BofA’s price for Countrywide: Just about right

Countrywide’s (CFC) finances keep getting worse, but not alarmingly so based on investor reaction Tuesday. The Calabasas, Calif., lender swung to a first-quarter loss of $893 million, or $1.60 a share, for the quarter ended March 31, reversing the year-ago profit of $434 million, or 72 cents a share. Loan fundings fell to $73 billion from $117 billion a year earlier, reflecting the sharp slowdown in the mortgage markets over the past year. The company also sharply boosted its provisions for future credit losses, as rising mortgage delinquencies and falling house prices figure to saddle the company with more bad loans.

There are plenty of ugly numbers in the latest quarter’s results, including a $1.5 billion provision for losses on residential loans, up nearly tenfold from last year’s $158 million. Charge-offs, reflecting realized loan losses, jumped to $606 million from $39 million a year ago. And Countrywide’s liability for estimated losses tied to home equity letter-of-credit rapid amortization - a quirk of loan securitization that arises when losses on the underlying mortgage pools rise above a certain level - rose to $798 million at March 31 from $704 million at year-end and zero a year ago.

Still, shares of Countrywide were up modestly mid-morning Tuesday, as investors bet the latest hits won’t derail the company’s planned merger with Bank of America (BAC). The spread between Countrywide’s share price and the amount Bank of America has agreed to pay - 0.1822 BofA share for each Countrywide share - was about 14% on Tuesday. While that suggests the market doesn’t exactly consider the transaction a done deal, the spread is much lower than it has been during recent periods of market stress. For now, it appears BofA’s offer - even at a steep discount to Countrywide’s book value - is priced about right.