Could The Foreclosure Crisis Push Countrywide Into Bankruptcy?

When Bank of America purchased Countrywide in 2008 for $4 billion it consolidated its power and dominance in the mortgage industry; but with the purchase came the many problems that has some speculating that BofA may put Countrywide into a Chapter 11 bankruptcy to protect the rest of its assets.

Credit Agricole Securities analyst Mike Mayo laid out the long-shot scenario in a research note this week. He contends Bank of America could put Countrywide Financial into bankruptcy protection to resolve the mounting mortgage losses.

Mayo sites three reasons why a Countrywide Chapter 11 bankruptcy is a real possibility:

  1. Countrywide is a separate legal entity from BofA, which protects BofA from many of the company’s foreclosure problems and would enable BofA to stay out of any bankruptcy it filed on behalf of Countrywide.
  2. Most of the foreclosure problems can be traced back to Countrywide mortgages.  At least 80 percent of the foreclosures with issues originated with Countrywide.
  3. And finally, filing a Chapter 11 bankruptcy for Countrywide could be the cheapest way to deal with the unfolding foreclosure problems that the company is facing.

What could happen in a Countrywide bankruptcy?  Well, first off, junior investors may lose the investments they made in the mortgages associated with the foreclosures.  Also, the company could negotiate settlements with its major creditors and minimize the damage coming from the foreclosure debacle. And while some analysts are saying that a Countrywide bankruptcy is unlikely because it could “damage BofA’s reputation” that view is not necessarily in line with the reality.  Right now many companies involved with the mortgage industry are turning to bankruptcy to survive and restructure debts that simply cannot be paid under the current economic conditions without the help of bankruptcy.