美國銀行 (BAC) 2006 Q1 法說會逐字稿

Welcome to the Countrywide Financial Corporation first-quarter 2006 earnings conference call.

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

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

Factors which could cause actual results to differ materially from historical results or those anticipated 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 the 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.

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

However, after today's presentation, we will be taking questions and we certainly encourage your participation at that time. (OPERATOR INSTRUCTIONS).

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

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

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

Please go ahead, sir.

Thank you, Greg.

Good morning and welcome to Countrywide's earnings teleconference call for the first quarter of 2006.

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

The presentation can be found on our website, www.Countrywide.com, on the Investor Relations homepage.

Turning to the agenda on slide 2, I'll begin with a brief review of the first-quarter results.

Then we'll talk about the results of the Mortgage Banking segment and for Countrywide Bank, after which I will give you an update on 2006 guidance.

Let's now turn to the first-quarter results in slide 3.

The first quarter of 2006 was characterized by the continuation of a relatively flat yield curve, although overall interest rates continued to rise.

Despite the challenges created by this environment, profitability improved over the fourth quarter of 2005, driven primarily by a $121 million increase in pretax earnings from the Mortgage Banking segment.

What has happened here?

I don't know what has happened.

I can keep on going.

Yes, keep on going please, sir.

Okay.

Let me go back to this sentence.

Despite the challenges created by this environment, profitability improved over the fourth quarter of 2005, driven primarily by a $121 million increase in pretax earnings from the Mortgage Banking segment.

On a per share fully diluted basis, earnings were $1.10 per share, up 7% from the fourth quarter.

Year-over-year consolidated net earnings for the first quarter were 684 million, down modestly from the first quarter of 2005.

The decline is the result of higher interest rates and a considerably flatter yield curve as compared to the first quarter of 2005.

Another factor contributing to the slight year-over-year decline was a $461 million increase in operating expenses for the first quarter of 2006.

This was driven primarily by an increase of $341 million in the Loan Production sector, which had higher origination volume and increased operating expenses as the Company continued to build its production infrastructure.

During the first quarter of 2006, Countrywide incurred pre-tax compensation expenses of $13 million related to FAS 123(R) which requires expensing of share-based payments.

For the first quarter of 2006, the Company also experienced a $44 million increase in the consolidated provision for loan losses.

This increase was primarily a result of growth and seasoning of the investment loan portfolio.

In spite of these factors, Countrywide still delivered a healthy annualized return on average equity of 21% for the first quarter.

This compares to 20% for the fourth quarter of 2005 and 26% for the first quarter of 2005.

Slide 4 shows pretax earnings contributions by segment -- by business segment.

In the Mortgage Banking segment, profitability improved from the previous quarter but declined year-over-year.

Quarterly earnings for the banking segment strengthened both year-over-year and sequentially.

Most noteworthy was the year-over-year pretax earnings growth of 58%, which was driven primarily by the increase in average earnings asset at the bank.

The banking segment represents 30% of the total Company's pretax earnings for the first quarter of 2006, which compares to 19% for the first quarter of 2005.

The Capital Markets group also performed well.

Year-over-year quarterly pretax earnings increased 27%, fueled by greater conduit and underwriting activity, as well as higher securities trading volume.

The Insurance segment generated $65 million in pretax earnings for the first quarter, an improvement of 19% from the first quarter of 2005.

The year-over-year increase is primarily the result of growth in net insurance premiums earned.

Slide 5 focuses on the Mortgage Banking segment.

Compared to the fourth quarter of 2005, pretax earnings for the Loan Production sector increased 179%.

This resulted from improved gain on sale margins which pushed the overall Loan Production sector pretax margin to 30 basis points compared to 9 basis points in the fourth quarter.

On a year-over-year basis, pretax earnings for Loan Production sector decreased 61% to $284 million for the first quarter of 2006.

As previously discussed, this decline is the result of higher interest rates, a flatter yield curve and increased operating expenses to support production infrastructure growth.

Countrywide adopted the newly issued statement of financial accounting standards number 156.

As a result, Countrywide elected to report its MSRs at fair value effective January 1st, 2006.

As such, beginning retained earnings were increased by $67 million.

Because MSRs are no longer constrained by low-com, or lower cost of market accounting, Countrywide believes that future servicing earnings will be more reflective of the true economics of the servicing sector.

For the first quarter of 2006 the loan servicing sector generated $249 million in pretax earnings, up from $17 million in the first quarter of 2005.

The year-over-year increase in quarterly servicing earnings was largely driven by portfolio growth and increased earnings from escrow balances due to higher interest rates.

However, results in the first quarter of 2006 are not directly comparable to the first and fourth quarter of 2005 because of the adoption of FASB 156 and a corresponding change in hedge strategy.

Pretax servicing margins were 9 basis points for the first quarter of 2006 up from 1 basis point in the comparable year ago quarter.

Our guidance for 2006 which I will discuss further, is 2 basis points to 10 basis points for the servicing sector.

Turning to slide six, let's look at Countrywide Bank which continues to perform very well.

Throughout this presentation when I refer to Countrywide Bank or the Bank, I'm referring to the investment and fee-based activities of Countrywide Bank.

The Bank's net interest margin improved from 211 basis points in the fourth quarter to 229 basis points in the first quarter of 2006 as a result of a reduction of prepayment speeds of loans and in the portfolio and fewer days of interest expense in the first quarter.

Interest rate lag and teaser effects were 44 basis points in the first quarter of 2006 similar to the prior quarter.

The provision for loan losses and mortgage insurance was increased from 10 basis points in the fourth quarter to 19 basis points in the 2006 first quarter primarily due to the growth and seasoning of the loan portfolio.

The Bank continued to carefully manage its cost structure.

Compared to the fourth quarter of 2005, expenses grew modestly as the Bank continued to focus on buildings infrastructure support growth and diversification.

For example, the Bank made investments to prepare for the launch of new business initiatives such as its retail savings link product, commercial cash management services and lending to homebuilders.

The Bank's first quarter return on assets was 1.09% and return on equity was 15.6%.

Now let's take a look at the Bank's balance sheet growth on slide seven.

The Bank asset growth continues to be strong.

Total assets were $77.8 billion at quarter end, up 52% since the comparable period a year ago.

Loans in portfolio net of reserves grew to $69.1 billion.

The corresponding increase in liabilities is driven by increased deposit balances which expanded 77% from the first quarter of 2005 to $45 billion at the end of 2006 of the first quarter.

Countrywide's bank deposits base provides the consolidate company with a cost funding alternative.

Let's look at the deposit franchise in greater detail.

On the liability side, Countrywide continues to expand its deposit base as shown on slide eight.

Of the $45 billion in total deposits at the end of 2006 first quarter, $28 billion, or 62%, were consumer deposits.

This compares to $14 billion or 54% of the comparable prior year period.

This consumer deposit growth is being driven by a cost effective scalable hybrid model.

In addition to Internet and call center platforms, consumers can walk into one of 87 financial centers and locations across the United States to open their accounts.

These locations, most of which are placed in existing Countrywide home loans retail lending branches, average about 700 square feet and employ one to two financial professionals.

Their primary focus is on retail CDs and money market accounts.

To put this into perspective and validate the success of our business model, the $4 billion consumer deposit growth we experienced in the first quarter of 2006 ranks us among the top banking institutions in the country.

The Bank continues to expand its deposit franchise.

Supporting strategies include geographic and product expansion, increasing productivity, rollout of a commercial product suite and a leveraging of escrow balances driven by Countrywide's loan servicing portfolio.

On the asset side, the Bank remains focused on holding short duration, prime first and second lien mortgages as shown on slide nine.

Of the $68 billion loan portfolio at the end of 2006 first quarter, hybrid ARMs accounted for 25% of the portfolio while home equity loans comprised 22%.

Pay option loans were 45% of the total which compares to 21% of the total for the same period a year ago.

We continue to believe that pay option loans present very attractive investment alternatives for the Bank, with high margins accompanied by low interest rate risk and low credit risk profiles.

Let's take a look at pay options in more detail.

As shown on slide nine, the amount of pay option loans in the Bank's portfolio now stands at $31 billion, up 19% from the $26 billion of the last quarter.

It's important to note that our pay option loan quality remains extremely high.

Original CLTVs and original loan to values are 78% and 75% respectively.

Average FICO scores on the pay option portfolio are over 720.

At 13 basis points, pay option delinquencies remain low relative to other loans of similar credit quality and vintage.

The moderate increase in delinquency rates results to the seasoning of the Bank's portfolio and is in line with expectations.

The amount of cumulative negative amortization remains relatively small at $169 million or approximately half of 1% of the portfolio.

Now let me give you an update on 2006 earnings guidance on slide 11.

Countrywide's 2006 earnings guidance has been revised at 390 to 480 per diluted share which compares to a previous guidance of 380 to 480.

Key full-year assumptions behind the guidance include, total mortgage market originations of $2.2 trillion to $3.0 trillion; average 10-year U.S.

Treasury rates of 450 to 530;

Mortgage Banking segment pretax earnings of $1.95 billion to $2.55 billion; and pretax earnings from other business segments which includes banking Capital Markets, Insurance and Global operations of $2.05 billion to $2.35 billion.

Key assumptions behind the guidance for the Mortgage Banking segment include, one companywide loan production market share at 18% to 18.5%; companywide loan origination volume of $400 billion to 550 billion; both loan production and market share and origination volume include production from the Mortgage Banking and Capital Markets segment and Countrywide Bank; loan production pretax margins of 20 basis points to 40 basis points, this excludes pretax earnings from Capital Markets and is based on total loans funded; average loan servicing portfolio of 1.20 trillion to 1.25 trillion at which includes inventory, bank portfolio and subservicing; loan servicing pretax margins of 2 basis points to 10 basis points with a base case scenario of 7 basis points.

The final slide contains a disclaimer regarding the forward-looking statements included in this presentation which I encourage all listeners to review.

Before opening the line to your questions, I would like to reiterate that Countrywide opened the year by delivering a strong operational and financial performance for shareholders.

The [first] quarter was characterized by the continuation of relatively flat yield curve although overall interest rates continue to rise.

Despite the challenges created by the environment, profitability improved over the fourth quarter of 2005.

Overall Countrywide results demonstrates the effectiveness of our time-tested business model of focus on mortgage lending and the continued diversification of our earnings base.

Looking at the balance of 2006, we remain confident in our position within the industry.

We will continue to capitalize upon consolidation of others and other industry dynamics to grow market share, enhance our infrastructure and create greater shareholder value.

And now I will ask the moderator to explain the protocol for questions.

Before you do that, Greg, I would like to just take this opportunity because in reading some of the comments of some of the analysts this morning which was focused on the Bank and the assets of the Bank, I want Carlos Garcia to go through some of the facts related to the asset quality of the Bank, delinquencies, write offs, home equity loans, etc. so that we can hopefully get some of that out of the way.

Carlos, why don't you go over some of those?

As Angelo alluded, the Bank continues to build its portfolio, its loan portfolio with pay options and HELOCs.

The quality of the portfolio remains very stable whether measured by LTV or FICO or any of the other attributes that comprise loan quality.

Our performance has been better than expected and better than the industry as measured by delinquency, charge-offs or really any other measure.

And delinquency has although increased moderately in the last several quarters has primarily been driven almost entirely driven really by the seasoning of the portfolio.

And so I would give you an example with pay options whereas today over 50% of our pay option portfolio is older than a year and there is only approximately 15% that has been originated in the prior quarter.

If you go back to the first quarter of '06 almost all of it was originated within the previous two quarters preceding that.

So a seasoning of the portfolio of course is creating an increase in delinquencies but it is all within expectations and still better than industry.

Our charge-offs are running also better than modeled and better than industry.

And almost all of our charge-offs are driven by the HELOC portfolio which is now a very seasoned portfolio as our growth has slowed there dramatically.

And the charge-off rate there is running at around 18 basis points on an annualized basis, something like 4.4 basis points in the first quarter.

And the 18 basis points is well in line with mature prime HELOC portfolios in the banking industry.

And also much better than our expectations and the levels that we are reserving at.

The first lien charge-offs which are almost nonexistent less than 1 basis point on an annualized basis, are driven almost entirely by natural disasters that have occurred.

And so we are very pleased with the performance of that portfolio and everything looks like it's performing not only in line with our expectations, but like I said earlier better.

And that is really my presentation for the asset quality.

Thank you.

Greg, do you want to open up the lines now?

(OPERATOR INSTRUCTIONS) Paul Miller.

Thank you very and great quarter, guys.

If I can just give one suggestion, when you give your earnings release if you can put an asset quality table talking about the different nonperformers in the different sectors and the charge-offs and your level of reserves, that would help us out.

I know it would help me out tremendously trying to assess the asset quality of the Company.

The question I have is on page 6 in the Bank's margin.

One of the things you guys went over very, very nicely last quarter was how much impact the pay option ARM, the lag effect and the teaser rates are going to impact the margin on the upside.

But I see even with today's big jump in margin from 211 to 229 your steady-state interest margin went from 258 to 273.

I was wondering if you could add some color to that?

And also you said in your investor day I believe it was last month, that you're going to get rid of the teaser rate.

So when this teaser rate effect drops off, will it drop off completely next quarter?

I'm going to take that question, this is Carlos Garcia again.

The interest margin for this first quarter did benefit slightly from the fact that February has a shorter number of days and we benefit from that in our cost of funds.

And we also had a benefit from a slowing in prepayments.

In terms of the question regarding the elimination of the teaser accrual rate, that product is expected to launch in the next 90 days or so.

And it won't immediately eliminate the teaser rate effect because it's going to take some time to accumulate a portfolio in that product.

As we start to increase the proportion of our production that comes from that product you will see the teaser rate effect disappear.

I know it hasn't happened that much but we are seeing and uptick in prepayments rates on a seasonality basis.

So is that steady-state margin going to feel some pressure going into the second and third quarters which are more active in mortgage production?

I think that the steady-state interest margin will experience some slight decline in the second and third quarters and it should start to pick up in the fourth quarter again.

Thank you very much.

That table, we're going to try to do that in the second quarter but it will probably be more likely we will put it in the third quarter.

Angelo, thank you very much.

Mike Vinciquerra.

Thank you.

First just a clarifier, just when you talk about the shorter days or fewer in February, Carlos, I assume your interest and expenses are accruing on slightly different basis, is that the reason?

The reason is mortgages and even HELOCs, they accrue interest on a 30 -- standard 30-day month whereas the interest expense we pay on deposits and other liabilities is on a daily basis.

Understood, thank you.

And then the thing that really jumped out at me this quarter was the resurgence in the prime margin, highest since I guess we've seen since the first quarter.

I presume that we should expect that to fall back a bit in the forthcoming quarters here.

Can you give us any explanation on why that was so strong?

We didn't really didn't see that from any other lenders this quarter.

Thank you.

Well, we're not like any other lender, Mike, you should know by now.

Stan?

Clearly we had a much better margin story on the prime and as well as home equity and subprime or nonprime mortgages during the first quarter.

There was an improvement in our front end pricing as well as in the execution, the secondary market execution, which if you recall in the fourth quarter we had mortgage spreads had widened out and credit spreads had widened out and we saw an improvement in the first quarter and that much of which is sustainable did have a slight outperformance on our hedges which may or may not be repeated.

But that was our estimate is about 7 basis points on the prime margin was attributable to slight overhedge performance.

You might remember when Stan discussed this the last quarter we had a pretty sloppy year end in the secondary market which exacerbated the spread issue.

Okay, thank you very much.

Bruce Harting.

Can you just do a little bit of a tutorial on the changes in the line items in the income statement for the accounting on -- where are we here -- thanks.

You know, sort of changes in how you are looking at amortization and the fair value?

Thanks.

I'm going to have Eric -- how are you doing Bruce?

Good, thank you.

Good.

Okay, Eric, you want to work through that?

Okay.

As you know we adopted FAS 156 effective January 1 of '06.

And the old conventions pre-156 are no longer with us.

We are no longer constrained to low com on the MSR value equation.

We no longer have concepts such as amortization of cost and impairment.

What we're going to do now is valuing all servicing rights that exist at a quarter end at their fair market value.

The bottom line is that the economics in our servicing business will be more accurately represented in the accounting.

When you look at the statement of earnings on page 9, you're going to see some legacy numbers from the past, 472 million amortization and mortgage servicing rights, and you're going to see recovery of mortgage servicing rights of 452.

What you see instead now is realization of expected cash flows from mortgage servicing rights of $738 million.

And you also see the change in the fair value of the mortgage servicing rights of 978.

The $738 million of realization of expected cash flow is effectively the economic decay as you collect principal from the underlying servicing portfolio.

So you'd expect to see that number somewhat in line with amortization.

A better number than amortization, because remember amortization in the old protocol was established at the beginning of the quarter to the extent you had a difference in actual activity, that was cleaned up through impairment.

The change in fair value of mortgage servicing rights would represent the impact of rates during the quarter affecting pre-existing servicing as well as what you create during the quarter.

The impairment of retained interest is comparable to the past as 156 did not affect any of the retained interest.

So the comparison of servicing hedge losses to the recovery of mortgage servicing rights in the first quarter of '01 would now be better characterized by the comparison of servicing hedge losses versus the change in fair value of mortgage servicing rights.

Did that help you, Bruce?

Thank you very much, thank you.

Seth Glickenhaus.

Angelo, I want to congratulate you and the entire team on the outstanding quarter in a period where home sales if anything have been dropping and there are fewer mortgages, etc.

My only question is this, do you -- you've indicated that you expect with the moderate slow up we're seeing that the more marginal mortgage companies will be under great pressure and perhaps drop out or else stop overcompeting.

And I was just wondering what you can tell us along those lines?

Yes.

Thank you very much for that comment, Seth.

I really appreciate it.

We're beginning to see in fact there was some news yesterday in the trade press, a couple of mortgage companies going out of business entirely.

And seeing consolidation taking place and you'll see that accelerate probably for the next 24 months.

And that is a great environment for us because one, it takes competitors out of the business; and secondly, there is fallout from that consolidation.

Some good people are affected by it and we like to pick up people in that environment.

And you've seen us -- two things.

One, you've seen us grow that environment, get good people.

And secondly, as we come out of the cycle we come out of it stronger because again there is less competition, more reasonable pricing and less capacity.

So this is a -- you have to go through these cleansing periods from time to time.

We've had five years of a great run, now we're going to go through a period of reduction in capacity, reduction in competition and a great environment for Countrywide in the long run.

Thank you ever so much.

Kenneth Bruce.

Good morning.

Nice quarter.

My question relates to the change in the MSR hedge strategy.

Could you spend a little time and provide some additional color as to what the strategy change is and what the implications of those are?

Stan Kurland is going to respond to that.

Yes, sure.

So just as a primer the issue with servicing under low com style accounting is that the asset can't be written up in a rising rate environment and so it's a negative convexity of servicing is much greater under low com than it is under fair market value accounting.

In typical hedge strategy and our hedge strategy has to change with changes in interest rates and changes in the value of the portfolio so none of this is really static but the fact is that we have to employ a level of optional coverage that deals with the negative convexity of the servicing asset which is now lessened from an accounting perspective given our ability to write up the asset within a rising rate environment.

So we feel that in the future that we will be able to reduce the amount of optional coverage and that should have in many different, many interest rate environments that we are involved with a tendency to reduce the cost of hedging.

And I think as Eric mentioned, the other improvement is the fact that we think it better represents the actual economic performance of the Company.

It's going to be a lot easier for people to understand the servicing segment with fair market value accounting.

Should we expect to see that the moving parts had a little bit closer negative correlation between one another?

In terms of the fair value of the mortgage servicing rights versus the servicing hedge, should we see those two line items somewhat moved in opposite directions by similar magnitudes now?

You know, I think again, a lot depends upon how our hedges are positioned.

But you will expect to see opposing moves.

That as the servicing hedge gains or looses you'll see the opposite effect.

But there will still be circumstances where you can have conditions where they won't be exactly offsetting.

Although clearly that is the intention of a hedge.

Great, thank you.

Mike McMahon.

Good morning.

I was also favorably surprised by the expansion of the margins in both the prime and sub prime.

Can you give us an indication today as to whether or not the margins in those two lines of businesses are within the range of what was reported for the first quarter?

We saw a general improvement in the sub prime activities which we talked about and it is really related to credit spreads.

And credit spreads improved and they are still at very tight ends of the spectrum.

In terms of what we see in the market today that improvement persists, we have in our availing ourselves of the marketplace and selling forward as much of our production as we can to make sure that we are selling where spreads are tight.

But generally the improvement that a lot of the improvement that we've seen from the fourth quarter to the first quarter are still in place although the competitive nature of the market and with interest rates moving up we can't really comment or predict whether or not they will prevail for the remainder of the quarter.

Understood, thank you.

Brad Ball.

Thanks.

Actually a couple of follow-ups, Stan.

First when talking about the prime margins, you mentioned that production hedge accountings were 7 basis points of the improvement.

I wonder if you could elaborate on what happened this quarter with respect to the production hedge to give us a sense as to whether or not we could see that going forward?

And then separately on the servicing sort of more broadly speaking if we now have a more effective way of recognizing the fair value of the asset and therefore getting more economically hedged, does that suggest that our "normalized" servicing margins could be higher than we had thought previously?

And if that is the case, then why don't we nudge up the high end of our servicing margin guidance for 2006?

Thanks.

So basically with the pipeline and inventory hedges we also have a level of optional coverage that deals with the fallout profile of the pipeline in a rising rate environment were going to see more loans closing.

And so we have optional coverage and we tend to run a slight excess short because of that -- the nature of that asset as well as the fact that the servicing asset that's being produced during the period is also increasing in value and actually ends up the effect of it results in a slight increase to our short position.

Those factors coming together in the first quarter produce the way that I view it, a slight excess short position that resulted in overperformance of the inventory pipeline hedge.

It's a condition that we believe is very well-balanced in the Company because as -- and should markets go -- should the markets rates improve or declining interest rates, we would expect to see increased production and increased margins on our new production.

So in a rising rate environment we've had a tendency to go back over the kind of history of this to have a little bit of overperformance on the pipeline inventory hedge.

I just would warn anybody that none of these things can be predicted or repeatable.

But we do a very thorough and complete job of managing interest rate risk on the pipeline and the inventory as well as servicing hedge.

With regard to -- we've given guidance which takes into effect what we know today about the servicing hedge.

I think it's a little bit early for us to predict the nature of all different interest rate paths and movement.

But the general belief that we have is that over the long run, fair market value accounting for the servicing asset will produce less convexity for us to hedge and improving net margin for servicing.

Just a quick follow-up then.

Can you actually in the first quarter tell us what portion of the 9 basis points of servicing margin is attributable to the change in accounting?

It's really difficult frankly to do it.

First of all, we didn't have the 156 in place until late into the quarter.

But we will continue to provide information about what we think it costs to hedge the servicing asset.

And I think it would be more appropriate for us to go through the quarters and talk about the impact of the changing hedge profile where we have more complete period of time to provide you with information.

Okay, great.

Thanks.

Jonathan Gray.

I have one question and then a comment if I may.

My question pertains to the reference to the impact of the repricing lag on the net interest margin of the Bank's loan portfolio.

I wonder if I could ask you a little about what is in there?

In other words when you talk about pay option ARMs, what roughly what fraction are tied our monthly repricing loans versus loans that reprice and intermediate-term ARMs?

And secondly, to what extent are these ARMs indexed to COFI or to treasury based product?

And then I would like to make -- I have a follow-on afterward if I may.

Jonathan, very happy to hear your voice.

Good to hear you.

Carlos is going to answer this, Jonathan.

Hi Jonathan.

The payoff in portfolio which is almost all of our ARMs other than for hybrids is 100% multi-adjustable.

Of the pay option portfolio I'd say about 85% is MTA and then the rest of it is broken up between the LIBOR and the COFI indexes.

I'm sorry, the first category that was tied to COFI -- there was monthly repricing was -- ?

The pay option portfolio first of all --

100% on --

100% of that is (multiple speakers) adjustable.

I understand.

Okay.

And 80 to 85% of that portfolio is based on the MTA index.

I see.

The remaining 15% or so is either COFI or LIBOR.

Very good.

If I could just make two quick comments.

First of all, I have to congratulate you on the quantity, the quality and the timeliness of the financial disclosure.

I have never seen anything like it and I think most of the people on the phone or other financial companies will corroborate that fact.

It is just an unbelievable presentation, extremely helpful.

The other comment I wanted to make is that on a personal note I've been spending a lot of time studying the natural sciences, organic chemistry, genetics, molecular biology.

And I want to report that I have found nothing -- nothing at all that compares in complexity or arcane quality with FAS 133, but I will continue to look.

Jonathan, I --

Everything is simple after that.

Just stay healthy.

Listen, one of the reasons I mean this sincerely that if you have the quality of reporting that we have in terms of the granular nature of that reporting is due to you and your prodding.

And we appreciate that.

Thank you.

[Don Meader].

Angelo, if I may, I'd like to move to a different area of your business which could be volatile and I know is expanding.

You're a primary reporting dealer and I'd like to know how many [ARMs] you have now, where they are located and where you expect to expand to?

And I assume you hedge every night and do have anything unique hedges that you put on as you devise for mortgages?

Okay, I think you are talking about the Capital Markets area?

The governments, right.

Well, within Capital Markets we have a primary dealer operation.

And that is housed solely in Calabasas.

Though Capital Markets now has offices -- in fact I just finished with a tour -- we have five or six offices here in the continental United States.

We're in -- which includes Chicago, New York, Fort Lauderdale, Plano, Texas.

We are in Tokyo and just visited that office.

We're in the UK.

We're opening up in two weeks in Hong Kong for the overall Capital Markets area but the primary dealership is operated solely out of Calabasas.

Your traders -- do they hedge every night, Angelo?

Well, hopefully yes.

We are supposed to be clean as close to flat as we can get to each night -- we're in good shape.

I think Stan was modest in his comment relative to the hedging strategies.

Countrywide has had in almost 40 years now no surprises relative to hedging and prepayments speeds and all the issues that other companies have faced even during the refinance boom, we have not faced because of the efforts of Stan and his team.

And we are pretty confident in our hedging and our management of the inventory that we retain on our balance sheet.

Is your hedge of treasuries or agencies any different than what the street does --? (multiple speakers)

No, is comparable activities.

And you're going to keep expanding the offices on your governments, Angelo?

When you say governments are you talking about the --?

Capital markets.

Capital Markets, yes.

We will continue although we've got Europe covered through the UK.

We have Asia now pretty well covered through Tokyo and Hong Kong.

And I want to get those operations settled in and established and then we will take a look at the rest of the world once that's (multiple speakers)

And we assume it's extremely profitable to you, right?

Well it has been -- you saw the numbers in Capital Markets, it has been a very profitable business for us.

Thank you, Angelo.

Fred Cannon.

Thank you.

Just a couple of follow-ups on the previous question about capacity in the sector.

You produced a very strong quarter on strong margins but I believe you dampened expectations a bit for both industry in your own top end of your volume due to the higher ten-year.

The higher yield on the ten-year.

The question is do you have concern that with the better gain on sale of margins but declining volumes that we might see it take a little bit longer to get capacity out of the sector with your weaker competitors?

I'd don't know if it's going to take any longer than -- again, this is not a new cycle.

I mean I don't know how long you have been doing this.

But these are typical cycles that in each one of them, each of these cycles take on a different complexion as we come out of the lower rates into a higher rate environment.

Because it depends upon the velocity of how quickly rates are increased.

It depends on overall volumes of new construction and existing construction.

So the dynamics of each of these cycles we go through are different.

But the one thing I think that is fairly standard and you can expect it is that it does take longer than expected to go through these cycles for people to finally give up and say that they have had it and either consolidate, sale, merge, go out of business.

It takes time.

But as I pointed out before, these are healthy cycles because what happened in the five-year period that we just went through I mean everybody got into the business and made it more difficult to navigate the landscape to get marketshare and to do what we wanted to do in terms of how we wanted to open up these communities that we are trying to enter.

And it is made it difficult.

And it is going to be easier for us once this cycle is complete.

How long it's going to take, I don't know.

If I had to guess it's going to take I would say 12 to 24 months to get through it.

That's very helpful.

Just a follow-up on that, one of the things you mentioned on the margins was that the front end execution was improved.

Was that to some degree related to the excess capacity we have of mortgage bankers out there on the wholesale side?

The front end --

By front end, we were able to achieve better pricing up front at the street level.

And I think it was a little bit of just an improvement in the overall execution, maybe slightly less competitive coming out of the fourth quarter which was very sloppy for the industry.

So that's what we mean.

I think it had something to do with, and I can't frankly at this point measure, I guess we could if we sat down and tried to do it, is that there was a difference in the product mix.

And when you're talking about sub prime, when you're talking about pay options, you have a little more room to maneuver there on the front end.

And so I think that is primarily what it is.

I don't think we have seen a weakening of competitors.

In fact, if anything I think they tend to become more aggressive as the end appears near to stay alive.

And so I wouldn't say that it less aggressive from the -- from our competitors.

I just think it is a product mix.

Okay, a product mix.

Okay, that's very helpful.

And finally one question, as we look at the expenses moving up in line with your strong revenues, looking forward should we relate expenses to volumes or to gain on sale margins or a bit of a mix of both?

I think that generally speaking we look at it in terms of margins because we measure a lot by product coming through the top lines, so you need so many employees per so many thousands of loans coming through.

And that is one of our key measurements both in servicing originations.

So volumes will have a lot to do with it.

And our mandate clearly going forward and everybody understands this in Countrywide, is to focus on that midline.

We're growing the top-line but if you don't reduce that midline expense then you're going to mitigate what comes to the bottom line.

There is a tremendous focus in Countrywide currently as we come out of this cycle to drive down the expenses of this Company.

And it comes from various areas of our operations.

Obviously you have things that are growing, continued to grow.

For example servicing continues to grow.

So there is very little to cut there except maybe you can add productivity.

The Bank continues to grow so they need personnel and technology.

But primarily in the mortgage bank itself, in CHL, is where we have to focus on the expense side of the equation and we will.

Greet.

Thank you very much.

That is very helpful.

Eric Wasserstrom.

Thank you.

Actually on the topic of the expenses could you just walk me through what change occurred with FAS 91 and where that is reflected in the financial statements?

Eric, do you want to take that?

Okay.

We made a reference to a change in the rate of FAS 91 expenses.

And FAS 91 is very specific about which expenses you can defer and we continually update our analysis to determine exactly how much of our expenses can be deferred.

And very simply the bottom line is that we are deferring less expenses as a result of FAS 91.

It has to do with the mix of sales versus processing expenses.

Bottom line is we are deferring less this year than we have in the past.

Okay.

And is that where I -- on the Loan Production sector statement, is that part of the 4 basis point increase in the allocated corporate expenses or is that something different?

It would not be necessarily in the allocated corporate expenses, it would be in the operating expenses.

Okay.

In the above line?

And what you would see is in prior years more costs deferred and you'd see a smaller gain on sale and this time around with the lower deferral, you'd see more expenses come through production and have the opposite affect on the gain on sale.

Okay, so a positive affect on (inaudible).

Yes, that is correct.

Okay, thanks very much.

James Shanahan.

With the adoption of FAS 156, the MSR was written up and is now greater than shareholders equity for the first time in fact it is 105%.

And looking at other financial institutions that also have a substantial mortgage business, this ratio is highest by far if we include Citigroup and Nat City, JPMorgan, Wells, the ratios tend to be between 43% and 65%.

The company that we looked at that is the most similar is IndyMac at 87% high but still lower than the ratio that you've reported.

And if we include the other retained interest and securitizations we are now talking about 123% of equity and these intangibles and both of these ratios are very high, highest by far for your company and on the rise.

Could this potentially expose your company to greater regulatory scrutiny and will there eventually be capital implications as these ratios continued to grow?

Let's walk through ratios.

First I want Stan to do that with you.

I think that -- I think you have to qualify what intangibles.

I understand that is a common term used for MSRs but when you have a cash flow and all the attendant cash benefits and business benefits from an MSR versus an I/O for example, both considered intangibles.

I think you have to be careful as to how you qualify the MSR.

The MSR is maybe an intangible that produces tangible benefits to the company.

Do you want to walk through that?

Yes.

You know, I think that we are very aware of the asset and the capital requirement that we have a surrounding the asset.

I think one of the items that you may not be considering in your analysis is that for the purpose of calculating the asset on our balance sheet, we deduct the deferred taxes that are associated with the MSR --

Regulators deduct as well.

I understand that.

But then all your competitors would be doing the same analysis and there really is no impact relative comparison purposes.

The ratios are still high.

And it seems like it's really growing here.

We do a risk-based calculation and our ratio from the fourth quarter to the first quarter did go up about 4% in our risk-based capital calculation really driven by the fact that the asset appreciated in value.

We have various efforts and capabilities of dealing with the equity requirement surrounding that asset.

One is other hybrid types of capital, for example, subordinated debt for a regulatory basis count and our risk-based capital is very low cost asset for us to manage our risk-based capital calculation.

We are as those who have followed the company know, worked to reduce the intangible investment by reducing the minimum service fee.

And we've made considerable strides there by the way in terms of reducing the minimum service fee on everything other than PBA, securities, so we are delivering on our ARM production and non-30-year fixed-rate production at lower service fees.

And you can see it subtly beginning to take effect on the basis points of servicing that we're retaining in new production and that will us to help us to manage down that investment.

I think along with that while it is clearly something that people focus on, the fact is we manage that asset very well in terms of the realization of the synergy that that asset plays with our production capabilities as well as the financial hedges that we employ to manage the risk of that asset.

And clearly while you compared us to the industry, our performance on hedging and managing the asset and macro hedge capability is far, far superior to anyone else in the industry.

Let me point something to you as well.

We are a mortgage bank.

We are not Wells Fargo, we're not JPMorgan.

We are a mortgage bank.

And as a result of being a mortgage bank and that is our purpose, you've got to expect that the asset of the Company is going to be centered on MSR, the very rights that we create as part of our core business.

That is our core business.

So if you're using that as your comparison then I would say that you would have to really review your own personal investment strategies as it relates to Countrywide.

We are not any of those institutions.

We are a different institution, has a different asset on our balance sheet, and that percentage of the MSR of our equity is going to be a major part of our equity going forward.

We will make no effort.

We're a mortgage bank, not a bank.

We're a mortgage bank that owns a bank that is in the mortgage business.

And so all of our focus is mortgages, therefore you've got to expect that to be the biggest part of our equity and our capital.

And I think you have to realize that.

There is no way that Countrywide is going to gear its operation to be JPMorgan or Citi.

Understood, thank you.

And may I ask a follow-up please?

I wanted to ask about the impairment of retained interest that you are disclosing now and the servicing sector breakdown that -- first of all thank you for that -- in breaking that out separately by quarter going back four years or so now.

In 15 and 17 quarters that's an impairment.

And I would like to understand what the catalyst there?

From a recollection in recent quarters it has been interest rate driven yet there are periods of time when in your data now where rates are rising and you still reported an impairment there of retained interest.

Can you discuss what the catalysts are there?

Stan is going to take that.

Yes, sure.

First of all, that primarily relates to residual interest and what would be included in there would be residuals on sub prime securitizations that we have issued as well as residuals on HELOC securitizations.

During the quarter, about -- you're looking at I think at the $120 million of impairment --

That is right.

-- about $30 million of that impairment relates to the reduced cash flows or kind of a squeeze that takes place on sub prime residuals.

And the remainder of that adjustment was actually the result of an increase or primarily the result of an increase in the discount rate that we use to in essence present value those cash flows and we made that adjustment because we attempt to estimate what the fair market value of the assets are.

And we saw an increase in OAS and discount rates and we also are in the market and sell as much of the residual as we can.

And that is the primary activity that took place there.

I should mention that to the extent that we had hedge losses from spread changes that those actually are included in the hedge activities.

And so they were hedged for the discount rate changes and OAS changes were changes to our models that were not hedged for.

Understood.

And I appreciate all of your patience.

Can you just comment on succession as well and I'll drop off.

And thanks a lot.

We will comment on succession when succession plans are in place.

It is an ongoing process and the Board is in charge of that process.

And the Board will make the announcements when they are appropriate.

Thank you.

Ed Groshans.

Good morning.

My first question is relatively quick.

I guess we are starting to hear commentary about tiered pricing for different originators and Angelo, you made the comment that Countrywide is like no other earlier today.

Are you seeing that benefit in the marketplace with the secondary pricing that you are getting better pricing potentially than other smaller competitors out there?

Better pricing from home?

The buyers of the MVS securities.

To the extent that it is volume driven I think that you enjoy the greater efficiency on the execution because of the size we do enjoy better execution.

I understand -- (multiple speakers)

I think ABS, maybe you are referring to ABS securitizations where the quality of the originator and their servicing capabilities are considered in terms of how well a security is sold and we've always experienced the top level of pricing as a result of the quality of our production.

Okay.

And then my next question is, there has been I guess two or three California banks [Co-America] and (indiscernible), all experienced I guess some margin compression due to title and escrow deposits running off as home sales have slowed.

Does that have any impact on Countrywide's deposits at the Bank?

So far the escrows have been building because our volumes continue to increase.

So we haven't seen it.

Have we seen a runoff in escrow deposits?

The bank is planning on entering the commercial (multiple speakers)

0h, is that what you are talking about, are you talking about commercial deposits?

Yes.

It was kind of strange because none of us were expecting to see that so that is why I'm just asking to see what you are seeing out there?

I see what you are saying because of lower closings and that sort of thing.

There's two impacts if I may.

One is the bank by the way takes are more stable, escrow deposits and we do as a servicer have -- when loans are prepaying, we hold the proceeds until they are passed through to the investor.

The net impact on servicing is actually positive because we have some typically associated negative pass-through of interest through to the security holder.

And the actual earnings on the underlying deposits while we hold them typically have been less than the interest rate that is being passed through to the investor.

So it has been -- it is a net positive for us and you can see that in the servicing segment where the net interest income is up substantially as loan pay downs have (multiple speakers).

What happens in the prepayments is that the mortgagor could pay off for example on the tenth of the month we have to pass through the security holder to the end of the month and that is our money, we have difference between the tenth for example in that particular case whereas at the end of the month we have to make up for to the extent that there is a slowdown in prepayments, that is what Stan is referring to, we are benefited by that.

Okay.

So most of your escrow deposits are really related to the servicing, taxes, interest -- things along those lines -- insurance?

That's correct.

As Carlos pointed out, we're getting into the commercial escrow business with title companies and closing agents.

Okay, so no impact from that trend on the commercial side yet until you are in that business?

No.

That is why I say we are experiencing the opposite because of the buildup of the slower prepayments and accreting our servicing portfolio which increased the escrow deposits.

Excellent.

Thank you very much.

Chris Brendler.

Thanks.

Good morning.

A couple of questions if I may.

First, if you could give a little more color on the expense increase in the production segment.

Volume sequentially was done a little bit but it looks like expenses excluding the allocated corporate was up about $70 million.

The increased headcount looks like -- anything else in terms of infrastructure build that you mentioned in the press release?

I think -- I'll have Eric sort of go through that in detail.

I'm just going to give it to you conceptually.

One is that to the extent that we still had pretty good volumes, a big part of that is commissions paid to the sales force that's in there.

Secondly, we continue to open up branches because of our overall marketshare goal of 25% to 30% by 2010.

So we have to be positioned to do that.

So we continue to open up facilities.

We're taking a look at how we can do that more efficiently and effectively than we have in the past in terms of opening up both the processing offices as well as the satellite offices that we're opening up throughout the country.

We have a tremendous investment into the minority community opening up branches in inner cities, taking Countrywide into the inner city and that is going to take a while to get the return back on our investments.

And of course continuously trying to upgrade our technology to make our overall process more efficient.

But Eric, do you want to walk through the components of that $400 million increase?

Sure.

I'm going to focus both on the year-over-year and the sequential.

The year-over-year expense increase in production was $340 million.

And without a doubt, the key driver there was the ongoing expansion of our distribution network.

Our efficiency ratio you will find went down from roughly 110% down to about 90%.

We continue to grow the infrastructure so that we can fund loans, and yet we have a seasonally low quarter.

So there is a little bit of idle capacity there.

We continue to grow that network.

Lesser significant factors would be the fact that production volume increased 13% over the first quarter of last year.

So naturally, expenses would be up with those higher volumes.

And we talked also about the FAS 91 change in the deferral rate.

Sequentially, the change is much, much smaller.

It's up about $93 million.

The biggest factor there would be the FAS 91 cap rate.

So other than that, there is not a whole lot going on.

The sequential change was very small, less than $100 million.

Is it fair to say that FAS 91 was the majority of the sequential increase?

Of the sequential increase, that is fair to say.

Excellent, thank you.

Second question, if you could provide any updated thoughts on what you are seeing on the front lines in the subprime sector, looking at some renewed price competition maybe and where you stand there, and also what you are seeing in terms of execution today?

Overall, I think that your -- and again, I'm speaking anecdotally here -- you know, Ameriquest which is the primary driver of reducing or eliminating the margins on subprime, really bringing them down to prime levels, has been sort or set back a bit.

We've become less aggressive, and I think that is providing us some relief on that end.

That is the overall -- that sort of comes to mind as you asked that question.

Stan, do you have any input on that?

Yes.

I think that we obviously had a very good first quarter pickup and recovery of margins.

It was again very much related to the credit spread change.

It seems to be very stable so far during the first quarter.

And we will see how it -- whether it continues to pan out that way.

But anecdotally, it seems somewhat stable and given the disruption by many of our competitors.

All right, thank you, gentlemen.

Sam Crawford.

Thank you very much.

A few questions about the bank if you don't mind.

First of all, just looking at slide 10 and the time series on the LTV/CLTV -- I've never had a chance to ask you all this before -- whether the valuation denominator basically stays as booked when the loans are written, whether the cap rates are steady?

I'm not sure I understood the question.

Something about on the CLTV.

I think he was saying that the original value is the one that stays put without regard to what happens to increases in values as time goes on?

Absolutely.

Yes, that is what he is saying.

Yes, the LTV disclosed here is the original LTV based on the original value of the property.

Having said that, our portfolio has experienced substantial appreciation in the underlying properties, and so the economic LTV would be much better than the one disclosed here.

Okay.

And a slightly different aspect, perhaps more broadly about pay option product.

The rate of increase with which the pay options are going into negative amortization is beginning to slow, or at least it looks like it's beginning to slow.

But it still looks like if the macro context were to remain unchanged for the next four or five quarters, it looks like it might move to sort of an 85, 90% utilization.

What I'm wondering is to some degree does that surprise you?

I realize your price figures in the market, but does that suggest to you -- I can't think of an option which is so heavily exercised unless the strike is just implicitly very low.

Has this product been underpriced by the market?

Well, we are watching -- I think you are referring to the level of loans that are exercising the minimum payment option.

I think that was -- correct me it I'm wrong -- about 65% of --.

70.

-- 70%.

You know it is -- I think people coming in and making a personal decision as to how they choose to use the equity that is in their home as they are initially getting into these programs we -- our origination activities are such that the consumer is underwritten at the fully adjusted rate of the mortgage and is capable of making a higher payment.

Should that be required when they reach the reset period, our history and the history of this product is very good and you have individuals who have very -- a little bit more sophistication in terms of the election to take this product and have that flexibility.

And you can see that in the very high FICO rates that you have in this product versus other ARM products.

I think also another way to look at it, another way to view this is that these people are making a choice of -- the alternative is to take out for the normal loan to take out a home equity loan.

That is basically what they are doing is taking out their equity without taking out a home equity loan.

Thank you very much.

Last question, just if you could indicate the degree to which the geographic distribution of loans and the pay option portfolio resembles the broader distribution in your portfolio or if it is somewhat more heavily bi-coastal?

I think originally when I looked at this (multiple speakers) -- ours are 50% of California and the industry is 52% California.

You've got to start off with the fact that California represents well over 30% of the total amount of real estate transactions in dollar amount in the country.

So you already have a high threshold to get through.

But I think that our distribution is about comparable for other products.

Thank you very much.

Let me add my two words.

It is just excellent disclosure.

Thank you very much.

[Jed Gore].

Hello.

Does the cap rate on the servicing portfolio include any implicit forward-looking assumptions around servicing margins?

I'm just trying to square the fact that the MSR has got a cap rate of 138 up from the previous quarter, 129, and yet you are guiding us for lower servicing margins and maybe that's apples and oranges?

I think it is -- let me just put some my color on it for a second.

Just so that it's put in perspective.

Our cap rate on balance was lower than all of our major competitors that have a lower amount of MSRs in their equity.

But the cap rate was relatively low (technical difficulty) the relationship between servicing fee and the cap rate.

I'm not actually talking about the level -- I'm talking about the direction meaning that the capitalization rate is up meaning the MSR is more valuable and yet you're guiding that your servicing margin will be lower going forward.

Servicing fees he is talking about.

The net margin --

Well, first of all, Jed, we are not guiding lower.

We took servicing margin guidance of 1 to 10 bips to 2 to 10 bips.

And we also indicated last quarter due to the convexity of the return of servicing that the base case would be expected to be 7.

We still hold that same view that over the balance of '06 we expect to see base servicing margins of 7 basis points.

Now in terms of where the direction of the servicing value that is going to be driven by the selloff in rates.

We had a 50 basis points selloff in the 10-year mortgages sold off a little bit less closer to 25, 30 basis points during the quarter.

That is going to drive the value up.

But there is an implicit discount rate in there that is going to be driving the expected return over the balance of the year.

Okay, I appreciate it.

I just was wondering whether you are being conservative on the servicing margin number?

Thank you very much for taking my question.

Bob Napoli.

Good morning.

Good afternoon.

Congratulations again on the quarter, a very broad-based nice quarter.

A couple questions still left.

In the bank the growth in the sustainable net interest margin, is that partially product related to the option ARMs?

And should we expect to see or are you hoping to get or targeting to get that return on equity up to 20% as the Fed stops raising interest rates?

Do you mean like the bank now, Bob?

Yes, I'm talking about the bank.

Okay, good.

Carlos?

So the expansion in the net interest margin during the quarter had primarily to do with the slowdown in prepayments that we saw during that quarter.

And with the fact again that February had a smaller number of days so we had a benefit on the interest costs that goes into the interest margin.

Right.

But then you said that you would expect it to continue to go up later in the year after coming down a little bit in the next quarter.

The reason we are expecting that to happen is that we are counting on the Fed will stop increasing rates and once that happens the lag effect will begin to dissipate.

Okay, but that wouldn't affect the sustainable margin that you are targeting, right?

That has been moving up and so my question is, are you -- with that going up, it looks like you can attain a 20 ROE once the lag effects stop hurting the margin.

Is that a target or not, a return on equity --

Yes, our target for an ROE is to make between 15% and 20%.

And as the lag dissipates and as the (indiscernible) cost also dissipates, we will get closer into the 20%.

Okay.

Let me ask a question on gain on sale and the percentage in your prime you break out prime and sub prime and home equity.

Within prime, I'm sure there's a lot of different products within prime.

I was wondering how much of that is nonconforming and is it -- the expansion in the margin and your margin trends versus some others are you getting some benefits in some of the nonconforming types of products?

What percentage of that is nonconforming of the prime?

Are talking about again the bank?

No, I'm into the Loan Production sector, the prime gain on sale margins and the prime originations.

I'm wondering how much of that prime is nonconforming and if some of those products like the all-day products, and maybe the reverse mortgage products, if there is margin benefits that you are getting.

We don't -- we're coming with a reverse mortgage, Bob, but we don't have it set up yet.

But the -- break it down and nonconforming is primarily driven by the loan amount.

Eric is running through some calculations.

Do you have it, Eric?

Just to give you some color on the product type distribution.

A little over 30% of our product is conforming.

A little less than 20 is pay option.

A little less than 15 are both jumbo and all-day.

Both of those are a little less than 15%.

So that gives you some flavor for how all of those will come together in the mix.

Okay.

Does that help you?

Yes.

Last question on the capital markets business.

A very strong quarter.

You had very strong trading volume as well.

Understanding how volatile and unpredictable that number can be the earnings out of that business on a quarterly basis, is there anything unusual in the first quarter's number and is there visibility into a decline in the profitability of Cap markets in future quarters?

I think the general there is one item that was unusual which was the $10 million item that was a brokerage -- we brokered a large group of hotels for one of our sponsors, one of the companies that we finance.

And they -- which I think is a real credit to our commercial team where they -- normally don't broker.

We bank.

So there was $10 million item.

Other than that, -- 6 million -- I think that balance is coming to your earnings.

So 6 million that was booked for the first quarter of that.

Other than that I think the potential for that entity as they continue to expand the product line and begin to put some meat around the primary dealership in terms of going into the swap business and other derivative type businesses to support the primary dealer.

I think things look very positive.

I was very impressed with the team that we put together in the UK.

The team that we put together in Tokyo, extraordinary people.

And we're beginning to break into areas that we have not had the opportunity to sell into in the future.

So I'm very positive on Countrywide capital markets.

Great.

And I'm sorry, I'll sneak in one last one, on global --

You promised that that would be your last question.

Sorry about that.

Global is -- this late in the call I'll sneak one more in.

But the $10 million that you made in the global would you expect that is that going to run down to zero over two years essentially (multiple speakers)?

I think we have a three-year deal so far in terms of the Barclays arrangement.

And I will have Stan work through those numbers with you but -- which is a very good deal for us and a good deal for Barclays obviously.

They are getting a world-class technology.

And the question I believe is that whether or not this technology that we have that we've created and licensed has value to other players in either the UK or Europe, Western Europe.

And that we'll have to see as time goes on.

We believe, at least conceptually, it has enormous value to anybody who is in the business of servicing loans on their balance sheet, all the banks in Western Europe and maybe in some banks in Eastern Europe.

But that we don't know.

We do know for the next three years what the contractual arrangements are.

Stan, do you want to walk through that?

You know what you seeing is we're going to have pretty steady state in terms of license fees for the technology and perhaps some occasional add-ons for additional programming that we will do on the account that we have.

We are having discussions with other interested parties in terms of licensing that technology further and it is a very complete suite of products for processing and servicing the style loans that you have in the UK and in Europe.

So I think it is a very good potential to license and we have the management team there focused on presenting the programs to other users.

It is a technology that we're getting use out of here in the U.S. because we have an opportunity to start with a clean slate there and it is a very advanced technology and we're using some of it here -- the Bank is using it for their reverse mortgage program.

Great.

When are you rolling out reverse mortgage?

When do you think that's going to happen?

Q3 to Q4.

Q3 to Q4.

Thank you.

George Sacco.

Actually my question has been answered.

Thank you.

[Jim Delial].

Hi guys.

We've heard in a lot of places about increasing oversight and scrutiny from the regulators to over affordability products for depository institutions.

And recently some of the nonregulated originators have had some very strong originations numbers, very strong option ARM components.

On the margin, how would you characterize the regulatory environment or the oversight for affordability products?

And do you believe that might be giving people who do not have bank charters a bit of an unfair advantage?

I wouldn't call it unfair.

It's America.

Anything is fair in love and war.

Let me first point out that the Countrywide home loans is independent of the Bank.

So we have the same advantage of a lender that is not regulated in a sense.

I mean the overall company is regulated by the Fed because of the bank -- because the fact that we have -- we're a bank holding company.

I would say that there are I think you can view this a couple of ways.

One is that there are advantages being regulated, advantages such as making sure that we have the best of class in governance.

The Fed demands that, mandates that and I think that over time is to the advantage of the company.

I think it's an advantage in terms of the view of rating agencies of us having the Fed oversee us O think gives us greater credibility with the rating agencies.

On the other hand no there's question that to the extent that the regulators place enormous pressure on the regulated entities relative to either to the quality of loans or the appraisal process, that gives an advantage to the nonregulated entities.

So it is a mixed bag.

And it's just a matter of how you manage your way through it.

Thank you very much.

Okay, I think that is it.

I would like to thank everybody who participated in the call and appreciate your continued support.

And we will talk to you next quarter.

Thank you very much.

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