Bank Of America's Mortgage Makeover

By Gregory S. Davis | August 28, 2008 AAA

The completion of the Countrywide bank acquisition is raising questions for Countrywide customers and potential Bank of America (NYSE:BAC) investors. Countrywide customers are curious to know when and if Bank of America will begin pushing its retail products/services on them. Investors are wondering if Bank of America's decision to acquire a mortgage lender was the right move while credit markets are tight and new home purchases are slumping.

New Look for an Old Bank
Bank of America becomes one of the country's leading mortgage lenders with the completion of the acquisition. Countrywide logos are still being used, but this topical appearance is expected to change in the future. The combined consumer mortgage division will not begin originating mortgages and home equity loans until mid-2009.

Mortgages Changes

(Exotic mortgages allow you to decide how much to pay, but they may cost more than expected. To learn more, read American Dream Or Mortgage Nightmare?)

The measures being taken are meant to help Bank of America avoid exposure to risky loans that could lead to default (non-payment) by mortgage holders. Countrywide's inability to sell loans to housing government agencies like Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) along with other mortgage backed securities compounded the mounting problems for the mortgage lender along with slowing residential housing sales and tightening credit markets. The combination of these problems led to the acquisition of Countrywide by Bank of America.

Why the Merger is a good fit for Bank of America
Bank of America Chairman and CEO Kenneth D. Lewis identified the three cornerstones of consumer financial services as deposits, credit cards and mortgages. Although Bank of America's total non-interest income dropped 21% for the first six months of the year ending June 30 as compared to the previous year, its card income and service charges on deposits increased slightly.

Losses tied to collateralized debt obligations were the main cause for the drop in non-interest income during the period. Revenue from mortgages could be the third cornerstone of Bank of America's business model to keep it profitable during economic downturns.

Final Thoughts
Bank of America plans to respect the wishes of existing customers who don't want to be contacted for additional services the bank can provide. The true impact of the Countrywide acquisition decision will not be realized in the immediate future, but at least Bank of America has a better understanding of how not to operate its mortgage business for when its consolidated unit goes live next year.

To learn more on what caused this financial crisis, be sure to read our related article Subprime Lending: Helping Hand Or Underhanded?

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