With mortgage companies dropping like flies thanks to massive numbers of bad loans, it's surprising to find that one has attracted a well-heeled investor. Countrywide may be in financial trouble, but Bank of America apparently views it as an undervalued bargain.

Founded in 1969, Countrywide Financial Corporation is a diversified financial services provider. Although it operates some banking and insurance businesses, it deals primarily in mortgages. In fact, Countrywide services one out of every seven mortgages in the U.S., and is the nation's largest mortgage lender. Due to heavy participation in the market for risky non-conforming loans such as jumbos and subprimes, Countrywide now finds itself deep in a sea of debt.

A sinking ship

Countrywide recently borrowed close to 12 billion dollars in order to stay afloat. Not only does it need the cash to fund mortgages, but its own banking system also needs a shot in the arm. In recent weeks, many depositors got nervous about Countrywide's ability to remain solvent, so they withdrew their funds. The scene was somewhat reminiscent of the "runs" on banks that preceded the Great Depression, and the situation underscores the severity of the current mortgage crisis.

Bank of America to the rescue

The good news for Countrywide is that one of the world's most powerful banks has come to the rescue, like a knight in shining armor. Bank of America-which controls assets worth $1.5 trillion dollars-plans to invest $2 billion in Countrywide to purchase interest-bearing securities that can potentially be converted to common stock.

The announcement prompted another major bank, Wachovia, to upgrade Countrywide's market value, and the news sent Countrywide's recently hammered stock up nearly 10 percent to around $22 per share. The rise in price, coupled with the infusion of investment cash, immediately strengthens Countrywide's balance sheet and restores confidence in the future success of the company.

Analysts note that Bank of America has a savvy track record of investments, and is sitting on a huge pile of cash that allows it to take advantage of buying opportunities during times of extraordinary crisis, when other financial companies are about to go under. Before changing its name to Bank of America, it leveraged one of the biggest deals in banking history.

A history of rescue

During the late 1980s, the demise of the savings and loan industry-which was also fueled by bad real estate loans-led to a downturn in the real estate market and left one of the biggest banks in Texas on the verge of bankruptcy. Bank of America-then named NCNB-came to the rescue of First Republic Bank of Texas, and bought all of its assets at fire sale prices.

Historians view the strategic investment as the pivotal moment in Bank of America's evolution to world-class greatness. Many view the investment in Countrywide as a similarly clever move to enhance its position in the mortgage industry. Whatever it means for Bank of America, it's encouraging news for Countrywide and its vast customer base countrywide.

Published on September 12, 2007