NEW YORK—A Friedman, Billings, Ramsey & Co. analyst said Monday Bank of America Corp. should walk away from its acquisition of mortgage lender Countrywide Financial Corp., or at the very least sharply reduce the purchase price.
Countrywide shares fell 8.2 percent to $5.49 in premarket trading.
FBR analyst Paul Miller said continued deterioration in the mortgage market, and weak pricing for nontraditional loans in the investment market, mean Bank of America would have to take between $20 billion and $30 billion in write-downs when it closes its acquisition of Countrywide. After the deal is closed, Bank of America would have to mark Countrywide's assets at fair value, which would likely lead to it reducing the value of Countrywide's mortgage holdings.
"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 in a research note.
In January, Bank of America agreed to acquire Countrywide for about $4 billion in an all-stock deal. The deal is supposed to close during the third quarter. Based on Bank of America's Friday closing price of $39.79, the deal values Countrywide shares at about $7.25.
Shares of Countrywide closed Friday at $5.98. Spreads that large typically signal substantial uncertainty in the market about whether a deal will close at all, or at the intended price.
Miller said if Bank of America renegotiates the deal, it is likely to acquire Countrywide for less than $2 per share.
On Thursday, Bank of America said it will not necessarily guarantee Countrywide's outstanding debt when it acquires the Calabasas, Calif.-based mortgage lender. Miller said that is likely the first sign Bank of America could renegotiate deal.
Miller cut his rating on Countrywide to "Underperform" from "Market Perform" and reduced his price target to $2 for the nation's largest mortgage lender.
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