Bank of America Leapfrogs to Top Spot

Bank of America's controversial acquisition of Countrywide Financial Corp. has created the nation's largest mortgage servicer, once again breaking barriers that seemed unlikely to be broken just a few years ago.

Before the deal, Bank of America serviced a little over $400 billion of home loans. Now, it's portfolio is nearly $1.9 trillion. (Long time industry leader Wells Fargo is now second, servicing $1.55 trillion of home loans in the second quarter.) On a pro-forma basis, Bank of America and Countrywide produced $96 billion of home loans together in the second quarter, before the merger was consummated, suggesting that the combined entity will have plenty of origination bandwidth to keep growing the portfolio.

Bank of America now expects the Countrywide acquisition to be "accretive" to earnings this year. In fact, during a conference call with investors and analysts, Mr. Lewis said Countrywide is "adding to the profits of Bank of America as we speak."

Mr. Lewis, now arguably the most important executive involved in the mortgage industry, said that Bank of America's results were "solid" despite a difficult operating environment.

But he did not downplay the continuing weakness in the housing sector, saying that home-equity credit quality has deteriorated faster and more deeply than anticipated.

He defended the bank's performance, noting that Bank of America remained profitable despite taking $3.62 billion of net charge-offs and adding $2.21 billion to its allowance for loan losses. Most of the additional credit costs are "directly tied to housing," including home equity, residential mortgage and homebuilder loans.

Mr. Lewis said he expects the decline in home prices to be "mostly over this year," though he said prices may continue to drop next year.

And like other lenders, Bank of America said it is actually benefiting from higher mortgage banking revenue, which contributed to the company's record high quarterly net revenue. Mr. Lewis said the combined company's consumer real estate headquarters will be in Calabasas, Calif., where Countrywide was based.

Bank of America has said that 7,500 jobs will be cut because of the acquisition. Bank of America expects to exceed original estimates for cost savings as a result of the merger. Previously, Bank of America said the combination would shave annual costs by $670 million, with those results being fully realized in 2011. Now, the estimates of annual cost savings are pegged at $900 million.

The cost savings are estimated to equal 13% of the combined consumer real estate and insurance cost base.

There are still concerns, of course. Investors wonder how deep the losses on Countrywide's $110 billion home loan portfolio will be. Bank of America expects Countrywide's credit losses to total about $19 billion. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/

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