Bank of America Corp is in advanced talks to buy struggling Countrywide Financial Corp, the largest U.S. mortgage lender, several people familiar with the matter said on Thursday.
Countrywide shares soared 51.4 percent, recovering losses posted in the prior two days, when investors were speculating the company could go bankrupt, even after the company’s specific rejection of that prospect on Tuesday.
Bank of America spokesman Scott Silvestri declined to comment. Countrywide did not immediately return requests for comment, but declined to discuss market activity in its stock, according to the New York Stock Exchange. The Wall Street Journal earlier reported the possible merger.
“From Countrywide’s perspective, it is their best chance for salvation,” said Sean Egan, managing director of credit rating agency Egan-Jones Ratings Co. “At the end of the chaos that is going to transpire over the next two years, it gives Bank of America a terrific position in mortgage financing.”
Countrywide shares closed up $2.63 at $7.75. Bank of America shares closed up 56 cents at $39.30. Both companies’ shares trade on the New York Stock Exchange.
Even after Thursday’s gains, Countrywide’s market value is still only about $4.8 billion. That is far below the roughly $26 billion it was worth last February, just as the housing crisis was about to explode.
A purchase would constitute another major acquisition for Kenneth Lewis, Bank of America’s chief executive.
He has spent more than $100 billion in the last four years on FleetBoston Financial Corp, credit card issuer MBNA Corp, LaSalle Bank Corp and the U.S. Trust wealth management firm.
The purchases helped Charlotte, North Carolina-based Bank of America become the nation’s second-largest bank, a direct rival to Citigroup Inc and JPMorgan Chase & Co.
A merger would also end Calabasas, California-based Countrywide’s more than 38 years as an independent company, since its founding in 1969.
Angelo Mozilo, its co-founder and chief executive, has been a lightning rod for critics who say he encouraged loose lending practices that contributed heavily to the housing crisis.
Mozilo has also been faulted for collecting hundreds of millions of dollars in compensation this decade from pay, bonuses, awards and stock options, including millions of dollars after it was clear the housing crisis had begun. In July, he called the slump the worst since the Great Depression.
Bank of America in August bought $2 billion of Countrywide preferred shares convertible into a roughly one-sixth stake in the lender.
That investment has lost money on paper, but analysts said it made Bank of America — whose own profitability is suffering from rising credit losses — an obvious candidate to buy Countrywide, eventually.
Countrywide overhauled its lending practices this summer, essentially ending subprime and other riskier home loans, after being forced to draw down an $11.5 billion credit line because investors would not buy its mortgages or offer credit.
The mounting problems led to a $1.2 billion third-quarter loss, and led to 11,000 job cuts since the end of July. Countrywide now primarily makes smaller home loans considered less likely to default.
Still, credit problems linger. On Wednesday, Countrywide said December foreclosures and late payments among home loans on which it collects payments rose to the highest on record.
While Countrywide has repeatedly said it has sufficient liquidity to operate, investors have not been convinced.
“Obviously a purchase of Countrywide by Bank of America would solve the company’s funding and liquidity problems with a stroke of the pen,” wrote Kathleen Shanley, an analyst at Gimme Credit, in independent bond research service.
“The big issue is whether Bank of America can get comfortable enough with the credit quality issues to move forward without any commitments of support from bank regulators.”
The cost of protecting debt of Countrywide’s home loans unit against default plummeted on Thursday.
Investors demanded $600,000 a year for five years to protect $10 million of debt against default, according to Phoenix Partners. They had earlier Thursday been demanding 31 percent up front, plus $500,000 a year, to protect the debt.