Feds Seem to Favor Countrywide Buyout

By purchasing Countrywide, Bank of America Corp. would prevent the largest U.S. mortgage lender from filing for bankruptcy and thereby avert significant damage to the home-loan market a mess the Federal Reserve and other agencies desperately want to avoid, analysts said, and one that poses far greater risks to the economy than mortgage industry consolidation.

The Wall Street Journal and The New York Times reported online Thursday that a deal was in the works, citing unidentified people familiar with the deal. The transaction would put the country's largest mortgage lender in the hands of the largest U.S. bank by market capitalization.

Bank of America was expected to announce as soon as Friday morning a deal to acquire Countrywide, which ran into trouble last year when it got hit by a surge of defaults, especially among buyers with poor credit.

The potential deal is "by far the most palatable way to resolve Countrywide's problems" said Guy Cecala, publisher of Inside Mortgage Finance, an industry newsletter.

Cecala said a failure at Countrywide would put the mortgage industry and its regulators in the extremely uncomfortable position of trying to figure out who would be responsible for collecting payments on millions of home loans. It could also be a huge blow to government-sponsored mortgage finance companies Fannie Mae and Freddie Mac, which are major buyers of Countrywide's loans.

For the first nine months of 2007, Countrywide was the largest U.S. mortgage lender, while Charlotte, N.C.-based Bank of America ranked fifth, according to Inside Mortgage Finance.

A Bank of America-led buyout is "the one and only hope that (Countrywide) has" to avoid bankruptcy, said Sean Egan, managing director of independent ratings firm Egan-Jones Ratings Co. Egan-Jones warned earlier this week that Countrywide could "falter" unless it receives an infusion of $4 billion in capital within the next two weeks.

A combination of Bank of America and Countrywide would require approval from the Federal Reserve, and possibly other agencies. Banking regulators declined to comment on the reports.

Federal law bars banks from making acquisitions that would increase a bank's market share to 10 percent of U.S. deposits, and Bank of America is nearing that point at 9.88 percent. However, experts disagreed about whether deposits held by Countrywide's federally regulated thrift, Countrywide Bank, would count toward that limit.