circles the drain. I got it now.
Pretty smart cookies, BofA….
I second the Mozillo charity contribution to equal $0.00.
“I think #2 was Daimler buying Chrysler….. but that is a whole other conversation.”
Nah, #2 was Cerebus buying Chrysler’s carcass after Daimler was through with ’em.
I think it’s two things, one as the article pointed out it may be that somebody or bodies don’t want the largest mortgage company to fall down into bankruptcy. So the FED decides to jawbone and twist the most respectable bank BofA into buying it for 4.1 billion dollars. And two they may be thinking about selling the debt onto the open market for pennies on the dollar. Lets say they decide to sell for 10 cents on the dollar (a steal), with over 200 billion in debt instruments on there books they are looking at making at least 20 billion in profit.
Because for the life of me it doesn’t make sense to think that they will have access to customers as a reason. Because for one, many of the customers couldn’t afford the house in the first place and add to that how much there asset (house) has been decreasing. Who wants to hold onto a house that is worth much less than the mortgage.
Dr. Housing Bubble, You do a great job telling it like it is. B of A will only look after itself and end up letting go massive amounts of people, which will only cause more foreclosures and longer unemployment lines. It happens everytime business merge. For all those non believers think this housing “slump” only affects the real estate business, take a look at this post
http://www.presstelegram.com/ci_7963566
If you think the aerospace indusrty pull out of the late e80’s and early 90’s caused the last So Cal housing bust, just wait and see what happens in the next two years. We’ll be wishing we were in the early 90’s.
My hope is there is a deal with the feds and US government about the types and quality of loans B of A takes. They have done this before — leaving the bad stuff with the feds and taking only the good. We will see. It will not be good for the Countrywide employees. They have been told all along that everything is good. I hope the Countrywide CEO has to “donate” all of his severance to a fund set up for the countrywide employees (and B of A) is this does not work. He does not deserve one dime.
Hey Doc-
Need some info on the BOA chart that you have in the post. When was that done? Where is it published? Is that just Countrywide’s loans or is it all subprime loans? What does the designation ‘near-prime’ include? Option-ARMs – in which case it looks very low? I need to be able to give a cite to the local newpaper that is preparing a 4-5 part series on the martgage-credit crash – and to explain to them whichtypes of loans are included in which groups. Usually option and hybrid options are not included in subprime.
Thanks
Buck,
People drive cars worth much less than their note because that is what gets them around. For the few people who bought a home during the bubble years with full intention of calling it a home and not an investment or cash machine, then they will hold on to it if they can indeed afford it. There are many people with top tier credit that will ride the storm to protect their credit than fold hand walk away. The ones that are walking away are the gamblers or ones that got caught up the frenzy.
Hi Doc,
In my humble opinion (which is worth about one cent), BofA purchased a lion’s share of the subprime market at firesale prices. Basically they stole it. BofA is financially strong considering they avoided the subprime market like the plague. I’m sure BofA is expecting a large percentage of the subprime portfolio to go the route of forclosure. They are probably betting on the remaining subprime loans to produce a significant profit in the long term. The percentage of subprime loans that don’t default will most likely be prime customers that were steered into subprime loans by Countrywide.
Eventhough BofA is a respectible bank, they are still a bank. In my experience BofA has one of the worst collections practices of all the “respectible” banks. Citibank comes in a close second. Ironically, Citibank is in hotwater as well by posting a $10 bill write-off this morning…
Thanks and keep up the good work Doc.
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