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Bank of America buys Countrywide | Bank of America buys Countrywide |
(10 minutes later) | |
US banking giant, Bank of America, is to take over the country's biggest mortgage lender, Countrywide Financial, in a $4bn (£2.04bn) deal. | |
Analysts said the deal had thrown a lifeline to Countrywide, which had been rumoured to be on the verge of applying for bankruptcy protection. | |
The firm had been hit by the recent severe downturn in the housing market. | |
Countrywide saw a 44% drop in home loan volumes in December and its highest level of foreclosures since 2002. | |
'Beneficial deal' | |
It's naive to think we're at the end of the process in terms of recognising losses from the mortgage crisis Rick Meckler, Libertyview Capital Management | |
Nancy Bush, banking analyst at Nab Research said: "This takes out a major point of uncertainty in the industry. | |
"It's certainly good for financial stocks overall. It's a tremendous beneficial deal for the whole financial services industry." | |
But Rick Meckler, president of investment firm Libertyview Capital Management, said: "The negative side is that Bank of America needed to step in, and there's still a lot of value lost by Countrywide shareholders. | |
"(Also) it's naive to think we're at the end of the process in terms of recognising losses from the mortgage crisis." | |
Key issues | |
In August, Bank of America had invested $2bn in Countrywide, which was a key participant in the sub-prime mortgage market. | |
Sub-prime lenders gave loans to those with poor credit records or unpredictable incomes. | Sub-prime lenders gave loans to those with poor credit records or unpredictable incomes. |
During the housing boom, a huge number of people took out mortgages to take advantage of lower borrowing costs. | During the housing boom, a huge number of people took out mortgages to take advantage of lower borrowing costs. |
But with US interest rates climbing over the past two years, many borrowers have been unable to repay their monthly loans, prompting huge defaults and repossessions. | But with US interest rates climbing over the past two years, many borrowers have been unable to repay their monthly loans, prompting huge defaults and repossessions. |
Under the terms of the deal, Countrywide shareholders will receive 0.1822 of a Bank of America share for each Countrywide share. | |
The deal values Countrywide at $7.16 a share, down 7.6% on Thursday's closing price. | |
The bank says it expects to make after-tax savings of $670m from the combined company by 2011. | |
In a statement after the takeover deal was announced, Bank of America chief executive Kenneth Lewis said: "We are aware of the issues within the housing and mortgage industries. The transaction reflects those challenges." |