Countrywide Plunging on BofA Deal Fears

A Friedman, Billings Ramsay analyst says BofA should 'walk away' from the deal, due to Countrywide's poor loan quality.
By Laurie Kulikowski ,

Countrywide Financial

(CFC)

shares plunged as much as 13% Monday after an analyst suggested that

Bank of America

(BAC) - Get Report

should "walk away" from the deal.

Friedman, Billings, Ramsey analyst Paul Miller cut the troubled Calabasas, Calif.-based lender's equity rating to underperform, the equivalent of a sell, from market perform. He cited the significant credit risk in the mortgage lender's loan portfolio, which led rating agency Standard & Poor's on Friday to

cut Countrywide's debt to junk status

.

"Given the continued deterioration in

Countrywide's loan book and weak pricing for non-agency loans in the secondary market,

Bank of America could face $20 billion to $30 billion of loan writedowns when it closes the

Countrywide transaction," Miller wrote in a note Monday morning. He cut his 12-month price target to $2 from $7.

BofA will "likely renegotiate the transaction down to the $0 to $2 level and force

Countrywide bondholders to absorb the remainder of the potential writedowns," he wrote. "

BofA should completely walk away from the

Countrywide deal, as

Countrywide's loan portfolio will prove a drag on earnings and could force

BofA to raise additional capital."

Charlotte-based banking giant BofA agreed to pay $4.1 billion in stock (approximately $7 a share) for Countrywide in January. The deal was expected to close in the third quarter.

Miller acknowledges that the current deal price for Countrywide is only 2% of BofA's market cap and "just a token price" for the franchise. In addition, "many investors believe that

BofA does not want the negative publicity from renegotiation to ruin a solid reputation," he writes.

Still, he says that BofA's filing with the

Securities and Exchange Commission

last week, in which it cautioned, among other things, that it may not guarantee all of Countrywide's debt, "is most likely the first step in renegotiating the entire deal."

S&P lowered its ratings on Countrywide and Countrywide Home Loans Inc. to BB+/B from BBB+/A-2 and Countrywide Bank to BBB/A-3 from A-/A-2. The rating agency cited BofA's May 1 filing, which said it was "evaluating alternatives for the disposition of the remaining Countrywide indebtedness," including "allowing it to remain outstanding as obligations of Countrywide (and not Bank of America)."

Shares of Countrywide recently were down 72 cents to $5.26. BofA's stock fell 1% to $39.38.

Stocks of mortgage lenders

Fannie Mae

(FNM)

,

Freddie Mac

(FRE)

and

IndyMac Bancorp

(IMB)

also were falling.

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