美國銀行 (BAC) 2002 Q3 法說會逐字稿

Good morning and welcome to the Countrywide Credit Industries third calendar quarter earnings conference call.

At this time all phone lines are muted or in a listen only mode.

However, after today's presentations we will be taking questions and we certainly encourage your participation at that time.

To queue for our question just press the one on your touchtone phone.

You will hear a tone indicating that you have been placed in queue and just as a note, you may remove yourself from the queue at any time by depressing the pound key.

Once again, ladies and gentlemen, if there are any questions or comments later in the conference call today please queue up by pressing the one on your phone keypad.

Also, should you require assistance during today's earnings report you may reach an AT&T operator by pressing the zero followed by the star.

And as a reminder, today's call is being recorded for replay purposes.

We ask that you stay on the line at the conclusion of today's meeting to receive the replay information.

With that being said, here's your host, Countrywide Chairman, CEO, and President, Mr. Angelo Mozilo.

Please go ahead sir.

Thank you, Deanna.

Good morning and welcome to Countrywide's earnings teleconference for the 3Q 2002.

We strongly encourage all participants to view the 3Q earnings and performance report while listening to this call.

This report can be found on our website at www.countrywide.com by clicking on Investor Relations on the homepage and then 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 our results for the 3Q and the first 9 months of 2002.

The next topic is discussion of the operational and earnings performance of our diversification activities during the 3Q.

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

We will then focus on our core mortgage banking business that continues to establish innumerable records.

The formal presentation will conclude with an earnings analysis that evaluates core earnings.

The analysis shows that current earnings levels could have been matched in normal market conditions without the benefit of a refinance boom.

Let's begin with our first topic on page 3, an overview of our results for 3Q.

Please keep in mind that year over year quarterly comparisons are based on quarters ended 8/31/02.

Countrywide is now a calendar year reporter having switched from Feb. 28 fiscal year due to the acquisition of our bank.

Earnings increased 45% over the prior year to $1.74 per diluted share, which marked Countrywide's sixth consecutive quarter of, at record earnings.

A key driver of earnings growth was our diversification businesses, which experienced 100% growth over the prior.

Operationally our mortgage banking business continued to excel and establish many new records.

Fundings reached a record of $64b and increased 90% over the prior.

The pipeline also established a new milestone and surpassed $51b.

This indicates that we are likely to establish a new funding record next quarter.

The servicing portfolio crossed over the $400b threshold and ended up $406b as of 9/10/02.

Turning to page 4, we present a similar overview for the first nine months of 2002.

Our accomplishments in the first nine months exceeded all prior full year performances.

Earnings per Share increased 49% compared to last year to about $4.55 per dilutes share.

Diversification pre- tax earnings grew 92% over the prior year and reached $262m.

Fundings of $150b for the nine months were up 77% over the prior year and handily exceeded the full year record of $138b set last year.

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

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

For many years Countrywide has strategically focused on diversifying the company's earnings and reducing their sensitivity to mortgage banking cycles.

Our core strategy is to leverage our world-class mortgage banking platform to grow our other businesses.

Pre-tax earnings from our diversification businesses in 3Q 2002 were up 100% over the prior year and reached $108m.

As depicted on the bottom line of page 5 the earnings contribution from our diversification businesses has grown from 21% in 3Q00 to 23% in 3Q01 and now to 30% 3Q02.

Since our mortgage banking business more than doubled its earnings in the same timeframe, it is even more remarkable that diversification earnings has increased this much as a percentage of the earnings mix.

On page 6 we address our capital markets business that provided 15% of the consolidated earnings during 3Q02.

Capital markets pre-tax earnings were $55m up 109% Y-on-Y.

The primary driver of capital market success is our securities broker dealer, Countrywide Securities Corporation.

CSC has capitalized on the historically high level trading in the secondary mortgage market.

Securities trading volume for 3Q02 was $545b, up 61% Y-on-Y and three times greater than 2000.

Securities trading volume YTD is $1.4t and it appears that $2t may be an achievable goal for the full year.

Countrywide Securities Corporation currently ranks in the top ten in all of its major trading areas.

The other capital markets subsidiaries include Countrywide Asset Management Corporation, a distressed asset manager that acquires non- performing loans from third parties and rehabilitates them for eventual sale, and Countrywide Servicing Exchange, a broker of mortgage servicing rights.

Moving forward to page 7, we next review our insurance businesses that contributed 8% of consolidated earnings during 3Q 2002.

The insurance sector pre-tax earnings were $28m, up 24% over the prior year.

Balboa Reinsurance exclusively reinsures primary mortgage insurance on Countrywide originated loans.

Policy growth has been in line with that of the servicing portfolio, which is our stated goal.

Balboa Life and Casualty is our national insurance carrier that emphasizes property, liability, and life insurance.

Policies in force grew 30% over the prior year.

Their management team has been upgraded and has heightened emphasis on business development and on the sales force.

This has driven net written premium up to $162m for 3Q 2002 compared over the prior year $97m.

Our National Personal Lines Insurance Agency is focusing on its core product and service competencies in homeowners and life insurance.

The agency will also benefit from process improvement programs being instituted within the insurance group.

Our newest diversification initiative, Countrywide Bank is addressed on page 8.

Banking provided 6% of consolidated earnings during 3Q 2002, banking pre-tax earnings were $22m, up 345% over the prior year, our banking strategy is designed to leverage our mortgage banking platform.

Countrywide has extraordinary asset generation capability that will support our growth plans in the bank.

We have over $6b of core escrow deposits that will provide the bank with a stable, low cost source of funds.

Our retail lending operation has 425 branch offices that are available to the bank for retail deposit gathering.

As a regulated depository we have insourced custodial services that may result in savings of as much as $30m per year.

We currently have 3.7 million mortgage customers that represent a low cost marketing opportunity for the bank.

The bank also provides Countrywide with enhanced financial flexibility.

Portfolio lending capability provides opportunities for spread income and an additional funding vehicle for adjustable rate loans, which is especially important after refinance booms end.

We also now benefit from access to the fed window.

Countrywide has developed a prudent control growth plan for the bank that has been approved by the regulators.

The plan is designed to provide significant spread income and intended to reduce earnings volatility.

Total assets were $115m at acquisition date in May 2001.

As you can see on page 8, total assets have reached $4.5b at 9/30/02.

Our goal is $22b by 12/31/04.

The intended asset mix in 2004 is roughly one-third prime adjustable rate first mortgages, one-third prime home equity loans, and one-third AAA securities.

Countrywide Warehouse Lending is included in the banking segment but separate from Countrywide Bank.

CWL is a warehouse lender that finances the mortgage inventory of smaller mortgage bankers and mortgage brokers.

Outstanding balances at 9/30/02 were $2.1b.

The pie charts on page 9 reflect a mix of earnings between our core business of mortgage banking and our diversification businesses for the first nine months of 2002, compared to management's expectations in five years.

Our diversification businesses contributed 28% of consolidated earnings for the first nine months.

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

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

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

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

Please keep in mind that the consolidated earnings pie will be significantly larger in five years than it is today.

We remain very bullish on our mortgage banking business, especially in view of the ongoing extraordinary opportunity provided by the massive consolidation in the industry.

Moving to our next topic, mortgage banking operations and earnings performance is summarized on page 10.

Mortgage banking pre-tax earnings were $256m, up 39% over the prior year.

Production earned a record $667m based on record fundings of $63b and record margins of 105 basis points.

Purchase funding volume was $24b for 3Q 2002.

The pipeline of applications in process is at a record $51b and indicates a new funding milestone should be achieved within 4Q 2002.

As would be expected in this low rate environment, servicing posted a significant loss during the 3Q as prescribed by GAP.

Countrywide continued to significantly amortize and impair its MSRs.

Amortization was $297m during 3Q 2002 and impairment was $2.1b.

The servicing hedge performed as expected during 3Q 2002 and provided a gain of over $1.6b.

It is noteworthy that Countrywide is growing its servicing portfolio at a record pace in spite of today's low rate environment.

The bottom line of our mortgage banking business is that the macro hedge continues to operate as it was designed.

An unusually low rate environment has resulted in record production earnings driven by record fundings and margins.

These production earnings subsidized the performance of our servicing operation that will provide a significant share of the earnings mix when rates ultimately rise.

The most compelling evidence that the macro hedge is working effectively is that Countrywide has achieved six consecutive quarters of record earnings.

Turning to our final topic on page 11, the formal presentation will conclude with an analysis that evaluates core earnings.

The analysis shows that current earnings levels could have been matched in normal market conditions without the benefit of the refinance boom.

The evolution of our mortgage banking and diversification businesses have significantly improved our per earnings.

In this analysis production earnings are based on an annual market size of 1.2t with 9% market share and 60 basis points margins.

Current estimates of CY 2003 total market fundings range from $1.4t to $2.0t.

Countrywide's market share is currently at 9%.

Margins of 60 basis points are achievable based on our expected product mix after the boom and the rational pricing habits of our current competition.

This compares to actual margins of 105 basis points during the 3Q.

Servicing earnings are based on the actual portfolio size of $406b and a margin of 12 basis points.

Servicing margins range from 10 to 20 basis points in the interim period between 1998, 1999, and 2001 and 2002 refinance booms.

Since our MSRs are a historical low of 117 basis points today, future servicing retained should be strong after the refinance boom.

Diversification earnings are conservatively placed at 75% of the level achieved this past quarter.

This amount of conservative, this amount is conservative because it allows capital markets earnings to decline 50% and implies no growth from insurance or banking.

While Countrywide has recently produced earnings at record levels, the point of this analysis is that the core earnings have increased significantly.

It is reasonable that Countrywide could match current earnings in normal market conditions without the benefit of a refinance boom.

We now turn your attention to the disclaimer on page 12.

The estimates discussed in this presentation are subject to certain risks and uncertainties that could cause actual results to differ from those, anticipated through a number of factors including but not limited to those listed in this disclaimer.

Countrywide has a policy of communicated earnings guidance for the upcoming quarter at the time of each quarterly earnings release.

This guidance is included in our earnings press release and intended to facilitate analysis of the company by investors and other parties.

Low mortgage rates are expected to drive record funding volume and prepayments in 4Q 2002.

Accordingly, production earnings will remain strong though MSR, amortization and impairment are expected to continue impacting servicing earnings.

Diversification earnings are expected to be relatively in line with 3Q 2002.

In view of these anticipated results management believes the company will report diluted earnings per share within a range of $1.75 to $1.90 in 4Q 2002.

These estimates should be considered a forward-looking statement as described in disclaimer on the last page of the presentation.

This concludes my formal remarks.

I would now ask the operator to explain how we will conduct our Q&A period.

Thank you, sir.

Once again ladies and gentlemen, if you wish to ask a question please depress the one on your touchtone phone.

Once again, you'll hear a tone indicating you've been placed in queue and you may remove yourself from queue at any time by depressing the pound key.

If you are using a speakerphone please pick up handset.

Our first question will be from the line of Bill Roy from Merrill Lynch.

Please go ahead.

Hi guys, a question regarding the gain on sale, were there any securitizations of home equity and/or sub-prime loans during the quarter and if so, what were the gains on those sales?

Keith McLaughlin's going to respond to that question.

Yeah, we securitized roughly what we produced during 3Q 2002 and the gains on sub-prime were $117m and on home equity and fixed rate seconds were $77m.

Do you have the impairment reserve in balance for 3Q 2002?

It's at approximately $2.4b.

Great, thanks.

Thank you.

Our next question will be from Rob Ryan from Banc of America.

Please go ahead.

Good morning.

Could you go over some of the statistics as to the MSR valuation at this point compared to the servicing portfolio as a whole, as well as the weighted average servicing fee?

We're carrying our MSRs at approximately 117 basis points per servicing portfolio at 9/30/02 and that represents an approximate 3.1 multiple of the net service fee, which is approximately [indiscernible] basis points.

And for comparison purposes the difference from 6/30/02 obviously a substantial decrease but just remind us.

If I recall it was around 167 basis points, 163 at 6/30/02 and the multiple was what four three, four three.

And your thoughts on the potential disposition of excess servicing going forward?

This is Stan Kurland, we are evaluating the market at a continuous basis and do plan from time to time to sell excess servicing when we think that the market values are appropriate and we have engaged in the process of securitizing excess in anticipation of doing another transaction.

Ok, thank you.

Thank you.

Our next questioner is now from the line of Paul J. Miller from Friedman Billings Ramsey.

Please go ahead.

Yes, thank you very much.

A nice quarter, guys.

Can you, this impairment charge, your total impairment charge is well over I think close to $4b when you include the last three or four quarters.

Is your plan to, if rates really snap back here, say go to four and a half or four and seventy five, would you reverse some of this impairment charge or would you just keep your amortization expense low for the next eight to six quarters?

The, the requirement relative to servicing values, as a GAP requirement, is that they need to be marked to market and so as interest rates decline we're estimating the market value and impairing the assets accordingly.

And then in a rising interest rate market, the market value of that asset will increase and to that extent GAP requires us to make a reasonable estimate of the value of servicing and to increase the value of servicing.

So we intend to maintain a conservative view on this asset but we also have to comply with the rules of GAP.

And does GAP require you to write this back up if say, if rates went up a 100 basis points?

Is that one of the requirements under the GAP rules?

Yes, it is.

We have an impairment recovery, part of that has to be recovered.

There's also, I should point out that we do have hedges that we hold against this asset.

Today those hedges have had dramatic increases in value.

We haven't closed out all of those hedges so you would understand that in a reversal of interest rates the hedges will decline in value and the servicing would go up in value and you know that's an important dynamic in the accounting process.

And one other quick question, on the new production coming on right now, what are you putting it on your books on a multiple basis?

Average multiple for servicing during 3Q 2002 was about 4.3.

Thank you very much.

Thank you.

Our next question will be from the line of [Dezek Janaja] from J.P. Morgan.

Please go ahead.

Hi.

A couple of questions.

The average servicing fee that you retain on a new portfolio that you have just capitalized was a little bit higher than last quarter, is that simply, is that something you're keeping more excess servicing or is there a change in the mix of [indiscernible] for any reason?

And continuing on the servicing issue, if you could comment a little bit on any changes you have made in the hedging of the servicing portfolio in light of all the volatility you've seen.

Relative to the, the servicing fee retention we did retain slightly, a little more excess during 3Q02, close to 4 basis points of additional and that is based upon certain models that we have for securitization, what we call best execution models, and we're evaluating making investment decisions, do we want to retain additional excess or sell through the excess so with declining interest rates and late you know hitting these all time lows, we felt that it was appropriate to retain a little additional excess as our models reduce that as a better execution.

I'm sorry what was the last part of your...

The other question was on the hedging of the servicing portfolio.

Have you, I know you're always changing your hedging on the servicing side.

You follow a dynamic model, could you comment a little bit on what kinds of changes you've made this quarter?

Well, you know, we do have a dynamic hedge and basically as rates, approach their low we moved, we did move part of our heading to more of an optional position so that in the event rates were backing up we would experience in the lower levels of losses on the servicing hedge instrument but at the same time retain the hedge effectiveness in the event that rates were to, you know, to move lower but it is hard for me to characterize all of the issues and, you know, strategic changes that we are looking at and evaluating and the hedge but I would say that, you know, moving to a little bit higher optional coverage on the hedge instruments was the most significant adjustment that we made.

And if I may, another question that's unrelated to servicing, looking at the insurance business your net losses rose more than your net premiums rose Q-on-Q.

I guess as a result your earnings were a little bit down on the insurance side.

Any color on which segment of the insurance business is seeing this faster growth in losses and what plans you have in terms of turning that around?

Relative to the insurance activity, I should point out that our, our loss ratios actually during 3Q 2002 came down from 50% to 40% and that our combined ratio was about, I'm sorry the loss ratios went from 47% to 54% and the expense ratios went from 50% to 40% with a combined ratio going down from 98% to 94%.

This is a business that is growing in terms of its [indiscernible] very significantly.

The premium recognition lagged and we do have some booked business that in terms of a [Texas] line of our business that produced some incremental losses that we have made adjustments for and ongoing looks very favorable in terms of the increasing income from our insurance segment.

As I noted in my presentation, we talked about the restructuring and reorganization of the management team.

We also looked at the core business of Balboa Life and Casualty.

We have changed the focus of that business.

We are substantially growing the top line again as that was pointed out in the presentation with additional premium business coming into Balboa.

We have identified the issues that were causing the losses.

We have ceased doing business in those areas that were causing them.

So we've taken a variety of steps to make certain that the issues were evident in 3Q 2002 were addressed.

Thank you.

Our next question will be from the line of Jennifer Scutti from CIBC.

Please go ahead.

Hi, good morning.

I have a quick question on the production side.

It seems that when I look at your production in dollars versus the number of loans that you've originated here, the average loan size seems to have gone up over the last couple of quarters.

I just want to see if I'm looking at that right and on that, on that note if you could talk a little bit about, kind of loan to value ratios, if you're seeing any kind of creep up there, and maybe just quickly kind of a run down again of the mix of your production for the quarter.

Well, I'm sure you're aware that throughout the country values have, you know, values of homes, particularly single family homes have risen and our, our portfolio historically over the last 34 years continues to reflect that fact.

I think secondly as, as Countrywide's brand continues to be known in the wider circle of economic and social classes that Countrywide is now not deemed to be a lender to the middle class but a lender to all classes.

And I think the portfolio reflects that.

We make two, three million dollar loans.

So I think it's a by-product of that.

In terms of the, of the loan to value ratios, I don't think we see any significant change in that, in that mix within our servicing portfolio.

It's remained fairly consistent.

I think one of the reasons being that if you look at the value of the homes that are securing those mortgages, the value of those homes are reflecting what's going on in the country so the, the overall loan to value ratio has remained fairly constant and the FICO scores.

The quality of the credit of the FICO scores have remained consistent, very high.

It's over 700.

And I didn't see it in the notes unless I missed it, just kind of a quick rundown of the mix of production between full sector and in the consumer markets, the different pieces that make up the consumer--

Well, each channel, let's take, you need a breakdown of the channels.

For the quarter, is that what you're asking for, for the quarter?

Yes.

OK.

You have C and D?

We'll get it for you.

C and D, its retail, retail branch operation direct to the consumer is how much?

Is $16.3b.

Wholesale, which represented 26% and wholesale was $17.6b.

That's dealing with mortgage brokers.

Correspondent, where we're dealing with financial institutions, banks, savings and loans, other mortgage bankers - $28b, the home equity component - $535m and full spectrum $971m.

Great, thank you.

You're welcome.

Thank you.

Once again ladies and gentlemen, if you'd like to ask a question please depress the one on your touchtone phone.

The next question will be from the line of Gary Gordon from UBS Warburg.

Go ahead.

OK, thanks.

First, speaking about 4Q 2002, you suggested that you're going to have higher originations 4Q 2002 than 3Q 2002 then looking at the servicing side where you took, I guess, the impairment charges that at per share a little over $2 greater than the hedge, it's hard to imagine that there's a material impairment charge if rates don't change so that would argue for, you know, roughly the same origination income and $2 higher servicing income.

Am I missing anything material in there?

Gary, you know, the, a couple of things.

One is given the you know decline in interest rates at the end of the quarter, our amortization that we project in 4Q 2002 will be higher because that's something which is set, you know, basically at the beginning of the quarter.

As I mentioned earlier, we did move to a more optional hedge addition which has additional costs but does protect against you know giving back everything on the, on the hedge in the event that rates were to rise.

And another thing that I think is important in terms of looking at the performance of the company and taking a conservative view of performance is that we did have a very significant gain on sale of mortgages and high margins and part of that was the result of you know the hedging and sales activities which worked out very well during the quarter on the pipeline and inventory so you know we have to look at those things also in a conservative manner.

But, you know, our models that we use and the conservative nature in which we're viewing the servicing asset you know would provide you with targets in ranges like the ones that we've given you.

OK, thanks.

And just wanted a technical question here, the servicing fees, the way you've lumped them together anyway, had a big jump Q-on-Q, up about $60m while your, I would assume your average servicing fee did increase, I assume there was either an accounting change or something else increased.

Well, you had a, [indiscernible] to the details I think [indiscernible] there has been a significant increase in the, what we call remittance fees running almost $30m a month and that would include late charges and prepayment penalties and other fees that we get relative to loans going back and forth, in and out of foreclosure and bankruptcy, and that sort of thing.

There was a substantial increase in the fee, the overall fee income not including the servicing fee.

Now, my colleagues here are scurrying around, what do you see?

Well, I think the, you know, one of the primary reasons for the increase has to do with the weighted average servicing portfolio outstanding, if you look at 2Q 2002 that was about $303b versus the, you know, $384b which was the average for the, outstanding during 3Q 2002 and so, you know, there's very significant additions to our portfolio are being reflected in the higher servicing revenues as well.

OK, thanks.

One final thing, obviously with the tremendous amount of business volume your expenses are going up, was there any sort of, I'd put them under the topic of voluntary expenses like extra marketing expenses, you know, quicker amortization of equipment or something in the quarter or is this pretty normal?

Gary, there's nothing significant there.

I mean we do, you know, the thing that again occurs to me is that we are, which I didn't cover in the presentation, we are significantly increasing our sales force to penetrate, get greater market penetration on our core business, mortgage banking business, particularly in the retail sector and all the evidence is it's working.

So we've added substantially to that area.

And, of course, as you do in these kinds of arguments, you have to add people, equipment, space, a variety of things and, of course, all of that to a great extent is, you know, can be reversed in the event that, you know, the markets indicate that you have to reverse it but I think it's just a reflection of the things that we have to do to accomplish what has been accomplished here which, you know, at least from my perspective, is an incredible accomplishment in taking the volumes that we have taken in, had the market penetration that we have had, had the increased production that we have sustained and do it with operational efficiency.

I would say that probably the biggest sector would be in the technology area.

We have substantial investments in technology and Six Sigma type programs, which we've engaged in over the last year where we've had to increase personnel to employ those programs.

OK, thanks and congratulations.

Thank you very much.

Thank you.

Our next question is from Richard Eckert from Wedbush Morgan.

Please go ahead.

Yes, first of all congratulations on a great quarter.

Secondly, can you confirm a report in the American Banker that you plan on increasing the commission sales force from 2200 or approximately 2200 currently to 3500 next year?

Yes, that, that is correct.

That's a short-term objective.

I think that probably the longer term objective is about 7000.

OK, thank you.

You're welcome.

Thank you.

Your next question will be from the line of Charlotte Chamberlain from Jefferies.

Please go ahead.

Yes, good morning.

A couple of questions kind of ranging far afield.

Following up on the questions having to do with credit quality, I was wondering if you could tell us for the prime versus the sub-prime loans the average time to liquidation.

In other words from the notice of first default to when you actually liquidate the property and the average loss.

And if you could tell us for prime versus sub-prime if you're seeing any notable trends in terms of average loss when you sell the collateral, if any.

And the other two is, if you could give us, I think you said that you, that the gross price on prime loans was 101.

I was wondering if you could give it to us on [HELOX] and sub-prime.

And finally the ten year has gone up 63 basis points since the end of September, just a phenomenally fast jump like we saw back in November and I was wondering if you are seeing anything literally in real time since the end of 3Q 2002, whether that's impacting either mortgage rates or your applications.

Thanks.

Well, let me take the first part.

Let me give a general answer to, Charlotte, to the issue of the time frame from the point of notice of intent to foreclosure from the ninetieth day of delinquency to, through foreclosure and the time through liquidation.

It varies widely and I hesitate to give you any kind of average.

I don't even know the value of knowing tha.

But I think that it's important to know that we do not take the real estate or the credit risk.

And you know Fannie, Freddie, FHA, VA, Ginnie Mae, private mortgage insurance companies receive from us substantial premiums each and every quarter for the because they take that risk.

So it's important to put that in perspective relative to the quality of risk that we take on these loans.

Now I would say that if where we end up with property, which overall is rare when you look at the total amount of loans that we make, we rarely end up with a property where it's deemed that Countrywide made an error and should not have made that loan and we end up with the property.

The last time we went through the cycle which was about twenty four months ago we were averaging about a $40-42k loss per property and the time, from the time they were able to get title to the property, and say it varies because people being very sophisticated with bankruptcy type tactics where they hold us off for a long period of time but once we get the property the average time is about 120 days from the time that we get it, get title listed and are able to market that property.

OK, one thing, when you said $40-42k per property, what was the average, is that per 100,000 or--

No, it's $42k.

But what was the underlying, you took a loss on, what was the principle on which you took the $42k, $40-42k loss?

I don't understand the question.

What's the average balance of the loans that, you know, when they're sub-prime?

There's no sub-prime. [Indiscernible] overall.

Overall our portfolio's at about $140k per loan.

OK, so it's like a $40k loss on $140k and OK, in 120 days and I guess, Angelo, the reason I'm asking it is you do have residuals on your balance sheet and if you don't retain any of the credit risk, I don't quite understand that given that you've got residuals on your balance sheet.

We have, we do have, I'm talking about the general, the size of the residuals related to our overall portfolio is diminimus.

I'm not relating it to the, what's [indiscernible].

Let me go through resale, let me go through residuals that we have credited so we're on, first on all, relative to sub-prime, our original method of securitizing result in a remaining residual at market value which has a value of $76m on $2.5b of remaining principal balance.

That investment has within it embedded reserves based upon current information, on the severity and frequency of loss.

The other primary investment residual that we have is residuals on prime home equity mortgages so I'll dimension that for you.

We have about $341m of residuals on our balance sheet that relate to prime, home equity, mortgages.

And again, embedded in the value of those reserves are the estimates for frequency and severity of loss.

So that is when we talk about residuals that is the type of credit or investment exposure that we have.

On our newer types of originations we provide some corporate guarantees at levels of losses that exceed certain levels and we have reserved for any type of loss that might be embedded by virtue of making those corporate guarantees.

Thank you.

Our next question will be from the line of Mike McMahon from Sandler O'Neill.

Please go ahead.

Stan, I want to get back to I think the first question having to do with writing up the impairment or recovering the impairment.

You do have some flexibility do you not related to hedge accounting and that if you realize some of the hedges then that may preclude you from having to write up some of the value?

Is that generally correct?

Well, you know it is a correct statement however what complicates the write-up is what we think of as the impairment reserv.

So even though you may not have corresponding hedge losses, you could still have to increase or reverse the reserves in the event that the value of the servicing asset increases.

All right.

Thank you.

Thank you.

Our next question will be a follow-up from the line Paul J. Miller.

Please go ahead.

Thank you very much.

On the $51b pipeline you have out there, can you tell me how much is, has a rate lock on it and secondly with rates moving up so fast, what percentage, are you estimating a percentage of that $51b will close?

Yes, let's give you a general-- I don't know if we have specifics here, obviously in this environment you know the market again is quite sophisticated so I can say that the number of committed, essentially committed has risen and Stan will go through numbers specifically with you and also your pull- through rate is going to increase dramatically at this point.

As rates rise people, you know, they keep stepping up and they, they want to make sure they get the loan closed and they stop shopping and just go ahead and close the loan so the pull-through rate historically increases during the cycles.

Stan you have some specifics?

Yes approximate terms, a little over 50% of that pipeline has commitments on it.

We have hedged fully the, the pipeline of loans in process and have you know years and years of model data on closing ratios that allow us to hedge the pipeline of committed loans in process very, very effectively.

So Stan, you would think the pull-through ratio would increase even though rates moved up 70 basis points because people are just trying to lock in any rate?

Yes just if you think about the profile of a pipeline of loans in process as we're hedging is that as interest rates rise there's going to be a greater percentage of that committed pipeline that will close within the terms of the commitment and inversely during a period of declining interest rates, we'll actually see a decline in the commitment that will close, within the terms of the commitment.

In other words people trying to renegotiate.

So that's the type of profile that we see and that we hedge to and you know again I want to tell you that that's a very effective history and strategy that we deploy in hedging the pipeline of loans and probably not an issue.

Now relative to the consumer, remember that while we've seen an increase in treasury rates, we don't have as great an increase on the mortgage side and there still is an enormous quantity of people that have loans which are refinanceable and so when they start to see interest rates increase you see a better pull-through or you know greater level of conversion of customers that you're dealing with and so while we've had a back-up in interest rates, the actual impact on the daily intake for new loan applications is very small relative to the historic levels of application volumes that we have been experiencing in September.

So in other words you haven't really seen a downturn in applications.

Is that what you're saying?

Well, you know I would say that it's slight, so slight that--

Very slight.

OK.

And I was wondering if you could make a comment about the new RESPA rules and how it's going to a lot of - there's been a lot of articles, how it's going to benefit some of the big aggregators such as Countrywide.

I just wondered if you had a comment about that.

Uh, that's true.

OK.

I mean would it be easier for you to pick up, you know commission mortgage brokers going forward?

That's speculative.

OK.

You can speculate on that as well as I can.

OK.

Thank you very much.

Thank you.

Our next question will be from the line of Don [Meader] from Bear Sterns.

Please go ahead.

Angelo a couple of things.

Is the dividend now, the $0.12 considered an increase of dividend, the regular dividend or is it an adjustment because of your accounting?

No, we had one adjustment because the, you know, change in the accounting year, this is a fundamental change in the dividend.

So it's not, it's not going to be considered the regular dividend?

It's part of the regular dividend.

It will be a regular dividend of $0.12?

That is correct.

You're active in the modern income [indiscernible] arena and you've introduced something called Easy Way recently.

What difference is this Easy Way program to your other program, to your previous program?

Yes let me just comment.

We probably have it's directed towards low income and minority borrowers.

Right.

And it's in cooperation with in our case Fannie Mae and what we're trying to do is just lower the barriers of entry and it has a variety of aspects to it.

Lower down payments, lower FICO scores, credit scores, you know some, less documentation.

It's just, we're continuously, both Fannie Mae and us, as well as Freddie Mac, are trying to find ways to get the, the home ownership rate among minorities and low income people from 48% it's presently at up to the 70% that Caucasians enjoy.

And so you're going to see, we must have right now 20, 25 programs, that's one of them, that do a variety of adjustments to the, offer the theme to lower the barrier of entry.

Also, Angelo, in this year there are a lot of pros and cons in sub-prime lending.

Is your forward-looking to increase or decrease your sub-prime area?

I think we've been relatively constant in that in terms of percentage of our business, you know, represents probably 4% or 5% of our business.

I don't see any substantial you know increase in our, you know, in the percentage that we do of that business.

It's been a very good business for us, we've had a very good experience with it, now we've in it for a long period of time where we've had an opportunity to watch the behavior of these loans and our ability to service them properly.

And we are very pleased with the performance of that business but I don't see us, you can't dig too deep into that chain.

Those who have done that have, you know, suffered the consequences of it.

So I think we're going to stay pretty much where we are, you know, in the A- category, the all day, you know, that type of loan.

It's a factor of risk, right?

You're taking more risk and you don't want to take more risk?

Well, we're taking, we're thinking.

The deeper you dig into the chain, yeah, you obviously increase, the lower, the lower the, not necessarily the lower the FICO but the lower the quality of the borrower which is not always reflected in the FICO score, you're taking on greater risk and there's a level of risk we don't want to go beyond.

OK, thank you and we, all the clients appreciate the extra dividend.

Thanks again, Joe.

You're very welcome.

Thank you.

Once again ladies and gentlemen, if you have a question please depress the one.

We have a question from the line of Richard Diamond from Inwood Capital Management, excuse me, Partners.

Please go ahead.

Yes, following upon some of Charlotte Chamberlain's questions, could you comment in general on the cash-out refi market given, you know, recent regulatory developments such as the Georgia Fair Lending Act as well as rising sub-prime delinquencies?

Well, I don't know where you're headed with that but we don't see any significant change in the cash-out refi volume where people are trying to you know liquidate their, liquefy their equity and move on.

We don't see any significant change in that.

There's been sort of a normal flow.

What people have been doing primarily is to try to get their rates and get their payments down.

That's been the general movement.

Has there been debt consolidation?

Yes, there's been some of that as people try to get rid of the 21% debt on a credit card into a much less expensive tax deductible mortgage payment.

As it relates to, I sort of look at it separately relative to RESPA, relative to predatory lending and Georgia law, the Georgia, the Georgia situation is troubling in that, troubling from this perspective, the very people that it's supposed to assist in our judgment or my particular, I'll take the hit on this, my judgment, it's going to harm them and I think you're beginning to see the signs of that very, very early on.

There is allegedly a lawsuit being fought by a group of minority mortgage brokers who feel that they don't have sufficient liquidity because of the constraints of the Georgia law.

There are some people who are now complaining that they are trying to get loans and are unable to get them for a variety of reasons and the fact that Fannie, Freddie Mac has pulled out of Georgia and isn't buying high cost loans there because of the infinite liability that you take on and has now stated that on covered loans, the second category, they will not buy whole loans nor buy securities with those loans in it.

That is very, very significant.

I know that first hand, that Freddie Mac has put a lot of thought into this.

It was the last thing they wanted to do.

They have the same desire that everybody else has in this chain to provide financing to the people who need it the most but are forced to pull out.

These are egregious laws that are being, in my judgment, will be harmful ultimately to the very people they are supposed to protect.

Thank you very much.

Thank you and our final question in queue will come from the line of Craig [Picarello] from Fairhaven Capital.

Please go ahead.

Hi there, it's actually James Ullman.

A couple of quick questions, one just in terms of the MBA refi indexes rolled over following the ten year treasury price, I just want to get an idea when do you think that impact might start to show up in your pipeline?

And the second question would be on your mortgage reinsurance business.

Some of the underlying insurers have seen some difficulty recently.

Has that made you think about potentially cutting back or pulling back in that business?

Let me take the second part.

I'll have Stan take the first part.

The answer's no, it's been a terrific business for us.

You've got to remember that we have selected the tranche of risk.

We don't take on the entire risk and we have somebody, we're in the middle.

We have a mezzanine of risk so we have the PMI company, whoever it might be, that we have the treaty with that takes on the front, the front and the back hit.

Our experience with it has been, now you know we've been into this four years now, has been incredible in terms of the losses so no, we have no plan to- remember we're only doing it on our product and we have- and that was designed to do it only on Countrywide product because we have a lot of confidence in our product and we know the metrics of our product so the short answer is no.

We're going to continue on the path that we had set out to do several years ago and we're going to continue to insure our own, the mezzanine that we, that we've established, the mezzanine risk on our own product.

Stan, you want to take the first one?

Yes, you know, I can only give you my personal guesstimate of what's happening given the backup in interest rates but my estimate would be that we'll see in the kind of immediate months something like 5-7% decrease in the refi index.

And that probably will hold pretty steady given rates maintain at this level.

But I, you know, I want to, to make sure that you understand that that's just my guess watching you know what's going on and day to day activity.

I think the important perspective from the investor point of view is that, you know, Countrywide is, is, has demonstrated its ability to penetrate this purchase market and we're going to continue to penetrate the, this in a very aggressive way.

That's why I mentioned the 7000 troops that we'll have in the field over the next several years.

We intend to dominate that, that purchase market which is a market that has steadily grown at a 7% compounded rate over the last 30 years irrespective of interest rates because some way, somehow those borrowers, buyers who want that home buy that home and, particularly with the new product that comes out.

You have, as rates rise, variable rate product so it's a matter of what kind of a mortgage payment we can create for that buyer and if he or she can make that mortgage payment they're going to buy that house and so we, it's just a focus on the refi index, I know you may not be doing this, but just to focus on that, would be a mistake.

You have to look at the overall market and the overall market is very, very large on that purchase side and so we intend to be the major player on the purchase side of the business.

Great.

Just one quick follow-up on that.

At the beginning of the call you were discussing your expectations, I guess, in terms of a normalized mortgage market in terms of capital markets being down about 50% and insurance and banking being flat.

Is 50%, do you think that's conservative?

Is there any reason that capital markets might only be down only 25% in a normalized market or--

Yes we took, I mean we gave that.

We gave that estimate to get to our core earnings.

To get to the core earnings we gave it the test of fire, you know, in that analysis was a very conservative analysis of it.

Countrywide Capital Markets, [indiscernible] of their business comes from Countrywide. 77% of business comes from outside of Countrywide.

So we, I believe it to be a conservative estimate.

I'm going to have Eric Sieracki comment on this since he was the one that worked on the model, on the current earnings model.

James the entire analysis was intended to be very conservative.

If you harken back to the total production market we told you that all the educated parties out there are estimating market size of $1.4-2.0t.

For our example we used the market size of $1.2t.

And likewise in diversification we assumed the most punitive set of circumstances that we could imagine.

Capital markets down 50%.

The bank, we know will grow.

You've seen assets grow from $115m to $4.5b.

Those assets will categorically grow into 2003 so it just demonstrates the conservative nature of the analysis and what we are trying to show is that in a normal rate environment we will be able to reproduce those earnings that we had last quarter and therefore we can sustain earnings growth after the boom ends.

The tone of this entire presentation, even relative to the questions related to MSRs and our approach to the MSRs, is a conservative one.

Our approach, we think and it's prudent particularly in any volatile environment, to be conservative.

Thank you, gentlemen.

We have no further questions in the queue.

Please continue.

OK, I thank everybody who participated who's still on the line.

We look forward to our next teleconference with you in the next quarter and hopefully the tone that we set will meet not only your expectations but in fact will exceed it.

Thank you very much and now, the meeting has ended.

Thank you.

Thank you.

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