美國銀行 (BAC) 2006 Q3 法說會逐字稿

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

We do appreciate your patience today while the conference assembles.

Good morning.

Welcome to the Countrywide Financial Corporation's third-quarter 2006 earnings conference call.

Ladies and gentlemen, please note that 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 in the third-quarter press release 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 of your phone lines are muted or in a listen-only mode, however after the presentation today there will be opportunities for your questions and we encourage you to queue up at that time. (OPERATOR INSTRUCTIONS) As a reminder, today's call is being recorded for replay purposes.

Please stay on line at the conclusion of this earnings release for that replay information.

With that being said, we are now going to get right to the third-quarter agenda.

Please join me in welcoming Countrywide's Chairman and Chief Executive Officer, Mr. Angelo Mozilo.

Good morning, Mr. Mozilo and please go ahead, sir.

Thank you, Brent.

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

I recommend that all of our listeners view the third-quarter earnings press release, which can be found on our website, www.Countrywide.com, on the Investor Relations homepage.

During the call I will be referring to tables that are embedded within the text of the press release.

Joining me on the call today among others are David Sambol, our newly appointed President and Chief Operating Officer;

Eric Sieracki, our Chief Financial Officer;

Kevin Bartlett, our Chief Investment Officer;

John McMurray, our Chief Risk Officer;

Carlos Garcia, our Chief of Banking and Insurance;

Jim Furash, our President of Countrywide Bank;

Ron Kripalani, our President of Countrywide Capital Markets; and Ken Mertzel, the Chief Financial Officer of Balboa Life & Casualty.

Now let's proceed.

As disclosed in this morning's press release for third quarter, net income was $648 million, a 2% increase from the third quarter of 2005.

On a per-share basis, diluted earnings per share were $1.03, unchanged from the third quarter of 2005.

For the nine months, net income was $2.1 billion, up 9% from the same period of a year ago and diluted earnings per share were $3.29, up 7% from the comparable period a year ago and represented a new nine-month record.

As you can see from table 1 in our press release, consolidated quarterly net income growth was primarily driven by robust double-digit increases in our Banking and Capital Markets segments as pretax earnings from these two businesses were up 33% and 53% respectively over the third quarter of 2005.

The mortgage banking segment however continued to experience the effects of a transitional market.

Now let's turn to the mortgage banking segment for a quick review of those results.

Interest rates declined significantly during the quarter, putting pressure on Loan Servicing sector earnings.

Despite the decrease in interest rates, real estate finance activity continued to moderate and as a result Loan Production sector earnings also declined.

However consistent with the design of our Macro Hedge, we expect the Loan Production sector's fourth-quarter results to benefit from the increased refinance funding activity stemming from the third-quarter decline in interest rates.

We anticipate the fourth quarter 2006 will be characterized by a continued slowdown in purchase volume beyond typical seasonality.

However, should interest rates remain at their current levels or move lower, we expect that increased refinance activity will mitigate this decline.

We also continue to expect that margins will remain under pressure and that pricing will remain competitive as the mortgage market consolidates.

In addition, pay option loans, which have historically provided higher margins, are declining as a percentage of our total production and have experienced margin erosion, and this trend may continue.

Mortgage banking segment pretax earnings as seen on table 2 declined 40% for the quarter and 20% for the nine months when compared to the same period a year ago.

The year-over-year quarterly decline was a result of decreases in all three sectors, Loan Production, Loan Servicing, and Loan Closing Services.

Third-quarter earnings were lower than the second quarter of 2006 primarily because of the MSR and retained interest valuation changes net of the hedge, representing a loss of $173 million in the third quarter.

This compares with a loss of $1 million in the second quarter, a negative swing of $172 million.

As seen in table 3, pretax earnings for the Loan Production sector decreased in dollars and as a percentage of loans produced from the second quarter of 2006 primarily as a result of a decline in gain on sale margins.

This was offset by an increase in net warehouse spread, which grew as a result of a higher average inventory balance.

In addition, miscellaneous income grew as a result of an increase in fulfillment fees that were paid to the Loan Production sector by Banking Operations for services performed on the bank's investment mortgage loans.

Operating expenses decreased primarily as a result of both our expense reduction initiatives and the shift in the mix of Loan Production to the lower-cost correspondent channel.

Compared to the third quarter of 2005, Loan Production sector pretax earnings were down primarily as a result of increased costs and resulted from our investment in growing the loan salesforce and branch distribution network as well as a reduction in FASB 91 deferral amount primarily due to a lower deferral rate and lower production volume.

This was partially offset by an increase in total revenues.

Revenues increased as a result of 24 basis point improvement in prime gain on sale margins partially offset by an $18 billion decline in prime loans sold.

As seen on table 4, the third quarter of 2006 overall gain on sale margins as a percentage of loans sold decreased 29 basis points from the prior quarter of 109 basis points.

This decline resulted from declines in all three product categories.

Prime margins declined between the second and third quarters primarily as a result of competitive pressures and lower relative sales prices of adjustable-rate loans including pay option loans.

Nonprime margins declined between the second and third quarter as a result of deterioration in credit spreads for highly leveraged second lien borrowers and competitive market conditions.

Home equity gain on sale declined as a result of competitive pricing pressures, increased cost of credit enhancement, and wider secondary market spreads.

Additionally because the inventory of nonprime and home equity loans did not qualify for hedge accounting pursuant to FASB 133, there were timing mismatches affecting the second and third quarters wherein hedging gains and losses and offsetting losses and gains from the sale of related loans were or will be recognized in different periods.

Specifically losses on the sale of loans in the third quarter offset by hedging gains recorded in the second quarter.

Furthermore hedging losses recorded in the third quarter attributable to interest rates decline during the quarter are expected to be offset by greater gain on sale of the associated loans in the fourth quarter.

Overall gain on sale margins as a percentage of loans sold increased 12 basis points year-over-year primarily as a result of improved margins on prime loans partially offset by a decline in nonprime and home equity margins.

This year-over-year decrease in nonprime and home equity margins resulted from factors similar to those that contributed to the sequential quarter decline in margins.

As seen in table 5, quarterly Loan Servicing sector pretax earnings decreased year-over-year because of the valuation changes of MSR as a retained interest net of the hedge and were a loss of $173 million in the third quarter of 2006, which compares to valuation changes net of hedge in the third quarter of 2005 of $16 million, a negative swing of $189 million.

This unfavorable comparison was partially offset by third-quarter 2005 hurricane losses of $51 million which were not repeated in the third quarter of 2006.

Delinquencies in the servicing portfolio were 4.5% at September 30, 2006, which compares to 4.03% at September 30, 2005.

Foreclosures in the servicing portfolio were 52 basis points at September 30, 2006, which compares to 42 basis points at September 30, 2005.

The year-over-year increase in delinquencies and foreclosures are primarily the result of portfolio seasoning, product mix, and changing economic and housing market conditions.

The weighted average age of the portfolio at September 30, 2006 was 21 months, while the age at September 30, 2005 was 18 months.

The Company believes its asset valuation reserves credit losses are appropriate for the increases in delinquencies.

Referring back to table 2, the LandSafe companies or Loan Closing Services quarterly pretax earnings of $20 million decreased from $31 million in the third quarter of last year primarily as a result of decrease in findings in the consumer and wholesale channels as well as an increase in expenses.

Expenses increased as a result of the Company's hiring of approximately 100 additional staff appraisers and reviewers, an initiative to enhance our appraisal quality controls.

Turning now to table 6, the banking segment, quarterly pretax earnings increased 33% year-over-year, driven by a 46% increase in Banking Operations earnings.

As shown on table 7, the increase in earnings for Banking Operations in the third quarter of 2006 was driven by a $14.8 billion increase in interest-earning assets combined with a 25 basis point increase in the net interest margin or NIM when compared to the same period a year ago.

Then NIM of 2.28% increased from last year primarily as a result of the reduced impact of teaser rates earned on recently funded loans as fewer pay option loans were originated in the third quarter of 2006 as opposed to the third quarter of 2005.

The loan loss provision was $28 million in the third quarter of 2006, a decrease of $45 million in the third quarter of 2005.

While the provision rose year-over-year related to increased delinquency and portfolio seasoning, this increase in provision was more than offset by declines related to Hurricane Katrina, slower funding growth, and payoffs.

The allowance for loan losses was $180 million at September 30, 2006, as compared to $107 million at September 30, 2005.

Delinquencies, 90 plus days at September 30, 2006 were 44 basis points, an increase from 11 basis points at September 30, 2005.

The increase in delinquencies was in line with manager's expectations and primarily reflects the seasoning of the bank's loan portfolio.

Asset growth year-over-year was 24% for the third quarter of 2006 versus year-over-year growth of 109% for the third quarter of 2005.

The Company's strategic plan calls for continued long-term growth in bank assets; however, asset growth in any given quarter could materially vary based on a number of factors.

These include general mortgage marketing conditions; the availability of assets which meet the bank's yield and credit criteria; secondary market execution alternatives that are Company's capital and earnings considerations.

The Company has invested in new business lines to supplement its current residential mortgage originations, as evidenced by the recent introduction of its Reverse Mortgage Commercial Real Estate lending, and Builder Finance Lending units.

As seen on table 8, quarterly pretax earnings for the Capital Markets segment increased 53% from the third quarter, a solid achievement against the backdrop of a declining production market and an inverted yield curve environment.

This improvement was driven by growth in conduit revenues primarily from an increase in the gain on sale of ARM loans, an increase in Commercial Real Estate mortgage revenues derived from loan sales of $1.2 billion in the current quarter compared to less than $0.5 billion in the comparable period a year ago.

As seen on table 9, for the third quarter of 2006, insurance segment pretax results improved year-over-year from a loss of $32 million to earnings of $91 million due to lower catastrophe losses in 2006 than were experienced in 2005 primarily as a result of Hurricane Katrina.

Pretax earnings growth is also due to an increase in earnings premiums net of related losses at Balboa Life & Casualty, which have risen primarily as a result of growth in both the voluntary auto and lender placed property lines.

Third-quarter pretax earnings at Balboa Reinsurance were 49% year-over-year as a result of a 27% increase in net premiums earned.

This increase resulted from an increase in the percentage of policies earning a higher reinsurance premium as well as overall growth of the reinsurance portfolio.

As for the outlook, we updated our 2006 guidance this morning as well as with our new diluted EPS range of $4.10 to $4.50 for the full year 2006.

This compares with our previous guidance of $4.00 to $4.80 which was provided on July 25, 2006.

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

The assumptions behind this guidance are outlined in the press release in table 10.

In summary, while we expect the continuation of a traditional environment in the near term, we are bullish on the positive long-term growth prospects for the mortgage lending industry and for Countrywide in particular as a result of the proven power of our business model and our strategic positioning.

We believe Countrywide's core strategies, our profitable marketshare expansion, growth in our mortgage loan investment portfolio and associated spread income, continued synergistic diversification and ongoing capital optimization will continue to deliver long-term shareholder value.

In response to changing market conditions, management has initiated an expense and headcount reduction program.

By year-end we expect that this program will generate an annualized cost-saving run rate of over $500 million.

Additionally as previously announced, management is executing a capital optimization plan and the Board of Directors has authorized a share repurchase program of up to $2.5 billion.

In connection with this program, the Company intends to repurchase $1 billion to $2 billion of its common stock in the fourth quarter financed through the issuance of high equity content debt securities.

In conclusion, Countrywide's long-term prospects for growth and profitability are extremely strong.

I am privileged to continue to lead this extraordinary organization.

As announced last Friday, I will be remaining as Chairman and CEO through December 31 of 2009.

I appreciate the Board of Directors continued confidence in me and look forward to working with them and with my team to deliver value to our customers, opportunities to our employees, and returns to our shareholders.

That wraps up my prepared remarks and I would be happy now to take your questions.

(OPERATOR INSTRUCTIONS) Mike Vinciquerra, Raymond James.

I wanted to ask a question on a new table you have added.

It is on page 21 of the release.

I just want make sure I understand it is on the pay option portfolio.

I just want make sure I am interpreting it correctly to say that you have $35.5 billion of pay option loans and of those, $29.5 billion relate to loans that have had negative amortization.

Is that correct and then the accumulated amortization is $470 million?

David Sambol will take that.

Yes, Mike, that is correct. $29 billion have had negative amortization and the accumulative neg am is $471 million.

Okay, then just the table below it, the interest deferred during the quarter, is that interest that you actually took into income during the quarter but haven't collected because it simply rolled onto the balance of the loan?

That is correct.

Okay.

Those are my only questions.

Thank you, guys.

What is the percentage, 1.5%?

What is the percentage of neg amortization to the total?

If you look at the amount of negative amortization, the UPP of the portfolio that has experienced neg am is around the 1.5%.

Of the total payout proposed, it is about 1 percent.

And a lot of this negative amortization is collected, by the way, through curtailments or additional mortgage payments that are made during the year by our mortgagors and to payoffs.

Just to give you an idea, in the quarter we had $1.8 billion of pay options that paid off that related to loans that had previously experienced negative amortization.

So the dollar amounts that are being negatively amortized are being collected.

Understood.

Thanks very much for the extra detail.

Ed Groshans, Fox-Pitt, Kelton.

I was just looking on the credit side.

I know it seems like you've been adding to the reserves and that is good, but the 44 basis points is quadrupled since last year due to portfolio seasoning and I guess I would call it in line with the peer group.

I just want to get your sense of do you think you're hitting the top there?

Is there maybe a little bit more to go?

Let me comment.

First of all, I think it is probably a little below the peer group because it's still a relatively new portfolio.

It is a high-quality portfolio by virtue of its FICO scores, the loan to value ratios.

Hard to say what is (technical difficulty) or not because a lot depends upon the economy, unemployment and those issues.

But it certainly is -- you can be assured that of that type of portfolio I don't think there is any similar portfolio perform any better than the one we have because the inherent qualities of the port and how it is how it is performing.

But I think right now it is at 44 basis points performing better than the peer group.

But again, I would hesitate to call a top on that.

Any comments on that?

Okay.

Thank you very much.

Paul Miller, Friedman, Billings, Ramsey.

Angelo, I just want to say this news release is the best news release you guys have had.

The tables are very easy to read and there is a lot more information especially average balance sheet.

I just want to thank you very much for putting that out there.

The whole issue here is continued to achieve transparency so that you know as much as we do.

But as an analyst, I always want more and it would really help us if we had credit tables and MPAs and charge-offs and what not on the tables and that is something hopefully you guys --

Well, the credit -- are you ready to do that in the Q, in the credit, can you do that?

It is an ongoing project that we're focused on.

The question is is the buyback, the $2 billion buyback or the $1 billion to $2 billion buyback, is that already included in EPS guidance for the year?

Yes, Paul, that is included.

What on the high equity debt securities can you give us -- is there a range of interest rates this is going to cost?

In the order of 7%.

Okay, and have you bought back any stock yet in the fourth quarter?

No.

We have not.

Could you just add color on the $140 million residual write down?

Was that just mainly -- is this part of the hedging transaction or is it increase in CPR rates because rates were so low at the end of the quarter?

Kevin Bartlett is going to respond to that question.

About $100 million of the $140 million was due to just rate declines and then the other $40 million was just assumptions about the market value of the yield requirements of investors on those particular assets.

So it is basically as a result of the decline in interest rates.

Okay.

I think that's all my questions.

Thank you very much.

Bob Napoli, Piper Jaffray.

Maybe a little clarification on the share repurchase.

Is it intended right now that the share repurchase, the amount spent on repurchases will be covered dollar for dollar with the convertible securities?

Are they -- are we expecting this is going to be a traditional convert?

There's two aspects to it, and I will have Eric clarify that.

One is, part of the buyback will be done through the debt securities.

Part of the buyback will be done through excess capital over time.

These securities fall into basket D, so it is 75% of the amount of the moneys generated from the issuance of the debt securities would be used to buy back stock.

Eric, is there any other color on that?

This is a traditional convert?

This is not a convert.

This is not a convert.

This is a high equity debt security.

So there will be no sharers, additional sharers?

Absolutely no impact on EPS denominator other than shares we repurchase out of the market.

But essentially if you buy back 40 million shares we're going to see an income statement next quarter that has the ending share count 40 million lower even with the security being issued.

That is correct.

There will be no share impact of the new securities that are issued.

Those are pure debt securities that have a high equity content.

Thank you.

That is very helpful, nice to see you do that.

On the bank, with these new products, would we expect to see first of all when you talk about the volatility of bank growth, are we going to see a significant slowdown in growth of option ARMs but see that be replaced with reversed mortgages, commercial mortgages, and builder finance?

What effect do those new products have incrementally on the bank margin would be my last question.

Let me just jump in.

I will have Carlos give you more details on it, but we will continue as we said in the press release our effort is to continue to grow the bank, but it won't be a linear growth.

Because of the nature of our business, it's a very volatile business.

You saw we grew it very rapidly during the great times of the previous years and down as there was less product available for the bank.

So you can expect that there will be volatility in its growth.

However, over time it will grow and continue to be a major factor in Countrywide's repertoire.

In terms of the other products, Carlos, why don't you talk about the reverse mortgages and where we are on that and whether or not that will even be a product for the bank and commercial loans.

The bank has been working on diversifying its asset sources and the three lines that you mentioned are all the lines that the bank has been working on.

The Reverse Mortgage business just recently launched and we have already some loans in the pipeline; none have closed as of this date.

We do anticipate portfolio-ing those loans and we are working as we speak on developing our best estimates of how much and how fast that business line will grow.

The other part, go to the builder finance unit, which we will lend to our builders and is very synergistic with our mortgage franchise as well as with our insurance operation that has a unit that's (technical difficulty) builders.

That business also recently launched and made its first loan and we are proceeding cautiously in that business in the current environment and also still developing our sense for what the contribution to asset growth will be.

Finally we are also working on Commercial Real Estate lending activities surrounding small balance loans in partnership with Countrywide Capital Markets.

They have a unit that you may be aware of that is involved in Commercial Real Estate lending and large loans and they seek to expand their distribution to small loans and the bank finds those assets attractive.

And so we are collaborating that business of small balance lending has not yet launched, but we anticipate that we should get started in the fourth quarter of this year.

If you could comment on the margin, the incremental net interest margin on those new products.

Yes, I think both the builder finance unit and reverse mortgages will have a margin comparable or better than what we have now and I think the commercial real estate will have a margin that is just underneath what we have now but will still be very attractive.

Thank you.

[Seth Lichenhaus], [Lichenhaus & Co].

I am curious to know, Angelo, you have indicated before that you have never seen a soft landing over the years.

How long do you think this slow up will continue in the mortgage world?

You know, beauty is in the eyes of the beholder here.

I think we have seen through what has happened in home building, new construction part of the economy, the existing construction numbers that came out that we have already had the hard lending.

When you're down 25, 30% in real estate, that to me is a pretty hard lending and we continue to see and it has not subsided yet.

Just taking a guess on my part, Seth, as to how long this could go on, I estimate that we are going to be through with this probably in the next few months and then start treading water over the 2007 period while the industry consolidates.

And in 2008 we're going to have one hell of a year for the people who remain in the industry.

It will be a smaller industry by that time, less capacity, margins will have reasonable margins of return, so I'm looking for 2008 to be the breakout year.

Thank you very much.

[Jonathan Gray], private investor.

If we were to have a Democratic victory that recaptured the House and Senate, presumably it would create a more liberal environment for Fannie Mae and Freddie Mac.

Is that the case in your view?

If so, what impact if any would it have on your operating environment?

Let me give you my 40,000 foot view of it.

There is no question that the Democratic Party has been more favorable toward housing philosophically.

They have been supportive of the government agencies, the FHA, the VA, Freddie, Fanny.

No question philosophically they are on the side of housing.

The problem has been that in their generally speaking in their reign, interest rates are high.

And even though you have Republicans who have a different attitude toward housing at least historically, during their reign interest rates are low.

So despite the fact that we are philosophically aligned with what the Democratic objectives are, it seems to me that the interest rates always seem to stand in the way of achieving their objectives.

That being said, getting to your specific question, I think that they will be supportive of Fannie.

If you see less pressure on Fannie and Freddie and I think Fannie and Freddie will have some breathing room, but I don't think Fannie and Freddie are going to be what they ever were before.

I think that what has been demonstrated over the last 24 months is that there is another market out there that is ready, willing, and able and is very liquid to accept the kind of product that Fannie and Freddie generally dominated.

And so Fannie and Freddie are going to have to fight like hell to get their marketshare back.

Thank you.

Fred Cannon, KBW.

My first question was on -- I was wondering regarding the guidance that recently came out on nontraditional mortgages if you had changed your underwriting criteria particularly on debt to income ratios for option ARMs and interest-only loans in line with that guidance?

I'm going to turn that over to Dave Sambol and I'm going to give you my philosophical view on it.

Fred, we have not made any changes yet.

We are in the process of analyzing the guidance currently and talking to our regulators to obtain clarification and their interpretation of various aspects of the guidance which are still unclear and needed.

So we have not made any changes and at this point the impact on our volumes in that program remains uncertain.

Great, thanks.

The issue on that is that, as Carlos pointed out, in the real world that these loans are performing, and you can see by the delinquency rate, these loans -- to assume that these loans will never pay off, that every one of the borrowers will achieve a 15% neg am over their original loan amount and to assume that all of them are going to retain the loans until reset and to assume that all of the loans will remain in place for 30 years is a flawed I believe a flawed assumption.

We already see that a significant number of these loans pay off very early because people are using them, it appears to us now as we've had now two years to observe the conduct of people very wisely.

They never get to the reset rate and never have that payment shock, a significant portion of them never get there.

To assume that all of them are going to get there I just think already the evidence is clear that that is not going to happen.

So I think that the entire approach to these loans has to be continuously re-examined and we will continue to make our case as to what our experience is relative to the performance of these loans.

So far they have proven to be a very, very good product for both the bank and for the secondary market.

Alright, but it would be fair to say that between the initial draft of the guidance and the final guidance the regulators did not seem to accept those arguments.

Is that fair?

That is correct.

Angelo, one question.

Lastly Banc of America made a statement that they wanted to jump into the mortgage business and make waves.

Any thoughts regarding that kind of approach by a large player like Banc of America?

We are still looking at their wave, the last 18 waves since the last 18 times they've moved into this business over the last 25 years.

So you take it for what it is worth.

They have been in and out of this business many, many times.

We have had to face Banc of America, GE, General Motors, Wells Fargo, all of which is another competitor, and we are prepared for whatever confronts us.

Great.

Finally one kind of technical question.

I noticed that the net warehouse spread in the production sector actually expanded from the second to third quarter and I was wondering if you could explain that?

I had thought it was an inverted curve that we might see that warehouse spread under pressure on a linked quarter basis.

Actually the increase in the warehouse spread was not as large as you think but the key issue there was size.

There was bigger inventory during the period.

There was a slight shrinkage in the net spread, but size, volume offset that.

Okay, thank you.

Mark Patterson, NWQ Investment Management.

A couple of questions.

On the production economics that shifted from Q3 to Q4, you were talking about the hedging losses that get recorded in Q3 that obviously the sales are taking place in Q4, so the production economics would be better in Q4.

Could you just elaborate on that a little bit?

Sure.

What happened in the second quarter is obviously an interest rate increase.

We had hedging gains that related to sub prime and home equity loans, principally fixed-rate and second loans that because of the way the accounting had to be recognized in the second quarter.

The opposite happened in the third quarter.

We had an interest rate decline which created hedging losses, which had to be recognized in the third quarter And then the gains and the related sales would be recognized the ones in the second quarter would be recognized in the third quarter and the ones in the third quarter actually would be recognized in sales in the fourth quarter.

It results in a timing mismatch.

Right.

I was just curious as to if you could elaborate on the potential magnitude of what those losses and lack of losses, hedge losses associated with the sales in Q4 would be?

Sure.

In the third quarter approximately $30 million in both the home equity segment and also $30 million in nonprime was the swing in the losses that impacted the third quarter.

Okay, so that $60 million was an offset to production gains in Q3 that will be associated with product that has actually sold in Q4?

Either that or a portion of the gain that was recognized in Q2 that inflated the results in the second quarter in terms of the margin that is recognized.

Okay, great.

I think just in general with the guidance issue, what you're throwing out in terms of guidance, I appreciate the conservative nature that you guys are taking especially given the environment we are in.

You're doing the right thing, reducing expenses, dealing with your capital structure to be more efficient there I think is a great thing.

It just seems like it would be a little bit difficult for you not to perform at the higher end of that guidance given some of these issues.

The production benefits going into Q4, I know volumes might be lower, competitive pressures are still there.

Your servicing guidance speaks to kind of a 5 basis point kind of number in Q4.

We have already seen rates go up.

It seems like that might be a better quarter than Q3 was in that regard with the hedging aspect and I know that is a wild-card.

But with some of these expense saves kicking in and your lower shares, it just seems like this guidance seems a bit conservative to me and is that the way you are trying to portray it?

That is why you get paid the big bucks to make that evaluation.

Okay.

Thanks.

Brad Ball, Citigroup.

A quick follow-up to Mark's question.

So the hedge accounting impact in the third quarter, could you actually quantify that on your third-quarter gain on sale margin?

Kevin?

Let me start again.

The gains that were recognized in the second quarter, the loans that related to those gains actually settled in the third quarter and had less of a profit in the third quarter than they would have had.

So that was roughly -- that's sum number which I will quantify in total in a second.

And then in the third quarter, we had hedging losses that could not be deferred in the third quarter to fourth quarter sales, so the difference is basically $30 million per the nonprime section and also the home equity section.

So again, if we look at the change in the gain on sale, 29 basis points linked-quarter, so we could calculate the $60 million as an impact on that 29 basis points or as a proportion of that 29 basis point?

Yes, because loans sold in the third quarter had lesser value as a result of the hedge gains that were recognized in the previous quarter and in addition, there were some hedge losses related in the third quarter that relate to loans that are going to be sold in the fourth quarter at greater gains.

So the difference is showing up in the each of the sections is about $30 million.

It's an [increase] of 133.

You can take the $30 million and you could divided by the production and that is roughly the margin change.

Right, and this is something that will be ongoing?

We should expect to see this happen in the fourth quarter and next year's first, second, so on?

Well, both the inventory for the home equity segment and the inventory for the nonprime segment do not qualify for 133 hedge deferral.

So in that case whatever hedging gains or losses that are recognized in terms of our hedges are going to flow right to the bottom line of that particular quarter and then the resulting gains or losses on the inventory are going to flow through when we actually sell the loans.

So I think they are going to be continued timing mismatches.

Yes.

And separately, the improvement in the bank net interest margin in the quarter, I know you talked about some of the teaser rate portfolio coming off.

Is that the main driver of the improvement and do we have more room to see that normalize, that bank net interest margin?

For the quarter, the reduction of the teaser rate impact was the primary improvement versus the same quarter of last year.

Looking forward, if rates stay where they are at or decline or the Fed doesn't increase rates, then we will begin to experience a decline in the lag that we see in the NPA index and our net interest margin should improve as a result of that.

Is the teaser rate effect complete at this point or was there more impact from the teaser rate coming off?

There was still a small amount, a few basis points of teaser rate impact, but very small.

Okay.

Finally on the buyback and the funding of the buyback, I think you had mentioned at your investor day capacity the issue about $1.5 billion of hybrids.

Was that what you would target to issue here and then fund the balance through existing capital?

Let me take this opportunity to expand on this a little bit.

David Sambol addressed the issue capital optimization at the investor forum and we're focused on this issue.

We gave you some more color in the release today.

The environment is ideal for repurchase.

Current market provides slower growth opportunities for us in mortgage banking and banking.

We already have significant excess capital.

We have over $1 billion today.

We expect that to go to over $2 billion by the end of '07.

These high equity content debt securities we've talked about are very, very lucrative.

We get 75 to 100% equity recognition on those.

There are no shares in the ROE denominator harkening back to the prior question and of course a valuation provides a great buyback opportunity.

The Board, as we mentioned, has approved a buyback of up to $2.5 billion.

As we said in the release, we intend to repurchase between $1 billion and $2 billion during the fourth quarter.

We are very mindful of our ratings by the way and the impact this might have on debt investors.

These repurchases have been approved by all three agencies.

In terms of what we plan to do in the fourth quarter, you mentioned the capacity of $1.5 billion.

That number is probably $1.8 billion today in terms of our capacity.

We're looking to do between the $1.2 billion that we mentioned.

If we were to do a trade on November 1, the fourth quarter of '06 impact would be roughly $0.025 to $0.05.

The full year impact on '07 would be in the order of 0.125 to $0.25.

The estimated ROE improvement would be up to a full point per billion that we do.

So I hope that provides a little bit more color on exactly what we are contemplating with the share repurchase.

Very helpful.

Thank you, Eric.

Jim Shanahan, Wachovia.

We've kind of touched on this issue and I wonder if you could just tell us when you expect the current portfolio to reach peak seasoning and at what level you'd anticipate delinquencies to be then?

You're talking about the bank portfolio?

Yes, sir.

Assuming a static portfolio or --

Which is not the case.

If you just take today's portfolio, you have to do that because you're always adding loans to it.

So you have really a bifurcated portfolio to the existing you are talking about when will that reach peak?

But it is always -- it's this whole issue of indeterminability because you're adding unseasoned loans to the port every single day.

I think the question is what would be a normal -- what would we expect in today's environment for a delinquency rate at the existing port we're talking about?

What is the comparable.

I do not have a number I can give you of the top of my head but what I was going to say is that if you make that assumption that just portfolio that bleeds over time obviously delinquencies as (indiscernible) season will continue to increase and also the denominator shrinks.

They also increase because of that effect.

But we also look at our vintages to see how they are performing and the bank's vintages when we compare them to the industry or to other products are in the case of the pay options we compare them to other products and we try to do everything apples-to-apples vintage type of product etc.

By vintage he means that was produced in 2003, what was produced in -- just examine that and if that is performing 2004, how does performing to that, but against the benchmarks.

When you do that, our portfolio outperforms the industry -- or our pay option portfolio outperforms the industry and other products by a material amount.

Internally there is not -- with all these moving parts I understand, but would you say that given the current economic environment and certain macrotrends that we are almost there, halfway there, still quite a bit ways more to go in terms of rising delinquency rates?

My instincts tell me that -- I think it is impossible to answer that question because, as I said, the environment is changing all the time.

So for example if you had increased -- if you had a changing unemployment situation, that would have a material impact on the issue.

So there's so many other factors that we have to consider.

I think it is something you have to look at each quarter, look at how the portfolio is performing in this throughout the segmentations of the vintages and compare it to how the industry is doing.

I don't think you can just lock in a number and say that is what we're shooting fort.

I think you to examine this each quarter and then match that against it and we'll report back to you how we're doing related to the industry not only in terms of vintage but also by product.

Let me just add to that.

This is Dave Sambol.

It is very tough to answer that question because there are many variables that impact the level of delinquencies.

They include prepayment speeds and unemployment and home prices and importantly the direction of interest rates.

So it is very tough to give you a single number.

Delinquencies would range depending on all those variables.

The bottom line is we can't answer your question.

Let me ask a different one then.

Regulatory data that is available -- provide some additional detail for the bank loan portfolio and it suggests that there has been somewhat of a divergent credit quality trend.

What I mean in the last few quarters nonperforming asset ratios among seconds have actually declined while first-lien delinquencies have been continuing to rise.

I think that is a bigger portfolio and probably the primary driver for rising delinquencies, but how do you explain that divergent trend and did it continue in Q3?

What did he say, between home equity loans --?

First lien delinquencies rising, second lien delinquencies declining recently.

I think if you look at the age of our portfolio, of our first lien portfolio, the growth has leveled off.

It is more seasoned than it was in the same quarter of last year by a significant amount.

I'm trying to see if I can find it -- let me give you the entire portfolio.

Maybe this will help you see what we're talking about.

In this quarter that just ended, the last two months addition to the portfolio only represent -- the last two quarters additions to the portfolio I should say represented only 24% from the portfolio, whereas if I look back at the same quarter last year, the most recent quarters added to the portfolio at that time represented almost half of the portfolio.

So that maybe gives you a sense for how the portfolio --

He is asking the relationship between the second liens and why is that delinquency --?

Are you saying it is a seasoning issue?

In the current quarter we grew the second lien portfolio much more than we grew the (multiple speakers)

Got it.

Just one more quick question.

You've stated the delinquency levels in the bank have been in line with peers and I think that is fair.

However your loss reserve ratios is well below at least several of your peers.

Why not just go ahead and build that reserve to be conservative?

By my math it might cost you $0.12, $0.14 to get a reserve up to 40 basis points and given the earnings power from all the other capital management and expense reduction activities, why not just send that message to investors?

Just for the hell of it, right?

We actually are recognizing the reserves in another way that's perhaps even more conservative or more prudent.

That is we're buying credit insurance.

And so to give an idea we have something in the neighborhood of as we speak $13 billion of loans covered by mortgage insurance representing an off-balance sheet reserve of something like $1.3 billion.

Then I would refer you to our portfolio quality, its performance, its characteristics, its current LTV, which is around 67% which is resulting a chargeoff rate that is stabilized at around 4 basis points, yet our reserve is 24 basis points.

So that would be six times.

Sure, but all your peers are reporting similar net chargeoff ratios.

Yes, but they don't have -- he just went through the reinsurance issue.

I understand that, but they are also reporting very low net charge off ratios yet carrying reserves that are at least equal to nonperformers or in some cases quite a bit higher, twice as high in some cases.

They do -- some of these portfolios do also carry mortgage insurance for high LTV.

It just -- it seems low, is 22, 23 basis points the right number?

This is John.

Key point, the mortgage insurance that Carlos talked about fell into two categories.

There is the category that you're speaking about which is the high CLTV, but in addition to that, we have also got full policies which does not just cover the high CLTVs or LTVs, it cover the lower LTVs as well.

So I suspect that that is different than some of the other portfolios we are aware of at least.

Finally can you comment what the impact was on gain on sale margin this quarter from credit related offsets, fraud and rep and warranty expenses, that sort of thing?

Thank you.

Sure.

The fraud in Indiana and I guess West Virginia that got a lot of coverage was actually reserved for in the previous quarter as soon as we became aware of it.

So at this point we are just in the loss mitigation phase.

George Sacco, JPMorgan.

Two questions.

First can you tell us the prepayment speeds for your bank portfolio?

The weighted average of the portfolio I think it is going between 20 and 25%.

Pretty much in that range consistently quarter in, quarter out.

The prepayment speed has been recently 20, 25 -- even with the flat yield curve you're not really seeing that elevated?

Some products are elevated, others have (multiple speakers)

Pay options have elevated.

They have come down, but I think the overall is around 20 to 25%.

Also in the text of your release, you mentioned that the fulfillment fee paid by the bank to the mortgage reduction segment increased this quarter.

What drove that increase?

I think it was the mix in loans and that we have more HELOCs and the HELOCs that have more units; unit volume increase.

Also, it was change in mix where those loans support more of the retail production.

Okay, so more home equity loans which have a smaller balance, and then also more retail loans which would have a higher fee.

Correct.

Just one other.

Earlier, you mentioned -- someone asked the question, you broke out that $140 million residual write-down.

I think $100 million was related to, you mentioned the direction of interest rates.

And there was another $40 million you said was due to -- I think it was borrower requirements for the rate.

Is that because credit has been weaker than expected or what drove that extra $40 million?

Either I misspoke or you misheard it.

The $40 million is really just investor yield requirements on those assets increasing on a relative basis, given the decrease in rates.

It could be either because of prepayment uncertainty or credit uncertainty, either one.

Okay, thank you.

Robert Lacoursiere, Banc of America Securities.

First, if you could just comment on the rise in the real estate acquired in lieu of payment; is that related to those frauds?

It was up about $45 million quarter on quarter?

No, there is no connection to the fraud.

As the real estate cycle has slowed and properties are listed for sale for longer periods, you see that same phenomenon occur in REO.

So there is no connection to the fraud.

As you know, I don't know where you live, but in most of the country the inventory of homes on the market has -- the time has increased, names on the market.

And, therefore, the amount of homes on the market has increased proportionately.

Similarly with regards to the -- there is a line about the loans repurchased from securitized pools.

Previously you used to detail this just as FHA/VHA with credit guaranteed.

Is that still the case?

Because it went up $200 million quarter on quarter.

Where do you see that?

That is in your loan portfolio; it is like $1.5 billion.

They're looking at that now.

It's defaulted mortgage loans repurchased from securitizations, is the title.

Ginnie Maes.

So there is no credit risk there, right?

Correct, no.

I wanted to take one last stab to understand the revaluation hit to the residuals.

Simplistically, I thought retained interest in securitized assets were a function of you NPV'ing excess spread or your expectation of excess spread over -- you know, if it's an I/O over a certain amount of time.

So when you broke out the write-down of $140 million approximately between -- $100 million because of rate movement and $40 million because of, I guess, change relative yield figure marking it at; is the $100 million part because you're getting thinner excess spreads from these that are being discounted, and the $40 million is because you're using a slightly relatively higher discount rate?

Well, it's actually -- there's two aspect of it.

One of them is that certainly as the curve changes and our future costs of the debt that are financing these assets in these residuals actually goes down.

So the spread increases a little bit.

But more importantly, the prepayment estimates on those loans grow significantly, which kind of outweighs that slight spread benefit.

So most of it is really just prepay related in the $100 million.

Thank you.

Chris Brendler, Stifel Nicolaus.

A couple questions, if I may.

Just to clarify on the hybrid if I go back to the investor day presentation, the $1.5 billion in available securities is now $1.8 billion.

That only gets you about $1 billion of equity treatment, and I think under the minimum credit rate agency level you had about $1 billion.

So you probably have a little over that given another quarter of earnings.

So that still doesn't give me the $2.5 billion.

Am I thinking about that correctly in terms of the equity or the capital you'll need to complete this buyback?

First of all, a key effect is that all three credit rating agencies have agreed to a dollar for dollar repurchase, so we're not getting the 75% haircut.

We are at $1.8 billion.

That is the revised number for the $1.5 billion as of June 30, so you have got that part right.

We are not dipping into the excess capital.

We're simply pointing out that we have that behind the equity securities that we're going to issue.

They will be dollar for dollar.

They won't be haircut by the 25%.

That's helpful.

Does this have anything to do with your projections for balance sheet growth or does it indicate anything about balance sheet growth going forward?

Well, I made reference in my earlier comments about the repurchase program, that the current environment gives us slower growth opportunities in mortgage banking and banking specifically.

We still have $15 billion of equity that is earning at a relatively high return, so retained earnings are coming in.

Our investment opportunities are less.

This gives us an opportunity to redeploy that capital in different directions.

Great.

On the expense side, how much of the cost initiatives, the $500 million run rate, how far along are you on this quarter?

This is Dave Sambol.

A big portion of our expected reductions will come in the fourth quarter and as we said we expect that by year-end the aggregate of our initiatives will translate into approximately $500 million in annualized savings.

Most significant source of those savings relate to our headcount reduction initiatives since the inception of the program.

We expect that gross layoffs will exceed 2500 employees.

Okay.

Was there much this quarter?

Expenses were a little below where I had them, I was just wondering if you made some progress this quarter.

Because usually if you're laying off people it actually causes more expenses from a severance perspective.

Yes, we did have some hit this quarter but the majority will hit the fourth quarter and our situation is such that we do not expect a material offset in severance.

Okay, one final question, a little broader.

Can you just talk about what you're seeing in the subprime market?

That gain on sale margin was probably hit the hardest, certainly some changing investor demand for certain product types, what you're doing about it, what you're seeing?

And then also maybe if you can comment if you think the nontraditional mortgage guidance will have any impact on your underwriting of subprime loans.

As we said before, it is our view that the overcapacity which exists in the mortgage market today is even more so applicable to the subprime market than the prime market.

And so we continue to see competitive pressures, significant pricing pressures in that sector which have caused margins in subprime particularly to trend downward.

It is the case that taken literally some of the guidance could be applied to subprime particularly the interest-only loans that we do in the subprime sector.

And as I said, the ultimate outcome of the guidance generally -- and as it relates to subprime -- is still uncertain at this point.

Okay, thanks.

Mike McMahon, Sandler O'Neill.

First, Angelo, we are glad you're staying on in an executive capacity for the next few years.

Thank you, Mike.

So am I.

Second, Carlos, for clarification you indicated earlier there was a small amount of additional benefit from teaser rates.

But am I correct there is still a larger amount of benefit coming from the increase in -- related to the lag in the indexes?

Yes, the third quarter still suffered from a small -- a few basis points teaser rate impact.

So we have some loans that were still in the teaser period in the third quarter, not many.

But more importantly the margins in the third quarter was impacted more heavily by the MTA index not yet catching up with where rates are at.

Yes, and there is a lot of room to go in that index assuming the loans don't pay off.

Then finally, you referenced a shift in production to the correspondent channel and last I heard I thought there was irrational pricing there.

So what has happened to improve that?

Mike, a couple of things have changed.

It was the case that we under indexed in Q2 versus Q1 in the correspondent channel and last quarter we indicated we lost some share there.

That has rebounded somewhat in the third quarter and we expect it will more so rebound in the fourth quarter.

There are a number of factors that explain that.

The first is explained by our own pricing.

We were a little bit more aggressive with respect to our pricing in that channel, although still our pricing moves were accretive.

Secondly, we made a material enhancement to our Alt-A program guidelines in the third quarter which -- to close some holes that we had in that segment of our guidelines and that got us a significant lift in volume, which contributed to our growth in correspondent mix.

Very good, thank you.

Howard Shapiro, [KBS Asset Management].

Actually my question has been asked and answered.

Thank you.

(OPERATOR INSTRUCTIONS) [Don Meader], Bear Stearns.

Angelo, it might have been said, I had to get off the line a couple of times but it's just wonderful the best news today was that you will continue to guide and lead Countrywide through 2009.

I'm glad that the Board saw it that way and I just want to acknowledge that to you, Angelo.

It's been a great and a great ride.

Thank you very much, Don.

I appreciate it.

Adam Weinrich, Basswood Partners.

I just want commend you on the share repurchase plan.

It's good to hear.

But secondly my question, there was an article in the National Mortgage News yesterday, Angelo, in which you mentioned possible interest in buying a Capital Markets firm.

I was hoping you might be able to elaborate on what you were thinking.

What I said it was -- and I don't know how it came out -- but that we are looking to expand in various areas of the company where there are acquisition opportunities.

We are not an acquisitive company by nature.

We do not do anything large, but with what is happening with consolidation of the industry and all aspects of the industry we believe there are some opportunities out there and in particular in the Capital Markets area.

We have Ron Kripalani is here and he is in my opinion one of the great leaders in Capital Markets in the country and we want to make sure we fully utilize his intellectual and physical capacity.

And so there are some opportunities out there that we are looking at and we want to expand Capital Markets as we do in the insurance aspect of our business, the bank aspect of our business, and the mortgage bank.

But I think question was asked me in a particular way and I responded it to the Capital Markets.

We are looking at specific opportunities there and hopefully some of those deals will reach fruition in the next couple of months.

Can you give us some idea of what functions in Capital Markets you lack that you would want to acquire?

It's not so much lack -- well let me give you part of it and maybe I'll have Ron expand on it.

We are a primary dealer.

We are in the treasury market.

In that market you really just to trade pure treasuries there is not much big there in that trade for us, but if you can surround it with derivatives, futures, and other products, you then enhance that business to where it becomes materially profitable to the company.

So we are looking to surround that business with other business that will enhance the value of the primary dealership.

But in all areas operation in the Commercial Real Estate operation and in the derivative area, we are looking to expand that capacity of each of those operations.

But let me have Ron just comment on it.

As we seek to grow our business, much like at the corporate level, the Capital Markets unit we seek to grow and diversify our businesses in synergistic ways.

Ways that we have done that in the last two years include becoming a primary dealer, expanding into Commercial Real Estate finance, and getting into the asset management business.

So as we view those businesses, two of which are fee generating businesses versus trading revenue, we look at potentially growing or asset management business which we call Countrywide alternative assets, which has a hedge fund as well as a CDO complex.

We might look to expand in that area through acquisition.

We might seek to expand our government dealership through acquisition.

We might look at new businesses.

There are a number of new initiatives that we are looking at that fit the Countrywide model and as we grow Capital Markets, we will look at them either through acquisition or organic growth.

Does that help you?

That helps a lot.

Just one other follow-up question, if you don't mind, sticking with Capital Markets, the conduit business seems to be the single largest revenue contributor.

The margins in that, do they differ materially from Capital Markets as a whole?

Secondly, how -- it is running at 100, $120 million a quarter.

How stable is that and would you expect that to fall materially if we see lower originations next year?

Absolutely lower originations could affect it or you might just look back to the fourth quarter of 2005 where there was irrational pricing by other originators.

And so what affects us is our ability to buy loans profitably from third-party originators.

So the combination of irrational pricing, a flatter yield curve certainly affects our profitability and certainly any just general slowdown in production would do that, so I would not call it stable.

What we have been able to successfully is grow volume in environments where there is thinner margins.

I think that accounts for a great deal of our success in the third quarter particularly in the ARM market.

Margins for that relative to the Capital Markets as a whole?

Our conduit margins are higher than most other margins within our business.

Okay.

Thank you very much.

Caitlin McCoy, Goldman Sachs.

This is actually Louise Pitt at Goldman Sachs.

I just wanted to check some of the details coming back to the hybrid potential issuance.

You said that you have $1.8 billion [less] of capacity now.

Are they intended to all come in dollars or do you think you may access other markets to tap diversified investor rates?

Secondly do you fully expect the one-to-one repurchase at the current ratings with stable outlook?

We would expect our ratings to remain stable.

We have discussed this issue with all three credit rating agencies.

As I mentioned earlier, management views our ratings as very, very important issue and we are also very concerned about our debt investors.

So we see no impact on the ratings.

We do see this getting done dollar for dollar and we do see this getting done in dollars.

And all in the fourth quarter?

We mentioned in the press release that we're looking to do $1 billion to $2 billion in the fourth quarter.

Okay, that's perfect.

Thank you.

A follow-up question from Bob Napoli, Piper Jaffray.

Just on the expense savings, what sectors are we going to see the biggest pieces of the expense savings?

David Sambol will run through those.

Bob, both in our production operations, where a significant portion of our headcount reductions were in the operations side, as well as in the corporate G&A area.

Now additionally we have a couple of other material areas including state income tax savings, which we sought to reduce that expense by migrating headcount out of California, which is a state where we pay a higher percentage of state income tax.

And so corporate G&A ops and taxes are three very big line items comprising the $500 million we referenced.

Okay.

Then just with regards to the market, where are you seeing the most competitive pressures?

We are hearing that subprime volumes are down 15 to 20% trending in the fourth quarter from the third quarter and where are you seeing the most pressures right now in the market both on the volume and pricing basis?

You're actually projecting some pretty good fourth quarter volumes.

Yes, it would be on the subprime side, Bob.

Would you characterize other sectors as being more rational than it has been or where is it most irrational?

We're seeing competitive pressures and downward pressure on margins really across all products.

Where we see it most pronounced is as I've mentioned, has been on the subprime side and absolute margins are lower on the more commoditized generic agency fixed-rate products.

At these margins do you expect to see a shakeout in the industry accelerate in the very near term?

Would you expect that?

We do.

We think that in the coming year it is going to be increasingly tough for many players particularly the smaller to midsize players to make a go of it.

Yes, I think with the reductions you've seen as I pointed out to Seth Lichenhaus, you've had a substantial reduction in real estate transactions, 20 to 30%.

That is extraordinary and with that comes at least historically enormous consolidation in the industry.

You're already beginning to see it and a lot of it is under the radar screen, Bob, because a lot of little companies have put themselves on the market have already put themselves out of business around the country.

But you're going to see increasing consolidation over 2007.

So it will be very, very significant, which always this cleansing that takes place as the markets pull back is always very healthy in the long run for both Countrywide and for the industry.

Ed Groshans, Fox-Pitt, Kelton.

I guess the buybacks have been beaten down pretty good but -- it's a pretty wide range of $1 billion to $2 billion.

Is it primarily just growth expectations that will determine whether you are more aggressive or less aggressive in that area?

It is in part market conditions and we have yet to make a final determination to what we intend to affect in the fourth quarter, which is why we provided for the range that we have.

It is amazing that for 39 years I have been told by the investor community that I should be buying back stock and I have not done it and been criticized for it and now that I buy it back I am being criticized for it.

I'm not criticizing.

Look, we have given the best shot we can at what we believe is the buyback projections and this is a very dynamic business that requires us to give you information and has some flexibility in it so that we can operate the company in a manner in which relates to what is happening in our industry and to the company.

So it may appear wide to you, but I think it is a realistic projection for us to work within, and depending upon market conditions.

Another consideration is that we might affect the repurchase some in the fourth and maybe some in the first quarter of next year and again, we have not made a final determination for those reasons as to the exact amount.

Then if I could -- just on the gain on sale and the margin pressure that is there, it just seems to me that with a shrinking market along with the regulatory guidance putting pressure on some of the higher margin products that as we're looking into 2007, that I guess it just seems that margins are going to be under pressure the whole year through.

Is there something out there that I am missing that could help revive the margins or does that seem correct?

Again, it is a very dynamic business in that you could have a lot of things happen during the year that could change the margin picture for better or for worse, but there is a limit.

Nobody has been able to sustain negative margins for any protracted period of time.

The Savings and Loan industry tried to do it and America West tried to do it.

A bunch of people tried to do it.

It just doesn't last that long.

I don't know what that bottom is but it seems to me we're fairly close to it and -- but it is very possible that those thin margins could last for the balance of the year.

But there are things that could happen during the year that could improve it, but they are very hard to predict.

Notably, a Fed easing and our reduction of long-term interest rates would be very helpful to margins.

Okay.

What about -- there is a lot of talk out of the OTC about putting pressures on states to enact the same type of guidelines.

Do you think that is going to happen?

It seems like that -- usually the states like their own rights and don't like to the told what to do by a Fed agency?

Are you talking about the underwriting guidelines?

Yes.

You're talking to the Fed, not the SEC, but the Fed?

Right.

I think that there is no way that is going to happen.

That is the inequity that exists here is that the regulated entities are being placed under one set of guidelines and the unregulated entities are not required to adhere to those guidelines and there is no way that I can see possible to make that -- those restrictions or requirements equitable or applicable throughout the system.

It ain't going to happen.

States take years to do things and many of them really have no interest in it.

So I don't see that as a possibility or a probability.

Excellent.

Thank you very much for your time.

Moshe Orenbuch, Credit Suisse.

I was just wondering if you could comment a little bit on what you have seen in terms of competition from the investment banks that have acquired in the mortgage industry over the last couple of months.

Significant.

There's several aspects that are interesting.

One is I think that it does make sense for them.

They are on the securitization side and they are having a problem getting product and so they say, well, we will just originate the product ourselves.

At least third-party point of view, so they do primarily wholesale and correspondent, not retail.

I think that the Bears and the Lehmans have had an impact and now that others are getting into it, I think they will have an impact.

Obviously it is additional competition for us, but as I pointed out earlier we have faced the biggest and supposedly the brightest and have beat them at the game and we will continue to beat the rest at the game, whoever enters the arena we will challenge them and we believe we will eventually be able to overcome any competitive issues that they may present.

The positive aspect of it from our viewpoint is that unlike what the (indiscernible) were able to do and in some respects the banks do from time to time is they can't hide anything on their balance sheet.

They are pretty much on a level playing field with us and so they have got to eventually mark their product to market.

So you won't see mispricing by them for any protracted period of time.

Because again, there is no place to hide.

So in that respect they are -- we are on a level playing field with them.

So they are just another competitor that has come in and certainly understand the reason why they have done it and the only reason you have to say, how many are going to be successful in pulling it off?

They are not all going to be successful and we will have to see how it all comes out in the end.

Now I think the important thing that we look at Countrywide is that we are the formidable, most formidable retail lender with the largest distribution network in the country on the retail side.

To the extent that we continue to exercise our power on that level and expand our distribution network and expand our sales force, to the extent that we get more loans into our retail channel that is less loans that will be available to those who seek to generate these loans through third-party channels.

The loans will never get there.

So we do have tools or weapons that we will use to offset any expansion of our -- the competitive landscape.

Just to supplement those comments, the investment banks that have entered this space are primarily focused, as Angelo mentioned, on the wholesale and correspondent channels and on the nonconforming, non-agency conforming segment of the market, particularly the subprime market and I would say that their presence and entry into the market has contributed to the margin pressures the market is seeing in the nonconforming area.

Thanks.

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

There are no further questions.

I would like to thank all of the investors who participated.

I give my thanks and thanks the entire team for the support of our shareholders, our institutional shareholders, our shareholders, and again, thank you for your participation in the call and we will be talking to you next quarter.

Thank you.

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

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