June 5 (Bloomberg) -- Bank of America Corp., the biggest U.S. consumer bank, won Federal Reserve approval to acquire Countrywide Financial Corp., the nation's largest home lender.

The regulator cleared the way for the stock swap, originally valued at about $4 billion, in a statement today. Taking over Countrywide would give Bank of America about a quarter of the U.S. mortgage market.

Bank of America has dropped 17 percent since the takeover was disclosed in January on concern about the deepening U.S. housing slump's impact on Calabasas, California-based Countrywide, which ran short of cash last year. Writedowns of $10 billion to $12 billion tied to Countrywide's home loans are likely, Merrill Lynch & Co. analyst Edward Najarian said in a report yesterday.

``If Ken Lewis pulls the trigger on Countrywide, he's going to lose his job,'' Christopher Whalen of Institutional Risk Analytics, a Torrance, California-based research firm, said in an interview today. ``It's so early in the cycle of this housing downturn, you almost know that they are going to go wrong.''

Kennedy Thompson lost his job as chief executive of Wachovia Corp. this week in part because of losses caused by a $24 billion acquisition in 2006 of Golden West Financial Corp., another California-based home lender.

Lewis told investors earlier this week during a conference call that his bank will come out ahead even if home prices drop more than Bank of America's estimate of 15 percent this year and 10 percent in 2009.

Market Share

``Mortgages continue to be a key consumer product for Bank of America, serving as a driver for adding new customers and deepening relationships with existing ones,'' Lewis said in a statement today. ``This transaction represents a rare opportunity for Bank of America to significantly gain market share in the mortgage business.''

Bank of America, which is based in Charlotte, North Carolina, expects the transaction to be completed in early July.

The combined companies would have deposits of $773.4 billion, or 10.9 percent for the whole U.S., the Fed said in its order. A U.S. regulatory cap of 10 percent doesn't apply to the transaction because Countrywide operated as a federal savings association, not a bank, according to the order.

Loss Assumptions

Countrywide, co-founded in 1969 by Chief Executive Officer Angelo Mozilo, gives Bank of America about 9 million borrowers to whom it can sell more products, and fees from servicing $1.5 trillion of mortgages. Declines in housing prices and pending litigation are reflected in Bank of America's bid, Lewis has said.

Bank of America agreed to stop making subprime loans and ``nontraditional mortgage products that may result in negative amortization,'' the Fed said. The bank also pledged to provide sufficient resources to assist late-paying customers who are at risk of losing their homes to foreclosure.

Subprime loans are made to people with the worst credit and have been blamed for helping to trigger a worldwide rise in debt defaults. Lawmakers and regulators have said Countrywide added to the problem by lowering its lending standards and then not doing enough to help people keep their homes when they fell behind on payments.

The Fed said it considered the Community Reinvestment Act performance of the two companies, noting that Countrywide received a ``low satisfactory'' rating in its last evaluation in 2004. Bank of America received an ``outstanding'' rating in its 2006 evaluation, the Fed said. The act sets standards for how banks serve the communities in which they operate.

To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net

Last Updated: June 5, 2008 18:38 EDT