BofA to Buy Countrywide

Updated from 10:37 a.m. EST

Bank of America (BAC Quote) said Friday morning that it will acquire embattled mortgage lender Countrywide Financial(CFC Quote) for approximately $4 billion in an all-stock transaction .

The deal values Countrywide shares at $7.16 per share, a 40% premium to where shares were trading before a Wall Street Journal report broke Thursday, but below Countrywide's Thursday close of $7.75. Under the terms of the agreement, shareholders of Countrywide would receive 0.1822 of a share of Bank of America stock in exchange for each share of Countrywide. The deal is expected to close in the third quarter.

Moody's Investors Service warned it may cut its rating on BofA's credit on Friday. Fitch Ratings affirmed its negative outlook for BofA and placed Countrywide on ratings watch positive. Standard & Poor's also put Countrywide on credit watch positive, removing it from its credit watch negative list.

In afternoon trading, Countrywide was slumping nearly 17% to $6.46. Bank of America was down fractionally to $39.16.

Calabasas, Calif.,-based Countrywide has been beset by rumors of a Chapter 11 bankruptcy filing. BofA already owned a 16% stake in the firm.

On Wednesday, Countrywide revealed that foreclosures had doubled to 1.4% of unpaid principal at its key servicing units and that late payments were ratcheting up as well. The news gave investors the sense that matters for the company could get even worse than they'd already become since the subprime collapse began last year.

Countrywide Bailout's Good Biz for BofA

In the statement announcing the deal, BofA says it will benefit from Countrywide's broader mortgage capabilities, including its extensive retail, wholesale and correspondent distribution networks, and Countrywide will benefit from the stability of being part of BofA.