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HistoryCountrywide acquisition - not so smart
Bank of America bought Countrywide Financial (CFC) earlier this year and therefore has to deal with problems in the housing and credit markets. They spent $2 Billion on buying preferred shares of CFC. On the positive side, the deal came with preferred shares and a 7.25% coupon- nice work if you can get it. And, as preferred shareholders, BAC gets to belly up to the bar first if CFC goes BK, in which case it's widely presumed they'd grab off the lucrative CFC servicing arm.
Well, already those preferred shares have lost nearly half their original value, and most traders expect CFC to get a lot worse before it goes bankrupt. And the servicing arm? It's robust, but now threatened by the latest Treasury mortgage rescue initiative, the so-called "teaser freezer" that would (if CFC voluntarily agrees to it) freeze mortgage rate resets for a few years, a move that would put a substantial dent in the CFC servicing arm's profitability.
Furthermore, the credit markets are going to continue to see problems for a variety of reasons. Consumers are highly leveraged due to all the easy money that was lent out the last time interest rates dropped to very low levels so I don’t think the current drop in interest rates is going to help out much. At the same time, the prices of commodities are being driven higher and higher by speculators, which will do a lot of damage to consumers. Rising food prices and gasoline prices are definitely going to have an impact on overleveraged consumers’ ability to pay bills.
A number of houses are for sales and with rising foreclosures, this trend is definitely is set to rise.
