Analyst Discusses Countrywide's Impact on Bank of America
Saturday, May 10, 2008
Subprime lending platform Countrywide Financial Corp., which is set to be acquired by Bank of America, announced this week that it experienced a net loss of $893 million during the first quarter of 2007, much of it due to credit-related expenses associated with mortgage loan losses.
DSNews.com interviewed senior analyst Matt Koppenheffer with The Motley Fool about Countrywide's first quarter losses on Tuesday and the impact they'll have on the looming Bank of America-Countrywide deal. Koppenheffer says, on the surface, it's unlikely to mean much.
“I think if you consider the price that Bank of America intends to pay for Countrywide, they had already anticipated a pretty horrific scenario,” Koppenheffer told DSNews.com. “If you look at the trading history of Countrywide, it traded at one and a half to a little more than that times book value. Bank of America is paying a fraction of that, so I think they expected something looking like this.”
Koppenheffer added that the company still “made a gamble.” “If things continue to deteriorate at this kind of pace, it could look bad for Bank of America, but this kind of thing, I think, was in the cards,” he said.
Koppenheffer says, right now, the risk has little to do with actual financial figures related to the transaction because Bank of America stepped in fully aware of what was needed to keep pace with Countrywide's loan portfolio. He's more worried about the threat of litigation stemming from the subprime mess.
“Not being a lawyer myself, when it comes to that kind of stuff, I kind of see it as a black box,” Koppenheffer told DSNews.com. “When we're in a situation like this where there's a rallying cry around subprime, there's a rallying cry around ARM mortgages and there is a cry around anything that looks bad, I think you could have a litigation situation where people really go after it in a big way,” he said. “That's what worries me.”
Koppenheffer says if litigation does become a concern—it only will be if it progresses quickly, prompting Bank of America to rethink its position when it comes to the anticipated acquisition. But, for the most part, Koppenheffer feels Bank of America entered into a transaction that is slated to be a boon in several ways.
“If we're looking at roughly a stable level of losses, or a turnaround in the types of losses that Countrywide is taking, Bank of America got a steal here,” the analyst concluded. “Not only did they bring on a huge asset base, but they expanded their loan origination platform “X” amount of times, and I think that really helps their business.”
When asked about the deal's worst-case scenario, Koppenheffer said, “The worst case scenario: Countrywide is highly leveraged, they've got tons going to them off-balance sheet. The real estate downturn has already been a lot worse than most people expected or even imagined could happen. If it continues to progress downward at a similar rate, Countrywide could take the type of losses that could make even the price that Bank of America took look not so great, if not expensive
DSNews.com interviewed senior analyst Matt Koppenheffer with The Motley Fool about Countrywide's first quarter losses on Tuesday and the impact they'll have on the looming Bank of America-Countrywide deal. Koppenheffer says, on the surface, it's unlikely to mean much.
“I think if you consider the price that Bank of America intends to pay for Countrywide, they had already anticipated a pretty horrific scenario,” Koppenheffer told DSNews.com. “If you look at the trading history of Countrywide, it traded at one and a half to a little more than that times book value. Bank of America is paying a fraction of that, so I think they expected something looking like this.”
Koppenheffer added that the company still “made a gamble.” “If things continue to deteriorate at this kind of pace, it could look bad for Bank of America, but this kind of thing, I think, was in the cards,” he said.
Koppenheffer says, right now, the risk has little to do with actual financial figures related to the transaction because Bank of America stepped in fully aware of what was needed to keep pace with Countrywide's loan portfolio. He's more worried about the threat of litigation stemming from the subprime mess.
“Not being a lawyer myself, when it comes to that kind of stuff, I kind of see it as a black box,” Koppenheffer told DSNews.com. “When we're in a situation like this where there's a rallying cry around subprime, there's a rallying cry around ARM mortgages and there is a cry around anything that looks bad, I think you could have a litigation situation where people really go after it in a big way,” he said. “That's what worries me.”
Koppenheffer says if litigation does become a concern—it only will be if it progresses quickly, prompting Bank of America to rethink its position when it comes to the anticipated acquisition. But, for the most part, Koppenheffer feels Bank of America entered into a transaction that is slated to be a boon in several ways.
“If we're looking at roughly a stable level of losses, or a turnaround in the types of losses that Countrywide is taking, Bank of America got a steal here,” the analyst concluded. “Not only did they bring on a huge asset base, but they expanded their loan origination platform “X” amount of times, and I think that really helps their business.”
When asked about the deal's worst-case scenario, Koppenheffer said, “The worst case scenario: Countrywide is highly leveraged, they've got tons going to them off-balance sheet. The real estate downturn has already been a lot worse than most people expected or even imagined could happen. If it continues to progress downward at a similar rate, Countrywide could take the type of losses that could make even the price that Bank of America took look not so great, if not expensive
