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Bank of America still paying for Countrywide

Countrywide Financial Corp. is the gift that just keeps on taking.

It’s been four years since Bank of America bought the mortgage banking money pit in one of the worst business deals of all time. The Wall Street Journal recently estimated that the $4.5 billion transaction has actually cost Bank of America more than $40 billion, thanks to business losses and endless legal claims.

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Last week, Bank of America posted a $2.5 billion quarterly profit — good news to be sure. But the company also warned that more investors were demanding it repurchase soured mortgages — a $22 billion pile of trouble that had grown 40 percent in just three months. Blame Countrywide and its subprime mortgage business.

Bank of America’s former chief, Ken Lewis, could have only had one idea in mind when he bought this bag of rocks four years ago. His bank would be the nation’s dominant mortgage player when the market eventually recovered.

But Bank of America decided to head in the opposite direction two years later. The bank needed to shrink and its mortgage business was getting clobbered from every direction.

Bank of America decided it would continue to sell home loans to its banking customers but stopped buying mortgages from brokers or smaller lenders.

Now the mortgage market indeed shows signs of recovering and a handful of other banks are profiting smartly in the parts of the home loan business more or less abandoned by Bank of America.

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The big winner in this transition has been Wells Fargo & Co., now the 800-pound gorilla of the mortgage industry. Wells Fargo made 33.9 percent — fully one third — of all the $385 billion of home loans written in America during the first three months of this year, according to Inside Mortgage Finance.

“Funding 1 in every 3 mortgages in the US has as much to do with Wells Fargo staying in place as some of its top competitors downsizing,” says Guy Cecala, chief executive of Inside Mortgage Finance. “A lot of that just came by staying where they were and not closing their doors.”

Wells Fargo’s mortgage market share in the first quarter was the biggest ever recorded by a single lender. The second place lender in the mortgage market — JP Morgan Chase — accounts for 10.6 percent of US home loans. Bank of America, limited to writing mortgages for its banking customers, ranked fourth with 4.2 percent.

The shift in the mortgage world isn’t simply a story about Wells Fargo and Bank of America. Other banks with conservative mortgage lending records, such as US Bancorp of Minneapolis, have gained market share.

Others that had been active in subprime markets, including Ally Financial, have lost ground.

But the big dynamic is hard to miss: Wells Fargo moved up when Bank of America moved out.

That shift has created a profit windfall for Wells Fargo. It recently reported $2.9 billion of income from mortgage banking during the second quarter — up 79 percent from the same period last year.

Not for nothing: Wells Fargo is now the nation’s most valuable banking company. It’s worth more than twice as much as Bank of America, based on stock market value.

But the financial implications of a decision to shrink mortgage banking would not have been obvious at Bank of America in 2010.

For one thing, most analysts would never have predicted today’s ultra-low interest rates that drive mortgage refinance activity, still the bulk of home loan business.

For another, the economics of the mortgage industry have turned upside down in recent years. Lenders once wrote mortgages for little profit — sometimes at a loss — to capture the more lucrative business servicing the loan over time. Now servicing profits are harder to come by but lenders are sticking to their fees and making big profits when they write loans.

So Bank of America, losing billions of dollars and under pressure to reduce the size of the company at the time, got rid of a business line that didn’t fit with a strategy of focusing on its own customers.

“It would have been a much better thing to have kept,” says bank stock analyst Gerard Cassidy of RBC Capital Markets. “But, in their defense, they had to pick winners and losers.”

Bank of America is still working to clean up the Countrywide mess — and paying for it. All the potential of that terrible deal never materialized.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.

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