Any guesses as to if the BOA buyout of Countrywide will still happen?

CNN is reporting this morning that Countrywide is now the subject of an FBI investigation into their lending practices. Countrywide is suspected of engaging in “widespread fraud…which may have contributed to the subprime mortgage crisis that has rocked the U.S. economy.”

fbi 1The FBI will investigate Countrywide’s underwriting practices, the way loans were originated and their accounting representations to shareholders in regards to subprime loan losses.

I wonder if there are more whistleblowers ready to share what they know, or perhaps they already have which is what prompted the investigation.

This makes me believe that we are going to see many, many, many lenders in the next several weeks coming clean very fast about any accounting irregularities that they might have been trying to delay.

In addition, watch for underwriting guidelines to FURTHER tighten and expect that all publicly traded companies to come out with new “best practices” guidelines for all employees and third party originators. The big question is, will the new best practices guidelines will apply to senior management?

I’m trying to imagine what it would be like to be a Countrywide employee today, facing the possibility of being interviewed by the FBI.

48 thoughts on “Any guesses as to if the BOA buyout of Countrywide will still happen?

  1. If CFC stock drops to $3 a share, then the buy-out won’t happen. A greater stock drop in CFC would indicate that there was even greater concern of it’s liabilities than people currently expect.

    Unfortunatley, I think there is a good chance that CFC will drop that much in the next month or so. If nothing else, as the reality of the real-estate downturn sinks in, and people assume ever higher default rates, everything tied to real-estate (and that includes CFC) will get a deeper thrashing.

    I just don’t see anything on the immediate horizon that will start cheering the markets about real-estate. The upcoming Fed cut won’t help, and increased Term Auction Facilities won’t do much either. There just no easy way out of this pickle.

  2. Jillayne,

    Awesome pic, did you come up with that yourself?

    I didn’t think this BAC/CFC deal would last this long – unfortunately all my CFC bankruptcy FEB puts are now expired. 🙁

  3. I can’t see how the deal will go through. By the time all of this unwinds, Countrywide’s name will have as much brand value as Enron or Worldcom’s.

    Anyone see the Congressional grilling of the Tan Man the other day? All it takes is a few more committee hearings with some disgruntled former employees to spill the beans before B of A decides to back out.

  4. synthetik,

    Can you buy more puts? There are lots of former employees of Full Spectrum (Cwide’s subprime division) that are on the blogs and forums sharing all kinds of interesting stories.

    In a way, it’s too bad that Countrywide is being singled out. There are so many large, national wholesale lenders who are out of the scene now, where the feds COULD HAVE gone in much sooner.

    But really, could any of this have been prevented? Really? I think the activity the feds are targeting countrywide for likely happened throughout all the wholesale lenders (that are now out of business) to some degree.

    Maybe Cwide’s best move is to shut down. What do you think?

  5. Synthetik,

    Regarding the picture, my daughter was playing pac man on her cell phone the other day and I was explaining to her that you have to strategically eat the magic dot right when the bad guys are near pac man, in order to turn around and eat them when they’re blue.

    The image I had in my mind, but didn’t have enough time to create, was to make the FBI logo look like it had teeth. Thanks for the compliment.

  6. Hi laxtosnoco and Kary,

    BOA went on record as saying the main reason for the purchase was Countrywide’s high quality internal mortgage software system, the servicing portfolio, and the locations. I could be leaving something out, so please correct me if needed.

    If I held BOA stock, I’d be asking questions about the value of the servicing portfolio, I’d wonder if the software couldn’t be purchased at a bankruptcy auction for a whole lot less, and I’d be questioning the true value of the real estate locations given the current shrinking mortgage market. Wouldn’t consolidation make MORE sense rather than expansion?

    But I’m not a BOA stockholder so I have no vote, only a voice here.

  7. I think it will probably still go through, but only because the whole deal was fishy in the first place. I never read a compelling reason for the buyout, its not like CFC blowing up was unknown at that point. There must be a private reason for the bailout we plebes are unaware of, in which case this news will likely have no effect.

  8. I do believe it’s going to get worse before it gets better. With Citi cutting back it’s mortgage operations, I believe they’ll pull out or limit their wholesale mortgage operations. I believe that BOA stopped their correspondent relationships so even if they do buy Countrywide, I wonder if they will broker.

    And then there’s the Thornburg mortgage saga… aghhh…it’s been a long week.

  9. Jillayne and B-

    Although there’s a lot of headlines surrounding CFC right now, the truth is their servicing platform is very cost efficient and industry leading – a big reason why BofA wanted to buy them in the first place.

    The franchise still has a lot of goodwill, although it seems BofA may have paid a little more than they could have given recent developments. The opportunity to purchase a company like CFC for behemoths such as BofA, JP and Citi doesn’t come around too often.

    This is consolidation not expansion,even in a shrinking market. BofA has one less competitor to worry about and it gets a super efficient servicing technology. The fraud news will continue to surface and given all that has happened to CFC it was an easy target.

  10. Hi R.Duke,

    You know, that is an excellent quesstion. I think someone should do a research study on this. Kind of like a time-lapse powerpoint slide show similar to how we all witnessed the transformation of Michael Jackson’s face over the years.

  11. Q-Diddy –

    The problem is that they could have taken that part, and the other good pieces, in bankruptcy. They had given them $2b which would have put them in the front of the line if CFC had gone under. It made no sense to take on all of their liabilities with even more investment money when they were already in a position to get the best scraps.

  12. Jillayne:

    Re #6

    SO TRUE, Ameriquest got out with most of its ill-gotten profits intact.

    I don’t know how much shady dealings they will find w/ FSL (CW’s esrtwhile subprime division), but there is at least one key distinction that must be made between CW practices and Ameriquest’s.

    If a customer called Ameriquest with the highest possible qualifications (and a gullible personality), they would leave with a subprime loan. They did not OFFER any prime loans. Ameriquest did this intentionally, so that they could not technically be charged with predatory lending (loosely defined as putting a customer in a worse loan than they qualified for). Since they did not offer prime loans, and did not broker loans, they could claim that they did offer the borrower the best loan available.

    The federal government did NOTHING while this was happening, possibly because the owner of Ameriquest and his family were huge contributors to Bush’s elections (2nd only to Enron). It was only the efforts of 49 state’s attorney generals that managed to get this stopped. In hind sight, that may have HELPED Ameriquest avoid the current train wreck.

    CW/FSL had fairly stringent procedures to ensure that borrowers that would qualify for a prime conventional loan (but not FHA or VA) would not get subprime loans.

    I’m sure the system FSL/CW was not perfect, but it certainly saved some folks from sub-prime loans.

    I gathered this interesting factoid about CW’s pending liabilities: 80% of the option arms were submitted with little or no income documentation. To be fair, many of those were for folks with high credit scores, low LTV or both, but many were not.

    Here’s the story.

  13. b-

    Yeah, they could have waited till bankruptcy, but that would have given others the opportunity to bid on the assets. The $2BN convertible injection doesn’t give BofA front row seats to the auction. JP and Citi had also been wanting to expand to the West for a long time and BofA was well aware of that when it made the acquisition. Keep in mind that at the time of the announcement it looked like a decent buy based on stock price. In hindsight they may have payed a little too much, but who could have known?

  14. Jillayne-

    The biggest headlines surrounding margin calls this morning is of course Thornburg and Carlyle. Thornburg owes about $610MM and Carlyle more than $400MM.

    The even scarier thing is lenders are requiring bigger haircuts for Treasury and Agency securities too, things that were considered basically riskless. I’m kinda shocked they’re asking haircuts on Treasuries, but then again I’m not surprised given price volatility. In a typical Repo transaction the haircut on Treasuries is zero. Now, they’re asking for .25-3% depending on the tenure.

    While the additional haircut requirements for total Treasury/Agency Repo outstanding probably will be mininal ($100-$200MM), the greater impact will be felt by Private Label Repos (corporate AAA ABS debt) where the haircuts have ballooned from 3% to 15% in some cases. Which means for every $1BN of outstanding Private Label ABS Repo there could be an additional $120MM in margin calls required! Price volatility could add another $10-30MM.

  15. Hi Q-Diddy,

    Thanks for the update, I just got back into the office. I heard there’s something going on with Fannie Mae looking for foreign investors.

    Also, here’s a link to a Marketwatch article on Countrywide:

    Countrywide probe may be game changer
    Commentary: FBI gives Bank of America a ‘get out of deal free’ card

    “Getting the FBI to do your due diligence doesn’t seem like a particularly great business strategy. One is left wondering whether the folks who put this deal together spent any more time looking inside Countrywide than the folks who bought all those collateralized debt obligations spent looking inside them.

    From the point of view of the G-men, Countrywide looks like a pretty good fall guy for the subprime mortgage mess. Playing “pin the blame on the lender” is a no-brainer for any ambitious law enforcement official or prosecutor type.

    But the subprime mortgage and credit crisis is much broader than previous scandals, such as the Enron debacle.

    And it clearly involves government policy failings as well as corporate ineptitude or malfeasance.

    So, while Countrywide may very well become the poster child for the debt crisis, that alone won’t solve the problems that got us here.”{0D8468B0-B2DF-44AD-8531-D4F516F080D4}&siteid=nbs

  16. I was told yesterday by a closing attorney that one of his clients got a free house because Countrywide sold the loan without informing the client – so the client continued paying Countrywide. When foreclosure notices came he sued and won. I guess when you have laid off so many it is hard to keep the paperwork straight.

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