Bank of America to buy Countrywide for $4B

— -- In a deal that could spur more consolidation in the mortgage industry and reduce consumer choices, Bank of America bac is buying Countrywide Financial cfc in a $4 billion stock swap that transforms the nation's largest retail bank into the largest mortgage lender.

The acquisition of Countrywide, now a symbol of the excess in the mortgage market that fueled the real estate bubble, catapults Bank of America from the No. 5 mortgage lender to No. 1. With Countrywide's enormous portfolio of loans and distribution system, Bank of America will soon originate one out of every four mortgages in the country.

"When the dust settles on this in two or three years, someone like Bank of America is going to be in great shape. And I don't think Chase or Citibank wants to wake up and see they've been left in the dust," said Guy Cecala, publisher of Inside Mortgage Finance, a trade publication.

Speculation of possible takeover targets included weakened subprime lenders like Washington Mutual wm, whose shares were up about 5% at $14.85 on Friday afternoon.

Customers of Countrywide and Bank of America will see few changes before 2009, when the companies begin to combine some of their operations. But soon after, Bank of America may start offering credit cards and other products to Countrywide customers, and may put Countrywide loan officers in Bank of America branches.

The union also will have no effect on current borrowers mortgages from either lender. Bank of America and Countrywide will not make any future loans to people with tarnished or subprime credit.

"Over time it's going to mean less choice" for consumers, Cecala says. "No one is going to want to hear that. Countrywide was really out there in terms of having a breadth of mortgage products."

Rumors that Bank of America would acquire Countrywide have been getting louder since August, when Bank of America invested $2 billion for an 16% stake in Countrywide, which was reeling from losses on its subprime loans and the evaporation of interest on Wall Street for mortgage-backed bonds.

Bank of America then watched about 70% of the value of its investment evaporate as Countrywide's stock price tanked and its managers were forced to repeatedly deny analysts' fears that Countrywide would have to file bankruptcy.

For Angelo Mozilo, founder and CEO of Countrywide, the deal signals an inauspicious ending to his 38 years at the helm of a company that last year was worth about $50 billion.

"I want him to stay until the deal gets done," said Ken Lewis, chairman and CEO of Bank of America. "Then I would guess he would want to go have some fun. I will talk to him next week about his personal desires."

Mozilo, who is under investigation by the Securities and Exchange Commission for his sales of Countrywide stock, was not immediately available for comment. In a statement he said, "We believe this is the right decision for our shareholders, customers and employees."

Countrywide, based in Calabasas, Calif., laid off 20% of its employees last year as the real estate market sank into the worst downturn since World War II.

The company, however, is still the largest mortgage servicing company, with a portfolio of 9 million loans worth $1.5 trillion. Countrywide also has a sales force of 15,000 people, 1,000 field offices and some of the best technology in the industry.

Under terms of the deal, Countrywide shareholders will exchange each of their shares for 0.1822 shares of Bank of America, worth about $7.20 based on Thursday's closing price and about 7.5% below Countrywide's closing price.

Bank of America will have to issue a "couple billion" in stock, and expects to take a $1.2 billion after-tax charge

The deal "was necessary, and the cleanest, neatest, least disruptive way to put an end to Countrywide's problems," said Cecala. "Countrywide is the largest lender and servicer, it is the public face of the U.S. mortgage market. To the extent (the transaction) keeps them from failing, or going under, is of paramount concern, and that was accomplished with this deal."

Bank of America's offer is "a gift" for Countrywide shareholders, said Richard Bove, a senior bank analyst at Punk Ziegel. "They will own stock in one of the nation's best banks."

But shareholders did not seem overjoyed by the offer, sending Countrywide's stock down 16% to $6.51 in Friday afternoon trading. Bank of America's stock was flat.

The buyout comes just weeks after Lewis vowed that making a deal in the mortgage industry would require him "to eat about seven years of my words."

The deal is expected to be neutral to Bank of America earnings per share in 2008 and lift earnings in 2009, excluding buyout and restructuring costs.

Bank of America expects $670 million in after-tax cost savings in the transaction, or 11% of the expense base of the two companies' mortgage operations.

Bank of America has $1.5 trillion in assets and is the nation's largest bank by market capitalization.

"Their balance sheet can take a shock much better than Countrywide," said CreditSights senior analyst David Hendler. "When you take the shocks at Countrywide, they have a big, busting consequence that's negative."

While Lewis downplayed the prospect of a major deal last month, it fits with a pattern of building Bank of America through acquisition. In the past few years, Lewis has expanded the bank's retail operation with multibillion purchases of FleetBoston Financial, bolted on a credit card business by adding MBNA and grabbed a wealth-management business in U.S. Trust Co.

The result of all the dealmaking is a widely diversified financial services company that does business with nearly one out of every two U.S. households.

In the past year, Bank of America has boosted its market share of prime mortgages, those offered to borrowers with a solid credit history, and was the top retail mortgage originator in the U.S. the first nine months of 2007.

"We are aware of the issues within the housing and mortgage industries," Lewis said. "The transaction reflects those challenges. Mortgages will continue to be an important relationship product, and we now will have an opportunity to better serve our customers and to enhance future profitability."

In Countrywide, Lewis gets the "best, total mortgage-banking company in the U.S. by far," Hendler said. Countrywide's sophisticated back office is a valuable asset that makes Bank of America a much bigger competitor with Wells Fargo, Washington Mutual and others, he said. In 2007, Countrywide had $408 billion in mortgage originations and has a servicing portfolio of about $1.5 trillion with 9 million loans.

"The technology platform, the people who run it, the hedging, the facilities, the mortgage servicing rights, the origination platform, you know, they are all state of the art," Hendler said.

While there are some regulator hurdles to close the deal, they are hardly insurmountable. The buyout would require approval from the Federal Reserve, and possibly other agencies, but analysts believe regulators are more concerned about a Countrywide collapse than industry consolidation.

A Countrywide failure would be a huge blow to government-sponsored mortgage finance companies Fannie Mae and Freddie Mac, which have been major buyers of Countrywide's loans.

Federal law also bars banks from acquisitions that would increase market share above 10% of U.S. deposits, a limit Bank of America is nearing. Experts disagree about whether deposits held by Countrywide's federally regulated savings bank would count toward that limit, and Hendler said Bank of America could also get a waiver from regulators.

Banking industry experts also say Bank of America could easily lower the total amount of money held in deposits by lowering interest rates and shedding deposits.