Explaining Southern California's economy

Bank of America continues to end its Countrywide problem

Scott Olson/Getty Images

Bank of America has agreed to a $10 billion deal with Fannie Mae, related to the charge that its Countrywide loans were bogusly represented.

Oh, what a difference five years makes! Back in 2008, Bank of America bought Countrywide Financial — then based in Calabasas, Calif. — for $4.1 billion, a fire-sale price at the time given the heights to which the now notorious subprime lender had soared.

But even at that price, Countrywide eventually became a giant concrete-filled truck tire around BofA's neck. In 2011, BofA saw its stock price plummet. CEO Brian Moynihan hadn't done the Countrywide deal, but he was dealing with the ugly aftermath. At one point, when the entire financial services sector was swooning, billionaire investor Warren Buffett swept in to support BofA and put a floor under the fall.

That didn't stop speculation about BofA putting Countrywide into bankruptcy — which would have led to the first big test of a major bank failure in the post-"To Big to Fail" era. I blogged about it at the time:

A Countrywide bankruptcy wouldn't be trivial in Southern California. BofA is already rolling up Countrywide's correspondent loan business. The bankruptcy gambit has been discussed, with two scenarios. First, BofA management has proposed that it would be limited to Countrywide — the former mortgage lender has remained a distinct entity and could be moved to Chapter 11 without BofA getting sucked in.

Second, a Countrywide bankruptcy would be a signal that BofA is in pretty bad shape and possibly close to collapse. Federal regulators would then step in and assume control of the Countrywide action — and then take control of BofA. For folks in SoCal, this could be highly disruptive, given that BofA has around $200 billion in deposits in the Southland.

That was then. BofA is now trading at stock valuations that are double what it was doing in those darks days. If you invested then, you'd be a sitting on a nice gain.

And BofA continues to work through lingering Countrywide issues. On Monday, it shelled out over $10 billion to satisfy Fannie Mae's insistence that the loans the government-sponsored mortgage giant — effectively nationalized in the aftermath of the financial crisis — bought from Countrywide were basically lies, lies, lies. Fannie's sister entity, Freddie Mac, says the same thing. This is from the New York Times' DealBook:

Both Fannie and Freddie, which have posted billions of dollars in losses in recent years, have argued that Countrywide misrepresented the quality of home loans that it sold to the two entities at the height of the mortgage bubble. Bank of America assumed those troubles when it bought Countrywide in 2008.

Before the latest settlement announced on Monday, the Countrywide acquisition had cost Bank of America more than $40 billion in losses on real estate, legal costs and settlements, according to several people close to the bank.

It's worth noting that Fannie and Freddie were embroiled in a major scandal during the financial crisis when it was reported that Countrywide had given sweetheart mortgage deals to prominent politicians and numerous employees of...Fannie and Freddie.

And the two entities are currently in a fight over whether it's in the interest of taxpayers to write down the principal of the mortgages it holds — a tactic that its controversial master, FHFA head Edward DeMarco, staunchly opposes

Monday's settlement, although substantial, isn't going to completely make BofA's Countrywide debacle go away. Worse, as DealBook points out, the experience has taken BofA out of the mortgage-lending and securitization game — just as the market is picking up, fueled by two Federal Reserve policies: ultra-low interest rates; and a massive ongoing buyup of mortgage backed securities designed to keep interest rates in the housing market low well into the future.

Follow Matthew DeBord and the DeBord Report on Twitter. And ask Matt questions at Quora.

blog comments powered by Disqus