After the announcement that Bank of America would be acquiring struggling mortgage originator Countrywide Financial, market participants cheered that the deal was a step in the right direction for the troubled firm.

But while Bank of America's investment could sustain the nation's number one mortgage originator, many observers believe that integrating the mortgage platforms of both firms will naturally result in the elimination of redundant operations and jobs.

Some market participants speculated that the broker dealer side of Countrywide Financial is going to be dissolved in the integration process. In fact, there were plans for Countrywide to stop their broker dealer platform months ago, a market source said. "Once they did not really have an origination pipeline, the loans stopped going out. The guys in New York got slashed and a lot of the operation was trimmed," he said.

Goldman Sachs analysts echoed some of the market sentiment in a recent report that said that the bulk of the cost savings from the Countrywide acquisition can be generated from redundant operations. For example, a portion of Countrywide's bank expenses can be cut, and Countrywide's capital markets operations are likely to be scaled back significantly as any securitization activity can be largely run through Bank of America Securities, Goldman analysts said. Other sources are expecting that some employees of Countrywide's broker dealer business will be relocated to N.Y.

More Food to Feed the Beast

However, not all market participants were as bearish on Countrywide's prospects, adding that while issuance has slowed, some segments of the RMBS market are still creating new business for its broker dealer channel.

This includes the conforming loan sector and the Jumbo market, which is starting to come back, said Bert Ely, an independent banking consultant. "They have got the origination platform, they have got a certain processing capability in the origination area and [you have to ask] how quickly are they willing to walk away from the broker channel?" he said.

Bank of America will also have to part with some of its own operations in the transaction, including its mortgage division, others predict. "Bank of America's mortgage business, both their technology and operations, are going to go over to the Countrywide side," said Bart Narter, senior analyst at Celent. "Countrywide is a much larger organization."

One Countrywide business that is expected to remain intact during the integration is the servicing business, said the mortgage market participant. Countrywide has $1.5 trillion in 9 million loans in its servicing portfolio, according to the company's December 2007 operational results. "This is a very labor, knowledge, and system intensive business and leadership likes it so it can't really be relocated," he said.

However, the process of integrating the two servicing businesses could be lengthy outside of trying to account for losses.

"Everybody has different platforms, they can not just sling stuff together," Ely said. "Plus you have got all of the criticism that Countrywide has been taking on about how it has been handling mortgage modifications and the litigation issues there. This could easily be a two-year process."

Ely added that it is not just a question of how Bank of America manages Countrywide as the whole mortgage market goes through turmoil, but it is also about how they will integrate the existing Bank of America mortgage operations with Countrywide's. Who is going to run the show? At the same time, Bank of America is currently folding LaSalle Bank, which could slow the process down.

Accounting for Losses

Also potentially stalling the integration process will be the losses that Countrywide needs to account for. Last month, 6.96% of the loans in Countrywide's servicing portfolio were delinquent, this was up from 5.02% in December 2006, as reported in its December 2007 operational results. Loan delinquencies as a percentage of unpaid principal balances were at 7.2% in the beginning of the month. Meanwhile, 1.04% of its mortgage loans serviced were pending foreclosure.

The potential losses are part of the reason Bank of America got such a huge discount on Countrywide. "They are getting Countrywide for a fraction of book value, so that is including liabilities," Celent's Narter said. There is even some speculation in the market that the price may be negotiated down even further.

For its part, Bank of America has already started making cost cutting adjustments internally, though a spokesman for the company said that the changes were not related to the acquisition. Last week, the bank announced that it is reducing its activities in certain structured products such as CDOs, selling its equity prime brokerage business as well as resizing its international platform to emphasize strengths in debt, cash management, and trading, which includes rates and foreign exchange. The bank also announced that it will slash 650 jobs in its global investment bank and global markets.

(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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