by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
Countrywide (CFC) has been acquired by Bank of America. This should come as no surprise to Bloodhound readers; we discovered the weakness at CFC last Spring and speculated about the price last Summer. Robert Kerr, Matt Heaton, and Bob Wilson, all Bloodhound readers, tipped me off to conjecture, asked all the right questions, and provided insightful commentary as I chronicled the descent; it was a demonstration of the power of weblogging. The Bloodhound community got this story correct while Wall Street was still starry-eyed about the strength of the “Mozilo franchise”.
Stock picking is not our mission at Bloodhound; industry analysis is. The Countrywide acquisition will be a nightmare for Bank of America (BA) for one simple reason- they really don’t know the mortgage business. BA is a bank, and a damned fine one at that. Their grew their asset base by acquiring regional banks. Bank of America is not and will probably never be a real player in the residential real estate finance arena.
Why? They’re bankers. It’s a cultural thing. Bankers react while brokers (Wall Street) create. Bankers imitate while brokers innovate. Let me give you some examples:
- BA lauds it’s Teacher Flex and Neighborhood Advantage programs as innovative thinking. The not so secret reason is that these loan programs were REACTIONS to the NCNB merger; NCNB had a less than enviable lending record in lower-income census tracts. The creation of those loan programs was a direct response to mandates imposed upon BA. BA was dragged, kicking and screaming, into the “homeownership mandate”.
- BA botched their sub-prime mortgage product line. They entered a business they didn’t understand and sold it at the worst possible time.
- Bank of America alienated over half of the retail origination channel when it cut off mortgage brokers. I think they bought CFC to shore up their weak retail origination business. That will fail, also. The cultural divide between these two companies is huge.
Here’s the dirty little secret for REALTORS; BA is not your friend. They have been the driving force behind the measure to enter your business. While they’re failing in their legislative pursuits, they’re attempting it in the online world. MLS searches, property valuations, and a network of real estate brokers prove that BA is going to attempt the disintermediation play sooner than later. While Russell Shaw didn’t find the smoking gun, his Columbo-like approach will eventually reveal that all roads lead to Charlotte.
Why am I bagging on this deal? It doesn’t solve problems. Today, mortgage financing is controlled by federally-chartered banks. The arrogance exhibited by those banks is nothing short of astounding. In one e-mail, a bank defended their bully tactics by saying “Quite frankly, with all the lenders going out of business, we can afford to take an aggressive stance“. That’s not solving problems, it’s perpetuating them.
…and arrogance always loses… always.
BA is buying problems with this CFC acquisition. The CFC sales force will not mesh well with the button-downed arrogance the BA crew exhibits. My prediction? CFC originators flee the newly-formed entity in droves during 2008. Mortgage brokers will reject the new entity because of their lousy customer service.
Who’s perfectly positioned to benefit from this exodus? Why, Wells Fargo, of course.
Wells Fargo, the mortgage lender disguised as a federally-chartered bank.
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Neal Bloom says:
I have an A loan with them and quite frankly have done business in the past with Bank America…I would never give them anymore business the way they treated me..I just hope this merger won’t affect my loan.
January 11, 2008 — 11:23 am
Jeff Belonger says:
Brian…. you make some excellent points. I agree that this is not a great fit. I think the acquisition does help to curb fears in the market place. But is this just a band aide that will fall off or break? Overall, I think you bring up some excellent insight.
January 11, 2008 — 11:28 am
Lenn Harley says:
I have to agree. I believe that BA is trying to leverage their insane $18 a share investment in CWF last year. Stock averageing makes sense for stock. It doesn’t make any sense to buy a dying behemoth with the baggage that comes with Countrywide.
Best to have simply let it die.
January 11, 2008 — 11:37 am
Bob in San Diego says:
BofA bought CW for a few reasons.
1. CW has the loan gig down cold. They are betting that the back end ops help them compete with Wells. Not sure how many will leave because I’m not sure where they will go.
2. BofA is near the 10% cap on deposits. Because CW’s bank is a thrift, the cap doesnt come into play and BofA can grow deposits there.
3. Stability. The Feds wont bail out CW during an election year, but a CW failure would be a critical blow to Fannie and Freddie. With $1.5 trillion in assets, BofA is the one entity that can absorb the loss.
The competition hates this deal, but they need it. They’ll trade BofA growth for their own survival.
my 2 cents.
January 11, 2008 — 12:16 pm
Bob in San Diego says:
>BofA is the one entity that can absorb the loss.
One caveat to that statement. Wells could do this, but a) Buffet wouldn’t and b)the industry doesn’t want Buffet to do it if he was so inclined.
January 11, 2008 — 12:37 pm
Bob in San Diego says:
>Mortgage brokers will reject the new entity because of their lousy customer service.
Brian, with BofA stance on wholesale, isn’t this a case of “you can’t fire me, I quit”?
January 11, 2008 — 12:49 pm
Brian Brady says:
“Brian, with BofA stance on wholesale, isn’t this a case of “you can’t fire me, I quit”?”
Explain, please.
January 11, 2008 — 1:33 pm
Bob in San Diego says:
It doesn’t matter what the brokers think. BofA will shut down CW’s wholesale just as they did their own.
Here is an analysis that jives with my own. Why the Countrywide deal makes sense
January 11, 2008 — 1:57 pm
Brian Brady says:
Oh, I see your point, Bob. The answer to your first question is no. BofA doesn’t understand residential real estate finance; that will be their downfall.
Here’s the problem with the article you cited:
BA isn’t a competitor; they’re a gobbler. Gobblers get fat. The MBS markets aren’t dead; they’re ailing. All it will take is one brave entrepreneur with a little bit of securities savvy to knock them on their butt (in the marketplace).
I’m guessing we’ll see that upstart by Labor Day. Ken is in over his head with this one.
January 11, 2008 — 2:18 pm
Brian Brady says:
Todd’s article shows his utter disdain for the broker-centric world lending was these past 10 years. While his article points out all the bad in the mortgage industry, it ignores all of the good things CFC accomplished.
Todd, the good ol’ days weren’t all that good. Less options are generally poor for consumers.
To all- I’ll ask the unpopular question; Weren’t things better for consumers 2 years ago?
My answer is, “Absolutely”. One less option drives prices up for the consumer.
January 11, 2008 — 2:22 pm
Bob in San Diego says:
That may be the case.
In the meantime, this still pumps some sense of security into the market by averting the collapse of a major lender. Even perceived security helps Main Street these days.
WaMu is next. It should be fun to watch Buffet school Lewis on how to buy, gut and cash out on a downtrodden company via the tax code.
January 11, 2008 — 2:29 pm
Robert Kerr says:
BofA bought CW for a few reasons.
All good reasons.
BUT … judging by CFC’s most recent foreclosure and delinquency rates – and where they appear to be headed – it sure looks like BofA has just thrown good money after bad.
Back in August, (to some people) Ken Lewis Lewis looked like a financial genius for getting $18 options in return for a $2B life vest.
The financial mags bragged: “$400M in guaranteed profits!” In just four months, that’s changed into a $2B loss.
Soon to be a $6B loss, I expect.
January 11, 2008 — 2:45 pm
Brian Brady says:
FWIW, the first paragraph of this article is the most interesting. Thanks to Robert and Bob for the tips along the way; you and Matt Heaton were the real co-authors of this series.
On to the next chapter
January 11, 2008 — 3:22 pm
Brian Brady says:
“In the meantime, this still pumps some sense of security into the market by averting the collapse of a major lender. Even perceived security helps Main Street these days.”
Agreed.
“WaMu is next. It should be fun to watch Buffet school Lewis on how to buy, gut and cash out on a downtrodden company via the tax code.”
Agreed, again.
January 11, 2008 — 3:24 pm
Brian Brady says:
“BUT … judging by CFC’s most recent foreclosure and delinquency rates – and where they appear to be headed – it sure looks like BofA has just thrown good money after bad.”
Agreed, even more. The interesting angle is this, Robert:
I expect BA to sell CFC to the employees vis a vis a LBO in 2010…AFTER they realize that they don’t know how to make it work
January 11, 2008 — 3:26 pm
Kevin Tomlinson says:
Brian
I don’t understand the reason for your post, nor some of the comments here.
If BofA wants to buy CFC, who cares?
This just goes to prove my theory correct. All this housing doom will be spread across MANY broad shoulders, not just the flippers or the “victims” of the sub-prime (DON’T get me started on that one)and on and on.
The deflation of the real estate in general will be diced up between individuals, banks, flippers, developers etc.
I say great that BofA came in and bought Countryslide. They are now just going to throw some of THEIR money in to the pot.
You know what I say to all of this: “better them than me!”
On another note, let’s bring on this whole doom and gloom thing now! No band-aids, no last chance mortgages, no rate freezes—NADA!
Let the bleeding begin — the wounded markets can’t heal until all the infection is out.
I say bring it on already, no more analysis or predictions. If I have to read some geek’s prediction on the real estate or mortgage market one more time — well let’s just say it is a real waste of time to even read that stuff. Whatever will be will be.
As an agent, I have made more money now that the market is really starting to tank.
Hearing the news yesterday about the likelihood of WCI (developer) about to go under and the Countryslide info was better than any gift I ever received.
I get the feeling that the dam is about to break, do you?
January 11, 2008 — 9:17 pm
Brian Brady says:
Kevin,
First, it was great to see you in New York. We’re thinking more alike than differently. Here we go:
“If BofA wants to buy CFC, who cares?”
On the macro level, the merger provides less liquidity and competition to the markets. BA will fail because they are not innovators, they are imitators. We need more innovation moving forward in lending.
“Let the bleeding begin — the wounded markets can’t heal until all the infection is out.”
I think I said that I’d prefer to lose a limb rather than slowly bleed to death when saying exactly what you just said. We agree.
“I say bring it on already, no more analysis or predictions. If I have to read some geek’s prediction on the real estate or mortgage market one more time — well let’s just say it is a real waste of time to even read that stuff. Whatever will be will be.”
Dude? You just called me a geek! I thought we were buddies!
“As an agent, I have made more money now that the market is really starting to tank.”
Good. You deserve it. See ‘lost limb theory’ to see why you’ll make more. I won’t bore you with geeky analysis why.
“I get the feeling that the dam is about to break, do you?”
If the last 10 days are any indication, you are most likely correct with your prognostication (that’s geek-speak for YES)
The analysis can get boring to read (unless you’re a geek). This post is more a shout-out to the three other geeks (Kerr, Wilson, and Heaton) who contributed to the dead-on predictions about the demise and eventual rescue of CFC. If you go back and read the linked posts, much of what I wrote was prompted from tips and commentary from all three. We were accurate… almost to the dollar.
January 11, 2008 — 9:45 pm
Kevin Tomlinson says:
Brian
You’re kinda geeky — but the cool kind I admire.
My “on another note” was just random thoughts to you.
My hope is for all this to just “happen” already. In my opinion, the bubble burst in April 2005.
It NEEDS to get messier before it gets better.
January 11, 2008 — 10:03 pm
Kevin Tomlinson says:
Brian,
In response to your comment:
>>On the macro level, the merger provides less liquidity and competition to the markets. BA will fail because they are not innovators, they are imitators. We need more innovation moving forward in lending.
Dont you think that it may be a time to “get back to basics,” at least for a little while?
I admit not to knowing the mortgage business like you, but is it possible the Countryslide is in the pickle that it is in because of their “creativity?”
Just a thought.
January 11, 2008 — 10:15 pm
Apella says:
Brian,
I could not agree with you more on all your points. I also agree with Bob above – Tax you way to Wealth.
This is a good deal for BoA but a train wreck in the making… maybe that is why we love to watch so much. I really do think that there is hidden agendas in this deal for sure.
As you stated, BoA is not the realtors friend nor are they the friend of Wal-Mart or the mortgage industry any more then they were of the credit unions years ago.
I think they are buying a large pile of out of industry problems such as legal issues.
Thanks for the Great Post! Please keep up the Great Work!
January 11, 2008 — 10:44 pm
Brian Brady says:
“Dont you think that it may be a time to “get back to basics,” at least for a little while?”
Yes…and no but more no. Getting back to basics would be Countrywide circa 2003.
Ability to repay the loan is important…VERY important!
Residual income is a good measure, also.
Cash reserves are important- cash solves problems.
Credit scoring? Not as important as one might think.
The ARM resets are teaching us that foreclosures weren’t caused by them; stated income loans were the culprit.
When describing BA’s underwriting dept, I’ll risk sounding like Jim Cramer; They know nothing, NOTHING!!!
It’s time to turn the faucet on, a bit.
“It NEEDS to get messier before it gets better.”
Maybe but lending doesn’t need to be the cause of it.
January 11, 2008 — 11:38 pm
Kevin Tomlinson says:
lending will just be a part of the crash.
January 11, 2008 — 11:50 pm
Joe Dallorso says:
Hello Brian
I was just reading about the tax implications of the BA deal. BA is a prifitable company that will now aquire Countrywides loses & use them to off set BA income. Which raises the question….Is this partially funded by tax payers??
http://money.cnn.com/2008/01/11/news/companies/sloan_countrywide.fortune/index.htm?section=money_topstories
January 12, 2008 — 6:35 am
Austin Real Estate Guy says:
So is now the time bo buy Wells Fargo stock?
January 12, 2008 — 9:58 am
Brian Brady says:
Is this partially funded by tax payers??
Yes and No. They’ll buy “losses” which may or may not be offset against income. Had CFC gone bust, it would have created a capital loss for the shareholders which could have been offset against capital gains. It’s probably a non-event event but it makes good copy.
January 12, 2008 — 11:16 am
Bob in San Diego says:
The above statement should be BOLDED!!! That is dead on.
Beware the rule of unintended consequences.
It isn’t always necessary to make the patient sicker in order to aid the recovery.
Many expect, or want to see bubble markets like San Diego crash. It may. It may not. The floor here is tied to the tried and true rent vs own scenario, with the short term investment strategy throw out the window.
No single part of our industry is more innovative than the lending side. Once they come back with rational lending solutions, and we get back to being able to make the rent vs own argument with a straight face, we’ll have found the floor.
A CW failure makes the August angst seem like a celebration. The CW deal is a signal of solution based thinking, even though consolidation is feared as anti-consumer.
Buffet is the next player to watch. He plays the game differently than Lewis, but both play with one goal – profits. We need the mortgage industry to be profitable, or we all lose.
Absolutely. All bank failure rescues are funded by taxpayers. This one is just sugar coated and goes down easier.
January 12, 2008 — 2:31 pm
Brian Brady says:
“So is now the time to buy Wells Fargo stock?”
ANSWER: 1st sentence of the 2nd paragraph
This may give you an idea of what the industry looks like today:
http://tgalleg.typepad.com/my_weblog/2008/01/do-stock-prices.html
January 12, 2008 — 2:46 pm
Robert Kerr says:
FYI: Independently, Diana Olick has come to the same conclusions.
BofA/Countrywide Deal: Does It Mean More Loans Ahead?
January 12, 2008 — 9:57 pm
Robert Kerr says:
This whole discussion may have just become moot.
There’s an awful lot of talk on the street this weekend that BofA was not happy at all with CFC’s books and is backing out of the deal.
January 19, 2008 — 4:53 pm