Countrywide Upbeat Despite $1.2 Billion Loss
Stock Surges as Largest Mortgage Lender Says It's on Road Back to Profitability

By Dina ElBoghdady
Washington Post Staff Writer
Saturday, October 27, 2007

Countrywide Financial, the nation's largest mortgage lender, reported yesterday that it lost $1.2 billion in the third quarter, but its stock price jumped because the company predicted that it would turn a profit this quarter and next year.

The quarterly loss, the equivalent of $2.85 a share, was the first in 25 years for the California lender, which funds nearly one in every five U.S. mortgages. For the third quarter last year, Countrywide reported a profit of $648 million, or $1.03 per share.

In a call with analysts, the company said a dramatic change in its business model and previously announced workforce cuts have positioned it for profit and ensured its survival -- something one analyst had questioned in August. David Sambol, Countrywide's president and chief operating officer, described the quarter's results as an "earnings trough."

Investors responded by boosting Countrywide's stock, which closed at $17.30 a share, up $4.23. The cheery outlook at Countrywide, coupled with a strong earnings report from Microsoft yesterday, helped lift the overall stock market. The Dow Jones industrial average rose 134.78, or 0.99 percent, to 13,806.70. The Standard and Poor's 500-stock index rose 20.88, or 1.38 percent, to 1535.28. The Nasdaq composite index rose 53.33, or 1.94 percent, to 2804.19.

Countrywide's losses included a $1 billion write-down for loans it held when investors lost interest in buying them during a severe credit crunch in August. In anticipation of future defaults, the company also took $2 billion in charges, including $934 million to fatten its reserves for bad loans.

"The company took its medicine," said Howard Shapiro, an analyst at Fox-Pitt Shelton. "We can basically say that, to a large extent, they have put this quarter's problems decisively behind them."

Kenneth Bruce, a Merrill Lynch analyst, yesterday upgraded Countrywide's stock to "neutral," from "sell." Bruce was the analyst who had raised the possibility of Countrywide's bankruptcy in a note to investors this summer, which sent the stock tumbling.

One reason for the increased investor confidence is that the company has restored liquidity by securing lines of funding that were depleted in August when it drew down an entire $11.5 billion line of credit to ease its way through the crunch.

Even so, company executives said the profits they're expecting will pale compared with those during the housing boom, and some analysts said that Countrywide's outlook beyond next year is less clear.

"They've set some pretty high expectations, and there are a lot of things that have to line up for them -- things they have no control over, mainly the economy and housing appreciation," said Vincent Arscott, a credit analyst at Fitch Ratings. "They're being fairly optimistic. . . . We need more evidence of their strategy playing out."

That strategy includes cutting back on the types of mortgages it offers and eliminating or curtailing loans that have fallen out of favor with investors, including loans that require no down payment or verification of income, as well as most loans made to risky, or subprime, borrowers.

Countrywide's loan production fell in the quarter to $90 billion, from $106 billion in the third quarter of 2006.

With production down, Countrywide needs fewer employees, which is why it previously announced plans to cut about 20 percent, or 10,000 to 12,000, of them by year-end. The lender took a $57 million charge in the third quarter related to those cuts and expects to take an additional $70 million to $80 million in related charges this quarter.

Meanwhile, Countrywide is changing its business so that it is not as reliant on money from investors to fund its loans. It has transferred its mortgage production from Countrywide Home Loans, its non-bank mortgage subsidiary, to another subsidiary, called Countrywide Bank FSB.

Countrywide Bank makes loans like a traditional bank. To the extent possible, Countrywide could use the deposits at the bank to fund its loans. Deposits are considered a more stable and reliable source of money than selling them to investors. The company said almost all the residential loans it's now making are funded by the bank.