WASHINGTON — Bank of America's $4.1 billion rescue of Countrywide Financial could help stem economic turmoil by giving global investors more confidence in the battered U.S. mortgage industry.
It also bolsters arguments that government intervention isn't the only way to assist struggling companies and settle nervous credit markets.
But experts say it's nowhere near a complete fix for the U.S. housing mess, as investors are still jittery about looming losses in mortgage-related investments. The threat to homeowners isn't over yet, either, analysts say, as 1.8 million subprime mortgages made to borrowers with poor credit are scheduled to reset to higher rates this year and in 2009.
"Hopefully, this is a signal that things are a little bit better" in the housing and mortgage sector, said Torsten Slok, senior economist with Deutsche Bank in New York.
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Still, investors weren't too reassured Friday. The Dow Jones industrials finished down nearly 250 points as investors feared that the financial sector's troubles with bad credit won't be over soon.
Shares of Countrywide dropped $1.42, or more than 18 percent, to $6.33 Friday, while shares of Bank of America Corp. slipped 80 cents, or 2 percent, to $38.50.
Countrywide had been the source of much worry because of its enormous size. It was the largest U.S. mortgage lender for the first nine months of last year. It also collects and distributes payments on more than 9 million loans worth $1.5 trillion and owns a federally regulated thrift with $55 billion in deposits.
Analysts say a bankruptcy filing by Countrywide would have been a logistical nightmare, and removing that threat eliminates a large potential source of instability for financial markets.
"What this demonstrates is the ability of the U.S. financial system to deal with a sizable problem in a manner that represents a relatively clean resolution," said Bert Ely, an Alexandria, Va. banking industry consultant.
The acquisition isn't expected to do much — at least right away — for the thousands of Countrywide borrowers struggling to make their mortgage payments. But it's a significant development, and consumer advocates are hopeful that BofA will do a better job of setting up loan modifications for struggling borrowers.
A Berkeley, Calif., low-income advocacy group, the Greenlining Institute, is urging regulators and lawmakers to pressure Bank of America to be more aggressive in helping troubled borrowers.
"They've got to reverse what Countrywide has done," said Robert Gnaizda, the group's general counsel. The Countrywide deal, announced Friday morning, raised suspicions among analysts that officials in Washington played a role in making it happen.
Jennifer Zuccarelli, a Treasury Department spokeswoman, said agency officials were aware of the negotiations between BofA and Countrywide but "did not encourage" the deal. In a conference call Friday, Bank of America CEO Kenneth Lewis said the government did not promise to take on any financial responsibility for loans on Countrywide's books that go into default.
Still, some were skeptical about whether the deal would have happened without government pressure.
"I can't, for the life of me, understand why they would do it otherwise," said Christopher Thornberg, a principal with Beacon Economics in Los Angeles. "There's a huge amount of risk here."