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Profit Climbs 27% at Lender

Countrywide's loan volume falls 3%. Its CEO warns of a likely drop in Southland home prices.

July 26, 2006|E. Scott Reckard | Times Staff Writer

No. 1 U.S. mortgage lender Countrywide Financial Corp. reported a 27% jump in quarterly earnings Tuesday but said its loan volume slipped because it refused to follow rivals in grabbing market share at any price.

Chief Executive Angelo Mozilo also warned that home prices probably would decline in formerly superheated markets such as Florida, the San Francisco area and Southern California.

"How low they're going to go it's hard to tell, but the trend is down," Mozilo said. The good side, he said, was that more people eventually would be able to afford homes, potentially creating more customers for Calabasas-based Countrywide.

The company said improved results in areas other than new lending helped push its second-quarter profit to $722.2 million, or $1.15 a share, from $566.5 million, or 92 cents, a year earlier.

Analysts polled by Reuters Estimates on average forecast profit of $1.14 a share.

Countrywide's mortgage billing and collections business -- which services a loan portfolio worth $1.2 trillion -- reported a threefold increase in operating profit as borrowers facing rising interest rates decided to hang on to the mortgages they already had. That keeps more loans on the books for Countrywide.

But funding of new mortgages was down 3% from the second quarter of 2005, to $118 billion. Mozilo said that was largely because Countrywide declined to join several large commercial banks in a bidding war for loans closed by independent mortgage companies and other lenders.

That so-called correspondent mortgage channel has the lowest profit margins of any section of the home-loan business, analysts say, and lenders now are competing more aggressively than usual for those loans. By lowering the net returns on the loans, that competition leaves less of a cushion should a large number of the borrowers have trouble paying their bills.

Mozilo said Countrywide preferred to concentrate on boosting its No. 1 market share in the high-margin retail business -- lending directly to consumers rather than buying other lenders' mortgages.

Of the banks battling to buy loans closed by other financial institutions, Mozilo said the most aggressive was San Francisco-based rival Wells Fargo & Co., the No. 2 mortgage lender.

"They stepped up and really put down the accelerator," he told analysts during a conference call Tuesday.

In announcing 9% higher quarterly profit last week, Wells said its mortgage originations were up 36% from a year earlier, helped by strength in correspondent lending. A Wells spokeswoman said the bank did not comment on competitors.

Mozilo said Countrywide's share of the mortgage market was lower than it had projected during the first half of the year -- about 16% instead of 18% -- because it backed off from the competition. He said he still expected to get to 17.5% or 18% later this year.

But, he said, Countrywide would never take excessive risk just to make a few more loans.

"We will not sacrifice economics for market share," he said.

Robert Napoli, an analyst at brokerage Piper Jaffray & Co., applauded the decision to cede market share temporarily.

"When lenders get aggressive in the correspondent business, it doesn't last long before your profit margins are impaired," Napoli said. "You might feel good for a quarter or two, but it doesn't last." He noted that Washington Mutual Inc., the No. 3 home lender, had exited the correspondent business rather than try to compete.

Continuing his trash-talking about rivals, Mozilo said the Wall Street firms Bear Stearns Cos. and Lehman Bros. Holdings Inc., which recently got into home-loan originations, "don't know anything about the mortgage business, which makes them dangerous competitors."

Besides underpricing loans, Mozilo said, the Wall Street firms "have no hesitation about paying personnel two or three times what we would pay because they're used to the big bucks."

A Lehman spokeswoman declined to comment; a Bear Stearns spokesman could not be reached.

Countrywide's net interest margin, the difference between what it earns on loans held by its banking unit and what the bank pays for deposits, shrank to 2.12% in the second quarter from 2.29% in the first quarter. But Mozilo said the lower margins were "anomalies" caused by such factors as the company's success in originating so-called pay-option adjustable-rate mortgages.

Those loans give borrowers several low-pay options in the early years of a loan. Countrywide's option-ARM borrowers typically make artificially low monthly payments for a year or two, then make mainly full mortgage payments, Mozilo said.

Despite their popularity with borrowers, option ARMs have drawn criticism from consumer groups, which say home buyers could wind up in hot water when payments adjust higher.

Mozilo acknowledged that if interest rates were to rise significantly from current levels, option-ARM borrowers could face "substantial" payment shocks.

Loans past due 90 days or longer accounted for 0.32% of the total in Countrywide's bank as of June 30, up from 0.07% a year earlier, but still a low figure overall, analysts said.

The company's shares, down 40 cents to $38.95 on Tuesday, are up 14% this year but are down from a record of $42.46 on May 15.

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