"I don't see much effect," said CUNA's Bill Hampel. "Most bank mergers have a positive effect on credit unions because of the difficulties of combining retail cultures, but that doesn't apply in this case because Countrywide is mostly funded by deposits; it's a deposit-driven bank. BofA was already huge and Countrywide was in trouble already." Hampel read the big issue with this combination to be an assumption that this merger will correct what he called the "subprime debacle."

He offered the hope that government regulators had learned a hard lesson and having since strengthened lending standards would not allow a repeat of conditions that caused the American housing market to crash. "The subprime market–as we know it–simply won't exist in the future," he said.

Meanwhile, it's unknown just how BofA will run Countrywide, and Hampel wondered if it might be as a subsidiary. As to the number of credit unions that sell or refer member mortgage loans to Countrywide, he said that enough mortgage lending opportunities existed through CUSOs and other providers to satisfy needs. "I'm sure those credit unions will find someone else to refer mortgages to."

CUNA Mutual's Dave Colby allowed that regulators were caught between a rock and hard place. "What's the alternative, a Countrywide bankruptcy? At least this merger brings some stability to the mortgage market. And I'm sure BofA priced its bid according to the size of the risk it will take on. They are probably making a good deal for themselves."

Only NAFCU Chief Economist Tun Wai raised the issue of moral hazard–a condition in which business entities are rewarded for poor behavior by somehow evading consequences or getting a bailout of sorts (Countrywide CEO Angelo Mozilo is expected to receive a severance of $115 million). "The moral hazard of allowing an institution to do bad things and get away with it could send the wrong signal to the marketplace, and this has the appearance of doing just that." But Wai also stressed that the losses Countrywide was staring at and the ripple effect a bankruptcy would have on borrowers and investors as well as the financial services landscape likely convinced the Federal Reserve and the Office of the Comptroller of the Currency to approve the deal. "A bankruptcy might have led to a taxpayer bailout anyway," he said. Weighing the stability of the banking business against such potential failure and disruption had to be on the minds of government officials and regulators, Wai added. BofA made a $2 billion investment in Countrywide last August, and had to know the extent of potential losses through the due diligence process, a part of every such acquisition. Pending litigation against Countrywide was also a factor in determining the sale price.

Colby said he lacked any sympathy for borrowers who bought large houses (and got loans) by questionable means or overstating income, "and I don't feel sorry for investors either, because it was a perfect storm. Initially there were a bunch of satisfied parties, from realtors to brokers to lenders to investment banks–with everyone taking a piece of profit along the way–until they up-priced even starter homes to unrealistic levels. Oh, this market will have to wring itself out good."

Skating Under the Radar

When the combination is finalized, the resulting entity will be the second-largest financial institution in the country (Citigroup is the largest at $2.35 trillion) and thanks to Countrywide's home loan and servicing portfolio can generate one in every four mortgages in America. That could make BofA's name–Bank of America–true literally.

Federal law prohibits any single bank entity from controlling more than 10% of U.S. deposits, a mark that BofA is nearing or may soon exceed. But it could just as easily make itself unattractive to new deposits by lowering deposit rates and skate under the limit. "By lowering rates and using borrowed foreign dollars it might be just under the wire," said Dr. Wai.

However, the size of the market share and the wealth contained in the Countrywide database is a rare plum for BofA. Soon to own 25% of all American mortgage originations and some 17% of mortgage servicing, according to Bloomberg, it will be a competitive 900-pound gorilla. "The value of the database exceeds the true value of the institution," said Dr. Wai. "It's a stream of income that goes on forever. The marketing opportunity of having such a large homeownership database is incalculable."

CUNA Mutual's Colby agreed. "A player that dominant in the marketplace can purchase those relationships and cross-sell all its other services. But right now, the competition for mortgage lending has gone down–many players have exited already–but it does make for concentration. I'm sure they factored in the value of that cross-selling into the purchase price," Colby said.

How concerned should credit unions be? "They should be concerned, especially in those areas where Countrywide was having a real effect on them, and that database is very valuable." Colby said he'd be surprised if the merger wasn't approved, but noted that the integration (if that is the plan) would be a difficult one. "They're better at it now than they were when Citigroup combined with Travelers." He said Countrywide, with its huge media presence, is also far better at attracting segments of the market not already being marketed by BofA.

Still, Colby figured there might be an upside, even if it's a small one, because they make and hold better loans. "Credit unions have out-performed the marketplace in originating home loans in 2007. If they hold those loans I'd guess that regulators might have some heartburn, given that real estate is 51% of the CU portfolio." It wouldn't be wise, he said, for credit unions to get too conservative on lending, either.

Hampel stressed that credit union capital is very strong, hovering at 11% and despite a rise in delinquencies from 0.65% in March to 0.90% in November, that increase still comes from very low levels historically. "It's risen from an all time low and there is no decline in net worth. I'm cautioning CUs against dramatically changing their lending policies as these delinquencies are due to external events."

John Reed, president/CEO of Maine Savings FCU in Hampden, Maine and chairman of the American Credit Union Mortgage Association offered a ground-floor level look at the merger. "I'm not sure how they'll incorporate Countrywide into Bank of America, but a fair amount of credit unions sell their loans to banks, so I think this gives CUs reason to pause. There are alternatives within the credit union world and always have been. It's up to those CEOs to decide if they want to work with a huge banking organization where the bottom line is all there is."

Everyone contacted for this story agreed on one thing: there is nothing terribly new here. Consolidation seems to be a fact of life in almost every area of business and the mantra 'grow or die' seems to win out. "We've seen this happen in credit cards, too," said Reed. "My message would simply be to say again that the credit union industry is large enough to step up and hold the future in its own hands. Maybe we need to re-think a few strategies. I've seen that if credit unions are willing to work harder and smarter they don't have to sell to Countrywide or banks."

Risk Concentration Questioned

It would seem that the merger was unopposed, but not entirely. The 1.9 million member-strong Service Employees International Union, the fastest-growing union in North America, cautioned against the "uncritical and short-sighted support for Bank of America's attempt to acquire troubled mortgage giant Countrywide."

The SEIU believes that combining the largest bank with the largest mortgage lender "will result in unnecessary and unacceptable long-term risk to the nation's working families and consumers. Permitting such concentration of risk would be like putting a sick patient, Bank of America, together in the same room with a highly contagious and terminally-ill patient, Countrywide, and expecting both of them to get better."

The SEIU urged lawmakers to take measures to curb the growth of the nation's biggest banks. "Huge banks and mortgage lenders have long leveraged their market dominance to rake in huge profits regardless of the risks to consumers and the economy and any bailout of Countrywide — the largest culprit in creating the subprime crisis — would be misguided. Rather than uncritically cheering Bank of America as a potential savior in the short-term, lawmakers and regulators must look to the potential long-term harm and the risks to the economy."

"Further consolidation of the nation's banking industry would inevitably result in concentrated economic risks. We believe lawmakers must aggressively enforce the 10% cap on bank deposits and set standards for the independent and transparent calculation of bank deposits and compliance. Bank of America should not be permitted to use a thrift institution loophole to sidestep the spirit — if not the letter–of the 10% cap."

SEIU's Linda Tran told Credit Union Times, "If you contrast credit unions with these big banks you see that credit unions provide fair loans, particularly in communities of color." She also stressed BofA's practice of driving up fees. "We don't want to stand by and just let this be rubber-stamped."

But Martin Eakes, CEO of the Center for Responsible Lending in Durham, N.C. said,

"Bank of America has the resources and the will to begin cleaning up the subprime mess that Countrywide has played such a large role in creating. We have nine months between now and the official merger date. This will be the most important period since the Great Depression for dealing with the millions of bad Countrywide loans that have pushed families to the brink of foreclosure. The No. 1 priority during this critical period is fixing these bad loans and keeping people in their homes."

"Over the past few years, by steering millions of people into bad loans, Countrywide has been the largest rogue mortgage lender in the country. According to Countrywide's own data, more than 80% of its exotic adjustable-rate loans were made to borrowers that do not meet current banking standards. Countrywide knew that these homeowners would not be able to make their monthly loan payments after dramatic payment increases became effective. Hopefully, Bank of America will not be surprised by the extent of the problems with Countrywide's home loans. Bank of America should be commended for taking the challenge of addressing these problems at a time when ordinary families most desperately need a fair shot at sustainable homeownership."

–[email protected]