May 5 (Bloomberg) -- Countrywide Financial Corp., the largest U.S. mortgage lender, declined the most in two months of New York trading after Friedman, Billings, Ramsey & Co. said Bank of America Corp. should abandon its takeover.

Bank of America, the second-biggest U.S. bank, may have to write down the value of Countrywide's loans by as much as $30 billion because of declining home prices, analyst Paul Miller of Friedman, Billings said in a report today. He cut his rating on Countrywide to ``underperform'' from ``market perform'' and lowered his price target to $2 a share from $7.

``Bank of America should completely walk away from the Countrywide deal, as Countrywide's loan portfolio will prove a drag on earnings and could force Bank of America to raise additional capital,'' Miller wrote.

Countrywide's credit rating was cut to junk on May 2 by Standard & Poor's, which cited doubt about whether Charlotte, North Carolina-based Bank of America will back the home lender's debt after a pending takeover. The action squelched expectations among bond owners that their holdings would become more secure after Bank of America buys Countrywide, and raised questions about whether the $4 billion stock-swap will be completed.

``The transaction is on track to close in the third quarter as agreed to,'' said Robert Stickler, a spokesman for Bank of America, in a telephone interview today.

Share Declines

Countrywide trimmed its loss for the day to 62 cents, or 10 percent, to $5.36 in 4:15 p.m. New York Stock Exchange composite trading, after plunging as much as 17 percent. Bank of America lost 2.1 percent to $38.97.

Bank of America will probably renegotiate the deal to $2 a share or less, from the $7-a-share price the companies agreed to in January, Miller said. The last four analysts to make price targets on Countrywide before Miller had an average of $6.63, according to Bloomberg data.

Countrywide spokeswoman Jumana Bauwens didn't return a telephone message.

Bank of America has named Countrywide's president, David Sambol, to run the companies' combined mortgage businesses. Countrywide, based in Calabasas, California, posted an $893 million loss in the first quarter, its third straight quarterly deficit, because of rising losses on its loan portfolio.

`An Opportunity'

Countrywide Chief Executive Officer Angelo Mozilo, who co- founded his company in 1969, reached out to Bank of America about a takeover after the home lender reported a record $1.2 billion loss in the third quarter. ``It's an opportunity that came to us. We didn't seek it,'' Bank of America CEO Kenneth Lewis said in January at a meeting with reporters.

Bank of America has declined about 0.8 percent since Jan. 10, the day before announcing the purchase. Countrywide has dropped about 31 percent.

Countrywide shareholders would receive 0.1822 of a share of Bank of America for each Countrywide share under terms of the sale.

Countrywide traded as low as $3.95 on March 17, its lowest level since 1995, as investors questioned Bank of America's commitment to the transaction amid the worst U.S. housing decline in more than two decades. Shares rebounded as high as $6.48 on April 2.

Home Prices

Bank of America considered likely declines in home prices and risks from lawsuits when it decided to make the purchase, Lewis said at the company's April 23 annual meeting. Several investors asked him to call off the Countrywide purchase at that meeting.

``Countrywide's loan portfolio has deteriorated so rapidly that Countrywide currently has negative equity and the acquisition will be a drag on Bank of America's earnings,'' Miller said in today's report.

Bank of America said in an April 30 regulatory filing it may not guarantee $38.1 billion of Countrywide's debt, fueling speculation that bondholders face a higher risk of default. ``There is no assurance that any such debt would be redeemed, assumed or guaranteed,'' the bank said.

The statement meant Bank of America hadn't made a decision, Stickler said.

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

Last Updated: May 5, 2008 17:17 EDT