Countrywide Lending Plunges

Lower Mortgage Volume
Shows Pressure to Cut
Costs as Focus Switches

By JAMES R. HAGERTY
October 12, 2007; Page A4

Countrywide Financial Corp., providing an update on how the housing slump and credit crunch are drastically shrinking its business, said total mortgage loans it made or acquired from other lenders in September fell 44% from a year earlier to $21 billion.

The disclosure illustrates the enormous pressure the nation's largest home-mortgage lender in terms of loan volume faces to cut costs as it makes fewer loans and focuses on conventional mortgages, which tend to be far less profitable than the riskier types of loans popular in recent years. Countrywide last month said it plans to chop its work force by as much as 12,000 jobs, or 20%.

Investors have become reluctant to buy many types of loans now considered too risky. So Countrywide is concentrating on ones it can hold as long-term investments or sell to government-sponsored investors Freddie Mac and Fannie Mae. Such loans tend to be made on tighter margins between the lender's cost of funds and the interest rate paid by the borrower. Bruce Harting, an analyst at Lehman Brothers, estimates that the gain Countrywide made on sales of loans sold to Fannie and Freddie in the third quarter was about 0.48% of the value of the loans sold. By comparison, Countrywide made an average gain of 1.09% for all loans sold in the year-earlier quarter.

Partly because loan volume has plunged, the Calabasas, Calif., lender is expected to report a large loss for the third quarter on Oct. 26. The range of estimates is huge, reflecting uncertainty over how much Countrywide will have to write down the value of mortgages and securities it holds.

Lehman Brothers this week forecast that Countrywide will show a third-quarter loss of 95 cents a share, or $618 million, compared with earnings of $1.03 a share, or $647.6 million, a year earlier. Moshe Orenbuch, an analyst at Credit Suisse, forecasts a loss of $1.3 billion, or $2.17 a share. Countrywide hasn't provided a third-quarter forecast.

Those Wall Street forecasts exclude the cost of layoffs. Lehman expects the layoffs to result in a pretax charge of about $750 million in the third or fourth quarter.

Also expected to weigh on results are higher provisions against loan losses. Countrywide said 1.27% of the total unpaid balance of loans that it services were in the foreclosure process as of Sept. 30, up from 0.51% a year before. Excluding foreclosures, payments are 30 days or more overdue on 5.85% of the unpaid balance of loans it services, up from 4.04% a year earlier.

After having increased employment by nearly 13% in this year's first seven months, Countrywide is rapidly slashing its work force. The work force totaled 55,932 at the end of September, down from a peak of 61,586 in July.

Because jittery investors have cut off other sources of short-term borrowings, such as commercial paper, Countrywide is relying more on its savings bank to provide funding for home loans. It said deposits at the bank, excluding escrow accounts, increased $2.1 billion in September to $44 billion. That is also up from $43 billion at the end of June, a Countrywide spokesman said. Countrywide was hit by a rapid outflow of deposits in August for more than a week amid fears over its financial health. But the bank has been attracting net inflows in recent weeks.