BofA Needs to Rework Countrywide Deal

Consensus is building among analysts that Bank of America(BAC Quote) will have to lower its offer price for troubled mortgage lender Countrywide Financial(CFC Quote) or pull out of the pending deal altogether.

Countrywide shares have taken a beating this week, after Friedman, Billings, Ramsey analyst Paul Miller on Monday wrote that BofA should "walk away" or at least renegotiate the $4.1 billion deal after Standard & Poor's downgraded the lender's debt to junk.

BofA itself already indicated last week that it was mulling its options about taking on some of Countrywide's debt -- which Miller suggested could be a "first step in renegotiating the entire deal." And while the bank publicly remains committed to closing the deal by the third quarter, a growing chorus of analysts is beginning to wonder how that can happen under the existing conditions.

"Things have deteriorated far beyond what anyone really expected," says Byron MacLeod, an earnings quality analyst at Gradient Analytics, an independent research firm in Scottsdale, Ariz. "BofA is probably going to need to renegotiate the terms for it to still go through."

Between the hundreds of lawsuits against Countrywide for fraud and other issues, regulatory investigations, including a probe by the Justice Department, in addition to the mounting losses and foreclosures Countrywide must deal with in its loan portfolio, "there is no way to get your arms around the diligence," according to Christopher Whalen, managing director of Institutional Risk Analytics.

"The bottom line is the transactional risk and the other types of risk that come along with Countrywide just says to me that there is no way to do this deal short of restructuring because you have got to quantify these claims," Whalen says.