Lender proves to be a costly buy for Bank of America

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Countrywide Financial Corp. turns out to be a huge miscalculation as red ink keeps flowing. The bank added $20.4 billion this week in expected costs to the tally.

When Bank of America Corp. acquired mortgage giant Countrywide Financial Corp. three years ago this week, cementing BofA's position as a consumer banking leader, the purchase price was a measly $2.5 billion in stock.

But the real cost could easily be 10 to 15 times that amount after the home lender incurred huge losses under BofA's ownership and the bank agreed to pay billions of dollars to settle litigation over bad loans made by Countrywide during the housing boom. On Wednesday alone, the bank added $20.4 billion in expected costs to the tally.

The mounting numbers have made the acquisition of Countrywide one of the most misguided takeovers in the history of banking, analysts say.

"The worst by a mile," FBR Capital Markets analyst Paul Miller said — or at least the worst since he began following the industry in 1992.

When the Charlotte, N.C., bank agreed in January 2008 to buy Countrywide, the nationwide mortgage meltdown was well underway in the wake of surging defaults on subprime and other high-risk loans written by the Calabasas company and other lenders.

Shortly after the takeover was completed the following July 1, Kenneth Lewis, BofA's chief executive at the time, acknowledged that Countrywide's losses were running at the high end of what his staff had projected.

But because accountants had aggressively written down the value of Countrywide's assets before transferring them to BofA's books, Lewis predicted the combined home-loan business, consisting mostly of Countrywide's operations, would immediately show a profit — and could see huge earnings growth once the mortgage industry recovered.

Instead, the unit has bled about $16 billion in red ink since the Countrywide takeover — with no real industry recovery in sight.

The $20.4 billion in bad news disclosed Wednesday includes $8.5 billion in payouts to 22 institutional investors to settle demands that Bank of America repurchase bonds backed by Countrywide mortgages. An additional $5.5 billion is to beef up reserves for similar demands by other investors.

The bank also said it would record $6.4 billion in additional mortgage-related charges for the second quarter. That amount includes a $2.6-billion write-off of its Countrywide investment and expenses for revising its mortgage-servicing operations to comply with orders from the Federal Reserve and the Office of the Comptroller of the Currency, which regulates national banks.

The Fed and the comptroller's office were acting in response to revelations that Bank of America and other large mortgage servicers had cut corners in their handling of troubled borrowers, including "robo-signing" documents supporting foreclosures without having the signers actually verify the information.

A coalition of state attorneys general and federal officials are negotiating a separate, broader settlement of the foreclosure fiasco with Bank of America and four other big banks that are major mortgage servicers.

Those authorities, who began their investigation in October, met with the servicers last week but were unable to reach an agreement with the banks on the penalty they must pay, a spokesman for Iowa's attorney general said. Estimates of the total to be paid by the five banks have ranged from $5 billion to $20 billion.

BofA said the newly announced costs meant it would report a net loss of $8.6 billion to $9.1 billion for the second quarter, instead of a profit of $3.2 billion to $3.7 billion. Wall Street seemed to breathe a sigh of relief that things weren't even worse. Bank of America shares ended the day up 32 cents, or 3%, at $11.14.

The new Countrywide-related costs are in addition to these previously announced items, some of which contributed to the operating losses at BofA's mortgage unit since the takeover:

A 2008 settlement with California to cut payments by as much as $8.6 billion on mortgages that state officials said were abusive.

A 2010 accord to forgive as much as $3 billion in principal for severely delinquent Countrywide borrowers in Massachusetts who owed more on their mortgages than their homes were worth.

An agreement last year to pay $600 million to former Countrywide shareholders to settle a securities-fraud lawsuit.

An agreement in April to pay $1.1billion to mortgage insurer Assured Guaranty Ltd. related to losses on Countrywide loans.

More than $6 billion in payments to government-controlled loan buyers Fannie Mae and Freddie Mac to settle demands for buybacks of flawed home loans.

Bank of America can take some consolation, however small, in the fact that it paid for Countrywide entirely with BofA stock.

When it agreed to the deal in January 2008, those shares were valued by the stock market at $4 billion. When the transaction closed, their value had fallen to $2.5 billion as the global financial crisis had intensified. They are now worth about $1.2 billion.