Questions over Countrywide acquisition remain

Is Bank of America overpaying for Countrywide?

A year ago, the nation's largest lender was worth $24 billion. Now Bank of America bac is offering a fire-sale $4 billion in stock, and some traders think that's still too much.

Shares of Countrywide cfc fell 18% Friday after the deal was announced, to $6.33 — nearly 10% below Bank of America's takeover price. The drop reflects Wall Street's hunch that Bank of America underestimated the trouble with Countrywide's loans and will have to cut its offer, or the deal might fall apart.

"There may be more ugliness to come out of Countrywide that will affect Bank of America's stock," explained Brian Koss, executive vice president for Mortgage Network, a lender, and a former executive at Countrywide. "And there is a belief (the deal) might not happen."

The acquisition would catapult Bank of America from the nation's No. 5 mortgage lender all the way to the top spot, with a dominant 25% market share. It would also salvage Countrywide's future, which has been threatened by soaring foreclosures and allegations of fraud and predatory lending.

CEO Ken Lewis, who has turned Bank of America into a financial titan with a series of shrewd acquisitions, tried to assure investors that scores of employees had scoured Countrywide's books for more than a month and that there would be no nasty surprises.

But most of the value of the acquisition seems to be the portfolio of 9 million loans that Countrywide services, collecting monthly payments for investors and taking a fee, says Paul Miller, an analyst with Friedman Billings Ramsey. fbr Miller says he suspects that Countrywide will have to write off 10% to 12% of its bank portfolio, which will "wipe out all of the equity in the bank segment."

Colin Glinsman, chief investment officer for Oppenheimer Capital, az says the main problem is that no one knows how many more of Countrywide's troubled loans will fall into foreclosure.

Bank of America "knows more about them than anyone else … (but) they don't know, either, what's going to happen with this stuff," Glinsman says.

The takeover, which needs regulatory and shareholder approval, is expected to close in the fall. Bank of America offered 0.1822 of its shares for each share of Countrywide. The bank would have to issue a "couple billion" dollars' worth of stock and take a $1.2 billion charge to cover the costs of merging the two companies' operations.

That fact concerns bond analysts at Moody's. The credit-rating agency said it will review the bank's "ability and willingness to raise capital to support its balance sheet after a number of sizable acquisitions, including Countrywide."

Contributing: John Waggoner