Countrywide's Future Is Anyone's Guess

The past year has been pretty darn ugly for Countrywide Financial (NYSE: CFC  ) .

Shares are down about 85%. CEO Angelo Mozilo is under fire for his mammoth pay package. Back in December, some even questioned the company's ability to stay alive after posting massive writedowns that left liquidity drained to the max.

And like a forgettable boy band, it keeps getting worse and worse. After weeks of disclosing continued declines in the quality of its loan portfolio, including yesterday's report that February's foreclosure rate (as a percentage of unpaid principal balance) doubled in the past year, Countrywide has yet another thorn in its side: An FBI investigation looking into possible securities fraud.

Whatcha gonna do when ...
The investigation, involving 15 subprime mortgage companies, questions whether Countrywide tweaked the quality of its loans to make them look more attractive before selling them to outside investors. If that's the case, investors owning loans Countrywide sold could be in for a wilder ride than they anticipated. From 2004 to 2007, Countrywide originated and sold more than $100 billion of such mortgage-backed securities.

On top of that, the Securities and Exchange Commission has been conducting its own investigation, looking into improper accounting practices that may have drastically underestimated actual reported losses. As it stands, those losses totaled $422 million in the fourth quarter alone.

If either investigation turns over stones revealing a more ominous situation than is already on the table, the credit crunch could have a whole new monkey on its back.

None of that is good news for Countrywide. Its fate could depending on a $4 billion acquisition by Bank of America (NYSE: BAC  ) . A couple of weeks ago, I mentioned that the deteriorating loan portfolio couldn't possibly look good to Bank of America and might derail the merger. With the new legal woes, the situation becomes even more unstable.

Bargain buy or Hail Mary?
Bank of America injected Countrywide with $2 billion late last summer -- coincidentally, just as the credit market starting turning sour. In December, Countrywide's woes swelled to unfathomable levels, which could have been a driving factor of the proposed merger. Either Bank of America would buy all of Countrywide, salvaging what was already invested, or let it ride and face the possibility of it going up in smoke, losing the original $2 billion.

Even though Bank of America has been quick to express its excitement for the pending transaction, that seems to be more of a PR campaign than true jubilation. Bank of America hasn't been left out of the credit market wrath either. January's announcement of a $5.3 billion writedown and 95% plunge in fourth-quarter net income shows how pressing its financial situation stands as well.

With its Wall Street brethren Citigroup (NYSE: C  ) , Merrill Lynch (NYSE: MER  ) , and Morgan Stanley (NYSE: MS  ) doing everything they can to raise enough cash to stay healthy, the timing of Bank of America shopping for strategic investments seems odd, even if it thought Countrywide was a steal at the time. It's as though someone who just lost her job bought Louis Vuitton bags and justified the purchase with the fact that they were on sale. Not financial management at its finest.

Now that Countrywide's loan portfolio is materially weaker, especially with the pending FBI and SEC investigations, Bank of America has tough questions to answer. Is buying Countrywide for $4 billion worth the risk, even after factoring the serious discount to book value being paid? Or is the better route pulling out, crossing all fingers, and hoping for the best?

With the now 34% discount to what a Countrywide shareholder would receive if the deal goes through, investors are voting for the latter.

Clock's tickin'
To be sure, Bank of America hasn't spoken a peep about calling off the deal, and for now, no news is probably good news. With the Fed's recent $200 billion commitment shunned by the market, Countrywide's ability to sell assets and raise cash is brighter than before.

Nonetheless, a few nagging points remain: Legal investigations are mounting, prior business practices have proven faulty, and home values continue to crater.

For related Foolishness:

Read/Post Comments (0) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 599077, ~/Articles/ArticleHandler.aspx, 5/27/2016 8:48:00 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 11 hours ago Sponsored by:
DOW 17,828.29 -23.22 0.00%
S&P 500 2,090.10 -0.44 0.00%
NASD 4,901.77 6.88 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

5/26/2016 4:00 PM
BAC $14.70 Down -0.22 +0.00%
Bank of America CAPS Rating: ****
CFC $4.25 Down +0.00 +0.00%
C $46.11 Down -0.83 +0.00%
Citigroup Inc CAPS Rating: ***
MER.DL2 $11.64 Down +0.00 +0.00%
Merrill Lynch & Co… CAPS Rating: *
MS $27.42 Down -0.36 +0.00%
Morgan Stanley CAPS Rating: ***