Countrywide Swings to Steep Loss
On Mortgage Losses, Write-Downs

NEW YORK -- Countrywide Financial Corp. on Friday reported its first quarterly loss in 25 years after the credit-market rout and rising mortgage delinquencies forced the company to incur a total of about $3 billion in credit-related impacts.

At the same time, the largest U.S. home-mortgage lender by market share expects to return to profitability as soon as this quarter, despite the persistent weakness in the U.S. housing market. David Sambol, Countrywide's president and chief operating officer, said the company views the third-quarter loss of $1.2 billion -- or $2.85 a share -- as "an earnings trough," adding that it anticipates being profitable in the fourth quarter and next year.

Shares of Countrywide jumped almost 15% in recent trading to $15.

The Calabasas, Calif., company earned $647.6 million, or $1.03 a share, in the third quarter of last year. It expects to earn between 25 cents and 75 cents a share in the fourth quarter. Countrywide's management based its projection on the slew of steps it has taken, including lining up $18 billion in what it calls "highly reliable" liquidity, tightening lending guidelines and downsizing operations.

The forecast echoes the one made last month by IndyMac Bancorp Inc., Countrywide's smaller competitor. At that time, IndyMac, which is due to release earnings Nov. 6, said it might lose as much as $36.8 million, or 50 cents a share, in the third quarter, but expects to turn the corner and be "solidly profitable" in the fourth quarter and beyond.

Countrywide and IndyMac are the nation's top two mortgage lenders not owned by a commercial or investment bank. Some investors and analysts have questioned their ability to survive the deepening housing and mortgage meltdown as an independent company.

"The issue is the sustainability of its business model," Scott MacDonald, head of research at Aladdin Capital Management LLC in Stamford, Conn., said of Countrywide. "The question is how do they get from where they are today to where they expect to be."

Standard & Poor's, the bond-rating agency, cut its ratings on Countrywide following its earnings release. "Over the near term, CFC will be operating with a lower volume of loan production and production concentrated in the lower margin segment of the market" for prime loans eligible for sale to government-sponsored mortgage-finance companies, S&P said, "which will likely limit a rebound to past profitability levels."

During the quarter, Countrywide said it recorded about a $1 billion loss associated with selling nontraditional loans and write-downs of those loans and related securities as soaring mortgage delinquencies have driven investors to shun almost anything linked to risky mortgages.

Since early August, just before the height of the credit-crunch hit, Countrywide's shares have fallen from a high of $29.64 to as low as $12.07 on Thursday, a level last seen in December 2002.

Despite the plunge in Countrywide's shares, some investors remain wary of getting in right now. "On one hand, they are trading at a big discount to book value, but what exactly is the book value," said Steven Persky, chief executive of Dalton Investments LLC, a Los Angeles investment-management firm specializing in distressed assets. "The risk is that the market is very illiquid," he said, "and it's hard to know the real value of the assets on its books because the credit quality of those assets is under question."

Countrywide said it ramped up its loan-loss reserves in anticipation of a continued surge in delinquencies and defaults, especially among subprime mortgages given to customers with poor credit history and so-called high-risk, high-return pay-option adjustable-rate mortgages. Countrywide set aside $934 million for bad loans in the third quarter, up from $38 million a year earlier.

The latest quarter's results also included $57 million in restructuring charges related to last month's announcement that Countrywide expected to reduce its work force by as much as 12,000 jobs, or 20%, by year-end in reaction to slumping mortgage production. Origination volume fell to $96 billion from $118 billion as it shifted its product mix to more traditional loans.

Countrywide posted negative revenue of $50 million, compared with revenue of $2.82 billion a year earlier. The negative revenue reflected loan-sale losses, credit-loss provisions and other write-downs in revenue data. The mean estimates of analysts surveyed by Thomson Financial were for a loss of $1.28 a share on revenue of $231.9 million during the third quarter.

The overall delinquency rate climbed to 7.12% from 4.55% a year earlier. For conventional mortgages, the rate rose to 4.41% from 2.57%, while the rate on prime home-equity loans increased to 5.76% from 2.52%. The subprime delinquency rate grew to 29.1% from 18.3%.

--Kevin Kingsbury contributed to this article

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