Countrywide Profit Sinks

In another sign of spreading credit problems, Countrywide Financial Corp. said Tuesday losses on certain loans to more creditworthy borrowers contributed to a 33% drop in second-quarter net income.

The largest U.S. home lender again slashed its 2007 earnings outlook on expectations of "increasingly challenging" housing and mortgage markets.

Countrywide's shares fell 7% to $31.55 in pre-market trading, versus Monday's close of $34.06.

The Calabasas, Calif., lender earned $485.1 million, or 81 cents a share, in the quarter, down from $722.2 million, or $1.15 a share, a year earlier. Revenue fell to $2.55 billion from $3 billion a year earlier. On average, analysts polled by Thomson Financial expected earnings of 95 cents a share on revenue of $2.86 billion.

"During the quarter, softening home prices continued to affect many areas of the country and delinquencies and defaults continued to rise across all mortgage product categories as a result," said Chairman and Chief Executive Angelo Mozilo. Countrywide set aside $293 million for loan losses in the quarter, more than triple the level a year earlier, primarily blaming a loan-loss provision of $181 million on prime home-equity loans.

The report comes as investors, already rattled by a surge in defaults on risky mortgages, increasingly fear that the subprime malaise is spilling over to the market for borrowers with relatively strong credit records. Countrywide said payments were at least 30 days late at the end of second quarter on 4.56% of prime home-equity loans serviced by the company, up from 1.77% a year earlier.

By comparison, payments were late on 23.71% of subprime mortgage loans, up from 15.33% at the end of the same period in 2006.

Many consumers took out home-equity loans as a ready source of cash during the housing boom. But with home prices falling in many parts of the country, borrowers are finding it harder to cash out by refinancing or selling their houses. According to the American Bankers Association, late payments on home-equity loans climbed to 2.15% in the first quarter, up from 1.94% a year earlier and the highest rate in nearly two years.

Countrywide said it expects the second half of this year to be "increasingly challenging" for the mortgage industry and the company. It expects loan volumes to fall and pricing pressures to increase. In addition, the lender also noted increased volatility in prices paid by investors who buy mortgages in the secondary market as well as plunging investor demand for bonds backed by risky mortgages. Those conditions, it warned, could further squeeze its profits from selling loans.

It cut its 2007 earnings forecast to a range of $2.70 to $3.30 a share, compared with the $3.50 to $4.30 range it projected in April. Earlier this year, Countrywide estimated it would earn $3.80 to $4.80 a share in 2007.

source:online.wsj.com