Bank of America Drowning in Countrywide Debt

By Kevin Chiu

The purchase of Countrywide Financial may be getting to be one of the worst banking acquisitions in U.S. history for Bank of America. Since the nation’s biggest bank bought troubled Countrywide in the throes of the financial crisis in 2008 the bank’s home loan department has lost $8.5-billion and counting in bad mortgages.

Former BofA CEO Ken Lewis called the banks $4-billion purchase a major value, but banking analysts were stunned at the takeover as Countrywide stock dropped in value daily on Wall Street. Countrywide above any other U.S. lender had been making more risky loans in subprime and Alt-A mortgages.

So what was the real value to Lewis, who would be shown the door when the U.S. Treasury provided funding from TARP for the newly acquired asset? It must have been Countrywide’s lucrative mortgage servicing department, insiders said. Bank of America now services 14-million home mortgages, the largest in the industry, 10-million of which came from Countrywide.

Bank of America

Too Big to Fail?

But is BofA’s massive mortgage servicing unit another case of “Too Big to Fail?”

It seems evident that it is since so much of its losses are being paid by U.S. tax payers. The Federal Open Market Committee has kept its benchmark interest rate near zero after buying $1.7 trillion in U.S. securities, mainly from troubled mortgage giants Fannie Mae and Freddie Mac. Federal records are unavailable to detail how much of it is Countrywide foreclosures. The Fed is purchasing another $600 billion in treasuries in the next eight months in efforts to get the economy moving and keep interest rates low.

BofA has set aside $4.4-billion for requests to buy back mortgages that have either gone bad or are at risk of default. The bank has also paid out $730-million in legal settlements. And that’s only the beginning. Another $13-billion in requests await bank approval.

Uphill Battle

Brian Moynihan, the bank’s new CEO is facing an uphill battle with shareholders, who have seen the value of their stock drop since the takeover, saying Countrywide is a “tale of two cities,” working through foreclosures and modifications as BofA cleans up the Countrywide mess.

Bank of America veteran Barbara Desoer is now handling the Countrywide unit. A tsunami of 1.3-million mortgages are now 60 days or more in default and the bank faces a series of lawsuits from mortgage holders. It has hired 10,000 new employees in default servicing to handle the problem loans over the last two years.

BofA froze foreclosures to look into the filings of foreclosure affidavits in all 50 states, but has since re-started foreclosures in 23 states after refilling paperwork. But the bank and four other mortgage lenders are still being investigated by attorney generals in all 50 states for improprieties bank employees admitted to in the way they handled paperwork as “robo-singers.”

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