(Corrects credit-default swaps in the last paragraph of a story originally published Jan. 11.)

Jan. 11 (Bloomberg) -- Bank of America Corp., the biggest U.S. bank by market value, agreed to buy Countrywide Financial Corp. for about $4 billion, taking over the largest mortgage lender during the worst housing slump in more than two decades.

Bank of America will acquire Countrywide for about $7.16 a share in stock, the Charlotte, North Carolina-based company said in a statement today, 7.6 percent less than the previous day's closing price. The bank will become the nation's dominant home lender, originating one of every four mortgages, and extend the company's lead over Citigroup Inc. in U.S. deposits, where Bank of America already controls almost 10 percent.

Ken Lewis, Bank of America's chief executive officer, is doubling down on the U.S. mortgage market as home sales fall for a third straight year, the worst streak since 1982. The takeover of Calabasas, California-based Countrywide increases Bank of America's dependence on the slowing domestic economy, where it gets more than 85 percent of its revenue, and follows a $2 billion investment in Countrywide last August.

``I hope Bank of America isn't throwing good money after bad,'' said Eric Schopf, a fund manager at Baltimore-based Hardesty Capital Management LLC, which invests almost $700 million and owns 216,000 Bank of America shares, in a Bloomberg TV interview. ``They struck a deal that wasn't very attractive. Hopefully they can get it right the second time around.''

Countrywide stock fell 18 percent in 4:17 p.m. New York Stock Exchange composite trading to $6.33, after soaring 51 percent yesterday when the Wall Street Journal reported the negotiations. Bank of America lost 80 cents to $38.50 and set a four-year low of $37.16 during the day.

Expanding Mortgages

Lewis said last month he preferred to expand his company's mortgage business internally and that any purchase would have to be ``pretty compelling.'' Countrywide, founded in 1969 by Chief Executive Officer Angelo Mozilo, gives Bank of America about 9 million borrowers to whom it can sell other products, and fees from servicing $1.5 trillion of mortgages.

Countrywide's market value has plummeted 85 percent to $3.66 billion during the past 12 months as the lender reported its first quarterly loss in 25 years. Lewis has said the U.S. housing slump probably won't bottom until mid-2008.

``There are near-term challenges, but where there are challenges, there are always opportunities,'' Lewis said during a conference call today. ``We view this as a one-time opportunity.''

Charges Ahead

Adding Countrywide's $209 billion in assets to Bank of America's $1.6 trillion would leave the combined companies second in size to Citigroup, which had $2.35 trillion in assets as of Sept. 30.

The transaction will result in a $1.2 billion restructuring charge as Bank of America cuts the expenses of the companies' mortgage units by 11 percent. Bank of America plans to issue about $2 billion in capital, Chief Financial Officer Joe Price said.

Declines in the value of home loans held by Countrywide and pending litigation are reflected in the purchase price, Lewis said. While the housing market will weaken this year and the market for buying home loans remains ``fragile,'' Bank of America expects to gain market share, Lewis said. The combined companies will handle 25 percent of U.S. mortgage originations and a 17 percent share of servicing, which involves billing and collections. No government financial support was provided for the transaction, Lewis said.

Avoiding `Cocaine'

The combined company won't make subprime loans and will limit its purchases of large packages of loans from other lenders, Lewis said.

``I don't like the cocaine of large bulk purchases,'' he said.

Mortgages to people with weak credit contributed to a surge in defaults last year. Bank of America, Wells Fargo & Co., and other big mortgage lenders have reduced their loan purchases from independent mortgage brokers, citing credit concerns.

``There's a tendency for people to underappreciate the risk of the housing market,'' said Robert Shiller, an economics professor at Yale University in New Haven, Connecticut, and co- creator of the S&P/Case-Shiller Price Indexes. ``I might have a lower valuation of Countrywide than Bank of America does.'' He later said in an interview today that ``the housing situation continues to worsen and it's not as surprising to me as it is to other people.''

The purchase, expected to close in the third quarter, will add to earnings beginning in 2009, Bank of America said. Savings resulting from the combination will be about $670 million, with about a third of that coming next year, the bank said.

Credit Review

Bank of America's financial strength rating is under review for a possible downgrade because of integration, litigation and mortgage value challenges, Moody's Investors Service said today. Moody's affirmed the bank's short-term ratings.

Countrywide's lending practices are under investigation by attorneys general in California and Illinois, while the Securities and Exchange Commission is looking into potentially improper trading by Mozilo and other company officials, according to a person familiar with the matter.

The acquisition was criticized as a bailout that doesn't help individual borrowers in separate statements by the Service Employees International Union and the Rev. Jesse Jackson, president of the Rainbow PUSH Coalition. Curbing growth of the biggest U.S. banks should be a bigger priority than saving Countrywide, the 1.9 million-member SEIU said in a statement.

Bank of America was sitting on a potential loss of about $1.3 billion from its $2 billion investment last August in Countrywide before reports of an impending sale boosted the mortgage lender's stock yesterday.

Preferred Stock

Countrywide sold preferred stock to Bank of America in August to bolster its finances amid what Mozilo called the worst housing slump since the Great Depression. The stock offers a yield of 7.25 percent and is convertible into common shares at a price of $18, 57 percent above yesterday's closing price.

Mozilo, 69, will stay until the sale is completed, said the 60-year-old Lewis, who plans to meet with Mozilo next week. Mozilo probably will ``want to have some fun'' after the deal closes, Lewis said. Mozilo's contract may entitle him to a package as high as $83 million, according to compensation consultant Brian Foley.

Bank of America will need to write down the value of Countrywide's $209 billion in assets by as much as 10 percent, or $20 billion, because of lower housing values, said Sean Egan, managing director of Egan-Jones Rating Co., a Philadelphia credit rating company.

``The $4 billion paid to the shareholders is a minor part of the overall transaction cost,'' Egan said.

Housing Outlook

The worsening housing market makes Bank of America's timing questionable, said Kyle Bass, a portfolio manager at Dallas- based hedge fund Hayman Capital Partners LP, which manages more than $2 billion.

``The collateral for their loans is depreciating at over 20 percent a year, losses are spiking and there's a big potential `fat tail' to Countrywide's legal liabilities,'' he said. Hayman sold Countrywide's shares short recently and has started betting against Bank of America's stock and bonds, Bass said.

Bank of America was advised in the transaction by Banc of America Securities and the law firms of Cleary, Gottlieb, Steen & Hamilton LLP and K&L Gates. Countrywide was advised by Sandler O'Neill & Partners LP and Goldman Sachs Group Inc. Wachtell Lipton Rosen & Katz was Countrywide's legal adviser.

Cash Crunch

Rising defaults among subprime borrowers blocked Countrywide from its traditional sources of capital in the credit markets. More than 100 mortgage companies halted loans, closed or sold themselves last year. Credit losses and writedowns tied to the collapse of U.S. mortgage markets at the world's biggest financial companies now total about $100 billion, according to data compiled by Bloomberg.

Countrywide may represent the opportunistic deal-making that turned regional bank NCNB Corp., which Lewis joined as a credit analyst in 1969, into the most valuable U.S. bank. He was former Bank of America Corp. CEO Hugh McColl Jr.'s Texas point man in 1988 after the government-assisted rescue of failing First Republic Bank, the largest bank in the Lone Star State.

The takeover of Countrywide is a fraction the size of previous deals engineered by Lewis, including the $48 billion purchase of FleetBoston Financial Corp. in 2004 and $35 billion acquisition of credit-card lender MBNA Corp. in 2006.

Investment Bank

Lewis is still grappling with fallout from the 93 percent drop in third-quarter profit at the company's investment-banking unit. He cut 500 jobs, ousted the head of the unit and vowed to scale back risk. Consumer banking accounts for about half of Bank of America's earnings.

Countrywide's market value fell below $3 billion this week for the first time in a decade amid renewed concern that the company was going bankrupt, a rumor the company denied. The speculation may have driven Countrywide's price down to an attractive level, said Robert Pardes, the former head of OceanFirst Financial Corp.'s Columbia Home Loans unit in New Jersey, which closed last year.

``It is an absolute opportunity for Bank of America to acquire an infrastructure they admire, including Countrywide's great technology, and, at these levels, it's mitigating most of the asset issues,'' he said.

Countrywide traded as high as $45.26 last January and the workforce peaked at 61,586 in July before declining 18 percent to 50,600 at the end of 2007. Monthly loans, which set a record at $53 billion in August 2005, have averaged about half that amount for the past four months.

At the end of 2007, more than 7 percent of payments in the company's $1.5 trillion servicing portfolio were more than 60 days overdue.

Looking Ahead

Bank of America may get relief from the 10 percent federal cap on the amount of deposits a bank can hold after a merger or acquisition. After the company bought ABN Amro Holding NV's LaSalle Bank unit last year, its share of U.S. deposits reached 9.88 percent, the Federal Reserve estimated.

Washington Mutual Inc., the largest U.S. thrift, rose as much as 7.8 percent today after CNBC reported it may be bought by JPMorgan Chase & Co., the No. 3 U.S. bank by assets.

The risk of Countrywide defaulting plummeted after the deal was announced. Credit-default swaps on the company fell to about 350 basis points, according to Phoenix Partners Group. Investors yesterday sought 7.25 percentage points upfront and 500 basis points a year for five years to protect Countrywide bonds. Contracts on Bank of America increased 9 basis points to 89.

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

Last Updated: January 14, 2008 09:08 EST