美國銀行 (BAC) 2007 Q3 法說會逐字稿

Good morning or good afternoon.

Welcome to the Countrywide Financial Corporation's third-quarter 2007 earnings conference call.

Please note that during this teleconference, Countrywide's management may make forward-looking statements within the meaning of the federal securities laws is 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 and 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.

Ladies and gentlemen, at this time and during management's prepared remarks, all of your phone lines are muted or in a listen-only mode.

However, later there will be opportunities for your questions and we certainly encourage your participation at that time.

(OPERATOR INSTRUCTIONS).

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

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

With that being said, let's get right to this third-quarter agenda.

It is my privilege to introduce Countrywide's Chairman and Chief Executive Officer, Mr.

Angelo Mozilo.

Please go ahead, sir.

Good morning and welcome to Countrywide's earnings teleconference for the third quarter of 2007.

Joining me on the call today are David Sambol, our President and Chief Operating Officer; Eric Sieracki, Chief Financial Officer; Kevin Bartlett, our Chief Investment Officer; Carlos Garcia, our Chief of Banking and Insurance; Ron Kripalani, President of Countrywide Capital Markets; Bob James, President of Balboa Life & Casualty; Jess Lederman, our Chief Risk Officer; and Anne McCallion, our Chief of Financial Operations and Planning.

Many of you have seen the thorough and detailed third-quarter supplemental presentation that Countrywide's management team has prepared.

To help you understand the events that took place during this challenging quarter, the presentation helps set in context the financial and operational challenges our company has faced, and the decisive actions this management team has taken in response.

In place of the Investors Day that had been scheduled for November 12, we have decided to provide the investment community with an extensive and detailed overview today.

In just a moment, Dave Sambol and Eric Sieracki will go through this presentation with you, so if you haven't downloaded it from your website yet, please do so now.

First, I'd like to address a few issues that are not directly related to our quarterly results but are important nonetheless.

(technical difficulty)

One moment, please stand by.

Please continue, I apologize.

What happened?

I don't know where I left off here.

I apologize, Mr.

Mozilo.

I don't know where you left off.

Let me just go back to this point because I don't know what happened here.

Yes, let me just go back to this point here.

First, I'd like to address a few issues that are not directly related to our quarterly results, but are important nonetheless.

As all of you know, Southern California has been in a state of emergency in recent days because of the wildfires.

Our thoughts and prayers are with everyone who has been affected by this crisis.

I would also like to commend the brave firefighters and emergency workers who have responded to the call to action.

Now I'd like to make a few other comments.

Considerable controversy has risen about my trading plans and the sales of company stock made under those plans.

I want to take this opportunity to set out the facts clearly and simply, so that we can focus on discussing the Company's performance, operations and future prospects.

I am sure you all appreciate it would not be appropriate for me to answer questions relative to this specific matter during the Q&A period.

Many of you on the call today know that I have spent 40 years of my life building on a dream that David Loeb and I had in 1968.

Our dream was to expand homeownership in America and by creating the largest mortgage provider in this country.

We have brought that dream to tens of millions of Americans.

During these four decades with the Company, I was awarded equity which was in the primary form of stock options as part of my compensation.

As Countrywide has grown and prospered, that equity has appreciated substantially in value, as all of our long-term shareholders know and understand.

In view of my expected retirement in 2006, a process was begun in 2004 to plan for this event.

Clearly, it would not have been in the best interest of anyone, the shareholders or mine, to be in the position of having to unload all or a substantial portion of my holdings into the market at the same time of my retirement.

In light of this, and the fact that I had a substantial number of expiring options, I was advised to begin further diversifying my investments.

To make sure that my sales were done in an orderly fashion, in 2004 I established a prearranged stock trading plan under the SEC rules.

Then towards the end of 2006, the Board requested that I postpone my retirement and serve as CEO for an additional three years.

In connection with my agreement to stay on with the Company, I signed a new employment agreement.

That new contract and my decision to defer retirement in turn necessitated changes in my financial planning and led to my adopting new trading plans in 2006.

These plans were put in place at the recommendation of my financial adviser, and all of these plans were established in accordance with the procedures and requirements of the SEC, the Company and my brokers.

The reason I entered into these plans is to provide for the disposition of Countrywide stock and, at the same time, remove myself from actively participating in any trading decisions.

I would like to state categorically that at no time did I make any trading decisions based on any material nonpublic information, and I fully complied with all company policies and applicable securities laws in connection with my trading plans.

I would also like to confirm that the Securities and Exchange Commission has opened an informal inquiry and that I welcome its review of my trading plans.

Let me emphasize that the Board of Directors, company management, and I are fully cooperating with this inquiry.

I am confident that this review will demonstrate that I have complied with all protocols relative to the establishment and execution of my 10b5-1 plans.

I am very proud of our accomplishments.

I remain committed to doing everything possible to help Countrywide get through these current challenges affecting the housing and mortgage sectors, and the related issues in the global credit markets.

I firmly believe that we will be as successful in the future as we have been in the past.

That is why since founding the Company nearly 40 years ago, I have consistently remained one of the largest individual shareholders in our company, and remain so today.

The second issue I would like to discuss is foreclosures.

I believe very strongly that no entity in this nation has done more to help American homeowners achieve and maintain the dream of homeownership than Countrywide.

That being said, we understand that in extraordinary times such as these, everyone, especially industry leaders like Countrywide, must step up and do more.

Countrywide is a leader, and leaders take action and responsibility for finding solutions when difficult challenges face their industry and the customers they serve.

In that spirit, earlier this week we announced a $16 billion homeownership preservation commitment to help borrowers facing or who have already experienced interest rate recess.

We have also teamed up with well respected consumer advocacy groups and a particular group, the National Assistance Corp.

of America, known as NACA, to promote counseling and other home retention services for borrowers who are in financial distress.

These are just two of many initiatives that we have under way to help our borrowers and our families avoid the painful and often devastating experience of losing their homes.

Finally, before we get into third-quarter results, I want to briefly mention the recently announced departure of Henry Cisneros from our Board.

I am very grateful to Henry for all of his contributions to Countrywide over the years.

He has given us great insights and guidance during his term as director.

I fully understand his responsibilities to his home-building Company, CityView, during these very difficult times.

I again would like to express my gratitude to Henry and wish him the best.

The Board's nominating committee has begun to identify potential independent director candidates who can bring additional financial experience and expertise to Countrywide and has retained an executive firm to assess with this process.

Now let's turn our attention to third-quarter results.

During the quarter we incurred a loss, the first quarterly loss in 25 years or approximately 100 consecutive quarters.

The loss was primarily attributable to the extraordinary volatile market conditions that we experienced during the quarter.

However as you've seen from our press release this morning, we expect to return to profitability in the fourth quarter and we anticipate that 2008 will also be profitable.

Perhaps more importantly, Countrywide and our very capable management team have taken the steps we believe that are necessary to position Countrywide to continue our long-term track record of success.

In addition, as the industry leader we continue to be bullish about the long-term prospects for both Countrywide and our industry.

I'll now turn it over to Dave Sambol who will then migrate it over to Eric Sieracki to go through the third-quarter of 2007 earnings presentation.

David?

Thank you, Angelo.

As Angelo mentioned, we prepared a very comprehensive presentation for this morning; it should answer many if not most of the questions that you likely have before we open it up to Q&A.

Starting on slide 2 on the presentation on the Web, we summarized the topics that we intend to go over this morning.

I'll start by commenting on the environment and the developments in the third quarter, the actions that we've taken in response to market development, how the Company is positioned today and then comment on the outlook for both the near-term and the long-term.

Then I'll hand it over to Eric who will go over our Q3 results and provide a perspective on the primary drivers of the loss that we reported in the quarter.

And then we'll spend some time going over our business model, some of the important changes that we've made to that model, we'll go over our current production trends and then we'll finish by updating you on capital, liquidity and we'll discuss the forward earnings outlook.

So moving to slide 3, here we summarize the key messages that we want to convey this morning and the takeaways that we hope you leave the call with.

First is that the Company, as Angelo mentioned, has taken the actions which were necessary in response to the unprecedented market turmoil that we saw in the third quarter.

The primary drivers of the third-quarter loss were charges which for the most part fell into one of three categories -- they were either noneconomic or non-cash, as was the case with inventory marks on loans transferred into our HFI portfolio where we shifted yield essentially from the third quarter into future quarters; or they represented charges that are expected to be nonrecurring as is the case with our restructuring and related charges and the inventory marks as well; or importantly, they represented material increases in our reserves and credit valuation adjustments that will lessen the future P&L impact of expected rise in mortgage defaults.

We expect that the third quarter will be a trough quarter in terms of earnings and profitability will resume in Q4 and throughout 2008.

And while profitable, returns through 2008 however are anticipated to be below long-term target levels primarily due to the expected declines in market volumes and elevated near-term levels of credit costs.

However, we see long-term prospects for housing, the mortgage market and Countrywide to remain very attractive.

The Company has sufficient capital, liquidity and financing capacity for its operating needs and its growth needs.

And coming through this environment CFC continues to possess all of its key historical competitive advantages, our management team with the experience and expertise, our distribution network, our fulfillment model, product breadth, technology and the Company's central focus on real estate finance.

And then, lastly, we want to convey that we believe that we are very well positioned for continued growth when this downcycle begins to turn around.

So with that preview, moving to slide 5, let me just comment on the environment during this past quarter.

I know that it's not news to anyone that since the beginning of August we've seen the perfect storm in the mortgage sector -- unprecedented disruption in the Capital Markets which impacted both the mortgage-backed securities market and the short-term public debt markets; we've seen a continued worsening of credit performance with delinquencies and foreclosures on the rise and market origination volumes have declined materially with current projections for 2008 anticipating a drop in the origination market of 30% or more versus 2007.

Now the impact that these market conditions had on Countrywide during the third quarter were really profound.

As a public mortgage banker our production funding has come in the past primarily from two sources -- the selling of our loans shortly after their origination in the secondary market, and the commercial paper market on the front end to finance our inventory.

Well, in the first two weeks of August we lost access to both, we couldn't sell nonagency loans or securities representing a significant portion of our production at that point and our inventory, and we couldn't reliably access the asset-backed commercial paper or the unsecured commercial paper markets.

Exacerbating this, negative press that followed one sell side analyst reports suggesting possible bankruptcy at the Company led to a short period of deposit outflow in our bank.

So our back-up liquidity framework was certainly very much tested in the third quarter.

Now on slide 6 we summarize the actions that the Company took in response to those market developments.

And the first and most important thing we did was to accelerate the integration of our mortgage operation into our bank, a process which at the time was approximately 50% complete and scheduled to have been completed by your end.

We then injected the Company with $11.5 billion of cash by borrowing against our bank lines of credit.

Since August we've arranged for approximately $18 billion of additional secured borrowing capacity; we recently negotiated the renewal of two facilities, borrowing facilities, which expired during the quarter representing another $10 billion of borrowing capacity; we brought in the Bank of America who made a $2 billion equity investment in the Company and this not only provided us with additional equity and an additional credit cushion, but more importantly we felt that a strategic investment by a marquee and respected name like the BofA would lessen the external anxiety and questions of viability which existed at the time, and it did.

We quickly implemented an aggressive and successful campaign to stem and reverse the deposit outflow that we saw for that short period in the bank; we materially tightened our underwriting guidelines and enhanced our controls such that we immediately took the steps not to fund any loans that weren't salable in the secondary market or that we desired for the bank's investment portfolio; and then we developed and quickly began implementing a plan to downsize our infrastructure in line with the lower anticipated volume levels.

And so on slide 9 we summarize where the Company stands today.

Today almost all residential originations are now funded by our bank; in fact the current run rates in October are approximately 95%.

The Company has ample and growing liquidity.

Importantly, we no longer have or plan to have any reliance on the commercial paper markets for funding.

We successfully and quickly, as I mentioned, reverses the short period of deposit outflows as a result of our campaign and in fact retail deposits since then have been growing at a record pace in September and October.

The Company is well capitalized with significant equity to support our operating needs as well as our balance sheet growth plans.

Our new thrift model and capital structure will lessen our risks and enhance our competitiveness going forward relative to funding costs and operating efficiencies and we will now be able to fully enjoy the benefits that many of our competitors -- large bank competitors do relative to federal preemption.

We have a deep and experienced executive team to manage through this transitional period and, again, we believe that we are well positioned to capitalize on the recovery in the housing market when it happens and also on opportunities that we believe will surface as a result of market dislocations.

Now on slide 8, there's certainly no shortage of near-term challenges for us and for our industry.

Housing is expected to continue to weaken by all accounts, at least through 2008, with expected continued home price declines.

Unless interest rates also decline we expect material declines in our origination volumes, as I mentioned.

Delinquencies and defaults are expected to continue to rise keeping credit costs at elevated levels in the near-term, and secondary market liquidity is not yet fully recovered.

However, as listed on slide 9, there are also positive trends and opportunities that are being created from these market conditions.

Numerous of our competitors have exited the origination market and more are expected to exit in the coming months.

Countrywide anticipates that as a result we will grow our market share in the more profitable retail and wholesale channel through 2008.

The primary remaining competitors of the Company tend to be large publicly traded banks and thrifts which we view as more responsible.

Production pricing margins on originations targeted for sale have improved materially relative to margins we were seeing in the first half of the year.

Current originations are of very high-quality; wider mortgage spreads on high-quality nonagency production is creating very attractive investment opportunities for our bank's whole loan investment portfolio.

And importantly, we have seen and expect a material increase in the earnings from our servicing portfolio and an increase in the economic value of our MSR asset due to slower prepayment speeds which are expected to further decline.

Now on slide 10, as for the longer-term outlook for the mortgage market and the industry the picture is also very favorable.

The number of households in the U.S., the most basic demographic driver of our market, is expected to increase by about 1.4 million per year.

Furthermore, the number of households headed by 25- to 35-year-olds, the primary age group for first-time home buyers, is expected to steadily increase as well.

Income is rising.

Disposable income is expected to grow at about a 5% pace in the aggregate or about 4% per household.

Household wealth, which is a major driver of housing demand, is rising faster than income.

In the near-term housing prices are expected to decline and that combined with rising income implies rising affordability.

That's the homeownership rate should stabilize and resume a rising trend.

In the long-run we expect housing appreciation at a rate of about 3%, just a bit slower than income growth per household.

And this is consistent with a long run rising rate of homeownership.

And finally, there remains a very large stock of home equity that has not yet been tapped, greater than $10 trillion which can be tapped to finance home improvements and other expenditures such as education investment, small business development and retirement spending.

So long-term we see a growing market with strong underlying demographic and other drivers of market growth and we also see compelling long-term share growth prospects for the Company as a result of rapid industry consolidation.

Now before I turn it over to Eric to go through Q3 earnings, let me just provide a brief update on current secondary market conditions as we see them.

Slide 9 highlights that the current market for nonagency securities is improving, at least as it relates to securities backed by newer production, where the market has really bifurcated between older and newly issued securities.

Securities formed before the rating agencies change their rating methodology in Q3 are still trading at very wide levels, if at all.

But liquidity has returned and spreads have been tightening at least for AAA securities backed by newly originated loans and that includes both subprime as well as prime.

Below AAA liquidity exists but mostly on newly originated, what we would prefer to as core product, meaningfully documented, prime, first lien mortgages.

And as a result of this market improvement we are now anticipating that we will securitize most of our nonagency inventory that we held at the end of the third quarter and began selling, at least the AAA securities, as early as the coming months ahead of where we previously suggested our plan was which was the first quarter of 2008.

And so with that general update I'll hand it over to Eric to talk about Q3 earnings.

Thanks, Dave.

Putting Countrywide's third-quarter earnings in perspective requires a focus on credit cost.

On page 13 of the presentation we have reflected the last five quarter statement of operations modified to emphasize the impact of credit cost on our performance.

The horizontal line shaded yellow pulls the credit cost out of other line items, principally net loan servicing income and gain on sale.

The increasing impact of credit cost is evident across the quarters and was one of the major drivers of third-quarter performance.

We'll review these credit costs in more detail shortly.

At the bottom of the third-quarter column, which is also shaded yellow, you will note that there are two EPS amounts reflected.

The top calculation is the diluted EPS calculation for the third quarter reflecting a loss of $2.85 per diluted share; the bottom calculation omits the impact of an implied dividend related to the convertible preferred stock we issued during the third quarter.

The implied dividend doesn't appear on the statement of operations but is deducted from the numerator for the EPS calculation and the impact is a $0.73 additional loss for the quarter.

Added to the $2.12 loss related to the $1.2 billion loss, we get the total loss of $2.85 per diluted share.

Turning to page 14, we focus on the major drivers of third-quarter earnings.

This is a key page in the presentation that gives very deep insight into our third-quarter performance.

Disruption in the markets complicated already complex valuation issues even further in the third quarter.

Management's intent was to be as conservative as GAAP permits when preparing its financial statements for the third quarter.

We endeavored to conservatively value the balance sheet and reflect the full impact of current market conditions and not burden future periods with deferred costs.

Three categories of drivers are listed on page 14; valuation adjustments, credit costs and restructuring charges.

Management views these accounting charges for the most part as non-recurring in nature, or they represent significant increases to valuation adjustment for future credit losses not yet incurred, and to reserves.

At the bottom of the two columns, you will note that these major drivers increased $2.1 billion in the third quarter compared to the second.

Pretax earnings declined $2.6 billion overall, so you can see the significance of these items, $2.1 billion of the $2.6 billion decline.

The other $500 million in pretax earnings decline is principally driven by forgone gain on sale, nondeferrable FAS 91 costs as loan sales decreased significantly during the quarter.

Focusing first on the valuation adjustments, $857 million of the charges were related to inventory and pipeline write-down.

$150 million was related to a low [cum] loss on loans included in securities that had been previously sold but didn't qualify for sales accounting.

While we only owned 84 million of bonds from deals totaling $3.2 billion, FAS 140 required the bonds previously sold to be added back to the balance sheet at September 30.

The mark on the collateral added back to the balance sheet but previously sold amounted to $150 million.

And offsetting gain will be recognized when the securitization qualifies as a sale, which would involve selling the remaining $84 million of securities.

The second driver and a more important driver were credit costs, which amounted to $1.9 billion for the third quarter.

The held-for-investment, or HFI as I will refer to it, credit provision was $937 million.

$790 million of this provision was at the bank, $150 million at the mortgage company.

The bank provision was extremely conservative and was over six times the charge-offs for the quarter.

I will give you more on that later.

Residual valuation adjustments were $690 million; $540 million from home equity loans, $150 million from subprime.

The other credit charge was $291 million for reps and warranties on loans and securities sold.

The reps and warranties provision was nine times charge-offs for the third quarter.

While this reserve is very conservative, we nonetheless intend to very vigorously defend our claims.

The final major earnings driver is a restructuring charge of $57 million.

This is related to the announced reductions in force of 10,000 to 12,000 employees in reaction to a declining mortgage market.

$90 million to $100 million of additional restructuring charge is expected in the fourth quarter as described and deferred by GAAP.

Now, concluding on page 14, we have provided a very concise overview of the impact of current market conditions on Countrywide's performance in the third quarter.

I urge you to remember that management views these accounting charges for the most part as non-recurring in nature, or they represent significant increases to valuation adjustments for future credit losses not yet incurred, and to reserves.

Moving forward to page 15, this page reflects the major drivers of the third-quarter loss by the business segment format we popularly use.

You will note that production servicing and banking operations someone equally share the burden.

Moving forward, page 16 provides more detail on the billion dollars of valuation adjustments, the first of our three major earnings drivers.

A $418 million write-down was recorded on $12.8 billion of loans transferred from held-to-sale to held-for-investment during the quarter.

At the bottom of page 16, you can see that $9 billion of prime home equity loans and $3.7 billion of prime ARMs were transferred.

The mark-to-market results in expected yields in the robust 20% to 30% range on the remaining basis of the HFI loans.

Also $420 million was written down on HFS held for sale loans that remained on hand at September 30.

The $150 million I discussed earlier that will reverse when the securitization qualifies as a sale is in capital markets.

Continuing with our goal of putting third-quarter earnings in perspective, we turn to credit costs on page 17.

Credit costs were the most impactful driver of third-quarter performance.

They will remain an important driver in the future as well.

Accordingly, we dedicated a brief section of the presentation to credit.

In determining our credit positioning, management was as conservative as GAAP allowed.

Factors we considered were lower home sales and growing inventory of unsold homes, continuing declines in HPA, rising delinquencies and defaults, and notably the tightening of mortgage credit.

Tightening of mortgage credit has an especially profound effect since it constrains the option mortgagors have to refinance, or get a home equity loan to solve their financial problems.

The factors we considered reflect a significant deterioration in the third quarter beyond what was discernible previously, and that required conservative credit charges in the third quarter.

Page 18, we begin the credit discussion with analysis of home price appreciation trends, a key factor in recent and future credit performance.

The light orange shaded area on the left-hand side of the chart reflects actual HPA, home price appreciation activity, from 2004 through the second half of 2007, according to OFHEO.

In addition to the national average which is depicted by the red line with yellow dots, the four most troublesome states -- California, Florida, Arizona and Nevada -- are also (graphed), the right side of the chart shaded grade is a projection prepared by economy.com based on the OFHEO actual data.

The projection doesn't reflect the positive national HPA until the end of 2009.

The loan level cum default model at Countrywide is fed with MSA specific HPA data from this independent third-party projection in our credit provisioning process.

We also use other models that interpret, among other things, role rate migration trends to check for inconsistencies and ensure that the integrity of our reserve calculations is intact.

Management conservatively chose the slow-growth scenario prescribed by Moody's Economy.com that reflects home price appreciation or HPA decline of 7.6% through the end of 2008.

The bottom line on HPA is that it is a critical factor expected to deteriorate further that we conservatively contemplate through an MSA specific third-party source.

Turning to page 19, we examined credit performance trends try to determine what the stats tell us.

The top half of the page shows 90+ day delinquencies for banking operation HFI, held for investment, on the left, and a residual portfolio on the right.

We focus on these portfolios because of their significance at CFC.

Starting with banking operations HFI on the left, note that total 2006 and prior vintage 90+ day delinquencies -- that is the bottom line shaded in gray -- were growing 3/10 of a percent to 4/10 of a percent for the period from the third quarter of '06 through last quarter.

The increase in the third quarter was 9/10 of a percent, triple that rate.

Drivers of increasing delinquencies, among other things, have been the 2006 vintage, over 80% LTV low-dock loans, and geographically, California and Florida loans.

Similar to the HFI, the residual portfolio 90+ day delinquencies shown on the top right of page 19 were growing roughly 1% per quarter until they grew 2.4%, all the way up to 8.2% in the third quarter.

These stats demonstrate the significance of rising delinquency rates, most acutely in the third quarter.

Charge-offs for the last five quarters are on the bottom of page 19.

Banking operations HFI on the lower left grew from $6 million last year to $126 million this quarter.

The residual portfolio charge-offs grew from $45 million for the third quarter last year to $249 million this quarter, up 20% from just last quarter.

The bottom line on credit performance trends is that 90+ day delinquencies and charge-offs have reflected declining trends that spiked in the third quarter, which required conservative provisioning.

We have looked at HPA now in credit performance trends, so let's move forward and look at a summary of our key credit exposures on page 20.

The summary reflects the balance sheet asset, the unpaid principal balance, the provision, and the reserves through our key credit exposures as of September 30 and June 30, 2007, and the quarters then ended.

CFC's credit exposures mentioned earlier is concentrated in its HFI port and residuals.

Contemplating declining HPA and deteriorating credit performance that we just addressed, we conservatively increased our reserves through the provisions for HFI at $937 million for HFI, residuals at $690 million, and reps and warranties at $291 million.

That is the $1.9 billion credit cost we discussed earlier on the major drivers page.

The last two columns demonstrate the significant growth in reserves in the third quarter.

Drilling down first into our HFI portfolio, let's examine portfolio credit characteristics on page 21.

The shaded yellow line highlights the characteristics of our total bank operations portfolio, which has a UPB of $79 billion at September 30.

Point out some noteworthy points.

32% of all loans have credit enhancement with 71% of the pay option ARMs having credit enhancement.

That level of credit enhancement was strategic as pay option ARMs have shown elevated delinquencies recently.

Despite falling home values and negative amortization, the bank operation's portfolio has a current CLTV of 79%.

Even home equity loans have a relatively modest 84% current CLTV.

The port also has a strong 727 average FICO.

We also reflect some other strong portfolio attributes here, namely less than 20% of the loans have CLTVs over 90%.

Only 6% have FICOs under 660.

And only 5% of the loans have reduced stock and CLTVs over 90%.

It is important to note that the bank proactively restricted volume in recent years in overheated markets such as Clark County in Nevada and Dade and Broward Counties in Florida.

The mortgage banking HFI portfolio is a modest $2.5 billion that is comprised primarily of GNMA buyouts and subprime seconds.

There's two points to take away here.

We are observing credit performance deterioration despite these high-quality borrower characteristics, and the quality of the portfolio will hopefully mitigate future losses.

Page 22 provides detail on the HFI loss provisions and reserves.

The left-hand side of the chart focuses on the banking operations HFI port as of September 30 and June 30.

In the middle of the page you can see the significant growth in reserve of over $1 billion in the last 90 days.

This has driven significantly improved reserve coverage as indicated by the ratios at the bottom of page on the left-hand side.

The reserve as a percentage of UPB has risen from 7/10 of a percent to 1.9%.

This compares very favorably to competitors.

The reserve as a percentage of NPLs has increased from 47% to 103%.

Further, the reserve as a percentage of NPLs without credit enhancement has increased from 66% to 216%.

While the provision is a multiple of charge-offs with a very healthy 2.2 times in the second quarter, the multiple jumped up to 6.2 times in the third quarter.

Once again, I repeat, the third-quarter provision is over six times third-quarter charge-offs for our banking operations HFI port.

Significant improvement has occurred in just the last 90 days, another testament to management's conservatism on provisioning.

The bottom line on the HFI loan loss reserves that they are very conservative is clearly indicated by the ratios in the bottom-left corner of page 22.

Having completed our review of the HFI port, we now turn our attention to residuals.

Page 23 is a residual summary that includes the balance sheet carrying values, the unpaid principal balance on discounted losses embedded in the valuation, and a distribution by vintage and loan type.

In the top-left corner of page 23, you can see that only $907 million of carrying value remains on the books at this time for residuals; $285 million of subprime and $622 million of home equity loans.

While the UPB hasn't declined significantly quarter to quarter, the carrying value is down almost $600 million.

In the top right corner of page 23, we reflect the undiscounted losses embedded in the valuation for the residuals.

Note that the undiscounted loss percentage has increased from 5.4% at June 30 to 9.9% at September 30 for subprime residual.

By the way, this includes almost 13% for the 2006 subprime vintage.

Similarly, undiscounted losses for home equity loans rose from 5.9% to 8.9% at September 30.

The undiscounted losses embedded in the valuation of the 2006 vintages for both subprime and home equity combined is over 12%.

An interesting note, on an overall basis for all products and vintages, 62% of the losses embedded in the valuation for residuals are on loans that our current at this time.

Highlighted in yellow at the bottom center of page 23, the vintage chart shows that only $256 million of exposure remains to the 2006 and first-quarter 2007 vintages, which were the trough and underwriting guidelines.

The bottom line on residuals is that balance sheet exposure is down to only $907 million, very conservative losses are embedded in the valuation, and exposure to the 2006 and first quarter of 2007 vintages is down to $256 million.

That completes the review of credit costs and trends.

On page 24 we address a macro intrinsic hedge driven by current market conditions.

That is the inverse correlation between MSR prepayments and servicing earnings versus HPA and credit cost trends.

During tightened credit markets like today where fewer consumers qualify for new mortgages that might drive a payoff, slower MSR prepayments are being to rise.

We show the last five months prepayment speeds for four broad product categories; agency, prime nonagency, subprime, and prime home equity on page 24.

All four categories reflect significant slowdowns in speeds due to the tightening of credit.

Speeds have almost been cut in half for each category over the last five months.

Significantly slowing is observed specifically from August to September as well.

Overall portfolio speeds slowed from 18 CPR in the second quarter to 12% CPR in the third quarter for Countrywide.

Speeds are expected to slow even more, since July applications were still funding in September and empowering prepayments.

Nonetheless, Countrywide's MSRs were written down $830 million in the third quarter, driving the MSR cap rate from 1.54% in the second quarter down to 1.51% in the third quarter.

This valuation was in line with the rest of the market.

It is management's view that the market is not fully contemplating the economic benefit of slower speeds, however, and is slow to react as usual.

Our models reflect significant slowing in future prepayment speeds.

We performed an analysis using September actual speeds, again although we expect to see more slowing, and used various dates to begin mean reversion in determining the increase in the intrinsic value of the MSRs.

As you can see on page 24, depending on the mean reversion date, the economic value of the MSRs at Countrywide that is not reflected on the books at September 30 ranges from $900 million to $2.7 billion.

It is our hope and anticipation that this unreflected value will be reflected in the near future.

With that, I will turn it back over to Dave for the business model update.

In the next section, I will review with you our business model and talk about that, which has changed or is changing relative to the model, and that which remains the same regarding our model.

On slide 26, the best way to characterize the Company's model prospectively is that we will be a large well-capitalized thrift with a compelling national residential mortgage franchise and with affiliated businesses that are linked and highly synergistic to our core lending business.

So going forward, our primary residential and commercial lending platform will reside in our FSB.

And starting this quarter, the fourth quarter, all securitizations will be done directly out of the bank and the bank will begin carrying and funding all-new MSRs and retained interest on its own balance sheet.

As it relates to CHL in the immediate term, it will essentially look like an investment holding company.

It will carry existing MSRs alone that were on our balance sheet in CHL before we moved our production operations under the bank, until those assets run down or are sold.

However, I want to emphasize that it is our intent to retain CHL's licensing and its ability to support nonbank lending and other business activities as we may deem necessary or desirable down the road.

We also, I want to emphasize, are committed to maintaining sufficient capital and liquidity in CHL and at the parent as well, and working to improve our investment-grade rating at those two entities.

As for our other subsidiaries outside of the bank in terms of our capital markets business, there will be really no changes to our core capabilities or activities, except that we did exit the derivatives trading business during the quarter.

That was not a material business for us.

It was relatively new and small and was a breakeven business that wasn't strategically important.

And the other notable change in capital markets is that we expect to move our commercial real estate lending activity in our conduit business under the bank in the near term, and that business will, however, will continue to be managed by our capital markets segment.

As it relates to our insurance franchise, really no material changes to our business model or strategy in that segment, which is doing very well.

On slide 27, arguably the most material change in our business model relates to the Company's funding model.

We successfully transitioned from a funding model highly reliant on capital markets funding, such as CP as I mentioned and MTN, to a model driven by traditional thrift sources of funding.

Presently that is primarily deposits and FHLB advances.

Our primary strategy relative to the bank's funding going forward will be to grow our retail deposit franchise.

We view this franchise to be very unique and highly efficient and scalable.

As many of our investors know, our retail financial centers are small kiosks occupying maybe several hundred square feet within our retail mortgage branches, which we generally staff with two representatives who simply take applications and discuss our savings and investment products and answer questions.

We do not take or handle any cash in our financial centers.

So, therefore, we are not technically bank branches.

The compelling value proposition that we have is to offer our customers a local presence, which is very important to seniors, our primary constituents, with higher rates enabled by the lower cost of our financial center model.

So our operating expense structure for our retail deposit infrastructure runs approximately 27 basis points of the deposit portfolio, and that is a fraction of the costs associated with a traditional bank branch infrastructure.

We also have and view the scalability of our financial center model to be superior to the scalability of traditional bank brick and mortar branches.

Our average deposit levels per financial center surpass industry averages for bank branches after just 13 months in operation.

Now I'll point out again that since we experienced that short period of deposit outflow that I mentioned in August, over the last 1 1/2 months our new deposit production and retail deposit growth levels have been running at record levels in the bank, well ahead of the budgeted levels which our plan calls for, including what we budgeted for 2008 daily and weekly run rates that we needed.

We plan on opening up 50 new financial centers by year-end.

Today we have approximately 150 financial centers, up from 100 at the end of the second quarter.

As it relates to other funding sources, we expect that our deposit and FHLB funding will be supplemented by other secured and unsecured borrowings when they become available at acceptable cost levels to the Company.

In fact, it's our intent to begin working on a covered bond transaction as early as the fourth quarter.

On slide 28, as it relates to our residential originations franchise, most of our key strategies in our production franchise really remain unchanged.

We will continue to source loans for both resale and for our investment portfolio through all three of our channels -- retail, wholesale and correspondent.

While the near-term emphasis will be on resuming growth of the bank's loan portfolio and retaining nonagency loans originated there where we are seeing attractive opportunities relative to both asset quality and yield, long-term our decision as to whether to retain or to sell the loans that we originate will be based on a number of considerations, including market yields that are available to us in the pricing of those loans relative to our return hurdles, as well as capital and current period earnings considerations.

We believe that this hybrid mortgage banking portfolio lending model enhances the Company's competitiveness, our scalability, and provides us with maximum flexibility relative to both capital and to earnings optimization.

Now, one notable change to our channel strategy is that we are pulling back from the lower margin segment of our correspondent channel.

We have historically bifurcated that the business in that channel between what we refer to as spot business, higher margin purchases of one loan at a time, and flow business commitments that we have in the past made to larger mortgage companies under transactions we typically refer to as assignment of trade transactions, which is a lower margin business and it is a capital-intensive business.

And we are materially pulling back from that latter business and intend to redeploy the capital that will be released into our other business activities, particularly the growth of the HFI portfolio.

This is, however, expected to reduce our market share in the correspondent channel.

Now, our primary focus going forward will be to grow share in the more profitable retail and wholesale channels, as well as the spot segment of the correspondent channel, with particular and primary emphasis on retail share growth where we expect to see significant opportunities in the near term.

In fact, I would point out that even during the disruption that we were managing in the third quarter, we saw gross headcount increases amongst our retail sales force at an all-time record in the third quarter.

As it relates to product strategy today, we are originating primarily GSE eligible products and high-quality, attractive yielding, short duration loans for the bank's investment portfolio, and that we expect that to be the case until the nonagency market reliably returns.

I will point out that that strategy does not make us unique.

That is the strategy that most of our bank competitors are also pursuing.

On the next slide, 29, we highlight our servicing franchise.

And when we talk about our servicing franchise at Countrywide, we are really referring to two things, our MSR investment and our servicing platform.

As it relates to the MSRs, they're the key component of the Company's macro hedge.

As Eric mentioned, we expect that our MSR investment will enjoy material earnings growth through 2008, such that it will partly if not fully offset the decline in our origination earnings.

As Eric also discussed, recent repayment speeds have slowed to levels ranging from 40% to 55% of speeds earlier this year, and we expect speeds to slow further.

In fact, I just yesterday read a research report issued by Bear Stearns, and it was Bear's view and projection that MBS prepayment speeds in 2008 will be the lowest in history.

Going forward, it is likely that growth in our MSR asset will slow relative to the growth rate that we have experienced over the last several years, and that is primarily as a result of the lower correspondent division volume I describe and also the lesser attention of excess servicing, which we have been retaining over the last year and beginning in the coming quarters will lessen.

And the reason for that really relates to the fact that it's several things.

Our view that spreads on those investments, IO spreads are going to begin to tighten as the market increasingly recognizes the inherent value of IOs and MSRs.

And also it is the case that over the last several years as we intentionally deployed capital away from investments with credit risk and allowed the bank balance sheet to shrink, we redeployed it to prepayment risk, which has worked out very well.

However, in the prospective or forward-looking environment, we intend to redeploy that capital back into the bank HFI growth.

The other important dimension of our servicing franchise is our large servicing operations, which are highly efficient and highly automated, and where we are today particularly focused on leveraging our loss mitigation proficiencies and extensive workout progress in this -- programs, excuse me, in this difficult environment.

And, of course, working to help our borrowers who are having financial difficulties in avoiding foreclosure.

In this regard, as Angelo mentioned earlier this week, we announced a $16 billion program to help subprime borrowers predominantly who are facing ARM resets to avoid foreclosure through a variety of refinance and modification initiatives.

Now, we are frequently asked what the impact on our servicing costs and earnings will be from increased delinquencies and loss mitigation efforts, and what happens to cost.

And what we point out as I will now is that increased operating expenses in times like this tend to be fully offset by increases in ancillary income in our servicing operation.

Greater fee income from items like late charges and importantly from in-source vendor functions that represent part of our diversification strategy, countercyclical diversification strategy such as our businesses involved in foreclosure trustee and default title services and property inspection services.

On the next slide, a couple comments on our strategically important capital markets segment.

This segment consists of really four business lines, what we refer to as our rates business which is agency MBS, agency debentures in U.S.

Treasury Securities trading; our residential whole loan conduit and private-label securities underwriting and trading business, which has been most impacted by this market; our commercial real estate conduit and CMBS trading also very much impacted; and then our asset management business.

Now, the strategic rationale behind these activities is to generate earnings and add value to the mortgage franchise and to CFC by distributing Countrywide's production at the offered side of the market, and more importantly providing in-house securitization and capital markets resources and expertise that benefit our mortgage origination franchise.

Long-term, the plan is to opportunistically grow existing business lines with emphasis on the growth of our asset management business.

In the near-term, purchases and originations in our residential and our commercial conduit do remain negligible, and will until reliable liquidity returns to the nonagency securities markets in which those businesses are dependent.

So near-term earnings will be primarily driven by our rates business in that segment.

The last franchise I want to touch on is our insurance business, which is doing very well in terms of both profitability and earnings growth.

That segment has two primary businesses, our property and casualty business and our mortgage reinsurance business, and both of these businesses are benefiting and we expect them to continue to benefit from the current environment.

In our P&C business, one of the primary earnings drivers is our lender placed property channel, which writes force-placed insurance policies for mortgage servicers when homeowners failed to keep their homeowners insurance in place.

And this business is again a countercyclical business to the mortgage credit cycle and does very well in periods like the one we are in today where delinquencies are rising.

As it relates to our reinsurance business, also a very profitable business.

It will particularly benefit from the current market's transition from second-mortgage piggyback lending back to traditional first-lien lending with PMI policies for higher loan-to-value transactions.

And we are already seeing a significant pick-up in the percentage of business that we are doing with PMI and in the related growth in our reinsurance portfolio.

As it relates to credit risk in this business, it is important to emphasize that Balboa Re only takes a mezzanine layer of risk, meaning the primary mortgage insurance carrier takes the first loss.

While it is the case that we have not paid any claims to date on our reinsurance portfolio, we do expect claims likely in '08 or '09, particularly on the 2006, possibly 2005, book, but we believe that we are very well reserved for future losses on that book.

On slide 32, we have summarized our rightsizing initiatives that were announced this last quarter, initiatives that will materially reduce our expenses and align our cost structure with the expected declines in our origination volumes.

We expect expense reduction, the reduction initiatives to be substantially completed by year-end, and we expect that they will result in a workforce reduction that we have estimated to be between 10,000 and 12,000 employees, and to generate annualized cost savings which exceed $1 billion annually.

The last and maybe most important aspect of our business model that I want to touch on some more relates to aspects that we have already discussed, and that relates to the various macro and intrinsic hedges that exist within our business model and the inversely correlated dynamics that are designed or that serve to dampen earnings volatility, and generally create either support or resistance levels to our earnings.

As we have pointed out, our origination volumes and earnings are inversely correlated to servicing earnings.

Our MSR prepayments and servicing earnings are inversely correlated to home price appreciation and credit cost trends.

Broader economic slowdown generally stimulates interest rate declines which then tends to stimulate growth in origination volumes and earnings, particularly in refinance activity.

Our vertical diversification businesses, some of which I mentioned, are countercyclical to credit cycles like the lender-placed property business in Balboa and like the in-source vendor businesses in our loan administration unit.

So this is a very important part of the Countrywide business model, and in part explains why we are projecting a return to profitability in the fourth quarter and in 2008.

Now let me transition and talk a little bit about production trends as they relate to volumes and margins and also to the credit quality that is being originated.

I will start with quality on slide 35.

Here it is important to emphasize that we did not start our guideline and underwriting tightening in the third quarter.

In fact, it was started in the second half of 2006, as we first saw signs that home price appreciation trends or growth were slowing.

And, of course, accelerated in the first quarter of 2007 with the subprime correction, it continued throughout the second quarter.

But in the third quarter, we certainly did make changes that could best be described as a wholesale revamping and tightening of our programs and guidelines.

The tightening focused primarily on limiting higher leverage or LTV loans, lower FICO or credit profile borrowers, and reduced documentation loans, particularly when these risk factors exist in combination.

We also eliminated almost all subprime production except that which is salable to the GSEs.

And then beyond program and underwriting guidelines, we instituted very significant enhancements into operating controls as well.

Now on slide 36, we attempt to illustrate the impact of our guideline changes on future credit costs by looking at what historical credit costs would have been had we made those guideline changes or had those changes been applicable to prior books of business.

So the rows represent the four product types that we have for the most part invested in credit risk in the bank at Countrywide; pay options, HELOCs, fixed-rate seconds, and then hybrid ARMs.

The first set of columns reflects the original loan amount, the loans -- the book of business that we originated in 2006 and 2005.

And then what we sought to do was to break up that book into loans that would have been eligible under our new guidelines and those that would have been ineligible under our new guidelines to see what performance subsequently was on those two breaks.

So, for example, if you look at the HELOC section, we originated a $26 billion of HELOCs in 2006 and $36 billion in 2005, of which 62% of the '06 vintage would have not been eligible under our current guidelines.

Only $10 billion of the $26 billion would have been eligible.

And if you look across to the very far right column, you will notice that where the accumulative defaults on the '06 and '05 HELOC books were 174 and 155 basis points, if we excluded the loans that wouldn't be allowed, the default on the remaining loans as a proxy for what we are originating today, it would have been only 30 basis points on the '06 originations and 47 basis points on '05; really a very small fraction of the defaults that we've seen to date.

I will point out that in terms of our credit model and use for reserving and pricing prospectively, the loss assumptions embedded in our valuation of newly originated loans are more conservative than the numbers you see here, materially more conservative, in fact, for defaults to date, on the loans that would remain.

On slide 37, we highlight the characteristic shifts in our production as a result of the guideline and program changes that we made.

And so we compare various characteristics, collateral characteristics, on our originations in the second quarter of '07 to what we are sourcing and applications we've taken in the month of September, just to contrast and compare what has happened.

And as can be seen from this slide, we have seen a significant improvement in credit quality; increase in FICO scores, lower LTVs and CLTVs, and a significant drop in reduced documentation loans where we have virtually eliminated reduced documentation loans on higher loan-to-value transactions.

On slide 38, we summarized recent volume trends in our daily application activity.

So again, we compare daily average applications or locks in Q2 versus the run rates that we have seen through September, and a couple of observations.

First, as can be seen on this slide, overall daily lock volume is down approximately 42% in September versus Q2 run rates, but significantly less so in our retail business where it is down approximately 25%.

And where most of the volume decline is being seen is in our third-party origination channels where volumes are down 50% or thereabouts, and in our AOT business which I mentioned close to 70%.

Also, you can see from this slide that the volume drop is almost entirely, in fact, entirely in the nonagency category where volume declines are 80% over those two periods, where agency eligible production is actually up in September in terms of the September daily run rate versus Q2.

The slide also reflects that virtually all of our nonagency production is production which is eligible for the HFI investment in our bank, and that volume represents approximately 15% of our total volume run rates today.

The next slide, slide 39, summarizes margin trends that we have seen.

We have an acronym that we manage to and that we use here when we price loans that we refer to as the net pricing margin.

And what that represents is what we price into our rate sheets in revenue before customer fees, economic revenue before customer fees, such that it includes gain on sale and net interest and also the present value of captive reinsurance income.

Again, comparing margin trends for NPMs from the second quarter to what we are seeing today, a significant improvement in margins across all of our divisions, individually and in total.

Now it has been suggested in some of the reports that I have read and in the speculation that our migration towards agency volume with a lesser concentration of nonagency production will hurt our margin; the speculation being that our margins for nonagency loans were higher than they were for agency loans.

To dispel that, that is not the case.

It might have been the case at one point in one or maybe two divisions.

Maybe it was applicable to pay option ARM margins at their peak, but earlier this year, in fact, nonagency margins were running below agency margins.

So the improvement that we have seen in the agency margins, you could see also is reflected in the improvement in overall margins expressed in basis points on all first mortgages that we are originating, again in each of our channels and in total.

So very attractive trends relative to margin improvement that we are seeing as a result of significantly lesser competition in the market.

The last slide indicates similar pricing and margin trends, but relative to the production that we are sourcing for our investment portfolio.

And here again, we showed the four products that we are originating, with the intent on holding in the bank the HFI portfolio.

And as you can see, comparing margins expressed as ROEs that we have priced into our rate sheet, the trend is significantly positive.

Where we were seeing returns on equity in the low to midteens embedded in our pricing of those products in the second quarter, we are seeing now ROEs in the high teens to mid-20s on those products.

So with that update on production trends, I will pass it back to Eric to talk about capital and liquidity.

Thanks, Dave.

We begin our discussion of liquidity and capital on page 41.

Funding the Company was a challenge in the third quarter of '07.

Secondary market liquidity dissipated, the credit crisis crept to our front-end funding liquidity, namely commercial paper.

Treasuries contingency planning prevailed, however, and there were two key factors.

One was accelerating our bank integration plan, which is already in place, five years in the making, five months from completion.

Very supportive help from our regulator insured our success with that plan.

The second item was we drew on bank lines $11.5 billion that provided a safety net to insure the transition of our funding model.

We now have ample and growing funding liquidity, and our current focus is on growing contingent liquidity at the bank.

On page 42, we give you a funding liquidity overview.

We currently have $33.6 billion of highly reliable liquidity available.

We have significantly enhanced our liquidity in the last 30 days, in addition to the $12 billion we have previously disclosed in our September operations release.

We renewed a $10.4 billion multiseller ABCP facility for one year, and we procured $6.25 billion of new whole-loan securities repo facilities.

I mentioned earlier we have ample and growing contingent liquidity at the bank to fund operating and growth needs, and to manage potential future stresses.

There may be additional shoes to drop.

The mortgage company has adequate liquidity to fund all debt maturities through 2008, without raising any new debt.

Taking it over to page 43, we provide you a schedule that we have been filing in Form 8-K updated through September 30.

I draw your attention to the bottom line of page 43, total highly-reliable short-term liquidity.

The maximum borrowing capacity you can see is $157 billion.

Outstanding at this time, $89 billion.

The amount undrawn on facilities, I would call this gross liquidity, $69 billion.

The far right column, excess borrowing capacity, I would call that net liquidity.

It is either available or we have unencumbered collateral to pledge to facilities.

That is the $33.6 billion that I mentioned previously.

So you can see the liquidity situation is very strong at Countrywide at September 30, 2007.

Moving forward to page 44, we review our capital adequacy.

To provide you with a few stats on the excess capital at Countrywide Bank, you can see at September 7, Tier 1 capital at 7.3%, total risk-based capital at 13.7%, rating agency excess $1.9 billion to $6.6 billion.

For the parent, excess Tier 1 capital $2.6 billion, excess total risk-based capital of $4 billion.

More importantly for the parent, rating agency excess capital, depending on the rating agency, of $1.1 billion to $4.7 billion; this despite the marks that we are taking at September 30.

So we have a very strong capital position at Countrywide at September 30.

On page 45, we take a look at earnings guidance at Countrywide.

For the fourth quarter and moving forward to page 46, for the fourth quarter, consolidated earnings are expected to range between $0.25 and $0.75 per diluted share for the fourth quarter.

We cite on page 46 a wide range may be caused by significant potential volatility arising from the factors listed; general market conditions, MSR valuation and hedge performance, residual valuation, credit performance, secondary market liquidity, LOCOM adjustments of inventory.

To drill down in a little bit more depth on earnings guidance for the fourth quarter, production is not likely to return to profitability in the fourth quarter, and incurred significant expenses related to fundings in the bank that are not reimbursed.

Servicing should be extremely profitable in the fourth quarter.

We have been very conservative with our modeling, still reflecting double-digit CPRs and reflecting significant profitability in the servicing sector.

We expect mortgage banking overall to be profitable for the quarter.

Moving forward to the bank, a fact I saved until now is that the provision for the bank's credit losses in the fourth quarter is expected to be in the low $200 million range, back to the $228 million level we observed in the second quarter.

The bank profitability will be significant in the fourth quarter.

Capital markets enjoys the potential reversal of the $150 million FAS 140 amount we talked about earlier, but may return to profitability on its own.

Insurance should have another highly profitable quarter, despite the higher losses due to the California wildfires.

So again, we expect significant profitability to return in the fourth quarter.

As far as 2008, we wanted to give observers from insight into our outlook.

We expect 10% to 15% ROEs for 2008.

We do extensive modeling looking at base case optimistic scenarios, recession scenarios that are more pessimistic.

As I mentioned earlier, we are contemplating HPA of -7.6 through the end of 2008.

We stressed that by an additional 5% HPA decline from there.

We shock rates in our modeling.

We do reflect double-digit CPRs very conservatively in our portfolio.

We do reflect the impact of HPA increasing 5%, as I mentioned.

That pretty much gives you some perspective on where we see earnings guidance for 2008, and on that note, I will turn it back over to Dave to summarize (technical difficulty).

In concluding our prepared remarks -- thank you, Eric -- again, I want to just summarize the message that we were hoping to impart in this presentation, and that is that Countrywide has successfully managed the recent environmental challenge.

The Company's liquidity is stable and improving.

We have strong capital adequacy.

Our new business and funding model is expected to reduce risk prospectively.

We have begun and taken the steps to right-size the Company for lower production volume.

Importantly, Q3 is expected to be a trough quarter, and we expect profitability to resume as we have said in Q4 and throughout 2008.

Countrywide, we expect will be a major beneficiary of industry consolidation and we are, we believe, well-positioned to exploit consolidation and well-positioned for future growth.

We are seeing reduced competition, which will assist our market share growth plans.

We are seeing, at least currently, very healthy origination margin.

And as we've pointed out, we are seeing very high quality on our originations with improved yields and opportunities to grow our bank investment portfolio in the near-term.

But really most importantly, I think the message that we will convey is that while we certainly hope that we don't see another market stress event like we did in the third quarter, it is very much the case that we are much more prepared and in better shape should one come.

With that, I will give it to Angelo.

Thanks, David, Thanks, Eric.

Those were very thorough presentations.

Hopefully, that gives you a view, the investors a view of our current status and management's view of the prospects for Countrywide going forward.

Now, Brandt, if you'd open it up for questions, we'll start taking them.

(OPERATOR INSTRUCTIONS) Ken Posner.

Thanks for the thorough presentation.

And I will say it was nice to see the $4.8 billion in cash sitting on the balance sheet.

That really, I think, suggests some helpful stabilization.

What I wanted to ask is going forward, you have built Countrywide on a very solid financial foundation.

It is hard to imagine Countrywide longer-term without access to the capital markets, and it seems to me the first step there would probably be paying off your bank lines.

I am just curious how you think about that and what even the initial plans would be to address those outstanding bank commitments?

The way we look at it is it is not that we don't expect to get access to the capital markets in the long-term.

In fact, it is our plan as I mentioned to work in improving our ratings and hopefully getting back to where we were, such that our cost of access, particularly the unsecured funding, becomes a manageable cost for us.

The message is that having moved the business into the bank, we are not reliant on capital markets funding as our competitors are not relying on capital markets funding to fund residential mortgage lending and investment business.

And so that is really the way we look at access to the capital markets.

As it relates to the bank debt that you mentioned, the borrowings that we have as a result of our drawing on the $11.5 billion of lines do not mature really for several years.

I think 70% of the amount owed does not mature for 4.5 years.

However, as we have conveyed to our bank group, it's our desire to begin paying them back before then.

We have more than enough liquidity in our projections if everything goes as we anticipate to begin repaying the banks before then.

And one of the dependencies, in fact, will be when we get resumed access to the capital markets at cost-effective levels.

If I could just ask one quick follow-up, the FHLB has obviously been very key to stabilizing liquidity with 50 odd billion in advances.

You must be pretty much at the maximum level, the 50% level that you can borrow from the FHLB.

What kinds of standards or speed bumps do you have to observed in maintaining that 50% ratio?

I think the more appropriate question, Ken, may be we put this through a stress test, but why don't you go through the rules that we are operating under now with FHLB?

First of all, we still have excess borrowing capacity at the FHLB, but importantly, our current liquidity situation does not require us or make us dependent on actually drawing down on that in the near-term or even in our plans for next year.

Our funding plans contemplate that we will fund most of our balance sheet next year with the deposit franchise.

Thank you very much.

Bob Napoli, Piper Jaffray.

Thank you.

Also, thank you for the in-depth presentation.

A couple questions.

First of all, I think it is on page 16, I would like to understand the mark-to-market, how you went through in deciding what the mark you took was when you moved loans into held-for-investment from held-to-sell?

Am I looking at this right; you transferred $12 billion in, and the write-down on the transfer was $400 million?

In terms of the marks, both for the HFI, HFS/HFI transfer and also just for the general inventory marks, we recognize in the current environment a market disruption, determining the marks on financial assets is difficult.

The historical relationships between asset classes and indexes have decoupled and, therefore, passed valuation practices that needed to be modified.

That being said, there is relative evidence of values in the marketplace.

Our primary goal was to search the marketplace for all information that could be considered relevant in determining values.

We considered quoted market prices of both the securitization or whole-loan market.

We considered actual trades, market information provided by street firms, whole-loan prices and indexes were applicable.

Whenever quoted prices were available, we used those as the primary source of our values.

When quoted prices were not available, we considered quoted prices of similar assets when available.

We considered indexes where applicable; we considered historical relationships between asset classes, although we used the extreme end of those relationships due to the decoupled nature of today's environment.

We considered the origination vintage of the assets being valued; we considered both post -- I mean past rating agency actions on the relationships between vintages, and we also considered the future rating agency actions on the current vintages.

And as a last resort, we considered discounted cash flow models.

So this process, though, resulted in a set of spreads that were used to value the positions used in terms of the HFI to HFS transfer -- excuse me, HFS to HFI transfer, and also the HFS inventory at the end of the quarter.

So we took all the market information that we could, and obviously it was a challenging environment.

We came up with spreads that we thought were appropriate that would establish a fair value, and that is what we used for both the valuation transfers and also the valuation at the end of the quarter.

Thank you.

Your guidance for next year, 10% to 15% return on equity, your shareholders' equity at the end of the quarter was $15 billion, but I think that includes the $2 billion from Bank of America.

Is the 10% to 15% excluding the $2 billion?

Bob, it is based on the common equity.

Okay.

And the servicing profit margins, what type of servicing profit margins are you expecting in the fourth quarter and in 2008?

Well, I mentioned that we're contemplating double-digit CPRs, which in view of what our models tell us is relatively conservative.

We departed from the normal protocol of giving you very detailed information about market share and market size and production sector margins and then servicing portfolio average size, and servicing sector margin.

The fact of the matter is that we have historically high profitability contemplated for the fourth quarter and beyond, still keeping with double-digit CPRs.

Bob, let me also say this, that as we run the various scenarios that comprise our view of next year's projection, within the range that we gave we did not contemplate any scenario where there would be a material write-up in the carrying value of the asset as a result of tightening spreads in the market.

So the only benefit that we gave the servicing segment was the benefit of improved cash flows and lower CPRs.

And in that respect, to the extent that the market recognizes the enhanced value of the assets, that would be something that would be a cushion that we did not consider in our range.

Have you adjusted your hedging because of that?

I'll let Kevin respond.

Yes, somewhat.

I think we are certainly reflecting in our views of how we lean in the direction of the hedge, based on what we think the speed environment will be going forward.

But it hasn't resulted in a material change to the hedge profile at this point.

Last question.

The Fannie/Freddie, the agency loans, what type of gain on sale margins are you getting on those currently?

Well, it's tough to answer that question because I look at things in terms of NPM, NPM as I mentioned in my update on margins.

And where we end up from a gain on sale perspective very much has to do with the mix of channel.

Because as you saw, the top-line pricing margin and correspondent is a fraction of CMD, and I have not weighted that out yet to project where it blends out.

Bob, let me also comment as it relates to the mark question.

I wanted to point out that with respect to sales that we put on subsequent to quarter-end, which are quite extensive, in fact -- we put on sales of AAA securities on subprime and fixed-rate and adjustable-rate loans as a result of some improving liquidity in the market -- in all cases, we sold at or inside of our marks at 9/30.

Thank you.

Paul Miller, FBR Capital Markets.

Angelo, this is a question for you.

One of the things that I think you got a lot of credit for a year ago is that you predicted somewhat this big downfall in the mortgage market.

You thought the market was expanding rather than contracting, and you felt at some point that some things were going to go wrong.

And you made a statement, I have never seen a soft landing in housing.

But yet again, it seems like you guys got caught off balance here in August; I know everybody did.

But you guys also expanded tremendously and you're still expanding, but can you just go through like what did you guys miss?

What went wrong with your model relative to what you thought would happen?

I don't think anything went wrong.

Let me just, first of all, the question I think was asked at that teleconference was either we believe -- the person asking the question said we believe there's going to be a soft landing or is there going to be a soft landing.

And my response was in the 55 years I have been in the business, I have never seen a soft landing, which is true.

It doesn't lend itself to a soft landing.

It's too disparate and you can't control it, and there's too many players.

And it is a very complex formula that keeps all of housing together, whether it is home-building, existing homes, home buyers, psychology, interest rates.

But I have never seen a -- that was my comment.

However, I must tell you that in no way did I expect what happened in August where it was a complete collapse, and seizing up the worldwide credit markets.

And it is an issue that was not Countrywide centric in any way.

As you witnessed yourself the recent news of Merrill Lynch having their issues, American Express having their issues, Bear Stearns, Citi, Lehman, Goldman; it hit everyone by surprise.

That was not anticipated.

My remarks were related to what I thought would be a normal hard landing that I had seen in the past.

In terms of our model, I think our model was one that has demonstrated that was able to be sustained during the most difficult period ever seen in my business life.

We are the only survivor of any major mortgage Company in the United States.

And I think the fact that we survived and nobody else did, and we came out of it as Eric pointed out with more liquidity and more capital than we have had in the past, is a testimony to our model or more so a testament to the management team, and that is my view of it.

Can you just address real quick the expansion?

It just seems like originations are going to go down across the board on a macro level, but you're still opening up, I think, 50 financial centers.

I mean, doesn't the industry as a whole have to downsize?

And why doesn't Countrywide --?

Let me separate that for you, if I can.

Let me separate the bank.

What David was talking about and Carlos was the bank financial centers.

Those are deposit-taking mechanisms, unique in its nature; no other national institution has that model.

So that is what adds to our liquidity.

So what we want to do is continue to expand our ability to create liquidity and liquidity that we can control and is reliable, of course.

So that is what those 50 financial centers are about.

The second thing that David talked about was the retail area of our operation, which is dealing with the consumer directly either through real estate brokers or through homebuilders.

It is extremely important that we continue to expand that aspect of our business; one, to pick up market share that will be left behind by those leaving the industry.

Secondly, it is our most profitable portion, most profitable channel that we have.

Thirdly, it is the best quality of loans that we originate.

So it is the most powerful weapon that we have as an origination company, and that is what we are about.

We are about originating and servicing loans.

So it is very important that we stay focused on our retail section.

You'll see us continue to expand there, as you will in the bank in the financial centers to generate liquidity to fund those loans in the retail section, as well as the wholesale operation of the Company.

Thank you very much, Angelo.

I would also add that the financial center expansion represents the opening up of kiosks, additional kiosks within existing mortgage branches of Countrywide.

So this is a very efficient and low-cost effort to expand our deposit franchise.

Brad Ball, Citigroup.

Eric, you mentioned a couple of times that you took actions in the quarter that were conservative, or as conservative as was permissible under GAAP.

Did that apply to your provisioning, and if that is the case, how do you take the permissible under GAAP versus what your actual expectations are?

In other words, are you providing more or less than you otherwise would, due to the GAAP conventions?

As you might imagine, Brad, GAAP is very important to us and we are beholding to it.

A couple of points I would make to you are that -- let's take the bank HFI portfolio.

The provision in the third quarter was $790 million, up from $228 million in the second quarter, up from $77 million in the first quarter.

I gave you a glimpse of what we expect in the fourth quarter in the low 200s as a credit provision.

Other institutions have announced that they expect to see meaningful increases in their credit provision.

We tried to contemplate all the information that we had at 9/30, the impact it would have on our existing portfolio, and capture that provision in this quarter, and not burden the fourth quarter with what we know now in the third quarter.

There may be further deterioration in the credit markets that drive our credit performance down that require increases in that provision from the $200 million plus level that I gave you.

But based on what we know now, we believe that we are capturing all that we can in terms of expense.

These are all losses that are inherent in the portfolio.

To give you some insight on pay option ARMs, we look at the roll rates that we expect, and they show increases for say the next four quarters, and that drives a significant provision this quarter.

And your assumption for 7.6% decline in HPA, can you give us a sense as to what the impact would be if that were to come in higher, let's say 10%, or come in lower, say down 5%?

Well, I would tell you that if HPA was down 5% additional beyond the 7.6, that the incremental losses would range in the order of 600 to $800 million.

600 to $800 million of additional losses within the bank HFI?

That's in the aggregate.

In the aggregate, okay.

Just finally, the table you showed on page 44 indicating that the agencies or that your capital is in excess of what the agencies would require of you seems to be a little disconnected from what we have seen this morning from at least one of the rating agencies who apparently are focused on your earnings and have threatened to downgrade if you incur an operating loss next quarter.

Could you give us a sense as to -- is there a disconnect there?

Are the rating agencies more focused on earnings than on capital?

Well, capital adequacy is one of the factors that the rating agencies consider in their ratings.

If we take CHL's ratings, for instance, and we won't name names, but there was disparity between the three rating agencies in how they reacted in the month of August.

One agency took CHL down one notch, another agency two notches, another agency three.

So you may have a phenomenon here where one agency felt as if they were perhaps out of line with the general context of the other agencies, and this was an opportunity for them to get more in line.

They are very secretive about their formulas.

Liquidity is something that is very, very important to them.

I'd keep an eye out there for releases from other agencies as well, and see if they make comments about liquidity and capital, and that will give you more insight into the way they think.

But earnings is a component of it.

Of course, yes.

Thanks very much, guys.

Moshe Orenbuch, Credit Suisse.

As it relates to your comments about liquidity and capital markets and external funding, you did say I think that you would hope to, in the next month or so, start selling at least the AAA tranches of deals.

Could you talk a little bit about that a little more?

Because I think that is what the original plan was three months ago when the market started to deteriorate, and talk a little bit about how much capital that would need versus where you are now, and what that might mean for your plans to originate?

Let me just give you a sense of the sales plans.

We certainly have -- we have already put on sales so far this quarter in excess of $1 billion of some of the inventory that remained at 9/30.

The market, though, just generally to give you a sense of what has happened to senior spreads, I'm going to give it to you two ways.

On the jumbo core fixed-rate stuff, the seniors might have been in terms of a spread to agency securities, in Jan would have been, let's say, three-quarters of a point back of agency securities.

In August, they got to the 2 1/2 point back range, and in October what we have seen so far is it is around 1 3/8 back.

So it is more than halfway returned on the fixed-rate side, which given there's really no negative press on fixed-rate lending, I think that that probably makes the most sense.

On the 5/1 product, the hybrids, you probably could have sold those in the June area at about swamps plus 50 in yield.

August got to around swamps plus 1.25 and now, you can probably sell those around swamps plus 100 because that hasn't totally fully recovered and neither one of those has really fully recovered and those are the two major products that we're selling now.

We have also been successful in selling AAAs on pay options recently and so that is an interesting event.

So the market has come back a little bit and there is decent flow and certainly the federal home loan banks have been very important in the process and I think that we will see how things shape up given all of the other issues out there in the market.

Just a quiz follow-up, Kevin.

Does that mean you are securitizing existing pay options or that you are actually originating them now?

We don't originate much in the way of pay options.

It is small amounts of pay options both in the monthly and the hybrid program.

It is probably less than 2% of our total production combined.

But no, these are sales of the existing pay options that were produced in the third quarter.

Howard Shapiro, Fox-Pitt, Kelton.

Thanks very much.

Two questions if I could.

The first relates to your loan modification program, the $16 billion program you announced a couple days ago.

Can you just tell us who has the legal authority or has to sign off for modification for example if a loan is in a securitization and there is a mortgage insurance?

Do all the bondholders have to sign up?

Is it just the servicer or does the mortgage insurer have to sign up?

Then I have a follow-up.

Thanks.

Just the servicer.

So you have complete authority to do the modifications?

Yes.

Okay, perfect.

The other question just has to do with the valuation on the mortgage servicing in the quarter.

Given the decline in -- or I should say the decline in prepayment rates and what you expect going forward, how did you get to the kind of -$800 million plus fair value mark?

I would have thought you would have perhaps even shown a positive mark on your mortgage servicing fair value?

That is a good question.

The accounting that is prescribed for the mark of servicing requires us to mark the assets to what we believe the market value is at that quarter.

And that is a difficult thing to do because MSRs are not actively traded.

So what we instead do is we look at surveys generally that are lagging that come in from sources such as the KPMG or PW has a survey and other surveys that tell us what other people are doing relative to marking their portfolio.

And we have to go through this process to determine where other people would end up and then that way establish that as the market value.

We were not sufficiently comfortable marking it up further before we saw what the market did, and that really explained why we didn't mark it up more.

And so we really widened the yield out dramatically on the assets.

Our models did project that prepayments would slow down, and the fact that we didn't anticipate others adjusting their asset by more, really translated into a much higher yield on the asset, which is what we anticipated the market value at 9/30 to be.

The key question is what happens at the end of Q4 and subsequently, and to what extent will the market recognize the value?

By the way, the write-down was driven really by the fact that interest rates rallied; the ten-year rallied by approximately 40 basis points in the quarter.

So if I'm understanding correctly, as the market plays catch-up so to speak, the economic value you feel is embedded in your servicing asset should be reflected in earnings over time.

It will either be reflected in ongoing operating earnings or it will be reflected through a markup in the asset.

But yes, either way over time the lifetime earnings from the portfolio will be greater as a result of the changes that we have described in the slowing speeds.

Okay, perfect.

Thank you very much.

Let me just clarify the question about the modifications and servicing, having the authority.

Let me just refine that response.

We have the authority to modify the loans within the parameters of the servicing contract.

Those contracts differ from (inaudible), but on balance we have the authority, and this will again vary from investor to investor.

We will manage the loan modification process.

We manage that on behalf of the investor.

So that gives you a more global answer to the question about modification.

But the bottom line is as a practical matter, operationally we manage the entire process.

Thanks very much.

Mark Patterson, NWQ Investment Management.

Thank you.

On the '08 comment about the 10% to 15% ROE guidance, I'm just curious if you guys could comment on how some of the current rumblings in Congress are factored into that expectation and how the market might change next year based on anything that might come out of congressional discussions right now.

And also maybe in conjunction with a that, what form you might expect the nonagency market to look, when it would come back or in what form it might come back potentially next year?

If I could take the first part relative to the -- there are several bills floating through Congress, one by Schumer, one by Marty Frank, one by Dodd, and they have a lot of similarities, some differences.

These yet have to vetter through because there are certain things about these bills that I think are very helpful to the market, particularly to consumers who are having difficulty getting funding to even purchase a home today, particularly in high-cost areas.

There are some areas that are problematic relative to liability, to security holders, that have to be vetted out.

And there are several provisions in there that are very helpful to the overall market.

For example, one is to lift the caps, at least on a temporary basis, from Fannie and Freddie's balance sheet, which I think is incredibly important today when the market really needs liquidity, particularly for first-time home buyers who are at the beginning of the housing chain.

And secondly, to lift -- and this is a very controversial issue; I'm giving you my viewpoint.

I think it is very important that Fannie and Freddie be allowed to increase their loan amount substantially above where it is today on some basis that relates to home prices in various MSAs.

And because they're totally irrelevant in an area in the state of California, for example, or many parts of New England and New York in high-cost areas of the country, and they should be irrelevant.

And so we support aspects of those bills.

Other areas of those bills we consider problematic, and we are working with the Congressmen and their advocates to see if we can ultimately come out with a bill that makes sense to everybody and everybody wins.

But it takes a long time to get these things through because they have to get through the house, get through the Senate, be compromised, and I wouldn't expect anything, if anything comes out, until 2008.

In terms of your question, Mark, on the secondary market and when nonagency demand will come back, it is my opinion that it is really just a matter of time before we see more liquidity come back and spreads normalized.

In fact, as it yields, particularly on the newer originations and the securities backed by new originations are anomalously high relative to other investments with similar risk profile.

And we believe that supply and demand conditions, as is always the case, and the market economy will revert to equilibrium.

These yields will attract demand as they already have, and so signs are positive.

Whether we return to the same credit spreads we were at before the disruption or there is a premium for nonagency securities to agency securities, there will likely be maybe a slightly wider premium, but we believe spreads will continue to tighten.

Timing, however, is uncertain.

What is certain is that the quality of the underlying collateral backed by those mortgage-backed securities will certainly not revert, and we do not expect to see the kinds of loans being made going forward that were made over the last several years that have underperformed so dramatically.

So, Dave, you put out the slide that talked about how the agency and nonagency originations, in at least the form that you are looking at the returns on that type of origination weren't materially different, at least as it related to kind of just the prior few quarters.

So maybe it is not that important about what is factored into your '08 expectations, but I would assume that you guys are conservative in thinking that maybe not necessarily that we have an August environment, but that we have something -- that we don't have something that returns back to a year ago.

I think it certainly will be helpful for the market and, by extension, for the Company for the secondary market to return, because I think that will -- I think volume, overall origination volumes in the market will improve as a result.

Our own share or percentage of nonagency production we don't view to be all that different than the overall market.

We think credit has been constrained in that sector, and so to the extent that liquidity returns, it will help volumes and we think it will help credit cost for the industry.

And I think anything to bring credit back to those markets where it has been constrained, including Angelo's view on the increasing loan balances for the agency, is going to be helpful for the industry and for us.

But the way it would manifest itself in our projections is likely higher volume levels, and by extension, higher gain on sales, and maybe a mix shift approach as what it was historically, if not to the same extent.

One last thing, I thought I might just elicit your comments on the subject of the scene that I think you guys had thrown out to the market for so long of surviving and thriving.

Angelo, you made the comment a little bit earlier in the call about being the only survivor.

Well, there's probably another one in Pasadena, but there's going to be opportunities.

And I think in your slide deck, you talk about being well-positioned to capitalize on opportunities from market dislocations, and just thought you might elaborate on those opportunities.

Is this organic growth; is it asset purchases; is it building the retail sales force like you have been by picking up people?

Is it all of the above?

First of all, let me comment because I have the highest regard for IndyMac and the management of IndyMac, particularly Mike Perry, and they are certainly an important player.

But Countrywide is a very significant size in relationship to IndyMac, and I'm talking about any companies who are even close to Countrywide.

But it was in no way to demean IndyMac; that's our child.

We gave birth to that company in 1985.

Let me just comment.

I'd like to make three comments to add onto what David said, and then I will answer your question in terms of opportunities for us.

One is that I believe that even though it is supply/demand curve, that ultimately it is a truism and it does ultimately come back to what is considered normalcy.

But I think normal is going to be very different than what we considered normal prior.

There's been, in my opinion, a significant structural change in the market, a permanent structural change, and it will not return to that.

One of the changes is that whether it be in corporate debt, mortgage debt, or any other kind of debt, private equity -- private equity has been materially impacted by this -- nothing was being priced to risk in any form of debt, and I think that game is over.

I think things are going to be priced to risk, so as Dave pointed out, that may not come back to where it was.

Liquidity will return, but not in the manner in which it was before.

The third thing that is a deep concern of Countrywide because it has been its mission since its founding is to provide homeownership opportunities to low-income and minority borrowers, and have spent 40 years of its life trying to close the GAAP between white homeownership and minority homeownership.

My great fear, and I think until something is done significantly here relative to a campaign and Freddie's participation in the marketplace, FHA, reconstruction of FHA, that in a three to five-year period, the gap will return and, in fact, worsen between white homeownership and minority homeownership in this country, which carries with it huge social implications.

And because there is virtually no liquidity to first-time home buyers today in high-cost areas like California.

Getting back to your question about the advantages that we have as a result of what is happening, one is that there is just a few players left of significant size in this country that they're in the mortgage space.

The advantage Countrywide has always had is that we're the only large institution -- large in terms of a JPMorgan or a Citi or a BofA -- as a major player in the mortgage space, huge volumes, that has the sole focus of mortgages.

Every other major financial institution has a lot of things on their plate, do them quite well.

But having the focus of doing mortgages the most efficient way possible has always been an advantage to Countrywide, and I think it will be even a greater advantage going forward because of the consolidation in the industry.

The other is that you are talking today to a time-tested team.

The average time that the management team has been with me is about 23 years.

We have been through a lot, nothing like August certainly, but we have been through a lot.

And now we have been through August and learned a lot as Dave pointed out.

So I think with the quality of the management team, the focus that we have, the mission that we are on, I think that we have a much better chance of success than any other player in the mortgage space today.

Great, thanks a lot.

Chris Brendler, Stifel Nicolaus.

A couple of questions.

Eric or David, on the slide 39 the agency margins, the increase in the net pricing margin from second to third quarter, can you just explain to me in a little bit more detail why that is happening?

Because I would have thought with the entire market going agency, everyone scrambling to go agency execution, that you would see pressure on those margins, the competitive environment not giving you nonagency execution.

I would have thought those margins would go down, and maybe where they were a year ago also in terms of what is driving that improvement second to third quarter?

The main reason, Chris, is that we have seen a significant amount of capacity exit the market, and competition has lessened.

And where we had overcapacity to put downward pressure on margins for the last several years, the reverse is being seen right now, and the market is giving us these margin opportunities as a result of that.

I would have thought that would have come more on the wholesale side, but it seems like it is pretty well-balanced across all three channels.

Well, to the extent that there is less competition on the wholesale side, it benefits the retail side as well.

When our retail loan officers compete with a loan officer that works for a mortgage broker or for a correspondent, the pricing that is quoted by the broker correspondent also impacts the price that we need to show on the retail side, and so there is a very strong link.

Okay.

Second question would be, can you talk about your deposit pricing, any changes you have made recently to your deposit pricing strategy?

I have heard that is has increased, but just wondered if you could comment on that?

The deposit strategy, the vast majority of deposits taken in over the past month, month and a half, have been in the 12-month category to try to stretch the deposits out, more reliable funding for the bank and, therefore, the pricing has been geared towards attracting the one-year money.

You want to speak to that at all, Tim?

The only thing I would add to that is with the more significant growth in assets experienced at Countrywide Bank in the quarter from the accelerated transition or integration of the mortgage banking operations, we have accelerated or been more competitive in terms of our pricing over the past 60 days.

We anticipate that will moderate somewhat in the coming month or two months as we bring on additional productive capacity.

We have added 50 new financial centers over the past 60 days and we're going to add 50 more.

With more productive capacity, we can reduce our competitive position and reduce our pricing.

I don't know if this is in the slide deck or somewhere in the release, but what is currently in the held-for-sale portfolio that you still have remaining?

Is it mostly agency at this point?

Yes, most of it is agency.

There is some remnants from the July/August/September production and remnants that relate to pay option, some BC and some expanded criteria, but for the most part, it is agency.

Can you quantify that?

Our nonagency inventory at 9/30 was approximately $10 billion.

My final question, and this is from a broader question that I'm struggling with, is I think you've taken a lot of very positive steps to improve your financial condition in the last several months, and I don't blame you for feeling better about the outlook.

But I struggle with that we still seem to be early in the process of this housing situation.

The prices really haven't started falling yet.

We have last month's sales and inventories still at record levels, and building the reduction in mortgage credit that you talked about I think is a huge negative for the future outlook.

And what has been striking to me, I think most recently, is just how rapidly mortgage credit is deteriorating over the last -- not even last quarter but just last couple months, you've seen such tremendous increases in NPAs.

How do you get comfortable with the '08 outlook and given what is happening or what is likely to happen or continue to happen in terms of the credit picture?

Do you have any sort of sense or can you share with me when do you think this is going to peak out and start to stabilize in terms of the nonperformers that we're seeing increase so rapidly right now?

Well, you lay out a fairly pessimistic scenario which could be the case, because I agree that you do see elements that are troubling in terms of house price depreciation.

But you have to remember that there are other moving parts here that, in fact, if that scenario is played out you would have to expect substantial lowering of rates by the Fed.

Sort of the theory of indeterminate ability, you can't just change one thing and don't expect a whole bunch of other things to change in the process, so there will be compensating issues.

But I think we have tried to be as conservative, as Eric I think used that word about seven times in his presentation, and staying within GAAP as well to try to prepare for the future.

And I think our quest for greater market share in a market where we are generating much higher quality loans, and having a servicing portfolio of $1.5 trillion are important backstops for us against these other -- the other issues.

But I don't know if you can get comfortable in light of all of the events taking place, but I can assure you that six months from now things are going to take place, certain things are going to take place in a positive way that we cannot predict today or we're focused in, or for the obvious reasons are on the negatives.

Do you want to -- also, by the way, let me just clear up one thing.

Eric may have or Dave may have another comment on this, but just to clarify the issue when I talked about surviving.

I didn't put IndyMac in the same class as Countrywide not only for size, but also you must remember that they were not dependent upon outside funding.

They have been a bank for many years now, and had a deposit franchise that funded all of their loans.

So they didn't have any need for the capital markets whatsoever for their funding and, therefore, weren't impacted like the other companies have been, like the Merrills and the Lehmans, because of lack of commercial paper and lack of MPNs and repo lines.

So they were really a thrift that was totally self-funded, and although impacted by the storm in the secondary markets were not affected for their primary sourcing funding sources, which we were.

Do you have any comments?

I'd like to say a couple of things.

Just to clarify our forecast, and when we talked about some of the opportunities it wasn't to suggest that we wanted to convey an optimistic outlook on the whole.

While there are some opportunities that maybe can lessen some of the pain, in fact our forecast, our reserving methodology and our plans all contemplate a continuing deterioration in the housing market.

And we have attempted to be conservative in our projections of origination volume, of credit costs, and that is incorporated in our reserves.

You know, I don't like to use the term conservative because you never know.

But our exposures relative to the forecast that we have given, which do provide for returns that are not acceptable to us from a long-term standpoint, are based on some degree of expected continued deterioration.

So our risk is worse deterioration than what we have contemplated.

And what I would like to do is I would like Jess Lederman, our Chief Risk Officer to maybe also comment a little bit on his view of housing and talk about what he sees and what others are projecting.

Jess, do you want to make a comment here?

Sure.

I think it is important in looking at how we reserve and the adequacy of those reserves to understand that the biggest portion of the reserves actually relates to loans that are current that we have reason to believe, because of how we look at the environment and how we look at our forecast, will become defaulted loans.

So we've talked about a couple of factors, the credit tightening that occurred in middle of the third quarter which is going to have the big -- we are assuming will have a continued negative impact on future credit behavior.

Obviously, borrowers who get into trouble, some portion of those will not have as many options to refinance.

What I think you can look back on is the slide that we presented which had the Moody's home price appreciation forecast that we presented earlier, and think about it, as Eric points out, the negative HPA gets its low point, maximum negative home price deterioration in the middle of Q3 and does not return to home price stability until the second half of 2009.

So you have got over a year and a half in our basic projections that feed into our statistical models that relate to how we reserve, that you don't return to home price stability until the second half of 2009.

And it is a forecast of really what would be the most severe drop in housing values in 50 years that is built into our models, which are really in sync with exactly that forecast.

And what that translates to is that we showed you some of the accelerating rate of 90-day delinquencies recently, and if you take a key portfolio like pay options or credit models based on these home price appreciation forecasts expect that new rate of 90-day delinquencies to actually increase for the next year, and for that new rate of 90-day delinquencies, the driver of defaults that's built into our reserves, to be at levels higher than today's levels for another two quarters after that, so really corresponding to that six, seven quarters out before home prices stabilize.

So it is built into our reserves as an assumption that things don't really start to get better until the second half of 2009.

And I will just add one other point, which is that I think it is worth noting that the credit cycle, it affects both the level and the timing of delinquencies.

So weaker borrowers who are likely to have gone delinquent in normal circumstances in future periods default earlier in the lifecycle, and what that suggests is that once we do sees signs of stabilization, that subsequent performance should be more positive than it would have been without the downcycle.

But that is a future positive and is not something that is factored at all into our current reserve calculations, which we're confident are adequate and prudent.

Okay, thanks a lot.

Gary Gordon, Portales Partners.

Vincent Daniel, FrontPoint.

It's Steve Eisman and Vincent.

Just a question on what was said very early in the call about the ability to start selling some AAA securities but really not much else.

I am just wondering if assuming that the capital markets stay like that, that you can sell most of the AAA securities in your newly originated loans, but you have to keep everything below in the capital structure.

In terms of a capital position, how long can you do that without then having to come back to the market for more capital?

Right now, what we are originating, Steve, that is nonagency are loans that fall into two categories, 85% or let's say 90% plus of the nonagencies being originated for the bank's HFI portfolio, and that represents home equity loans originated under our new guidelines, as well as attractive-yielding short-duration ARMs.

And candidly, our challenge and our desire is to get more of those loans for our portfolio than we are now originating.

That which we are originating with the intent to resell through a securitization is for the most part a longer duration, jumbo fixed-rate product and on that product we are able to sell both the seniors and the subs.

Where the lesser liquidity for subordinate securities lies is more so in the older vintage securities outstanding and in products that we do not desire to securitize and sell.

Okay, thank you.

Ron Mandle.

Thank you.

In regard to the HPA, I just want to make sure I understand it that -- I think on the chart on page 18, you said the worst quarter is down 8% or 9%, 7% or 8%, or was that the cumulative decline?

I'm just wondering what you see as the cumulative decline.

What you see on the chart is an annualized rate, and when it waits out on our portfolio over the next five quarters, you are talking about a cumulative 8%.

Oh, I see, that is the cumulative.

Then in regard to getting back to the credit outlook, as you say on slide 19 you've seen a jump in the delinquencies and the rate at which delinquencies are increasing and so on.

And in a way it strikes me that the worst, as you'd said, were the '06 and '07, first half of '07 production.

And in a way, it is like a pig in a python, and I am wondering how long you think it takes that pig to go through the python, how high you think delinquencies will get, and maybe more specifically what you are using as a loan loss provision and charge-off rate for next year?

Give us a sense of how big you think that python is.

Well, I think the pig is really the key element rather than the python, and the pig is what you'd have on your books from '06 and '07.

The pig's got to be the one traveling, right?

Yes.

I will let Jess comment as well, but what we have done in terms of increased provision and reserve buildup this quarter is not explained by the increase in charge-offs as you might have seen quarter-over-quarter.

Right, obviously.

It is explained by the leading indicator that we saw in looking at delinquencies and 90+'s which increased more dramatically.

One point, that offsetting point that we will see what happens in October, is there are many that believe that the September 30th delinquencies were in part impacted by lesser days in the month.

So we don't know where that will come out, but our view and our reserving was heavily weighed by early indicators in delinquencies trends.

The other thing that I would point out relative to '06 and '07 is we have two major risk books; we have the residuals and the HFI portfolio.

As Eric pointed out, with respect to the residual book, our exposure no matter how worst it gets is it is floored at approximately $250 million if you take the entirety of the assets backed by '06 collateral and Q1 collateral.

With respect to the bank's HFI portfolio, your guess is as good as ours as to where this thing goes.

But one other aspect of our reserves that is worth mentioning is we have a reserve methodology, at least we have had to date, and may change it in subsequent quarters, that we think is somewhat conservative relative to what most of our peers do.

And what we do it is where maybe some of our peers book in their reserve what they believe to be one year's worth of forward charge-offs, maybe five quarters in the case I think as we have looked at the landscape, the most conservative guide, we have a reserve methodology that books more than five quarters of expected losses.

And it is because what we do is we book kind of a reserve for the lifetime losses on loans that are delinquent today, 90+ delinquent, as well as the lifetime expected losses on loans that will go delinquent within the next 12 months.

So that includes certainly all of the 12-month charge-offs and it includes subsequent charge-offs on loans that go delinquent during the latter part of the next 12 months.

So it is something that you should consider when reflecting on our reserves.

And in regard to your forecast of a 10% to 15% ROE for next year, what range of loan loss provision are you using in that modeling?

The credit-related provision, at the base case of -7.6 nationally through the end of '08 is in the order of $1.2 billion in the aggregate for all of our credit sensitivity.

And that compares with the $937 this quarter, or which number this quarter?

That is the totality of our credit-related provisions.

It would be the HFI at the Bank, at CHL, residual write-downs, everything.

In the bank's HFI, I think Eric previewed that we expect the fourth-quarter provision to be approximately $200 million, down materially from what we needed to build the reserves to where we wanted them, or where they needed to be at the end of September.

We expect that those reserve levels or those provision levels, the fourth-quarter levels, will persist through most of 2008 and maybe start falling thereafter.

So that might give you a little bit of insight as to what we envision for the Bank's HFI portfolio.

We do not provide in the residual portfolio for any additional impairment, on the premise that the existing valuation is intended to provide for cumulative losses.

So unless we see deterioration worse than what is expected and what we can reasonably justify at 9/30, which is certainly possible, we don't expect to see -- in the base case forecast, we are not providing for impairment of the residual assets.

And we are providing for somewhere in the 700 to $800 million of provision on the Bank's existing HFI portfolio.

Okay.

Thanks very much.

Fred Cannon, KBW.

Thank you.

I just wanted to go back a bit on the bank funding.

You know, out here we are seeing rates at your bank branches of around 5.70%, I think, on the one-year CD that you mentioned that was important.

I think on the Internet you are around 5.65% which is well above market rates.

It looks like you raised those rates a little bit as early as last week.

I was wondering, is that the rate -- how long do you think you'll have to maintain those kind of rates?

What kind of incremental spread are you earning when you have are having to pay that level on your funding?

(inaudible) is going to respond to that.

We anticipate that we will be -- by moving off the 12-month term here in the coming weeks and moderating our price.

And one of the ways to think about the funding is that the majority of the asset growth in the third quarter came in the form of fixed-rate seconds and HELOC second-rate product, which is generally tied to prime.

The margins are reasonable from that perspective.

But we will be managing the net interest margin and our cost of funds very carefully over the coming five quarters.

But we have looked over the past two months to ramp up our deposit production ahead of our infrastructure, to make sure that we can support the asset growth with the accelerated integration.

How does -- you mentioned, just for comparison's sake, that you have about $25 billion of available liquidity for the Bank.

How does the current rates that you are paying for that 12-month deposits compare to what you can -- what the other funding cost would be?

Well, you know, what you should know, Fred, is that our strategy over the course of the quarter, including through today -- and it is a strategy that will likely subside -- is that we have been motivated to expand liquidity dramatically.

To source liquidity from all available sources we felt was the smart thing to do in an environment of uncertainty and stress such as we are in.

That liquidity has not been cheap in the near term.

We expect as things normalize here, hopefully very quickly, that you will see that reflected in our pricing and deposits, and the cost of incremental liquidity will go down.

Thanks.

Just one final question.

You guys have presented a fairly positive outlook today in terms of -- or getting back to a 10% to 15% ROE.

Your stock is still trading well below your September 30 book value.

Is there any contemplation of management stock purchases?

Yes, I know a lot of managers are contemplating that.

Thanks.

James Fotheringham, Goldman Sachs.

Thank you very much.

I understand that 71% of the pay option ARM portfolio and 12% of the home-equity portfolio has some level of credit enhancement.

Could you just let us know, on average, what level of losses the credit enhancement covers, and how that differs by product line?

I don't have the exact numbers off the top of my head here or on a piece of paper.

But the general range I think for the credit enhancement on the second liens is in the neighborhood of -- depending on the policy -- anywhere from I think it is 7% to a 9% loss coverage.

You know, cum loss coverage, if that gives you a sense.

On the pay options, where 71% of our portfolio is covered, we have both first loss coverage.

I think it is two-thirds of that 71% is first loss; and the other third is mezzanine.

I think that the first loss coverage covers typically around 3 points of cum loss.

The mezzanine coverage starts in some cases at, I think, if I recall, at a point --.

1% and 1.75% are the two attachment points, so it limits our losses to 1% or 1.75%.

Okay, thanks.

Just one follow-up on Mark's question on legislation.

The Barney Frank bill and this mortgage reform and anti-predatory lending act introduced to Congress this week, it proposes -- as I read it anyway -- the standardization of sales commission rates across products as well as securitizer liability.

Now if the bill were passed -- and I realize, Angelo, it might take some time.

But how might these two changes in particular affect your ROE outlook relative to the 10% to 15% guidance?

Thanks.

I have no idea.

You know, there has been a lot of safe harbors carved out of that liability issue, although we don't believe enough safe harbors.

Because I think you'd have a real problem in liquidity of the secondary market based upon the provisions that Barney Frank has in there.

As I said, I think this bill has a long way to go.

Sandy, would you agree with that?

We have a staff working on it.

We have a -- at the end of the day I happen to know Barney Frank personally; he is a reasonable guy; he gets it.

He does have his constituents that he has to obviously pay attention.

I think we will come out with a reasonable bill that will work for everyone.

Because the one thing you don't want to do is create the situation they had in Georgia just about a year ago, when they had a similar provision for security holder liability; and the market just shut down.

We had to shut down our operations.

Everybody did.

Obviously he doesn't want that.

So I think we just have a long way to go before we get the bill formalized and then assess what that means to Countrywide.

My experience with this over the years is that the initial reaction is panic; but at the end of the day things are worked out in a reasonable manner so that we can operate within the framework of the legislation.

That is my hope here, but we have got a long way to go.

Thank you very much, Angelo.

Jay Weintraub, KBW.

Okay, thank you very much and thank you for having this call.

You have said in the past that you hold liquidity sufficient to pay all of your maturing obligations through the end of 2008, I believe.

Could you confirm that that is still the case?

Hello, Jay.

That comment was made with respect to CHL, our mortgage company.

The bottom line is that we do have sufficient cash on hand and liquidity to service all debt through the end of 2008 that would contemplate sales of some nonagency products.

That's the $10 billion that Dave referred to earlier.

Okay.

Does that include contemplating the $2 billion of converts that are likely to be put in October 15 of '08?

Those are contemplated in the cash flow analysis.

Okay.

One final question.

On your balance sheet you show $5 billion of cash.

In your highly reliable liquidity sources you show $15 billion of cash and equivalents.

What is the definition you are using of cash equivalent?

The equivalents were excluded from cash on the balance sheet.

Right, but what are the equivalents?

What type of instruments are they?

The instruments that we are using are those that are convertible to cash immediately, should the need arise.

Okay.

Thank you very much.

One last point, Jay.

Remember that the HFS has been marked, and we contemplate having that collateral sell at the marked levels.

We don't contemplate any gain on that.

But we do contemplate being able to sell it.

Right.

Okay.

Thanks a lot, Eric.

Shaumo Sadhukhan, Lotus Partners.

Angelo, I am wondering if you can comment on the Bank of America financing?

As I read your financial statements right now, it seems like you almost really didn't need the Bank of America financing.

I am wondering sort of in retrospect what you -- how you feel about that.

First of all, I feel very good about it.

They are terrific people to have as partners in the Company.

I think if you -- it is easy to look back.

And this is not a criticism at all, because I think what you are saying has some relevancy.

But at the time nobody knew where this market was going.

The secondary market had dried up entirely.

We had been downgraded.

There were a lot of negative aspects to what we were trying to do here.

We felt, as important as anything else, that being attached to a name like Bank of America, that that was a major endorsement that we needed in order to calm the markets.

Whether it be the equity or the debt, secondary, primary, bank, we needed that marquee name.

So I don't -- in looking back it was the absolute right move to make.

It has been very helpful, by the way.

Since that time they have been very, very supportive partners of Countrywide, very constructive.

I think it was not only a constructive step but I think it was one of the most important steps that Countrywide has made in its 40-year history.

Do you expect -- are there any reset provisions on the pricing of the conversion because the stock did fall below for a period?

Or will the convert price stay at $18?

It's at $18.

It stays at $18?

Okay.

Listen, I just want to say that you guys have taken a lot of heat in the media; and I think that the results today show the quality of the management team, and that they speak for themselves.

Okay, thanks.

Write some nice letters to the papers, will you?

[Nick Vasolakos], [Columbia].

Thank you.

I just wanted to see, do you guys happen to have the book equity number for Countrywide Home Loan?

We will have that for you momentarily.

You want the total dollars of common equity for CHL?

Yes.

It's about $3.4 billion at September 30, '07.

Great.

Thank you.

I would advise you, though, there are many equivalents in CHL as well.

So its rating agency equity and other calculations of available equity are far north of that number.

I guess I was looking for the number to gain some comfort with regards to the net worth covenant test in your bank lines.

It seems like you have ample room there.

Tom Atteberry, First Pacific Advisors.

Thank you.

Gentlemen, I do appreciate your giving more detail in a conference call than normally arises from you and from most others.

But I do want to follow up with one question that was made earlier, and then I have a different question to ask.

But I would like to know from each of management what their intention is of how much money they are going to go purchase and the amount of stock in this Company, given the glowing reports you think you are going to have going forward.

You know that is an individual personal decision that each of the management will make.

I don't think it's appropriate for me as Chairman and CEO to commit anybody to that.

I have always considered the employee's participation in stock or the handling of stock options to be very personal to them.

So you know, it is a question that we just won't answer.

I don't think we are capable of answering it, frankly.

Well, I will ask another question, but I will have one follow-up.

You have asked us as investors to put more money forward.

I merely as an investor are asking you to put money forward, also.

(multiple speakers) From what you presented, it appears to be the beginnings of a turnaround situation.

I think that you -- are you a money manager; is that what you are, or an analyst?

What are you?

I am a money manager and I also have personal money.

Okay.

I think that that that is a decision that after reviewing our presentation, whether it be us or any other company that you might invest in, you have to make a determination whether or not you think that Countrywide is a worthy investment for you and will fulfill your investment objectives, both on a personal level and as a money manager.

We just present the story.

Your decision to buy or sell is yours.

Now, my other question deals with rep and warrant.

You put a much larger reserve for rep and warrant this quarter.

What struck me a little bit was, when I was reading the press release on the earnings, was one of -- it seems that you are expecting a much higher call on that rep and warrant.

I would have thought that that kind of call would have happened earlier, when the sort of the -- some of the less quality activities were going on.

I was just caught a little bit by surprise of why you jumped it so much.

Are you expecting to see a lot of claims from a lot of people trying to put loans back to you because they were misrepresented, or you have warranted them to be one way and they actually turned out to be another way?

Our projection of the necessary reserve for rep and warranty liability is a product of our projection of future delinquencies times -- and a claim rate.

And the two correlate.

We tend to see claims only when loans go down.

So the increase in the reserve in the rep and warranty area was attributable to the same dynamic that impacted all the other reserves, which is an increase in future defaults, primarily.

With that, Mr.

Mozilo, I will turn the call back to you for any closing remarks.

Thank you very much, and thank you for all who participated in the call.

If you put this all together over the last two hours, you will see that this management team is committed to continuing to strengthen our liquidity, strengthen our capital position, our balance sheet, and increase our earnings going forward.

That objective of Countrywide has never changed.

It is more true today than ever, since we have now faced an event that we have never seen before, nobody has ever seen before.

As a result of the continuing consolidation in the business we do see substantial opportunities for us to move forward and pick up market share.

We are going to take advantage of that.

Again, this Company has the advantage of a very seasoned team who is very focused on one primary objective, and that is to put people into homes and to keep them there.

So again I want to take this opportunity to thank everybody who participated and look forward to our next quarterly teleconference.

Thank you very much.

You are welcome.

Thank you, Mr.

Mozilo, and to our management team.

We do appreciate that.

Ladies and gentlemen, Mr.

Mozilo is making management's discussion available for replay through 11.59 PM Pacific Time on November 9, 2007.

The replay dial-in numbers and access code are domestically toll-free 800-475-6701 and at the voice prompt enter today's conference ID 885787.

Internationally please dial 320-365-3844, again with the conference ID of 885787.

That does conclude our call for this third quarter.

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

You may now disconnect.