It has been another tough week for shareholders in Countrywide (CFC), the mortgage lender that agreed in January to sell itself under duress to Bank of America (BAC). Countrywide shares were down 19% for the week on Friday afternoon. The big hit came Monday, when a Friedman Billings Ramsey analyst said BofA should walk away from the deal in light of a filing last week that said BofA hadn’t decided whether it would guarantee Countrywide’s debt. Not everyone was persuaded by that argument, but Countrywide also came under fire in Congress. On Tuesday, Sen. Charles Schumer criticized the company’s handling of bankruptcy debts and questioned whether BofA should even be paying the agreed-upon $7 or so a share in stock.

The selloff had Countrywide shares trading Friday afternoon at a 28% discount to the implied value of Bank of America’s takeout offer. That spread suggests that some investors are betting the deal won’t get done at the agreed-upon terms of 0.1822 Bank of America share for each Countrywide share.

Still, the chart below, put together by Fortune’s Sarah Slobin, shows that the spread isn’t as wide as it was two months ago. The high remains 38% - reached March 17, the day after JPMorgan (JPM) agreed to buy Bear Stearns (BSC) for $2 a share, accelerating investors’ flight to the safety of Treasuries. With any luck, that’s a scene we won’t have to revisit anytime soon.

Not everyone is persuaded by speculation that Bank of America (BAC) could renegotiate or walk away from its $4 billion agreement to buy Countrywide (CFC). At The New York Times DealBook blog, law professor Steven Davidoff writes that the steep decline of the mortgage markets Countrywide operates in - and the fact that those conditions were known back in January, when BofA agreed to make the purchase - will make it difficult for BofA to claim a so-called material adverse event that would let it walk.

“BofA is going to have a hard time claiming an MAE,” Davidoff writes, “given that Countrywide’s woes appear to be the result of general economic conditions generally affecting its industry.”

Davidoff concedes that the status of the BofA-Countrywide deal isn’t clear-cut, but he says that without knowing the content of documents such as disclosure schedules, investors can’t know whether Bank of America might have grounds to terminate the deal.

“Ultimately, the only thing this analyst’s report tells us is that BofA might have a financial incentive to walk or cut the price,” he writes, in reference to a report Monday that said BofA might face outsize losses on Countrywide’s loan book. “But to do so, it must have grounds under the merger agreement. And as I said, it appears that any MAE claim will be tough to prove, at least based on the public facts. Perhaps the legal investigations may qualify, or shareholder or customer lawsuits. But again, we just don’t know without seeing what is in the disclosure schedules.”

All that said, Davidoff notes that the collapse of buyout deals such as those for Sallie Mae (SLM) and Harman (HAR) is making investors in targets understandably suspicious. “Irrational fear in today’s buyout market,” he writes, “has unfortunately proven correct too many times.”

Countrywide (CFC) is under fire again in Washington. Sen. Charles Schumer said Tuesday that buyer Bank of America (BAC) should cut the price it has agreed to pay in a $4 billion buyout of Countrywide if it turns out that Countrywide engaged in unscrupulous lending during the housing boom. “These latest revelations should make Bank of America think even harder about how they want to proceed,” Schumer said in prepared remarks before the Senate Judiciary Subcommittee on Administrative Oversight and the Courts, Bloomberg reports.

Schumer is chairman of the subcommittee, which on Tuesday held a hearing into alleged misconduct by lenders toward borrowers in bankruptcy. Countrywide issued a statement Tuesday afternoon defending its practices, saying that “allegations made in the media recently relating systemic errors in bankruptcy servicing practices” are “unfounded.” The firm said it “believes its bankruptcy servicing processes are best in class and result in minimal instances of error.”

The hearing comes just days after BofA said in a filing that it wouldn’t commit to guaranteeing Countrywide debt. That remark led S&P to downgrade Countrywide’s credit ratings, citing the uncertain status of the company’s creditors. On Monday, an analyst at Friedman Billings Ramsey said BofA should walk away from the deal because of the prospect that loan losses on Countrywide’s high-risk loan book will outstrip the cushion BofA has built into its all-stock acquisition of the company.

Chris Whalen of Institutional Risk Analytics goes a step further in his latest ruminations on the subject. He believes that in addition to the potentially large loan losses, Countrywide faces massive and open-ended legal risk that Bank of America cannot afford to take on, tied to the allegations centering on Countrywide’s aggressive lending. “We don’t believe that the BAC+CFC transaction can get done without a re-organization to address the litigation and other off-balance sheet, contigent claims,” he writes. Whalen says he believes Countrywide creditors would be best off trying to push the firm into an involuntary bankruptcy proceeding.

Countrywide (CFC) sank 11% in morning trading Monday after an analyst said Bank of America (BAC) should walk away from its $4 billion deal to buy Countrywide, due to rising credit costs and souring loans at the troubled mortgage lender. Analyst Paul Miller at Friedman Billings Ramsey downgraded Countrywide to underperform from market perform and cut his price target to $2 from $7, saying Bank of America could face writedowns of $30 billion or more when it closes the Countrywide deal. He says BofA’s statement Thursday that it won’t guarantee Countrywide debt “is most likely the first step in renegotiating the entire deal.”

Miller estimates that Bank of America has a $22 billion cushion to absorb writedowns of Countrywide’s loan book. While that sounds like a big number, the analyst lays out a worst-case scenario that could see Bank of America taking $17 billion in writedowns on Countrywide’s home equity and second mortgage portfolio alone. The analyst says writedowns could reach $11 billion on Countrywide’s portfolio of option adjustable-rate mortgages (ARMs) and $5 billion on hybrid ARMs and other loans. Writedowns of that size could easily swamp the cushion Bank of America set aside when it agreed back in January to buy Countrywide for $7 or so in BofA stock.

“The issue of fair value marks was a significant part of the reason that National City (NCC) failed to find an acquirer,” Miller writes, referring to the Cleveland-based bank, which has taken large mortgage-related losses. “If fair value marks sufficiently exceed BAC’s projections at the time of its due diligence, we believe the deal price for the purchase of CFC could be renegotiated lower, or BAC could (and should) decide to walk away.”

Ratings agency S&P cut Countrywide’s (CFC) debt to junk Friday, citing Bank of America’s (BAC) failure to commit to a guarantee of Countrywide’s obligations after Bank of America completes its $4 billion takeover of the mortgage lender. S&P cut Countrywide to “BB+/B” from “BBB+/A-2.” Triple-B is the lowest investment grade.

S&P’s decision comes just days after Bank of America said in a regulatory filing that it hadn’t decided whether to guarantee $38 billion in Countrywide parent debt. “There is no assurance that any such debt would be redeemed, assumed or guaranteed,” the company wrote on page 59 of the filing said. Bank of America is due to complete its purchase of Countrywide later this year, and the decision not to guarantee the Countrywide debt could leave the mortgage lender’s creditors facing losses.

Chris Whalen, a principal of bank watcher Institutional Risk Analytics, said in a note earlier this week that Bank of America’s decision could lead to massive upheaval in the market for bank debt. If B of A walks away from the debt, bondholders - including state pension funds - could suffer catastrophic losses. That could scare investors out of the market for bank loans as well as other securities issued by banks. “It is BAC’s behavior, not the deteriorating financial condition of CFC, which is injecting potentially dangerous instability into this situation,” Whalen wrote. Countrywide’s shares, after spending most of Friday’s session around the unchanged mark, fell 4% in afternoon trading.

There are more questions about Bank of America’s (BAC) planned purchase of Countrywide (CFC). A Bank of America regulatory filing this week notes that the big bank hasn’t decided whether to guarantee Countrywide debt after BofA’s $4 billion takeover of Countrywide, due to be completed later this year. A decision not to guarantee the parent company’s $38 billion in debt would be unusual and could leave Countrywide debtholders facing default, Bloomberg reports.

The wording of the filing has some observers wondering if Bank of America chief Kenneth Lewis “may be playing chicken with all of us,” reasoning that worries of a Countrywide default could push the price of its bonds lower, allowing Bank of America to buy them at a discount rather than redeeming at par. But if not, says Chris Whalen of Institutional Risk Analytics, investors could be in for quite a shock. If Bank of America were to let the Countrywide debt go into default, it could “adversely affect the entire market for bank debt. What investor in their right mind would want to hold the debt of any bank holding company were BAC to elect the nuclear option and place [a post-merger Countrywide] into a bankruptcy?” he asks.

“If bondholders get stiffed by Bank of America, it will scare the hell out of everyone,” Whalen tells Bloomberg. “This is called thinking the unthinkable.”

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.

Despite his poor performance in recent years, Legg Mason (LM) portfolio manager Bill Miller remains bullish on stocks. He writes in a letter to Legg Mason Value Trust shareholders Wednesday that “with most investors being fearful, I think it makes sense to allocate some capital to the greedy side of that pendulum, and that means putting cash to work in equities.”

Miller’s comments come after the Value Trust posted a 20% decline in the first quarter, weighed down by big bets on Bear Stearns (BSC), Countrywide (CFC) and Washington Mutual (WM), among others. But Miller says the fund has been doing better in April’s healthier market. And he notes that despite the criticism of his money-losing Bear Stearns investment, Legg Mason actually has had a much bigger position in JPMorgan Chase (JPM) - whose shares have risen since the big bank agreed to buy Bear in a Fed-induced rescue.

Miller’s 15-year-long streak of outperforming the S&P 500 is history now, in the wake of poor performances in 2006 and 2007. But that doesn’t mean Miller is ready to let go. “My friend Jeremy Hosking, who has delivered around 400 basis points per year of excess return over two decades at Marathon (in London), corrected me recently when I spoke about our underperformance,” Miller writes. “‘You mean, your deferred outperformance,’ he said. I thought it a clever line, but it contains an important point.”

You might assume the point is that no one should ever bring up Miller’s recent negative returns, but that’s not quite it. “For value investors, price is one thing, and value is another,” Miller explains. “When prices move against us, it usually means that the gap between price and value is growing, and our future expected rates of return are higher.”

While that sounds nice, the recent action in some big Miller holdings - his top 10 positions at March 31 included UnitedHealth (UNH) and General Electric (GE), both of which recently saw big stock price drops after poor earnings performances - offers a reminder that high expectations can be tough to live up to.

Weakening credit conditions hammered Bank of America (BAC) in the first quarter. The Charlotte, N.C., bank made $1.21 billion, or 23 cents a share, for the quarter ended March 31, down from the year-ago $5.26 billion, or $1.16 a share. The latest quarterwas hit by a $6 billion provision for future loan losses, which is five times the year-ago level, reflecting rising loss expectations in the bank’s home equity, small business  and homebuilder portfolios. Analysts were looking for a 41-cent profit, according to Bloomberg.

“Despite revenue growth in most of our businesses, these results clearly did not meet our expectations,” said CEO Kenneth D. Lewis. “The weakness in the economy and prolonged disruptions in the capital markets took their toll on our performance.”

Bank of America said it took trading-related losses of $1.3 billion in the first quarter, reversing the year-ago trading profit of $1.7 billion. The latest-quarter number was hit by $1.47 billion in writedowns of collateralized debt obligations and $439 million in writedowns of leveraged loans. The writedowns were fairly modest, given that Wall Street had forecast a number in the $4 billion to $5 billion range. But the rising loan losses sent shares down $1 in premarket trading to $37.56.

The world is swimming in ideas on how to ease the pain of the housing bust. The Senate is considering a $15 billion relief package that would fund purchases of foreclosed properties and help borrowers refinance troubled mortgages. Consumer advocates want to allow judges to reduce residential mortgage debts, a measure congressional Republicans have opposed.

But while those ideas get tossed about in Washington, Mark Gimein offers up an idea at slate.com that lets consumers take immediate action to ease the glut of unwanted houses: You can buy a foreclosed property direct from Countrywide (CFC).

Buying from Angelo Mozilo’s crew may not be your first choice. You may think Countrywide has gotten enough help already, what with its massive executive payouts and its agreement to sell itself of Bank of America (BAC). You may have noted with some alarm that the Justice Department is now probing the company’s lending practices.

Indeed, you may wonder about the possible conflicts of interest involved in a purchase from Countrywide’s real estate portfolio. Gimein notes that the company demands that forclosed-house buyers who don’t pay in cash must prequalify for a mortgage with a Countrywide loan office just to make a bid, whether or not they take the loan.

But, Gimein points out, taking a loan from Countrywide means getting a free appraisal, too - which makes for a very attractive proposition, at least for the company. “Take that offer and that means you’ll be buying a house from Countrywide, financed by Countrywide, on the basis of an appraisal from Countrywide,” he writes. “You can file that under Department of Foxes and Henhouses.”