美國銀行 (BAC) 2005 Q3 法說會逐字稿

Welcome to the 2005 earnings conference call.

Please note, ladies and gentlemen, during this teleconference, Countrywide's management may make forward-looking statements within the meaning of the Federal Securities laws regarding their beliefs, estimates, projections and assumptions with respect to, among other things the Company's future operations, business plans, and strategies as well as industry and market conditions.

All of which are subject to change.

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

Factors which could cause actual results to differ materially from historical results or those anticipated 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 obligations to publicly update any forward-looking statements. [OPERATOR INSTRUCTIONS].

With that being said, it's my privilege to introduce your host for today's call.

Countrywide's Chairman and Chief Executive Officer, Mr. Angelo Mozilo.

Please go ahead, sir.

Thank you, Brent.

Good morning, and welcome to Countrywide's earnings conference call for the the third quarter of 2005.

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

The presentation can found on our website, www.countrywide.com on the investor relations home page.

Turning to slide two of the presentation, you'll see today's agenda.

First I'll give an overview of our performance during the third quarter, and first nine months of 2005.

Next I will provide a brief overview of our business segments.

In the bank section, I will focus on the topical issues concerning pay option ARMs and IO loans, interest-only loans.

Then I will conclude the presentation with our revised 2005 guidance.

After the presentation we'll open the lines to take your questions.

Turning to slide three of the presentation, let's look at our third quarter highlights.

The production of 146 billion, Countrywide set a new record increasing 59% over last year's third quarter.

In fact, when we look at market-side estimate from the MBA, Fannie Mae, and Freddie Mac reports, it appears that we advanced our market share substantially during the third quarter.

Depending upon which of these estimates you use, our implied market share is between 15.6% and 19.3%, having increased by 1.6 to 2.9 percentage points from the prior quarter.

By Countrywide's own internal estimates of the market, which is somewhat higher than the others, our market share was 15.6% in the third quarter up 2.1 percentage points.

Most market forecasts for 2006 suggest that the market value will decrease from the 2005 levels.

Given that decrease, what level of market share would Countrywide need to achieve in 2006 in order to keep this origination volume at or near the 2005 levels?

Let's use Countrywide's market estimate for 2006 at 2.6 trillion, down 20% from our 2005 estimates at 3.2 trillion.

The midpoint of Countrywide's 2005 full-year origination estimates is $458 billion, which represents 17.6% share of our 2006 forecast.

As you'll notice, according to CFC's third quarter estimates, CFC has a current market share of 15.6%.

So to maintain we would need to increase our market share by 2 percentage points.

Turning now to the servicing side of our mortgage banking business, we set a new benchmark during the quarter, eclipsing the $1 trillion level.

With the recent rise in rates, our large servicing portfolio generated $258 million in pretax income, even after an unusual $51 million pretax charge in the servicing sector relating to the hurricanes.

In the bank, the growing portfolio of high-quality assets continue to generate substantial earnings growth.

As the bank continues to grow, Countrywide will benefit from the stability that portfolio spread income provides.

The chart of slide four shows our consolidated earnings highlights.

Net earnings in the quarter were $634 million, a gain of 27% over last year.

For the nine months, net earnings were $1.9 billion which is up 3% over the same period last year.

On a diluted share basis, we reported $1.03 for the quarter, and $3.07 for the ne months of 2005.

I would like to point out that the third quarter and the nine months of 2005 diluted EPS results do include a $0.19 per share charge related to the hurricanes, primarily Hurricane Katrina.

Return on average equity remained at 21% for the third quarter, as compared to last year.

For the nine months, return on equity was a healthy 22%.

ROE levels for the third quarter and nine months within our long range target, our ROE range, and exceeded the average for the S&P 500, which was 16.5% at October 25 according to Bloomberg.

On slide five we'll review the detail behind our losses related to the hurricanes, primarily hurricane Katrina.

Most of the charges fall into categories relating to our insurance operation, as well as estimated uninsured losses primarily associated with flood damage on properties that collateralized mortgage loans and loans underlying mortgage servicing right, MSRs, and residuals.

The charge includes after losses of $64 million related to the insurance operations. $31 million in the servicing sector related to [intamerate] event MSRs and residuals, as well as the provision to servicing advances related to government insured loans.

As you know, there is a -- we created a moratorium on the collection of payments for a period of time to provide relief to our mortgagers.

The remainder of $20 million is primarily attributable to estimated credit losses on loan inventory held at Countrywide Home Loans and loans held for investment at the bank.

The $115 million in total losses are net of expected in reinsurance recoverables and other insurance proceeds.

We continue to assess the impact of Hurricane Katrina on our business assets and operations, and recognize that many factors will affect the ultimate impact on Countrywide as described in the disclaimer at the end of this presentation.

Slide six shows the breakout of pretax earnings among our various business segments.

Mortgage banking pretax earnings were $703 million for the third quarter and $2 billion for the first nine months.

Mortgage banking results in the third quarter of 2005 were impacted by lower margins in the production sector, partially offset by stronger results in the servicing sector.

Pretax earnings for our banking segment was 71% for the quarter and 92% for the first nine months of 2005, When compared to the same periods of 2004.

This growth has been fueled by asset growth as well as a very efficient cost structure for deposit gathering.

Capital markets profitability was up 2% for the quarter, which primarily stemmed from an increase in new business activities, but was down 4% for the first nine months primarily to lower underwriting and trading revenues as well as increase in expenses.

The insurance segment pretext losses were $32 million in the third quarter 2005, a result of a $98 million pretax related to the hurricanes.

Pretax earnings for the third quarter of 2004 was $30 million, which included $23 million related to hurricanes.

Earlier this week, we filed a notice with the Florida Office of Insurance Regulation.

To discontinue underwriting voluntary homeowners, condos, tenants, dwelling, fire, and renters insurance in the state of Florida.

This action, which is subject to the review of the Florida Office of Insurance Regulation was taken because of the excessive exposure to hurricanes in Florida and the challenges in pricing future policies at a profitable level.

Based on policies enforced at the end of the third quarter, the impact to the net written premium as a result of this discontinuation would be approximately 4% of the total net written premium.

Let's take a closer look at Countrywide's mortgage banking segment on slide seven.

Production sector pretax profits for the quarter were $414 million, down 17% from the third quarter last year.

As noted earlier, our mortgage banking production set a new record but the increase in loan volume is more than offset by the decline in margins.

Production sector margins with 32 basis points of loan production compared to 64 basis points for the third quarter of 2004.

Production margins were primarily impacted by reduced gain on sale margins for prime and home equity loans combined with lower net warehouse spread.

Loan servicing sector pretax earnings were $258 million, up $281 million from last year's third quarter.

Servicing sector results were aided by a 38% increase in servicing fee revenue as a result of our portfolio growth.

For mortgage servicing rights and other retained interest, amortization expense increased by $259 million due to the new -- due to the low-interest rate environment at the beginning of this third quarter.

This was largely offset by an improvement in [intamerate] recovery, net of hedging results of $221 million.

The third quarter of 2005, the recorded increase in the value of MSRs and other retained interests more than offset the decline in value of hedges and the cost of hedging by $16 million, compared to a net impairment in the third quarter last year of nearly $205 million.

The $16 million net recovery includes hedging outperformance resulting from a market sell-off that more than fully absorbed hedging costs for the quarter of $139 million.

After such an selloff, this outperformance might not be repeated, but it also must be noted that the servicing sector results were negatively impacted by $51 million pretax, $31 million after tax related to the hurricanes, which also would not be repeated absent specific conditions.

Let's turn our attention to production margins.

The chart on slide 8 shows this sequential quarter trend in gain on sale margins, a significant component of all in margins.

Of all in margins.

Prime gain on sale margins declined modestly to 75 basis points, down 7 basis points from the third quarter of 2004 and 4 basis points from the second quarter of 2005.

This decline was largely attributable to decreased margins in pay option adjustable rate loans.

For the non-prime product, the gain on sale margin increased to 228 basis points, up from a reported 121 basis points in last year's third quarter.

The year to year gain on sale comparison is favorable to the timing of the recognition of economic hedge losses during the third quarter and the gain on sales during the fourth quarter of 2004.

Compared to last quarter, the [undefined] gain on sale margin increased 38 basis points.

Home equity gain-on-sale margins decreased 75 basis points from the third quarter of last year, and 183 basis points from last year to 219 basis points in the third quarter of 2005.

The decline in the last quarter is a substantial increase in sales in the third quarter which reduced the basis point contribution to gain on sale from recurring items such as subsequent draws.

Across all three product categories, certain loans were retained in inventory at Countrywide home loans, September 30, 2005 to optimize a best execution strategy.

With non-prime loans in particular, sales execution is currently more advantageous when closed loans are placed into pools.

We expect to sell these loans held in inventory at a later date.

Slide 9.

Describes our banking segment which includes Countrywide Bank and our warehouse lending group.

This discussion will focus on the primary component, Countrywide Bank.

At the end of September, assets from Countrywide Bank reached $71 billion, more than double the level of a year ago, and more than 4 times the amount at September 30, 2003.

Pretax earnings for the banking segment were $278 million for the quarter, an increase of 71% for the third quarter of 2004.

The banking segment contributed 26% of consolidated pretax earnings compared to 21% in last year's third quarter.

Obviously the increase in bank assets has been the dominant factor in the banking segment's rapid earnings growth.

Slide ten shows the composition of the bank's loan portfolio and how it shifted over time.

The components of the portfolio are our home equity loans, pay option loans, hybrid ARMs, fixed rate second mortgages and other products.

The most notable trend on this graph is the increase of pay option ARMs.

This has resulted in a shift to an overall shorter duration over time which results in a more stable earning stream from the Bank.

Turning to slide 11, you can see the Bank has been very effective in closely matching the duration of this asset and its liabilities.

Going forward, there's a positive indicator of the Bank's ability to perform well in a wise interest rate in environments and fluctuations.

Moving to slide 12, pay action ARMs are the primary driver of the Bank's recent margin and returns trends.

We view these loans as an attractive short duration, high-quality investment that is already contributing and will continue to contribute to the bank's substantial stable earnings stream.

Growing this portfolio in a period of rising short-term interest rates has resulted in a temporary compression of our net interest margins, this margin compression should be viewed as investment in future high-quality earnings.

The temporary nature and cause of this compression can be seen in the top three lines of this chart.

As you can see, our steady state interest margin, the margin exclusive of rate lag and teaser rate costs has been remarkably stable over this time period.

Two factors primarily account for this trend in net interest margin.

First, the cost associated with interest-rate lag has been significant as the Bank has built a substantial portfolio of newly originated pay option loans tied to a lagging interest during a period of rising short-term rates.

This cost has been substantial, rising to 28 basis points in the third quarter, but is expected to come down over time as short-term rates stabilize.

Second, asset yields are skewed downward by an influx of loans with low introductory rates, often called teasers.

While loans with teaser rates we set within one to three months, our high growth rate means new loans are replacing the ones resetting.

As shown in this chart, teaser rates costs rose 27 basis points in this quarter.

This cost is expected to decline on a relative basis as the portfolio grows in a relationship to quarterly fundings.

Pay option ARMs have recently been portrayed negatively.

But we view this product as enabling us to better serve qualified customers looking for a more efficient and flexible way to manage their obligations.

It is also an excellent asset for our portfolio, given our mortgage loan origination, servicing and risk management competencies.

And the prime quality of our pay option borrowers.

Our pay option ARMs represent a very profitable product with high margins, a floating rate, prepayment penalties and a very stable prepayment behavior.

Our pay option portfolios have very high credit quality, characterized by high FICO scores, solid loan-to-value ratios, and a low debt-to-income ratios.

Our borrower base consists of sophisticated borrowers who are qualified at the fully indexed rate and fully amortizing payment.

Borrower qualification requirements results in debt-to-income ratios within guideline tolerances, virtually all interest rates shock -- within all interest rate shock scenarios.

In addition, we have mortgage insurance on loans with greater than 80% LTV at origination.

Our pay option portfolio is actively managed with sophisticated modeling to control risk, resist [glaring] and careful monitoring to avoid speculative markets.

Our experience in servicing a trillion dollar portfolio gives us a significant advantage in managing delinquencies and losses, and there is a proactive notification to consumers regarding utilization of the minimum payment option and the resulting negative amortization.

As you would expect, our pay option portfolio has exhibited outstanding performance displaying both exceptional delinquency and lower and more stable pre-payment relative to other loans.

Moving to slide 14, let's focus on some of the attributes of the pay option product.

The amount of the pay option loans and the bank's portfolio now stands at $22 billion, up from $16 billion in the last quarter.

As can be expected, in an environment with rising short-term interest rates, the dollar balance of loans with negative amortization has been increasing and now stands at $7.9 billion.

The amount of cumulative negative amortization, however, remains relatively small at $25 million.

While the rising negative amortization may be of concern to some, it is important to note that our loan quality remains high.

Countrywide CLTV, combining loan to value, and an original loan to value are 78% and 74% respectively.

Average FICO scores on the portfolio are well above 700, Delinquencies remain low relative to other loans of comparable product type and vintage.

Slide 15, offers a similar look at our portfolio of interest-only loans.

The balance of IO loans actually declined slightly from prior quarters and now stands at $14 billion.

As in the case of pay option loans, we mitigate credit risk through accepting only high-quality assets on our balance sheet.

The pay option loans, we mitigate credit risks in our balance sheet.

The original combined LTV and the original loan to value on IO loans are 81% and 76% respectively, while FICO scores remained a steady 735.

Slide 16 shows the loan loss reserves for the bank as well as the provisions for loan losses for the bank, The CHL and for the consolidated company.

As you can see, we maintain a conservative policy relative to our chargeouts and nonperforming assets.

The provision for loan losses, which rose this quarter, was primarily driven by estimated hurricane losses.

Other factors which impacted our quarter-to-quarter positions are the rate of growth in our portfolio, the mix of new loans being added and the rate of change in delinquency in the portfolio as it seasons.

Having said that, the credit performance of our loan portfolio is measured by delinquencies and chargeoffs have been outstanding to date.

The bank's delinquency by vintage continues to develop in line with or better than expectations for each major product segment.

Our bank reserves relative to nonperforming assets compare favorably to other banks.

This is a reflection of both our conservative loss reserve policy and the high-quality assets we have on our balance sheet, compared to other banks.

The next section of our presentation covers our revised 2005 earnings guidance.

Beginning on slide 17 you'll see the new range is $3.85 to $4.40 per diluted share compared to the previous guidance of $3.85 to $4.60.

With this in mind, our guidance assumes the relevant range for the size of the mortgage market 2005 should be 3.0 trillion to 3.2 trillion.

In addition, our guidance assumes pretax mortgage banking pretax profits will ranged from $2.3 billion to $2.8 billion, and the pretax earnings, contributions or other business segments will now range from $1.6 billion to $1.7 billion.

This revision was primarily driven by hurricane losses in our insurance segment.

Slide 18 shows more detail behind the guidance.

Average consolidated production market shares are expected to be within a range of 14.5 to 15%, declining volume for Countrywide of $435 billion to $480 billion.

The range for pretax production sector margins is 40-50 basis points, which compared to previous range of 40-55 basis points.

The implied production sector margins for the fourth quarter are 25-70 basis points.

On the servicing side, the estimated average portfolio balance is $970 billion to $990 billion.

This net pretax servicing margin after impairment or recovery and hedge gains or losses expect to be 2-6 basis points compared to the previous range of 1-6 basis points.

This final slide contains a disclaimer regarding the forward-looking statement, including this presentation which I encourage all listeners to review.

Before opening the lines for your questions, I'd like reemphasize that despite the pessimism that surrounds our industry these days, Countrywide delivered an outstanding quarter.

Earnings were up 27% from the same time -- same quarter last year, despite substantial negative impact from our losses related to Hurricane Katrina.

Underlying the earnings growth, Countrywide continues to make substantial advances in three key operational metrics, production of market share, which grew by at least 1.6%, depending on which market estimate you use, serving portfolio size now over 1 trillion and bank assets now over 70 billion, more than double the amount of a year ago.

Based on Countrywide's delivering such a strong quarter admidst the challenges of today's market, I'm confident that our Company's dedicated, hardworking people will continue to deliver excellent results on behalf of our shareholders.

Thank you and now I would like the monitor to open the line for questions.

Thank you, Mr. Mozilo, and our host panel;

I'd be happy to. [OPERATING INSTRUCTIONS].

Representing Raymond James, our first question, we go to the line of Mike Vinciquerra.

Please go ahead.

Thank you, good morning.

I wanted to ask a big picture question.

There's been talk in the Bush administration about a proposal to limit the interest reduction on mortgages and also possibly eliminate the interest reduction on the home equity product.

I was hoping you could comment on whether or no there's a possibility it actually passes, and what impact it might have on your business?

Let me give you my thoughts on it.

I think the probability for it passing at least in this session is slim.

But I think you have to view it this way: Believe we're the only country that has a estate deduction, or tax reduction for interest on mortgages, and the home ownership rate in many other countries are as high as ours.

I don't think people buy houses for interest-rate reductions.

That happens to be something that comes along with package.

They buy homes because they want to have part of the American dream.

Be part of the American dream of home ownership.

But the reality is, they've been given that opportunity of having an interest rate deduction and it's hard to take it away.

My thought is this: That they'll probably not eliminate it, but they'll probably reduce it again.

Before it was infinite, up to any amount, reduced it to interest on a million dollars I think they'll come down some number around $350-400,000.

At that level, you can have an estate deduction to that level.That will cover probably 90% of the people in this country, and it won't be a big uproar.

So I think that a reasonable common ground will be developed as they go through this progress.

Thank you, and just the effect of on home equity would that be a big impact?

No, they need the money to for various reasons, to consolidate their other debts or primarily make home improvements and they don't think about the interest rate reduction.

Typically, the average loan is $200,000, these people don't -- that segment is not focussed on that, they're focussed on need more than tax deduction.

Thanks very much.

Thank you, Mr. Vinciquerra, and next representing Piper Jaffrey, we go to the line of Bob Napoli.

Please go ahead.

Good morning.

Question on the expense controls.

Maybe a broad question.

What do you see different about this cycle?

The one thing I notice about the industry and yourself, one noticeable difference about Countrywide if you go back a couple cycles, typically you guys were cutting headcount pretty aggressively as you forecasted a slowdown and now you're using a different payment structure.

So I was wondering if you could comment on the overall cycle and what you see in the mortgage world and what you expect and how you what you see different about Countrywide operationally through this cycle?

Countrywide hasn't changed, the culture is immutable, and have hopefully forever, you'll see us act very, very quickly if you see volumes begin to deteriorate.

We have not seen that issue, seen by our closings, we've broke a record, two months in a row.

We're going to break a record overall and my belief is, overall closings of the year, versus the biggest year in our history, 2003.

So right now the activity is very vigorous, all throughout the country.

In all areas of the business, not only in the mortgage origination sector, but all channels of that sector, but you can see the volumes in Countrywide securities, the bank is growing at a very rapid pace, the insurance company, as you know, has had problems, we're making substantial cuts there, but the culture is that we move very quickly so that there's Countrywide of 2005 is not different than Countrywide of 1995.

So that the culture sticks.

In terms of the industry, I think you're going through the normal cycle.

And some of you, Bob, you've been following us a long time Vince has, and many people on the phone, and that we're going through a cycle now.

And absent to any force majeure, like 9/11, rates are going to continue to climb and you have built up capacity, therefore you have built up capacity and people are going to scramble for a while and then they're realization is you'll see consolidation and hear more companies being sold in this next 12 months and that's the cycle we're going through, once the capacity is used up, we'll go book to normal margins and continue to grow our market share.

At this juncture hat we're doing at this period is we attempt to go out and pick off the best people in the industry to strengthen our operations.

So as we go through the next end of the cycle, we're prepared to continue to pick up market share.

I must say my last trip to the east coast, and speaking to 50 or 60 or 80 or 100 investors, I think the encouraging thing to me was that I've never seen such pessimism by the investing community relative to the industry.

Not only not a light at the end of the tunnel, you can't even hear a whistle.

And to me, that was extremely encouraging.

And so, you'll see Countrywide operate over the next, over this cycle as they have in every other cycle.

Quick to act, quick to make sure the Company is structured for the environment that we're in.

And then take advantage of what, I believe, a lot of opportunities come up.

At least in the next 24 months as other companies not as efficient, not as ethocentric, begin to have problems.

Thank you.

You're welcome.

And thank you very much Mr. Napoli.

Next we go to the line of Michael Hodes, representing Goldman Sachs.

Hi, good morning.

Two questions, first on the servicing sector.

I noticed a healthy increase in the escrow balance benefits, I wondered if you would comment on that trend and the benefit from the rising short term rates.

If you would elaborate on that.

And secondly in terms of the bank, there were some comments in the release about capital raising you've done recently.

I was hoping you would give us some context around of what you feel, just looking forward a little bit, you could add to the bank while maintaining the right capital levels at the corporate level.

Just to get a little more clarity on that.

Yeah, on the escrow balances, this is somewhat axiomatic, as rates rise, we benefit in several areas, one certainly in the escrow balances because the rates are higher than we have to pay out to the consumer as each state requires, and that spread begins to increase as short-terms begin to rise.

We're a beneficiary, as part of macro hedge, we're a beneficiary of high interest rates both from the standpoint of escrow balances and having slower prepayments speeds.

People not refinancing as much in that environment.

Also a beneficiary in the insurance company because it carries about $1.2 billion, $1.3 billion in cash and investments, and is subject to and lives off of the earnings obtained on its investments.

So it's a beneficiary of it.

So as far as the bank is concerned, and I'm going to turn this over to Eric -- okay.

So turn this over to Eric if you want to speak on it, Eric.

I just got a note that the bank is a big user of capital and there's no question about that and you can see it in the statement.

And what proportion is in the bank today almost 50%.

But the bank can now grow to $100 billion in 2006 without any additional capital infusion.

So we can focus on our capital on other businesses.

Okay, and just one other question on the bank as it relates to escrow balances, I know that that's a nice source of funding, how does it work from an allocation standpoint?

Is some of the pickup that we're seeing on the servicing on the escrow balances?

Does that come out of the bank?

Yeah -- This is Stan Kurland Basically we have a charge or the bank pays market rate levels to the servicing segment or to Countrywide Home Loans for the use of those balances so that, from the servicing sector perspective you're seeing the returns that they would enjoy regardless of what they were using the bank or an outside party, there is an advantage, obviously, to using our own bank to utilize balances.

Thanks a lot.

And thank you very much.

Our next participant will go to the line of Bruce Harting representing Lehman Brothers.

Please go ahead.

Two questions.

One on your conversation about why the home equity gain dropped so much.

And I think I missed the meaning of that and the other question, can you just remind us of the moving parts now that rates are rising and prepayments may be slowing in the components on slide 7?

Which you went through, but, is it safe to say we've turned the corner here on loan servicing income and we'll probably start to see realization of the higher basis point income stream from loan servicing?

Thanks.

This is for Stan, but I think generally speaking, it's always been the case that when rates rise, the prepayments slow down, and the rate of slow down depends on the rate of rising interest rates, and so, Bruce, you've seen this over many years, this cycle is certainly not any different than any other cycle you've seen in terms of prepayment speeds or the impairment of the MSR.

Stan, why don't you --

Bruce, it's a little -- there's a bit of noise in the home equity margins, and most of it comes from subsequent draws versus the volume of loans which we're selling in the quarter.

And so -- in the third quarter, sales of home equity loans were about $10 billion versus in the second quarter they were about a little over $3 billion.

But subsequent draws are a pretty stable level of activity that runs through that increase in balance from subsequent draws is a value that's captured at the point of the subsequent draw and feeds into gain on sale.

So when we have the big stepup in sales that you see in the third quarter, because and that took place primarily because like the economics of holding the pay option ARMs versus home equities at the bank, but that big increase works to reduce the basis point -- gain on sale and that's a significant part of what you're viewing.

And that difference and that change.

And then there is a -- a level of margin compression in that product, as well.

And that's a smaller number well within about three eighths of a point.

So I hope that's helpful.

Thank you.

Thank you very much, Mr. Harting.

And our next participant in queue, we go to the line of Paul Miller representing FBR.

Please go ahead.

Thank you very much really quick Angelo.

You didn't give '06 guidance this time around, Usually around this time, you do.

I'm just wondering, are you having any plans soon to give us some '06 guidance to some of these numbers?

We'll plan to do it in the fourth quarter.

When we get further along in the fourth quarter.

When did we give it last year?

We gave it in a November investor forrum last year.

Timing is not going to be much different than it was last year.

You say sometime in the fourth quarter you're going to give it?

Yeah, sometime.

It may be during the fourth quarter, it may be when we report fourth quarter earnings in January.

Okay, and then the other issue is on the gain on sale stuff in the subprime area, we know that the whole space has been getting beat up on the gain on sale, and on your side you reported non-prime up a little bit.

Are you seeing any relief at all in this subprime area in the gain on sale?

I think you can see from our results that basically we've seen that stabilize, and we have -- actually a little bit of a pickup from the previous quarter, but basically it seems, to have stabilized, there was some, I think, public comments by other subprime originators that they had moved their prices up, and that took pressure off of the market as well.

I know that there's still a lot of people out there that are looking at loan bids and still seeing a lot of pressure out there.

And I think it does surprise us that yours went up a little bit.

Do you see any turning point?

Do you think people felt the pain to the point where you're going to ratchet up or do you think they'll be somewhat irrational going forward, too.

Well, I think what we're seeing is more than normalization of subprime margins, that they were high, partly driven by a steeper yield curve, and a lot of demand and right now we're at a point where they're just reaching more levels and seems the pressures clearly reduced, but I don't think, at least from our perspective, I don't see any margins going back to the type of levels that we had.

A year ago.

Just to add to that.

Excuse me, the what you saw happening when you go back in and look at the history of the subprime, it was a area relegated to smaller boutique companies that focused on it because it had very high margins and the mainstream players, such as the Banc of Americas, the Wells Fargos, the Chases, Countrywide, is not in there competing for that product.

As prime margins decreased substantially, and you surveyed the landscape of what opportunities you might have out there, it was obvious it was in the area of subprime and therefore, virtually at one moment in time, simultaneously, all of the major players got into subprime area, and that in effect began lowering the margins, the competition and the fact that it doesn't take 300-400 basis points for a company like Chase or Wells or Countrywide to make it a profitable product.

And secondly, there's a concern over and should be the predatory lending issue.

And so all of the combination of that, I think that Stan is correct, we're e getting to a more normalized margin, and I agree that it's not going to go back to where it was.

You guys reporting, that's probably more of a normal state and that's where we can model in going forward the with some noise?

We're still in a period of adjustment mere, the news that you get about subprime margins is generally from monoline players that are exclusively dependent on that product.

Countrywide and other big lenders, subprime is not as big as of a factor.

Subprime wasn't even 10% of our fundings for the quarter.

So it's much less of an issue for us.

I'm not prepared to say that the adjustment in margins is over yet, it's going to depend on the behavior of these other competitors, we'll see where it goes from here.

We're very pleased that we saw the 38-basis-point uptick in margins..

Thank you very much and good quarter.

Thank you very much Mr. Miller.

Our next question we go to the line of Neil Abromavage of Deutsche Bank.

Please go ahead sir.

Thank you very much, good morning, gentlemen.

Good quarter.

Just listening to that last response, it sounds like there's never a better time to be a subprime lender.

As you think about the competitive climate from both a private and underlying perspective, is it your assessment that mortgage lenders are getting paid for the risks that they're taking and how is the secondary market execution impacting your ability to sort and manage your business?

And the second question would be, if you look the a your production margin, well within the range of what you're predicting for the full year '05.

Heading into the quarter is that 32 basis points in line with what you're expecting?

Thank you very much.

Okay.

What I would tell you about production margins is that we are exiting a refi boom period where we had extraordinary production margins, 90-120 basis points.

If we went back to 2000 and prior, before the refinance boom, if you ask me what normal I would have said 30-50 basis points at that time.

The 32 basis points for the third quarter is clearly within that range, we're in a period of adjustment here, and we've given you guidance that implies that what the margins will be for the fourth quarter which is at or just above where we performed in the third quarter.

So we're happy with that compensation, part of your question was are lenders being compensated for the risks that they're taking?

We were compensated very well during the period.

Consumer demand for mortgages far outstripped lender supply, that's why you saw our margins increase so dramatically.

Margins were in line with your expectations during this adjustment period.

To answer in another way is that I believe that the responsible lenders who are -- who are insisting on high FICOs, high LPVs are being properly compensated for their risk.

If they're going out and making low FICO 100% loans and minimum to no documentation at the spreads that we had seen today, no they're not being compensated for their risk.

It depends upon the quality of the loans you originate.

Let me add from the perspective of loan originations, you have broad scale of originators from very small mortgage banks to large mortgage banks, and economies of scale play very much into whether or not the economics provide an appropriate return, and that's why we're so convinced that the market is headed to significant consolidation of smaller lenders and the larger lenders, like Countrywide will benefit because our model produces acceptable returns at these levels.

One other thing to consider, Neil, is that to the extent we sell these loans into the secondary market, our credit exposure is greatly reduced.

The bank where we retain credit risk is generally buying less than 10% of the fundings of the largest originator in the country.

And they took advantage of the fact that they sold loans back to us to select the loans that they chose to keep in their portfolio, so they were able to sell us back seasoned loans, so with a second glance, they were able to parrot those out.

So that's really where you should focus on the credit risk, is what we retain at the bank, And they're obviously selecting the finest product that we produce.

Thank you very much.

That was a terrific answer.

Maybe one last quick one, Eric, as you sort of look at the supply coming to the secondary market here in the fourth quarter markets -- any sort of commentary there?

The back end of the secondary side has relatively unaffected.

We aren't seeing in issues in terms of investors whiting out spreads, things have been relatively stable.

The margin compression has been more on the front end in terms of pricing to consumers.

Great, thank you very much.

Once again great quarter.

We go to the line of Mike McMahon representing Sandler O'Neill & Partners

Can I just find out the inventory of home equity and subprime loans at the end of the quarter please?

You're talking about the bank or the parent?

At the parent level.

At the parent?

Okay.

Balance sheet.

We're looking it up right now.

How're you doing, Mike?

Doing very well, thank you.

You can just read it out later when you get it go on to the next call.

Close to it?

Okay they're going to look and we'll give it out to you Mike, stay on the line.

Thank you.

We'll take the next call.

All right and thank you very much.

Our next question go to the line of the Jonathan Gray, representing Sanford and Bernstein.

Please go ahead.

Jonathan?

Yes, Angelo, in light of the fact that we're going in all likelihood into an environment of substantial reduction in loan origination volumes, is the Company's strategy likely to be one of aggressively pursuing market share expansion at the expensive margins, historically, the company was very quick and very nimble in reducing its personnel and cutting overhead when you would go into a cyclical decline, but now your overarching strategic goal is to expand market share fairly aggressively, and so the question is, would you be inclined to bludgeon your competitors, although it would be brutal to your own production margins in order to expand share, or would you defend margins?

Should your shareholders be prepared for weak earnings and pressured margins over the next two or three quarters?

Is this something the Company should identify as an expected environment, given your strategy?

Or not?

Thank you for the wonderful and profound note you sent me, it had quite an impact on me.

Thanks, Angelo.

Let me go through this because I think it's a question that requires a global answer.

The strategy of Countrywide up until several years ago was one without a sales force.

And therefore, all of our expense was fixed.

We had very little in flexible expenses.

And as a result, when volumes went down we had to cut severely because we had no way to reach out to penetrate the market.

The market had come to us, we didn't go to the market.

And that's why we had a history of doing fantastically well when there was a big refi boom because we always had capacity and efficiency.

But as it receded, we suffered the sequence consequences of that.

We're a totally different company today.

We have some 15, 16-18,000 people in field and that's enough salary, they're commissioned people out there.

Where the volume would whatever that volume would be, and let's take a scenario that you laid out where you have reduced volumes.

We certainly would cut very severely inside to where we're experiencing -- we have payments to individuals not based upon volumes ,it's fix expenses, but we would cut there, but we would keep our forces that are commissioned forces to gain market share.

So I think we have a strategy now that puts us in a position where we can cut our expenses, but at the same time seek market share without giving up margins, that's not our strategy, and we believe we can effectively do that.

If it came a choice of increasing volume and giving up our margins, we would not do that.

Thank you.

You're welcome.

And thank you very much Mr. Grey.

Next we go to the line of Ken Bruce representing Merrill Lynch.

Good morning, thank you for the questions.

It looks like in the quarter, and you'd mentioned it in the earlier comments that you had retained a significant amount of loans that were not sold in the quarter, and I was wondering if you could give us some additional clarity as to what may stimulate those in the future or if you would looking to ultimately increase your investment on loans on a little bit longer term basis, separately?

You mentioned that the HELOC margins in terms of gain on sale had been a little lumpy due to withdrawals.

I want to clarify, does that mean in future quarters if you have additional withdrawals in those home equity loans that you may actually see the gain on sale expand in future quarters?

Let me just take the first part and you guys take the rest.

In terms of the -- the first part of your question -- I want to get the first part first.

Give me the first?

You retained quite a bit of loan inventory that was not sold, and I was interested if that might be just a timing issue or if there was a strategy to just retain higher levels of loans or if there was something that, in the secondary market that basically suggested that you may want to sell those at a later date or kind of what the dynamic in terms of holding inventory verses selling.

The demand is orchestrated in a very careful way.

Management spends an enormous amount of time sure we maintain as exquisite balance as possible.

Between the buildup of income over time and gain on sale.

So that we're dealing with current earnings of the company, which is essential.

We're now in a position where we're doing both.

We're looking at where we can get the most opportunistic and the best product to put in the bank, so that over the next years the company will continue to try to maintain that balance as you've seen us do in the second quarter.

You saw us put a pile of loans into the bank, high-quality to the bank, but then you saw us in this quarter sell more into the secondary market for the gain on sale, and that's going to be a constant effort on our part to maintain that balance.

For the rest of the question, Stan?

Just going to go back to the previous question, on the volume of loans on home equity and subprime and that amount.

Was $7.2 billion in non-prime and home equity was 1.8 billion at the end of the quarter.

In terms of loans that were holding at the end of a period, it is a function of the ability to securitize and deliver and to get best execution on those deliveries.

So you can imagine that loans closing on the last days of the month are difficult to deliver out, for example, into -- in the same quarter so you're always going to be holding something, we do have discretion to hold and, to deliver and build big pools of mortgages for securitization, and that's part of the strategy around subprime and HELOC mortgages as well.

And we enjoy warehouse spread on the higher rate mortgages as well, which adds to net interest income, but it is something that we work through and coordinate very closely all throughout the quarter in terms of capital -- requirements, and looking at best execution.

Great, and my other question just in regards to the lumpiness of the home equity gain on sale?

Yeah, let me just make sure that I'm clear on that?

The issue is subsequent draws, so on a home equity loan of credit there's going to be additional draws, and that value of the additional draw or added principal in the future isn't something that is picked up in the gain on sale at the point of -- that we've sold the base HELOC in the past, but it is.

It does become part of gain on sale when the draw is made.

And so that draw amount, given the size of our portfolio, is pretty standard level but there's fluctuations in the sales of volume of sales, so when we sell, higher levels of home equity, just has the mathematical impact of reducing the basis point gain on sale and that's what you're seeing.

It has about three quarters of a percent impact on the -- what you're looking at and margins on home equity in the third quarter versus second quarter.

If the draw downs in the future you would recognize that the gain on sale associated with that higher level withdrawal in future periods?

Yes.

Yes.

That's correct.

If overall reduction of -- if there was a reduction in the amount of HELOC sales in the quarter, we would still have subsequent draw gains and that would produce higher gain on sale margins as compared to the base sales.

Okay.

Thank you.

Thank you very much, Mr. Bruce, and our next question we go to the line of Ed Groshans, representing Fox-Pitt Kelton.

Please go ahead.

Good morning gentlemen.

Just on the in the servicing side, you had the large write up and the retained interest, and I was just wondering what drivers you were seeing that led up to the write up of those instruments and then if there were any particular piece that benefited more, whether it was the net interest margin securities or the prepayment bonds that are benefiting.

You know, I'm not sure what you're referring to, MSRs increased in value in the during the quarter as a result of a rise in interest rates.

We had a net impairment on the retained interest.

The 221 in your press release the 221 million.

The rise in retained interest of 221.

The reason is retained interest increased because of sales of subprime and home equity.

Stan is correct, we did have impairment in terms of the subprime because of rising short-term rates.

Basically you have 228, 327 collateral that has a fixed yield for the period and then short term rates rise to pass through to the investigator's increases so therefore you have a little bit of compression in your residual values.

The interest is because of the sale of new loans.

We sold $10 billion of home equity up from $3 billion up from prior quarter.

We sold $11 billion of subprime.

That's driving the increase of the residuals.

Okay, and I don't know, I don't think you've ever broken it out before, but can you at least discuss, I guess, the break down between the gross gain on sale margin and the uses of hedging gains and losses?

And, I'm looking for the gross gain on sale for prime and non-prime pieces.

I don't know how much an influence the gains from hedging had on a non-prime piece?

You want that answer offline?

Sure, okay.

You call Eric, we've got to pull apart some of these statements.

Can I ask one more question?

Sure.

The bankruptcy bill, there's been a lot of talk about pull through and things along those lines, do you expect any benefit to come through, I guess, in the longer term as people clear up their unsecured debt and free up cash?

Well, in some respects we tend to be a beneficiary of people going through bankruptcy because they tend to do is going into a bankruptcy process, which requires two chapters to do that, is to, what it does is eliminate all of their non-collateralized obligations even including their car payments, and they maintain the home.

And as long as they continue to make payments on time they can keep it out of the bankruptcy.

We're a beneficiary because now they have no other payments but to us.

What I'm hoping it does, and I'm not frankly intimate with the bankruptcy law, the problem is it's abused and it's where a family of three or four people will go, once we get through the first bankruptcy, holding off a foreclosure and then the other person the family declares bankruptcy, and that's over with, you go three months with that, and then you go on years while they screw with the bankruptcy law and abuse it.

And we're hoping in one of the changes that were made is to cease that abuse.

All right.

Thank you very much.

And thank you Mr. Groshans.

Our next participant in the queue, we go to the line of Mark Patterson representing NWQ Investment Management.

Please go ahead.

Thanks, a couple of questions on servicing and production.

As we look at the servicing sector break down and we see 10.4 basis points for the third quarter, should we be looking at that as having a $50 million pretax Katrina effect and really the 10.4 could be 12.4 because that's reflected in the impairment of the retained interest?

It is the case that the servicing segment has been reduced by Katrina losses of $51 million, so that's accurate to simply, I want you to consider what we've indicated both in the highlights and the press release that we had very good performance on the servicing hedge activities that covered the normal decay of options, we call the, data costs of running the hedge activities and that happens from time to time.

But that also is something that is, planned repeatable activities that really depends upon the direction of the market.

Understood, you guys, and you did have great hedging performance.

One other question, on servicing and going forward for the fourth quarter, you've given good guidance on this in the past, the business picked up 40 basis points in the quarter, finished at 434, we would expect the schedule to be reduced.

I'm guessing to the tune of $150 million plus, does that sound like in the ball park for the fourth quarter?

Actually, Mark, no, that's not right.

Our expectation for amortization in the fourth quarter is $670 million, up modestly from the $653 that we had in the third quarter.

You are capping at a higher rate at about 133 basis points and you had a significant write up in the pre-existing MSR as well.

Okay, got you..

Over time, so it modestly offset --

I think it's also important to capture the fact that there's added revenue with a larger portfolio.

Definitely, there would be an offset there.

On the production side, if I look at the production sector -- well even in the press release where you guys actually show your production at $131 billion but only sold $121 billion.

And even if that was a decent mix of your overall sales that you held back that $10 billion that was at 97 basis points, given that most of it is in the non-prime sector, I would assume what you held back was more valuable than 97 basis points.

That actually if you throw that into the production sector break down, we wouldn't see 32 basis points, we would see something closer to 40 because that's all based on production volume as opposed to sales, right?

That's accurate.

What you're saying, is that if we were able to or had we sold more of the current period production, we could see higher gains.

Mark, this point is illustrated on page 7 of the press release in our table.

We show that in the mortgage banking sector total production was $131 billion, loans sold was $121 billion.

The 10 billion of excess was roughly $6 billion of prime, $4 billion of non-prime.

But that mix would be better than the 97 basis points.

I'm just saying if it were even 97 basis for the $10 billion, you'd have another $100 million of gain on sale revenue.

That's a fair point.

That would add, I'm guessing, about 8 basis points, and send you back up to 40, so you really didn't have any degradation at all verses the last quarter.

That's correct.

That's great performance.

Thank you very much.

Next we go to line of Eric Wasserstrom with UBS, please go ahead.

Great, thanks.

You guys touched on this a little bit, but I was wondering if you might clarify what you mean when you talked about getting the better execution on closed loans.

Subprime loans are placed into loan pools.

Why is that?

It's just in terms of creating securitizations, it's helpful to have a large pool of loans to be picking from and to structure the securities from so we look to create large securitizations and we need a variety of loans to pick from and so it's helpful to have considerable volume of loans.

A little bit different than 30-year fixed rate pools where you can deliver in very small dollar levels, it's homogenous and isn't going to affect execution.

Okay, and so previously you were doing it on just basically like a flow basis is that right?

We've always held typically had periods where we're holding subprime production and then there's periods where we've blown out the inventory as well.

We're examining the markets and selling and timing sales and what we think is in the best interest of the company.

What I think is important relative to that question, is the point that Stan is attempting to make here is that these sales, whether it be sales originations, all has to be thought about virtually every minute of every day, and everything we do, we try to maximize the execution, and to do whatever it takes to maximize it.

To get better execution, we're constantly doing to think that we had one handle we can pull and just continue to pull that handle one way and get the same results, it's just a company that can't operate that way.

Everything we do has to be thought out very very carefully, each and every day to make sure that the end of any period, we've done the best that we possibly could to maximize the value of the assets of the company.

I certainly appreciate your thoughts on this one.

Just so I'm clear, did change in strategy have any influence on the 38 basis point uptick in the subprime gain-on-sale margins?

Well, you know, had we sold more that a higher number.

In terms of gains recognized.

It's fair to say on the loans that were sold that we did benefit from the better execution.

Great, thanks very much.

And thank you very much.

Our next participation in queue is George Sacco with J.P.

Morgan please go ahead sir.

Two questions.

First, it looks like the dollar amount on subprime residual, at least that you disclose on your financial sales, looks like it was down a quarter over quarter.

Wanted to know if you did any sales or what drove that?

And as for the capital issue with the sub that you issued.

I believe you're going to get less credit for that starting in March because it will be less than 5 years to maturity.

I know, you've talked about looking at other solutions to the capital problem, but have you considered backing off of the growth targets for the bank as a way to conserve capital and maybe help the profitability of that business a little bit?

On the first part of the question, when looking at non-prime residuals, you have to be careful, available for sale and as trading securities, if you aggregate those two, you'll find that non-prime residuals went from $425 million at December 31 up to $549 million at September 30.

So it's very important that you aggregate both the available for sale and the trading securities.

Now, with respect to the capital issue, the sub debt is callable at the time you're talking about and a consideration we'll have at our disposal at that time.

We don't view that as an issue at all.

As far as capital, this question was asked before, we got cut off we didn't get a chance to answer it.

The changes that occurred is that we've been operating in an environment being above 11% total risk-base capital at the parent.

It's very easy to have that excess capital available to grow the bank very very quickly.

We undertook several measures to get back to that 11% risk base capital level.

That would have been $500 million of subprime debt that you talked about, that would have been loan sales back from the bank to the mortgage company which were sold into the secondary market.

We relieved the capital charges related to having those assets on the books and generated retained earnings from the sale.

All of those measures resulted in us getting back to approximately 11% total risk-based capital at the parent.

We are now in a capital maintenance mode as opposed to operating with that excess capital above 11%.

So we're going to have retained earnings growth to fuel bank growth.

We're going to have non -- let's call them quasi equity alternatives that will not be dilutive to EPS that we can grow in order to fund our growth.

There are instruments out there that basically make perpetual preferreds deductible now.

We're looking at those very carefully.

So we do have other options to grow equity without affecting and diluting EPS.

Other measures that we can take are to look at capital allocations within the Company today.

Are there certain businesses where we can direct the capital to the bank?

So this is a very dynamic fluid process one we look at, and we're not prepared to say at this time that we're going to have inhibitions on bank growth, it's something we're managing very carefully, witnessed by the things we did at September 30.

The issuance of the subdebt and the sale of the loans.

and if I can just, get back to the first question, you do disclose the non-prime in both help for sale and trading? and the help for sale, you have non-prime residual securities, it was -- it actually looks to me like it was down.

Because, I don't know where you're getting the fact that it was up.

Because I add the two together, the decline in those classified as trading was greater.

What I was looking at what was on page 16 of the press release which is December 31 and September 30.

I'm looking versus last quarter.

Yeah, I don't have the June information in front of me.

It's a simple matter of adding those together and we have had residual sales throughout the year and have had those occuring at approximately the levels that we've booked the residuals confirming that we're valuing those residuals proper properly.

That should not have had any impact on the gain on sale margin for subprime.

and the -- just give an update on the sun fish, has that had been fully invested?

They have 250 million in capital and they have just over 200 that's been deployed.

Okay.

Thank you.

Thank you.

and thank you very much and next we go to the line of Kristina Clark representing Wachovia Securities.

Please go ahead.

Yes, thanks so much.

I would just like to better understand the relationship between the mortgage company and the bank as it stands right now.

The mortgage company's been an originate and distribute vehicle, and the bank has an originate or buy to hold model.

And now we're seeing the bank sell loans and sell them back to the mortgage company from where they came not too long ago.

Just like to better understand the flows between the two and if you're selling them back to the mortgage company for risk management reasons, why were the loans placed the bank in the first place and why does the bank not securitize these assets?

So basically, in order for the bank to participate, for us to direct mortgage loans to the bank, they have to have origination processes that are tied into our various operating divisions, and it's very difficult for us to turn that on or off, and it's unnecessary to do that if you don't want -- if we have production that we're looking to sell in a mortgage banking style.

So our very simple solution to that is to allow the loans to flow through the past that has been created and then to sell back to the mortgage bank and securitize in sales through the mortgage bank.

So it's really an operational efficiency issue.

The bank is still growing and accumulating mortgage assets, albeit we're optimizing and making sure that we're handling that relationship as efficiently as possible.

Let me give you a statement from the bank relative to your actual question.

And the question was discuss the rational to the bank to sell some of its production.

The bank is conducting certain mortgage banking operations in the bank in order for CFC to take advantage of the bank's lower cost of funds and federal preemption.

The EOCC provides an umbrella to the national banks relative to predatory lending.

Accordingly, the bank will be engaged in these activity and is you should expect continued mortgage loan sales from the bank.

The bank and CFC, from time to time, may also sell loans from portfolio to rebalance the portfolio to optimize capital and position the bank and CFC for growth in product to become more attractive.

This is what transpired in the third quarter.

CFC sought to sell to allow the bank to grow the portfolio, faster.

So I think, the thing you have to keep in mind in you're an investigator in Countrywide you're going to see us doing a variety of things, we believe always in the best interest of the company, and you just don't turn on the engine and let the engine go, you can't do that in a company -- a financial services company.

You've got to see various movements of loans back and forth we didn't do it from the parent -- from the bank to the parent, we can't do it from the parent to the bank.

But that -- it's just to optimize the return to our investors, to make sure that the bank can keep on growing and it doesn't securitize because it would be redundant.

That's what Countrywide does.

There's a tremendous costs in securitizations, and Countrywide Home Loans does the securitizations so it would silly and a waste of shareholder's money for us to set up a securitization operation within the bank when we have it within CHL.

All of the loans that were sold, were they HELOCs?

It was above $3.5 billion of HELOCs and $1billion of pay options.

and in this transactions you pay market rates, or when the bank buys from the mortgage company or when the bank sells to the mortgage company.

The bank can only sell to the --

the bank receives and we're looking at the separate statements of the bank, when the bank sells back to the mortgage company they receive market value for mortgages when the bank originates in mortgage, they originate at their cost.

Is that okay, you got it?

Yep, absolutely, thank you.

And thank you Miss Clark.

Our next participant is Vincent Daniel with Frontpoint.

Please go ahead.

My questions have been answered.

Just want to congratulate Angelo on the Sunday New York Times article.

Thank you.

Did you like the caricature?

I saw it.

You were very handsome.

I refused to have them send out a photographer so they got me back.

I'm sorry I missed that article.

Thank you Mr. Daniel.

Go to the line of Jason Seo with Standard & Poors.

Please go ahead.

My question has been answered thank you.

Okay, and our next participant we go to the line of Fred Cannon representing KBW.

Please go ahead.

Good morning.

Just a couple of questions, as usual you guys are very generous with your time.

On your pay options ARMs, we've seen your largest competitors.

Golden West and Washington Mutual, raise their minimum payments on their product recently, I was wondering in October, and both of them had stated that they would be continuing to raise those minimum payments over time, Would Countrywide have plans to raise the minimum payments?

We are continuously examining what's happening on that front and watching what our competitors are going as well.

So it is, you know, clearly as short-term interest rates are going up, it's appropriate to see and anticipate that there'll be increases to the to the start rates.

Thanks, and would you expect that to slow volumes?

I think that it certainly will make the product less attractive in terms of initial payments, how a lot of that depends upon how the product looks relative to other options in mortgage products, but generally, we are moving to higher rates and as we've discussed before anticipating a smaller market next year then we had during the current year.

Okay.

Thank you.

Would you disclose what percent of the HELOCs, both in production and the bank are piggy back as opposed to non piggy back HELOCs?

Hold just one second for that.

Do you have any other questions that we can answer?

Just one other one, on the capital issue which you gave a great explanation of, at one point earlier, I believed Angelo, you said that you believed you could grow the bank to $100 billion in 2006 without more equity, I believe, would that go into $100 billion that would include some of the other kind of nondilutive equities that you discussed?

No, actually, that would be incremental above that.

Okay.

We do have --

You believe you can go up to $100 billion based on retained earnings.

That was meant to imply what we can do without any additional infusion of capital.

And the unspoken point that I left out earlier is we're not interested in common equity that would be diluted at this time and we're going to use other alternatives, equivalents, that would allow us to grow our options without diluting our EPS and that was not considered in the$100 billion number.

Thank you.

Ladies and gentlemen we do appreciate the strong interest shown in the company this quarter, however we are out of time so I would like to turn it back to Eric Sieracki for any closing remarks.

Thank you, Brent, I would like to thank you for you interest in Countrywide.

Fred the answer to your your question about piggybacks was 30%.

On behalf of Angelo and Stan I would like to thank everyone for participating.

Thanks for participating, we look forward to another good quarter.

[OPERATOR INSTRUCTIONS].

Thank you very much for your participation as well as for using ATT executive teleconference service.

You may now disconnect.