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Subprime Storm Isn't Over

Countrywide CEO talks to analysts

January 31, 2007

By PATRICK CROWLEY


photo of Patrick Crowley
The co-founder and chief of America's largest originator told Wall Street analysts Tuesday that as many as 50 subprime lenders are going down a day -- a trend that he expects to continue though this year.

"We've got another eight, nine, 10, 12 months of headwinds, and then we believe well have a much cleaner canvas to paint on for the next few years," Countrywide Financial CEO Angelo Mozilo said in an earnings conference call reviewed by MortgageDaily.com.

"We believe that 2007 will likely be the trough year of the current housing cycle and that 2008 should represent the beginning of upward trends associated with the next cycle," he said.

Countrywide reported fourth quarter residential originations of $122 billion and annual fundings of $463 billion -- higher than any other U.S. mortgage banker.

Net income fell 2.7% in the fourth quarter to $621.6 million, or $1.01 a share, from $638.9 million, or $1.03 a share, earned in the final three months of 2005, the Calabasas, Calif.-based company announced. Revenue climbed 6% to $2.76 billion.

For the full year, however, profits hit a record. Countrywide earned $2.68 billion, a 5.8% increase over 2005. Total loan production for 2006 fell to $421 billion from $428 billion in 2005.

Mozilo said subprime lenders are operating "in the face of a challenging environment which included flat and inverted yield curve conditions, home price depreciation, slowing home sales, declining production volumes and pressure on credit quality."

Those conditions are driving subprime firms out of business and into mergers and consolidations necessary for them to stay afloat.

"There are no signs of the pressure abating in the subprime arena and, in fact, some signs that problems are accelerating," said Mozilo. "You're seeing 40 or 50 (subprime companies) a day throughout the country going down in one form or another. I expect that to continue throughout the year.

"There is a substantial amount of consolidation taking place either through acquisition or just going broke or bankrupt or everything that is happening," Mozilo said. "A lot of it is happening below the radar screen. We believe the shakeout is very positive for us because it has been in the past. And as we come out of the cycle we will have a much cleaner landscape to operate."

But some pain will still be felt through 2007 as borrowers struggle to make payments and lenders try to grow loan volume.

"Looking ahead to 2007, the industry will likely see continued pressure on margins as mortgage origination volumes decline and industry capacity is rationalized," Mozilo said. "We are also preparing for increased borrower delinquencies and continued credit deterioration.

"We've got a way to go on that."

Mozilo would not comment when pressed about a possible merger or other deal with Bank of America.


Patrick Crowley is a feature journalist and blogger for MortgageDaily.com. He is also a reporter, blogger and columnist for The Cincinnati Enquirer.
e-mail Patrick at: [email protected]

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