Countrywide Could Bring BofA Misery

Bank of America(BAC Quote) on Tuesday closed its $2.5 billion acquisition of Countrywide Financial(CFC Quote), but the pain caused by the deal may only be beginning.

The all-stock deal, originally worth $4 billion when it was struck in January, makes Bank of America the nation's leading mortgage originator and servicer, while protecting its $2 billion preferred stock investment made in 2007, along with another $3 billion invested in Countrywide's common stock.

"Mortgages are one of the three main cornerstone consumer financial products along with deposits and credit cards," BofA Chairman and CEO Kenneth Lewis said in a company statement. "This purchase significantly increases Bank of America's market share in consumer real estate, and as our companies combine, we believe Bank of America will benefit from excellent systems and a broad distribution network that will offer more ways to meet our customers' credit needs."

The market, however, is clearly biased against the deal. BofA shares have fallen nearly 40% since the deal was initially announced in January and nearly 12% since Countrywide shareholders approved it last week. BofA shares were recently trading at $23.46 on Tuesday, or just 75% of book value.

BofA said it "will continue its long-established policy of not originating subprime mortgages" and will discontinue certain nontraditional mortgages, such as option-adjustable-rate mortgages. These are mortgages that give borrowers the option of making a monthly payment lower than the interest that accrued the previous month. When borrowers take the lowest payment option, the loan balance increases, a process called negative amortization. BofA also will "significantly curtail" certain low-documentation loans and other nontraditional loans.

What BofA is Getting