美國銀行 (BAC) 2004 Q3 法說會逐字稿

Welcome to the Countrywide Financial Corporation's third quarter, 2004, earnings conference call.

During this teleconference, Countrywide's management may make forward-looking statements within the meaning of the federal securities laws regarding their beliefs, estimates, projections and assumptions with respect to, among other things, the company's future operations; business plans and strategies; as well as industry and market conditions, all of which are subject to change.

Actual results and operations for any future period may vary materially from any past results discussed during this teleconference.

Factors which could cause actual results to differ materially from historical results, or those anticipated, are included, but not limited to, those items described on the last slide in the written presentation that accompanies this teleconference, and other risks, detailed in documents filed by the company with the Securities and Exchange Commission from time to time.

The company undertakes no obligation to publicly update or revise any forward-looking statements.

With that being said, I'll cover just a few housekeeping items, and then, we'll get right to today's agenda.

At this time, all of your phone lines are muted or in a listen-only mode.

However, after the presentation, we will be taking your questions, and we encourage your participation at that time.

To queue up for a question, simply press star then 1 on your telpephone keypad.

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So, once again, ladies and gentlemen, if there are any questions or comments later in the conference, please queue up by pressing star, then 1.

Also, should you require any assistance during the earnings report reach an AT&T operator by pressing star and O. And as a reminder, today's call is recorded for replay purposes.

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

With that being said, here, now, is the host, with the opening remarks, Countrywide's Chairman and Chief Executive Officer, Mr. Angelo Mozilo.

Please go ahead, sir.

Thank you very much.

Good morning and welcome to Countrywide's teleconference call for the third quarter of 2004.

I strongly recommend that all of our listeners view the presentation, which accompanies this discussion.

The presentation can be found on our web site www.countrywide.com, in the "Investor Relations" section under "presentations".

Turning to page two of the presentation, see today's agenda.

First, I'll give you an overview and nine months year-to-date for 2004, including operational and earnings highlights.

Next I'll discuss our banking segment and key diversified businesses.

We'll conclude the presentation with an update of our 2004 earnings guidance.

Let's begin with a discussion of operational and earnings highlights during and through the third quarter of 2004.

Turning to page four of the presentation, you'll see a list of our key operational highlights.

For the third quarter, total fundings 92 billion bringing the nine month total to 268 billion.

This included record purchase volumes of 52 billion for the quarter, and 130 billion through nine months.

The volume of adjus-- adjustable rate fundings was 56 billion for the quarter and 139 billion for the nine months.

Adjustable rate loans comprised 61% of the total volume, in the quarter, and 52% year-to-date.

As of September 30, our pipeline applications were at $51 billion.

Our total servicing portfolio reached 786 billion and bank assets with 34 billion.

Securities trading volume in our capital market segment was 795 billion for the quarter, and 2.4 trillion through the nine-month period.

The chart on page five shows our consolidated earnings and highlights for the same periods.

Net earnings in the quarter were 582 million, down 47 % from last year's record-breaking third quarter.

In the third quarter this year, Countrywide's recorded MSR apparent expense, net of hedge gauge, of two -- was 205 million.

Last year's extraordinary third quarter results included 231 million in MSR and payment recovery, net of hedge losses.

This variance, roughly half, accounts for the 518 million decline in earnings, compared to the same period last year.

For the nine months year-to-date, net earnings approached $2 billion, up -- up 9% from the first nine months of last year.

Earnings per diluted share were 94 cents, down from last year's third quarter.

Through the first nine months, diluted EPS of $3.19 were -- were down 2% from the same period last year.

Year-to-date, return on average equity was 29%, compared to 38% for the comparable period last year.

Page six shows the breakout of earnings between mortgage banking and our diversified businesses.

Mortgage banking pretax earnings declined 58% from the third quarter of last year, while nine month mortgage banking earnings were up 2%.

Third quarter diversification earnings rose 13% from last year's third quarter.

Year-to-date, the increase is 36% over of the same period last year.

Diversification accounted for 31% of consolidated earnings in the third quarter, and 28% year-to-date, both numbers up from the comparable period last year ,when mortgage banking earnings hit record highs.

Let's take a closer look at Countrywide's mortgage banking sector on page seven.

Production pretax for the quarter was 633 million, down 55% from the third quarter of last year.

This decline was primarily attributable to changing market conditions as the overall mortgage origination market now includes considerably less refinance volume than it did a year ago.

Nine-month production earnings were down 31% for the same period last year.

Profitability on the servicing side also declined, posting a loss of 23 million during -- $23 million during the quarter, compared to a gain in last year's third quarter.

A firm-rate cause of a decline in longer-term interest rates during the quarter, resulted in net MSR impairment expense as previously mentioned.

For the nine-month period, pretax servicing earnings improved by nearly 1.2 billion from the comparable period last year when prepayments fees were considerably higher.

Now, let's turn to review our key business lines.

Page nine describes the key factors that affected third quarter performance in the mortgage banking segment.

The interest rate environment during the quarter featured a sharp rally in the ten-year treasury bonds.

Over the course of the quarter, the ten-year yield fell 48 basis points to close at 4.14%.

The decrease in rates created MSR impairment, net of hedge gains, of 205 million, resulting in the servicing segment loss in the quarter.

Normally, a rate movement such as this might be expected to trigger a corresponding surge in production profitability.

In the third quarter, we did indeed see strong funding levels, and an increase in quarter-end pipeline.

Margins declined, however, largely as a result of a product mix-shift toward adjustable rate loans and a generally more competitive environment.

Highlights in the third quarter included the following: the pipeline of applications in process, rose 8% to 51 billion.

Based on public disclosures, it appears Countrywide has widened its market share lead as the number "1" originator in the third quarter; the servicing portfolio increased by nearly $60 billion; the MSR capitalization rate was reduced 12 basis points to one -- one -- 114 basis points; and the MSR impairment reserve increased 778 million from 778 million to 1.2 billion.

As the market conditions continues to transition from refinance boom conditions to a more normal environment, our servicing portfolio is likely to become increasingly prominent in our earnings mix.

Page ten shows how Countrywide has increased the size of portfolio, while reducing its MSR capitalization rate and its weighted average coupon.

These three metrics provide an indication of the long-term earnings potential of this asset.

The table on page 11 shows the performance of the -- our diversification segments.

Banking remained the most profitable of these segments.

Pretax banking earnings for the quarter were 163 million, up 93% over the third quarter 2003.

For the nine months year-to-date, banking earnings were up 99% over the same period last year.

Bank growth is the vehicle for pursuing our strategic objective of redirecting a portion of our current gain on sale income into a stable, long term stream of spread income.

Capital markets experienced a 33% decline in pretax earnings from the third quarter last year.

The primary causes were: one, a reduction in mortgage securities trading volume associated with a decrease in mortgage refinance volume; two, a reduction in margins earned on the conduit and mortgage securities trading businesses; and three, startup costs associated with the new business lines.

Year-to-date pretax earnings for capital markets were down 4% from the prior year's first nine months.

The insurance segment made a pretax contribution of 30 million, down 3% from the third quarter 2003.

During the quarter, the company incurred a $23 million charge related to the Florida hurricanes.

Banking segment growth is highlighted on page 12.

Total banking segment assets reached 37 billion at quarter end, of which 34 billion were on the balance sheet of Countrywide Bank, and the remainder were assets of Countrywide Warehouse Lending, Inc.

Bank segment assets were up 96% from the third quarter last year, and 22% from the -- from the previous quarter.

Growth in banking -- in the banking segment profitability has followed a similar trend, with pretax profits reaching 163 million.

Our previously stated goal for the bank is to grow total assets to 120 billion by 2008, and we're currently evaluating opportunities to accelerate this growth.

Our strategy for our banking growth targets, is to continue leveraging the strengths of our mortgage banking operation, such as its asset-generat-- generating capabilities, servicing related escrow balances, intellectual capabilities, and physical locations.

The bank now has 51 financial centers located within the Countrywide retail branch network.

As shown on page 13, growth in Countrywide's bank loan portfolio has been steady and its composition has remained fairly constant.

As of September 30, 63% of the portfolio consisted of first-lien mortgages, with a majority of the remainder comprised of prime home equity lines of credit.

The bank continues to focus on portfolio quality as the average FICO is now seven-- 732 and the weighted average LTV stands at 80%.

Our capital market segment described on page 14, continues its transition from a re-fi -- from re-fi boom conditions, to a more normalized market.

Segment pretax earnings for the third quarter were 90 million, unchanged from the last quarter, and down 33% from last year's third quarter when mortgage market volume was considerable higher.

The major highlight of the third quarter for the capital market segment was record underwriting revenue of 95 million, up 45% from the last quarter, and 119% from the third quarter of 2003.

Countrywide Securities Corporation underwrote and distributed 32 billion mortgage-backed and asset-backed securities during the quarter, with CSC acting as lead manager on 44 transactions, and a co-lead on an additional 17 transactions.

Other highlights included progress in two newer business lines.

During the quarter, our commercial real estate operations funded its first loans, and CSC established a Tokyo branch with license approval expected early next year.

Trading and conduit revenues, on the other hand, declined in the face of changing market conditions.

Less robust conditions in the mortgage-related fixed income securities market reduced securities trading margins.

Security tradings revenue declined 50% from the second quarter, and 73% from last year's third quarter.

Declining volume and increased competition reduced the margins on conduit activity with conduit revenues down 30% sequentially, and 46% from last year's third quarter.

Looking ahead, overall mortgage market activity will remain a key driver of capital market's profitability but growth in newer business lines, the U.S.

Treasuries and commercial real estate -- U.S.

Teasury dealer and commercial real estate businesses -- is expected to diversify and increasse revenue opportunities going forward.

The remainder of this earnings presentation will focus on the updated earnings guidance for 2004.

Countrywide is revising its EPS guidance for 2004 as discussed on page 16.

The new guidance is a range of 375 to $4 per diluted share.

The revised guidance of -- reflects our actual performance through three quarters as well as our fourth quarter outlook.

Key assumptions of our guidance include: the ten- year Treasury yield at year end, will fall within a 4% to 4.5% range, and reflects our expectation for continued production pressure -- production margin pressure -- as well as a higher amortization resulting from the low interest rate environment as of September 30.

The company plans to provide 2005 earnings guidance via a press release on November 3, 2004.

In addition, we plan to host an investor forum on November 3rd at our Calabasas headquarters , at which time we will provide further color on the 2005 guidance.

The investor forum will be webcast live over the Internet.

Risk factors which could affect the accuracy of these forecasts is shown on page 17.

The first is the level of interest rates which potentially could vary substantialially during the quarter.

The second important factor is the volatility of interest rates which can cause a difference in the period in which different rate elements of our financials are recognized.

Price competition in the production markets can also be a significant factor, driving market share, or margins, or both.

Additional factors include, but are not limited to those in the disclaimer in this presentation and those found in Countrywide's SEC filing.

Page18 shows how this new guidance measures up against our recent historical performance.

The lower range 375 represents a 48% compounded annual growth rate since the beginning of the decade.

This final slide on page 19 contains a disclaimer regarding the forward-looking statements included in this presentation, which I encourage all listeners to review.

And before I open the lines for questions, I'd like to, once again, thank the employees and the management of Countrywide for their efforts in delivering another outstanding quarter.

I'd also like to express my gratitude to our board for their continued constructive support of the strategy interaction of our company.

To our audience, we appreciate your interest in our company, and the time you've taken to listen to this conference call.

We will now take your questions.

At this time, I would like to ask the operator to explain our question and answer protocol.

Thank you very much.

And thank you, Mr. Mozilo.

Ladies and gentlemen, as you just heard, if you do have any questions or comments, we encourage you to go ahead and queue up at this point.

Once again, simply press star then 1 on your phone keypad.

You do hear a tone indicating you've been placed in queue, and once again if you would like to remove yourself from the queue, simply press the pound key.

So, once again to ask a question, simply press star 1 on your touchtone phone.

And representing Raymond James, our first question comes from the line of Mike Vinciquerra.

Please go ahead.

Thanks very much, and good morning guys.

Michael.

Question on the uh -- the salary side of things.

It took a surprising jump in the quarter on a sequential basis even though revenues were down and I think you mentioned briefly in the press release that there was some build out going on, with your going after the purchase business and so forth.

Could you give us more color on what's going on there?

Because I'm wondering if this is a run rate or something you had one-time costs fixed in this quarter?

There's -- the aspect of the investment in it [inaudible] that is correct.

We recruited a substantial number of sales people in our quest to meet our stated goals for 2008 of 30% market share.

So that requires an investment in people that takes two forms: One, people we bring aboard and they are producing loans and we pay commensurate commissions ; but secondly, the acquisition of pipelines, where people are coming aboard with their pipeline and we actually acquire those, that's included in the uh in the --- in the expense, and that amounts to the 146 million of the 172 million.

We -- the bank, again, continued to grow the branch system to a $20 million increase in bank, and in the capital markets, a $12 million increase.

And that a lot has to do with the establishment of the -- the Treasury desk and all technology related to the Treasury desk.

Are these -- are some of these ongoing costs?

Sounds like some of these would be considered kind of one-time in nature and we might see --

I would say, certainly, the capital markets and the bank, although the bank is growing, and you'll have increased expenses.

I think the focus should be on the revenue side.

And this should generate the revenues to-- to-- to maintain our return on equity, which I think is 38% this quarter, which is extraordinarily high, and uh -- and so, you have to look at both sides of the equation.

We continue to invest in people; continue to invest in technology; and it's not smooth as you're making the investments; they come in spurts.

So I think that every dollar spent here in the increase in expansions is one that's invested for future earnings and future higher runs.

Alright, thank you very much.

And thank you, sir.

Next,,t we go to the line of Bob Napoli representing Piper Jaffray.

Please go ahead, sir.

Good morning.

A couple questions I guess on production margins and get that out a little bit more.

Can you talk about -- what did you sell during the quarter in the sub-prime and prime -- sub-prime and home equity sectors?

And what were the gains on sales margins, again on sales dollars and margins on each of the businesses?

Could be given a broad comment as well on the state of competitive environment.

Let me take that part first and then I'll turn it over to Keith, specifically.

These things, as I said, are not-- the flow of business is generally not smooth.

The action of competition changing market is not smooth; the margins, certainly, have been compressed and we'll go over that with you; but, again, still very rational, based upon the experience back in '95 and again, I think, in '97.

These margins are -- have been reduced as a result of keener competition, less volume, less of a pie, less to go around, and, therefore, your going to get margin pressures.

But at this point, certainly off of their highs.

I mean, comparing to last year, when nobody had capacity except Countrywide, we had enormous pricing power.

It was an unsustainable pricing power last year.

Now we're getting back to our normalized environment.

That's my general comment.

Keith can talk specifically to the question.

Yeah, sure.

In terms of the numbers, we sold approximately, 85 billion this quarter.

Sixty-six billion of that was prime mortgages, about 9.9 billion were home equity loans and fixed rate seconds, and about 9.1 billion of sub-prime mortgages.

For the home equity and sub-prime?

Nine point nine was home equity and fixed rate seconds; another 9 .1 billion was sub-prime.

Right.

Those are the amounts sold, what was the gain on sales?

Net gains were 540 million for the prime mortgages; 266 million for sub-prime; and 290 million for the home equity and fixed rate seconds.

Okay.

So, it looks like you still had -- well, pretty decent gain on sale margins on the sub-prime sector?

Is that -- am I calculating that right?

I'm sorry, 2.9%.

That's right.

That's correct.

And then, I guess, on the expense side, just following up on that.

The uh -- you have been hiring employees, but, under the mode of on a commission-only basis, so, therefore, one would generally expect that for the most part, the expenses would still track the orginations.

And-- and this quarter, that the expenses were significantly -- you know expenses went up significantly while the orginations came down, and that kind of goes back to the prior question Miike Vinciquerra had, I think, on the -- how much of that -- is that still the strategy?

That you're hiring variable -- you're putting on variable cost personnel?

Is that still the case?

And should we no longer expect -- I mean, should we expect expenses to track with orginations?

First of all -- no.

As I told you before, this is not smooth.

That you -- you know, rates go down, suddenly we have a tremendous amount of closings; rates go down and we have an increase in pipeline.

It takes 40-30-45 days to close and you don't have closing commensurate exactly with the movement of interest rates.

Secondly, -- there are, even though its commission only people, I think it's easy to understand, it should be, that these employees are not contractors -- independent contractors, they're employees.

And therefore, we have other expenses, although not salaries expenses, which you have benefits attached to each benefit costs attached to each person we hire.

In some of the cases, as we said earlier, we bought pipeline to take some time before we realize the closings of the funding of the loan in that pipeline.

So you have to really look at this thing over a longer period of time to sort of put these pieces together.

You don't have instantaneous loans increase in the pipeline, increase in expenses and increase in the revenues generated from the closing of these loans.

Stan, do you want to--

Yeah.

I would just like to you know -- add on to what Angelo is saying.

There's significant up front costs in terms of hiring the sales staff.

We've had, you know, significant increase in our overall sales employees, over the course of the year, and in the last quarter, I thought you know just looking at, for example, sales people with less than four months of tenure, we have 2300 employees, that almost 25% of that sales force is brand new.

And you know when a sales person comes on, they're not immediately producing, that production comes as they develop business, you know, in their new positions.

So, there's a cost, a cost to the housing of the individuals and a cost to the recruiting.

And there's draw periods that we're paying and expensing as the production volumes are increasing.

Another factor I think is important to understand in the third quarter is that we have, as we talked about, increased our activity in purchase loans, as well as home equity lines and we've seen a drop-off in refinance activity.

And the way that the compensation structure works is that you would, I think -- is that you would, I think, agree is logical, that we pay a lower level of commission for refinance activity than we do for purchase-related activity.

And so as the volume has shifted, to more purchase and more HLAC, the fact is that the commission expense is higher on those loans.

They take a much greater sales effort.

And so that's one of the items that's influencing the increase in expenses.

Last question, and I'll let it go.

On the -- what is your outlook -- I mean your production margin fell pretty sharply this quarter versus last quarter and the mortgage market we'd expect to decline 30% next year, which would suggest more margin pressure.

Can you give outlook for where you think this quarter's production margin stands relative to what you would expect, assuming the mortgage market goes to 1.7 trillion or so, 1.6, 1.7 next year?

Thank you very much.

Very hypothetical, I must say.

If it goes to that, I'd say that the -- we're in great shape because it will knock out -- are you still on the line?

Yes.

Okay.

It will knock out an enormous number of our competitors.

That's a dramatic hypothesis that you just laid out, and it would knock out, except for the very large ones, the four or five of us, that are large enough to sustain that.

I think we'd have a wonderful environment after that, very few people would be around.

Are you prepared to think that?

I would say beyond what Angelo said we shouldn't elaborate at this point on '05 and you know, we're going to do that on the third of November.

Okay.

Thank you.

And thank you very much Mr. Napoli.

And next we go to the line of Brad Ball, representing Prudential.

Please go ahead.

Thanks.

Actually more on the production margin, I'm trying to reconcile your production margin in the quarter, with your guidance for potentially lower production margins going forward.

Your gain on sale of loans in the quarter was actually up, versus the June quarter so it looks like the decline in the production margin is entirely due to higher direct production costs.

Can you confirm that?

And do you expect more of the same going forward?

Or as you indicated, do you expect the gain on sales might come under pressure given the mix shift and competition and so on?

This is Keith.

You know, to parse what happened in the production sector in the third quarter, revenues were down and that was driven, as we alluded to, by reductions in prime margins and sales of prime loans were down, and that was offset partially by increased sales, increased margins on home equity loans, sub-prime loans.

Revenues were comparable to the prior quarter.

And did you have any follow-ups, Mr. Ball?

Your line is still open.

So, again, is the revenue impact related to the makeshift occurring, you're saying, this quarter and will that carry forward into the fourth quarter?

You know, I think that you know the level of margin is within ranges that we would anticipate in terms of what our rational margins on prime loans and transitions where the markets become a little more competitive and the product mix as in an impact on us in terms of ARM loans.

There are you know, I think, some, you know, I think, reasonable, you know, floors, in terms of where margins, you know, should result in a normal market.

And I think that the third quarter seems to be more representative of a normal market.

There are opportunities that margins may go up, slightly, you know, as we look at and evaluate expenses and compensation programs, as well.

And as these new additions to our sales force begin to produce higher volumes of loans, it'll offset fixed costs.

I think one of those examples is the commercial real estate operation we put in place.

That's ten or 15 employees, highly skilled individuals.

We had a setup there for the entire operation for them and that was a big investment and we just started closing loans in the third quarter, the pipeline for the balance of the quarter is coming in, I'd say, at a robust pace and we're doing very, very well.

And of course we're not realizing the revenues from that until we got to get a time for those loans, particularly those types loans to close.

The other thing that occurs to me, I think, we've narrowed the guidance, you know, to $.25 range and I think that we've responded to your question just by our guidance.

Okay.

Thanks.

And thank you very much Mr. Ball.

Next in queue is Jonathan Grey with Sanford Bernstein.

Please, go ahead.

Yes, two questions, one interesting and one picayune.

First, Wells Fargo volume in the most recent quarter is dramatically lower than yours.

In the second they were nose to nose with you.

Did something -- for example, I think, in the second quarter you did 99 billion and they did 97.

In the third, you did 92, and they did 68.

And so it would appear that you have opened a lead against them of several body lengths.

And the question is: Did something happen to curtail their activity in the market?

Or are you just beating them?

I think -- two things: One is, this is our focus and this is what we do.

The core of Countrywide is mortgage banking.

The core of Wells Fargo is not.

And having that kind of focus certainly gives us an advantage and as we've gotten larger and stronger, we're able to go head-to-head with them, and beat them at this game.

In more detail, we had a number of people come over from Wells Fargo to Countrywide because the nature of our structure, I believe, accommodates the salesmen a lot better than the protocol used by the competitors.

What you see in the increase of Countrywide -- increase of Countrywide is a result of Wells Fargo, as well as other competitors, coming over to Countrywide and generating the kind of volumes that they have.

The purchase transactions in particular.

I think that could be part of it.

We haven't seen them back away in terms of pricing or any of those kinds of things to cause it.

I just think it's the loss of -- driven -- driven by the sales staff.

I think, that something has happened to the sales staff in that quarter and we'll have to see what's going to happen going forward.

But if you look, I don't know if Washington Mutual is out with the numbers, that should indicate a similar-type of situation and we're clearly picking up market share and that's what this investment is about.

What's your picayune question?

Okay.

And by the way, I thought you were great on television defending the GSEs.

Oh, well, thanks very much.

The-- the -- I wonder if you could, I guess the picayune question has to do with the breakout of $796 million of net MSR impairment.

It should split between basic MSR and a write down of -- a loss on retained interest.

In the second quarter, for example, there was 1.357 billion of MSR recovery, that's now negative and the retained interest in the second quarter was a loss or impairment of 178 million.

I wonder if you could just break out one of those pieces?

We didn't have any impairment of retained interest during the -- other retained interest -- during the quarter.

All of the impairment relates to the MSR.

If I could ask one last question.

In reference to the sales force, the numbers are not necessarily consistent from -- and we keep getting different perspectives on how you're viewing or defining commission sales head counts.

Could you give us some kind of historical base, either a year ago or an end of year versus now?

In terms of the quantity of sales force?

Yes.

The commissioned sales force, the total sales force, any way you want to des -- Sure.

You know, if -- you know, taking you to the beginning of the year, we had about 9,000 total sales force in our production divisions and that's--

That's in several channels.

That would represent all of our production channels.

And that has grown to, about, 11, 900.

At this -- at the end of the third quarter.

Well, thanks very much.

The 35% expansion seems to be consistent with the -- the increase in your market share.

Seems to be almost a one to one.

Yeah.

It's going to work.

Again, we have initial investments you have to make because, again, in some of these cases we are acquiring pipelines and not necessarily just Wells or competitors, but many mortgage brokers who have the very compelling origination operations are deciding this volatility is too much for them and are joining forces with us.

So we have the production people coming from both competition and from the smaller, medium-sized mortgage broker operations.

Thank you very much.

Representing Friedman Billings Ramsey, Paul Miller go ahead.

I have two.

How much sub-prime or home equity loans did you hold back?

Homes for sell held to 19, 2, 27.

Most home equity or sub-prime loans?

And how much of each do you have?

We have, in our inventory, I believe about a billion -- about a billion and a half of home equity and a ball and a half of sub-prime.

The mortgage portfolio did grow and that was essentially within the bank and consisted of home equity loans and prime first mortgages.

the bulk of that is sub-prime loans and home equity loans?

I thought it's's been holding in the billions, close to billion of those loans back.

I'm a little confused here.

Yeah.

We sold some of that inventory in the second quarter and again here in the third.

The strategy has been to move, basically, the portfolio to the bank.

So as we've allocated more production to treasury bank, we have relieved the portfolio investment that was on Countrywide Home Loans balance sheet.

So you're really, you know, the overall impact on the Company is simply the movement of that portfolio to the bank, which is is -- has a better, you know, value, in terms of holding that long term.

Then does the Countrywide Home Loans.

So the 2.4 billion between home equity loans and sub-prime in the held for sale, will that eventually move into the bank or will that eventually be sold?

I think what you see now is, you know, what -- see now, is what, you know, will primarily be sold.

Although one of the things that we do is in terms of the equity contributions that we make to support the growth in the bank, we do do that in the form of home equity loans.

So, some of that will be used to make the equity contributions known in the last quarter of the year.

If your guesstimate will be sold.

The other issue is more of a macro view the mortgage bonds, including you guys, say when the re-fi boom goes away it will different in the sense of cut-throat pricing on the gain of sales margins and whatnot and getting on the backside and starting to see margins come in, we've expected some.

Are you still saying this is different than it was in the mis'90s or mid to late '90s, still different environment or are things shaping up to see business as usual in this space?

Well, look, this is a guesstimate, but the environment changed dramatically from the previous periods because in the previous periods we had a deal with the S and L industry who would take loans in at any cost and distorted the entire marketplace and they were major factors that had a lot of capital, at least a lot of ability to invest in mortgages, and operated including, irrationlely, not only zero to losses on loans, originated loans that losses where there was no more begins whatsoever. -- no margins whatsoever.

We don't have that today, we have responsive, Wells, Bank of America and Chase and we've seen them behave very responsibly and because they were all public companies, I don't see what the motivation to be to orginate loans at zero margins or losses.

I believe the environment is different; obviously, history is going to have to determine if we're correct or not.

If I was a betting man, I'd bet the environment stays fairly close to where it is today.

You know, on the one side, which I think is confusing, everybody is little bit, -- anglo low, we're taking the MSR hits and not the flow, will that material into higher owns as MSR hits are too big because the flow is not there?

You mean the flow the origination nation side of it?

Yes.

You know, it's really a -- I understand and I'll give you my response to that and hopefully Stan's not too different.

You have a position of events here, not the greatest.

In that, it's true that rates have come down to tenure come down and longer rates come down and put us in the position to, under the GAAP, to create impairment of that portfolio.

On the other hand, they're not down to a level where it would stimulate refinances, as it did in the past. -- as it did in the past.

Most of the loans refinanced in '02 and o32 are lower than today and there's no incentive to refinance.

The only thing going forward 61% of our loans are now ARM or hybrid and those loan,, those consumers have to address that issue, once they run out of the fixed rate period or a year goes by and they're bumped and they're forced into a refinance mode and that's something very different than was in the past most loans were 30-year fixed.

So rate -- there's going to be a refinance -- probably be a higher refinance rate going forward than normal because the the -- because these lens are coming -- loans are coming due and there will be rate hikes.

You've got a very, very environment and also have the fact that we have to impair under GAAP and we're not getting the kick in the refinance.

Picking up purchase transactions and picking up market share dramatically as ind indicated by the numbers.

When you look at refinances and 1993, $3 trillion year, $3 trillion, 70% is refinancing.

A good portion of that has gone away for a protracted period of time.

The market is the purchase market business and home equity and specialty loans known as sub-prime and that's where we'll see a pick-up in margins and a pick-up in volume.

Stan, you want to comment?

I want to put the timing issue into perspective because you know it is the case that as we you know impair the portfolio we're doing that because we look at the higher speed potential that occurs as of a given date when we value the portfolio.

And what we see occurring, basically, is that there is the percentage of the market, which is refinanceable, is increasing, but it's not at the same magnitude so you're not going to see it, you know, these huge jumps in the quarter.

So for example, if we went from the, you know, basically, the, you know, what occurred in the third quarter, was probably an expansion of the mortgage market from where it was at its highs to -- from anywhere from 15 to 17%.

But you know those are loans that refinanceable and that refinance, period, you know might be a three-year period, two or three-years.

You're talking about an increase in the overall origination market that's 5%.

But it's not all going to occur, you know, on an annual basis and it's not all going to occur in the quarter in which impairment is charged.

It's going to be realized in production over the -- a period of time, which, you know, is a considerable.

And so it's one of the issues in terms of the accounting and mortgage banking which is, you know, requires people to go a little bit further than just looking at the impairment numbers or one quarter's worth of products action.

The fact -- production.

The fact is, that you know, either the impairment occurs and there's additional refinance activity; or it doesn't occur in, which case the earnings in cash flows from the investment and servicing will be higher.

But it's just unfortunately we can't get these things to match up all within the same quarter.

Is that the major reason why you tighten guidance on the downside in the for example, -- fourth quarter, you see the miss match will continue, at least into the for fourth quarter?

I think one of the very primarily items, in my mind, in terms of the tightening of the guidance has to do with how we forecast amortization for the next quarter, for the fourth quarter.

Basically we take rates at the end of the third quarter, beginning of the first quarter, and we use those, that rate, to project amortization.

So, obviously, the lower the interest rate, the greater the projected amortization.

And amortization is an expense that we're going to incur, no matter what happens, to interest rates Via accounting amortization during the quarter is set and knowing that it's set at a higher level, it simply takes out the opportunity for a, you know, higher levels of performance for example on a rising rate environment because amortization reduces the basis of the servicing at that and, therefore, lower of cost or market will prevent us from writing up the portfolio, even if the result is that we've overamor advertised the asset -- amortizationed the asset below the level of actual pre-payments.

So, given that knowledge of how the, you know, pre-set amortization is set to occur, we felt it was one of the primary items that led us to reduce the high end of our estimate.

an increasing -- if rates go up from here?

If rates go up from here, you know, we have -- you have -- you have impairment recovery, but, you know, my point is that to the extent that you have amortization, you know, amortization that is set very high, you're not going to be able to recover that because amortization reduces the cost basis of the mortgage as opposed to impairment, which can go up and down.

So we can recover and impairment we can't recover the accounting amortization.

I'm taking too much time.

Thank you very much.

And thank you, Mr. Miller.

Representing Credit Suisse First Boston, is Oren Buck.

Please go ahead.

Not to [inaudible] it, one way or the other the amortization rate will decline if you don't get a follow-through from refinance activity or see ton the production side of it, is that a fair observation?

Correct.

Absolutely.

Okay.

In terms of talking about the production side a little bit, the -- it seems like there's a little bit of confusion about the term "production margins" I guess the revenue mar grins were actually on average up a little bit from the second quarter, kind of the pre-tax margin was actually what was down and the driver there was, I don't want to say voluntarily, but planned increase in expenses?

I think that -- Keith?

Fairly accurate?

I think some of the confusion lies in the fact that we have sometimes express the margins based on sales; other times based on production.

That's why I tried to just express in terms of dollars of revenue.

All right.

Okay.

And just one technical item.

Last quarter you told us the difference between the fair value and book value of MSR is there a comparable number for this quarter?

About $111.

Thank you.

And representing Susquehanna, our next question comes from the line of Michael Cohen.

Could you see the history's home equity originations, and obviously we've had tremendous growth due to 80-10-10 products, to require customers to use it as a down payment?

Some people simply take out seconds at the time they take out a first, whether first home or origination -- I mean refinance.

Some are getting seconds independently, could you talk about how you see the break down or how one should bucket the earnings, if you will?

The percentage, you mean -- I understand stand you correctly, and I think the assessment is right, we have a piggy, and that is a home equity loan that's piggy-backed-backed on to a first in order to avoid private mortgage insurance, consumers are hip to that now and there's a lot more of that being done in order to get a tax deductible interest rate rather than a nontax deductible PMI, private mortgage insurance.

Let me see if I can get a break down of what the piggies and non-pig goes.

Do you have that?

We're looking.

I'll give you a general comment and come back as soon as I get the answer.

Sure.

There's clearly a major trend toward using a home equity loan as a purchase vehicle, is the way to lessen the burden for a down payment and also to increase the tax deductible of the transaction.

And there are people not long after the transaction closes that do take a home equity loan out, primarily to do some improvements, either home improvement on the house or consolidate debts to a tax deductible situation their than--

Can I add a little clarity to my question?

I think the gist, beside 80-10-10, what I'm trying to get out is the difference between circular and cyclical growth of home equity?

I think think it's clearly circular.

I don't see this like a fad that's going away.

I think this is a fundamental structural change in the way people utilize the the equity.

There's a clearly a dynamic over the last year or two or the consumer is be having very differently than the past.

We're going to run down the numbers for you, basically, to break down the volume by what we call piggy back, the loans made in conjunction with the first mortgage, of which, a significant part of that is to avoid MI.

And then I guess there's two, sort of ways I'm thinking, two types of piggy back; the kind to avoid MI, and the kind that says, "All right, I'm here, refinancing my home and it's convenient for me to refinance my home and get a second line of credit to not go through filling out the paperwork down the road?

Right.

We see some of that, what we count, by the way, in in terms of our HLAC production is where there's been a draw and we're not reporting lines.

So, then, in the event that someone take out a HLAC loan and it's undrawn, it's not included in our production numbers, although it unincluded in -- it is included in subsequent draws on -- HLACs when the line is used.

It is -- we have a growing need to produce greater levels of stand alone HLAC of volume as well.

A lot of our progress is really been producing in the space that was once only for banks.

We've become a, you know, major, you know, top, originator of home equity lines.

We're the largest, if not the largest in the country.

But to be table to get the numbers?

You got it?

Okay.

[ Inaudible ]

Mr. Cohen, did you have a follow-up?

I'm answering the question.

By dollar volume, piggybacks represent about 44% of our production and the remaining 56% is stand alone.

And what banks' balance sheets look higher skewed toward piggybacks; or less skewed toward piggybacks, in terms of the home equity that you're keeping?

I don't think we break that down in that matter, do we Keith?

To us, it's a generic product, although it was originated for different reasons.

When it come to us out of the bottom end of the funnel they're all the same to us.

Fair enough.

One last sort of follow-up, someone broaden, and I'll hang up after that, you know, could you talk about home price activity and if you're seeing sort of beginning to see issues of distribution in certain regions of the country that concern you, or do you feel good about what you see right now?

Let me answer that generally.

In fact, I was at a meeting yesterday, about the same issue.

The average price of a home in this country is about $190,000 and the average loan probably around $130,000.

So that the -- I don't see any of the concern about bubble.

Now, if you take Manhattan and somebody bought a $40 million penthouse, is that worth $20 million in a year from now?

Is it a problem?

Sure.

From the type of loans Countrywide is essentially involved in, and the demographic situations today where we have the tremendous inflow of immigrants into the country with a primary desire to own a home and builders unable to build as fast as they have to to meet the demands, I see one of two things: continued but modest increase on pricing pressure on the upside; or stabilization of values for protected period of time strictly because of affordability.

I think there's got to be a question, is there [inaudible]?

We don't see it at all, no indications in delinquencies or naturally the first sign delinquencies and closures and very low unemployment 5.4 and -- foreclosures are very low and we don't see any of those issues on the horizon.

And not a regional level, yet, either?

No.

Great.

Thank you so much I really appreciate it.

Thank you very much Mr. Cohen.

Next in queue is Ken Posner, representing Morgan Stanley please go ahead, sir.

Thank you.

I have first an accounting question.

I look at your loan production sector statement of income break down, we can see, or I can see, the total production declined from 99.6 billion in the second quarter to 1.8 billion in the third quarter.

However, the -- not all of the production goes to the mortgage banking unit.

And increasing share of that production, 6.5 going to 8.7, went to the bank, and I presume there's no gain on sales for the--

That's correct, there is none.

-- bank production.

The capital markets conduit went from 4.6 to 6.1 billion.

How is that accounted for?

Does the capital markets pay again on sale to mortgage banking or the capital markets recognize gains through trading?

How does that show up?

Those profits are part of the capital markets results.

Do they acquire them on their own, if you will, and, then -- okay, great.

And then my second question is: I wanted to clarify--

Doesn't include by the way, but it is included in our, Ken, production numbers.

Right, but not in terms of production earnings, that would not include gain from the capital markets or expenses?

Part of the consolidated sale numbers, and shows up in the capital market.

Correct.

My other question is:just to clarify, somebody asked about $1.7 billion mortgage market next year what, it with mean, the last time I checked, not in the last couple of weeks, but I thought 1.7 billion was the consensus in terms of the mortgage banking, Fannie and Freddie and so forth, is it your view 1.7 billion is a consensus forecast?

1.7 trillion , not billion.

You're a student, go back to the productions over the last several months and it changed 11 times.

That's correct.

Okay.

So, I think that's a very, very conservative view, worst case scenario, that number, and I think we have our finger better on the pulse of the what's happening than they do and we're located in every single state.

The information we gather from each state gives a pretty good indication we have a pretty healthier market right now and we have, as you can see, by the numbers, are continuously picking up market share.

The total mark set not out of the equation, the share of the market is another and we'll continue to pick up mortgage share.

From my own perspective Ken I think it's very, very conservative worst case scenario.

That's helpful and answers the question.

The last thing I wanted to ask, if I could, about the conditions in the asset-backed market and what the implications are for the sub-prime business?

My colleagues who track this stuff tell me that the [inaudible] on home equity securitizations are trading at what they think are very tight spreads right now.

I don't know if you have a view on that subject?

But the question is, if the ABS markets become less generous on the pricing for B-pieces in the future, what kind of implications would that have for the sub-prime margins or volumes in your business?

Well, you know, one with regard to our pricing that we offer, it's based upon what is we expect the execution to be.

And so you know the first part of our pricing model would be to, you know, maintain our margins and, you know, to -- you know, to pass along that increased cost to the consumer.

That is, you know, how we would expect it, the market, to work.

Although, you know, clearly, if the market, you know, drys up in terms of execution, it will have an overall all impact -- an overall impact on -- an impact on the industry.

We've seen a significant and liquid market developing for sub-prime mortgages, whether it's in securitization or home loan sales.

Clearly so far there's no issue.

One last thing, if I may?

Interest only loans.

People have noticed that the proportion of those loans, not so much in the prime market, but more so, I guess, in the [ inaudible] market, that those loans are growing quite quickly.

I'm curious what your appetite is to hold interest-only loans in the treasury bank portfolio?

And to what extent you are originating and securitizing them?

First of all, there's been a movement by the consumer, for the interest-only loans.

Because they, I guess, that this generation believes that real estate values will continue to go up forever and there's no need to pay down principal.

Whatever the reasoning is, there's certainly a trend, throughout the country, for these interest-only loans.

The second part that occurs to me, yes, that question, what's the difference -- is there an assumption that these loans are of lesser quality than a normal amortization loan?

And there's absolutely no indication of that, whatever.

The FICA cores in these loans are at good or better on a loan amortizationed in a traditional manner.

To me it's a quality loan, not the fact it's interest-only.

You got to remember the application to principle over the first five or six years is very insignificant in a normal amortizationed loan.

We're paying both principle and interest.

I don't see it from any perspective a negative issue and I think it's positive because it gives another alternative to the consumer, to lower their payment and make the housing more affordable for them.

The -- you know, today, in the third quarter, we had about 21% of our total production done as interest-only loans, as Angelo indicated, they are very high quality loans, average , 7 -- FICA, 711, you know, with very good LTV and 76% LTV in our portfolio.

So it is, you know, these are high-quality loans but increasing affordability and the loans are, in our case, we can secure a tax or sell to the GSEs or sell on a whole-loan basis so the majority of our production, you know, we don't have credit exposure to, with regard to the bank, their standards for portfolioing loans is also, you know, very high.

And they will do, you know, and have an ability to do interest-only loans.

As well as you know pay option mortgages, as well.

But again, at the very high end of the credit spectrum .

You know, I really appreciate your perspective on this, I guess the guess is some people raise, not so much the IOs are bad loans, but a question mark over the ultimate performance, if there is-- [ OVERLAPPING SPEAKERS ] I think it's totally irrelevant whether it's IO or P and I as to performance I don't believe there's any difference in performance.

I don't understand why there would be.

Thank you.

And thank you very much, sir.

And next representing Jacobs Asset Management, we go to the line of C. Y. Jacobs.

Go ahead.

Bill Roy, thank you.

Most of my questions were answered.

But I had a couple extra ones.

Did you take any impairment on the retained interest?

No, we didn't.

Okay.

So all of the 795 million was from--

MSR, yeah.

MSR.

To clarify the bank assets, is it fair to say that going forward you'll have less HLAC additions to the bank, HLAC and second, second loan additions, and more prime adjustable rate loan going into the bank?

I don't know how we didn't predict that.

I mean, the bank, again, limits its intake on loans to very high FICA score loans.

It, again, has to match up in terms of maturity with their liabilities.

And whatever fits that mold, whether it be home equity or hybrid or whether it be -- whatever the type of loan that does that for them, those are the loans that they will take from our pipeline to make sure they have a proper maturity match.

So there's no artificial stated restriction on their volume of home equity loans that they would take, going forward.

We do depend upon what the consumers want and what hundreds of loans coming in the pipeline are -- what the basis of the loans are, be the, you know, be they a faked rate; by a five-year for hybrid or pure ARM base or any one of those things.

There's no BIAS at -- at moment at the bank.

I noticed that the margin just on what you earn on ending assets went up on the bank.

Can you just explain what went on there?

Part of it is the prepayment speeds which helped them, lower prepayment speeds.

You know there's interest has been going up a lot to do with the fact that they deployed more of their cash proportion proportionately liquid assets in loans.

The other thing that's happening there is that they also have an adjustment to the underlying loans as short term interest rates have been rising and so that's improving their yield, the leverage on their portfolio, as well.

And you know they're building a franchise in -- they are building a franchise in terms of the deposit structure and their costs relative to LIBOR has improved over the course of the year as well.

All of those things contributing to an improving interest spread.

Thank you.

And thank you very much, sir.

The next participant in queue is Mr. Eric Wasserstrom with UBS.

Please go ahead.

Thank you.

One quick question on the capital markets activities.

Is it a correct understanding to, obviously, overall activity came down in the quarter as a origination volumes and such came down to some extent in the prime spaces, but the -- is it your position that as you add product, even if overall orginations come down, the activities of that statement of your business will increase?

It should.

As we pick up market share.

Okay.

Thank you.

You still here?

Mr. Wasserstrom the line is open.

That's the entirety of my question.

Oh, okay, very good, thank you.

Our next question from the line of Ed Groshans with Fox-Pitt Kelton.

Go ahead, Mr. Groshans.

I wonder if you could breakout the HLAC ARMs fixed rate?

Do we have this?

Let's see if we can get that.

We can get that for you, Ed, and shout it out.

If you're not on the line--

No, I'll be here.

The other thing about, 80% as expected to close, is that the normal close rate on those?

Or is it a little bit higher?

That's pretty close. 80 to 85% of the pipeline.

We don't see any change in that.

Talking about mixture and margin pressure and I guess could you just, like, run through, like, what the difference is in the margin of, you know, of one-year ARM versus a 3:1; 5:1 hybrid type of ARM relative, to, I guess, 30-year type of profit?

Well, more generally speaks, you know, the point that we've made is prime margins have declined and that has more to the product mix shifting to more ARMs, generally speaking.

And it's also due to the competitive environment as we've mentioned, as well.

Things tightening up a little bit.

That's, you know, press margin as little bit.

Now within the ARM's products themselves, the pay options ARMs and the interest-only ARMs tend to have higher margins than the standard hybrid ARMs do.

Would those be in line with or little bit lower than 15-year or 30-year-type of product?

Well, generally the fixed rate products carry higher margins.

When we look at it today, that continues to be the case.

That is, the product mix is definitely shifting toward more ARMs.

Right.

You do put out the information on your web site and concerning the gain on sales margins, breaking down some of the option-related type of product versus the fixed rate on there, also, to get the sense -- given that it seems that over 50% of the production is coming in the ARM products now?

Well, you know, it get as little dicey the more granular you try to get.

As it is, we have to make some allocation between the general product categories that we disclose now.

So, I would be reluctant to attempt to provide anymore detail than what we do already.

Okay.

Do we have that number?

On the pipeline?

Yeah.

We have that totaling up now.

The other thing is, you mentioned there is -- I want to make sure I have it correct -- 146 million, is that the amount paid for acquisition pipeline?

Oh, no, no, no, no, no.

No.

That was in the production channel, overall -- the channels were -- 146 million was the increase in expansions, 172 million was the increase in expenses, some of it the result of hiring sales people, hiring sales people with pipelines, bringing in mortgage brokers, who were formerly customers are now, now part of Countrywide.

It's a mix.

But it all has -- is related to the building the -- building the edifice that supports our production operations.

Okay.

Is that a consolidated number and not in the breakout of the loan production sector?

Consolidated number.

Say again?

It's a consolidated number in our production operation.

Now, let's give you the pipeline.

Hope this helps you enormously in the forecasting and we'll give it to you.

The pipeline is, today, is fixed rate mortgages are a third, 33%, ARM mortgages are 40%;

HELOCs help 11%; and sub-prime represents 14.

And then there's 2% other category.

Okay.

Okay?

I appreciate that.

You're welcome.

I guess, my last question is going to be on the direct production costs that's in the loan production sector.

Can you just give me some refinement of the cost that is are in there, and then if any of those, or some of the items that you're discussing with, you know, the new hires, I guess, you know -- I guess one of the concerns that I have is seeing pretty much what I consider a significant increase quarter over quarter in the total production costs.

And the commentary that more is paid out for the purchase of the HLAC-type of products, you know, it clearly shows in this sector the profitability went down and it seems to me if you go in for higher margin-type of products like HLAC is would be the opposite way.

I guess what's not clear is how much of one time is in the 716 or 816 16 production cost --

First of all, it's scale issue.

Go ahead.

Yeah.

I can give you a general breakdown.

Bonuses paid within the production sector increased about 25 million from the second quarter.

Salaries up about 16 million.

Marketing expenses up about 10.

And the rest of it, rest of the increase relates generally to infrastructure, except, notably FAS91, deferrals, reduced by 24 million and that results in an increase in reported expenses quarter to quarter-to-quarter and that's just an accounting issue there.

I think we already touched upon what's behind the increase in compensation and mark marketing relating in the shift of overall, Moore mortgage purchase market and less refinancing and cost of driving in that purchase business.

Can you elaborate more?

How much for a purchase loan over re-fi and how much for HLAC?

Let me suggest something.

You've been on here now about eight minutes and there's people lined up.

What I'd like to do --

I don't think I've been here longer than most people so far.

Eric, do you want to give him a call back?

Give him the -- I think you're going to to get better quality information in the -- with Eric calling you back as per your specific questions as you dig deeper in the pipeline.

I'll take one more question, we've got to move on here.

That's fine.

Okay.

There's another phone number and Eric, sir, will give you a call and as much time as you need to go through all of the details you're asking here.

Thank you, Mr. Groshans.

Ladies and Gentlemen, as you heard, we do appreciate all of your questions today however we have a large number of participants in queue and we'd like to get to ach as we can, from this point forward, we do ask to limit your yourself to one initial question and should time alowrks we're be taking fop-ups.

Next in queue is Kenneth Bruce with Merrill Lynch go ahead, sir.

Thank you for the question.

Most of mine are answered.

I do have a follow-up.

Specifically in the sub-prime space, I know that you have been moving fairly aggressively into this sector and margins are high, relative to the traditional book of business.

Do you see some risks these margins will erode as well as many other competitors continue to push down stream?

There's always a risk of that, that, you know, margins, people chase markets and, therefore, the margins and, therefore, the capacity builds up and compressing margins.

We haven't seen much of that.

Plus, there is a higher cost in originating these loans, I don't think that can be ignored.

Certainly, the higher margins are justified, simply because of the cost of originating counseling these people, obtaining documentation, nontraditional documentation is higher cost.

Could the spreads narrow from this point forward on [inaudible] They could --

We don't -- you know, we've gone through what happens in the same quarter last year versus this year and I've seen some compression but no major compression in the area.

I just don't -- I wouldn't -- I wouldn't understand if it happened, the justification, unless [inaudible] did something irresponsible.

Stan?

Also, there's pretty significant barriers to participating in the sub-prime arena today.

You know, starting with you know, regulatory compliance environment that takes the type of -- capabilities and disciplines that Countrywide had has.

The other is specialty servicers are far and few.

The -- so we are -- we have the ability to not only originate the loan to but did to continue to servicing it, which is a very few specialty servicers left of any significance and that is a barrier to participation by many originators.

And, also, you know, on the security marketing side -- secondary marketing side, we have very, you know, considerable levels of expertise and not only the securitization of sale but in the whole loan distribution of sub-prime loans, as well as the modeling of the credit and interest rate risk associated with sub-prime mortgages and I think the barriers are considerable.

A follow-up: That being said, I mean, you are probably a low-cost provider in that space, so, by and large, you can determine pricing to a large extent.

What position do you think you are willing to be at in terms of returns or profitability in that business, as you'll probably be pretty much the price sitter overall longer trend?

I would agree with that.

I think we're the -- I don't think we are the price setter at all in the specialty category you're talking about.

You know, I think that we have to play the hand that's dealt us, so far you've seen the results of it.

I told you that I don't believe in general you're going to see any major price compression in sub-prime sector in that space.

I don't think I want to be anymore specific than that in terms of giving you what we think, it would be speculative on my part to do so.

But we don't -- I think it's safe to say that we don't expect any major compression of -- on the sub-prime side of the business, in terms of pricing.

You know, follow along that, we have very good mottling capabilities to maximize our total return.

So we never move price without understanding, does it provide all increase to the bottom line of the company?

And -- overall increase to the bottom line of the company?

And that's managed keenly throughout the Company.

There are times, so you're aware, there's time in our 36-year history and even more recently, where in certain sectors, certain channels, we have withdrawn from the channels, not formal, but stepped back if a competitor begins to acting irresponsibly and we'll not go head-to-head with them, it doesn't meet our -- it doesn't meet our thresholds of return.

So I think the saying is especially appropriate that -- appropriate that is has to pass our smell test before we'll go in and compete for that product.

So far it has.

Thank you very much.

Sir, our next question from the line of Jordan Hymowitz with Philadelphia Financial.

Please go ahead.

Hi, guys.

Congratulations on the continued market share, I think people have overlooked in this process.

Two questions:one, you've given guidance for '08, on market share, would you have any guidance for '05 on market share?

Is that a question for the investor?

We'll be discussing that-- That's a question for November 3 at the forum.

Thanks for the acknowledgement of pick-up in market share.

I appreciate that.

Don't mention it.

Second on the sub-prime, do you sell forward, if so, how much is sold forward through this year?

Well, you know, basically, we -- what we do is we hedge the committed part of our pipeline.

So we would have either sales, forward sales, or you know hedges in you know indirect hedges in place on the sub-prime pipeline that's you know policy that is in place.

We've been operating in all of our pipelines for many years.

And I'm just wondering, you know, the new mood -- not -- Standard & Poor's new requirements for over classification comes out in the fourth quarter, has that impacted your pricing going forward, or have you not handling past that point?

It has influenced the pricing and it's already been adjusted in the pricing so that the mortgages in our pipeline and that were originating are already set to that adjusted collateralation level.

Did you say how much?

Or do you prefer not to say?

Don't have it.

Don't really no.

Okay, thank you.

Thank you very much, sir.

Our next question from the line of Bruce Harting with Lehman Brothers.

Please go ahead.

Just as we got through [ inaudible ] And you know Freddy MAE -- MAC issues last quarter, we have the Fannie MAE and Marsh MAC and insurance issues.

[ INDISCERNIBLE ]

Pardon?

Life is tough and then you die.

Yeah.

It just-- I mean I just--

General comment.

By the way, to bring it up to you on that, nobody wants to see this happen, at the end of the day, the survivors are much stronger from a variety of view points, as I said, no one likes to see this, we certainly don't.

But if you have solid intellectual assets and solid financial assets, the end result of it could be positive.

I'm sorry to interrupt.

Go on.

No, that's good.

That's good.

Specifically, any, just to reassure us, I don't see any at your company at all, on the Balboa and the reinsurance business with mortgage insurers, I've been getting questions on this, put out a note yesterday on it, saying that, you know, we've had federal, you know, appeal's court precedence saying that the captive reinsurance arrangements are fine and don't harm the consumer; in fact, there's nothing wrong with those.

So a lot of precedent in terms of federal case law saying that's fine.

Just a reassuring comment from you in terms of -- -- comment from you in terms of issues.

Other rumors, throughout the credit card and GSEs and security industries and Angelo, in terms of the trade groups and things like that, is there anything in the mortaria, not necessarily Spitzer or someone of that sort could find some problems?

Thanks.

First of all we're not aware of anything that's going on in the mortgage space relative to regulatory investigations of that nature.

Two things that occur in my mind when you ask that question, Bruce.

One, the industry is constantly, over the years, being investigated by some group, be it nonprofit or regulatory, and it seems to be just, you know, the way of life here.

And but I think the bottom line is I -- I think it's a very legitimate question that you asked -- as I review the landscape of Countrywide is there's something that I'm aware of, or even in the industry, that we would be vulnerable to as the -- it appears the insurance companies having some sort of a cartel, if that's true, or if somebody is trying to hide $5 billion in earnings.

Those issues do not exist, search at Countrywide.

I don't know of any -- we're about the only public company left of any stature.

I don't see there's a practice going on that is clearly something that's questionable as it relates to how the customer is being treated.

I just think that we're -- Countrywide is a byproduct of continuous review and continuous investigation by all of the regulators that do business, including the Federal Reserve, OCC, SEC, NASD, all combined virtually on a daily basis, including the public accounting firm.

I don't see anything that is not saying someone from the plaintiff's bar can pluck out something, I don't see anything either in the industry or with Countrywide that would subject us to what the GSEs have gone through and now the insurance industry is going through.

Good question.

Thank you.

And thank you very much Mr. Harting.

And next representing Wachovia Securities, we go to the line of Christina Clark.

Please go ahead.

Thanks a lot and good afternoon.

I was wondering if you could talk about the sub-prime of I heard it's gone up to $600 million.

Is there any portion to wrap the AA adds level and have there been any changes to the evaluations assumptions to the sub-prime versus the metrics you put out at the June Investor Day?

Do you recall the word that preceded "level"?

We missed that in the -- you said something-level.

No.

Just that they've gone up 60% To 516 approximately -- or -- yeah, about 592 million and just whether or not any of that is going to go to the -- with wrathed at the AAA level?

And then if there's been any changes to the assumptions?

You know, we got some clarification on underwriting and evaluation assumptions related to sub-prime residuals back in June at one of the investor forums and I'm one wondering if it's changed as we look at the balance sheet? .

First of all I would point out the residuals are down from June 30.

And that we do continue to transfer credit risk wherever we can in a number of different ways.

Either by including mortgage insurance in the deal or more recently we've been [ INDISCERNIBLE ] Our transactions and reducing our investment and residuals that way.

You know, going forward, you know, well, in the third quarter, we named approximately two billion of the securities that we formed.

You know, going forward, that will continue to be our MO, to transfer the credit risk to the extent that we can, either through naming or MI.

Or, perhaps, involving GSEs, again.

So we kept our residual investment, I would say, pretty low, relative to the level of business sub-prime business that we've done.

We're very sensitive to the -- that category on the balance sheet and sub-prime residuals and as Keith pointed out we continue to look for market opportunities to finesse that asset off our balance sheet and we have done this quarter several nim transactions and you understand our objective to to keep these assets at the lowest level and we're in the sub-prime and if you want it, you're going to have it.

Do you have a target for, you know, kind of the residual exposure excluding the AAA and NIMS, core sub-prime exposure as a percentage of your net worth or total assets?

Is there a level you kind of target and keep it to?

I don't think we have a fixed -- we don't have a fixed number and we're dealing with volatile markets.

There are opportunities to sell it and we'll seize the opportunities and they're at markets -- there are times it doesn't make economic sense to the company because it's high-return asset to the company and shareholders.

We try to strike a balance between that asset and what it throws off, and our overall exposure on $100 billion balance sheet and based upon the assets of the balance sheet its a's very low number.

Stan has there been any changes to our underlying assumptions?

I would say we -- you know, we continually review our assumptions and refit the models as more data becomes available to us.

I would say there's been no significant changes in the underlying assumptions.

Great, thanks a lot.

Thank you.

Thank you Ms. Clark.

Our next question from the line of Richard Diamond, representing Inwood Capital Partners.

Please go ahead.

Yes, Angelo.

Looking out the ten year is now at a rate between 3.98% and 4%.

And at what point could we see another re-fi range?

I think we're getting close.

If you get down to the 380 level, you know, at the low, of course, in fact, 309, is the end of day low, intra day low, but I think you get into the 380s, you're going to see not the boom we saw last the three years, but you're going to see an increase in refinance activity.

What I really like to see, frankly, a much healthier situation, is the short end of the curve, you know, going lower, stop the increases because there's, you know, compression taking place now on the curve and the curve is narrowing.

If we get to 3.8 you'll see a spurt of refinance.

Am I correct in assuming that your guidance does not--

Does not--

Yes.

Does not include that.

I think the world is exceptional at [ INDISCERNIBLE ] Thank you.

And thank you very much Mr. Diamond.

Still a number of participants in queue.

Next we go to the line of William Matthews with Canyon Capital Please go ahead.

I was wondering, you touched on a few questions ago, strategically how do you prioritize margins versus market share?

You talk about 2008 gain of 30%.

I understand you don't have the rationality of the savings and loans, the current competitors, and benefit and the new phenomena of the companies they're looking to fuel growth in the sub-prime market, how do you prioritize the market share goal within margins?

Obviously, the dominant factor is margins.

We're not going to sacrifice originating loans and losses as was done in the past.

So our priority would be, if you put it in the philosophical sense, our priority would be make sure we have positive margins and positive return on our, you know, on our equity.

What that number is, it depends upon a number of factors.

If you have a mini boom of refinancing you'll have volumes going to create an opportunity to originate loans at little wider margins.

This environment, you know, [ INDISCERNIBLE ] Narrow, I don't believe we've sat down and said, this is the formula.

If the margin goes to "X" minus something we're out of the business.

We have to go with the flow and we also, with volumes, your expense per loan goes down.

So, you know, scale does help as we go through the process.

We don't have a fixed just positions of margins and market share.

We're assuming the 2008 number is based upon our assumptions that the margins will be reasonable.

Okay.

That's helpful, thank you.

And thank you very much, sir.

And our next question comes from the line of Lawrence Camp of Sonic Capital.

One of the rationales to the banking business is a slightly higher ratio and the equity has gone up 24% since the previous year, and the assets only gone up 7%, so I would like you to comment on the capital structure a little bit if you can.

At the bank?

Consolidated?

Consolidated.

Well, I think, you know, you have to look at the bank and view its activities.

You know, independently.

You know they are working to expand their leverage particularly of -- as they've come through the period.

It is the fact that when we have very high levels of production, our leverage goes up.

Simply because if you segment out the -- our balance sheet, we're afforded higher leverage on inventory, for example, than we we are on the services assets.

Simply what you're seeing is the, in terms of leverage, the result of the production market, declining from its highs.

But we will, as we build market share, and grow our production, even in the, you know, in the normal market, produce higher levels of leverage.

I think the, you know, the main -- really main issue isn't so much a function of how you look at leverage how you look at investing capital.

And the bank represents a great opportunity for investing capital at a return that provides great stability and growth for the Company.

And that's one of the, you know, major areas that we're targeting to invest capital and end result is that it will have a, you know, an it will show higher leverage as a result of that because it's higher leveraged.

I think that the -- really is the just position of how the company is structured today and the bank is relatively small, still.

Related to the entire company.

And because of that, we're not getting the full value of leverage enjoyed by the bank, versus the mortgage company.

So the mortgage company's constraints by the rating agencies is still the dominant actor.

As the bank grows and more capital is applied to the bank, you'll see the condition, over time, enjoy better leverage.

How are the conversations with the rating agencies going?

It seems like no matter how much you increase the equity, he don't want to give you an upgrade.

Right, I agree with the statement. [ LAUGHTER ]

I mean, obviously, we can't disclose conversations we have with the rating agencies, I think, you know, they're looking at acompany that's a very healthy company.

I think at the time that they gave us the rating, we were 5 billion total balance sheet and 100 some odd billion today with a lot more equity.

It's just if I had to make a general stating, the rating agencies have two problems: One, the industry itself, is the industry that concerns them; two, We're the only one that's left.

So trying to get that attention, being the only one left is sometimes difficult.

But we've, you know, continued to do -- continued to do well and it forces us to be very good managers.

We don't have the luxury level our competitors have and yet we may beat them at the game.

So I don't -- obviously, we deserve a higher rating and because Issues I just raised with you, it's the business itself is problematic to the ratings agencies, when things happen to the home side and Lois and nettleton it value dates the cash.

I'd like to point out, first, relative to the ratings, they're stable with all three of them.

And then back to the capital, it's not dramatic, but you probably notice that we had increased our dividend rather significantly and we have indicated that its our intent to increase the dividend yield up to around 2% level.

Okay.

Follow-up, if you will, on the corporate scandals.

I think one of the things that has been in terms of control necessary is lack of accounting expertise within the ranks and you have one or two CPAs.

How about 20?

How about 20 CPAs in the executive tank?

Could you comment if you use the short cut method in the hedge accounting?

What's that?

Short cut method.

We only apply it in the case of the debt where we've issued fixed rate debt and swapped at the floating rails or vice-versa.

There it's very straight forward.

and the fair value of the derivative is zero at the initiation of the head relationship?

Right.

Thank you, much.

Thank you very much Mr. Camp.

Our next question is from the line of Andrew Rexroth with Green Light Capital.

Go ahead.

Good morning.

Two questions.

Last quarter on the conference call you guys made a comment that you expected the margins in sub-prime to do is better in the third quarter than they had in the second quarter and it looks like if you do the quick math, roughly the same.

Wondering if it changed it from an outlook on your view of the near term you'll look for sub-prime margins?

The second question is, let's go back to the loan production service.

I'm wondering, is there any impact on the growth of the direct production cost line?

Any impact at all there from higher premiums and course corresponding wholesale channels or captured elsewhere?

Be a gain on sale.

Right.

It wouldn't be in the expense category.

The 90 million their all just additions to infrastructure and strafing and whatnot and higher variable compensation?

You raised a good point, is that, you know, it's true the sales people come in at -- we have to pay for benefits and obviously commission only and expenses Ps variable and the support is not variable and fixed and you have to have POW medal people to process loans and make homes in papers and fasteners in files and that kind of stuff for salaried employees.

Every time you hire a group of sales people there's a portion of that that you have to absorb the expenses.

You want to comment?

Yeah.

With regard to your questions of prime, we did, during the quarter and third quarter, have a pretty significant increase in our volume of activity, over a ball and a half additional volume vs. the second quarter, so that the overall revenues that company enjoyed from sub-prime did go up in the third quarter.

It is, you know, our view that since our discussions at the end of the second quarter, that sub-prime margins are going up.

There's a, you know, cost of developing the pipeline that we have that weighs down, slightly, the margin that we show for the third quarter because it's not the -- we don't enjoy the same derivative treatment on the sub-prime pipeline that we do, for example, on the prime pipeline so that has the impact of actually reducing the margins that presented?

It is our feeling that sub-prime margins did improve during the the third quarter we should see, at minimum, that they've stapled out, given the market today.

And so you're suggesting comparing the 261.4 you reported as a gain on sale in the Q2 is not apples to apples, 266 this quarter has other expenses in there that are not comparable?

Not only that, the other facts that I am able to look at the pipeline of loans in process and the inventory, unsold, what are the margins embedded there?

And it is, you know, that is very consistent with the discussions that we have in the second quarter.

I'm sorry.

I want to decode that.

Does that mean you expect the margin you report on kind of a simple mathematical dividing the gain by the loan sold in the for example, being what you know -- fourth quarter, being you what you know today, better in the third quarter or the same?

Given the information that we have and understand today, I would expect them to be slightly higher in the fourth quarter.

Okay.

Great.

Thank you very much for your help.

Thank you, Mr. Rexroth.

Next to the line of Jaime Weiss with the Bank of Montreal.

Please go ahead.

Thank you for taking the question.

I was wondering if you could comment on insider tradings?

Specifically, insider selling at the company, looking through the form-4 filings over the last six months or so, I see a collection of Angelo and David Sambow Garcia, basically every day selling some stock.

I wondered if you would comment on that?

Well, let me speak myself.

First of all, Stan and I 10-B-5-1, been under, for at least two years and started 10-B-5-1 and that's -- those are -- let me speak for myself, those are expiring options I either let expire or execute and sell or execute suit and pay the taxes and hold.

My decision has been that since I'm 65-years-old to exercise and sale on done on a schedule, irrespective of the market, stock up or down.

So, I would attach no meaning to it whatsoever, those in the past that attached a meaning to it, is a big loser.

The price of the stock is exemplary and the stock I sold, particularly, a year ago, even before the splits is a HELL of a lot more now.

The sell by myself, I think I can speak for Stan, is one of a personal nature and has nothing to do with the Company.

Precisely.

You know, the case is that we had these 10-B-5s setup well over, almost, they run for about a year.

Mine are dealing, you know, solely with expiring options, some of those options that are, you know, ones that I've held for 10 years.

And you know, they represent a small part of my overall interest and I think that, you know, if you went deeper into some of the other executives that you see coming up, they have a very similar issues, the ability to, you know, exercise and hold the stock is you know represents a significant financial burden and you know the most e-- way of dealing with -- efficient ways of dealing with the options 10H been H5 and that's what you see.

The reason you see it everyday is to be as accommodating as we possibly can to the other shareholders in the company, they could be dumped in one day.

Right.

We don't do that.

We try to do it in such a manner that we maintain market stability and, but, again, have no control over once we've established how it's to be sold, the the timing of it, you know, each week, or each month, is once it's done, it's done.

Irrespective of what happens in the marketplace.

Again, I only repeat this because I have been answering this question for 3636 frickin' years and wasted upon sale of stock at Countrywide made a mistake in every single case.

Management knows something they don't know.

It has nothing to do.

Thank you very much.

Thank you, Mr. Weiss.

Our next question then, comes from the line of Randy Selig.

Hi, how are you.

Most of my questions are answered.

I had a symbolic question.

Is sounds like from the call, that the sub-prime market, sub-prime part of the business, is actually doing quite well.

It sounds like you expect margins to be up and volumes healthy and that seems to have been reflected in the past quarter, can you comment on that?

Yeah.

I mean you're assessment is correct.

We continue to invest in that market, because that's really where the opportunity rests.

It's that market segment that enjoys a low homeownership rate.

So we have many initiatives and -- initiatives and alliances with nonprofit groups, faith-based groups and a whole bunch of amenities through the United States continue to penetrate the market because that's where the opportunity is.

Didn't mean to interrupt you, go ahead.

No, I actually interrupted you, sorry about that.

One last question.

A couple of the sub-prime originators have formed rates it and it seems like the costs are a little bit lower, at least more tax efficient, how would that impact you in terms of org nation volumes?

How would that change the market?

You know I do use the expression, it's crude and use it to get a point across, it's lipstick on a pig, you know, if a company is not performing well as a tax-paying entity to convert it to inform and a REIT doesn't make it better or more -- it works on the position over time.

I don't think the shift that we've seen of the sub-prime lenders, opting to go the REIT route will make them any competitor as alluded to in a previous caller.

I think it may, at the end of the day, make it worse that's only based upon our own personal earnings.

We had a REIT.

Indymac Bank was a REIT.

And we're paying out most, if not all of the of the earnings, in terms of dividends.

We at this point don't see the shift to mean anything to us.

Okay.

But it sounds like, in general, the market is doing well.

That portion of the market?

It is, very well.

Thank you very much.

And thank you very much Mr. Selig.

Next in queue is Matthew Lindenbaum with Basswood Partners.

Please go ahead.

Hi, Angelo and guys.

Let me -- I just have a two-part question.

One, I would like a breakout, if you've got it, of the total productions.

I no it's 92 billion and I know total sold I think is 85 billion.

I like it broken out between the mortgage company, the bank, capital markets, and what the quantity of balance sheet loans sold?

That's one.

Keith is going to go through that with you right now.

The mortgage banking production segment used about 80 billion during the period. [ INDISCERNIBLE ] Bank funded call it 5.7 billion.

And capital markets through the various con conduits about 6 billion.

What were the amount of loans sold off the balance sheet?

Well, you know, Stan's pointed out, if you look at it from a consolidated basis, mortgage portfolio remained unchanged from the second quarter.

There was a shift from mortgage and sales within the mortgage bank and mortgage sales within the bank during the period.

Okay.

How much did we sell?

About 8 billion.

Off the balance sheet.

We sold 85 billion.

Total?

I mentioned before.

Just so I interrupt.

The a5 that you're talking about includes -- does not include capital markets sold?

Or does?

Does not include capital markets.

Just the mortgage company and off the balance sheet?

Correct.

Okay.

Then you combine those, you know, we sold an amount which was roughly equivalent to the total production.

Which is another way of saying we left the portfolio unchanged.

Going back to an old question I think generating confusion, this timing, this timing issue, you take in an impairment on the servicing because rates came down at the end of the quarter , which is -- quarter, which is based on obviously expectations of higher prepay notice fur tur, it would seem the higher prepays [ INDISCERNIBLE ] Reproduction -- why not Countrywide?

There's a process-

Let me -- Angelo, let me finish it and you can really hit it home.

So I gets what I want to clarify is, that still is the case, I think, and I think are we talking here about a it timing issue that in, maybe, the previous year or so, that offsets to the impairment, i.e., the runner runoff higher production come very quickly and maybe now it comes over a longer period of time?

Could, maybe, Stan was the one that said all of this, could you just elaborate on that a little bit more?

Thanks.

Let me throw it to Stan.

I think two issues.

One is timing.

And the other is velocity.

The the timing issue is correct we're happy to impair the portfolio as a result of the number, 10-year at the end of the quarter of the that last day.

And in the closing of the loans, of new loans committed to the portfolio, into the pipeline, as a result of that lowering of rates, does not fund immediately, there's a process.

Certainly a timing issue there.

Under the velocity, it's not comparable to what happened in the previous three years because it was such a body of business out there that was ready to refinance that was in that average weighted could you cow -- COUPONS off the loan, you saw the surge come through and, pent up.

I don't see this -- I see an increase of volume, because we had -- I think we ended the month -- we ended with 51 billion in the pipeline and 8% increase from last quarter.

Saw an increase but not the velocity of last time I don't think the body of business is out there that is impacted by these lower rates as it was back year ago.

Stan, you want to?

Yeah.

You know, it's -- try and explain the path is, you know, compared to, you know, current period.

The fact is that we would estimate that between the second and third quarter, that the refinance -- refinanceable loans grew.

From, say, the low 20%, of outstanding production, to, about, 40%.

If you just take the -- where there's a refinance incentive and that activity has to be pursued and by sales people and through campaigns.

And it will generate increased activity and that activity of both loans refinance, it'll result in the payoffs, the ones projected by the impairment.

The fact that it's a different, I think, is, you know, in terms of the velocity of it, because, here, you know, we had periods going back where 80-90% of the mortgages outstanding were refinanceable.

And it was -- and the incentive was, you know, very significant.

Here wear's talking about incent I incentives that are, you know, a -- incentives a quarter of a change in interest rate vs. those much bigger, you know,100 basis points change in interest rate.

So, it isn't that we don't have an increase in market, it's just, you know, to take the 15% increase and refinance both mortgages, not all occur in the quarter, thankfully.

It will take place over years.

There's one way to think about it so it's clarified, when you take the inpairment charge you doing, obviously, some kind of present value calculations over a long period of time the life of the loans.

Yeah.

The runoff that you're expecting doesn't have to happen this quarter or next quarter, it can happen, two, three, four, five-years from now?

Yeah.

The point -- maybe I'm extreme the point is, you're still going to get the offset, it just may not be now and unfortunately accounting says take the impact on the PD of service.

Think about an interest-rate increase that happened on the last day of the quarter.

There would be no incremental volume during the quarter P could all be in the future.

The impairment would be the same, whether that change in interest rate took place at the beginning of the quarter or, you know, the beginning of the year.

So, it's just an imperfect accounting for what takes place, but there will be increased volumes.

We're also, by the way, you know, one of the other things that is occurring, seasonally, we have a decline in activity from purchase loans.

So you're seeing, you know, some of that seasonality is really influencing macro view.

You know, because you have the declining -- a declining purchase market, which is being offset by an increasing re-fi market.

What is it going to take for fixed rate mortgages, [ INDISCERNIBLE ] To take more share away from the ARMs?

In other words, I would think the low level of the 30-year fixed rate mortgage--

It's close, in my opinion.

It's -- you know, if we had a 3/8th of a percent change in fixed rate, I think you'd see a lot of the hybrids.

Or if the [ inaudible Flattened?

Right.

The fact is what's going to happen 90 shortened.

If the short end, you know, went lower, concurrently, it would still be a propensity for people to look for the short cut to the free wave of happiness and get the lowest rate possible, in an ARM.

What's happening, these are converging, short and long converging and curve narrowing.

In that case, I agree with Stan, the consumer is very sophisticated by the way, collectively, individually, don't seem to shall, collectively make the right decisions and you would OPT more for the fixed rate.

Kind of like self-side analysts and a bar-side not so smart but individually to the right place.

Except for today.

Guys, thanks a lot.

Thanks.

The next question from the line of Charlotte Chamberlain with Jeffries and Company.

Please go ahead.

Hi.

Couple of housekeeping issues.

Stan, you said the amortization that you're expecting it to go up in the fourth quarter, could give us kind of a scaling factor there?

I looked back to other periods when interest rates were down at the end of the period, compared to the first and I don't really see any pattern there.

And then the second -- well, the second housekeeping one is, the insurance company done on its charges for Florida?

I mean, has it taken the charges this quarter?

Or should we expect them to see more going forward?

They -- the way accounting works for the insurance company, you have to make an estimate of claims -- estimate of claims where damage has occurred but not yet report.

It's special form of accounting for insurance companies.

And we believe that the 23.2 million, or what exactly the number is, has been taken.

So, accounting for the current Hurricane season, is -- if another Hurricane comes through or some other natural event, obviously, we'd have to deal with that.

It is done with the issues that took place the month of September.

Okay.

And then the first part on the amortization Stan is going to take that part.

Just, you know, if you looking Charlotte at the third quarter, the amortization that we had determined in the third quarter, which was set the end of the second quarter, was about 3 ninth 94 million dollars.

And if you reflect back, you know, to previous quarters, we've had in the second quarter, 570 million, if you went back to you know the third quarter of last year, it was over -- close to 700 million dollars.

Our modeling gives us a number which is closer to what it was in the second quarter about 560 million dollars of am-work cast for the for example.

-- fourth quarter.

Okay.

The final thing, Angelo, I know you said in respect to Bruce's question that I guess pain makes you stronger, but the fanny MAE decides to shrink into the capital -- Fannie MAE decides to shrink into the capital market and not buy anything and replace the the runoff, how would that affect you?

I'm not sure a lot.

Let me take a guess, we have to think about these things.

One is still the guaranteeing capability on securitization side, you know, instead of buying whole loans.

And based upon my discussions with some of the people that would be involved in their regulation of the GSEs, that's not an issue for them and there's no attempt to reduce the ability of the GSEs po provide a guarantee in the securitization space.

More importantly is it's demonstrated that the private structure mark set very liquid and very powerful and we hope that everything turns out okay for the institution Fannie MAE and the people in Fannie MAE we have a high regard for.

If something takes place unexpected, we're prepared to go go to the private market route.

Probably a greater of execution and that's to the consumer.

I don't see an issue with equity.

If Fannie and Freddie went away taking stream position you'd have a higher cost to the consumer.

You're feeling as long as they can still wrap their guarantee ribbon around your mortgages, that the private market could absorb what Freddie and -- I mean, the basic thing is, you're taking -- if you take the larger buyer of mortgages out of the market, who replaces them?

And what you're saying is there's still enough appetite for this stuff to keep margins and yields kind of what they would be if Fannie hadn't gone away?

I believe that's the case.

You have Freddie that appears -- Freddie that appears to have -- brook done has done a magnificent job in restructuring the financial structure and the culture of the company and there's alternatives to Fannie MAE but I think, obviously, I believe that necessity is the mother of invention, somehow the markets will adjust as they have in the past.

When long term capital management collapsed.

We have a series of major crisis.

And the market remained liquid and efficient throughout all of the crisis.

And I believe we're going to be okay.

I prefer, obviously, that all of the issue goes away, with Fannie MAE and that they remain healthy and strong and a major participant.

We're prepared for any cause of action the regulators take.

Okay.

Thanks so much.

Thank you.

Thank you very much Ms. Chamberlain next to the line of Andy Wagstaff with Tristone please go ahead.

Hi, thanks, guys.

If you could, what percentage of loans do you guys have in California?

Can you give me a break out on that and a percentage of the portfolio?

25% and it would match almost exactly to the decimal point the amount of business in California vs. the rest of the country.

Okay.

What percentage of loans are interest-only that you guys are writing in California?

You know, I gave them the overall number.

You gave 21 across -- you gave 21% is the number you gave, I'm interested in the California marketplace, what are you doing?

We don't have that number with us.

Here.

We'll --.

I'd be surprised if it didn't match up with the national.

But, maybe -- what's your point?

Just a question.

Okay.

Yeah.

What are you trying to get to so maybe we can figure out another way to answer the question?

No.

Yeah.

No, I would like to know, obviously home prices higher in California, I'm wondering if you're seeing a disproportionate portion nature share of interest-only in that marketplace?

It hasn't come to my attention, if there is.

Again, I stick with my position that it doesn't make it a better loan or worse loan.

You know, it's the fact that it's interest-only.

And do you guys, I don't know what you guys would call the product, there's a -- is it a flex-pay product?

Out there?

That's now being used?

We call it pay option plan.

Pay option plan.

What percentage of originations nations in California the pay option plan?

We don't have the state breakdowns here.

And that -- at this time and we'd love to answer the question.

Why don't we -- do you have the questions asked that he's -- Eric that he's asked?

Do this.

Do you have the phone number?

When we -- we doesn't have the detail in front of us.

Okay.

I can get that.

Fine with you, Eric?

Yes.

Okay.

Absolutely, yeah.

And then there was a gentleman that asked the question on a sub-prime margins, I was wondering, what was the margin in the quarter for sub-prime?

The absolute number?

The gain on sale margin was 292 basis points.

And what was that in the second quarter?

290 basis points.

290.

Okay.

And expect that to be -- expect that to be directionally higher in the fourth quarter?

We hope to see improvement.

You hope to see improvement.

Okay, thanks very much.

And thank you very much Mr. Wagstaff.

Next we go to the line of Erica Bergman with capital management, please go ahead.

I was hoping to address the trend in the weighted average services fee?

I was under the understanding, generally speaking, ARMs had a higher services fee and the trend is downward as we made the shift from fixed to ARM production?

That was a, you know, years ago, ARMs used to have a higher service fee, today, all service fees are too high at a quarter of a percentage. 25 basis points is the minimum applies to all loans today.

That's dictated by the GSEs .

What Stan is alluding to that we would want to -- we would want the service of second quarter sub -- service fee to be substantially reduced. 25 basis points $50 and cost of $100 at at time no technology and now the average is $300,000, 25 basis points and we had 750 bucks and cost of $50.

You know, inverted.

We think that it would be better for all concerned, in our opinion, difference of opinion within the industry, in our opinion, we feel strongly about it, that the servicing fee be reduced to a level that's more commence rat with the cost of cost of servicing these days and lessen the amount of capital to the asset and substantial substantially lea December the hedging responsibilities.

So, Countrywide has been front front -- upfront far a couple of fees we'd like to see the lowering.

Very quick clarification on the loan production statement of income?

You say that 77 billion dollars for the loan production volume was mortgage banking.

Are the revenues shown on the schedule and production crosses shown on the schedule, solely dedicated to the mortgage banking function?

Or do you have some of the costs in capital markets in the treasury bank included in the cost number?

No, we don't.

Okay.

That's solely mortgage banking?

Yes.

Okay, great, thank you.

And thank you very much.

And next we go to the line of Jonathan Grey, a follow-up, once again with Sanford Bernstein.

Go ahead.

I should probably withdraw the question to be merciful. [ LAUGHTER ] Let me just -- I want to clarify something, I think it's pretty important that I -- actually pretty important and somewhat new.

I'm surprised, what you're saying the amortization in the fourth quarter will reflect where rates were at the end of the third quarter, or beginning of the fourth, irrespective of what rates do during the for fourth?

Yes.

Jonathan to think of it, if rates went further down and you incurred greater levels of prepayments or future expected fee, you'll have impairment.

And the declining rate environment.

In a rising rate environment, you know, our ability to -- we have the ability to recover [inaudible] or to employ --ism or employ hedge accounting to write up the asset.

We don't have designated hedges that would apply to hedge accounting.

We basically have hedges on plates and rely upon the impairment reserves to capture a portion of the increased value of those.

I guess you probably think I'm following this, don't you?

I tried.

Let me just -- I guess, Charlotte asked you what the normal amortization would be in the fourth quarter?

And I think you gave her a number of, basically, in other words, known now? 00 million? 560. 560 in the fourth.

Normal amortization, irrespective of what rate does?

That's right.

Fascinating.

Thank you very much.

Thank you.

We also have a follow up from the line of Matthew Lindenbaum with Basswood Partners.

Please go ahead.

That was what I was going to ask.

Someone earlier said the mortgage company orginations with 76 billion I thought it was 80.

I thought you had said it was 80?

Am I on the line?

Yeah, you're on.

80 for the mortgage company and 5 isn't 7 for the banks and 6 for capital markets and to the at 92?

We're double checking.

Okay we're going to we're going to verify.

We originally said 80 808080 -- 80 billion.

I can sing elevator music, if you like?

Maybe we should proceed until we solve.

Earlier, when you broke out the gains, 90 million gain in equity, 266 million gain in sub-prime and 540 million gain in the, was that the prime loans originated?

Yes.

What was the quantity of that?

Prime was at -- sold was 66.

Maybe that's what they were referring to 66 billion for the prime?

66.4 billion were sold, yeah yeah.

Okay.

And obviously, the home equity and sub-prime you're giving included 5 billion sold out of portfolio?

Correct.

Okay.

And Angelo , do you -- Angelo, do you have an opinion, I spent time looking at Golden West comparing you what you're doing and it seems they're offering a extremely long [indiscernible] period on the loans, where, basically, you're monthly payment or annual payment is extremely low and takes, maybe, five years to get to a normal level, you know they start at a teaser of 2% and get you to the high 4s on a long period of time and negative am in it, think you folks, make get a three-month tease or something?

What's your view of that product and where do you think it's headed?

First of all, I think ours is seven years when it has to be restructured so that you have normal amortization.

It's anything am out to that -- neg am and starts out and low rate and max min 7% increase for year and 7 years make it whole and generally do that through refinancing.

It's not a big product with us now, I don't think, that pay option plan.

What percentage of our business is pay option?

I think you did 1 billion last month vs. 4 billion.

90% of the business.

Where's it going?

Probably give birth to -- probably giving birth to more exotic type of stuff in this environment.

Unless we get down to a 30-year fix or 5% or 4.9% where people say, I'm not going to mess with the neg am or exotic and go to the fixed rate, it will as long as it's substantially below a fixed product or variable it seems to me the consumer continues to OPT, generally speaking for the lost lowest monthly payment in order to get into the house and worry about what's going to happen later.

Why wouldn't you guys compete more aggressively?

It seems like Golden West is more aggressive in terms of the willingness to bring the payment done.

I think on Eyewitness news it's a portfolio product.

Absolutely.

They have a very, very low cost of funds because of the way structured and probably have more room to play with a product like that.

And in their space, you know, which is you know they have the space to themselves, they're very good at it.

And they're -- but I -- we won't chase a product that when we look at the off-set in the secondary market that show as break even or a loss, we just won't do that and that's why I alluded to you before, we we sue that kind of stuff we back away and try to be creative in another product.

This product has done pretty well, 9% of the production from standing start a couple of months ago, irrespective of the spats with the competition with Golden -- Golden West.

I say our brand is a national brand and terrific brand and I think Golden West isn't and we're much more pervasive through the country.

Is it more of a credit decision Golden West is willing to experience the neg am and not amoritize to keep that -- effectually lending the bar or money to make the payments for a number of years and accruing a very high interest rate while doing it and the rates are much higher than yours and [ INDISCERNIBLE ]

I have spoke to Herman Sandler and they're a company that knows what they're doing in their space and I can't speak to what they're thinking and why they give birth and what they're doing.

I don't know.

You know, we are pursuing expansion with the product and a lot has to do with the, you know, systems capabilities that were developing as well as educating and obtaining the right sales force to do that activity.

It's something that we're very much pursuing.

Let me answer a couple of questions that we have the information on, the total mortgage banking production was 77 billion, our capital markets, approximately, 6 billion; and our treasury bank production was the the remaining production of 8 billion, you know, rounded.

8 1/2 billion?

8.7 billion in treasury bank, just, you know, rounding to the 92 billion of production.

7 and 8.7 and total loans sold 85 billion?

Correct.

Okay.

That was not available on the press release or anything, right?

As I was looking for the numbers, I didn't find them.

On the,website?

They will be.

Yeah.

Production numbers in operation [ INDISCERNIBLE ] In queue.

Okay, thank you.

On the pay option, and interest-only percentage in California, about 36% of our production in California is interest-only.

And about 13% of the California production is pay option.

What was the percentage, again?

13.

13, thank you.

Just add one more point of clarification to beat it to death enitely, the 85 billion is the quantity of loans that were sold profit recognized within the production sector, the remaining 6 billion were capital markets COND you IT part of the capital market P&L.

Right.

the gain -- loan -- gains in the mortgage banking sector, uses the denominator of 85 billion.

Correct.

Thank you.

Okay.

Our final question today comes from the line of Sam Miron with the Jim Value Fund.

I'm make it quick.

We spoke of the flattening curve, as I look at the P and L, you managed to keep the net income actually in proportion and actuallyi s proving, can you talk about how you manage the assets and liabilities?

The second half of the question, looking forward, if the yield curve on continues to platen, what -- continues to flatten, what would be the impact on the [indecipherable] side at the main options and bank regarding CD deposits?

First of all, the two primarily con contributors to the interest income, proving one is the influence of prepayment speeds in our servicing portfolio where as prepayments lull, the interest cost on pass-through declines.

And so that's something that one that -- one of the influences.

The other is the escrow pal bans that -- ball bans that we -- balances that we hold is going up in value and returning a higher spread as well.

So that was one issue.

The other area, obviously, the growth in the bank is producing greater interest spread which we talked about earlier.

You know, with regard to the bank, the bank has a you know very closely matches the duration of their mortgages with their deposits.

And so their spread should be -- spread should be able -- we should be able to maintain spreads within the comfortable margin, even as interest rates increased.

And you know we've had an increase in interest rates and we've seen just that occurrence within the bank.

Is there another part to the question?

That's it, appreciate it,

Thank you, Mr. Miron.

With that Mr. Mozilo and host panel, we'll turn it back to you for the closing remarks.

We'd like to thank you very much for the participation and to remind you we have the investor forum on November 3 and hopefully you'll be able to make the forum and we'll give you the '05, thank you very much.

Ladies and Gentlemen, the management earnings call will be available for replay through midnight Eastern Time, through Wednesday November 3, 2004.

Replay dial in numbers and access code 1-800-475-6701 and internationally 320-365-3844.

At the voice prompt, please enter today's conference ID of 746699.

And that does conclude our earnings call for this quarter, thank you very much for your participation.

As well as for using AT&T executive teleconference service.

You may now disconnect.