Financials analyst Mike Mayo raises a provocative question this morning: Will Bank of America pursue bankruptcy protection for its troubled Countrywide unit?
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It makes a certain sense, Mayo argues in a research note, given that “most” of the bank’s “mortgage problems stem back to [its] acquisition of Countrywide, which originated 86% of [its] mortgage loans that are 60-plus days behind on payments.” He adds that B of A’s $20 billion in lost market capitalization — the amount by which its stock has depreciated since it announced plans to halt foreclosure proceedings in all 50 states in early October — “seems in excess” of what it paid for Countrywide.
Back in 2008, when paid $4 billion for the Southern California home lender, plus the assumption of its loan guarantees, it was seen as a vote of confidence for a struggling housing market. During the housing bubble, Countrywide issued one of every six U.S. mortgage loans; once combined with B of A, the new entity accounted for one out of every four.
But the intervening years have brought nothing but trouble, as unemployment, plummeting home prices, and market reversals sparked a wave of foreclosures — further damaging an already weak housing market and overwhelming home-lending operations with both paperwork and financial losses.
And now there’s the prospect of a putback crisis, in which mortgage-backed security investors could attempt to return poorly performing home loans to the firms that issued them in order to be made whole. J.P. Morgan , Ally Financial’s GMAC unit, and others could be targets, but because of its outsized market share, B of A is in the hottest seat of all. Industry estimates suggest that of the $55 billion to $130 billion in putback liabilities that could ensue, B of A will bear the single largest portion of that figure.
So, would filing for Chapter 11 protection for the Countrywide unit be a way to ringfence those liabilities? Maybe, says Mayo (who in his note acknowledges the “slim legitimacy” of the bankruptcy notion). After all, Countrywide is still a separate legal entity, contains a disproportionate share of the problematic home loans, and a bankruptcy filing could prove cheaper than the putback costs.
But bankruptcy lawyers are highly dubious. A Countrywide Chapter 11 filing would be “devastating” to B of A’s reputation, says one, raising deep questions about its ability to live up to its obligations and the extent to which the market could maintain confidence in it. And Countrywide’s structure could make it difficult, or even impossible, to put the unit into bankruptcy.
Maybe they’re distracted by the elections, but investors don’t seem to care much for this idea, either. B of A shares are down a little over 1% so far today. And a company spokesman declined to comment on the Mayo note.
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