MELTDOWN IN WALL STREET?

Countrywide's Net Declines 33 Percent on Home Equity (Update6)

July 24 (Bloomberg) -- Countrywide Financial Corp., the biggest U.S. mortgage lender, reported a third straight quarterly earnings decline and reduced its 2007 forecast as a growing number of consumers fell behind on home-equity loan payments.

Second-quarter net income tumbled 33 percent to $485.1 million, or 81 cents a share, from $722.2 million, or $1.15, a year earlier, the Calabasas, California-based company said in a statement today. Analysts estimated Countrywide would earn 91 cents. Revenue fell 15 percent to $2.55 billion.

Countrywide shares dropped more than 13 percent, the worst performance in the Standard & Poor's 500 Stock Index, after the lender said overdue payments reduced second-quarter profit by $388 million. The earnings report adds to signs that late payments on consumer loans are spreading from subprime borrowers, those with poor or limited credit histories, to people with more reliable repayment records.

``What really surprised people was the guidance,'' said Paul Miller, an analyst at Friedman Billings Ramsey Group Inc. who cut his rating in May to ``market perform'' from ``outperform'' on Countrywide shares. ``I don't think any investor is going to be that confident with mortgage banking earnings until '09.''

Chief Executive Officer Angelo Mozilo said he expects ``difficult housing and mortgage market conditions to persist'' through the end of this year and slashed profit forecasts for 2007 to $2.70 to $3.30 a share. In April, Countrywide predicted $3.50 to $4.30 a share.

Shares Decline

Countrywide stock fell $4.48 to $29.58 in 3:05 p.m. New York Stock Exchange trading. It was the biggest intraday percentage drop for the shares since the market crash of October 1987. The stock has lost about a quarter of its value this year on concern the slowing housing market and rising defaults would cut into profit.

Standard & Poor's reduced credit ratings last week on securities backed by home-equity term loans to prime and subprime borrowers with $3.8 billion in initial balances. It blamed looser underwriting standards, the housing slump and rising payments on adjustable-rate first mortgages. Bank of America Corp. and JPMorgan Chase & Co. said more of their home-equity loans soured when they reported earnings last week.

Countrywide often retains an interest in the payments on mortgages it packages into securities and sells to investors. The value of those ``residuals'' declines as expectations for defaults on the loans increase. The company said late payments increased on home-equity loans that were used as collateral on such securities, hurting profit by 40 cents a share.

Tighter Standards

Mozilo, 68, has tightened standards for approving loans to Countrywide's riskiest borrowers as part of a plan to cut subprime lending to as little as 4 percent of total mortgages, half the level at the end of last year.

Now he must address an increase in missed payments for prime loans, or those granted to borrowers with good credit histories. The company set aside $292.9 million for loan losses in the quarter, compared with $61.9 million a year earlier, as it earmarked $181 million for prime home-equity loans.

``Credit performance has surfaced as a bigger risk factor than we expected,'' Morgan Stanley analyst Kenneth Posner wrote in a note to clients today.

Loans held by prime borrowers entered foreclosure at a record pace in the first quarter, the Washington-based Mortgage Bankers Association said in a June 14 report. The rising defaults have made investors reluctant to buy securities backed by home loans, hurting profit at Countrywide and rival lenders.

Facing Hardships

Mozilo said late payments are being driven by ``more traditional issues'' such as job loss, divorce and health problems, not because adjustable-rate mortgages are resetting at higher rates.

``We are experiencing home price depreciation almost like never before, with the exception of the Great Depression,'' Mozilo said during a three-hour conference call with investors. He said it would take all of next year for the mortgage market to ``turn this battleship around,'' before demand rebounds in 2009.

The median U.S. home price probably will fall 1.4 percent to $218,800 a year, the first national decline since the Great Depression in the 1930s, according to Lawrence Yun, a National Association of Realtors economist. Tumbling prices make it difficult for people with adjustable-rate mortgages, whose payments are rising, to refinance or sell property.

Countrywide accounts for almost a fifth of all mortgages made in the U.S. The company revised its forecast of new loans to $420 billion to $500 billion this year from $450 billion to $550 billion predicted in April. It extended $123.1 billion in new loans during the quarter, 15 percent more than a year earlier.

Mortgage-banking earnings for the quarter fell to $320 million from $630 million a year earlier. The lender made $183 million from selling subprime loans to investors, down from $200 million. Gain-on-sale from prime loans, or those to borrowers with better credit, rose to $1.04 billion from $972 million.

Profit got a 12 cents-a-share boost in the quarter from a ``non-recurring'' reduction in its corporate tax rate.