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Countrywide Subprime Performance Worsens

Subprime delinquency 23.71%

July 24, 2007

By MortgageDaily.com staff

Nearly one-in-four subprime mortgage loans at Countrywide Financial Corp. was delinquent last month.

Second quarter earnings were $485 million, according to an 8-K filing with the Securities and Exchange Commission today. While net income was better than $434 million in the first quarter, it was way down from $722 million a year earlier.

Results "were adversely impacted by continued weakness in the housing market," Countrywide Chairman and Chief Executive Officer Angelo R. Mozilo said in the filing. "Due to these adverse conditions, the company incurred increased credit-related costs in the quarter, primarily related to its investments in prime home equity loans."

The Calabasas, Calif.-based company's chief noted second quarter loan production of $133 million was "the third-highest in our history." He said prime production margins were mostly stable and subprime production margins significantly improved.

Production was originated from 986 retail branches as well as mortgage brokers and correspondent sellers, according to Countrywide -- which saw a shift toward the more profitable retail channel. Full-year production was estimated to be between $420 billion and $500 billion.

Pre-tax earnings for servicing rose to a loss of $147 million from a $69 million loss the prior quarter and a $279 million profit in the second quarter 2006, according to the filing. Servicing hedge losses were $1.373 billion, climbing from $114 million during the first quarter and $621 million a year earlier.

"The servicing hedge performed in line with management's expectations amidst an increase in fixed mortgage rates of roughly 50 basis points during the quarter," Countrywide reported.

Overall delinquency was 5.73 percent as of June 30, rising from 4.90 percent on March 31, the filing said. But subprime delinquency ended the latest period at 23.71 percent -- jumping from 19.62 at the end of the first quarter and 15.33 percent a year earlier.

Countrywide forecasted lower originations and decreased liquidity from increased secondary market volatility in the third quarter.

"Management believes that the company is well positioned to capitalize on opportunities during this transitional period in the mortgage business, which management believes will enhance the company's long-term earnings growth prospects," according to the filing.

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