July 1 (Bloomberg) -- Bank of America Corp. will buy Countrywide Financial Corp., the home lender battered by the collapse of the subprime mortgage market, for about $2.5 billion, 37 percent less than originally planned.

The second-biggest U.S. bank by market value agreed in January to acquire Countrywide for $4 billion in stock amid speculation the Calabasas, California-based home lender might go bankrupt. The price declined as foreclosures rose to a record and shares of both companies dropped. Bank of America fell 21 percent in New York Stock Exchange trading during the past two weeks.

As Bank of America of Charlotte, North Carolina, completes the deal today, Chief Executive Officer Kenneth Lewis must prove that the benefits of being the No. 1 home lender in the world's biggest economy outweigh mounting defaults. Lewis has brushed off suggestions from analysts led by Friedman, Billings, Ramsey Group Inc.'s Paul Miller that he scrap the Countrywide purchase.

``The mortgage market is going to take a while to turn around,'' said Stuart Plesser, an analyst at Standard & Poor's who recommends clients ``sell'' Bank of America shares. ``Bank of America will be right in the thick of it.''

Bank of America shares fell 7 cents in early German trading today to $23.80, as home prices dropped and lawsuits surfaced against Countrywide. As shareholders were preparing to approve the deal on June 25, California and Illinois sued the lender for allegedly luring borrowers into risky loans they couldn't afford.

Washington Governor Christine Gregoire announced plans to fine Countrywide for alleged discrimination against minority borrowers and asked that the company's license to lend in the state be revoked. Florida Attorney General Bill McCollum sued Countrywide yesterday for allegedly deceiving customers.

`Negative Impact'

``There will still be some negative impact with associating Countrywide with Bank of America,'' said Eva Weber, an analyst at Aite Group LLC in Boston. ``From a reputation perspective, that's certainly something Bank of America will have to overcome.''

Countrywide's biggest challenge is its $27 billion pool of option adjustable rate mortgages, which let borrowers skip part of their payment and add the balance to their principal, said S&P's Plesser. Delinquencies on Countrywide's option ARMs totaled 9.4 percent at the end of the first quarter.

Integration of Countrywide is already underway, with Bank of America announcing plans to cut 7,500 jobs, or almost 3 percent of the combined staff of 259,000.

Mozilo, Sambol Out

Among those who won't be staying are Countrywide Chief Executive Officer Angelo Mozilo, 69, and President David Sambol, 48. The latter, originally named to run the combined mortgage operation, was replaced after his pay and Countrywide's lending practices drew criticism from regulators.

Bank of America also is discarding the Countrywide name, which has become an icon of the mortgage industry's boom and bust, and Countrywide's penchant for loans more prone to default, such as subprime mortgages.

What the bank gets is a leading market share, controlling about one out of every four new U.S. home loans and billing and collections on 17 percent of existing domestic loans. Adding Countrywide's $212 billion in assets to Bank of America's $1.7 trillion would leave the bank second in size to New York-based Citigroup Inc., with $2.2 trillion in assets.

Lewis, 61, envisions greater growth opportunities through dominance in the U.S., rather than venturing into global markets where the bank has limited expertise. The bank cites research by Boston Consulting Group showing U.S. retail-banking revenue will still dwarf all other nations in 2015 despite a slower growth rate than China, India and other developing nations.

10-Year Return

``If you're looking between now and 2010, yes, this is a riskier proposition,'' said Walter O'Haire, senior analyst at the Celent consulting firm in San Francisco. ``But if you look to 2018, then I think this might be seen as a great deal.''

Bank of America's decades of experience in acquisitions lessens its risks as it consolidates Countrywide, O'Haire said. The staff reductions announced June 26 probably underestimates the eventual cuts by as much as 50 percent, he said.

Buying Countrywide enables Bank of America to sidestep a 10 percent federal cap on market share and sets it up for more purchases, CreditSights Inc. analyst David Hendler said in a June 25 report. While the combined companies' deposits total almost 11 percent, the Federal Reserve approved the merger by counting Countrywide's bank as a savings institution.

If Bank of America increases its deposits at an annual rate of 4 percent for the next five years, earnings could rise by $1.9 billion to $3.7 billion a year, Hendler said. That would more than compensate for his ``worst-case scenario'' for writedowns on Countrywide's loans of $8.3 billion and as much as $2 billion in legal costs.

Miller of Friedman Billings is more pessimistic, estimating that Countrywide's losses may reach $30 billion.

To contact the reporters on this story: David Mildenberg in Charlotte, North Carolina at dmildenberg@bloomberg.net; Ari Levy in San Francisco at alevy5@bloomberg.net.

Last Updated: July 1, 2008 01:54 EDT