WASHINGTON (AP) -- A Bank of America bid for Countrywide likely would come as a relief to federal regulators, analysts said.
By purchasing Countrywide, Bank of America Corp. would prevent the largest U.S. mortgage lender from filing for bankruptcy and thereby avert significant damage to the home-loan market - a mess the Federal Reserve and other agencies desperately want to avoid, and one that poses far greater risks to the economy than mortgage industry consolidation.
The Wall Street Journal and The New York Times reported online Thursday that a deal was in the works, citing unidentified people familiar with the deal. The transaction would put the country's largest mortgage lender in the hands of the largest U.S. bank by market capitalization.
Bank of America was expected to announce as soon as Friday morning a deal to acquire Countrywide, which ran into trouble last year when it got hit by a surge of defaults, especially among buyers with poor credit.
The potential deal is "by far the most palatable way to resolve Countrywide's problems" said Guy Cecala, publisher of Inside Mortgage Finance, an industry newsletter.
Cecala said a failure at Countrywide would put the mortgage industry and its regulators in the extremely uncomfortable position of trying to figure out who would be responsible for collecting payments on millions of home loans. It could also be a huge blow to government-sponsored mortgage finance companies Fannie Mae (FNM) and Freddie Mac (FRE, Fortune 500), which are major buyers of Countrywide's loans.
For the first nine months of 2007, Countrywide was the largest U.S. mortgage lender, while Charlotte, N.C.-based Bank of America ranked fifth, according to Inside Mortgage Finance.
A Bank of America-led buyout is "the one and only hope that (Countrywide) has" to avoid bankruptcy, said Sean Egan, managing director of independent ratings firm Egan-Jones Ratings Co. Egan-Jones warned earlier this week that Countrywide could "falter" unless it receives an infusion of $4 billion in capital within the next two weeks.
A combination of Bank of America and Countrywide would require approval from the Federal Reserve, and possibly other agencies. Banking regulators declined to comment on the reports.
Federal law bars banks from making acquisitions that would increase a bank's market share to 10 percent of U.S. deposits, and Bank of America is nearing that point at 9.88 percent. However, experts disagreed about whether deposits held by Countrywide's federally regulated thrift, Countrywide Bank, would count toward that limit.
In addition, banking industry experts say Bank of America could easily lower the total amount of money held in deposits by lowering interest rates and losing deposits to competitors.
It wasn't clear how quickly a deal might be struck for Countrywide, which has been roiled this week by rumors that a bankruptcy filing was imminent. The Journal reported that negotiations between the two companies could fall apart.
Bank of America, which took on a 16 percent stake in Countrywide over the summer, said it does not comment on market rumor or market speculation. Countrywide did not return calls or e-mails seeking comment.
Countrywide (CFC, Fortune 500) shares climbed $2.63, or 51.4 percent, to close at $7.75 Thursday, while Bank of America (BAC, Fortune 500) shares rose 56 cents, or 1.5 percent, to $39.30.
Countrywide's stock plummeted in recent days to record lows amid intensifying anxiety among investors over a continuing surge in defaults and foreclosures afflicting the Calabasas, Calif.-based lender and others in the mortgage industry. Last August, the mortgage lender drew on an $11.5 billion line of credit to steady itself.
Bank of America aided Countrywide by buying $2 billion in the form of nonvoting, convertible preferred stock. The shares can be converted into common shares of Countrywide at $18 per share. If Bank of America should convert the shares, it would hold between 16 percent and 17 percent of Countrywide shares.