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Shares of number-one U.S. mortgage lender Countrywide Financial surged more than 20% in pre-market trading Friday after posting a worse-than-expected quarterly loss, but surprising the Street by saying it expects to return to profitability by next quarter. A net loss of $1.2 billion (-$2.85/share) was the company's first quarterly loss in 25 years. Last year, the company earned $647.6 million ($1.03/share) in Q3. Analysts, on average, had expected a $1.65/share loss. The company said the situation will be short-lived: "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," President David Sambol told investors. "Over the longer term, we believe that prospects for the U.S. housing and mortgage markets, as well as for Countrywide, remain very attractive," (full earnings call transcript later today). Countrywide blamed the loss on three factors: inventory valuation adjustments caused by unprecedented disruption in the capital markets; increased credit costs related to continued deterioration in the housing market; and restructuring charges resulting from Countrywide's expense reduction initiatives. The company took a $1 billion write-down on its mortgage-backed loans and securities. It increased loan loss provisions to $934 million, compared to $293 million last quarter. It also said housing-market weakness and credit-market tightening are expected to substantially reduce mortgage origination volume in 2007 and 2008 relative to earlier volumes. For Q4, Countrywide expects EPS between $0.25 and $0.75. "The wide range in the guidance is caused by the significant potential volatility," it said. Countrywide also told investors it was able to secure $18 billion in "additional highly-reliable liquidity."

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Source: Countrywide Surges on Expected Return to Profitability in Q4