Stocks Fall With Lender's Earnings
Countrywide's Dip Ignites Concerns About Economy

By Dina ElBoghdady and Tomoeh Murakami Tse
Washington Post Staff Writer
Wednesday, July 25, 2007

U.S. stocks took a beating yesterday largely because poor earnings from one of the nation's largest mortgage lenders renewed concerns about whether the housing downturn could damage the broader economy.

Countrywide Financial, which originates 17 percent of U.S. mortgages, reported a sharp drop in second-quarter profit, slashed its earnings forecast and signaled that its woes reflect that credit problems are spreading to a wider population of borrowers than once believed.

With more than 1,000 branches and an extensive network of mortgage brokers, Countrywide's reach makes it a closely watched bellwether of market conditions, which is why its lower-than-expected results rattled investors, analysts said.

All major stock indexes recorded the biggest loss in more than four months. The Standard & Poor's 500-stock index, a broad market measure, fell 30.53 points, or nearly 2 percent, to 1511.04. The Dow Jones industrial average of blue-chip stocks fell 226.47, or 1.6 percent, to 13,716.95. The tech-heavy Nasdaq shed 50.72, or 1.9 percent, to 2639.86.

"The stock market was already having difficulty digesting the full effects of the housing and mortgage industry downturns," said Mark Zandi, chief economist at Moody's Economy.com. "The Countrywide news is just one more difficult thing to digest."

Countrywide's profit plummeted 33 percent, to $485 million (81 cents a share), in the quarter ended June 30, compared with $722 million ($1.15) in the comparable quarter a year ago. Revenue fell 15 percent, to $2.5 billion.

The California lender's stock closed at $30.50, down $3.56.

In a three-hour conference call with financial analysts, company executives cited softening home values for the troubles. Home prices climbed or stayed steady in all of the nation's 381 metropolitan statistical areas from 1998 into 2006, said John McMurray, Countrywide's senior managing director and chief risk officer. But now half of those areas are suffering price declines.

The "rather abrupt" turnaround, as McMurray described it, means more cash-strapped borrowers cannot sell their homes or refinance, resulting in more delinquencies for Countrywide.

The highest number of delinquencies occurred among subprime borrowers, typically people with bad credit.

But Countrywide indicated that the more-creditworthy prime borrowers are also struggling to make payments, an alarming sign given predictions that the mortgage crisis was limited to the subprime arena.

That showed up in the earnings, as the company wrote down $417 million in losses, $388 million of them from home-equity loans to prime borrowers. It also increased its reserves by $293 million to account for expected losses, again mostly from prime home-equity loans.

Angelo R. Mozilo, the company's chairman and chief executive, said he did not believe market conditions would improve soon. "We expect difficult housing and mortgage market conditions to persist" for the rest of the year, he said.

The uncertainty about the mortgage industry has hurt the stock prices of financial services firms in recent months, and yesterday was no exception.

Despite better-than-expected second-quarter earnings, American Express shares fell 5.4 percent after reporting that a rise in credit-card payment delinquencies had prompted the company to boost its reserves for loan losses.

Adding to yesterday's equities drop were disappointing earnings from chemical maker DuPont, which said its profit was flat for the second quarter, with weak demand from U.S. auto and housing industries. And shares of Texas Instruments fell 4.5 percent after the chipmaker's announcement Monday night that its quarterly revenue had fallen below Wall Street estimates.

"It's understandable why Countrywide, being a housing lender, would feel the pain more than somebody else," said Todd Clark, director of equity trading at Nollenberger Capital Partners. "But they really threw them all to the wolves today as far as financial stocks. And that weighed heavily on the markets."