GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

Will Countrywide Bring Down Bank Of America?

January 02, 2012 | About:
In 2008, at the opening period of the global financial crisis, Bank of America (BAC) purchased flailing mortgage lender Countrywide for approximately $4 billion. At the time, Bank of America CEO Kenneth Lewis stated he expected the bank would earn back the $4 billion from the purchase in less than four years. So far Bank of America has paid out almost 10 times that amount in claims, and continued claims resulting from the Countrywide mortgage origination practices are still a very dark cloud hanging over Bank of America. Mr. Lewis resigned from Bank of America in October 2009.

Through the end of 2011, Bank of America has paid out over $33 billion in losses from the Countrywide acquisition. One estimate is that the bank will rack up another $20 billion in costs before the Countrywide problems are behind it. Lawsuits concerning the Countrywide business practices have been filed on several different fronts.

One track for lawsuits comes from investors who bought mortgage backed securities filled with Countrywide originated mortgages. In June 2011, Bank of America agreed to a settlement amount of $8.5 billion to pay off claims against the mortgage securities. Since that time legal battles have continued. Investors and the federal government have indicated they believe the settlement amount is way too low. Also, there is disagreement whether the case or cases should be heard in federal court or state courts. If investors in each state are allow to press their legal claims against Bank of America, the final settlement amount could be many times the agreed upon $8.5 billion.

Another source of lawsuits are individual counties going after the mortgage banks – including Bank of America – for mortgage recording fees which should have been paid when home loans were transferred between lenders and into mortgage securities pools. In September, 2011, Dallas county filed in Texas state court against Bank of America, asking for up to $100 million in unpaid filing fees. Lenders used a company called MERS to transfer mortgages and MERS even used the fact the lenders would not pay filing fees as part of the company's sales pitch. During the heyday of mortgage lending, MERS electronically handled over half of the new mortgages originated in the U.S. and Countrywide was among the company's largest clients. This is a new attack against Bank of America and if the first few lawsuits are successful, more counties will pile on lawsuits and the resulting settlements could add up to more billions of dollars.

The final area of attack against Bank of America from the former Countrywide operations concerns lending and foreclosure practices against homeowners. Bank of America recently was fined $335 million for discriminatory lending practices against minorities by Countrywide. Many states are considering additional lawsuits against Bank of America concerning the Countrywide lending practices and how the company has handled foreclosures since taking over the mortgage lender.

It is impossible to predict how all of these different sources of lawsuits against Bank of America will turn out. If Bank of America starts to believe the suits will go against the bank, the company will probably quickly agree to the lowest settlement amounts which can be negotiated in a relatively short amount of time. It is not unthinkable that losses from the Countrywide operations could mount up to additional $20 billion or more. If the amount is lot more, the future of Bank of America could be threatened. On the flip side, Bank of America reported a net profit of $6.2 billion in the third quarter, so the company could still buy its way out of a large amount of problems.

The uncertainty hanging over Bank of America including the large number of lawsuits has been reflected in the share price. BAC is trading at levels 60 percent below where the share price started out in 2011. The financials overall have had a tough year, but Bank of America's better run competitors, Wells Fargo (WFC) and J.P. Morgan Chase (JPM) are down just 12 percent and 22 percent respectively for the year. The 2012 consensus earnings estimate for Bank of America is close to $1.00 per share. With the stock trading near $5.00 it seems the market does not believe those profits will actually materialize. The money may end up going to the MBS investors, governments and homeowners lined up to sue over the Countrywide lending practices.

About the author:

Investment Underground
Buy low and sell high is easier in theory than in practice– and that’s where we come in.

At Investment Underground, our editors are disciplined, independent thinkers who will inform you when to buy undervalued investments, recognize catalysts, and sell when full value is realized. We provide timely, detailed analysis of our value investing strategies and help you achieve your goals of a reduced-risk trading environment.

If you are fed up with volatile markets and manipulation that put your financial well-being in jeopardy, join us to achieve those gains you deserve without the headache.

Visit Investment Underground's Website


Rating: 3.9/5 (15 votes)

Comments

superguru
Superguru - 2 years ago
Wondering, why does not BAC sell off or close down Countrywide?

Selling off might be difficult as there would be no buyers, how about closing it down?
ajb5000
Ajb5000 - 2 years ago
Sure, they can "close it down". It's called Bankruptcy.
tyt
Tyt - 2 years ago
Boa screwed themselfs

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK