By Tomoeh Murakami Tse and Dina ElBoghdady
Washington Post Staff Writers
Friday, January 11, 2008

NEW YORK, Jan. 10 -- Countrywide Financial shares more than doubled Thursday after reports that Bank of America was in discussions to buy the nation's largest mortgage lender.

The deal, rumored for months, could come "very soon," although it could be delayed or fall apart all together, the Wall Street Journal reported on its Web site, citing people familiar with the matter.

Investors bid up shares of the embattled California lender, which closed up 52 percent, or $2.64, at $7.76.

The New York Stock Exchange said it contacted Countrywide in light of the "unusual market activity," and asked it to issue a statement on any corporate developments that may be behind it. Countrywide declined to comment, the NYSE said. The company did not return phone calls Thursday.

A Bank of America spokesman also declined to comment, saying the company does not comment on market speculation.

The deal talk comes after a long and painful slide for Countrywide, which became a major industry player during the recent housing bubble. In 2006, it issued about a fifth of U.S. home loans in terms of dollar amount, helping to extend a mortgage boom that has come crashing down, hitting the balance sheets of financial companies everywhere and threatening to push the economy into a recession. The company posted its first loss in 25 years during the third quarter, and some analysts expect further losses in the fourth quarter.

Although the terms of a deal were unclear last night, some analysts speculated that the purchase price would disappoint Countrywide investors.

Paul Miller, an analyst at Friedman, Billings, Ramsey Group, said that Bank of America could probably acquire Countrywide at a bargain.

"Countrywide is probably on the verge of bankruptcy," Miller said. "It will be negotiating from a point of weakness."

If Bank of America does buy Countrywide, it would probably do so for less than $7 a share, Miller said. Bank of America is probably trying to assess the anticipated losses from Countrywide loans gone bad and factoring those into the price, he said. Miller estimates that the cumulative losses over the life of those loans could be as much as $6 billion.

Countrywide has $90 billion of loans on its books. Of those, $32 billion are home equity lines of credit and $27 billion are payment option ARM loans, which are loans that allow the borrower to decide how much to pay each month toward principal and interest. "Those loans are deteriorating rapidly," he said. "That has to be factored into the deal price, and once you factor that in, [Bank of America] has to wonder if they want this."

If the deal does not go through, Miller said he suspects Countrywide's shares will drop further.

Countrywide shares have steadily declined from a high of $45 in February of last year. With the lender's shares hovering just under $22 in August, Bank of America made a $2 billion equity investment to shore up the company. That deal gave Bank of America about a 16 percent stake in Countrywide. The bank now owns preferred shares that can be converted into common stock at $18 each and that carry an interest rate of 7.25 percent.

Despite the infusion, Countrywide shares continued their slide as the housing and mortgage markets worsened.

The purchase of Countrywide could help Bank of America, based in Charlotte, recoup its $2 billion investment. With shares now trading in the single digits, Countrywide's market capitalization stands at just $3 billion.

The lender received its latest blow Tuesday when investors sold off its stock on rumors, denied by Countrywide, that the company was contemplating a bankruptcy filing. Then on Wednesday, Countrywide reported that foreclosures and late payments on mortgages in December soared to their highest levels in five years, prompting some analysts to express alarm.

ElBoghdady reported from Washington.