No Savior for Mortgage Biz

This story has been updated from 6:07 a.m. EDT with new stock prices.

Waiting to see big banks piling into the mortgage business a la Bank of America (BAC Quote)? Don't hold your breath.

BofA surprised Wall Street last week by making a $2 billion bet on struggling Countrywide (CFC Quote). The news, announced after the close last Wednesday, gave Countrywide's sinking stock a one-day reprieve.

The linkup also boosted smaller stand-alone lenders such as Thornburg Mortgage (TMA Quote) and IndyMac (IMB Quote), as investors wagered that commercial banks such as Wells Fargo(WFC Quote) and Wachovia(WB Quote) might make copycat moves.

Countrywide's shares leapt $2.48, or 11.3%, to $24.30 in overnight trading Thursday after news of BofA's cash injection. Thornburg shares tagged along, rising 86 cents, or 6.7%, to $13.70, as did shares of IndyMac, which jumped $1.05, or 4.5%, to $24.50.

But since last Thursday's mortgage industry relief rally, the shares of the big lending companies have resumed their swoon. In recent trading Tuesday, Countrywide was back down at $19.34, 20.9% below its Thursday high. Thornburg, meanwhile, had fallen 21.3% from Thursday's high to $10.98, and IndyMac was down 8.2% to $22.74.

The reason? The U.S. housing industry keeps getting sicker -- and observers are starting to appreciate what favorable terms BofA chief Ken Lewis wrung out of struggling Countrywide.

"It was a layup, basically," Mark Batty, a financial services analyst at PNC Wealth Management in Pittsburgh, says of the terms BofA got in its deal with Countrywide. "A lot of investors would have an interest in that type of investment opportunity."

Indeed, a lot would have to go very wrong at Countrywide for Bank of America's $2 billion preferred-stock investment to look like a loser. Much was made of the fact that the bank could wind up with a 16%-17% stake in Countrywide should BofA convert all its preferred shares into common stock. The preferred stock converts into common at $18 a share.