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Countrywide: $1.2B loss now, but profit soon

Mortgage lender reveals a quarterly hit much larger than expected but predicts a quick return to profitability as CEO Mozilo touts 'right-sizing.'

By Chris Isidore, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- Countrywide Financial, the nation's leading mortgage lender, reported a staggering $1.2 billion third-quarter loss Friday that was much larger than Wall Street expected, but predicted it would quickly return to profitability.

Countrywide's net loss came to $2.85 a share, or $2.12 a share excluding certain items. Analysts surveyed by earnings tracker Thomson First Call had forecast a loss of $1.28 a share, compared to the net income of $648 million, or $1.03 a share, it reported a year earlier.

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The company said its first loss in 25 years will be short-lived. Its executives told analysts and investors they believe the company is well positioned to thrive as the mortgage market returns to normal.

Countrywide Chairman and CEO Angelo Molizo said the lender has weathered the worst of its problems and is in a good position to post a profit in the fourth quarter, as well as in 2008. He pointed out out that many lenders have pulled out of the residential mortgage business in recent months due to the upheaval, or have gone out of business entirely.

But he said Countrywide was a "survivor."

"As a result of the continuing consolidation, we do see an opportunity to move forward and pick up market share," he told investors and analysts during a nearly three-hour conference call Friday afternoon.

Company President David Sambol told investors that the problems in the broader real estate and mortgage markets were a "perfect storm," but that it had left the field with "more responsible" competitors, which would allow the company to concentrate on less risky loans with better returns going forward.

"We view the third quarter of 2007 as an earnings trough, and anticipate that the company will be profitable in the fourth quarter and in 2008," Sambol said in the company's earnings statement. "Over the longer term, we believe that prospects for the U.S. housing and mortgage markets, as well as for Countrywide, remain very attractive."

The forecast of a return to profitability cheered investors, sending Countrywide (Charts, Fortune 500) shares soaring by about 30 percent from its depressed value in late afternoon trading following the conference call. The news from Countrywide was also seen as one of the factors providing a lift to the broader market in late-afternoon trading.

Still, even with the rebound Friday, Countrywide's share value is down more than 40 percent over the last three months.

Countrywide was particularly hard hit by the meltdown in the mortgage finance market this summer that dried up the source of funding for the loans it had come to depend upon - the sale of securities backed by home loans.

Rising delinquencies and default rates in mortgage loans made investors wary of buying those securities, particularly those backed by subprime loans made to borrowers without top credit scores, as well as other loans that did not conform to standards set by mortgage finance firms Freddie Mac (Charts, Fortune 500) and Fannie Mae (Charts).

Bank officials said that they expected to begin selling mortgage-backed securities again soon, perhaps within the next month.

Mozilo said that the industry, and Countrywide, will be better off because investors will be leery of buying securities backed by the kinds of risky loans that had been made to home buyers with bad credit or without proof of income.

"One of the changes - whether it be in corporate debt, mortgage debt - is nothing was being priced to risk," he told analysts. "That game is over. Liquidity will return, but not in the manner it was before."

Mozilo and Sambol said that a shift in business strategies has allowed Countrywide to do business going forward even without commercial paper and a functioning market for mortgage securities, if necessary.

"While we certainly hope we don't see another market stress event, we are much better prepared and in better shape should one come," Sambol said.

Countrywide had to tap into much more expensive bank lines of credit to fund its ongoing operations. It also raised rates to depositors at its banks to bring in cash. It also announced plans for deep staff cuts and office closings, taking a $57 million restructuring charge in the quarter. It expects additional charges of between $70 million to $90 million.

"Countrywide has responded decisively and taken the steps we believe are necessary to address the current challenging market environment," said Mozilo in the company's statement. "During the quarter, the company stabilized its liquidity, strengthened its capital position, significantly tightened its loan program and underwriting guidelines, and began the process of right-sizing operations for today's lower volume mortgage market."

In a conference call Friday, Mozilo confirmed reports that the Securities and Exchange Commission has opened an informal probe of his sale of Countrywide shares this year. He said that the sales were under a pre-arranged sales program set up in 2004, and was updated in 2006 when his planned retirement was postponed by three years.

Mozilo added that he did not take an active role in any of the trades based on any information about the company or the problems in the mortgage market. "I welcome the review [by the SEC]," he said. He said he is confident the SEC will clear him of any wrongdoing and that he planned to remain among the company's largest shareholders.

"I firmly believe we will be as successful in the future as we have been in the past," Mozilo said.

Countrywide was the largest lender in virtually every segment of the mortgage market heading into the third quarter. Investors and economists both were eagerly awaiting this report and guidance. It is seen as an important indication of when both mortgage finance markets and the housing market overall can start on a road to recovery.

The company said it is looking for earnings per share between 25 and 75 cents in the fourth quarter. Analysts had been forecasting EPS of only 21 cents, with estimates as low as a 10-cent-a-share loss.

The company said the much wider-than-normal range in its guidance is caused by the significant potential volatility in credit markets.

The meltdown in the mortgage market in the third quarter has hammered companies across the sector. On Wednesday, Merrill Lynch (Charts, Fortune 500) reported it was taking a $7.9 billion charge to write down the value of its mortgage investments. Last week, Bank of America (Charts, Fortune 500), the nation's No. 2 bank, reported that net income fell 32 percent, and that would pull out of the wholesale mortgage business.

In addition, Washington Mutual (Charts, Fortune 500), the nation's largest thrift, reported a steeper-than-expected decline in earnings and warned that it is bracing for more difficulties ahead in the housing market. And Wachovia (Charts, Fortune 500), the nation's No. 4 bank, said profit fell 10 percent and was hurt by $1.3 billion in losses and writedowns related to turmoil in the credit markets. Top of page

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