"The Fed Bails Out Another Sub-Prime Lender"

The Federal Reserve on Thursday approved Bank of America Corp.'s purchase of distressed mortgage lender Countrywide Financial Corp.

In a statement, the federal regulatory said it considered many comments for and against the company buyout and "has considered carefully the financial factors of the proposal."

Charlotte-based Bank of America, which announced its $4 billion acquisition of the Calabasas, Calif.-based mortgage lender in January, has faced much criticism for Countrywide's large exposure to subprime home loans that were offered to borrowers despite their shaky credit.

Countrywide lost about $1.6 billion in the last six months of 2007, and the company faces numerous investigations and lawsuits related to its lending practices.

Bank of America has said it will tighten those lending standards.

"This transaction represents a rare opportunity for Bank of America to significantly gain market share in the mortgage business, allowing it to expand in a cornerstone financial product," Bank of America Chairman and Chief Executive Officer Ken Lewis said in a statement commenting on the Fed decision.

In its order, the Fed board said that after the proposed deal Bank of America would remain the largest depository institution in the country, controlling approximately $773.4 billion in deposits, which represent 10.9 percent of total insured bank deposits in the country.

When the deal was first announced, Bank of America said it would pay about $4 billion in an all-stock deal for Countrywide, exchanging 0.1822 shares of Bank of America for each share of Countrywide outstanding.

In recent months, some analysts have speculated that the deal may be completed at a lower price because of further deterioration in the mortgage market and a continued rise in mortgage delinquencies and defaults.

Experts have said that the deterioration of the mortgage market and Countrywide's loan portfolio could lead to costly write-downs and create a drag on Bank of America's earnings.

But on Monday, Lewis told analysts on a conference call that he believed buying Countrywide was still a good deal even though the housing market had continued to falter since the deal was announced.

Lewis said he believed that housing conditions would improve by early next year. He said that Countrywide and its professional sales force would give the bank a boost as it pushes to increase market share in the mortgage sector.

Upon the Fed's decision Thursday, Lewis said that mortgages "continue to be a key consumer product for Bank of America, serving as a driver for adding new customers and deepening relationships with existing ones."

Bank of America said it expects the sale to close in the July-September quarter.

The Fed board approved the deal in a 32-page order issued Thursday. Countrywide had said previously that it will hold a special meeting of shareholders on June 25 to approve the proposed sale.

Thu Jun 5, 1:58 PM

An auction sign is posted at a house under foreclosure in East Palo Alto, Calif., Thursday, June 5, 2008. Home foreclosures and late payments set records over the first three months of the year and are expected to keep rising, stark signs of the housing crisis' mounting damage to homeowners and the economy.

(AP Photo/Paul Sakuma)

The foreclosure hammer is hitting ever harder. People lost their homes at the highest rate on record in the first three months of the year, and late payments soared to a new high, too — an alarming sign that the housing crisis and its damage to the national economy may only get worse.

Dumping more empty homes on an already glutted market also is likely to put a further drag on home prices — extending a vicious cycle.

Slumping home values are being blamed in large part for the rising tide of foreclosures. Troubled borrowers are left owing more to the bank than their homes are worth. They can't sell without taking a huge financial hit, so they just walk away.

In fact, Americans' equity in their homes — usually their single biggest asset — now has dropped to the lowest level on record in figures going back to the end of World War II. Homeowners' portion of equity fell to 46.2 percent, which means the amount of debt tied up in their homes exceeds the equity they have built up.

"The economy is treading water, and the housing market is one of the undercurrents trying to pull it down," said Stuart Hoffman, chief economist at PNC Financial Services Group.

Both the rate of new foreclosures and late payments were the highest on record going back to 1979.

With prices expected to keep dropping, foreclosures and late payments "are going to continue to go up," Jay Brinkmann, the association's vice president of research and economics, told The Associated Press.

Homeowners with tarnished credit who have subprime adjustable-rate loans took the hardest hits. Foreclosures and late payments for these borrowers also swelled to all-time highs in the first quarter.

California, Florida, Nevada and Arizona accounted for 89 percent of the total increase in new home foreclosures, he said. Those are places where prices have fallen sharply and there was a lot of home building, creating too much supply, Brinkmann said.

As foreclosures and late payments climbed, financial companies took multibillion-dollar losses when their investments in mortgage-backed securities soured. A credit crisis spread, crimping other types of financing. The fallout plunged Wall Street in turmoil, disrupting the normal functioning of markets.

All those troubles have pushed the economy to the brink of a recession. Employers, cutting costs, have eliminated more than a quarter-million jobs in the first four months of this year.

To bolster the economy, the Federal Reserve made aggressive interest rate cuts. But with inflation on the rise, Fed Chairman Ben Bernanke this week sent his strongest signal yet that the central bank's rate-cutting campaign is coming to an end.

The Bush administration has urged lenders to freeze rates for some homeowners and encouraged lenders to rework mortgage terms so troubled borrowers can stay in their homes.

A congressional plan that includes a foreclosure prevention program has stalled as lawmakers figure out how to pay for it.

     Once again the Fed has bailed out another very large sub-prime lender, Countrywide Financial, in the face of nation wide escalating home foreclosures, many of whom had Countrywide Financial sub-prime mortgage loans. On the surface it seems unjust to bail out the mortgage company that made all these bad loans and not the homeowners that are losing their homes because of those same bad loans. Life is not fair. The fact of the matter is, Countrywide Financial is still holding millions of mortgages that can be saved if Bank Of America is willing to rewrite these loans and enable homeowners to keep their homes, which is implied in Bank Of America buying out Countrywide Financial. The bottom line, this cycle of foreclosures and falling home equities , will just have to run it's recessionary course, as I see it. This is America. We fall down and we get up. Most of the time , we learn from our mistakes. Once you reach rock bottom, there is no where to go but up. I believe that solvent, profit seeking and ethical banks will lead the way out and up from this sub-prime lending mess America  now finds Herself. That's the beauty of capitalism and the free enterprise, as I see it.

tags: countrywide financial  bank of america  economy  free enterprise  sub prime  business  capitalism  america  takebackamerica  the fed  

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