美國銀行 (BAC) 2002 Q2 法說會逐字稿

Good morning and welcome to the Countrywide Credit second quarter earnings conference call.

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Your host is Mr. Angelo Mozilo.

Please go ahead, sir.

Good morning and welcome to the Countrywide earnings conference call.

We encourage all participants to review the performance report while listening to the call.

This can be found at www.countrywide.com by clicking on investor relations on the home page and selecting presentations and quarterly earnings and performance reports.

On page 2 of the earnings and performance report, we provide an agenda for today's teleconference.

First, I will provide a brief overview of results for the second quarter and first half of 2002. The next topic is discussion of the operational earnings performance of diversification activities during the second quarter.

These are a key driver of Countrywide's earnings growth.

We will (inaudible) specifically address our strategy and success in growing our purchase mortgage business that is the foundation of the overall business RIR respective of mortgage rates.

The formal presentation will conclude with earnings guidance for the third and fourth quarter of 2002. Let's begin with our first topic on page 3, overview of results for second calendar quarter.

Keep in mind year over year quarterly comparisons are made to the three month ended May 31, 2001.

Countrywide is calendar year reporter having switched due to the acquisition of our bank. Increased earnings increased 55% to $1.48 per share, (inaudible) of earnings.

A key driver of earnings growth was (inaudible), which experienced 81% growth over the prior year.

Operationally our mortgage banking business continued to excel in establishing records.

Fundings surpassed 42 billion and increased over last year.

The pipeline has surpassed 23 billion again and indicates we are likely to establish a new funding record for the next quarter.

Our servicing portfolio reaped a record of (inaudible) at June 30th and represented source of future earnings when mortgage rates begin to rise.

Turning to page 4, we present a similar overview of the first half of calendar 2002.

Our performance in the first half compares favorably to the result of many full years.

Earnings per diluted share (inaudible) nearly matched 2001 12-month total of $3.14.

Diversification earnings of 154 million for the first half was 29% higher than the entire fiscal 2001 total of $119. Fundings of $86 million in the first half rank as third best full year in the company's 33-year history.

Our next topic is the operational and earnings performance of our diversification businesses.

On page 5, we present historical track record of diversification track earnings.

Countrywide manage focused on diversifying earnings and reducing sensitivity to the (inaudible) world class mortgage banking platform to grow our other businesses.

Pre-tax earnings from diversification businesses in second quarter reached 80 million up 81% over prior year quarter.

As depicted on the bottom line of page 5, the earnings contribution from diversification grown from 17% to 22% in 2001 and now to 26% in this past quarter. Since our mortgage banking business doubled (inaudible) remarkable that diversification earnings have increased this much as a percentage of the mix.

On page 6, we address capital markets business that provide 12% of consolidated earnings during the second quarter.

Capital markets, pre-tax earnings were 38 million, up 67% from last year. The primary driver is securities broker dealer business.

Countrywide Securities Corporation.

Securities trading volume for are the second quarter was (inaudible) up over last year and 174% higher than 2000.

Csc ranks eighth in the trade account through June 2002.

CSC also ranks number five in non-agency (inaudible) in first half. Other capital market subsidiaries include (inaudible) acquires and manages nonperforming loans for rehab and eventual sale and Countrywide broker of servicing rights.

Moving forward to page 7, we net review insurance businesses that contributed 10% of consolidated earnings during the second quarter.

Insurance pretax earnings were 29 million, up 22% from last year.

Second charter is our reinsurance subsidiary that reinsurance mortgage insurance on Countrywide originated products.

The number of policies lesss insured has grown in line with the servicing portfolio, which is our stated goal.

Balboa is our insurance carrier.

Policies have grown 24% over the prior year. (inaudible) driven net written premium to 119 million for the second quarter, compare tod $79 million for last year.

Our insurance agency continues to reflect consistent growth by reaching 645 colleges in force at June 30th 2002.

Our penetration rate of 3.5 million customer portfolio is approaching 20%. Our newest diversification initiative Countrywide Bank is addressed on page 8.

The banking provided 5% of consolidated earnings during the second quarter.

Return on assets will improve as we deploy available cash into the investment category.

Countrywide developed prudent, controlled growth plan designed to provide significant spread income intended to reduce earnings volatility.

Total assets are expected to reach 22 billion by the end of 2004.

Our goal of reaching 6 billion by year end is achievable on the funding side. Asset drive, the driver of growth plans will always be quality.

High quality assets and strong controls will be our constant priority.

The intended asset mix by 2004 is roughly one-third adjustable rate first mortgages, one-third home equity loans and one-third triple A securities.

The funding mix will come from deposits in 2004.

Core escrow funds we control related to the servicing portfolio will approximate 7 billion by that time. 4.5 billion of deposits will be retail generated through lending branches, broker deposits or the Internet. 40% of funding will come from advances and repos.

Equity will be maintained at 6%, safely above the 5% regulatory requirement.

Also included is Warehouse Lending that financing smaller mortgage bankers and mortgage brokers. The pie chart on page 9 reflect mix of earnings between core business and diversification businesses for the first half of 2002 compared to expectations in five years.

Diversification businesses contributed 27% in consolidated earnings during the first half.

Management expects these businesses will contribute 50% in consolidated earnings within five years.

Banking is expected to grow at a rate that exceeds consolidated group and provide 25% of earnings in 5 years.

Capital markets and insurance are expected to grow at a rate similar to the consolidated group and remain at 10% each.

Global is expected to provide 5% of earnings in 5 years.

Mortgage banking our core business, will continue to grow, but not at the same pace as the overall company.

Keep in mind, consolidated earnings are expected to be bigger in 2006 than today.

We remain bullish in the mortgage banking businesses, especially in view of the ongoing extraordinary opportunity provided by consolidated in our industry. Page 10 is a brief summary of mortgage bankings performance.

Production volume grew 38% over last year and 190% over 2000.

Servicing portfolio stands at 375 billion.

Countrywide is growing faster than ever in the history during the refinance boom, while certain competitors are experiencing shrink.

Production earned (inaudible), driven by near record fundings and margins.

The pipeline of applications and processes is a leading indicator of future fundings indicates increased fundings in the near future.

No margin pressure has been observed due to the fact our major competitors have acted responsibly and have the same mandate we do, to maximize shareholders value. Servicing incurred loss of 168 million, an improved of 103 million over first quarter.

Countrywide continues to advertise and impair MSRs.

Amortization was 244 million during the first quarter and impair was 697 million.

Servicing hedge net of cost of (inaudible) was achieved, it was a gain, achieved during that quarter.

The net impair of 235 million was more than offset by increased production earnings.

Since the refinance boom began in 2000, gross amortization impairment amounted to 4.4 billion.

During the same period, loan servicing fees were 2.6 billion.

The servicing gain was 1.7 billion and production was 1.8 billion.

The bottom line for mortgage banking business, the hedge continues to operate as it was designed. Unusually low rate environment has resulted in record production earnings driven by unprecedented fundings in margins.

Production earnings subsidized performance of servicing organization that provide (inaudible) when the rates ultimately rise.

The presentation addresses one other important issue under mortgage banking on page 11.

Countrywide is strategically focused on home purchase mortgages because of the consistent consumer demand for this product that results in stable growth in the overall purchase market.

The chart on page 11 reflects growth that Countrywide has achieved in the purchase funding market fair.

Purchase fundings reach all-time high of 23 billion during the second quarter.

All three production divisions enjoyed increases in purchase funding volume.

While successful in recapturing refinance runoff from our own portfolio, retail division developed another key strategy for purchase business.

In order to augment our strategy developed in 1974, we have assembled a sales force for the retail vision numbered at 2000 at June 30th, up from 922 last year.

This new team is competent by (inaudible) branch managers and other production and call center personnel.

We expect this growing sales force to be a key driver of future purchase market share growth. Turning to page 12, we provide earnings guidance for the third and fourth quarters.

Low mortgage rates are expected to drive high funding volume in second half of 2002.

Accordingly production earnings will remain strong.

Both high MSR will impact servicing earnings.

Earnings are expected to be in line with the second quarter n. view of anticipated results, management expects the company will report diluted earnings per share within a range of $1.55 to $1.65 for both the third and fourth quarters of calendar 2002.

This guidance is included in our earnings press release and will facility analysis of the company by investors and other parties.

These estimates are forward-looking statements, as described on the last page of this presentation. On page 12 we depict scenario that is match low and high end of the estimated earnings range described above. We now turn your attention to the disclaimer on page 13.

The estimates addressed earlier are subject to risks and uncertainties which could cause actual results to differ from those anticipated due to a number of factors, including those, but not limited to those in the disclaimer.

I want to emphasize (inaudible) financial strength.

Our mortgage business continues to thrive and is well positioned to perform after mortgage rates begin to rise.

Our diversification businesses are meeting growth goals and provide earnings insensitive to mortgage cycles.

Our balance sheet valuation is conservative.

We recently completed IO sale that demonstrated the MSR book value was equal to market value and emphasized liquidity of excess servicing.

Significant gain on sale has been deferred as assets were placed in portfolio instead of being sold.

We have 3.5 billion in portfolio at the mortgage company, exclusive of the bank.

Countrywide has unmatched risk management expertise.

Our track record in interest rate risk, management and production and services is well established.

Credit and (inaudible) is virtually eliminated through arrangements.

In addition, the assets we hold in portfolio have extremely favorable credit profile.

We recently developed new enterprise risk assessment function designed to provide quality control over all of our operational risk management activities.

Regulation from Federal Reserve and oec provides another set of eyes, which is particularly important in today's environment.

This concludes my formal remarks.

I would ask the operator to explain to you to conduct the question-and-answer session.

Thank you very much.

Ladies and gentlemen, if you wish to ask a question, press the 1 on your touchtone phone. ( inaudible) You may remove yourself by pressing the pound key.

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Press 1 at this time for questions.

One moment, please for the first question. 00:28:18

First question is from (inaudible).

Thanks.

Good morning, guys.

Congratulations on the quarter and the outlook.

Wanted to ask two things.

Number one, the guidance that you just gave actually indicates in a lower production environment, you will actually expect to have higher earnings based on the table you showed.

I was wondering if it is the way you have your hedges set up given the low rate environment we are currently in and the expectation that you weren't expecting rates to go lower over the next couple of quarters.

Second of all, you mentioned something about selling IOs during the quarter.

Can you provide us with more detail on exactly what you sold and what the pricing indicated to you?

(inaudible).

Those two questions.

We had excess IO, as you know.

Our excessive IO is anything over 25 basis points, around 40.

We had a opportunity to liquidate some of the excess and we did through the GSEs and it gave us a couple of opportunities.

One is to reduce the excess, reducing your exposure to payments.

You have less of a hedge requirement on excess.

Secondly, we clearly demonstrated that excess is marketable.

It is liquid.

Thirdly, we demonstrated we had excess booked at a reasonable and relatively conservative value.

So, those were sort of the end results of the ripple effect of the sale.

It was a very good sale for the company overall and let me go through and have Keith go through the metrics on that sale in terms of the dollar amounts.

It was about $300 million or 330.

Keith will do that and Stan will go through the discussion with you on how we look at earnings of the company in a rising rate environment.

(inaudible) of our portfolio and the average excess fee that was sold was approximately 25 basis points.

The effected multiple that we realized on the sale was 3 and a half.

The weighted average note rate of the underlying mortgages was 7.2.

The net cash realized was 320 million.

Okay.

Basically with regard to the chart on page 12, where we give a range of earnings estimates, what you are seeing in terms of the lower production environment and a higher earnings profile is the significant capability of the servicing (inaudible) production was at a lower range and lower amortization, as well as less impairment, better performance in essence on the servicing hedge. (inaudible) beginning of debtor (inaudible) wrap up in the macro hedge strategy we have been talking about for quite sometime in terms of the earnings performance that we can expect out of the servicing environment.

You guy dos better in lower rate environment, (inaudible) exceed the amortization on servicing side.

The opposite is the case.

We have (inaudible) market?

We do very well on the servicing side relative to a rising rate environment.

Again, we are providing conservative range estimates relative to production.

Margins are just intended to give you a few of the capabilities of the company relative to earnings.

I think it is very important to understand there is a structural change here.

Countrywide now has the end of the next quarter 450 million dollars in servicing.

As the rates rise, the impact of the size of the portfolio is going to be much more profound than it was in the past simply because of the sheer size.

The other structural change we mentioned in the past is the fact we have fixed long-term debt of the actual earnings profile in a rising rate environment.

It is better than at any time for the company.

Thanks very much.

We have a question from Howard slew of (inaudible).

Thank you very much.

Congratulations on a great quarter.

Question for you on the valuation of the mortgage servicing rights.

At the end of the second quarter, wells was valuing MSR at 123 basis points, Washington Mutual at 136.

If I am correct, you guys are 163 basis points.

How do we understand the difference?

Is there a significant difference in the underlying mortgages?

Do you view the asset differently?

Do you do a significantly better job hedging that would cause you to value it differently?

Can you help us understand that large discrepancy in valuation?

Let me go through part of it and then I will have Keith go through it with you.

There are several elements that comprise the model for developing the cap rate.

The - one of the issues is the quality of the portfolio, by quality I don't mean credit quality.

But, let's take the Washington Mutual case.

If you - their prepayment speeds are 50% faster than Countrywide.

Because of the nature of what loans they have in their portfolio, which is about 50% arms being paid off rapidly today, as people graduate to a higher rate or fixed. If you impose that 50% faster speed on our model, we are right on top of the 1threx.

So, there - one of the aspects is the prepayments of the portfolio is relative to Washington Mutual.

Now, let me turn over to Stan and Keith to take you through the model.

We don't have much information on the composition of wells portfolio or for that matter, that much detail, we can put directly to the model of Washington Mutual.

It is a significant difference and their speed is 50% faster than ours.

It is probably the result of (inaudible) and older servicing portfolios they have acquired.

We have a model which is very reliable and tested and we believe that - for example on the issue of Washington Mutual, we can correlate very precisely a similar cap rate in the event our portfolio was running at those types of speeds. We do have very well tested time tested model in terms of our servicing assets, which we continue to adjust for change necessary prepayment speed and feel very confident in the valuations that we provide.

You know, as we mentioned before the IL transaction that we just engaged in, it is really one of the finest tests of that model because we were able to sell IO Security at a level which was slightly better than where we had the servicing book.

Stan, if I could follow up briefly, if we stay at these levels, I would assume that over time, as your servicing portfolio recycles to ever lower coupons which it appears we are going there, it would become more valuable because there are presumably less chances going forward to refinance?

Is that a correct way to look at it?

I think we are creating the most valuable servicing asset possible in the last 20 years, at low rates.

The market is extremely rational in terms of the valuation being provided on new servicing.

I think the sophistication in the industry is relative to modeling capability and interest rate risk management and assessment is much, much greater.

That speaks well for the future of mortgage banking, as well as investing in mortgage servicing because it presents, in the future, a much higher return profile than they did in the past.

Thanks very much.

Question from the line of Mike Smith with (inaudible).

Good morning and congratulations.

To follow can Howard's comment, shouldn't we factor in weighted (inaudible) fee into the calculation?

I don't think Wells discloses their's.

Your system around 40 dips which is a conservative multiple about four times.

Is that about right?

This is Eric (inaudible).

You raise a good point.

It is always important to factor in the service fee.

People take the MSR and divide by the principle balance and come up with the cap rate.

Of course, that will result in a different calculation.

Our service fee is just below 40 basis points at this time, as a result of that io transaction, giving us a multiple of four (inaudible).

Great.

If I can, last week (inaudible) impacted your stock price for that day.

Can you once again share with us your subprimed exposure and risk associated with that?

I will have Eric go through that on terms of the balance sheet, but 80 to 90% of our originations represents 4 or 5% of originations, is now being sold to GSEs.

We have no more liability than on a prime loan, as a result of that.

The balance is being insured by private insurance companies.

We don't have residual risk as of today as a result of the origin stuff we did.

What do you have some

The remaining residual balance related to subprime is 56 million dollars on 42 billion dollar balance sheet.

You can see that is nominal exposure.

The secondary execution we are using today do not put us in a first loss position.

Great.

Thank you.

We have a question from the line of (inaudible) with Prudential Securities.

Thanks.

Three quick ones.

Did you mention that you had a gain on the sale of the excess IO, could you quantify what the gain was?

And whether or not you expect to continue to sell excess IOs going forward?

Secondly, could you clarify - you talk body 8.8 market share in the purchase market.

What was your total market share of production - you talk about 7 and a half percent market share in the third and fourth quarter.

Finally, on the bank, you seem to be slowing the growth and the assets of the bank.

It sounds like you are intimating you may not make the level you targeted for the end of this year in terms of assets.

What is behind the slowing of growth and what is the mix of the assets right now in the bank?

Okay.

On the profit on the IO, I don't think -

We had a very small gain, minimus gain.

The concept was managing the balance sheet and reducing the IO-secured interest rate risk in the IO.

And you know, basically goods sold close to the book value.

Just to add (inaudible).

Thanks.

On the market share issue, I think he gave us the numbers.

We are around 7 and a half.

Is that right, Eric?

Overall market share we believe is 8.2%, 8.8 on purchase, as you suggested.

You are expecting to see a decline in overall market share in the second half?

I think what you are seeing is conservative.

I reflect 7 and a half percent market share, we are building conservative estimates.

Our goal is to continue to increase our share and to - we don't know what the market share numbers will have to be to be number one in five years.

Whatever that is, that is what we will be.

We are telling you where we are.

Probably you are going to have to be around 15% market share to achieve the number one position. In terms of the bank, let me give you overall thoughts on the bank.

As I explained, our concern is quality.

We want to make sure that bank is safe and sound at all times.

So, we are extremely careful in how we grow that bank, particularly on the asset side.

The liability side is not an issue.

That is number one.

That is the overriding issue is to make certain at the end of the day that our goal is quality.

Now, in terms of quantity, we feel that we have a reasonable chance of achieving $6 billion this year goal.

Now, remember we look at this thing longer range. We feel confident in our ability over the next three years to get to the 22 billion.

And however, there are technical issues - technological issues in dealing with Countrywide because of the requirements under the 23A and B in terms of transactions.

It complicates the process of making certain the bank is operating within the guidelines set forth by the regulators.

That is one issue.

Second issue is this is an environment where the variable rate product is not a prevalent product.

It is fixed rate that is prevalent.

The bank wants maximum flexibility in variable rate product.

There is not a lot of product around.

So, we are going to have to be very careful and very cautious both in quality and make sure we grow it properly and have all the technology in place to have a smooth acquisition process by the bank. So, that is where we are.

Whether we make 6 billion or 5 and a half billion, whatever it is, it will be.

As long as at the end of the day, we have a good system, good process and high quality loans.

In the current mix right now?

Current mix in terms of (inaudible)?

The majority of the business has been triple a securities, hybrid armed securities, with a small amount of production coming from home equity lines of credit as we are gearing up their operation s to take on additional volumes of home equity, in line with the desired product.

Again, it is building the process, the systems in a manner for the bank that maximizes the safety of their activities.

Okay.

Thanks.

We have a question from the line of Bob McFoley with U.S. Bank.

I would like to congratulate you on strong performance and outlook.

I think the focus of a number of investors is the earnings ability to continue to generate growth and earnings post this phenomenal rebuy boom that never ends.

Can you give outlook and your feelings on your ability to grow earnings into 2003?

And one follow-up question.

I think as Stan stated, I think properly we feel very strongly because of the size of the portfolio and the strength in the company, because of our change several years ago in going from a noncommissioned sales force company to a very sophisticated world class sales force and you now add the numbers up close to 3000 people whose primary responsibility it is to generate purchase transactions.

We have a different company going into next year.

Now, assuming it will end at some point.

We don't know - it keeps on getting pushed out in terms of lower rates. We know we are in for another big, big boom.

And going forward - so, 2003 will have some spill-over.

As rates rise, we will have over 400 billion dollar servicing portfolio kicking in, substantial earnings.

You will have 4000 people in the field, ground troops competing head-to-head with Wells and Chase and Washington Mutual.

We think we are better, obviously.

As a result, we think we will prevail.

From the origination side, you will see a gain substantial market share in momentum.

And if you look at the balance sheet of the company, the balance sheet has never been stronger.

We have a standpoint of 9 billion dollars.

As rates rise, we are no longer subject to cost of funds rising as rates rise.

A lot of factors going into 2000 3.

I support the position of 2003 that rates should prove to be a very good year for us. (inaudible) and the philosophy of the rise.

The other aspect to it, as I pointed out, we have rational competition now.

This is no longer the era of irresponsible risks.

The Charlie Knapps and Keatings of the world, they are gone.

You have responsible players who have the objective of increasing (inaudible) shareholders, maintaining reasonable margins.

We saw that.

We had a little spike at the beginning of this year.

We didn't see deterioration this year.

First time we didn't see that.

As we look at the pressure points in the company, as to what we should be looking out for and prepared for, we think that obviously the world is not perfect.

We think we are positioned for any environment that confronts us going forward and we will be successful in that environment.

You expect earnings to grow next year?

Yes, we expect earnings to grow.

Numerical question.

Did you hold back home equity loans or did you sell your (inaudible) subprime?

In the parent?

Yes.

3.2 in the parent of home equity loans.

We held back $700 million of production this quarter.

I think your stock when Capital Won had their news was weak because you had a rapidly growing bank and people were concerned about (inaudible).

Did you author that phrase very rapidly growing bank?

I think you will grow from a couple billion to (inaudible) would be a bank where the assets are going to grow quickly.

I would say that would be a correct assessment if you don't consider all the aspects Countrywide brings to the table.

This is a company that originates close to that a month in terms of the 22.

We did 14 billion last month.

You can see by the size of our pipeline, that will increase.

There are less than two months production at Countrywide.

With the backdrop as a parent, that is the originators of the world that can support the bank.

I don't think that is aggressive growth at all.

That is reasonable growth expectations.

Have you had feedback from the regulators?

The regulators are getting more ancy about everything today.

Regulators have every right to be ancy.

We look at regulators as constructive partners.

They have a lot to offer in terms of working with us to make certain we build an institution in the bank that is durable for a long period of time.

And we both have a vested interest in security and safety of the institution.

We don't consider themselves ancy, we consider them diligent and prudent in what they expect of us.

We are working together very well.

Thank you.

Question from the line of Gary (inaudible) from the line of UBS Warburg.

Hi.

Couple of things.

Historically your hedge gain was close to impairment charge.

This was despite substantially beating earnings expectations (inaudible) between the two.

A variety of reasons that might have occurred, but I am interested in your answer.

Two, on capital market earnings, on a rough basis, what proportion of the earnings at this quarter were coming from the issuance of your own cuters as opposed to trading seeing a general secondary market maker.

First of all, one of the issues in terms of servicing hedge performances that we have available for sales securities that are not market to market, but we are in our catch position.

We didn't liquidate those to take the gains, but rather they make up a considerable gain that was not recognized or reducing the impairment charge during the quarter.

The second thing is that we are not trying to cover at this point in the interest rate cycle, 100% of the possible impairment because - first of all, there is considerable expense in do being that.

Also, we don't - when interest rates rise, those hedges have a loss which we want to maintain as prudent and proper of a hedge position, given the tremendous potential that the macro hedge has.

In other words, we are relying upon the performance of the origination sector in the recapture and refinancing of mortgages that are running off to produce part of the profit and part of the margined offset impairment.

So, the hedge works very much the way we had anticipated for the type of rate move that occurred.

What was the capital market earnings from the trades versus Countrywide?

Can you break that down?

I am sorry.

They do 30% of their business comes from Countrywide.

Okay.

Thanks.

Follow-up then on the hedge to summarize the hedge discussion.

You did have hedges on that you could have recognized, but could have generated x amount of millions more, but you chose you were in a position where you could choose not to take them?

Ye, and that number was 60 billion of additional gains from PL Securities that we did not realize, but are held on the balance sheet.

Then, there is - we also - another point, we do have a budgeted cost for running the servicing hedge, which is also comprised in the net 235 million dollar number.

Okay.

Thanks a lot.

We have a question from the line of Bill Roy with Merrill Lynch.

Hi, guys.

Great quarter.

Do you have the securitization of home equity on the $700 million in production during the quarter? (inaudible) add any?

We are securitizing all of the e-locks held in securitization form.

Everything, the additional $700 million dollars of he-locks if you don't was added to he-lock (phonetic) and is in the process of being securitized.

What portion was securitized and what was the gain on the security?

We don't have gain on securitization.

We don't recognize gain.

That is what I meant.

Call them two different things, they are the same thing.

We sold in the quarter a billion dollars in (inaudible) and the combined (inaudible) 70 million dollars.

That is the answer.

Thanks.

On the servicing right 3 and a half times.

It appears this reflects somewhat dislocated and distressed market versus what we have experienced in the past.

And does this not create a opportunity to buy servicing when a lot of the larger players like Annette Stellers.

If no, does that put downward pressure on the multiple and continue to widen the gap between your multiple, which appears to be 4.3 times and current market rate of 3.5 times?

Is there a market to market issue we need to be aware of?

Let me try and distinguish between the multiple on our portfolio and the multiple on IO.

You have to segment servicing into two pieces, which we do.

One is base servicing, which is 25 basis points.

Base servicing includes with it certain other income, certain ancillary assets, such as value of escrows associate wide servicing asset.

And that typically has a higher multiple than would the excess.

Now, with the - excess servicing would parallel the value of pure IO securities, which in fact are securities are excess servicing securities sold at a percentage of IO. Now, remember that the multiple that (static) for a range of servicing that went anywhere from mortgages that went from 5 and a half percent on the mortgage to over 8%.

So, we are not looking at the same thing as newly originated servicing The market on servicing today, we feel is very good for newly originated servicing.

We are originating the levels to our own operations which are tax advantaged and have the highest possible returns to us.

That is the most efficient method of investing capital in the servicing aspect that exists. (inaudible).

To put it another way is if the economics of a port that is being sold in the market place was better for us than originating servicing asset ourselves, we would entertain acquiring that asset.

We have never seen that.

So, it is always better for us on an economic basis to originate the product ourselves, than to buy it, number one.

Number two, there is not a hell of a lot of servicing being sold and exchanged throughout the country today.

The primary originators are large, the Wells Fargo, Washington Mutual, the Chase's of the world, don't sell servicing, they retain it.

I am not sure of the unique opportunity you are talking about.

We don't see it existing in the day-to-day market place.

Thank you.

We have a question from Nick Adams with (inaudible) Management.

The question has been answered thank you.

We have a question from Richard Diamond with Inwood Capital.

Yes, talking about the subprime business, have you ever given any thought to divesting it to someone to whom the market would give more credit?

I mean, I am looking at H and R block that get 48% of pre-tax income from subprime lending and is trading at over 15 times forward earnings.

Does it make sense to sell the piece to someone to whom the market is going to give a lot more credit and thus reducing some of the subprime risks?

Thank you.

Again, we went through the risk profile.

We don't see any risk in subprime originations and we have been doing subprime originations for many years.

I think our track record and the ability to servings the product speaks for itself.

It is an important part of the business, what we do.

We have expansive product line t. is part of the product line.

It is very profitable to the company.

As long as it remains a solid risk, quality risk for the company, with returns that it has for Countrywide, we will continue to service it.

We don't look at other companies and what multiple they get if we sell to them.

The multiple they get - and the multiple H and R block gets is interesting.

But, that is as far as it goes.

Thank you very much.

We have a question from the line of (inaudible).

If I could shift gears to the insurance subsidiary, just wanted to get a little color.

If I look at premiums in a year-over-year basis, they are up 53%.

Yet, your policies and earnings are up in the range of 20%.

Can you give us an idea of what the dynamics are going on there?

What is the mix of revenues from the second charter verse Balboa and why would (inaudible) for future losses?

Probably the biggest component there is Balboa is increasing percentage of the mix and their loss profile is going to be different than Second Charter's.

Let me make sure I clarify that for you.

The primary driver of earnings at the moment is Second Charter.

Balboa, we continue to restructure Balboa.

Again, to make sure that we have an infrastructure in place that has permanency and is sound and underwriting risks that are sound risks, we continue to go through this transformation and therefore, its sales, as you can see, from 79 million in the previous quarter to 119 million.

That its growth is substantial on the policy side of the equation.

It has not yet filtered down to the bottom line.

So, you are seeing major growth in net premium, but not yet in profitability.

The majority of profitability is emanating from both the charter reinsurance and Countrywide agency, which contributed about 4 or 5 million in the quarter. So, I think that is the dislocation that you may be seeing or the disparity you may be seeing.

Succeeding quarters, there should be a better relationship to growth in policies, growth in network premiums and earnings.

Great.

Do you happen to have a breakdown on expenses between claims, losses and (inaudible) or an approximation?

I can follow-up.

We don't have it available, but would be happy to share that with you.

Question from the line of (inaudible) with GLS.

Most of my questions have been answered.

One quick question, in terms of looking at the diversification earnings, number one, do you think the capital markets portion will continue to be around 50% of the diversified mortgage bank earnings?

Second of all, you mentioned a few moments ago, we are in for a big boom in refinancing, (inaudible) will be starting to drop for these quarters?

First let me answer the last part first.

I don't think so.

The diversification earnings should continue to grow as the capital markets are beneficiary of the refinance loan.

It is a major contributor.

The insurance segment should continue to grow.

No, our expectation is even though the banking component will continue to expand, particularly in this environment, earnings will continue to grow probably at the pace it did quarter-to-quarter (inaudible). In terms of - what was that?

Repeat that other part of the question.

Capital markets 50%?

I don't.

If you look at 2006, earnings will increase.

We are looking at 2006 for the capital markets to contribute 10% of the overall earnings of the company.

Again, the overall earnings would be much larger than it is today.

Their component we expect to be around 10% level.

Question from the line of tom Porter with (inaudible).

Mike, my questions have been answered.

(inaudible) of Bear Stearns.

Nice to see the great report. (inaudible).

One of my questions was answered.

My next question has to do with the future.

Going on to higher rates, I assume your mix goes to a fixed rate, I mean adjustable.

If that is true, is there certain advantages moving into adjustables on spread or whatever that may be?

Would you please discuss that?

Well, it is true.

As rates rise dramatically, the consumer - that is why it is so important to us.

The consumer adapts very quickly and looks for a payment they can afford because the desire for the home.

They will gravitate to any - attached to arms, including negative arms.

So, now in terms of margin.

The margins, there is no fundamental reason why the margins should be less on arms than on fixed.

We don't anticipate that the margins would shrink in an arm environment versus a fixed environment.

Looks like for the future things are in place.

That is what it looks like.

Thank you.

There are no further questions in queue.

Thank you very much.

We look forward to revisiting with you at the end of the third quarter.

Thank you.

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