Countrywide stock up on reports

Countrywide was a key participant in the sub-prime market

Shares in US mortgage giant Countrywide Financial have risen sharply following reports that it is in talks to be acquired by Bank of America.

Countrywide shares ended the day 51% higher at $7.75, after falling for two days in a row on rumours that it was seeking bankruptcy protection.

The firm saw a 44% drop in home loan volumes in December and its highest level of foreclosures since 2002.

In August Bank of America invested $2bn (£1bn) in the struggling mortgage firm.

Sub-prime

Analysts said the news of the talks, reported by the Wall Street Journal and Reuters citing sources, was a positive sign for the sector.

"A Bank of America deal for Countrywide gives people confidence that maybe the financials are not as toxic as people think if Bank of America sees value there," said Edward Bretschger, director of equity sales and trading at Calyon Securities in New York.

The firm was one of the main participants in the sub-prime market, which is targeted at giving loans to those with poor credit records or unpredictable incomes.

When the housing boom took place, a huge number of people took out mortgages to take advantage of lower borrowing costs. But with US interest rates climbing over the past two years, many borrowers have to been unable to repay their monthly loans, prompting huge defaults and repossessions.

While December's year-on-year figures, released earlier in the week, marked a fall in home loan volumes, the company underlined that mortgage volumes last month marked a 1% rise from November.

David Sambol, the firm's chief operating officer, said the company was pleased with progress made in the current "challenging environment".

In a bid to cut costs the firm has cut 10,986 jobs since the end of July.