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Countrywide Deal Wins Few Fans

Early gains evaporate as ratings agencies hold the line.

Countrywide Financial's


big coup failed to win the day on Wall Street.

Wednesday evening's news that the struggling mortgage lender had scored a $2 billion investment from

Bank of America

(BAC) - Get Bank of America Corp Report

initially sent Countrywide shares surging 20% in after-hours trading. At first, the deal was widely viewed as expressing confidence in Countrywide's future in a darkening mortgage industry landscape.

But the big early gains evaporated Thursday, after ratings agencies declined to raise their ratings and Countrywide CEO Angelo Mozilo warned that the nation could be headed for a housing-led recession. The shift shows how deeply concerned investors are about the fate of the housing and mortgage sectors of the economy, which appear deeply troubled after a long-running boom came to an end last year.

Fitch Ratings revised Countrywide's credit status Thursday to evolving from negative, while maintaining its negative rating. The bigger bond rating agencies stood pat. Moody's Investors Service said that it left its rating Baa3, one notch above a junk rating, and maintained its negative outlook. Standard & Poor's also maintained its Countrywide credit rating of

A-minus, with a negative outlook.

Notably, Fitch's ratings move gives the rating agency sufficient wiggle room to assess the creditworthiness of the lender and its various subsidiaries and to factor in its newfound cash injection.

"This isn't a panacea for some of the things that Countrywide needs to work through, but this is a badly needed shot of confidence," comments Christopher Wolfe, managing director at Fitch and lead analyst on Countrywide. "I think that

this BofA investment will give them the type of breathing room that they will need to restructure their business," he says.

Echoing comments Mozilo made earlier Thursday during a


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interview, Wolfe cautioned that the worst might not be over for the mortgage lending community. He said Fitch could still downgrade the lender if the market's challenges increase the likelihood that it might default on its debt.

"Liquidity issues have gotten very acute, and I'm not sure those have been fully addressed or resolved," Wolfe says.

Shares of Calabasas, Calif.-based Countrywide's stock soared 6% in early morning trading but cooled a bit after Mozilo's on-air comments. Bank of America acquired convertible shares with a 7.25% coupon to support the home lender's business, which has been stymied because of increasing defaults and an inability to roll over short-term commercial paper used to help fund its lending operations.

Credit fears and the subprime mess have claimed numerous victims, including

New Century Financial


and most recently

American Home Mortgage



Bank of America's $2 billion investment is viewed as a big boon for the nation's largest retail bank. It could end up owning the biggest stake in the nation's largest mortgage lender -- as much as 16% to 17%, assuming full conversion of the preferred stock -- while collecting a tidy 7.25% annual yield along the way.

"We believe that in the current turmoil the stock market has been underestimating the value in Countrywide's operations and assets," BofA chief Kenneth D. Lewis said in a statement about the investment.

Indeed, the investment could be hugely successful for Bank of America, which could further solidify its stake in the mortgage business. That could pay off in future years -- but probably not until after 2009 or so, when billions of dollars in adjustable-rate mortgages finish the process of resetting to current rates, Wolfe points out.

"We think that there are continued challenges in the market," Wolfe comments. "Third-quarter

resets are going to be rather scary," he adds.