B of A acquires a stomach ache

Implications: While on paper the acquisition versus the valuation of loan servicing looks good, the reality is a whole mess of operational and regulatory risk. The Countrywide CIO was just announced leaving for FIS (Fidelity) and the state of the art systems was one of the selling points in the acquisition. An asset sale will probably be the answer.

Analysis: 1. Potential increase in defaults against portfolio loans.
2. Potential rising for class action suits based on lending and securities issues.
3. Potential for talent flight at countrywide.
4. lack of in depth expertise on sub-prime at BOA, they dropped sub prime a while ago.
5. Existing staffing issues at Countrywide servicing
6. Legislative initiatives.
7. The lack of profitable channles to originate loans. The whole sale channel is not viable right now and closed, that leaves the retail originating a narrow margin fannie and freddie product. The big margins supporting the retail expansion was the sub-prime.

I know that the systems there are not that great, when a loss mitigation specialist gives an extention number to call back and when you do there is no place in the call sequence to input the extention and you therefore go through the usual phone tree. Something defaulted borrowers will not be inclined to do more than once. The other question is the valuation at 150 basis points.  Most of this paper is conforming at 25 basis points and I do not believe the average life is going to be 6 years even with the decrease in pre-payment speeds. The non0conforming portfolio is at 50 bps of servicing fee but also has accelerated advances and now a large portfolio of unsold loans to take on balance sheet.