Countrywide Financial Corp.
Reaches Eye of the Storm

Countrywide Financial Corp.'s stock price rebounded sharply from its recent lows as the mortgage lender said it will eke out a modest profit in the current quarter after recording a $1.2 billion loss for the third period.

Shares of the nation's largest home lender by volume jumped $4.23, or 32%, to $17.30 in 4 p.m. composite trading on the New York Stock Exchange on Friday. But the stock is still down 59% this year, and investors face a white-knuckle ride as Countrywide struggles with rising defaults, plunging loan volumes and falling home prices, which reduce the value of collateral.

The Calabasas, Calif., company said it expects earnings of 25 cents to 75 cents a share in the current quarter, compared with $1.01 a year earlier, and to remain profitable in 2008.

The profit forecast reassured some investors who had worried about Countrywide's ability to survive as an independent company. "Countrywide should pull through this," barring another major disruption in the credit markets, said Mike McMahon, a private investor in San Francisco and former equity analyst who has followed the company for more than 20 years. Mr. McMahon said he bought stock Friday morning in Countrywide, replacing shares he sold in September on fears that the company's problems would worsen.

Foreclosed real estate held by Countrywide totaled $676.1 million at the end of the quarter, up from $251.2 million at the end of 2006.

The damage has spread well beyond subprime loans, those made to people with weak credit records. One area of concern is the $26.8 billion of option adjustable-rate mortgages, or option ARMs, held as investments by Countrywide's savings bank. These loans, though classified as prime, are risky because they allow minimal payments in the early years but leave borrowers exposed to much higher ones later. Excluding loans made this year, payments were at least 90 days late on 3.3% of these loans as of Sept. 30, up from 0.3% a year earlier.

Like other lenders, Countrywide has had to become far more conservative after years of lax lending. It is demanding bigger down payments and adding restrictions to loans for investors and people who don't fully document their incomes or assets. Under the new guidelines, Countrywide said, 89% of the option ARMs granted in 2006 wouldn't be made.

Countrywide also has reduced its subprime lending sharply over the past year and now says it is making virtually no such loans. But the company still faces possible losses on subprime and other loans it has sold to investors. Investors sometimes can force lenders to repurchase loans if they can show that the lender didn't meet its obligations in screening for fraud or other problems. Countrywide raised its provision for such claims by $291 million in the latest quarter, bringing the reserve to $748 million.

Countrywide expects the housing market to remain weak "at least" through 2008, its president, David Sambol, said in a conference call with analysts. But the company says it will benefit as more competitors are forced out of business. "We do see substantial opportunities for us to... pick up market share," said Chief Executive Angelo Mozilo.

Fresh foreclosure figures for California, Countrywide's biggest market, illustrate the challenge ahead. DataQuick Information Systems, a La Jolla, Calif., real-estate research firm, said the number of notices of default -- which can be filed when mortgage payments are 90 days late -- totaled 72,571, more than double the year-earlier level and topping the previous record of 61,541 in the first three months of 1996. About half of the defaults were concentrated in the region called the Inland Empire, which consists of two counties east of Los Angeles, and in the Central Valley, the heart of California's farm belt.

Fewer than half of the homeowners in default emerged from the foreclosure process by bringing their payments current, refinancing or selling their homes, compared with 81% a year ago, DataQuick said. Many homes had multiple loans, complicating negotiations with lenders. The number of California homes lost to lenders in foreclosure totaled 24,209 in the quarter, seven times as high as a year earlier and the highest level in DataQuick's statistics, which go back to 1988.

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