美國銀行 (BAC) 2002 Q4 法說會逐字稿

Ladies and gentlemen, good morning.

Thank you for standing by and welcome to the Countrywide Financial Corporation fourth quarter fiscal year 2002 conference call.

At this time, all lines are in a listen-only mode.

Later we will conduct a question and answer session with instructions given -- later we will conduct a question and answer session.

If you wish to ask a question at that time, press one on your touch-tone phone.

You will hear a tone indicating that you've been placed in queue and can remove yourself with the pound key.

Once again, when we go to the Q&A session, to ask a question, you will need to press 1 on your touch-tone phone.

If you should require operator assistance during the call, please press zero then star and an operator will assist you.

As a reminder, this teleconference is being recorded.

Now I'd like to turn the conference over to Countrywide's Chairman, Chief Executive Officer and President, Mr. Angelo Mozilo.

Go ahead, sir.

Thank you.

Good morning and welcome to Countrywide's earnings teleconference for the fourth calendar quarter of 2002.

We strongly encourage all participants to review the fourth quarter 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 selecting presentations and quarterly earnings and performance reports.

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

First I will provide a brief overview of our results for the fourth quarter of 2002 and the full calendar year.

As you will see, Countrywide achieved numerous milestones in both periods.

The next topic is a discussion of the operational and earnings performance of our diversification activities during 2002.

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

The presentation will conclude with a brief review of our core mortgage banking business that continues to establish innumerable records.

The strength of the current origination market will be addressed as well as the industry experts forecast for 2003.

Let's begin with our first topic on page 3, an overview of our performance during the fourth quarter.

Please keep in mind that year-over-year, quarterly comparisons are based on quarters ended November 30, 2000 and November 30, 2001.

Countrywide is now a calendar year reporter having switched from a February 28 fiscal year.

Earnings per diluted share increased 53% over the prior year to $1.94, which marked Countrywide's seventh consecutive quarter of record earnings.

Diversification earnings grew 120% over the prior year and were a key driver of consolidated earnings growth.

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

Earnings reached a record of $102 billion for the quarter and increased 142% over last year.

The pipeline of applications in process remains strong at $49 billion.

This indicates that fundings are likely to be robust again next quarter.

The servicing portfolio reached a new milestone of $452 billion as of December 31.

Countrywide led the industry in organic servicing growth during calendar 2002.

Turning to page 4, we present a similar overview of Countrywide's performance for calendar 2002.

All amounts presented in this chart for the current year are all tying company records.

Earnings per share increased to $6.49 per diluted share, a gain of 50% compared to last year.

Diversification pretax earnings grew 99% over last year and reached $375 million.

Fundings of $252 billion were up 99% over the 12 months ended November 30, 2001 and handily exceeded the full calendar year record of $138 billion established in 2001.

According to inside mortgage finance, Countrywide had 10% market share for 2002 and enjoyed the largest percentage growth in funding volume of the top 25 lenders.

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

On page 5, we present the quarterly and full-year diversification earnings history.

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

Of course, strategy of the company is to leverage our world class mortgage banking platform to grow our other businesses.

Pretax earnings from our diversification businesses in the fourth quarter were up 120% over the prior year and reached $113 million.

Diversification earnings for the calendar 2002 amounted to $375 million, 99% higher than last year.

Diversification businesses contributed 28% of the consolidated total for both periods, which is noteworthy in view of the extraordinary high earnings from our core mortgage banking business.

On page 6, we address our Capital Markets business that provided 15% of consolidated earnings during 2002.

Capital Markets pretax earnings were $200 million for the year, up 136% from 2001.

The primary driver of capital market's success is our securities broker dealer, Countrywide security corporation, which provided almost 90% of the Capital Markets earnings for the year.

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

Securities trading volume for CSC for the year was almost $2 trillion, up 53% over last year and over 3 times greater than 2000.

CSC currently ranks in the top 10 in all of its major trading areas.

Other capital market subsidiaries include Countrywide asset management corporation, a distressed asset manager that acquires nonperforming loans from third parties and rehabilitates them for eventual sale.

And Countrywide servicing exchange, a broker of mortgage servicing rights.

Our newest diversification initiative, Countrywide bank is addressed on page 7.

Banking provided 6% of the consolidated earnings during the year.

Banking pretax earnings were $84 million for the year, up from $10 million in 2001.

Our banking strategy is designed to lever our mortgage banking platform.

Our goals are to diversify our earnings and our funding structure.

Portfolio lending capability recharacterizes the gain on the sale of a loan in the current period in to spread income in future periods.

The bank also affords access to new liquidity sources such as FHLB advances and retail deposits.

Countrywide developed a prudent, controlled growth plan for the bank, approved by the regulators.

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

As you can see on page 7, total assets have reached $5.1 billion at December 31, total assets are expected surpass $6 billion by the end of this month.

Our goal remains to reach $17 billion at the end of this year and $22 billion by December 31, 2004.

Countrywide warehouse lending is included in the banking segment, but is separate from Countrywide bank.

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

Outstanding balances at December 31 were $2.2 billion.

Moving forward on page 8, we next review our insurance businesses that contributed 6% of consolidated earnings during 2002.

Insurance pretax earnings were $82 million for the year, down 8% from 2001.

The insurance sector is comprised of three separate companies, Balboa reinsurance, exclusively reinsures primary mortgage insurance on Countrywide-originated loans.

Balboa life and casualty is our national insurance carrier that emphasizes property liability and life insurance.

And Countrywide insurance services is a national personalized insurance agency that focuses on its core product and service competencies in homeowners and life insurance.

Balboa reinsurance earnings increased significantly compared to last year.

The book in business grew in line with the servicing portfolio.

Carrier earnings were down compared to the prior year due to lower investment portfolio income and higher claims cost related to reinsurance contracts in Texas that have now been terminated.

Additional reserves were also booked related to certain other contracts due to observed losses being higher than expectations.

These contracts were subsequently favorably renegotiated.

These amounts were partially offset by significant growth earned premiums from profitable lines.

The agency was restructured during the fourth quarter in order to streamline its operation and focus on profitable business lines.

No further adverse impact on earnings expected in the future related to these matters.

Management believes that the actions taken properly position the carrier and the agency to resume their growth in profitability.

It is noteworthy that the independent rating agency A M Best reaffirmed Balboa's "A" rating last week, designating in the excellent category.

The pie charts on page 9 reflect a mix of earnings between our core business of mortgage banking and diversification businesses for 2002 compared to management's expectation in 2006.

Our diversification businesses contributed 28% of consolidated earnings for 2002.

Management expects that these businesses will contribute 50% of consolidated earnings in four years.

Banking is expected to grow at a -- at a rate substantially faster than a consolidated group and provide 25% of the earnings in 2006.

Capital Markets currently represents 15% of earnings due to the refinance boom but is expected to normalize at 10% in four years.

Insurance is expected increase its contribution to the consolidated group and provide 10% in 2006.

Global is expected to provide up to 5% of earnings.

Please keep in mind that the consolidated earnings pie will be significantly bigger in 2006 than it is today.

We remain very bullish in our core mortgage banking business, especially in view of the ongoing extraordinary opportunities 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 pretax earnings were $968 million, up 45% from last year.

In 2002, production earned a record $2.4 billion based on record fundings of $252 billion and a record -- and record annual margins of 95 basis points.

Purchased funding volume was $86 billion for the year.

The pipeline of applications in process is at $49 billion, which indicates fundings are likely to be robust through the next quarter.

As would be expected in this low rate environment, servicing posted a significant loss in 2002.

As prescribed by GAAP, Countrywide significantly amortized and impaired its MSRs.

Amortization was $1.3 billion during the year and impairment was $3.4 billion.

The servicing hedge performed as expected and provided a gain of $1.8 billion.

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 for our mortgage banking business is that the macro hedge continues to operate as it was designed.

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

These production earnings subsidized 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 achieved seven consecutive quarters of record earnings.

Prospects for the mortgage business remain strong as application activity has remained vibrant.

On page 11, we present the MBA's purchase, refinance and total applications indices for the last three years.

Calendar 2000 is included because it predates the current refinance boom.

The first column in the chart on the left is the average purchase application index for each year.

While 2001 was flat to 2000, the index jumped 16% in 2002 which fueled a record year in purchased fundings for the overall market.

This trend in the purchase application index is discernible in the graph on the top of the right side of page 11.

Note that the purchase index today of 355 is the same as the average for 2002.

Despite the adverse seasonal effects normally observed this time of year, the purchase market remains vibrant.

And Countrywide's goods purchased market shares from 6% in 2001 to almost 10% today according to inside mortgage finance.

The second column in the chart on the left is the refinance index.

Calendar 2000 was a normal market and had a typical average refinance index of less than 450.

The refinance index soared to 2500 on average in 2001 and even higher to 3400 in 2002.

The last reported level was 5,433 on January 17, 60% higher than the average in 2002.

In conclusion, application activity remains strong and the refinance boom seems have significant steam left in it.

It is important to note that Countrywide's business model is designed to sustain earnings growth after rates rise and the refinance boom ends.

Looking at the big picture for the mortgage market, forecast by the industry experts for the total market size in 2003, are reflected on page 12.

While forecasting total market size in 2003 is a daunting task, certain interesting trends can be discerned among the experts' forecast.

All three forecasters agree that purchase fundings for the total market will be roughly $1 trillion in 2003.

A purchase market of that size creates a softer landing in the post refinance boom environment.

Opinions vary significantly among the experts who refinance fundings in 2003.

The average estimate again approaches $1 trillion.

A total market of roughly $2 trillion indicates another robust year for the production sector in the year 2003.

We now turn your attention to the disclaimer on page 13.

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

Countrywide has a policy of communicating 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 facility analysis of the company by investors and other parties.

This policy is not intended to divert observers from taking a long-term look at the company.

Low mortgage rates are expected drive high funding volume and prepayments in the first quarter of 2003.

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

Diversification earnings are expected to be stronger, although relatively in line with the fourth quarter.

In view of these anticipated results, management believes the company will report diluted earnings per share within a range of $1.95 to $2.10 for the first quarter of 2003.

These estimates should be considered a forward-looking statement as described in the disclaimer on page 13.

This concludes my formal remarks.

I would now ask the operator to explain how we will conduct our question and answer period.

Thank you very much.

Thank you.

Ladies and gentlemen, once again, if you wish to ask a question, please press the 1 on your touch-tone phone.

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

If you're using a speaker phone, pick up the handset before pressing the number.

If you have a question or a comment, press the 1 on your touch-tone phone at this time.

And the first line will open as Robert Napoli at U.S.

Bancorp Piper Jaffray.

Good morning and congratulations on great trends.

Thank you very much.

A question on your servicing business.

And then just a small question on the bank, if I could.

On the servicing business, your -- your platform has grown and the servicing portfolio has grown substantially.

And if you look at the -- the monthly data you give out on the personnel in that business, it's grown much slower.

That's going to be the driver -- key driver to your earnings as the refi boom slows down.

Can you give thoughts some what you think the pretax margins as a percentage of the portfolio might be as you get into a full-fledged refi bust.

And on the bank side, is there anything unusual in the earnings?

You had very strong growth in bank earnings.

Let me take the first one on the bank and then I will turn it over to Keith on the -- on the servicing question.

The bank, there's nothing unusual at the bank.

The bank is enjoying a -- an extraordinary period.

This is probably the best time in retrospect to build a bank at the -- at the level of interest rates that -- that -- that you have to pay, depositors have to pay for the liabilities.

Our cost of funds are very, very low.

Particularly because of the micro sites that we have established in using our existing brand systems set up the one and two-person micro sites.

That's provided us extraordinary leverage and is the key driver of our retail composites and provided us the highest margins.

So, clearly we -- we -- there is a need for a local simplistic facility for the older set to -- to contract their banking business primarily by buying CDs and putting money in money market funds.

We've had -- we've enjoyed enormous success, in fact, in the month of January we're 249% over planned in those micro sites and expanding the micro sites.

So, it is really the leverage issue that we've been able to utilize in growing the bank, but nothing unusual.

Keith, you want to go over the service --

Sure, you know, first in terms of productivity gains on the servicing segment, frankly I'm not sure what stats you're looking at.

We think we have maybe modest improvement productivity over the last 12 months.

The long-term trend is obviously been very good.

In terms of servicing margins, what we can expect in a post refi boom environment, obviously as you know, amortization expense is currently running very high and we would expect that to be substantially lower in a -- in a normal -- in a normal environment.

And we think it's -- it's a good benchmark to look at the long-term expected runoff rate as it -- as a close proxy for amortization.

So, in a normal market where you expect loans to turn over at about a 9, 10% rate, we would expect amor to closely approximate that.

The other major dynamic in that environment, obviously, interest rates are going to be higher.

We're going to see positive earnings from our escrow balances, as you know, they have been running negative of late.

That will be offset partially by increased interest expense related to carrying the investments in the servicing segment.

We think net-net that margins of somewhere between 10 and 12 basis points in servicing are achievable in that kind of environment.

Okay.

Thank you.

Thank you, the next line we'll open as the line of Brad Ball at Prudential.

Go ahead.

Thanks, just as a follow-up to that, can you talk about the margins on the production side? 95 basis points in '02, can it be sustained for the first couple of quarters?

And secondly, would you talk a bit about full spectrum lending.

An idea as to, you know, what the risks are, what you're seeing in terms of quality there?

And whether you have plans to -- to book some of those loans at the bank at some point in the future?

Thanks.

Let me take the full spectrum and turn the other question over to Stan.

Let me get the two of them -- full spectrum's performance is -- is better than we expect in terms of loan quality, in terms of delinquencies and foreclosures.

It's performing very well.

Again, we're very careful in that -- in that business because of the nature of that business.

So, we're not in the deep subprime category.

We're -- we're expanding some of its operations so that it -- it can -- it has a broader and more diverse product line and that's taking place over the next couple of months.

So that, you know, on a blended basis, the FICO scores of those loans are coming through full spectrum will probably move higher.

In terms of the bank, we do not see that product being placed in the bank anytime in the near future.

We want to make sure that the bank remains pristine in every regard and the quality of the assets are the highest quality of all time.

So, we don't see any situation where we will merge those efforts in any way.

We will keep it in the Countrywide home loan family.

Stan?

Yeah, with regard to -- to margins, you know, from a long-term perspective we see the industry consolidation and the -- and mortgage banking held in very rational hands today, as a very good direction in terms of a more rational pricing environment to return requirements in the long-term.

At the -- at the current time, volumes remain, you know, very high in terms of application activity and we would look to sustaining the type of margins that we've achieved in the -- you know, in the last several quarters, particularly in this upcoming quarter, from, you know, what we're -- where we're priced and in terms of current activity.

I would, you know, suggest that as margins -- as production declines, that we would see margins start to retract in -- primarily in our correspondent and wholesale operations.

But...at levels which will produce good returns in those -- in those operations.

I just -- to tag onto that, the -- the -- give you a sense of where it's going currently, the application volume in January is running about 4% ahead of December.

Great.

And -- and what would be a normalized production margin, then, Stan?

Well, you know, it's -- it's -- because of the business mix, it's very hard to give you something that is meaningful in that sense.

You know, our -- the most -- or best that I can tell you is that I think that margins can contract in our wholesale and correspondent activity by as much as a quarter of a percent.

Uh-huh.

But that -- our retail operations we look as -- look as being far less sensitive to -- to price changes.

But, again, I want to emphasize that even with that type of contraction, that we have very significant earnings coming from the production divisions.

Great.

Thanks.

Thank you.

And the next question will come from the line of Matt Veto at Salomon Smith Barney.

Please go ahead.

Hi, thanks, let me add my congratulations on a great quarter, too.

Thanks.

I wondered if you could talk a little bit about the competitive environment, particularly in the purchase market.

I'm sort of wondering if part of the -- part of your ability to take share in that market doesn't result from being able to focus on that market as competitors are getting sort of flooded with refi's and if that's the case, how would you expect that to evolve if we get into a less robust refi environment, would the people come back harder or think the opportunity is lost there for them or how would you do that?

Them being competitors?

Yes.

As you can see, we picked up overall market share in a pretty robust environment, very competitive environment, where capacity was a issue.

Let me say this to you, this is not a static environment.

Countrywide is dramatically changing and has over the last several years, its focus, its protocol and how it seeks out that business.

By the end of this year, we will have the second largest sales staff on the retail side of our business in -- in the industry.

So, we're growing a very focused sales staff that's -- that is calling on the community that creates the purchase business, which is the real estate community.

And -- and that's how we're growing market share.

It's not happening through inertia, it's because we have a purposeful effort to dominate that business and we will as a result of building a very sophisticated, world-class sales force.

Great.

Thanks.

Thank you, the next question will come from the line of Paul Miller at Friedman Billings.

Please go ahead.

Yes, thank you very much.

Congratulations on a nice quarter.

My question is with correspondent lending, this quarter, correspondent lending represented over 50% of total production, that's been trending upwards over the last four to six quarters.

Is this just a result of just picking up cheap servicing out there because of the refi boom?

Or is it a trend that will continue going forward or will back off in a normalized market?

Well, the cheap servicing issue is a result and not a cause.

The reason why we're -- why the correspondent had such momentum is because we have the best execution in the business.

Both on a offline and online basis.

Platinum plus is our platform by which correspondents communicate with us. 98% of the correspondence now communicate with us and do business with us electronically.

We have the best systems.

Therefore we provide them with the greatest efficiency and as a result, you know, we're getting -- we're getting the end result of servicing rights at very good pricing.

Stan, do you want to comment on that?

Yeah, I think on a -- focus you also on the industry consolidation that's taken place.

There are, you know, fewer correspondents, and, you know, as Angelo mentioned, we have, you know, systems which allow for the effect -- for effective service levels and because of that, we've gained market share.

We also have a very, very broad product range and so entities that are looking for a correspondent lender are attracted to Countrywide so we picked up share in that marketplace and I think that, you know, as the industry continues to consolidate, we will play a bigger and bigger role in correspondent activities.

So, I guess as a percentage, then, you could see that number staying -- I mean continue to trend upwards, then, as a percentage?

you know, our emphasis is in growing all of our production divisions and it is, I think high now as a result of refinance activity.

You know, we have customarily run that at more of the 40% of our production and probably as refi's subside, we will see a slight setback or a back to normal volume levels.

That business is one that has greatly benefited by the -- by industry consolidation, by the rationalization of the marketplace and so if you look at the history of correspondent activities, you see entities, for example, Homeside, which was mispriced and, you know, for several years, and was detrimental to correspondent activities.

Today, the competition is all rational and so that makes that activity a much, much better part of our company and of our strategy going forward.

Thank you very much.

Thank you.

The next line will open as the line of Gary Gordon at UBS Warburg.

Please go ahead.

Okay.

Thanks.

A couple of things.

One, again, unusual for you are the charges of $600 million, the hedge gain was $31 million.

Summarizing that, you were extremely conservative in evaluating your MSR asset.

Was that a question?

Yeah.

Okay.

Keith?

Well, well as you -- as you may not know, mortgage rates did decline during the period, about 20 basis points, in contrast to treasury rates, which rose about a like amount.

Prior to what you saw there in the fourth quarter was spread tightening and when that occurs, that -- that does create a -- a -- a loss for us.

You know, we're looking at the servicing market and we, like the whole industry, perceive servicing values to be declining, yields are increasing everybody is acting more conservatively.

We think what we're doing is consistent with the industry.

The evaluations are historically low.

Okay.

Thanks.

I'm sorry, on the servicing miscellaneous fees, those have been moving up.

I presume most of these are late fees and will sort of remain at this level as long as your delinquent loans remain at this level, or is there anything else moving that number?

Let me point out, if you look at the history of the ancillary fees, which is dominated by the late charges, it continues to grow as the portfolio grows.

So, I wouldn't necessarily, you know, look for any trends there except to continue up in those numbers.

And not only is it late charges, but it's -- we get foreclosure your fees and a whole plethora of fees with the servicing business, as a result of -- it's one of the benefits of having, you know, a servicing portfolio.

So, there's nothing unusual in today's environment, that's causing the fees to be where they are, including unemployment and that.

Do you want to comment on that?

I would say one component currently are prepayment-related fees, like prepayment penalties and other payoff fees that we collect.

Okay, thanks.

Last, did you -- one more after this -- did you sell any excess servicing in the quarter?

Yes, with -- yes, we did.

We executed another IO transaction, realized proceeds of approximately $250 million.

Okay.

Thanks.

And last thing is your -- the pricing costs on a percentage basis were up about 15 basis points this quarter over last quarter quarter.

I would assume that's a mix shift because of the correspondents business; that the same case?

It's a change in business mix.

Okay.

Thank you.

Gary, just on that point, our "A" paper volumes grew dramatically during the quarter and that change in mix results in the change in the ultimate gain on sale.

Okay, thank you.

You're welcome.

Thank you, the next line will open as Howard Shapiro at Goldman Sachs.

Please go ahead.

Yeah, hi, just a follow question on the mortgage servicing.

Your capitalization rates at the end of the quarter, by my calculation, was about 119 basis points, which was actually up slightly from last quarter.

Your peers in the industry during the quarter continue to markdown their mortgage servicing rights.

Wamu [ph] was 88, I think, and Wells was 84.

Can you just walk us through exactly how you've come up with the valuation and how should we feel comfortable with your valuation relative to your peers, who at this point, appear to be valuing their assets significantly lower than yours?

And -- and just as a follow-up -- one other addon, you boosted the scheduled amortization rates on the mortgage servicing assets substantially during the quarter.

Would that be a run rate we should be using going forward?

First of all, you know, I want to point out that there are significant differences in portfolios, so, that when you compare Countrywide's valuation to, for instance, Washington Mutual's valuation, you have to consider the characteristics of the servicing assets.

So, I will point out something which is pretty easy for you to look at and see on their financials.

That their prepayment rate on their portfolio, for example, is about 50% higher than ours.

In other words, where we ran off in the quarter at about a 13% CPR, their CPR was 19%.

So, significant -- significantly higher and that obviously means that their portfolio has a shorter duration, probably because of jumbo loans or high concentration in California or higher concentration of ARMs.

So, when you take that shift in duration, if you were just to, you know, make a very simple calculation, you would see that their servicing should be worth about 2/3 of the value of our servicing, just by virtue of the fact that they have higher prepayment speeds, which is, again, a factor of the underlying loans that are in their portfolio.

Now, with regard to the growth in the -- or the site growth in the -- in our servicing asset, the other phenomenon that we have that is different than most of our competitors is that the percentage growth of our portfolio or the percentage new servicing our portfolio, is significantly greater than what you're looking at in the competitors portfolio.

So, for example, where our portfolio, you know, $252 billion was produced this year.

As you look at the $100 billion of new servicing that we originated during the quarter, that was booked at approximately 173 basis points.

So, you have the phenomenon is you have new valuable servicing coming in at 173 basis points, you have the older servicing, reducing in value as a result of impairment and the combination of that is a very slight increase in the overall basis point value of our -- of our servicing asset.

So, if I'm understanding correctly, what you're saying is, given the fact that you've been growing your servicing book more quickly, organically, you're adding a greater percentage of more valuable coupon servicing?

Yeah, absolutely.

If you look at -- you know, we had very significant net growth, $50 billion growth in our portfolio have over the quarter whereas if you were to look at, you know, some of the names that you're comparing to Countrywide, their net growth was actually very little.

So that, you know, we have a greater portion of our servicing is, you know, is higher value, you know, newly-originated servicing.

So, that accounts for the phenomenon.

With regard to amortization, your question on amortization, amortization is set at the beginning of -- of the quarter.

Uh-huh.

So, interest rate at the end of our third quarter, the first day of the fourth quarter, were, you know, very -- extremely low.

And we project the amortization and set that amortization at the beginning of the quarter.

And so that is -- that calculation is what results in the very high amort rate for the fourth quarter.

We should see amortization actually come down from that level, you know, for -- actually for, you know, reasons not only that the interest rates were not as low, but also because of the permanent impairment on the -- on the asset will result in lower amortization in the future.

Okay.

This has been very helpful.

Howard, I have one more point for you on valuation.

Keep in mind, we had two excess sales during the year, proceeds of almost $600 million, all of that excess was sold to the market at the level where we had booked it.

So, what that tells you is that we're booking the servicing where the market is willing to buy it.

Keep in mind that, $600 million is over 10% of the assets on our books today.

I should point out, also, we're very, very confident in our valuation and models and we can't, you know, there may be entities that have used more aggressive approach to amortizing or reducing the value of their assets and that's something which is clearly, you know, not within our control.

But we are very confident in the values that we are using.

Do you -- do you get third party validation, if that's the right word?

We -- we do.

We have -- we engage in studies of our models and tests that provide us with, you know, very high confidence that what we're doing is appropriate and we see bench marks of studies that are done on the servicing assets as well.

Thank you very much.

Howard, the ultimate third party acknowledgement is when they pay you what you have it booked at, in the excess sales.

Which would be those excess sales.

That's right.

Right.

Okay.

Thank you.

The next line will open as the line of Jonathan Gray at Sanford Bernstein.

Please go ahead.

Mr. Gray, your line is open.

Do you have your mute button on, sir?

All right, we'll move on.

The next line will open is Ken at Morgan Stanley.

Please go ahead.

All right, the next line will open as the line of Mike McMahon at Sandler O'Neal.

Go ahead.

Yeah, good morning.

How much is the impairment reserve at this point?

Roughly.

Mike, we recorded approximately $1 billion of permanent impairment in the fourth quarter.

So, after that adjustment, the impairment reserve stands at about $2 billion.

$2 billion.

Now, is that a number that is potentially able to be reversed if rates move high enough?

Theoretically, assuming the marketing value were to increase by that amount, we could, under GAAP, reverse that reserve.

Okay.

And then on a different topic, you have never, to my knowledge, talked much about cross-selling and I know that you have sophisticated procedures in place to -- to do that in your servicing area.

Is that something that you're working on and will eventually start releasing some numbers on the cross sales?

Or what's your thinking there?

Well, first of all, I think we have talked about cross selling activities in the past, particularly as it relates to, for example, home equity loans, that's been a big factor in our earnings growth over the last several years.

Our ability to take existing customers and communicate with them and -- and offer them home equity product, we're a major, major player in the home equity area.

We have an insurance agency that has 580,000 policies enforced today, all of which are from our own customer base.

We've talked about these numbers in the past.

We continue to try again -- the thing about the company, not from a financial point of view, necessarily, but from an operation point of view, is to talk about leverage.

So, we have -- we spend a substantial amount of our intellectual assets on the whole issue of cross selling.

The bank is really a cross selling vehicle for us in terms of tapping our mortgage or base for the banking activities.

So, you know, as I said, we have, from time to time, released numbers on cross-selling.

The -- if you look at our diversified earnings of the company, a lot of that is -- is as a result of cross-selling activities.

Our title business, our appraisal business, our credit reporting business, is all related to cross-selling.

Is there any comment you want to make on cross-selling activities?

I would say, you know, Mike, this is Keith again, a related metric is the volume of new productions coming out of the quarter.

Approximately 80% of CNB's refinances come directly from our portfolio.

That's another major source of value.

You know.

Very good, thank you.

Thank you, the next line will open as Jonathan Gray at Sanford Bernstein.

Go ahead.

I'm assuming you could hear me this time.

First of all, congratulations on spectacular results.

Is it reasonable to assume, correct to assume, that the retail sales force that's been grown to approximately 2200 contributes volume only through the retail channel and that correspondent and wholesale would not reflect that production?

That -- hopefully you're well, Jonathan.

Thanks, Angelo.

Yes.

The -- I don't know what the exact numbers are today, but probably approaching 4,000 sales people and they're -- they're segregated in the retail sector.

Just call on real estate agents that deal with the -- they just drive that product.

Wholesale has a whole separate sales force that deals with mortgage brokers.

Correspondent has a separate sales force that just deals with institutions.

Would it be possible to get a breakout of origination fees from gain on sale of loans in the quarter?

As the company's reported in the past.

Keith, do you want to respond to that?

You know, Jonathan, we collapsed those line items just because it's really standard industry practice to do so and more technically correct under GAAP to do so.

And the origination fees were really just an allocation of a portion of the cost basis of the loans.

We think it's more enlightening to do it this way.

We didn't plan to provide a, you know, a breakout going forward.

I can, if you'd like me to --

No,, it's not necessary.

Can he we get a breakout, however, on the gain from the sale of keylock [ph] and gain from subprime?

Yes, in the fourth quarter, gains from the sale of home equity loans was $39 million and gain from the sale of subprime loans were $131 million.

And that -- and put that into context, we saw approximately 1.19 million of keylocks [ph] in the quarter and 2.1 billion of sub prime loans in the quarter.

Given the $2 trillion origination year that the company has postulated based on the forecast of industry experts, does management have an opinion as to whether it can sustain sequential quarterly growth in earnings per share within the context of such an environment over the remainder of this year?

Yeah, I think as we -- as I expressed in my report to you that we're -- we're -- we believe we can because of the way the that macro hedge is now structured.

Anytime we've gone through these periods where rates have risen in the past, we never had the balance that we have today.

Not only within our core business, which is now a $452 billion servicing portfolio, which is going to provide enormous earnings as rates rise, but we have the diversified businesses which we never had before.

So, I can say that we feel confident that we can sustain the earnings growth in any foreseeable environment, particularly if we have, you know, I have a personal opinion, I think $2 trillion is -- a year is -- is a robust forecast.

You know, in light of the year we just came out of.

You know, but, you just never know, but our budgeting does not call for a $2 trillion year.

It is below that.

I see.

Thank you.

Our next question is from the line of Mark Gilford with Deutsche Banc.

Please go ahead.

Yes, just a clarification on the sale of excess servicing.

Was that the proceeds that you said were $250 million in the 4Q and $600 million in the full year?

I also think you said you sold for what you had it booked for.

Was there no gain on the sale of the excess servicing?

That's fair to say.

Why sell it, then?

Simply, you know, it reduced our exposure on that asset and we think that, you know, we're -- our primary objective is to build base servicing because we enjoy much higher return on the base servicing asset from the recapture and from ancillary benefits and excess has a lower return.

Requires, you know, hedging activities that are expanded over what they would be.

And it doesn't have the same -- it doesn't have the tax advantage that the basic servicing asset does.

And just another clarification, I think you said the pipeline of purchase -- the purchase pipeline was $49 billion and you --

The full pipeline.

Oh, the full pipeline, okay.

And -- okay, no, I just wanted that clarification.

Thank you.

Thank you.

The next line will open as Dezek Janaja at JP Morgan.

Go ahead.

A couple of questions.

Firstly, since we don't have the benefit of the presentation, you may have the number -- could you tell us what the average servicing fee was on the portfolio?

Since that's a better metric in comparing your validation?

It's approximately 38 basis points.

And secondly, as you -- And secondly, as you look at the retail sales stock that you're adding, are you adding experienced staff, people have already been in the mortgage business or getting new folks that you're training up, can you give a little more color about it?

Yeah, the -- the -- the vast majority and I say well over 95% of them, are experienced people who bring a -- a customer base with them.

Okay.

One more time, on the global side, your loan service went up quite a bit.

Has a new partner been added or anything changed?

Yeah, the -- the -- it acreeted primarily because of the Barclay's acquisition of Woolidge [ph] and we renegotiated the entire transaction we had with them with Barclay's.

What you see in that portfolio is us bringing in Barclay's business, which is located in Leeds, in the U.K.

About 800 people and about 30 billion pounds or something like that, in servicing.

Thank you.

Thank you.

The next question will come from the line of Bill Roy at Merrill Lynch.

Please go ahead.

Hi, just a little bit more color on the excess servicing sale.

Do you know what the multiple was and the weighted average coupon?

And also, who -- who's the buyer of these excess trades?

You know, Bill, I meant to get that information, but I don't have it with me.

Maybe Lori's got it.

I will give you that, the buyers of these are --

It's a small universe of buyers.

The DSEs have been buyers.

Bond funds, you know, fixed income funds.

So, if they're buyers that you could essentially sell to without -- you know, on a booking a gain or a loss, why then, could you not sell the excess at point of origination?

Why do you have to wait?

Because it's a timing issue.

Let me give you, generally my view of it and have Keith and Stan comment on it.

At the time of original sales, that excess is compressed and it's not a good economic execution.

It turns out, by waiting, by holding and waiting and waiting for markets to shift, the economic execution to the company is better when rates begin to go the other way.

And so it has been a -- when we compare -- if we had sold the excess initially in the compressed environment versus the timing that we have utilized over several years now, it is a much better economic execution for the company by waiting.

Bill --

Now your excess goes up --

Yes, it can go up, if you have lower rates -- if you have rates trending lower at a substantial velocity, the prepayment calculation would indicate the value of that excess would be lower.

If it -- it's go the other way, the value of that excess changes.

To give you a sense of what was sold, the -- the lack of the weighted average coupon, the mortgages, were about 6.8% and we sold approximately 22 basis points of excess.

What, you know, what -- the market today is not efficient at the point of origination, primarily because the buy-up buy-down grids that are provided by Fannie Mae and Freddie Mac, are out of sync typically with the market for lack IO.

And so, you know, the -- the -- that's, you know, our primary methodology is to look at one of the, you know, what are the buy-up buy-down grids versus what can we do by selling as a security at a percentage of what a -- lack IOs sell at?

We are, you know, very optimistic about the ability to sell what our quarter coupon securities and that market seems to be starting to evolve, which will provide another efficient means of selling excess.

Reducing excess and selling through the mortgage-backed security.

Huh.

It seems that the current production would be worth more than existing production servicing.

You said you haven't booked it for a gain, but we can talk about this at a later point.

You know, the existing servicing is at -- the asset has a hedge on it and it's mark-to-market.

And so it's only, you know, it's very likely then, that when we sell excess, that it will show, you know, neither gain nor loss because we should be booked very close to its existing value.

Okay.

And real quick, has anyone done any of the work on market share in the current quarter?

Your volumes definitely accelerated beyond many of your competitors.

The current quarter -- you mean this quarter?

It's too early.

The fourth quarter, I'm sorry.

The fourth quarter.

I think the one number I saw that we had about 14% share.

But, you know, we're waiting for the full stats to come out on the market.

Okay.

All right.

Thank you.

I mean for the year.

The year was 10% and, you know, we had -- we picked up significant share in the fourth quarter.

Great.

Thank you.

Thank you, the next question will come from the line of Mike Vincecleara at Raymond James.

Please go ahead.

Thank you, good morning.

Two quick numbers questions and one question on the insurance side.

What was -- as a percentage of your purchase business, how much of that comes through retail, approximately?

And is it different than the percentage of your refi business that comes through retail?

I guess what I'm getting at --

We understand the question.

We're trying to figure out the answer.

Sure.

The stats.

We don't break it down?

I think it's between 20 and 25% of our total purchase volume comes out of retail.

That's about right.

It is pretty proportional.

Okay.

So, in other words, about the same as your total production.

Overall --

Okay.

And what what's the current coupon if you could on your servicing portfolio versus what it was at the end of Q3, just to give us a feel.

6.8.

6.9.

6.9%.

Was it 7.2 at the end of the third --

I think it was -- 7.175 to 7.2.

Okay.

Thank you.

And then last thing, just on the insurance side, I'm trying to get my hands around how we should be looking at this.

There was what sounded like one-time issues in the quarter, but when we look at the revenues say between your P&C business and your reinsurance business, can you give us a breakdown between those two.

I assume there's almost no losses in the reinsurance, which is what you said in the past.

On the P&C side, what should we expecting as far as a percentage of premiums that you pay in and out benefits on a quarter by quarter basis?

First of all, the earnings of the -- of that sector is dominated by the reinsurance business, we have not experienced any losses yet.

On the reinsurance side.

The -- between, Keith, between the reinsurance and Balboa life and casualty -- , what's the breakdown.

About 80 -- I think about $85 million of the net earned premium last year was attributable to the reinsurance operation.

The balance to Balboa.

Okay.

And then --

And the percentage -- The percentage on Balboa life and casuality of premium to payout?

Right.

In claims.

Do you know what that percentage is, Dan?

The loss ratio?

Was it about 75% last year, is that right?

I think we have that status with us.

Let's see if we can come up with that status.

Sure, come back to it or I'll follow up after the call.

That's fine.

Thank you, guys.

Thank you, the next question will come from the line of Joel Hulk at Wachovia.

Go ahead.

Thanks.

Good afternoon.

Good morning.

With the current I guess mortgage coupon distribution being very tight, I wondered if you had any thoughts with respect to kind of handicapping the refinance forecast that you put up in slide 12.

I think you suggested that your -- your budget was something less than that and I don't know if you can comment on where you think your market share will shakeout in 2003, but both of those things would be helpful.

Thanks.

The market share, I would eventually say is going to be somewhere between 12 and 15% by the end of 2003.

We have a lot of momentum.

Could be higher than that.

We have a lot of momentum gong in that area and I had a meeting last night on that particular area.

I'm very confident that we are -- we are getting into the position of just dominating many sectors of this -- of the channels that we're in on the origination side.

By the substantial increase in momentum of the sales force of this terrific sales force, is being developed.

The first part of your question was the -- total market size.

I mean -- I would, you know, I'd venture to say that if you look at this conservatively, you know, there's a lot of unknowns, but it seems the consumer is, you know, so driven relative to two issues, one is to get their payments down, so irrespective of all the geopolitical issues, the focus of the homeowner is to take advantage and be opportunistic in the low rate environment.

And, secondly, in terms of the desire for homeownership, particularly in the emerging market area, immigrants, minorities, low income, they -- they -- certainly obviously not oblivious to what's going on around them, but their priority is to own a home and you can see that in the numbers with the home builders and starts and all of that, that -- I would say we'd estimate that it would be somewhere about 1.6 to $1.7 trillion.

All right.

Thanks, that's very helpful.

Okay.

Thank you.

The next line will open is the line of Charlotte Chamberlain at Jeffries.

Please go ahead.

Hi, good morning.

Good morning.

Jonathan almost got my question out, but let me finish it up.

Could you split out for us the loan originations versus the gain on sale or should we go back to the third quarter and add up the entries in proportion amount and assume that that holds for the fourth quarter?

And the other issue is -- the gain that you show on mortgage loans at MBS helped your sale went from about 7.5 billion to 15 billion on the balance sheet.

Is that a good indication of, you know, what you've got available for sale and basically your dry powder for earnings in the first quarter?

Thanks.

Keith?

Yeah.

The last question concerned the mortgage loan inventory and the fact that it's grown, which is really -- really in proportion to the growth in production during those periods.

So, I wouldn't -- wouldn't say that there's any particular skew towards future earnings.

You know, I would look toward the beginning pipeline, you know, primarily there.

And it's just that it's been around $7 billion all year and then it just blips up to 15.

Well, the production went, you know, the production essentially doubled, the run rate in the fourth quarter.

So, again, I would say it's pretty proportional.

Okay.

And it's also fair to say that -- that, you know, we're holding keylock [ph] securities and inventory.

That's grown a little bit and there are gains on those -- you know, if we were to sell those securities.

That would be realized in the quarter that they're sold.

And then, you know, back to your first question, the -- the total amount of loan origination fees that would have, you know, previously been reported to you for the fourth quarter were approximately $507 million.

Okay.

And then, finally, on -- on the subprime loans, are you seeing any change in the pricing, I mean we've heard that -- that Wall Street was paying as much as 105, 106 for this stuff in the fall.

Are you seeing any change in the pricing that you can -- it sounds -- Angelo, it sounds as if you're selling all of that stuff it f you're not putting it in the bank.

I wondered if you're seeing any difference in the pricing?

In the subprime?

Yes.

I'll let Stan answer that, but that's correct, we're not putting it in the bank.

Nor do we plan to put it in the bank.

There's no -- there's no intent on our part to ever portfolio subprime mortgages.

The securitization market's been very steady for us and the pricing is -- is holding up.

Okay.

Thanks.

Stan, why don't you answer the question on the claims issue?

Just on the loss ratio, which is from a previous question, is about 58% loss ratio.

And also, Mike asked a question about what was retail purchase funding volume for the fourth quarter?

That was $6.3 billion, it's about 24% of purchase volume for that quarter, which is, as Keith mentioned earlier, in line with our 24% share of our overall production for the quarter.

Thank you.

The next question comes from the line of Jennifer Scutti at CIBC.

Please go ahead.

Your line is open.

Okay, we will move on.

The next line will open is Joanne Yurman at Lehman Brothers.

Please go ahead.

Good morning.

I actually have a couple of questions.

I wanted to know more about the increase in the occupancy in overhead charges since I presume these are mainly fixed charges and not volume-related.

Would we expect to see this type of level going forward?

The occupancy costs?

I would say they're going to remain stable.

Yeah.

Okay.

And what is behind that increase?

It's like up 25% from last quarter?

Well, I think it's the -- it's -- it's housing -- you know, not to be flippant, but you need a space for people and it relates to the growth look at the growth of the population of Countrywide, it's been very substantial over the last six months and we have to house them in -- in facilities that -- that provide them the opportunity to do their work in the best possible environment, the most efficient way, so, what you see is us acquiring and/or leasing space, in California,Texas and in Arizona.

Okay.

And then also on the -- I had a question on the treasury bank assets.

It says that 37% of those assets are residential and home equity.

What percentage of that are home equity?

About 2/3 --

About 2/3. 2/3 are home equity.

Okay.

Thank you.

Thank you.

The next line will open as the line of Don Meter at Bear Stearns.

Please go ahead.

Certainly appreciate the quarter and the year, especially with the progress over the last 21 years that's outstanding Angelo and Stan, and, of course, we have many happy clients.

Thank you.

Angelo, a few more words on the U.K. operation, like how many Countrywide staff do you have there and the volume?

What's the default situation there?

Are you going to move to other countries?

Is this still a growth area for you or just a break even project?

We're actually making money at it now, Don, let me go over the issue with you.

We have about, a little less than 2000 employees in Dartford, England, close to London, and Leeds The -- we -- we are not -- you know, our role there is -- is as a functionary to process and service loans.

We don't take any risk of any kind relative to default rate or problems with underwriting.

We have none of that responsibility.

We have a processor and I would say that -- I'm not aware, frankly, in that regard of any substantial increase in default rates.

My understanding is it's been a slight deterioration in credit quality, but not anything that's alarming.

In terms of the future, I mean we -- we have -- we've used the U.K. as our base to spring from.

Our plan was and is to develop a world-class processing both in servicing and origination operation that is exportable throughout the continent.

So, that our plan is to once we believe we have the best plants and operations, we will take that and expand it throughout Europe.

Again, did you say you have 2000 Countrywide employees there?

Approximately.

Approximately 2,000.

Okay.

Thank you.

Once again, ladies and gentlemen, if you do have a question or a comment, please press the 1 on your touch-tone phone at this time.

The next line will open as the line of Richard Diamond at Inwood.

Please go ahead.

Yes, good morning.

Just some quick questions.

In view of the predatory lending legislation in Georgia that has been passed and the upcoming predatory lending legislation that's supposedly on the docket in New York, how should we think about it vis-a-vis Countrywide?

It is a -- it is a issue that we remain concerned about.

Now, again, the bulk of the business that we do is prime and doesn't fall into the thresholds of an established -- under the predatory rules.

But let me point this out to you, there is 145 bills relative to the predatory lending throughout the country in cities, states and municipalities.

Of which about 30 have passed.

Georgia has gotten a lot of publicity because it is the most egregious and most destructive, not to Countrywide, but to the people who Countrywide is attempting to serve, now foreclosed in the opportunity of ever owning a home.

And so it is a -- it is a troubling phenomenon.

It's our understanding that Georgia is taking another look at it because the previous Governor is the one who signed it because clearly in North Carolina, which was the birthplace of predatory lending law, the subprime business is down 15% so far.

These are studies down out of -- done out of Georgetown University.

It's having a serious impact on minorities and low income where legitimate lenders such as Countrywide and Wells Fargo and B of A are trying to serve and can't.

So, what -- what we believe is the ultimate resolution to this, if I can just go over all of these valleys and get to the peaks is preemptive legislation, federal preemptive legislation.

They will provide a law that -- that addresses the true abuses, there are abuses, by predatory players, by sharks.

And addresses those and punishes those, but provides a liquid environment for those in the community -- in the minority low income community, immigrant community that, need housing and -- and so hopefully that's where we'll end up.

The other question I had, I know it's challenging and you guys have done a terrific job of, you know, managing the growth of your sales force in a peak boom by not spending on salaries, making them commission-based, but, just out of a -- to complete the thought process, you mention that you're adding lease space in California, Texas, et cetera.

If there were to be a sharp rise in interest rates, although that seems increasingly unlikely as time goes on, how do you facilitate the return of that real estate space or what kinds of commitments are you making up front and how much of it becomes a fixed and not a variable cost.

Let me provide some perspective here.

We've been doing this 35 years.

Absolutely.

We've run through horrific cycles over those 35 years.

What you find is one cycle leads to the other.

The one thing we've learned is not to get hung up on occupancy issues.

You know, we made the mistake of selling or getting out of space that, we eight months later needed desperately.

So, what we would do is -- let me address the overall space, there would be a cutback in the processing area of the company and those facilities might be used for servicing because we'd need additional servicing people as we continue to complete the portfolio.

Diversified businesses are not affected by -- by a moving of interest rates, in fact maybe enhanced by that.

We will need additional space for our merging companies, but to the extent that there would be empty space, there's empty space.

Now, in terms of how we would approach that environment, we would be very aggressive in tong build that sales force.

We're a believer, always, in growing the top line because it's the only way we figured out how to get anything to the bottom line.

So, we -- irrespective of what interest rate environment we face, we will continue to dominate and do whatever we have to do on the sales end to build a sales force to dominate.

So, we will -- I think much of the space, because of the way Countrywide is structured today even though we go through the type of cycle you described, there's not a lot of empty desks, but if there is, it's only for a short while, then it springs back.

Cool.

Thank you very much.

Thank you.

The next line will open as the line of Mitch Cass at Endeavor Capital.

Please go ahead.

Hi.

It's Makika Kofal at Endeavor Capital.

Thank you for taking the call.

I have two questions.

One is on your earnings here, based on your guidance, obviously you are [indiscernible] more in the first quarter but if you could help me understand conceptually.

Assuming that origination is going to be [indiscernible] for all three, how should your earnings fluctuate from quarter to quarter?

Should they go down gradually or stay stable?

On a $2 trillion market?

Yeah.

I would just give you -- my belief is, that earnings would continue to rise.

That's a very, very robust -- it would be the second largest market in the history of this country.

And as we continue to pick up market share in a $2 trillion market, I can oolly assume if I put all these numbers together and look at the growth of the bank, look at the turnaround of the insurance company, look at global, that our earnings will continue to rise in their environment.

It's very healthy environment.

But that's what you are modeling -- budgeting your [indiscernible].

No, I said that's the consensus of the three experts, the MBA, I don't know who the other two, Fannie and Freddie, that's their consensus.

What I said was, our budget numbers, showing increased earnings, is a market below that.

Okay.

And my other question is, on your capital ratio, the total liquidity assets has been coming down every single quarter and now it stands at less than 9%, a nd can you fund the growth in your bank without raising more capital?

Yeah.

We believe so.

The lowering of the equities is primarily caused by the very substantial impairment and amortization of that servicing asset.

I think that the -- Well, growth is a very liquid component of our balance sheet.

You know, ie, the mortgage inventory, [indiscernible] portfolio, the [indiscernible] broker/dealer, and even within the bank, those investments in there are very liquid.

So, frankly, we're not concerned about.

We don't think the rating agencies are concerned about it in our [indiscernible].

With them, you know, based on our forecast, it doesn't appear that we will need to raise additional amounts of equity, we might do a -- a trust preferred transaction, which is equity in the eyes of the regulators.

So -- so basically we think retaining earnings will be sufficient to support the growth.

Okay.

Great.

Thank you very much.

Thank you.

The next line will open as the line of Christina Clark at Banc of America.

Please go ahead.

Hi.

Thanks, fantastic quarter!

My question was just answered.

Thank you very much.

Thank you.

Then we have a follow-up from the line of Robert Napoli at U.S.

Bancorp Piper Jaffray.

A couple of line items.

Would you expect the insurance business to get back to historic earnings level then in the first quarter following the -- the moves you made in the fourth quarter and the global -- the pretty big increase in the pretax income there have bringing on the Barclay's portfolio.

Is that -- is that a sustainable level that you reported this quarter?

I would -- let me give you what I believe.

Sure.

Relative to global, we've seen a substantial turn around there.

And it's not by accident, again, it's purposeful.

We've made massive organizational changes and structural changes at the beginning of last year and personnel changes and we're beginning to see the results of that.

I -- I can only believe based upon my own experience that we're going to see continued positive performance on -- on the -- and what you saw in the fourth quarter, at minimum, should be replicated going forward.

As to the -- what was the other question --

The insurance business.

Yeah, I would say -- I would -- was I -- was I say clearly if you look at this a little longer range through the first half, you -- I would believe we're going to see significant improvement.

I'd be a little concerned about telling you I'm going to see something significant in this quarter as we continue to go through this recalibration of both our treaties, our organization, our business lines and our personnel.

But I had an opportunity go through this thoroughly, individual by individual, in the organization and it's given me great comfort in terms of how we've restructured this and the future of the -- particularly Balboa, life and casualty, and the -- and the agency.

I think those two entities are going to have -- over a longer term -- a very substantial positive impact on the company.

On the reinsurance side of the business, the MIs seem to be not willing to give up as much of the people up as -- are you seeing that trend?

I think you have to be more specific.

NMI said they won't do that.

Right.

Whether or not the other MIs are going to follow, you know, who knows?

We don't anticipate it, but there are other ways to work around that and adjust that and so it's -- we don't think it's an issue for us.

Thank you.

Once again, ladies and gentlemen, if you do have a question or a comment, press the 1 on your touch-tone phone at this time.

And the next line we'll open as Danielle Orlo at Numera International Go ahead.

Great quarter, guys.

Two quick questions for you.

I'm trying to understand a little bit in terms of the excess servicing fee for securatization.

Do you have any way of guiding us to appropriate capitalization rates or relative expenses on -- in terms of volatility hedging that is appropriate for -- given the scale of the securitization?

And second, you know, if we look forward into the filing of the Q, should we look for any sort of a -- things in term of cash flow from finances versus cash flow from operations as being significantly different going forward?

Thanks.

Yeah, you know, I -- not clear that I understand the question regarding the securitization of the excess -- let me just characterize from our perspective, what's going on.

We have a servicing asset.

It has excess spread on it.

It is held it as a servicing rights.

When we securitize it, we created security and we're able to sell that asset and we sell it basically at the level that what is its market value.

And typically it's very close to where that asset is booked from, you know, an evaluation perspective on the company, you know, no-one should expect a gain or loss from that activity, it's just one to manage the balance sheet and the capital devoted to servicing rights.

It is, again, you know, servicing the asset that has -- that we have a hedge on and that hedge -- the cost of hedging can range.

You know, from, you know, in some environments it's 100 basis points nd in others we're, you know, either volatility premiums go up or the servicing is deeply in the money and can go up 500 basis points.

So, it very much depends upon market factors.

But we're -- but as it relates to excess, you know, servicing, there we're simply managing our capital position and looking to reinvest capital at a higher return.

It's a relates to the question on cash flow, as you know, the servicing portfolio has grown significantly and that is a substantial generator of cash flow.

In addition on the production side, we're, you know, we're enjoying substantial margins there so that -- so that the actual cash that we're investing in new servicing as a percentage of that servicing is at an historic low.

So, net-net cash flow from operations is -- is as high as it's ever been and we, frankly, expect that to continue on, as well.

And in terms of Capital Markets activity?

What about it?

Just saw the repo; that going to have any substantial impact?

You're talking about our -- our Capital Markets, our subsidiary?

Yes.

You know, it is enjoying, you know, good volumes because -- because of the high level of transactions in the industry that it -- its volume should correlate to some extent with investing activity in mortgage-backed securities.

So it looks forward to, you know, a very promising year as well.

And in addition to that, it is an entity that is growing its own market share both through, you know, gaining additional customers but also expanding, you know, the products that it's involved with.

So, we have, you know, it looks like a very good year ahead for capital markets.

It's important to note that only 25% of that business comes from Countrywide. 75% comes from outside of Countrywide.

Okay.

Thanks again for your time.

You're very welcome.

And there are no additional questions in queue at this time.

Please continue with your presentation.

Okay.

I'd like to thank everyone for their attention and -- and we look forward to the -- to the end of the next quarter when we will be communicating with you again.

Thank you and good day.

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