美國銀行 (BAC) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by.

Good morning.

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

Please note that during this call conference 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 in the second-quarter press release and other risks detailed in documents filed by the Company with the Securities and Exchange Commission from time to time.

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

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

So with that being said, let's get right to this second-quarter agenda.

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

Good morning sir, and please go ahead.

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

I recommend that all our listeners view the second-quarter press release which can be found on our website, www.countrywide.com, on the Investor Relations home page.

Please note that we will not be providing slides to accompany the conference call as we have done in the past.

Instead we have embedded tables within the press release itself which contain the information previously disclosed on our slides.

My comments today are structured around these tables and I'll be referring to them throughout the call.

Please also note that some of these tables contain information primarily related to our banking operations that previously would not have been available until the filing of our 10-Q.

In addition, we have streamlined and integrated our prepared remarks so we can increase the time allotted for Q&A.

Our intent is for these changes to provide investor community with a greater amount of useful information delivered in a more efficient and user-friendly format.

Let's now proceed.

As disclosed in this morning's press release for the 2006 second quarter the net income was $722 million, a 27% increase from the second quarter of 2005.

On a per-share basis diluted earnings per share was $1.15, up 25% from the second quarter of 2005.

For the six months net income was $1.4 billion, up 12% from the same period a year ago and diluted earnings per share were $2.25, up 10% from the comparable period a year ago.

As you can see from table 1 in our press release, consolidated quarterly net income growth was driven by robust double-digit increases in all of our core business segments with mortgage business pretax earnings up 20% year-over-year; banking pretax earnings up 30%; capital markets up 50%; and insurance up 54%.

The key highlights of the mortgage banking segment as shown on table 2 include servicing sector pretax earnings advancing 213% year-over-year for the second quarter.

And while production sector pretax earnings were down on a year-to-year basis, the second quarter of 2006 was up from the first quarter of 2006 by 14%.

Let's first look at production sector performance as illustrated in table 3 of the press release.

Pretax earnings for the loan production sector advanced in the first quarter of 2006 primarily as a result of an increase in gain on sale.

Similarly, total loan production sector pretax earnings as a percentage of production for the second quarter increased 1 basis point for the first quarter of 2006.

Compared to the prior year second-quarter revenues grew as a result of an increase in gain on sale.

Net warehouse spread, however, decreased as higher short-term rates drove funding costs upward, more than offsetting the benefit of a higher average inventory balance.

Total expenses, both in dollars and as a percentage of loans produced, increased in the second quarter of the prior year primarily as a result of ongoing strategic initiatives to increase the Company's marketshare as well as a decrease in FAS 91 deferral (indiscernible).

As a result total loan production sector pretax margins for the second quarter decreased 9 basis points from the second quarter of 2005.

Overall gain on sale margins as a percentage of loans sold as shown in table 4 of the press release rose 10 basis points from the prior quarter to 138 basis points as a result of increases in margins across all three product categories.

Compared to the first quarter of 2006 second-quarter prime gain on sale margins were up 5 basis points.

This sequential quarter increase was fueled by a slight improvement in pricing margins which vary by product type with pay options playing a significant role.

Both nonprime and home equity margins increased primarily as a result of improved secondary market execution.

Quarterly loan servicing sector pretax earnings as seen in table 5 increased year-over-year primarily as a result of a $231 million improvement in valuation changes as the MSRs retained interest and servicing hedge, and a $60 million improvement in operating revenues.

These improvements were partially offset by an increase in interest expense resulting from growth and servicing assets combined with an increase in the cost of debt.

The net result was a pretax loan servicing margin of 10 basis points for the second quarter of 2006 which compares to 4 basis points for the same period a year ago.

Key highlights for the banking segment, as shown in table 6, include the following.

Banking segment quarterly pretax earnings increased 30% year-over-year driven by a 38% increase in banking operations earnings.

Earnings for banking operations were driven by a 37% increase in average earning assets by the bank as well as a 3 basis point increase in net interest margin.

On a sequential quarter basis banking segment pretax earnings declined by $16 million primarily as a result of an increase in corporate overhead allocations as well as a $5 million decrease in earnings from Countrywide's warehouse lending known as CWL, and a $2 million decline in earnings from banking operations.

Banking operations earnings were down primarily due to the interest rate lag effect that the investment pay option on loans which has compressed net interest margins as well as an $8 million increase in the bank's loan loss provisions.

The loan loss provision was increased due to higher originations and to portfolio seasoning.

Delinquencies 90 plus days at June 30, 2006 were 31 basis points, a slight increase from 28 basis points at March 31, 2006 and 7 basis points at June 30, 2005.

As shown in table 10, the quality of originations of the bank loan portfolio was sustained across all product categories.

Key highlights for the capital markets business as shown on table 11 include the following.

Quarterly pretax earnings for the capital market segment advanced 50% from the second quarter of last year driven by increases in all revenue categories including 44% and 39% year-over-year increases in conduit and underwriting revenues respectively.

Conduit and underwriting revenues were higher as a result of an increase in gain on sale margins as well as an increase in volumes.

This was partially offset by a decline in net interest income due to the flattening of the yield curve.

The commercial real estate finance group continues to perform very well, selling $1 billion in loans for the second quarter of 2006 compares to $0.5 billion in the comparable period just a year ago.

Key highlights for the insurance segment are shown in table 13 including the following for the second quarter of 2006 insurance segment pretax earnings grew 54% year-over-year due to an increase at both Balboa Reinsurance and Balboa Life and Casualty.

The increase at Balboa Reinsurance is primarily the result of an increase in premium seeded.

The increase at Balboa Life and Casualty is primarily the result of premium growth in voluntary homeowners and auto insurance fueled by a new strategic distribution partnership indicated that we initiated in 2005.

Partially offsetting this increase was a one time capital gain of $9.8 million for the second quarter 2005 that did not recur this year, slightly dampening the year-over-year comparisons.

In summary, performance in the first half of 2006 benefited from the positive loan servicing sector performance which at 9 basis points approached the upper end of the range within previous earnings guidance.

The primary driver was outperformance of the servicing hedge.

Loan production sector margins for the first half were close to the midpoint of the range contemplated in previous guidance, reflecting moderate front end pricing competition and an improvement in credit spreads compared to the end of 2005.

Management's outlook for the second half of 2006 contemplates potential changes in the operating environment compared to the first half of the year.

These potential changes include returns closer to the midpoint of expected performance levels for the servicing sector, a modest decline in the size of the purchase mortgage market, and the possibility of a more competitive front end pricing paradigm for mortgage products.

However, we began the second half of 2006 with a $65 billion pipeline of mortgage loan applications and an assemblage of new products targeted for introduction before year-end including reverse mortgages, enhanced refinance programs and a production salesforce of over 16,000.

Our bank's new savings link deposit products and its initiatives targeting small business customers are expected to fuel growth and liability generation, enhancing the Company's overall funding capability.

Capital markets is progressing on the implementation of its new business initiatives in the derivatives, commercial real estate finance and asset management sectors as well as continued global expansion.

Besides the UK we now have offices in Tokyo and Hong Kong.

Our insurance division continues to focus on profitable growth by refining its operations and reducing it catastrophic risk exposure.

In addition, even as Countrywide seeks to sustain marketshare growth, the Company is implementing an efficiency project designed to identify redundancies and reduce costs as we move toward a more normalized market.

With a proven, time-tested management team; a $195 billion balance sheet; and high investment grade credit ratings we're well positioned to be a beneficiary over the long-term in this consolidating market.

We updated our 2006 guidance this morning as well with our new diluted EPS range of $4.00 to $4.80 for the full year of 2006.

This compares to our previous guidance of $3.90 to $4.80 which was provided on May 31, 2006.

This revised guidance reflects actual results for the first half of 2006.

The assumptions behind this tenet are outlined in the press release in table 14.

In conclusion I would like to thank all of our employees and the management team for their enthusiasm and dedication to making Countrywide what it is today, a cultural and financial leader among its peers.

While our shareholders mostly focus on the results we deliver each quarter, which they should, there are millions of homeowners who witness the dreams we deliver everyday.

That wraps up my prepared remarks and we'll now take your questions.

(OPERATOR INSTRUCTIONS).

Bob Napoli, Piper Jaffray.

Good morning.

I'd like to get two questions if I could, Angelo.

First of all, on a broad view of the mortgage market, how far away are we from a normal market?

Your forecasts generally have been a little bit more accurate I think than some of the other forecasts out there.

You're now at 2.4 to 2.8 '06 barring a spike in rates from here.

What would you expect 2007 -- a reasonable range for '07 to be?

And then I just had one follow-up on the bank.

I think that 2007 will probably be at the lower end of the range we're giving for 2006.

I think it takes -- I know just from my own personal experience, Bob.

I've never seen a soft landing in 53 years, so I think we should have a way to go here for this thing to level out, particularly along the coastal areas where you have the biggest volume, that's where you've had tremendous explosion of values.

Those things have to settle down a bit.

So, again, I have to prepare the Company for the worse that could happen in the markets and my view is that I think that the market itself and I think that comments by [Bernanke] were quite optimistic.

Okay.

And at $2.4 trillion, even that would be kind of the softest landing I've ever seen from --

Yes.

I think it could be somewhere around 2.2 to 2.5, somewhere in there for 2007.

And then on the bank.

Just on the -- the net interest margin for the bank came down a bit more than what we were looking for.

And I'm just wondering if you can kind of give a little bit of an outlook for what you see the on the margin and on the credit trends in the bank.

Assuming that he Fed raises we would say one, no more than two more times, what would you over the next quarter or so, what would you expect to see out of the bank margin next year?

The margins that we just reported, there were some anomalies in there; one which I mentioned which was the compression caused by the pay option loans, but there's also a -- home equity loans -- what was the dollar amount as the home equity loans not coming in --

We had about $3.5 billion come in at the end of the quarter on the last day.

Yes, it came in at the last quarter and the parent -- Countrywide Home Loans got credit for the interest, not the bank.

And the bank at the same time had to take a reserve so it was a double whammy for the bank.

That again will obviously be made up in the upcoming months.

But I think there were two distortions in that number.

In terms of what will happen if we have one or two more increases here -- I don't see much of a change in the bank spreads.

I think if it's managed properly -- which I believe Carlos and Jim (indiscernible) and the team are doing well I think we're going to be -- I think what you see now is pretty much what you're going to get.

Thank you.

Ed Groshans, Fox-Pitt, Kelton.

You took the share count down or you had expected share to 16.7, but you have a much more aggressive longer-term marketshare outlook.

And I guess I was trying to think of what can Countrywide do in terms of growing its share as well as do you expect production to grow at mortgage debt outstanding and then what do you think the potential for growth in the production side of the businesses is in the next three, four, five years?

I think overall the growth will be quite healthy.

If you look at the composition of our population, you have 70% of -- 80% of white homeownership rate with only 45% of African-American/Hispanic homeownership, right there is a great opportunity in itself.

You have continuous migration into the country each and every year with the primary objective trying to buy a home.

So think overall the prospects of continued increase in the homeownership rate, an increase over time even though I said I think I see a reduction in volumes in 2007.

If you look at this over a four or five year period year going to see very healthy growth going forward -- and one thing good about our business it's not a fad.

Money is not a fad, financing is not a fad and homeownership is certainly not a fad; it's built into the culture.

So I think they're looking at a very, very healthy long-term picture in the mortgage market.

In terms of competition, you've seen some continuous consolidation -- Wachovia, World Deal, you've seen others, you continue to see more.

You saw at Washington Mutual relieving themselves of some of their MSR issues with selling to Wells.

But in our particular case, in the short-term that you mentioned in terms of reducing our marketshare projections, it's an issue that we keep on assessing because the competitive issues continue to change; the environment is a very fluid environment, we have to just keep on assessing that.

But the current issue is that, for whatever their reasons are, our major competitors namely Wells, Citi, Chase, have become very aggressive in one of our channels and that is the correspondent channel.

It's the easiest channel to become aggressive in because it's simply price driven.

And we have, at least at this point in time, chosen to back off which is -- our nature is that if somebody gets very, very aggressive and we believe to be making uneconomic decisions -- at least from our perspective, maybe not from their perspective because they have a different structure -- we will back away.

And that's where you see the reduction in the marketshare is in that one channel because in the retail channel we are gaining marketshare by increasing our sales force and our brand system.

But I don't believe that's a long-term issue.

We'll figure it out and get it resolved.

We mentioned we'd be somewhere between 25 and 30% in five years.

That's our goal, we continue to assess it as each quarter goes by, looking at the competitive environment, looking at the overall housing environment and see if that's achievable.

That's sort of where we are at the moment.

Okay.

And you've also talked to marketshares as like the consolidation comes through and that's kind of a boost that that will give Countrywide some of the share.

I guess a little bit different this time is while the consolidation is starting to occur starting to see some big investment banks enter the business.

Does that raise any eyebrows for you or are you concerned a little bit by that at all?

Yes, it tightens my cheeks, sure.

You've got Bear and some Lehman buying mortgage company and the dynamics there is -- at least from my viewpoint speaking very frankly -- is they don't know anything about the mortgage business which makes them a dangerous competitor.

And they have lots of money to spend.

And so I think they'll be disruptive for a while.

I don't know how long it will be, but certainly they're also on the correspondent side by the way.

They're pricing loans -- what we believe to be -- at least for us, again, based upon our structure away from the market.

And they are clearly -- when Friedman said (indiscernible) he woke up one morning.

I woke up one morning and I was competing with tons of little mortgage companies and suddenly I was competing with banks.

And then I woke up the other morning and found out I'm competing against the Street.

And I think that's a paradigm shift that's taking place and one that we are keeping our eye on, one that we're building our defenses against and building our strategy around is how do we defend ourselves against a new competitor who is not knowledgeable in the mortgage business, who is not knowledgeable as to risk -- and they may get away with it, but not knowledgeable to risk, and have no hesitation about paying two and three times what we would pay personnel in the business because they're used to the big bucks and so it's a new paradigm.

Thank you very much, Angelo.

Mike Vinciquerra, Raymond James.

Thanks, good morning.

And Angelo, we do appreciate all the extra disclosure you provided this quarter, it's very helpful.

I wanted to ask on the bank, one thing -- I'm sorry, I've lost my train of thought.

Did (indiscernible) I had a chance to talk to Carlos about it a little bit and it sounds like you guys feel like you can get very good returns off of that product based on the blended rate you expect to pay.

How has the progress been with that?

What's the acceptance been from customers and is that growing as you expected it to?

On the SavingsLink?

Is that what you said?

I'm sorry?

You said the SavingsLink?

Yes, exactly.

We launched that product about 60 days ago and it's doing better than our expectations were on a run rate right now of approximately $300 million a month in production from that product.

And our goals are to get it to $1 billion a month and we're well on our way after 60 days.

Great, thank you very much.

And the question I forgot was just -- on the seasoning at the bank you raised your provision pretty significantly and you mentioned seasoning as one of the issues.

My only question there is I understand that you're supposed to provision for what you think over the life of the loan.

When you put the loan on the books how did seasoning actually impact it?

Are you actually seeing a little bit lower credit quality than you originally anticipated when those loans went on the books in the first place?

There are a number of factors beyond seasoning.

One of the most material factors that's occurs is the one that Angelo alluded to where we decided to portfolio some HELOCs at the end of the quarter and we ended up having to book a provision for that in the banking segment.

So that dramatically increased the provision in the banking segment.

But no offset, by the way, of interest.

As loans season and as delinquency increases, obviously you have to book additional provisions to cover that.

Our performance in the delinquency area is still better than our models are projecting.

And so pricing in lines of pricing and our reserving assumptions, our delinquency is also being affected modestly by the economy in the Midwest, the auto sector is weak and we have about 4.5 to 5% of our portfolio there and that's experiencing a little higher delinquency in that area than we had anticipated.

Okay, that's very helpful.

Thanks, guys.

Paul Miller, FBR.

Angelo, can you walk us through how you guys consider your provision?

I believe your provision was right around $60 million, but $35 million of it or $36 million went into the bank.

This is up from like $17 million a year ago I believe I might have a raw numbers.

But what were the charge-offs at the bank and what were some of the reps and warrants maybe that you paid at the mortgage bank -- or just can you walk us through where all that money went?

I'm going to bifurcate this question between Eric Sieracki and Carlos Garcia;

Eric from the parent point of view and Carlos from the bank.

Eric, why don't you go ahead?

Okay, Paul, you made the observation that our reserve was up from roughly the high teens in millions of dollars last year to significantly higher number and it was really the same situation we saw in the first quarter.

If you look at the second quarter, the provision is up from 17 to 62; in the first quarter it was up from 20 to 63.

On the bank side which Carlos is going to get to it's principally due to seasoning, higher delinquencies, issues like that.

On the CHL side, this is a provision related to loans held for investment.

So those loans have been increasing; you can see that in the tables that we provided in the Q as well as the press release here.

Also we've seen secondary marketing executions move away from securitizations more to whole loan executions.

So instead of seeing loss activity and residual performance, we're going to see it in loans held for investment.

That's pretty much the nature of the increase on the CHL held for investment side.

I'll turn it over to Carlos to talk a little bit more about the bank.

The bank's provision is going up for a couple of reasons.

First of all, as the portfolio increases we have to provide a greater provision.

In basis points the provision is fluctuating quarter-to-quarter with the mix of loans that are (indiscernible) for the quarter, the rate of growth of the portfolio, the change in the delinquency during the particular quarter as well as our assessment and review of the models that are used to book reserves.

But if you average the reserves of the bank with the provisions in the bank over an annual period, I think it's averaging something around 15 basis points, which is well within our model assumptions.

I think also if you look at the growth in the balance sheet of both the bank particularly and the overall company, there's been a substantial increase in that balance sheet, just $18 million in the last quarter I believe.

And then going back to like you're selling more whole loan so you've got to hold more provision at the mortgage bank instead of holding it for residuals.

Is this just a different compartment you're moving from one area to another (multiple speakers) what it is?

Paul, in terms of secondary marketing we always seek the best execution.

And from time, it may be securitizations from time to time it may be a whole loan.

So that's something we monitor on a regular basis.

And is there any way that -- in the future is there any discussion about disclosing the level of charge-offs from across the company, both at the bank and the mortgage bank?

Yes, there is.

As a matter-of-fact, as Carlos was talking about the provision, I was reflecting on the fact that his charge-offs will be very, very nominal in relation to the size of the reserve that he has at the bank and we are working on providing a flow of the reserve in the near-term future.

Thank you very much and congratulations on a good quarter, guys.

Bruce Harting, Lehman Brothers.

Paul cleaned me out of all of my questions -- line of thought there.

But what were the charge-off numbers at the bank or the other --?

By the way -- Ann, you said at the third quarter we'll be showing the charge-offs?

Yes, you'll be disclosing those in the third quarter.

Yes, the third quarter we'll show the charge-offs.

The charge-offs at the bank are stable at around 3 to 4 basis points on an annualized basis.

So as these loans season and the portfolio keeps growing, just expect a normal seasoning provisioning pattern going forward.

Just by sheer size, Bruce.

As it increases in size, you have an increase.

Can you comment on the impact of short rates on the warehouse and any advantages you may have in funding mortgages that the weaker players don't have now.

And with the 400 basis point rise in rates we have seen, I would have thought -- and we have seen with the consolidation you pointed out some of the weaker players folding and selling out.

But more specifically to your business and the fact that you have the investment-grade rating and some of the advantages you have from size, behind the scenes what advantages we may be seeing in your ability to fund loans that others don't have right now?

Well, when you say other, Bruce, obviously there's all gradations when you talk about a Chase, Wells or BofA or in that group of players.

Obviously, they have equal to or better funding costs than we do for pretty obvious reasons.

And then you get -- we are sort of in a world of our own here.

We're the only one of our kind as constantly reminded by the Fed.

And then you get to below us and that runs into a large number of disparate players who have very little funding ability and some will have some, and then we have a big advantage over them.

That is where I think the consolidation will continue.

On the warehouse, you will see that in my presentation that the income from CWL's warehouse lending operation which is sort of under the bank, our income was reduced because of the flattening of the yield curve.

And that's the primary driver of that.

And in terms of -- the real advantage we're going to have over time is as we grow the bank because our current cost of funding -- cost of funds in the bank is how much under LIBOR?

Roaming around 20 basis points under LIBOR.

20 basis points under LIBOR which is our lowest cost of funds.

And so to us -- and that's why we keep on focusing on the growth at the bank because it could provide us over time the lowest cost of funding.

And so -- and also resolve some of the rating issues.

So that's unrated liabilities.

And so I think that's why we constantly try to look for ways to reduce our cost of funding.

But I think as you go through the maze of the opportunities that we have to do that the bank stands out -- best method for us to do that.

And obviously of course to the extent that we would ever increase -- better our ratings with Moody's and S&P and Fitch that would certainly help.

But that's where we are.

But I think you raise a good point, Bruce, because the cost of funds ultimately will drive the weaker players out.

Bruce, as an add-on.

Generally speaking our pricing formula is flexible enough to contemplate the client (indiscernible) spread while we own the loans in inventory.

And what we do is we increase our margin and gain on sale.

And generally speaking you're going to see gain on sale and interest spread in the warehouse period in sync with one another and they should counteract one another.

Of course market conditions may stop you from actually being able to collect the incremental margin, but in concept the pricing formula contemplates such an issue.

Okay.

I knew I had one more follow-up on the credit.

I did a little matrix where I just went through the sectors versus the balance sheet -- the consolidated balance sheet, Eric, and for go-forward purposes you'll show the charge-offs, but on the consolidated balance sheet where it says loans held for investment net of allowance, that allowance is for both -- for the whole organization or just -- are we talking about just the loans held for investment and then there's another allowance somewhere else -- pardon?

Because on the consolidated income statement where you show provision, that includes both the provision for the bank as well as other loans.

But I'm not clear on whether the consolidated balance sheet picks that up.

Okay.

The consistent theme that you're going to see is it's loans held for investment which would be both at the bank and CHL.

So when you look at the provision on the face of the income statement, that's going to be CHL and the bank.

When you look at the reserve for losses against loans held for investment again that's going to be CHL and the bank.

Okay, thank you.

Moshe Orenbuch, Credit Suisse.

I was just wondering if you could give a little more detail on the planned expense reductions, what types of things have given the idea that you are continuing to gain marketshare on the retail side and where would we see that?

How can we expect to see those (inaudible)?

Let me break it in two parts for you.

As the Company grew quite rapidly over the last five years, as you know, we've had an opportunity now to look back and we find redundancies and waste in certain areas of the Company which we're addressing.

And we believe that the amount of dollars represented in those two categories are significant.

And we have a full-time executive who has worked with senior management in identifying these areas very specifically and are attacking them for the balance this year and into next year.

We expect a significant reduction in those redundancies through December and into probably the first half of next year.

On the other hand -- on the other side of the equation is that we have to increase our quality of effort in other areas of the Company, both on the origination side increasing our salesforce in certain administrative areas of the Company where the Company got ahead of it, we have to catch up, some IT issues that we have to address.

When you balance that out it may very well be that the savings that we incur on the redundancy side and waste side will be utilized to make the Company a -- continue to be a world-class company in all of its operations.

So I hesitate to tell you that you can look at a number and see where that -- the savings, but it will be money better spent, more wisely spent in the Company.

Why don't you talk about this, Carlos?

In addition to reducing the expenses of the Company via the G&A expenses we're also working on reducing our funding costs by leveraging the bank.

The Company's intention is to fund an ever-increasing proportion of the mortgage warehouse through the bank and that's well underway.

As of today we're funding about a third of that warehouse through the bank and those numbers are not reflected in the bank segment, they're reflected in the mortgage banking segment.

So the goal is, to be more specific, to drive down the redundancy expenses by that about $0.5 billion over the next 12 months.

But it could very well be that a significant portion of that savings will be dedicated to substantial improvements in other areas of the Company in order to get to the next level has to make these improvements and so we'll let you know when we have our arms around it after December and see if the number is significant enough for us to report.

Great.

Thanks very much.

Mark Patterson, NWQ Investment Management.

I just wanted to add that I think the new format in the press release is excellent.

Thanks for that.

We're always concerned to try to make any changes because we don't want it read in the manner in which we feel we don't have full -- we try to disclose more and more.

Some people do it to hide it; some people do it to show how great they are.

Assuming that you expect that the investment banks are going to continue to acquire, Angelo?

Yes.

I think that every time -- I think right now they look at this as the freeway -- short cut of happiness and they're going to -- because they're on one end of it.

They sell the securities and they say if we sell the securities why don't we get into the product -- manufacturing the product that creates the security which has some logic to it.

And so I think that they will -- you'll see most of them enter the business as the banks did and become more aggressive.

I just wanted to clarify some comments about the market share the reduction in the guidance that goes up to 17% now versus the 18 and 18.5 that we had before, is that really due to the banks chasing the business is that kind of the cause of that?

Because your absolute volume doesn't really fall but you're not grabbing the incremental piece of the higher overall market.

I'm not sure of that question.

What we attribute it to -- Stan, you ought to comment on this -- but what we attribute it to is the fact -- what I mentioned is the -- our decision to back away on the -- to some extent on the correspondent part of the business because the pricing that's out there by the major players is one that we're having some difficulty reconciling.

And so, until we do reconcile it we want to make sure that whatever we do is economic to the Company and we're adding value.

And so the drop in the perspective marketshare is due to that one channel.

Now the bank chasing -- I'm not sure I understand it -- you mean other banks?

Other banks.

Wells has clearly become aggressive.

They're our primary -- and have been for some time -- our primary competitor who is very good at what they do.

And they've stepped up -- they put their foot down on the accelerator.

Once we passed them by I'm sure they weren't happy with that.

And if you noticed, the deal with Wells was just enough to get over the hump to make them number one.

I don't know if that's an accident or not.

But they have their eye on us and I understand that.

So yes, the banks, and particular Citi, Wells and Chase have been aggressive.

Mark, if I can make it follow-on comment.

You appropriately noted that our original guidance on marketshare was 18 to 18.5% for '06.

Our actual experience in the first half was 16% marketshare.

Angelo has well-documented the street firms and the banks being more aggressive, especially in the correspondent channel.

And while we do have lofty marketshare goals, we're only going to do it if it's economic.

What we're looking at for the second, half after the 16% actual for the first half, is roughly 17.5 to 18.

That's how you get to the blended 16.7, 17 range.

So we are still expecting marketshare growth in the second half despite the actual of 16% marketshare in the first half.

Just to add on to what Eric said is that -- questioning these -- we've done hundreds of these now quarterlies over the last 40 years that the question is always asked would you shoot for marketshare irrespective of the economics?

And I think you can see that the answer is clearly no, we will not do that.

We will not sacrifice economics for marketshare.

That's very clear; thank you very much.

I have a question on the guidance as well.

On the servicing end, I'm kind of curious of how you might use 5 basis points at the low-end which I think given where you think you're servicing portfolio will end up at the end of the year and that's a pretty consistent item that that would entail maybe as low as 1 basis point on the low-end for second half of '06 in the servicing line.

I assume that that would be your scenario where there's a major drop in rates in refis pick up.

Your hedging has been excellent, it was great this quarter.

Just kind of curious of how you might even get down to the 5 basis points on an annual basis this year for servicing.

That's a fair point, Mark.

And you notice, if you take a look at our original guidance for '06, we had quite a wide band.

We were actually 2 basis points to 10 basis points in servicing.

And the reason we shrunk it to 5 to 9 was in respect of the fact that we had 9.3 actual for the first half.

Now I would point out that in both the first and the second quarter we had roughly 100 million -- just over 100 million of servicing hedge outperformance in both quarters.

That's not something we can necessarily count on in the second half, so we're reflecting that in there as well.

But we generally like to keep wide bands to give you an overall perspective of what exactly can happen.

In our guidance on the ten-year treasury for instance, if we looked at 480 actual for the first half' we looked at roughly the 510 level when we were preparing the guidance; and we banded 50 basis points around that for a 460 to 560 ten-year average for the second half.

So if we had a 460 second half we could see some significant runoff.

Were that rally to occur late in the year there might be some decline in servicing value not fully covered by the servicing hedge in anticipation of production earnings that might occur in '07.

So we're just keeping wide bands to make sure that the actual results fall within our guidance.

Okay.

Thank you, Eric.

And one last question.

If you could speak to the significant change in the allocated expenses -- that kind of hurt the servicing line this quarter.

I noticed in your monthlies that there was a change in the organizational format of where corporate overhead assumes some of the headcount from origination and servicing line and I would assume that that's part of it.

I'm sorry if I missed it, but could you talk about the external allocation of expenses?

At the end of the day, Mark, corporate allocation is an evolving process and one of the realities is that our corporate expenses have been increasing substantially.

And the overhead allocations are increasing to all the divisions and certain divisions experience significant increases in the first quarter, certain divisions experience some different allocations that increased in the second quarter.

That process will continue.

Again, the real driver here is that our overall expenses, our infrastructure expenses are growing and therefore the corporate allocations out are growing as well.

And the reason why they're growing is because of the issue I raised before is that the Company has now had to take a breath and look at where our weaknesses are in our infrastructure and make sure that they reinforce those areas that need improvement -- whether it be in HR, and IT and in the finance area of the Company to make certain again that we have a strong foundation for the next move.

Thanks for the very solid performance, guys.

Ken Posner, Morgan Stanley.

I wanted to ask about the hedge out performance and how I can see that in the numbers.

If I look at the statement it looks like $569 million in (technical difficulty) fair value of MSRs and $52 million cover retained interest exactly equal to the servicing hedge loss (indiscernible).

So I must be doing something wrong to understand the $100 million in hedge out performance.

Stan it going to talk to you about this.

Basically in this environment where you have the flat (indiscernible) in particular, one would expect that given the types of instruments that we use in hedging and the decay of options that there would be a cost associated with the hedges in many quarters.

And so you wouldn't necessarily expect a valuation change to be zero or even you'd expect it to be a level a beta or normal decay, and we've talked about that in the past and that number can be anywhere from 300 to 400 basis points on the asset.

And we've had in the first two quarters performance which is better than that driven in the last quarter by the fact that interest rates were up slightly.

We tend to leave the position so that produces a value and an additional value.

In a rally there are times, as Eric mentioned, we leave a little bit of a whole that the macro hedge will fill in with additional production earnings.

To give you our budgeted data in the second quarter based on the positions that we ran was about $112 million to give you a -- portion that number for you.

You would have expected the cost to be $112 million instead of coming out right at zero (indiscernible) '03?

The market was unchanged.

I would expect actually to come closer to that $112 million.

The hedge actually performed much like we expected it to perform given the rate change that we had.

But our guidance assumes a lot of different rate paths.

And so we're providing a variation of what are the possible outcomes of that.

You know, the outcomes that we've had in the last couple quarters have been very good.

We want people to understand what is the normalized or kind of average performance for this.

And if I could follow up with a question for Angelo or for anybody.

I remember we had a discussion a year and a half ago about I/Os which are becoming popular.

And Angelo in particular, you made the point that in the early years of the loan the amortization rate wasn't all that different between an I/O and a normal loan and that they weren't the beginning of the end as some people feared.

So now that debate has switched to the pay option arms and there have been a number of accounts amount the risk inherent in those products.

You all must feel differently given the volume that you are doing or maybe not, but if you could just tell us generally where you think the infatuation with pay option arms is going to end up?

Well, I don't know where it's going to end up because it will depend upon interest rates.

I believe if we had a lower interest rate on a hybrid, for example, five to seven to ten, 30-year fixed than we have today, I believe that most of these people that have any kind of arm or even an interest only or a pay option would opt to get out.

And at least that's been the history of this business is that people if given the choice would always pick a product where they have some certainty in what their mortgage payment is going to be over the next several years.

I don't know if these people are going to have that opportunity.

So let me go back to the -- my comment on the I/O was that there's not a significant difference -- not that there's no difference, there's not a significant difference in the amort of a hybrid I/O than there is in a fixed-rate loan -- a (indiscernible) amortizing loan, it's (indiscernible) the interest payments in the first four or five years.

And I think that that has proven out.

That's why it shifted because the fear of the I/O has gone away because I think it was an unjustified fear.

And so far as the pay option loan, that's a little more complicated in that there are resets here and depending upon where rates are the resets could be significant and we just need time to see how this is going to play out.

If rates continue to rise significantly, then these resets and payment shocks will be substantial.

If they level out where they are or go down then they'll be more palatable.

We do get a sense that there is some refinancing taking place.

You had the five-year -- at least it was yesterday under 5% -- gives us an opportunity to produce a pretty good hybrid for the consumer; we see some of that happening.

We are sending out a notice to every single mortgagor in our portfolio with a pay option loan as to what the reset could mean to them and how their payments could be increased and therefore encouraging them to make principal curtailments to minimize the impact of a reset.

We're also providing it upon loan applications all of the caveats to the mortgagor relative to this loan.

Now that I've given you all of that background -- in terms of the delinquencies that we're experiencing on that loan overall in our portfolio is about 61 basis points versus 81 for all other types of conventional loans.

And obviously they should perform better;

I mean it's a low payment and they should -- so they're performing well in this environment.

The test will be when the resets take place and I'm not certain exactly what's going to happen there.

Thank you.

Brad Ball, Citigroup.

Just a quick follow-up on those comments on the option arms, Angelo.

Is there any reason to believe that the credit quality of the option arms that are securitized is any different from what Carlos just describes in terms of the quality of the arms that you're holding in your portfolio at the bank?

I don't think in general my answer to that would be, no.

However, we don't -- if you're relating to the article in the Wall Street Journal this morning timing was a Little suspicious.

We don't know what the composition of those securities were because the market is very smart and efficient and it prices to the risk profile of what's in those securities.

For example, it could very well be that in those securities for example versus Washington Mutual that there were investment properties under pay options in those securities.

We don't know.

It was an article that was very difficult to figure out what basis they used for the comparisons.

But in general, we originate these loans on an equal basis and the decision in securitization is more of a timing decision than it is a credit quality decision.

And again, the market, if in fact our securitization show a slightly higher delinquency than they'll be priced into -- or lower delinquency would be priced into the product, but there's no conscious decision on our part.

And separately --

I just want to add a couple of comments on that.

First of all, we should understand that Countrywide securitizes as one way of distributing pay option arms.

We bank as a portfolio investor and we also sell whole loans.

So it isn't -- if you just compare securitizations to the bank or -- you have to look at all combined.

That's number one.

Number two, one of the things that I think is the most outrageous about the comparison in the Wall Street Journal is the fact they're comparing the vintage age of a loan, but not when it was securitized.

So as a mortgage lender we securitize right at the point of origination.

Whereas Washington Mutual, which holds loans in portfolio, may take 2004 vintage loans and securitize them in 2005 and 2006 and obviously they're going to pull out delinquent loans when you go into that securitization.

So it's really -- when we say that this is not apples-to-apples, it's kind of a horrible type of comparison to make and to confuse everyone over.

And to Angelo's point, the underwriting standards is the same across the board?

Across the board the same.

They go through one protocol, Blue's, same protocol, same underwriting standards.

And not all loans are the same in terms of the credit quality and that's why we use risk-based price approach in that is why an investor takes on loans with slightly less credit quality they're getting paid more for those loans.

You just can't isolate a particular security or vintage or age to draw those types of conclusion.

Separately through this quarterly earnings period we've heard from other mortgage lenders, mortgage originators and servicers that there's a big appetite in the market for servicing and a lot of people have sold servicing.

And you noted yourself the WaMu sale.

I'm wondering where you stand on the servicing.

Is there any portion of your portfolio that you would sell?

And conversely, are you a buyer of servicing?

Let me try and answer that.

No, there's no plan either currently or prospectively to sell servicing.

We're in the business of building servicing and building scale.

From time to time in an opportunistic way -- you've seen us do that, small pieces, people come in and want a particular geographic area or a particular city, municipality, wants a particular zip code and are willing to pay up for it we'll sell it, but nothing significant.

You can see that our pattern over the last 40 years to build servicing.

What I like about the Washington Mutual trade is that it shows that there's a liquid market out there for a big chunk of servicing, $100 some odd billion, $130 billion is a lot of servicing to dump and I think anybody who had a concern about the marketability of servicing, I think that should have muted that concern.

But no we are -- in terms of buying servicing, it had to be very opportunistic because the issue that we have, the servicing asset sits within Countryside home loans which is not a regulated entity, it's not the banks, not part of the bank and therefore has limited, very limited leverage on that asset.

And so we're not out to purposely strain that issue and so we're not looking to buy servicing.

It doesn't mean that, again, in an opportunist way, maybe something out there that may be appealing to us for one reason or another we might do it, but generally speaking we won't sell servicing and we won't buy servicing.

Okay.

And if I may, just to extend that, would you look at buying production in here?

I know there are some banks that -- at least one major bank is talking about selling its production business.

And that's Citi you're talking about?

Yes.

We'll look at that.

I think that the one -- I wouldn't call it a C change, but one change in attitude among the management team here is that we have a big company now and we've done it all organically.

And for now in terms of our future growth plans as part of that in all of our channels -- whether it be Countrywide, Capital Markets, whether it be the insurance coverage weather be in the mortgage bank in the commercial area of the bank -- commercial area of the securities operation, we will be doing opportunist acquisitions.

Great, thanks very much.

Jonathan Gray, Sanford Bernstein.

No longer representing, but retired.

Am I correct in my belief that the 800 pound gorilla in the room is the uncertainty regarding the outlook for residential real estate values?

Angelo, you yourself indicate that your experience suggests that soft landings are hard to find, no pun intended.

My question is this -- it looks as though for about a 4 or 5 basis point fee you could purchase some sort of catastrophic credit risk insurance on your bank's entire portfolio, certainly the unsecuritized portion of it.

It looks as if the annual cost per share would be less than 3% of your EPS.

It looks like for about $0.10 a share per year 100 or $150 million pretax only, you could virtually sign off on any credit risk from your bank's loan portfolio, might that not be worth exploring and might it not have a positive impact on the way your company is valued versus those that incur significant credit risk to a decline in residential real estate value?

Jonathan, let me just ask --

In the bank we do a purchase of full insurance on HELOCs that have an LTV of 90 or greater.

In addition to that, we are exploring the types of things that you're saying, but that's all and in an exploratory phase right now.

So we're looking at that issue.

I think that your -- I know you put a lot of thought into it, Jonathan.

We'll have to find out how realistic that is in terms of people willing to take on all the risk of the bank for that kind of premium.

Well, if it turned out that it would cost you less than 3% of your EPS per year to virtually eliminate the catastrophic credit experience when all the world around you were losing theirs so to speak.

Would that be of interest and would it be worth while perhaps to survey some of the investment community to see how they feel?

That's very compelling.

I'm sure the investment community would like that a lot.

It takes a lot of the uncertainty out of the investment portfolio and certainly it's something we'll continue to explore, Jonathan.

Stan?

Jonathan --

It would shorten your conference calls also.

The fact is that we do look at credit fault swaps and also clearly the initial underwriting on the mortgages is one of the most important attributes in terms of controlling credit risk and it's a very high-grade portfolio.

But one of the other things from a macro perspective is to look at the environment in which real estate values would decrease and that would likely be a rising interest rate environment.

So another area that we pursue managing the risk is to make sure that we have very little exposure to interest rate in that regard.

We're also pursuing methodologies that produce even better performance for the bank in a rising rate environment.

So we really are looking at all of these things and it's a constant point of attention for the Company.

Jonathan, from my point of you and I think you know me well enough now that I am concerned about real estate values.

I tend to believe, and hopefully I'm wrong, but that people are overly optimistic about, again, this soft landing as to real estate values.

I saw some statistics come out this morning that indicate that building inventories and the only thing that's really holding back the dam now is the fact that we have now very good employment numbers if we begin to see unemployment numbers.

And to the extent that there's a linkage between unemployment and the home-building industry -- because the home-building industry affects many other industries.

It's lumber and it's cement and it's rugs and it's appliances and all kinds of things ripple effect that could have an impact on the employment rate.

When you begin seeing that the only buyers of homes are construction workers it's time to start reassessing.

I think my question -- and I don't want to belabor it and I'll make this as concise as I can.

Not to be simplistic, but all of this sophisticated analysis has no impact whatsoever on the market.

The market is just fearful, and correctly so, as you would agree, have agreed and I would about at least the risk of a serious decline, a meaningful decline in real estate values that produced a meaningful rise in credit loss.

And the point is if somebody were able to sell you a label that you could put on your car that said this car driven by someone who runs a company with very little credit risk I mean.

I mean, I would rather have you say, gee, we think we can earn 550 next year but we're only going to earn 530 because we're going to go out and buy airbags and all kinds of bumper guards so that if the road gets bumpy everyone will know it's not going to affect us.

It will probably effect your executions in the market and you probably would get most of it back from an earnings standpoint.

And with that I will stop talking and thank you very much.

Okay, thank you.

We're going to obviously continue to look for ways to get the smoothest ride that we can possibly get.

Seth Glickenhaus, Glickenhaus & Co.

I want to congratulate you and your team.

I think you've done a wonderful job.

And many of my questions have been more than answered, but I have one left.

I hear that you're opening an office in Hong Kong and I was just curious to get your motivation and what you hope there?

To you feel that this may expand into China to a much larger degree?

Could this be something very big?

Let me break that down for you.

Thanks for your comments, Seth.

The purpose for the Hong Kong office is to be a distribution point for our securities and our corporate debt.

As you know, China has a lot of dollars and the most efficient way for them to invest them is in dollar backed securities.

And our motivation is this, Seth, that the one issue that we don't want to face is -- we're doing 400 to $500 billion a year in mortgage debt; we're doing commercial loan debt; we're don't want anybody to come to us saying you know what, we have concentration risk with Countrywide domestically.

And in order to make sure that doesn't happen, we want to create as many distribution points as we can so we never have a concentration risk in the U.S.

So we will not be originating loans there.

We'll just be selling the securities that we create here in the United States.

And we'll also probably be spreading out in mainland China over the next couple of years beyond Hong Kong to take advantage of the amount of liquidity that's in that China space.

I see.

Thank you, Angelo, I get it.

Eric Wasserstrom, UBS.

Just a quick question on the home equity production.

Looking at table 4 the production in the quarter was $11.2 billion and the loans sold was about 5.9.

The remaining 5.3, does that represent loans that were ultimately transferred or will be transferred to the bank balance sheet or does that represent loans that will -- will be held at the parent company for sale at a future date?

Those loans are held in our mortgage banking segment.

Are they held in CHL?

They're held as held for sale which could be in CHL or in the bank which is the bank held for sale is part of the mortgage banking segment.

Okay.

And are those the assets for which there was the recording of the incremental provision but not the recognition of the --?

A portion of those, those that were held in the bank.

Okay, thanks very much.

Mike McMahon, Sandler O'Neill.

I was going to ask about being the Journal article, you discussed that.

Thank you.

The second part of my question --

It's great for wrapping fish.

The second part was in the past earlier this year at some of your investor forums, equity and fixed income you provided some nice slides on the actual performance of your pay options relative to your expectations.

And I'm hopeful that you could give us an update on those trends now.

Were you referring to the chart where we go through the fully adjusted yield of those loans?

The delinquency trends and the charge-offs relative to what you had originally modeled versus the actual.

Carlos is going to take that, Mike.

The actuals were much better than what you had modeled.

I don't have the specific numbers on now our delinquency is performing versus the model, but I can tell you that it's better.

That's number one.

Number two is in terms of charge-offs, I said earlier that the bank is experiencing about 3 to 4 basis points of charge-offs on an annualized basis and that's consistent quarter in quarter out right now.

And those charge-offs, by the way, are coming mostly from the HELOC portfolio which one would expect, and those products are also performing better than model.

In the first lean portfolio which is comprised we have virtually no charges.

Those charges we have had have been related to random events -- a landslide, that kind of thing.

All right, thank you.

Adam Weinrich, Basswood Partners.

You guys probably have more real-time data on the housing market than almost anyone else.

Could you tell us just what you're seeing in terms of the likely direction of house prices year-to-date?

Maybe if you could generalize nationally and then also for California specifically?

Will you be surprised if home prices are flat to down this year and just sort of give us your general view on the direction of home prices?

Again, it's antidotal.

As I travel about the country -- and if anybody else has any input on this -- but I'd say flat would be a good expectation, that would be good if it was flat.

But you do have -- I think there's plenty of evidence now.

There's substantial buildup in inventories, particularly in the existing home category where -- and that's just historically true that home builders are very smart and they use whatever tools they have available to reduce their inventory, giving away swimming pools and whatever it takes to reduce their inventory plus slowing down there starts where the individual homeowner tends to lay back and tends to be Pollyannic in terms of how it's going to change for the better in the future and it generally does -- it takes a while for these things to run their course.

And so we do see buildup in inventory primarily in the coasts, substantial buildup in both Northern and Southern California and on the East Coast in Florida and Dade and Brown County in New York.

And that tends to generally a buildup of inventory -- supply/demand curve tends to lower prices.

How low they're going to go, hard to tell.

Bit the trend is down which I think is healthy.

It's healthy for those who -- we had a whole major affordability problem over the last several years, particularly with young families trying to get into homes.

I think this is going to give people an opportunity to buy homes that couldn't.

And so, but to answer your question directly as we see it -- the trend to be down for a while.

Thank you very much.

Just one quick add on to that.

If you look on a national basis over the past 30 or 35 years there's never been a decline nationally in home prices.

So the key thing that we expect to see is a slow down in the appreciation rate and with respect to your questions on California, what we're starting to see are the fastest appreciating areas move to the inland portion of the state and away from the coast.

So you see places like Bakersfield, Fresno, Modesto appreciating fast now compared to the coastal areas previously.

Right, everyone likes to say that home prices have never fallen using the standard indices.

But corrected for inflation one is seeing real declines in home prices, in particularly years where there's high inflation home prices went up something less than that.

I'd like to -- to respond to that point, there's nothing to stop home prices from falling in nominal terms in a very low inflation environment simply because it's never happened before.

The other point I would add on to that is if you looked MSA by MSA which we do, there's actually -- you actually see nominal year-over-year price declines and we've got that tracked for the past 40 years or so as well.

So we've seen as much as 40% of the MSAs having year-over-year declines on a nominal basis.

So I agree with your point.

It's a good point.

That's a statement that's used over and over again on a national basis prices have never declined.

But I have lived in areas where I've had to give away houses personally, so I don't know what that means.

Great, thank you very much.

Chris Brendler, Stifel Nicolaus.

A couple quick questions hopefully.

Just one quick follow-up on the pay option portfolio, can you just help us think about what -- we're seeing some seasoning in the portfolio.

I'm looking less at the delinquency trends but more about the percentage of the pay options portfolio in the bank is actually using the neg am feature and it's been increasing pretty rapidly as well as the neg am of the those increasing.

Do you have expectations for where we think that would go?

And what your projections have been -- has that been also in line with your expectation?

In the bank I think as in CFC, by the way, approximately 70% or so will be a pay option customers start out taking neg am minimum payment feature or I should say less than the fully amortizing payment.

And then go down to around 50% of the 12 months or so.

So there is a significant portion of customers that are making those payments.

Having said that, when we look at the amount of negative amortization that's been experienced in the portfolio as a percentage of the UPB -- and by the way, I'm talking about the percentage of the neg am related only to the loans that [neg am'd] -- that number is very nominal.

I think right now it's around -- in the neighborhood of around 1.5% in the bank.

It's actually 1.2%.

Yes.

So the dollar amount is relatively small.

John, you had some comments?

I just wanted to underscore the point that Carlos made.

On every vintage of pay options, both inside the bank as well as CFC consolidated.

What we see through time is the percentage of hours making the minimum payment starts out very high and then it declines through time.

So we expect as the bank portfolio continues to season for that percentage making the minimum payment to decline.

Okay, that's helpful.

So it sounds like it's actually not (indiscernible) material attention and consumer behavior versus (indiscernible) on the pay options.

The pattern is the same as what we've seen in the past couple years.

Okay.

There's been some question on the margin.

I was wondering if you used to disclose the bank NIM, the steady-state NIM and then the two interest rate and (indiscernible) rate lag effects.

Are you not going to be able to give that disclosure any more or, if you are, can you just help us think about what the steady state margin in the bank was?

And I have a related question?

We moved away from that disclosure this quarter, but we would be happy to provide that disclosure in the future.

Is that important for you?

I think it's just helpful to think about.

We'll go back.

The related question is there's been a lot of talk about deposit pricing in the retail bank segment and I just wanted to get your thoughts.

You had some new disclosure this quarter about your retail deposit originations essentially.

It seems to me that if consumers are looking for more yield and they're moving out of low yielding checking accounts and into savings products that should be a positive for Countrywide.

Give us an update as to how you see that playing out and how you're doing as your deposit growth and the competition out for deposits today?

Let me answer that question.

What you say is true, that we're the beneficiaries of the environment that we've discussed.

To give you an example, this year we've been averaging around 20 basis points under LIBOR in the deposit production.

Last year at the same time we were probably 20 basis points over LIBOR so we have seen a benefit in our deposit pricing and some of it is due to the environment and some of it is due to our strategies and tactics and also the fact that the bank is getting bigger and expanding and its reach is expanding.

Just on the steady-state margin in the bank, for the second quarter the steady-state net interest margin was 2.63% and you get there by adding back to our net interest margin which was 2.12% the asset liability reset lag impact which was 39 basis points and then the teaser rate impact which was 12 basis points -- 2.12 plus the 39 and the 12 basis points, 2.63 and that compared to the previous quarter which was high at 2.69.

Year ago it was 2.41.

Great, thanks so much.

We'll provide those disclosures going forward.

Fred Cannon, KBW.

Thank you and thanks again for being so generous with your time.

Just one, you've answered most all my questions.

If you could provide a little color about the swing that we saw between the first quarter on the impairment of retained interest when you had a fairly significant impairment of retained interest in the first quarter, a recovery in the second.

What kind of swung that and what are some of the factors that drive that moving forward?

So what number are you referring to when you're saying impairment?

On the consolidated income statement the recovery impairment of retained interest of $51.5 million in the second quarter.

The $52 million?

Yes, and it was I think in the first quarter --

Most of that relates to residual interest on the impairment of retained interest and that's the changes in values and assumptions that are involved in residual interest sub prime residuals (indiscernible) probably the greatest portion of that shift.

We've seen an increase in the value.

I guess the question is you had an impairment in the first quarter of $121 million and then it was a recovery in the second quarter and what would have been the shift to create that swing?

The biggest driver was a decline in impairment on nonprime residuals of about $100 million from the first quarter to the second quarter.

You had a change of 120 of impairment to 51 of recovery total change in 171.

The biggest component would be a little over 100 of decline of impairment of nonprime residuals.

Okay.

Is it possible that there are certain indicators that could help us understand how that would move in the future or in the past or not really?

Not really.

You could look at credit default swaps would be an indicator -- spreads, interest rate spreads in the yield curve have an impact.

But and then market appetite for residuals and investors also is a critical component.

But nothing that you can say would change from first to second quarter necessarily?

No.

Well, it's not just prepayment driven.

It's related to the curve and other factors as well.

The slope of the curve.

So the inversion could have had an effect?

Yes.

Thank you very much.

[Darius Braun], Citadel.

Thanks for taking my question.

I was hoping you could comment on any opportunities you may see in the mortgage outsourcing business, just given the more challenging origination environment, if there are any opportunities there for you?

Thank you.

If I understand the question, for business to be outsourced to us?

That's correct.

We had a major outsourcing operation in the UK which we've renegotiated and we now just are a licensed technology.

I think there's potential there in the licensing and technology, particularly internationally.

But I don't -- and also we do quite a bit of sub surfacing and we're always open to that.

And we do accrete that business over the years.

But in terms of originating loans, aside from the joint ventures that we are involved with and continue to grow with people like [Hoffman & Brode] and other major players, I don't the us out there doing outsourcing for other lenders.

David, do you see that?

Yes, I would agree.

We're not very bullish on the prospects for material growth in mortgage outsourcing area of our business.

It's been our experience that that activity and volume tends to pick up during refinance booms and during periods of low refinance activity.

Very few banks, which have been the historical customers in our outsourcing business have purchased business to outsource and they generally desire to keep the HELOCs that they source where it's our desire to own the HELOC.

And so for Countrywide we don't view that to be a sector with significant opportunity for us.

What happens -- just our experience -- we did it for major credit card players.

We were outsourcing to them and the history there is once they learn how to do it (technical difficulty) it themselves.

So I don't like being -- we're a mortgage company not a school for mortgage banking.

Thank you.

Don [Meder], Bear Stearns.

Angelo, I am getting questions regarding loan values, real estate values, appraisals and what have you.

So I'll ask you a couple questions on it.

On appraisers, do you have your own appraisers?

What appraisers do you use?

How do you see the -- of course, this always happens when real estate values go down.

Is there any legislation, is there any organization of appraisers, Angelo, that you see in the future?

Well, we have a panel of appraisers, approved appraisers, that work through LandSafe.

Each one of these appraisers throughout the country are approved by us.

We do have internal appraisers to review the work of outside appraisers, so the answer to both is yes.

Again, we'll only use our own approved appraisers, and that panel is screened very carefully from time to time to make sure that we're getting rid of the bad ones and we're only putting in good ones.

Like I said, we have internal appraisers who review the appraisal work of the panel, and there is an appraisal association.

There has been attempts for a licensing for many years.

In some states, there is licensing required.

In other states, there is not.

Obviously, we would like to see licensing requirements and professional standards throughout the country.

But I don't know of any legislation frankly now, Don, that addresses that issue.

Okay.

Thank you, Angelo.

James Shanahan, Wachovia.

Good afternoon for some of us; the marathon continues.

A question here.

You've reported that the fair value of mortgage servicing, the asset increased in the period in spite of what appears to be an acceleration in runoff of loans serviced compared to Q1.

Is the fair value methodology -- is it like a forward-looking OAS model or how does it capture prepayments say from refinance activity that could occur, even accelerate in this elevated or perhaps even rising interest rate environment?

You know, we have prepayment curves and projections that go into the model, OAS is (indiscernible) different paths that produce the value and then we sync up our value to a series of information that we gather on what is the market value of servicing because ultimately servicing is held on our books at an estimate of its market value.

So we're looking at our historic model payments which are adjusted and reviewed really on a continuous basis all through the year, very confident in our market value.

To the extent that prepayments pick any one period that loan no longer exists and can't be included in the value.

So there's a natural adjustment for loans that prepay during a period which are not forecasted.

Although I should point out that our forecast has been very accurate from quarter to quarter in terms of prepayment expectations.

What would be the impact on the value -- of the market value of servicing if an originator were to be mining their servicing portfolio for production value?

Like this has come up with a couple of originators in the past I think six years and I can think of one specific example.

But if your interest is in driving market share let's say and you were mining your servicing customers for cash out refinance activity for example, what does that say about the value of the servicing and how would the market perceive those activities generally?

Well, first of all the fact is that the intrinsic value of the servicing asset is much greater to us because of the relationship that we have with the customer and the fact that when someone is prepared to refinance their home, which isn't by the way all that driven by their existing lender, it's driven by the marketplace and their appetite to refinance.

But given that they're our customer in that we have access to them, it produces high levels of origination income and that is the great synergy and intrinsic value that exists for a large servicer, a large originator.

I think that servicing market values, while they don't include specifically in the contractual cash flows in which you evaluate servicing, they don't include a value for cash flows for recapture.

The fact is major lenders invest in servicing for that return which all included in our mortgage banking segment produces a very high return.

I'll ask differently then.

If at some point over the course of the next year, two years Countrywide is reporting refinance activity from their servicing portfolio that is say a lot higher than the market overall, will the market punish you somehow?

And if not on the servicing site is it possible that the bid and the secondary part (multiple speakers)

Generally not.

It's been an issue for many years.

Generally not.

It's a big market out there.

I mean, if there's a dramatic difference in prepayment speeds, obviously the market will be sensitive to that and put some shots over the bow.

But we have been -- our position is this.

It takes a lot of money for us to get a customer into our portfolio.

We're going to do everything we can to hold onto that customer either through cross sell or refinance.

And generally speaking we have not seen any significant change in our pricing on our loans irrespective of the prepayment speeds.

Thank you very much.

Bob Napoli, Piper Jaffray.

Touching on something that hasn't been discussed.

Your insurance business has had very strong growth in revenues and in earnings and I was wondering if you could give a little color on what is driving the growth of the insurance business and what the outlook is for the insurance business?

Generally speaking we're very high on the insurance business irrespective of what we've been put through in the last couple of years with the hurricanes in Florida and the Gulf Coast.

But we happen to have Bob James here who heads that operations and, Bob, do you want to comment on that?

Yes, we've had a two-pronged strategy over the last 18 months.

The first part of that strategy was to lower our catastrophe exposure, primarily in the state of Florida, and we are in the process of withdrawing from the state of Florida for voluntary home owners insurance like a lot of other companies that are challenged by the Florida marketplace given the frequency and severity of hurricanes and the predictions for those to continue to be higher than normal, at least over the next ten years depending upon who you want to believe from a weather standpoint.

Secondly, we have been expanding our voluntary personal lines products to include auto insurance and have entered into two large strategic relationships that give us access to distribution that we have not had in the past for both voluntary auto and homeowners insurance and the combination of those two things has lowered our catastrophe exposure and is lowering it in the Gulf Coast area, but has also increased business in other parts of the country.

And primarily in parts of the country that have not been prone to weather-related losses in 2006 such as the Midwest and Texas.

And as a result of that is we've had higher premiums, lower loss ratios and it's driven better earnings on a quarter-over-quarter basis.

What kind of growth are you looking for out of the insurance business over the next several years?

Well, we have a growth plan that's pretty aggressive.

A lot of it is tied to the growth in the Countrywide portfolio.

The introduction of voluntary auto insurance as a Countrywide insurance product into the portfolio will help us grow the insurance business quite a bit over the next five years.

And we're also for the first time underwriting a home warranty product which is also strategically aligned to mortgage originations.

And the combination of those two things, along with the growth in the Countrywide mortgage portfolio on the lender place side, has that business growing about 15% on a CAGR basis.

Okay.

The title insurance business, what do you guys think of that and do you have any interest in being in that business?

I think you maybe have tried to be in that business.

We don't think much of it and the answer is, no.

You don't think much of the product per se?

No, we don't.

We tried it, it doesn't work for us.

If you look at the two major players that are out there -- Fidelity and First American -- you can see they're very diversified companies.

Title insurance is a -- I don't know how significant a part of it, but less significant than it was and there are processors involved in a ton of other business.

But title insurance itself, history has demonstrated it's not a great business either as a business itself or as a public in terms of the multiple that you get from the public on that business.

Than Angelo, you guys mentioned some new products and I was wondering if this had an effect on your marketshare -- the marketshare expectations being higher in the second half of the year and the first half of the year you talk about reverse mortgages and enhanced refi programs and obviously continued growth of your salesforce.

But how significant do you expect those products to be -- the reverse mortgage product and the enhanced refi programs?

I think that initially startup of these things is slow and in 2006, I think 2007, '08 and '09 they'll be significant.

You have a growing population of elderly who have outlived their money and are using the home as their only savings account and they are -- evidently there was a shift in that age group where they spent their lives trying to pay off mortgages and now seem to have no problem in tapping the equity in order to live out the rest of their lives in a reasonable fashion.

So I think there's great market for us to participate in.

And like anything else, once we get in there we'll dominate it.

And you can see that [Indymac] has done a great job in there when they bought Financial Freedom -- or Freedom Financial, whatever the name of it was -- and they dominate about 50% of the market today and it's a growing market, rapidly growing -- from a small base obviously but rapidly growing and we're going to participate in it.

Its overall impact will be small for the first year or so on our overall (indiscernible) -- we do a tremendous amount of volume so it's hard to impact the percentage that the reverse mortgage will have.

But I think overall, over the next three or four or five years, all the programs that we've embarked upon, including our partnerships with homebuilders and real estate brokers and all of those, will help us pick up market share.

Thanks.

And last question -- with regards to the percentage of your business that's nonconforming and the outlook, what would you expect?

This is going from a marathon to an ultraman very rapidly, but go-ahead.

Just on what percentage of your portfolio was nonconforming originations in the quarter and the percentage of nonconforming in the market overall has improved -- increased substantially.

With Fanny and Freddie being more tightly controlled do you expect the share between conforming and nonconforming to hold where it's at or what do you expect?

I don't know what the percentage is right now, but they'll come up with it.

Fanny and Freddie are still trying to find their balance.

They've got a lot of people taking shots at them and they're trying their best to try to stabilize their operation under this continuous assault and we're hopeful that they'll get that stabilized as quickly as possible.

We believe that they're under great leadership today.

But it's hard to believe that Fanny and Freddie are going to be what they were in the past, and it appears unless something else happens in terms of credit quality and a collapse in the markets or whatever, I think Fanny and Freddie will play a different role than they have in the past, but hopefully still a significant role in the housing business chain.

But I would expect that nonconforming will continue to outweigh conforming in light of the restraints that Fanny and Freddie are under, particularly if they put a lid on the size of their balance sheet.

What's the percentage?

In response to your question on the percentage, in the second quarter approximately two-thirds of our overall volume could be characterized as nonconforming and that percentage has been increasing slightly over the last couple of quarters.

Thank you.

Kristina Clark, Wachovia.

Thanks so much.

I was just looking for a little bit more color on -- and Carlos mentioned this a little bit in his comments.

The bank seems to be originating a lot more loans for sale now than before.

Just wondering if you'd talk a little bit more about sale activities at the bank, what type of loans are sold, are they all sold to the mortgage company and are sub prime loans included in that?

Are you asking this for the sake of Wachovia Bank or because you're an analyst?

Just because I'm an analyst, I promise.

As I mentioned earlier, it is the Company's plan to take advantage of the bank's lower-cost of funds to fund the warehouse of mortgages -- the entire warehouse of mortgages.

And we're in the process of hooking up all the pipes to be able to do that.

And I mentioned earlier also that we were up to around a third of the (indiscernible) is now the secondary market warehouse of the bank.

Our aspirations are that next year we'll be able to get to close to 100% of that production will be funded through the bank.

We're not doing sub prime loans yet because we need to develop a specific business plan for sub prime before we engage in that, but we are in the process of doing that as well.

Would you anticipate also holding then sub prime loans on the bank's balance sheet over time, or will they just be targeted for sale?

Be targeted for sale.

And are they all sold to -- the current warehouse, is it all sold to the mortgage company or is it sold to other third parties as well?

At this point the production is all sold back to CHL which then securitizes and sells the loans into the secondary market.

It is also in our plans to eventually start doing some of those activities out of the bank in order to start investing in (indiscernible) in the bank and again to take advantage of the bank's funding advantage.

Do you anticipate having to raise capital at the bank in order to kind of facilitate this more expanded role or is that pretty good right now?

Our projections don't show the need to do that because as we fund more and more of the CHL warehouse to the bank there's a corresponding decline in the need for capital in CHL.

So it's kind of like the merger was doing.

Okay, thanks a lot.

With that, Mr. Mozilo, I'll turn the call back to you for any closing remarks.

Thank you very much for your participation and we'll see you next quarter.

Thank you very much.

Ladies and gentlemen, Mr. Mozilo is making today's conference available for digitized replay.

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