美國銀行 (BAC) 2004 Q4 法說會逐字稿

Good morning.

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

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

However, later during the conference, there will be opportunities for your questions and we encourage your participation at that time. (OPERATOR INSTRUCTIONS) Today's call is being recorded for replay purposes.

We do ask that you stay online at the conclusion of our release to receive that replay information.

Ladies and gentlemen, if I may have your full attention 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 which of are subject to change.

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

Factors which could cause actual results to differ materially from historical results are those anticipated, include but are 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, let's get right to this quarter's agenda.

Here with our opening remarks is Countrywide's Chairman and Chief Executive Officer, Angelo Mozilo.

Please go ahead, sir.

Thank you very much.

Good morning and welcome to Countrywide's earnings teleconference call for the 2004 fourth quarter and year-end.

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

The presentation will be found on our website, www.Countrywide.com, on the investor relations home page.

Turning to page 2 of the presentation, we'll see today's agenda.

First, I'll give you an overview of our recently completed fourth quarter and full-year 2004, including operational and earnings highlights.

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

We will conclude the presentation with an update of our 2005 earnings guidance.

The range is reaffirmed at $3.25 to $4.25 per diluted share.

Let's begin with a discussion of operational earnings highlights for 2004.

On page 4, we see that the loan production volume was $95 billion in the forth quarter, up 4 percent from the third quarter and 25 percent from the fourth quarter of last year.

Total fundings for the year were $363 billion and while down 17 percent for 2003's record year, it was still our second best year ever.

Much of the volume strength throughout the area year can be attributed to our strategic efforts aimed at the purchase market, as well as the breadth of our product line, In 2004, purchase fundings grew 36 percent to a record $176 billion.

In addition, the breadth of our product line can be demonstrated through our volume of arm fundings, which grew 107 percent from 2003 to 2004.

Robust production activity translated to strong growth in our servicing portfolio which, reached $838 billion at year-end.

Almost $200 billion more than just a year ago.

Assets at Countrywide Bank reached $41 billion at year-end, more than double last year as the Company continues the strategies to invest in building the bank's loan portfolio.

Capital markets reached a new high in securities trading volume of $3.1 trillion, up 9 percent over last year and in the Balboa group, our insurance subsidiary, net premiums earned rose by 7 percent over last year to a new record of $782 million.

The chart on page 5 shows our consolidated earnings highlights for the fourth quarter and for the full year.

Net earnings in the quarter were $343 million, down 39 percent from last year's fourth quarter.

I'll address this decline in a moment.

The full year net earnings were only down 2 percent from the prior year's record results.

Earnings per diluted share were $0.56 in the fourth quarter and $3.83 in for the year.

As you may have noted, the reported earnings in the fourth quarter of 2004 do not add to the total of $3.83 for the year.

The reconciling item is a retroactive anti-dilutive impact of our Convertible Securities Exchange Offer completed in the fourth quarter of 2004, as required under EITF 04-8 and described in the footnote on this page.

Page 6 shows the breakout of earnings between mortgage banking and our diversified businesses.

Mortgage banking pretax earnings declined to 68 percent from the fourth quarter of last year and full year mortgage banking earnings were down 14 percent.

A very important factor in the fourth quarter earnings is that fourth quarter diversification earnings rose 55 percent from last year's fourth quarter.

For the full year, diversification earnings surpassed the $1 billion mark, rising 41 percent to a record of $1.3 billion.

This is evidence of our continuing success in diversifying the Company's earnings base. 2004's diversification earnings nearly matched the pretax earnings for the total company in 2002.

This strength of our diversification efforts helped mitigate the decline in mortgage banking earnings to give our total company pretax earnings essentially flat at $3.8 billion for 2004, versus 2003.

Turning to slide 7, let's take a closer look at Countrywide's fourth quarter comparison to the third quarter.

Production pretax profits for the quarter were $477 million, down 25 percent from the third quarter.

This decline was generally in line with expectations, given the reduced contribution from the home equity loan product line.

The pretax loss on the servicing side worsened by $255 million due to a number of market factors that converged in the forth quarter, namely a substantial flattening of the yield curve, tightening of mortgage swap spreads, and a reduction in interest rate volatility.

Banking pretax earnings were up 19 percent to 195 million due to asset growth, while capital markets earnings rose 62 percent on a sequential quarter-to-quarter basis, primarily as a result of an increase in revenues from its conduit operations.

Insurance earnings were flat despite a $45 million charge that took place in the fourth quarter related to the Florida hurricanes that occurred during the latter part of the third quarter.

Fourth quarter EPS was also effected by an increase in our 2004 full year tax rate of 38.9 percent.

This increase pushed the fourth quarter tax rate to 43 percent versus 36.9 percent in the third quarter and resulted primarily from the Company's rapid growth, particularly within the banking segment, which led to a greater income apportionment to California where tax rates higher.

Going forward, Countrywide will continue vigorously to migrate activities out of California, which result in growth in states where tax rates and the overall cost of doing business are lower.

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

Let's take a closer look at Countrywide's mortgage banking sector on page 9.

Production and pretax profits for the quarter were 477 million, down 18 percent from the fourth quarter last year.

This decline was primarily attributable to changing market conditions.

Full year production earnings were down 30 percent from 2003.

While servicing experienced a negative change of 361 million for the fourth quarter year-over-year comparison, the servicing sector showed an improvement of nearly $800 million for the full year.

Now, let's drill down to some specifics that affected the fourth quarter.

Page 10 describes the key factors that affected the mortgage banking segment.

The production sector earnings declined by 155 million or 25 percent from the third quarter, mainly due to a reduction in home equity gain on sale and net interest income.

Home equity sales were 9.9 billion in the third quarter versus 7.1 billion in the fourth quarter, a decline of 2.8 billion.

And hence gain on sale income declined by 68 million or 24 percent.

A detailed breakout of gain-on-sale by product line is provided on the investor relations website.

Net interest income declined in the home equity category because average inventory balances fell by 6.7 billion from the third quarter to the fourth quarter due to the decision to sell inventory at the end of the third quarter.

As a result, home equity net interest income declined by approximately $82 million.

In the servicing sector, pretax earnings declined by 255 million from the third quarter because we had a $169 million increase in amortization and a $92 million of impairment -- of other retained interest that was caused in part by a greater than expected flattening of the yield curve.

Let's take a look at some of the factors in greater detail.

In slide 11, we can see an illustration of the yield curve flattening during the fourth quarter. 2 year and 10 year swap rates began the quarter with 161 basis point differential and ended the quarter with 119 basis points differential, converging by 42 basis points, which was greater than implied by the September 30 forward curve.

This flattening not only caused a decline in prime and subprime net interest income, but also caused a 45 million of the 92 million impairment charge against other retained interests.

This compares to a modest impairment recovery in other retained interest in the third quarter.

On slide 12, we see illustrations of the decline of volatility and spread tightening.

Volatility is measured by the one year interest -- 10-year swap rate declined by two points, while the spread between mortgages and swaps tightened by 10 basis points.

Together these factors resulted in adverse affects of approximately $140 million, relative to expectations in the value of the hedge instruments that was not offset by a corresponding increase in the carrying value of the MSR's, which would have been expected to occur given the decline in volatility, the tightening of spreads, and the increase in treasury rates during the quarter.

Now, let's look at the diversified businesses on slide 13.

Banking is the most profitable of the segments.

Pretax banking earnings for the quarter were 195 million, up 111 percent over the fourth quarter of 2003.

For the full year, banking earnings were up 103 percent over last year.

Bank earnings in 2004 represented nearly half the total diversified business' pretax earnings and nearly matched the total company's pretax earnings of 586 million in fiscal 2001.

Capital markets produced a 52 percent increase -- astounding -- in pretax earnings in the fourth quarter and an 8 percent increase year-over-year.

This is a remarkable achievement, given that the capital market's earnings are affected by loan production volume which is down for Countrywide and down for the entire industry year-over-year.

The insurance segment saw year-over-year decline for the fourth quarter resulted of an additional $45 million charge in the fourth quarter related to the Florida hurricanes, which is partially offset by a decrease in non-hurricane related loss expenses in the voluntary homeowners and lender placed lines of businesses.

For the full year, insurance earnings were up 15 percent, primarily as a result of the increase in net premiums earned.

Global operations increased 63 percent year-over-year as a result of an increase in the servicing portfolio, a favorable shift in foreign exchange rates and increased revenues in our international technology business.

Banking segment growth is highlighted on slide 14.

Total banking segment assets reached $45 billion at quarter end, at which 41 billion on the balance sheet -- were on the balance sheet of Countrywide Bank and the remainder were assets of Countrywide Warehouse Lending, Inc.

Growth in the banking segment profitability has followed a similar trend, with pretax profits reaching 195 million for the quarter.

Our previously-stated goal for the bank is to grow total assets to $80 billion by the end of 2005.

The bank expects to accomplish this by continuing to deploy its highly effective strategies which include enhancing mortgage lending products through Countrywide Home Loan's channels and expanding the geographic scope of its financial centers.

The bank now has 58 financial centers located nationwide.

Let's take a closer look at the capital markets on slide 15.

As can you see by this chart, conduit revenues were the largest growth contributor for the fourth quarter.

The conduit aggregates whole loans bought from third parties or from CHL to create securities.

For the full year, underwriting drove the largest gain in revenues, increasing 68 percent.

For 2004 Countrywide Securities Corporation rose to the number 2 spot among non-agency MBS underwriters, achieving 11.2 percent market share, per Inside MBS & ABS, an industry trade publication.

This compares to 8.3 percent market share and a number 4 ranking for 2003.

U.S. treasury trading volume has continued to increase throughout the year and the treasury business is expected to start making a positive impact on revenues in the latter half of 2005 upon completion of our proprietary treasury trading systems.

In August, we established our Tokyo branch of Countrywide Capital Markets and have submitted an application to the financial services agency of Japan to become a Japanese securities broker dealer.

We are hopeful that the license will be granted in the first quarter of 2005.

In addition, the commercial real estate business was incepted (ph) in the second quarter and is off to a great start.

Fundings in the fourth quarter totaled 355 million and the pipeline at year end stood at 308 million.

In 2005, our growth will be focused on continued expansion in commercial real estate finance, international fixed income sales, and U.S. treasury trading.

In addition, we will continue to diversify into new products and services and build our global sales team to capture additional market share.

Now let's take a look at our 2005 guidance.

On slide 17, we see that our 2005 consolidated earnings forecast calls for diluted earnings per share of $3.00 to $4.25.

This reaffirms the guidance previously given in November.

The assumptions behind this guidance include the average 10-year U.S. treasury rate for 2005 will be within a range of 4 to 5 percent.

With this in mind, our forecast assumes the relevant range in the size of the mortgage origination market should be 2.0 to 2.9 trillion.

In addition, our forecast assumes mortgage banking pretax profits will range from 1.6 billion to 2.4 billion and pretax earnings contributions of diversified businesses will range from 1.7 billion to 1.9 billion.

Slide 18 shows more details behind the forecast.

Average production market share is expected to be within a range of 14.5 to 15.5 percent, implying volume for Countrywide of 300 billion to 420 billion.

The range for pretax production margins is 30 to 50 basis points.

Implicit within this margin is production revenues of 160 to 165 basis points and production expenses, including overhead, of 110 to 135 basis points.

On the servicing side, the forecasted average servicing portfolio balance is 950 billion to 980 billion.

The net pretax servicing margins after impairment, impairment recovery and hedge gains or losses is expected to be 3 to 12 basis points.

Risk factors which could affect the accuracy of the guidance as shown on slide 19.

The first risk factor is the level of interest rates.

As we have seen in the past periods, average rates outside of our forecast range can generate results that are not consistent with our forecasts.

A second important factor is volatility of interest rates.

They can cause a difference in the period in which different rate sensitive elements of our financials are recognized.

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

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

The final slide 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 would like once again to thank the employees and management of Countrywide for their efforts in delivering another outstanding year in 2004.

It was a challenging year, but a most successful one.

Following the record year of 2003, the mortgage industry faced a challenging traditional environment in 2004.

Against this backdrop, Countrywide not only delivered the second best financial results in our 35-year history, but also made substantial investments in the Company's future growth in diversification and stability.

During the year, Countrywide reclaimed the number 1 spot in mortgage originations and servicing, grew the servicing portfolio by 193 billion and more than doubled the bank assets to 41 billion, grew our home loan sales force by 48 percent, established our expanded new capital markets business lines, including our primary dealer in U.S. treasury securities, a commercial real estate finance group and a new Asian subsidiary, and substantially strengthened our consolidated balance sheet, as assets grew 14 percent to 111 billion and equity increased 29 percent to 10.4 billion.

And it should be noted that our exemplary achievements during the year are the norm for us, not the exception.

Those of you with a long-term perspective know this.

Over any time horizon, Countrywide has generated outstanding returns for its investors.

As of year end 2004, total returns have averaged nearly 30 percent annually over the last 10 years. 44 percent over a 5-year period and more than 70 percent over the last 2 years.

This is the real Countrywide story.

And now, I will be happy to take any of your questions.

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

Indeed, I would be happy to. (OPERATOR INSTRUCTIONS) And representing Raymond James, our first question comes from the line of Mike Vinciquerra.

Please go ahead.

Thank you, good morning.

I wanted to just ask on the hedge performance.

Obviously, the big item that surprised people probably in the quarter.

Can you give us a little more detail on -- is there a possibility that this loss can reverse or is it something that is a realized again at this point?

And help us understand how you have the hedges constructed now, you know, heading into 2005.

Thank you.

Get us over to Stan.

Stan Kurland will respond to this question, Vince.

Yes, Vince.

The fact is that as you know, the way that our hedge is structured is -- it's positioned that as interest rates rise that will see losses in our hedges and we then expect a corresponding gain in the servicing asset.

What was unique about this quarter was that we did have an increase in interest rates, if measured by the treasury -- the 10-year treasury, or measured by the swap curve, but mortgages were relatively unchanged to down a couple of basis points.

And this tightening of spreads between mortgages and treasuries plays a little bit of havoc with the valuation of the MSR asset.

In addition to that, we also, as we talked about earlier, saw a reduction in the volatility premium that is paid for options.

That also has an impact on the value of the hedges going forward.

It has a positive impact in terms that the cost of hedging, the portfolio, declines.

But it's unclear, particularly in these spot in time valuations of the servicing portfolio, that all of these characteristics get picked up in the value of the port.

And so as we calibrate the asset -- the MSR asset, these subtle differences resulted in less of a pick up in the servicing asset than we would have expected in our models.

Will we pick that value up?

That is pretty subjective question.

I would tell you that, for example in the case of volatility, where the cost of reduce -- of hedging a portfolio goes down, you would expect the underlying asset to ultimately go up and appreciate as a result of that.

So it's very possible that the value of the port does pick up.

And one final point is that as interest rates on mortgages have stayed low, we did experience a greater production volume in the overall market of refinanceable mortgages that stayed pretty consistent at about the 40 percent level.

Just -- I'm sorry, is it safe to assume that if the long end of the curve about did rise to some degree, you would be able to capture a little bit of value that you were not able to capture this quarter?

You know, clearly there -- there's obviously the change in interest rates -- a rise in interest rates that would result in increasing value in the servicing portfolio.

And there is this more what I consider subtle issue that over time, as the perceived cost of hedging the portfolio -- servicing portfolio given lower vol, that that will result in greater value to the servicing asset and in any case, will be reflected in our results in terms of lower hedge costs in the future.

Thanks very much.

Thank you, sir.

Next in queue, we go to the line of Mike McMahon representing Sandler O'Neill.

Please go ahead.

Good morning.

To follow on Mike's question, the hedging loss in the quarter was largely unrealized in non-cash?

Is that correct, Stan?

Well, no.

We have hedge assets that decline in value.

I mean if you went to -- if you kind of track the history of those assets there, I think in the previous quarter were up probably $700 million.

And so we've had that asset goes up and down just as the servicing asset does.

So it is an investment -- we make an investment in derivatives and assets and they do lose market value.

I meant unrealized from the standpoint that there was a mark on it, but it was a non-cash loss, if you will.

Largely.

Yeah, I refrain from -- I understand your point, but it is a mark issue.

We have invested cash in those securities in their mark-to-market and there is a market value change and those -- the value of those derivatives and hedge instruments will go up and down as they have through the history of the servicing hedge.

But I wouldn't characterize it as -- I characterize it as we have an investment in servicing and servicing hedge assets and it's really their mark-to-market which is changing.

I understand it.

And I wanted -- my main question was -- I wanted to, if you could, comment on the potential for the minimum servicing fee going down and whether or not that would be likely to be primarily, if not entirely, passed on to consumers and how that would impact competition in servicing and whether or not that would be a consolidation.

Let me -- I'll answer that.

We're getting some traction.

You know we're working very hard on it with both Fannie and Freddy and we're beginning to get traction from both of those entities.

You've read it in trade publications.

I think we have -- where we're at at this moment, about a 50/50 chance of getting that done.

Certainly the amount of servicing fee that's mandated today makes no sense at all based upon the cost of services.

So I think in terms of its possibility, I'd give it 50/50 chance at the moment.

We'll continue to work very hard and this is a very big project for us this year.

Secondly in terms of its impact on competition, I think that it will have very little because, the matter of the fact is that the values of servicing, to a great extent, have already been translated into the pricing of the mortgage.

That's happened over the last 2 decades.

So there is no competitive advantage to Countrywide, for example, as a large servicer, versus the smaller player.

But what it does do is substantially lowers our exposure in terms of the -- have to hedge that asset.

And substantially reduce the amount of capital that ha to be applied to that asset so the capital can be used in businesses that have a higher return.

So overall, it would be very positive for us, but I wouldn't characterize it in a manner whereby we would have a competitive advantage over anybody else.

Thank you.

Thank you very much, sir.

Next we go to the line of Paul Miller representing Jeffreys and Company.

Please go ahead.

Excuse, me.

I beg your pardon -- Friedman, Billings, and Ramsey.

Please go ahead.

Thank you very much.

You have given your -- Angelo, you've given your presentation for your guidance for next year -- the 425, I mean the 325, 425, with 10 year between 4 and 5 percent.

And right now, I think the 10 year is between 410 and 420.

If the 10-year stays at these levels, what type of pressure is put on your warehouse spread, especially if the Federal Reserve continues to take rates up and what part of the business will this impact the most?

Will it impact the correspondent wholesale businesses or will it impact all of them across the space?

Where there is further compression of the curve?

Yes.

So the rates go up, as stabilization on the 10-year?

Yes.

(indiscernible)

Let me take a stab at this.

It's an issue, I think in understanding the mortgage banking formula that we try to provide clarification on.

The fact is that, if you imagine when we price a loan, we're pricing in ultimately to make a margin and a return on equity in that origination process.

So, the composition of where it comes from is often flipped between net interest income that we're going to anticipate during the warehouse period or, if that -- if there is reduced net interest income in the warehouse period, then we expect a higher gain on sale of the loan.

In fact, you can see, you know, when we go through the gain on sale versus the net interest income, just that impact during the fourth quarter, that interest income -- net interest income, for example, in our prime inventory went down, but gain on sale went up.

And so these things are offsetting.

The area where spread compression really impacts the Company's performances more on residuals.

And it's really to the expect that the -- like in a subprime residual where the forward curve is actually changes in a manner which is unanticipated.

So a tightening, that is, a greater-than-otherwise anticipated or flattening that is greater than what was anticipated.

But within the context of our inventory and also even in the bank where we have HELOC mortgages that are, for example, vary with the prime rate, there's a tiny lag period, but the underlying liabilities are adjusting very frequently.

So we have very little economic exposure other than in the residuals to the curve changes.

I mean basically you're saying even if the curve -- if the 10-year stays where it is --.

If the 10-year stays where it is between 4 and 420, you don't see a lot of compression on the production margin because you think your gain on sale margin will compensate for that warehouse spread.

Yeah, exactly.

Even in a -- like to take an extreme case, if you had an inverted yield curve such that the spread was negative, we would be increasing our margin to supplement for that negative spread.

And that won't offset -- I mean that won't offset production?

They will offset in terms of the pricing models that we use.

Are there other factors -- competitive issues that might interfere with that?

Clearly that's always a possibility, but it's not a high probability, since everyone needs to conform to rational economic models.

Okay.

Thank you very much.

You're welcome.

Our next question comes from the line of Moshe Orenbuch from Credit Suisse First Boston.

Please go ahead.

Thanks.

I was hoping you could talk a little about the competitive environment on the production side, given how much the industry has seen a decline in production and the levels that we're likely to see -- a consensus of around 2.4 trillion of originations in 2005.

Let me just -- the first thing that comes to mind when you ask that question is it's been rational.

Now, it's been consistently rational, for the most part.

There's been a couple of times in 1 or 2 of the channels where we're seeing some behavior there was surprising, but it receded quite quickly.

So we've had a very good rational competitive environment overall with a small exception in the correspondent -- in the correspondent channel.

The second comment I would make is that there probably is more books out now in terms of companies for sale -- mortgage companies for sale, particularly small and mid-size companies, than we have ever seen.

So I would expect that this year -- again, which is very positive for Countrywide.

It has historically has been very positive.

You are going to see an enormous amount of continued consolidation, both in the single-family and multi-family side.

Mr. Orenbuch, we still have your line open.

Thank you.

Okay, you're welcome, sir.

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

Please go ahead.

On the hedge -- if I could clear up.

Has there been any change at all in your hedging philosophy or strategy?

And I would like to follow that up, if I could.

Our strategy is pretty much the same as we have been operating it for -- I think you have to look at the hedge in a long-term perspective.

We have -- we do anticipate a cost of running the hedge during the entire year for 2004.

The total hedge, actual cost was only $200 million, well-below where we had the type of 350 to 400 basis point levels that we would budget for, for hedging.

So the hedge has performed over the course of the many years very well with really -- looking at the fourth quarter and we're always analyzing and evaluating instruments so, not that it goes unchanged, but the base strategy we believe is solid and has had excellent results over the years that we have employed it.

The answer is no.

There has been no real change to take more risk.

No, no, no.

Okay.

And just -- I'd like -- on the '05 earnings guidance, just looking at the 1 segment, the diversified businesses segment, you had a very strong fourth quarter, but within the guidance you kind of tweaked down the high end of the range.

And I was wondering why, given the strength in the fourth quarter.

And you didn't give us detailed bank forecast that you had for '05.

Is there any change to the bank portion of that forecast?

Keith McLaughlin will respond to this question.

First, I would point out at the high-end we're still -- if you'd annualize the fourth quarter, we are still showing a 26 percent increase in earnings in '05 from the diversified businesses.

The capital markets operation we expect will basically tread water or maybe decline slightly in '05.

That will be offset, obviously, by growth in the bank.

As we have mentioned, we expect the bank's assets to roughly double in size through the course of '05.

But at the same time, we expect their margins to compress slightly and I would say, relative to the guidance we gave on the bank 90 days ago, there is probably slightly less net interest margin built into the projections now than there was then.

Okay, and then I'm sorry, last question.

On the refis in the market today, you would expect with rates where they are that you would have seen a decline in refis.

What are you seeing -- what is the primary products people are refinancing into, and wouldn't you expect refinancings to be lower than they are, given the increase in the short end of the yield curve?

Stan?

Yes, we're still, you know, running very significant levels of refinance activity.

In fact, we're about 50/50 in the -- for the quarter.

We do -- we are seeing a significant growth in our ARM activity, which has been a normal trend as interest rates come off their bottom.

And the fact is the U.S. consumer is becoming more and more confident in using ARM products.

But clearly, as the market stabilizes at any particular point, we would see the refinance activity ultimately subside to the more normal levels.

Where that is -- it could be that normal refinance levels are 25 to 30 percent of the market.

I think that's a fundamental change taking place again.

This market shifted from a 30-year fixed market to hybrids and to straight ARMs.

Those people who have those hybrid and straight ARMs obviously at some point are forced to refinance.

We haven't had this environment before, and therefore I agree totally with Stan.

I think that the norm for refinances in terms of the old 10 to 20 percent rule, I think, has changed substantially.

So I think that refinancing will remain at relatively high levels, as long as we remain within the range that we've projected.

Another thing to look at if in fact the administration is successful in some of their tax legislation, one of which is to eliminate the tax deduction on home equity loans, you could very well see people refinance and consolidate that home equity loan back into a single -- into a one mortgage loan.

And that could prompt, if that came about, that could prompt refinances -- the degree of refinances that were not expected.

Thank you.

You know, I just want to add if you look at the changing composition to hybrid ARMs that basically have a repricing period in the -- from 3, 5, 7 years out, we would expect that the normal level of refinance activity is increasing compared to years ago where everything was or the majority of loans were 30-year fixed.

Thanks.

Thank you very much, Mr. Napoli.

Next we go to the line of Ken Posner with Morgan Stanley.

Please go ahead, sir.

Hi, I have a question for Stan, which I'll struggle to see if I can ask it coherently.

It's back on -- just to understand the hedge versus the servicing asset and the point about the volatility.

If volatility declined, then the value -- the hedges goes down and theoretically, one would expect the value of the MSR to go up, but it didn't go up as much as the hedges lost in value.

And so my question is -- was this a function of, I guess the deliberate -- I guess it would be a VEGA mismatch in your position or is this really -- what we're talking about is essentially model risk, which is the limited ability of an MSR model to capture every nuance that you might think it should.

Yeah.

I would say it's more of a model risk because remember, we're at a point in time we have to calibrate our model to what we're observing in terms of MSR values.

And that is a very difficult market to assess in a point in time because there's not a high level of trading activity that takes place, there is just a lot of surveying that is done by third parties and their models for -- that are used, many of them are not as sophisticated as our model, which does incorporate vol.

But in any case, we have a process that has us calibrate to the information that we're receiving from the market and it results in what I think you termed very well, this model risk.

And it just takes more time for the market to absorb the economic values of such a significant asset.

And so we're kind of presented with this point in time valuation process and we take a very conservative view in our calibration and that's what my opinion results in, the valuation of the MSR not keeping up with the -- our model.

Right.

Would it be fair to say, Stan, that it wouldn't make sense for you guys to over hedge the MSR by having more exposure to VEGA in your hedges than what you thought was in the MSR.

That wouldn't make sense, so you must have been astonished not to see the MSR values reflect the decline in volatility.

Yeah, I would say that we were -- there was this level of astonishment that we had.

But again, I want to emphasize that whether or not it gets picked up immediately in the value or it results in really actual lower hedge costs, we are, you know, we ultimately become the beneficiary of lower vol in the hedging process.

Great.

Okay.

Thank you very much, Stan.

Next, a question from the line of Mark Devries representing Lehman Brothers.

Please go ahead.

Morning.

I have 2 questions.

First, would you expect that as the bank continues to grow and becomes a larger percentage of overall earnings, that you might be able to reduce the scope of your hedging activities?

Possibly.

We haven't thought about that, frankly.

I think it's possible because the amount of spread income that that would create could mitigate the necessity for the size and scope of the hedge we have to date.

Stan, do you?

Yeah,one of the objectives of our diversification has been to really grow the -- all of the earnings of the Company to somewhat dwarf the volatility of the MSR assets so that we can, in essence, accept this level of volatility without having to incur hedging to cover every last dollar of exposure.

Because remember in our -- in our business model, we do, as interest rates decline, realize great value from the servicing portfolio in the form of refinance activity and origination margins.

And so the hedge is really to provide a transition into that period and take out some of the volatility.

And to the extent that we could hedge less or reduce our hedges because we have a greater amount of income from other activities.

Very positive for the Company going forward and when I think we -- you know, we've made excellent progress in that direction.

Okay.

Second question, what is your outlook 2005 for your home equity and subprime businesses?

Would you expect to continue to see those rise as a share of your total originations?

And also, based on the month and a half so far of 2005 that you have seen, what are the trends in the margins on those products?

Let me answer the first part.

We would expect the subprime to continue to expand the Countrywide full spectrum operations, so we will continue to pick up market share in both the subprime and in the home equity area.

Remember, our quest for market share is across all product lines.

Particularly since the trend is towards subprime, because that's a bigger market at the moment and the -- and towards home equity, you should see us expand in that area.

In terms of margins, again part of that depends upon, as I pointed out in my presentation, the competitive pricing.

Stan, do you have any other comments relative to this?

Well, we do see the subprime markets are becoming steadily more efficient.

That's positive in terms of the operating costs embedded in the subprime activity.

But we have in the forecast that we -- the guidance that we provided you with, included a slight decline in the subprime margins as the market becomes more efficient.

Offsetting that is our market share growth.

Just like, again, as Stan points out, the efficiency factor -- something where competition has feared, we encourage.

In other words, the fact that we're able to securitize more of the subprime and participate more with the GSE's in that.

Yes, there is a contraction or compression in the pricing, but there is much greater volume.

That's an atmosphere that we like.

An efficient market where we can produce substantial volumes of that product, sell it to the secondary market and have less pressure on us relative to having to book a residual.

Okay.

Thank you.

Thank you very much, Mr. Devries.

Next, we go to the line of Jonathan Gray with Sanford Bernstein.

Please go ahead.

Yes, can you break out your -- the volume of subprime loans actually sold and I guess total volume of loans sold?

In fact, your website is not yet updated for the most recent quarter, only to the end of September.

Jonathan, before I answer the first question.

How are you feeling?

I feel great.

Okay.

Good.

Okay.

The first part was the --.

Jonathan, I'm getting nods here that it is updated.

I wonder if you have a breakdown here.

The gain on sale is at the home page of the website.

Here we go.

Jonathan, this is Keith.

In terms of the volume of sales in the fourth quarter, there was 67 billion in prime mortgages sold, roughly 9.4 billion of subprime mortgages sold, and between HELOC and fixed rates, looks like about 7.1 billion was sold.

In another -- sort of in another vein, did the Company -- didn't the Company being making commercial real estate mortgages in November, I believe.

Was that product sold in the fourth quarter or do you have some volume of unsold inventory?

Keith, why don't you break that out?

I think it's roughly 70 million sold in the fourth quarter.

And I think there are scheduled sales of around 650 million in the first.

I see.

On a strategic level, can you tell us what you're seeing from the large lenders in the marketplace in terms of aggressiveness?

Who is being offensive in terms of going after market share and who is being -- who is basically receding from the market amongst your large competitors like Wells, WAMU, Chase and City?

Let me give it to you this way, and I think, Jonathan, you and I talked about it.

I don't think much has changed since then.

Let me give you the landscape as I see it.

The primary, I would say the premier player here from our point of view is Wells.

You know, it's really between them and us.

We passed them in the fourth quarter, continue to widen the gap this quarter, and -- but they are clearly a, a very, very good competent competitor.

However, in all of our competitors, you may have read in the trade publications, the Chase and Washington Mutual, particularly, they have had a complete changeover of management, and it's going to be hard to determine which route this management's going to go.

All the old guard is gone.

Washington Mutual has a whole new team.

Chase has announced just, Jamie Dimon announced just a week ago, they have changed over their entire management team.

In fact, Well has had a substantial change -- turnover of their management team, so we don't have a sense yet of the direction that these new teams are going to take.

Bank of America made changes this year, but I say it's still, when you get down to it, it's really at this juncture, Citigroup is not a factor.

It's between us and Wells.

Thank you.

And representing Glickenhause and Company, the next question comes from Seth Glickenhause.

Please go ahead.

I want to congratulate you -- your entire team on a very fine job.

Most of my questions have been answered, but I have one for you.

What is the current interest rate of your portfolio of servicing and what percentage of it is going to be -- is going to be paid off this year?

5.9 is the average weighted coupon of the port.

What is our anticipated prepayment speed, do you think?

Yeah, the guidance contemplates a range of between 15 and 25 CPR for '05.

Thank you very much.

Seth, I wanted to wish you a very happy new year and thank you for your kind comments.

I appreciate it.

Very good.

Thank you.

Thank you very much, sir.

Next we go to the line of Charlotte Chamberlain with Jefferies and Company.

Please go ahead.

Good morning.

To continue the line -- the questioning about the hedging and also the HELOC, is it time to restructure the hedges to take in more optionality?

Certainly when Washington Mutual had their misadventure, which was back in June where you had the same problem with the yield curve flattening out and volatility going the wrong way.

What they decided to do was to go from 55 percent optionality to 85 percent optionality.

The question to you would be then, is it now time to look at that?

And then the second question is about the HELOC.

It would seem that typically, you lock and load.

You sell them -- you sell them out and you reload the next quarter and it would sound, Angelo, although you're saying people aren't irrationally pricing that you decided not to compete as aggressively in the HELOC markets so you could reload for this quarter.

So I was wondering again if you could just go into a little more detail on the subject of pricing in the HELOC market.

Thanks.

With all due respect to Washington Mutual, they're the last I would like to model myself after.

Secondly, I would like to -- the answer to the issue of the hedge itself and changing the hedge to what is perceived to be this new environment, Stan, do you want to talk to that issue?

I think it's, you know, our hedge to begin with is highly optional.

It's a asymmetric hedge profile and it is the uniqueness of the drop in vol or the value of the options that results in some of the, you know, inefficiency or perceived inefficiency of the hedge during the quarter.

So it is not -- we do and are always examining our approach to hedging and we have a long, very good track record, particularly looking at the overall year, it would be one of slight over performance.

So we don't -- you know, we are always looking but it is not the same issue that you recall from WAMU activity, which was really a -- their entire hedge, I believe, was basically long positions, and that's very different than the hedge we operate.

The second part, though, Charlotte, you asked another question about the home equity loans.

Yes.

What was the second part of the question?

It would sound as if -- the reason that you didn't sell as much in HELOCs is that you chose not to really fiercely compete in that market.

Not correct.

I was wondering if you could address the rationality of pricing the HELOC.

I think the premise is incorrect in terms of competing on the HELOC.

We're aggressively competing, Stan, do you want to address that?

Yeah, I think the confusion, Charlotte, is that in the third quarter, we had sold from the inventory of ARMs that we were holding in CHL, but that our actual production of HELOCs in the fourth quarter and our sales are pretty close.

I think we had production of about 7.9 billion in HELOCs and we sold about 7.1 with some HELOCs continuing to build the portfolio within the bank.

So, we did -- it's not that we were not aggressive or producing HELOC activity during the fourth quarter at about the same pace and market share as we had in the third.

It's just that the the third enjoyed sales -- a greater level of sales than loans produced.

Okay, well then going back to the hedge, what, in general, what proportion of your hedge would you say would be option space?

Our hedge, I'm going to give you, you know, really off the top of my head that we are probably in the 80 percent options.

Okay, and then the final question is -- you said that what really nailed you was the drop in the vol.

Where would you, if you had a Bloomberg terminal, what would you pull up to track what vol is doing?

What would be your track vol?

What is it?

Well, we have -- there are various measures of vol.

Do we have where -- we have the indication of what Bloomberg paid?

There was a slide in Angelo's presentation that showed you where we had the 2-point drop.

I understand that, but sitting at at a Bloomberg terminal, where would I pull up to track it myself?

Well, I don't know -- .

Look at USSW and there is a spread of all the different vols for the different swap transactions and you can see some of the beginning high-level views of vol.

Okay.

So it's -- so it's the, it's the swap between the 10-year swap and the 30-year mortgage.

That's what you're looking at?

No, the 1 into 10-year swap.

We're talking about LIBOR swap and swaptions and payer swaptions.

We're happy to give you more precise pages that you can look at.

Just as a start, you can look at USSW.

Okay, fine.

If you want, can you call Eric and he'll go through the pages with you so you can look at what we're looking at.

Perfect.

Thanks so much.

Representing Prudential, the next question is from the line of Brad Ball.

Please go ahead.

Thanks, just for clarification on the hedge, Stan.

If we continue to have a flattening of the yield curve, if interest rates -- the 10-year rate goes down further, given your current hedge position, would you expect a similar result in the period ahead or do we expect now that we've now adjusted our hedge position for this flatter yield curve and the lower level of vol?

Well remember that as interest rates decline, I'm sorry.

As interest rates decline, we do anticipate that we have gains in the servicing hedge instruments and those are offset by losses in the MSRs.

So as the -- as interest rates decline, we would expect to see typically the same profile as we've presented.

Slight losses in the net positions that are offset by increasing levels of production.

The flatness of the yield curve really is more of an issue again on the, you know, subprime residuals and is built into the cash flows that are projected.

The forward curve is -- it's only when the forward curve changes that will, you know, or becomes more -- becomes flatter than what is projected in the forward curve that we have any type of variation.

And we really try not to over hedge that, particularly at these -- the projected activity of the Fed is pretty well-known and there is not that much ongoing risk.

And if we try to hedge away every issue of risk, we will also reduce our ultimate returns.

That's our hedge is really very much managed and in the same general levels as it has been.

Does the latter part of that explanation regarding this subprime residual write down in the quarter, does that explain the MSR impairment that you experienced versus the impairment recovery that some of your competitors experienced, such as WAMU?

I wasn't aware of WAMU's having recovery.

So it's hard for me to comment.

I believe they wrote up their MSR asset.

And I'm just trying to reconcile how they were able to do that when you're experiencing the opposite.

Well, we had a slight increase in recovery on the MSR asset of about $60 million.

It's just that the anticipated writeup in our model should have been greater and offsetting hedge losses except to the extent of the (indiscernible) decay that we expect on the options.

Everybody's model is a little bit different in the servicing -- the basis that they have -- the low comp test that they have to go through.

It's really hard to -- their cap rate is like 109, but they have -- but, again, their composition is very different.

It's a higher speed portfolio -- greater percentage of ARMs, I believe.

But it is, it's very, you know, it's hard to compare -- impairment, you have to -- we have to be using similar amortization techniques.

The hedging, whether you're applying 133 or not.

It's just pretty complicated for me to try and answer that.

Where do you stand, by the way, on the application of 133?

Are you still -- you're still using low com (ph) -- Keith, do you have any thoughts about using 133 going forward?

No, at the present time, as we sit today, we have about a 1.1 billion impairment reserve, which should help to shield us against -- or allow us to offset any reductions in the value of the hedge.

To (indiscernible) in the MSRs, assuming rates rise.

We're in pretty good shape and we're holding out for the FASB to make the change in accounting that allows us to go to fair value, which we're hoping will be sometime this year.

Great.

Thank you very much.

Representing Goldman Sachs, our next participant in queue is Gary Lapidus.

That's a world-class operator because they never used to get my name right.

Thank you.

There's no question, he's very good.

I noticed just comparing '03, '04 and then into your '05 forecast, it would look like the ROEs declining from 36 down to something maybe in the 20 or slightly less than 20, depending on where you ended up in that -- within the guidance range.

And I guess my question's pretty straightforward.

I mean would you say that what we're witnessing in this decline is the normalization of returns in the mortgage banking business?

Or is it the evolving mix towards the diversified businesses and do those have lower returns on equity?

Maybe if you could just put those 2 things into context, so that the secular change in your business mix and then obviously the cyclical swings in the returns and the mortgage bank.

Let me just frame it before I turn it over to Stan and Keith.

First remember that in terms of a secular trend, the 3 major impacts in the fourth quarter, I assume you're addressing the fourth quarter.

I'm sorry, it was full-year.

Full-year?

Full-year '03, '04, and '05.

Well --

Looks look it's going from 36 and then to 25 in '04 and then --.

18 to 22 is the implied range for '05.

Yeah, for the return.

We have been -- I don't see anything fundamental, frankly, that has changed.

At least at this juncture.

As Stan pointed out the hedge strategies remain consistent.

Our strategies relative to our core business of mortgage banking remain consistent in terms of how we approach the business, how we are continuing to pick up market share.

I think the fundamental difference that you will notice in the numbers is that we set an objective of 50 percent of our earnings by 2008 coming from diversified businesses.

I think the only thing you that might consider here as a secular change is that more and more of the income of the Company is coming from the non-pure mortgage banking business.

The growth of the bank, the capital markets expansion, the commercial banking, the primary dealership, the insurance operation, which continues to grow.

That is a fundamental change in Countrywide's history and, and so I think that what you will see -- what what you will continue to see is the diversified businesses -- the ones I particularly mentioned, will play a major role in the future earnings of the Company.

And that doesn't mean we won't continue to expand and be a vigorous competitor on the pure mortgage banking side.

It's the overwhelming growth in our other businesses that will mute the income from the mortgage banking business.

Yeah.

It's sort of my overall view of it.

Stan, do you want to -- .

Well, we are, first of all, coming off an extraordinary period going into 2000 and going back to 2003, 2002, where a return on equity was some 40 percent in '03.

Obviously an extraordinary period.

At the same time, we generated very significant levels of capital, which we have been redeploying into the operations and in building the bank in particular.

Now, there are different ROE profiles of these activities.

The bank, obviously has a lower ROE profile, though much greater stability in its earnings profile and should result in the averaging on that segment will have a average -- our ROE to a lower level albeit a much stabler return.

And then offsetting that, we're redeploying excess capital, which had frankly a very low return level in -- during 2004.

Mortgage banking has I think, pretty -- performed very well in 2004, with about a 30 percent ROE and as the opportunity of servicing begins to perform -- to improve.

So I think it's important that we look at the composition of the businesses and the appropriate ROE's as we look to grow the core activities of the Company.

So it sounds like the answer then is maybe it's a little bit of both.

You're normalizing the mortgage bank returns from very high levels and the diversified businesses perhaps have a lower normal ROE but also less cyclical, more stable.

Is that the right --

Yeah, I would like to.

The capital market's activity, which is also expanding rapidly and doing very well is not a low ROE business.

They're probably -- I mean it's been our highest ROE.

Yeah.

We in New York are glad for that.

What?

We in New York are glad for that.

We in California are also, by the way.

Okay.

Also, I think for your analytical purposes, you should really look at 2003 -- calendar 2003 as an anomaly.

Yeah.

Okay.

I appreciate that.

Also, Angelo, I think that Arnold Schwarzenegger took note of your statement about moving out of California.

Yeah.

He's going to want to see you.

Yeah. (Laughter)

Take care.

Next representing Sonic Capital, we go to the line of Lawrence Kam.

Please go ahead.

Good morning, guys.

I note that, I guess, your servicing hedge in -- out of the last 11 quarters, this is the only quarter that there is -- that they went in the same direction as the impairment of the same interest.

And I suppose going forward, you're suggesting that it's much more likely that that's going to be like the other 10 quarters of the past 11, moving in opposite direction as opposed to the same direction.

Is that correct?

Yeah, we would expect a more normal relationship to exist.

Okay.

That's great.

Angelo, a quick question for you.

I've been hearing a lot about this company, first Marblehead, they say that, people are saying that it's the Countrywide of education loans.

And I'm wondering why Countrywide can't be the Countrywide of education loans.

So if you can just give me comments as to -- .

I think it's a very valid observation.

We have looked at -- under theoretical basis, it's a natural.

We encompass the home, home equity loans, and the insurance, and sort of embrace the issues that a family faces in terms of their financial issues and student loans would clearly fit into that equation.

We have not -- if you look at Marblehead or any of these -- their multiples are very substantial.

Yeah, about 10 times yours.

Yeah, right.

So we -- it's not something we have ignored and, in fact, there's been recent discussions that have been taking place along those lines, whether it would be one where we actually get in there and take the risk and do the servicing or we're a participant in a joint venture partner, that type of thing.

We have been looking for the right situation.

We agree with you, on a theoretical basis, that is a natural fit for Countrywide.

Okay.

Great.

One last --

Again, we've looked at all of them.

We haven't found anything that makes economic sense to our shareholders.

Okay, one last one.

With respect to the Florida losses, is it fair to add that back on a current basis on the insurance side?

Depends whether you believe in Gore's theory of global warming or not.

(laughter)

I don't know.

We -- there was a 200-year event.

We think it's a one-time issue.

We faced 3 issues, we believe, at one time.

One is the hedge issue, which people are focused on today.

One is the $45 million hit that we took for the hurricanes.

And one is the $65 million adjustment in taxes because the difference in the tax rate.

We are not expecting those things to be repeated.

Okay.

Fantastic.

Thank you much.

Thank you very much, Mr. Cam.

Next in queue is Eric Wasserstrom with UBS.

Please go ahead.

Thanks very much.

I just wanted to make sure I understood some of the drivers on your guidance, in terms of the sale margin.

On the revenue side, you were guiding to 160 to 165 versus a fourth quarter level of 155 and on the cost side, it's 110 to 135 versus about 100 in the past quarter.

Can you just explain to me why you view each of those as going up?

Yeah, it has to do with several factors starting with product mix.

Looking ahead, we expect the home equity loans and subprime mortgages will make up a bigger component of the total and they have, obviously, higher margins than does the traditional prime business.

And that will also drive up costs because it costs more for us to source those loans.

In addition channel mix is going to change.

We expect more of our production to come out of retail next year.

Less out of CLD.

That drives up revenues and also drives up costs.

So those would be the principal components.

Also, the nature of the business, depending on the environment, will be more purchase, less refinance and purchase loans, as you know, generally cost more to originate than the refis do.

Right.

If I could follow up on one comment, Angelo, you made earlier.

You're seeing a lot of books.

I know historically buying things other than servicing portfolios has not been part of your strategy.

Has that changed at all?

It's really not -- this is not an issue of -- the way we look at it is can we originate loans cheaper than buying an origination structure.

Can we do it ourselves cheaper than buying something.

And, from time to time, we now are coming across certain transactions -- we did a deal with the Temple Inland recently, primarily it involved a servicing portfolio and some servicing.

But if we came across an opportunity whereby we, it was accretive to the Company, we would, we would do it.

However, I think the reality -- the way to look at it is this.

What these entities are are field people out in the field originating loans on, generally, an antiquated, arcane origination structure.

So we would be paying a premium for something we would immediately throw away.

Our strategy has been, rather than buy companies, is really to go out and solicit and acquire the source of the business, which are the salespeople.

And so if you look at the economics of that, it would take -- logical progress would take you down a path of buying the people rather than the company.

It's a lot cheaper.

Great.

The primary way in which you purchase the people is what, through offering them a different --?

Well, it depends.

Obviously if it's a -- and you have seen us do that.

If it's a region, we, for example in 2004, we picked up regions rather than just branches.

In that case, there might be to an earn out provided to the key people that keep that region together.

There is no set pattern.

Each of these acquisitions, if you want to call them, carry a different profile with them, depending upon the size, the scope, the pipeline.

The importance that individual is to a community.

So it's -- there is no pattern.

Each of one to look at individually and priced individually.

Some of them, frankly, just come to us because they want to be with a winner.

I have spoken to many of the individuals and asked them why have you come from X to Countrywide.

They said you have dedicated yourself to being number one.

I consider myself to be number one.

I want to be with a company that has the same culture as I have.

Thank you very much.

Thank you very much, Mr. Wasserstrom.

Next in queue is Ed Groshans with Fox-Pitt, Kelton.

Please go ahead.

Good afternoon.

Just looks like there was a couple of changes in some of your guidance or outlook.

I know in the Investor Day, you talked about market share 14 percent and now you're talking 14.5 to 15.5.

I just wanted to know if you're seeing a change out there or are you looking to hire more.

Is it just people falling off and more share becoming available?

I think all of those.

I think all of those issues.

One is that as consolidation will continue, and I think it will be dramatic in '05.

We do very well in those -- when those (indiscernible) take place because it's tremendous disruption within those companies and we are able to pick up people who get disoriented during the process.

So I think that that is going to be a major factor in terms of the amount of books out there.

I think that probably too late for a lot of these people or they're going to have to agree to prices they -- that they didn't anticipate just a year ago.

But this is not unusual in a market that you see is contracted as dramatically as this has.

You see companies that put themselves up for sale and the fact that these books -- we have a little M&A group, so it's not that we're against M&A.

They're seeing a very substantial number of these companies or regions up for sale and we continue -- we consider that to be very positive for us in 2005.

And, therefore, our market share should increase.

Also, we don't have the numbers yet, the publications have not put out all the numbers for 2004, but we, particularly in the last quarter of 2004, I think we're going to show higher market share growth than -- at least in terms of percentage of growth than we have seen in the past.

You also mentioned opening I guess an Asian office.

Are you looking in applying to Japan for brokers security fund?

It is open.

We have hired some key people in that facility, so we have a facility in downtown Tokyo.

We have several people already manning that office and we have, as I pointed out, applied to the FSA for licensing.

The reason for that was we originally thought some years ago when we opened up London, that we could trade Asia out of London and the timing is such that you can't.

You can't be responsive enough, there's too many hours difference and so if you want to have -- trade Asia, you have to be in Asia.

Okay.

I guess, in the past you have talked about the mortgage centric type of business model, how the other businesses that you're getting in, leverage off the U.S. mortgage expertise.

I'm missing how the Japanese office fits into that model.

It gives us greater distribution.

We want to great as much liquidity and distribution ability for our products and, particularly for dollar-based products.

Asia has a lot of, obviously, a lot of dollars.

If you're driving a Japanese car, you understand what I mean.

And, therefore, they're buying an enormous amount of U.S. securities, including not only treasuries, but mortgage backed securities, and we want to be part of that.

So all it is is expanding our efficiency and liquidity base here in the U.S. by expanding our distribution centers, as we did in London, into Asia.

And just one other item.

It looks like in this quarter some of the home equity residuals and subprime residuals were reclassified into trading.

I was wondering if you could give us some color around that change.

Stan, you want to comment?

Or, Keith?

Keith.

Yeah, I think beginning in the third quarter, we started classifying our residuals as trading securities which gives us some added accounting flexibility -- allows us to mark up the assets and mark them down, which when they were available for sale, you could only mark them down.

It just provides us with additional flexibility and helps us mitigate some of the accounting risk.

Okay.

Thank you.

Our next question comes from the line of Mark Patterson, representing NWQ Investment Management.

Please go ahead.

Just, I think I heard it.

I wanted to clarify that you had 61 million of impairment adjustments and recovery, so that moved the balance of the impairment reserve from 1.2 billion down to 1.1?

That's correct.

Okay.

With regard to the servicing, the multiple on the servicing book, your sheets show us on the website that this quarter's servicing book went on at 3.35 times the servicing fee.

And that's up a little bit from last quarter.

For the year even, it's 3.5, roughly -- it's down materially from the last couple of years, which were closer to 4.5.

Even 4 or 5 years ago, when they were closer to 5.

7.

Yeah, and at the same time, the WAK (ph) has declined quite significantly.

I assume this is predominantly a reflection of the change in refi expectations that you might have talked about earlier which is more of a secular issue, an increase in the percentage of refis through cycles.

Is that correct?

Well, I don't know if it's that single issue.

I'm going to take a shot at it and get my comrades here to get a shot at it.

I think what you're -- you see, you know, look at the complexity of these questions.

I have been doing this for 35 years in terms of dealing with investors and you're talking about the hedge for the servicing port.

It is a complex asset to hedge.

And there is capital -- substantial amount of capital has to be applied to it.

As accounting rules have changed.

As 91 has come in -- as 133 has come in.

I think the complexity of managing that asset has had an impact on on its value.

And that's why -- I think one of the effects of it.

Before you would have -- first of all, when it was at 6 -- 5, 6, and 7 multiples, and you remember those times.

These were relatively small packages, at the time.

Easily tradable and there was a lot of trading going on before FASB -- what was the FASB ruling that changed, that you could book that originated? 16?

120.

65.

Yeah.

But prior to the time that you could put an originated loan on your balance sheet, it forced a lot of trading.

And so it was just a different world were in.

And values did go up, as I said, up to, we saw them trade at the 7 multiple.

I think it's an asset that is looked at differently today, and I think that has forced, you know, this multiple down.

That's sort of my view.

Keith, you want to give your view?

Yeah, I would say looking at the short-term trend, it has a lot to do with the change in product mix.

From the beginning to the end of year, there is a higher percentage of ARM loans in the sale and they have inherently lower servicing values.

And as well as HELOCs and subprime mortgages have lower values.

Our net servicing fee has been declining.

That would be inherent in the multiple.

Longer-term, I think it's -- to the points Angelo was making, it sort of -- I think the increased interest rate volatility, consumers' increasing propensity to prepay the mortgage has just caused sort of a paradigm shift in terms of how companies view the value of servicing rights.

Also, the lower interest rate environment, generally speaking, as it relates to one material component of the MSRs, which is your earnings on your escrow balances, those have been, as you've seen, substantially depressed because of the very low short-term rates that we have seen.

As rates rise -- you could look at this, as rates rise over the next couple of years, you can see that multiple change.

One is, as I think Keith pointed out, a very good point, which I missed, which is the escrow -- the returns on the escrows have been substantially diminished over the last few years.

Right.

I believe there is a lot of unrecognized value there, but I, I think by -- .

It's, let me say this.

Clearly the intrinsic value of servicing is much higher than the market value.

Yeah, I think by spending all the -- all of us spending an inordinate amount of time focused on the servicing and hedge performance, this quarter -- any one quarter, we really run the risk of missing out on the big picture story, which seems to be alive and well today, and that's that it's extremely strong story of growth and diversification.

And so to the extent that the servicing hedge piece can become a smaller piece of the story, all the better and maybe it's the potential move of reduction of the servicing fee by the GSEs that helps that along.

I don't know what.

That's what -- that's no question.

That will be a big help or the mark-to-market will be a very big help.

Yeah.

Okay, thank you, guys.

Great job.

Thank you.

Thank you very much, sir.

Now, the next participant in queue is Michael D. Cohen with Susquehanna Financial Group.

Please go ahead.

Hi, wondered if you could talk about your bank outlook for bank margin ROA in growth in light of the flatter yield curve.

Does the -- do any of those things -- are any of those things affected by the fact that the yield curve has flattened?

You know, again, as I explained earlier, the benefit in the strategy of the bank is that it has a closely matched duration of liabilities and assets such that putting on a spread, which is fairly sustainable other than slight lag periods that sometimes are beneficial and sometimes not.

But that lag period, again is very low and, you know, when we acquire hybrid mortgages, for example, in the thrift -- in the bank, we are matching, you know, very closely the deposit life in duration to the asset as well.

So we look at it as really having a return on asset which is pretty stable.

It's the greater the volume we can shift from the mortgage company into the bank obviously has a positive impact on the long-term ROA of the bank, And that's probably the item that would have the greatest influence on ROA is how much of Countrywide Home Loan production is originated in the bank.

Okay, great.

May be if I could follow up more on the flatness of the yield curve -- not to beat the competitive environment to death, but is it possible that the flatter yield curve is going to send some of these mortgage REITS heading for the hills?

Yeah, I think they're in the hills already.

I think it's a matter of where they're going to go from there.

I don't know.

The mortgage REIT -- we've had our position on mortgage REITS because we were one at one time.

You know we had -- IndyMac Bank was Countrywide at one time.

We've been through that experience.

I do not believe, unless there has been a change here that I don't understand, which is possible, I don't think it's a sustainable model.

Great, thank you, Angelo.

Okay.

Thank you very much, sir.

Next we go to the line of Garish Bakul (ph) with Ruwain Cucunis (ph).

Please go ahead.

Hello.

Incredible results, guys.

I almost couldn't believe them compared to all the competitors.

Congratulations.

I had a quick question -- 2 or 3 questions.

The first on the retail strategy.

Just wondering how it's going.

Can you update us on the number of people you have there?

And I read an article recently that you had reduced compensation of producers in retail.

Yes.

I didn't realize it became public.

We did a couple of things.

One is -- I don't know where our number is now in terms of salespeople out there in total.

You know what that is, Ann? (inaudible) We'll come up with that number.

But we continue to grow our sales force.

Now at a more rapid pace, simply because we are -- and I don't think I'm being chauvinistic about this, we are clearly the (indiscernible) company of choice for the top producers in the country because we have a model that works better for them and for their customers.

So we've had a substantial increase and continue to grow, but the -- we have to make certain it's quality, that quality is the overriding issue, not quantity.

You have that number, Keith?

Still looking at it.

I think it's around 10,000.

What was the second part of that question?

Thank you.

The compensation.

The what?

Oh, yes, we did -- we reviewed the compensation issue and particularly related to the call centers, where these people (indiscernible) by their salespeople in the call centers.

During the refinance boom, margins were fairly large and as the margins compressed, we had to take a hard look at the compensation issue because it's the primary -- it's over 50 percent of our expenses, and we had, across the board in the call centers, a reduction in compensation.

We have seen no negative impact of any materiality relative to that change.

I think it was understood.

It was a fair change.

We've also made some modifications -- the people out in the field, the external home consultants.

Again at the end of the day, it's equitable, it's recognized as equitable by the salespeople and have had no fallout again or negative impact as a result of the changes in compensation.

Yes, just looking at our retail operations in CMD, we're now at 8,500 employees.

You know, giving you something to compare that to back in December of '03, we would have been at 6,100.

salespeople.

salespeople.

There are several thousand in the full spectrum operations.

About a thousand, I think, in wholesale, so I think we're around close to 12, 13,000.

Somewhere around there is where we're approaching.

I got 12.8, but I'm not sure.

12.8. 13.

It's pretty close.

I think -- so we're and, again, continued growth.

That's the name of the game.

You have to -- this is a hand-to-hand combat game, despite all the advances in technology, particularly on the retail and wholesale side of the business.

And if you want to have contact with the people, you have to have the people to do it.

And then in the subprime business, the gain on sale margin -- I was just wondering, given the higher cost of originating that product whether that's still a profitable product at these kind of gain on sale margins and whether very happy with that.

The general answer is yes.

It's very profitable.

Any significant changes to that, Keith, over the last couple of quarters?

Our operating costs have come down over the last several years, while still high in comparison to prime, we've enjoyed significant reductions in the cost of originating subprime mortgages.

Very positive for us and the industry.

So you would be happy at these kind of gain on sales margins?

Oh, yeah.

Yeah, I think also we're getting better at refining the solicitation process.

As to how we originally solicit that customer and make contact with that customer.

We're getting better at it and technology is helping us with that.

It's mostly a call center operation, right?

Yes.

It's primarily a call center operation.

Not solely but primarily.

We have -- there are real estate -- there are areas in the country where the -- that type of borrower is concentrated and real estate agents in those communities, therefore deal with that level of customer.

There is focus on calling on those real estate agent to solicit that business.

It's not solely dependent upon borrowers calling us in the call center.

We do have an outreach program.

Finally, I did understand correctly that you do hedge the subprime residuals to a flattening curve and if do you, then how do you hedge them?

Well, you know, subprime residuals are included in our hedges.

It's just the -- we have less sensitivity in the hedge to a flattening of the yield curve that goes beyond what is predicted in the forward curve.

So we do have for a general rise in interest rates, a portion of our hedges, you know considers the change in value that comes from changing rates.

Thank you.

Okay, thank you very much.

We go to the line of Bill Roy (ph) with Jacobs Asset Management.

Please go ahead.

Thanks.

I'm not sure if this was actually disclosed, but do you have the weighed average servicing fee of servicing booked and what the actual servicing that was booked as well?

It's the average servicing -- (multiple speakers) For the quarter or the year?

For the quarter.

32.5.

Servicing fee, Stan. 32.5?

Yes. (multiple speakers)

What was the next one?

And what was the actual servicing value that was booked.

(multiple speakers) 917 million.

917.

If you can start with the beginning MSR and you add 917 million and back out what you amortized at 523 million, write up the MSR, I come to a different number.

What variable am I missing?

What number are you coming up with?

Something less.

Something less than what?

Than 8.78 billion for the ending MSR -- . (multiple speakers)

There were some bulk acquisitions in the quarter.

That would be a missing component.

Okay.

That's what thought it was.

That was probably the Guaranty deal, I think.

Did you sell any excess servicing?

Excuse me?

Did you sell any excess servicing?

We did not -- did we sell in the quarter, any excess?

I think we did.

That's no longer part of the MSR, Bill.

We created the separate IO strips when we securitize the mortgages so they never form a part of the MSR.

Okay.

Okay, let me -- .

I don't think we did any sales in the fourth quarter.

Excuse me?

Yeah, we did.

We removed $223 million from the -- that went into excess strips certificates.

Yeah, but wouldn't be part of his MSR.

It would not or would?

Would not.

Okay.

Let me try to balance it with the bulk purchases.

Okay, if you have a problem with that, get back to Eric.

If you don't reconcile out, we'll help you with that.

Sure.

I have a follow up.

Given where the 10-year ended and where mortgage rates ended the quarter, what do you expect the (indiscernible) amortization to be in the first quarter?

We're still working on that number, Bill.

Don't have it for you just yet.

Directionally, do you know if it will be up?

I would expect it to be up slightly.

Yeah, given the growth in the port.

Okay.

Finally, when you guys refer to the mortgage-to-swap spread, what -- are you referring to the 10-year swap?

Yes.

Okay.

I don't see much of a change in the spreads, but I'm using the Freddie Mac --

I want to go back -- Bill, I want to go back to the original question you asked.

We have a little discussion going on here.

Is it up or down is the answer.

Not yet determined.

Let's put it that way.

Okay.

Rather than guess up, why don't you just hold that for awhile until we get that.

Okay.

We have a difference of opinion here.

Right.

In the current quarter, the first quarter of '05, have you seen much of a change in the spread between mortgage to the 10-year swap rate because I know that you cite 3 things in your press release.

One, the 2 to 10-year spread, which clearly in the first month, the 2 to 10-year swap rate has come in another 31 basis points.

But I don't know if I can or we can calculate the mortgage to 10-year swap rate so I'm asking you whether you have seen any change, positively or negatively, in the first 30 odd days of the quarter.

We're running slightly tighter again.

Okay.

And on the $330 million hedge cost, let me know if I'm in the ballpark here, I'm trying to break this out into 3 categories.

I -- you referenced tighter mortgage-to-swap spreads 140 million.

I'm assuming that's part of that number, right?

Yes.

Okay -- .

That would be the rise in interest rates.

It would really be the cause of the reduction in hedge value.

Okay, so you mentioned 140 million mortgage that charge hit somewhere in the P&L, but you don't say where and I'm assuming it occurred in the hedge cost.

And I'm kind of hearing that maybe it might be somewhere else.

Is that --

No, that's accurate.

It's in that -- included in that number.

Okay.

And I'm using a 3 percent cost of the hedge, which gives you that $60 million VEDA, which would bring us up to 200 million, leaving 130 million for something else.

Is this the volatility mark?

I think that, by the way, the VEDA would be -- should come up with something greater than the 16 million.

60 million.

We had -- in the quarter it was running about 130 million so the the remainder is basically volatility.

Okay, so that would be 60 million for volatility mark.

The volatility stays where it is.

You've talked about this in the prior question.

The volatility doesn't change, how do you mark-to-market your swaps for lower volatility, or do we continue to see -- or should we continue to see lower marks going forward if volatility just stays low?

No, they're mark-to-market.

All right.

Excellent.

Thank you.

And thank you very much, sir.

Our next question comes from the line of Lee Rosenbalm (ph) with Loomis Sales.

Please go ahead.

Hi, Angelo, congratulations on a strong year.

A quick question.

If it's available, if not, I'll wait for the K. The cash taxes paid in the quarter and full year?

I know it's probably big number, but if you have that available.

Do you have that number? (multiple speakers) Don't have it.

Sorry.

Okay, thanks a lot.

There is a lot.

Our next question comes from the line of Matt Vetto with Smith Barney.

Please go ahead, sir.

My questions have been answered.

Thanks.

(OPERATOR INSTRUCTIONS) Next in queue is Fred Cannon with KBW.

Please go ahead.

Thanks.

Most of my questions have been answered.

You guys were generous with your time.

Two fairly quick questions.

As you guys noted, your ROE for 2005 in your guidance comes in plus or minus 20 percent and you're continuing to grow your MSR very rapidly in the bank, very rapidly.

Assuming you don't get the cut in the MSR fee, do you see a point in time where you would actually have to raise capital?

I think on a theoretical basis, yes.

If you get to the -- our goal of 1.9 trillion, we don't get a break on the fee, which is hard for me to believe, but let's assume we don't.

There is a possibility of that -- that's not built into our plan, by the way.

The plan out to 2008 that we have laid out to the public does not call for any additional capital.

It's all internal.

With that assumption?

Without a reduction?

Without a reduction.

In the fee.

Another quick question is -- last quarter - may be you guys disclosed this -- you disclosed your amortization for the rate on the MSR for the fourth quarter because you set that at the beginning of the quarter.

Have you disclosed that yet or could you disclose that?

No, we haven't determined that yet.

Oh, you haven't.

Okay.

Thanks very much.

Thank you very much, next we go to the line of Phil Marriott representing Arnhold and Bleichroeder.

Please go ahead.

Thank you.

I'm just curious -- you talked about the spreads narrowing on the yield curve more than the forward would have indicated at the beginning of the quarter.

I wonder about your -- how your behavior with respect to the hedge is affected by that sort of activity.

How do you react to that?

Well, we study it.

The fact is that if you go back over the last several years as the yield curve slope increased more than anticipated, we were a great beneficiary of the change in spreads.

This is a rare quarter where it's against us, but some of the items are not really practical or, you know, cost-efficient to try and hedge through every environment.

So we're -- we examine it, we maintain certain risk factors that we're studying to see what the potential is, and we're also evaluating it in terms of where the normal curve is.

But we're -- it's not -- we don't think or feel that there is a necessity for any significant adjustment in our approach.

Okay, just as a follow up to that, if you were to look at the forward curve at the end of the fourth quarter and the forward rates that were implied, how has the market -- have rates actually changed over the course of the last month versus that expectation?

I believe we're pretty much right on expectation.

Okay.

Thank you very much.

Thank you very much, Mr. Marriott.

Our next participant is Christina Clark representing Wachovia Securities.

Please go ahead.

Thanks a lot.

You mentioned that you hedged the subprime residuals for rising rate.

I was wondering what the performance of those hedges were and if that's imbedded in the $45 million impairment this quarter.

And then secondly, if can you comment on the market for buying bulk servicing and how much you purchased for all of 2004.

For all of 2004.

I don't have the hedge performance broken out by, you know, the elements like that.

So it's not -- is it not included in the 45 million.

So there's something that would offset that on the hedge we're not seeing directly in that number.

You understand the question?

She's looking for a hedge number to associate with the change in value, the subprime residuals apart from the flattening affect.

And we don't look at the hedge in that way.

It's more of a global hedge of our retained interest.

Go through that again for her so she -- . (multiple speakers) No, you do it.

Okay.

We hedge our retained interests in a global fashion, so we look at the interest rate sensitivity of the MSRs combined with the residuals and IO's and PO securities that we hold and we create an overall profile which we hedge.

In light of the affects of the macro-hedge.

So we never carry a 100 percent hedge, not that that's possible -- of our retained interested.

There is always some net exposure that is reflective of how we think the rest of the business is going to perform in those environments.

So given our approach, it's difficult to tie one component of the hedge to a component of the retained interests.

I think what might be helpful is that in the, in the quarter there was very little change in the value of the subprime residuals resulting from the interest change other than the flattening of the curve.

So there wouldn't -- we wouldn't really have expected to have a pick up in the value of subprime residuals or much change and the hedge has -- very little portion of our hedge activity really related to subprime.

Has the average life of the residuals changed materially?

Does that affect it as all?

There was a slight speed increases that did affect values of residuals, if you look at the, you know, the $92 million change.

Almost half of that was not related to interest rate curve shift and the other had more to do with speed assumptions.

Now, the other part of the question was -- what was the amount of bulk purchases of servicing we made during 2004?

That and also just commenting on the market for buying bulk servicing.

The number is about 40 to 50 billion, I believe, for 2004.

The bulk of which was subprime servicing.

And there appears to be a pretty healthy market at the present time, anyway, for subprime servicing.

There is a lot of people generating that servicing that don't care to own it.

So it's creating a pretty good opportunity for us, given that we have the expertise and the capacity to acquire that servicing and we're picking up a pretty healthy return.

Great.

Thank you so much.

Thank you very much, Miss Clark.

Our next in queue is Bennett Lindenbalm (ph) with Baswick Partners.

Please go ahead.

Hi, hello.

I wanted to check.

I think you gave the numbers, I wanted to make sure I heard them correctly.

The loans sold actually.

I got a total of 84 billion, which is less than what you funded.

Is that accurate?

Yeah.

That's right.

Okay.

That's right.

We had loans produced by the bank that went to portfolio that were not sold.

Is that -- that explains the difference?

No, because -- that loan sales number is just the sales by the mortgage bank.

There was also conduit sales that occurred within our capital marks operation.

Right.

Okay.

The other thing is -- can you give us the gain on sale margin on the stuff that you sold?

Hold on, we're getting it.

Okay.

In the fourth quarter, it's 90 basis points for prime paper, 302 basis points for subprime paper and 312 basis points for home equity.

Okay.

Got it?

Got it.

And then on the subprime market, leaving aside the issue of you guys taking share, which I'm sure you will, do you have an opinion about the size of the market -- the subprime market has grown astronomically.

I guess I'm wondering is the size that we're seeing sort of a new normalized level or should we expect the size of the market to come down to somewhat lower percentages of the overall market?

What is your view on that?

My view, for what it's worth, is it's going to grow.

It's going to continue to grow as the country as a whole.

As the president's laid out, his desire and the overall desire of the country to increase the homeownership rate among those who have been traditionally left behind.

That is a vast market and so I would expect that, as we get to better understand how to deal with the subprime market, how to make certain that we put them in a position where they succeed rather than fail, that that market is going to -- the substantial increase is yet to come over the next 4 or 5 years in the subprime market.

So that implies that we need to think in terms of the submarket.

Once as the prime market normalizes to more -- 2 trillion levels, we should think of the subprime market being north of 20 percent of that market, which is quite large, at least by historical standards, for that market.

Yes.

I think it's going to be larger than it has been historically.

Lastly on the education front which, I thought was interesting.

It sounds like you're -- to the extent that you would do something there, you have been looking around potentially at something you would acquire that would make sense.

Would it not be possible to sort of grow that thing organically?

You know, hire people, build it out that way or that's not possible?

You could do it de novo.

It requires a buildup of a platform.

It is a process and it is a product that is foreign to us.

Now, to just give you a sense of history, back in the '80s, 1980s, we were a student loan lender through an entity called the Countrywide Thrift and Loan.

We had -- we learned enough to know that we don't know enough about it through that process.

We want to -- it would be, I think, a much smoother -- we could do it organically -- we can do anything organically.

And it may be the route we must go.

Before we go that route, we want to make sure that we search the landscape to see if there is a situation out there that will give us a short cut into that business.

Right.

Did you guys take a look at education lending group -- that thing that CIT bought recently?

Did not.

To my knowledge, we did not.

I looked at the -- I looked at the ones -- personally looked at the ones that had -- matter of fact, 3 or 4 went public in '04, and I had looked at those entities and the structure of the entities.

Again, the multiples were way out of whack.

We would have immediate dilution to our shareholders.

We have been busy with the primary dealership, with commercial lending, with the bank and so it was -- we have not put forth the kind of time necessary to search out the best opportunity for us.

We're having some discussions now -- I am, relative to that issue and we'll certainly let the public know if we're going to do something, you know, formalize any kind of arrangement on it.

We do agree that, at least again theoretically, it's a good product for us.

One in which we can again capture a larger part of the so-called wallet of the consumers, almost now 6.5 million consumers that do business, with us with an average age of around 35 to 40 year old, so having kids just entering college.

Right.

So we're in the right space.

Right.

Okay.

Thank you very much.

Our next question comes from the line of Don Meter (ph) with Bear Stearns.

Please go ahead.

Angelo, I want to add my congratulations on a great year in 2004 to you and your associates.

It's reassuring to see the increase in a dividend -- that makes a lot of happy shareholders.

Thank you very much.

My question is -- I know that to you and to Countrywide, loans to lower-income and minorities have always been an important project to Countrywide.

And I noticed that (inaudible) that you increased your commitment to, I guess it's $1 trillion.

That's correct.

The largest commitment by any company in the United States.

We made that commitment several weeks ago at the National Association for Home Builders Conference in Orlando, Florida.

Could you give us color on that?

For instance, how much would be funded this year?

Will you hold loans and the down payment and the pricing of the loans?

We have it to 2010.

2010?

Through 2010.

There will be principally -- as we see it shaping up, we're letting it take it's natural course, but it really is for low-income, for minority, primarily Hispanic, African-Americans and Asians.

We have opened up special offices dedicated to those communities in those communities.

We have formed alliances with church groups, faith-based groups throughout the country to assist us in partnership in this effort.

We're well on our way to achieve that -- we're about the $400 billion level now.

We're going to achieve it, but it's going to take a massive effort in terms of dedication of people, development of partnerships, working with nonprofits, working with mayors.

At the recent mayors conference last week, we gave -- donated a million dollars to each of the cities for their efforts, for educational programs to help people understand their rights of homeownership.

It's a comprehensive effort, Don, that should have a major impact on the society of this country.

Will they still be required to make down payments?

Yes and no.

We have no down payment programs.

We have -- we made an announcement yesterday in fact, on a whole different subject, but for our military, a $500 down payment.

Many of these, dedicated to people in service.

And you will continue to see Countrywide come out with products that are going to make it much easier for these people to get into a home -- to lower that barrier of entry that has been in the way for so many years.

We're going to do a lot of non-traditional things.

And we're earning the assistance, frankly, of Fannie and Freddy and others and HUD, in making these things happen.

When it's all said and done, do you do the loans through your subprime program?

That's correct.

And we will -- these loans will be sold as we do other loans into the secondary market.

They will be sold.

They see competitive interest rates, then.

At competitive interest rates.

We're trying to continuously lower the interest rate to the subprime borrower because it makes it easier for them to qualify.

I know for years you have campaigned this, Angelo.

This is extraordinary and I compliment you and your staff for this.

Thank you very much.

We have a question from the line of Ralph Johnson (ph) with Peminger Wasset Partners.

Please go ahead.

Good afternoon.

Two questions on your MSR model.

Did I hear you earlier say the weighted average discount to your model was 5.9 in 2004?

The weighed average coupon of the loans in the portfolio is 5.9 percent.

Okay, do you have 2004, I think you used an OAS spread.

Yes, the OAS model.

Okay.

Could you also comment on why would the -- according to my calculations, the effective discount rate is quite a bit different from some of your competitors.

I think their effective rates, weighted average discount rates are 7.5 to roughly 9 percent.

Is that just a mix?

(multiple speakers) You're talking about weighted average coupon.

The discount rate is 1. -- where are we at today? 1.19?

In terms of OAS, is a little over 600 OAS on the -- for the overall portfolio.

Oh, that discount rate.

It's around 630?

Yeah.

I'm trying to figure out the assumptions you're putting in the MRS model.

It's a -- from your 10-K, it sounds look it's a DCF-type model and I'm just trying to get -- trying to compare your assumptions with some of your competitors.

I tell you what -- we're compiling that information and it will be in our 10-K.

Okay.

Thank you.

Thank you very much, Mr. Johnson.

Next in queue is Thomas Capolo (ph) with DGM Management.

Please go ahead.

Hey, guys.

I'll leave you alone on the hedging questions since you guys do a great job -- you've always done a great job and most of us are convinced you'll continue to do a great job.

Thank you.

Angelo, you said your home loans sales force hit growth of 48% in calendar year '04.

Ball park, how many reps do you have now and where do you think that number will be at the end of '05.

We have -- I think we pointed out about 12.8 -- 12 to 13,000 at the moment.

I don't know how we project it out, but probably add another 5 to 8,000 this year, in '05.

To the overall sales force.

That would include call centers, that would include full spectrum subprime, that would include retail and wholesale.

Where does -- where is the commercial effort fit into that?

Well, separate.

They had not -- none of the those numbers, commercial effort.

We had about 60 people overall today in commercial.

They're -- 8 bankers -- they call themselves bankers -- 8 or 9 bankers in that group.

They're the ones that source the loans.

We have really left it up to that.

These are an incredibly confident group of executives and they've given us their budget and their growth plans for '05.

You know how many more bankers they're going to add to the group?

I don't think there is much growth in terms of their overall personnel count there.

The -- organizing themselves to putting out their product to the various channels, particularly our wholesale and correspondent operations.

And so they're really just getting off the ground and they've built the base infrastructure to now, as they have in the last quarter, begun to produce a volume of mortgages.

You had mentioned that -- I think you sold 70 million in commercial during the quarter and, Stan, you pointed out you had 615 scheduled sales for the first quarter.

Is that right?

That's correct.

So -- I'm sorry.

Say again?

Yes, that is correct.

What are your, ballpark, what are your monthly originations now?

Where do you feel the business goes in '05, I guess?

What's the '05 budget number, do you know?

For volumes? (inaudible) We think it's around 2 billion, which would puts them in the top tier of originators.

Okay.

Great.

I appreciate it.

Thank you for your time.

Thank you, sir.

The final question comes from the line of Adam Juwan (ph) with Goldfield.

Please go ahead.

Thanks very much.

Someone earlier on the call mentioned First Marblehead and also discussing education lending.

If you actually look how First Marblehead makes its money, it doesn't take credit risk -- it doesn't originate loans.

It just services and processes loans and then securitizes them.

So they generate an enormous margin on securitization.

And if you look at what those numbers are -- it's about 16 percent, with the face amount of the securitized loans, so obviously an extremely attractive business.

Is that -- when you were discussing FMD, were you thinking about competing with them or just getting into the education loan business, where you would be an originator of loans?

We would source the business.

We would look for, at least that's my initial reaction off the seat of my pants, based upon how we thought of this business.

We believe because we have the customer base for it, we're the source of the business -- we would source the business, and either would joint venture or offload the servicing platform to, you know, to the experts that service those loans.

In terms of their risk, these are -- these would be government guaranteed --. government-guaranteed loans.

We would not get into, at least at this juncture, not get into the non-guaranteed arena.

Okay, that much.

Thank you, Mr. Juwan.

With that, Mr. Mozilo, Mr. McLaughlin, and our host panel, I'll turn the call back to you.

There are no further questions.

Okay, thank you very much all of you for your questions and for your attention today.

Those of you -- lot on the line have been long-term supporters of the Company and we're very grateful for that.

And you will -- we will continue to see us work hard and diligently to make certain that we continue to bring -- keep the Company in an upward movement and show the kinds of returns -- continue to show the kinds of returns we have shown in the past.

Thank you very much.

Ladies and gentlemen, your host is making today's conference available for digitized replay for 2 weeks, starting at 3:00 p.m.

Pacific standard time February 2 all the way through 11:59 p.m.

February 16.

To access AT&T's executive replay service, please dial 800-475-6701 and at the voice prompt, enter today's conference ID of 764515.

Internationally, please dial 320-365-3844.

Again with the conference ID of 764515.

That does conclude our earnings for this fourth quarter.

Thank you very much for your participation, as well as for using AT&T's executive teleconference service.

You may now disconnect.