Countrywide sees shakeout in lending

With home sales weakening, the mortgage business is in for another year of “cleansing� contraction, but good times will return in 2008 for industry pacesetter Countrywide Financial Corp., the giant Calabasas lender’s longtime boss said Tuesday.

The prospect of less competition leading to higher profit margins combined with the announcement that the company would buy back as much as $2 billion worth of its shares drove Countrywide’s stock sharply higher on a day when its third-quarter earnings report, taken alone, might have had the opposite effect.

Countrywide said profit from mortgage banking tumbled a greater-than-expected 40%. The company also trimmed the high range of its probable earnings for the full year. But the lender eked out a slight increase in overall earnings as its secondary businesses -- banking, securities and insurance -- improved markedly.

In a conference call, Countrywide Chairman and Chief Executive Angelo R. Mozilo and his top executives outlined current troubles that largely boiled down to too many competitors chasing too few loans.

Countrywide President David Sambol disclosed bad news for the company’s employees, saying more than 2,500 will lose their jobs in a round of layoffs that was announced in broad terms last month.

The staff reductions, which follow downsizings at rivals such as Washington Mutual Inc. and Ameriquest Mortgage Co., are expected to shave $500 million off Countrywide’s annual expenses.

But Mozilo, who had remarked recently that he’d never seen a soft landing in the housing market, raised hopes by suggesting that the industry was at or near the bottom of the trough.

“We’ve already had the hard landing� in housing construction, Mozilo said. Housing starts took an unexpected tick upward in September, along with applications for new loans at Countrywide.

Mozilo also predicted that the current cutthroat environment, with mortgage lenders struggling for market share by cutting interest rates and fees, would moderate as the industry consolidates. That process, he said, was further along than many observers realized because many smaller lenders already had closed up shop without attracting attention.

Countrywide reduced its guidance for full-year 2006 earnings from $4.80 a share to no more than $4.50. Mozilo said that Countrywide would continue “treading water� in 2007.

That picture, however, will change, he said, as weak players exit the mortgage business, including some of the Wall Street firms that recently purchased home lenders.

“And in 2008, we’re going to have a hell of a year,� Mozilo said, asserting that less competition means bigger profits for the companies left standing.

“This cleansing that takes place as the markets pull back is always healthy in the long run, for both Countrywide and the industry,� he said.

Countrywide shares rose $2.12 to $37.33 on Tuesday, a gain of more than 6%.

During the quarter that ended Sept. 30, Countrywide earned $648 million, or $1.03 a share, up 2% from $634 million, also $1.03 a share, during the same period in 2005. Revenue inched up from $2.7 billion to $2.8 billion.

Analysts surveyed by Thompson Financial had expected earnings of $1.08 a share.

Countrywide’s pretax profit from mortgage banking plunged from $703 million to $424 million. But Mozilo said that declining long-term mortgage rates had spurred a new round of refinancings, mostly borrowers abandoning adjustable-rate loans for fixed-rate mortgages. That trend is expected to bolster results in the fourth quarter, he said.

In the third quarter, interest rate trends contributed to an unusual decline in profits from mortgage production and servicing, down 32% and 52% respectively. Results from those two parts of the business generally move in opposite directions.

When borrowers pay off mortgages by refinancing, it reduces the number of loans on which Countrywide earns servicing fees for billing and collecting payments. Reflecting that trend, the company recorded a net decline of $173 million in the quarter for the valuation of mortgage servicing rights.

But it was too early for the increase in refinancings to have much effect on the loan origination numbers, which aren’t recorded until the loans close, Mozilo said. Loans for home purchases, meanwhile, were sharply lower, reflecting the downturn in the housing market.

Countrywide’s fortunes in large part remain tied to the slumping housing market. The latest sales numbers for existing homes are due out today, with new-home sales data to follow Thursday. But two more home builders offered an unpleasant glimpse into the business Tuesday.

MDC Holdings in Denver reported that its profit fell 60% and its orders 40% in the third quarter. Dallas-based Centex Corp. said its profit declined 59% and orders were off 29%.

Sales of existing homes have plunged as well. According to DataQuick Information Systems, the number of sales in the six-county Southern California region fell 28.6% last month from a year earlier. It was the lowest September level in nine years.

In the face of the mortgage slump, Countrywide’s secondary businesses accomplished Mozilo’s stated purpose for them by helping to balance the ups and downs of the home-loan operation.

Pretax earnings for Countrywide’s bank rose 33% to $371 million. Capital markets -- a Countrywide business that includes issuing mortgage-backed securities, trading Treasury securities and financing commercial real estate -- jumped 53% to $141 million. Insurance turned a $91-million profit, reversing a loss of $32 million a year earlier largely because of Hurricane Katrina.

Investors were impressed by Countrywide’s decision to buy back shares for the first time in its 36-year history, said Brandon D. Bond, an analyst at investment firm TCW Group in Los Angeles, which is Countrywide’s third-largest stockholder with 35 million shares.

Noting that Mozilo’s previous “no soft landing� comment had attracted considerable attention, Bond said it was perhaps most important that the veteran executive “is now seeing some light at the end of the tunnel.�

“He said we’ve already seen the hard landing,� Bond said.

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Diversified gains

Countrywide’s third-quarter pretax earnings by segment

(In millions)

*--* 2005 2006 Mortgages $703 $424 Banking 278 371 Securities, 92 141 bond trading Insurance -32 91

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Source: Countrywide