January 11 2008: 7:31 AM EST
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Countrywide stock soars on BofA sale talk

News of Bank of America's interest is the first ray of hope in months for shareholders of the mortgage lender.

By Roddy Boyd, writer

Bank of America CEO Kenneth Lewis isn't looking so smart for investing $2 billion into Countrywide last year.
Countrywide CEO Angelo Mozilo tells investors that the mortgage lender isn't headed for bankruptcy.

NEW YORK (Fortune) -- Bank of America is in advanced talks to purchase struggling home lending giant Countrywide Financial Corp., according to The Wall Street Journal.

The news represented the first ray of hope in months for Countrywide shareholders, who saw their stock bid up to $7.69 in late afternoon trading Thursday, a $2.34 spike that amounted to a more than 45 percent one-day gain. In the past year, Countrywide has shed almost $20.3 billion in market capitalization. (Editor's note: Bank of America said early Friday it would buy Countrywide for $4 billion.)

If the deal occurs, Bank of America would utterly dominate U.S. residential real estate finance. The newly combined Bank of America, based on MortgageDaily.com 2007 third quarter origination numbers, would have originated $142 billion in mortgage and home-equity financings. The next closest: Wells Fargo at $68 billion.

Practically speaking, the deal represents very different things for each company.

For Countrywide (CFC, Fortune 500), it is likely the best chance it has of staving off a nearly intractable liquidity crisis brought on from its multi-year residential lending binge. The lender has run through an $11.5 billion multi-bank lending facility, been shut out of the commercial paper and corporate credit markets and has been forced to borrow extensively from the Federal Home Loan Bank system.

For Bank of America (BAC, Fortune 500), the cost savings inherent in combining Countrywide's market-leading residential lending platform with its own fourth-place effort are no doubt tempting. The bank would also pick up millions of customers - as well as thousands of depositors from Countrywide's own bank - to peddle a variety of higher-margin personal finance offerings. It would also, presumably, bail out the $2 billion investment Bank of America made in the lender in August. Prior to the news, the bank was out a cool $1.4 billion on the trade.

That said, the deal could fall apart at a moments notice.

If it does fall apart, a likely culprit would be the rapidly deteriorating credit quality of Countrywide's mortgage and mortgage servicing portfolios. To top of page