Countrywide Financial Q3 2007 Earnings Call Transcript

| About: Countrywide Financial (CFC)

Countrywide Financial Corporation (CFC) Q3 2007 Earnings Call October 26, 2007 12:00 PM ET


Angelo R. Mozilo - Chairman of the Board, Chief ExecutiveOfficer

David Sambol - President, Chief Operating Officer, Director

Eric P. Sieracki - Chief Financial Officer, ExecutiveManaging Director

Kevin W. Bartlett - Chief Investment Officer, ExecutiveManaging Director

Carlos M. Garcia - Executive Managing Director, Banking andInsurance

Ron Kripalani - President of Countrywide Capital Markets

Robert V. James - President, BalboaLife and Casualty

Jess Lederman - Chief Risk Officer

Anne D. McCallion - Senior Managing Director, Chief ofFinancial Operations and Planning


Ken Posner – Morgan Stanley

Bob Napoli - Piper Jaffray

Paul Miller - FBR Capital Markets

Brad Ball - Citigroup

Moshe Orenbuch - Credit Suisse

Howard Shapiro – Fox Pitt Kelton

Mark Patterson - NWQ Investment Management

Chris Brendler -Stifel Nicolaus

Vincent Daniel - Frontpoint

Ron Mandel

Frederick Cannon - Keefe, Bruyette & Woods

James Fotheringham - Goldman Sachs

Jay Weintraub - Keefe, Bruyette & Woods

Shomu Sadokahn - Lotus Partners

Nick Vasselakos - Columbia

Thomas Atteberry - First Pacific Advisors


Good morning or good afternoon. Welcome to the CountrywideFinancial Corporation’s third quarter 2007 earnings conference call. Now,please note that during this teleconference, Countrywide’s management may makeforward-looking statements within the meaning of the Federal Securities Lawsregarding their beliefs, estimates, projections and assumptions with respectto, among other things, the company’s future operations, business plans, andstrategies, as well as industry and market conditions, all of which are subjectto change. Actual results and operations for any future period may varymaterially from any past results discussed during this teleconference.

Factors which could cause actual results to differmaterially from historical results or those anticipated included but are notlimited to those items described in the third quarter press release anddetailed in documents filed by the company with the Securities and ExchangeCommission from time to time.

The company undertakes no obligation to publicly update orrevise any forward-looking statements.

Ladies and gentlemen, at this time and during management’sprepared remarks, all of your phone lines are muted or in a listen-only mode.However, later there will be opportunities for your questions and we certainlyencourage your participation at that time. (Operator Instructions)

With that being said, let’s get right to this third quarteragenda. It’s my privilege to introduce Countrywide’s Chairman and ChiefExecutive Officer, Mr. Angelo Mozilo. Please go ahead, sir.

Angelo R. Mozilo

Thank you, Brent. Good morning and welcome to Countrywide’searnings teleconference for the third quarter of 2007. Joining me on the calltoday are: David Sambol, our Presidentand Chief Operating Officer; Eric Sieracki, our Chief Financial Officer; KevinBartlett, our Chief Investment Officer; Carlos Garcia, our Chief of Banking andInsurance; Ron Kripalani, President of Countrywide Capital Markets; Bob James, President of Balboa Life and Casualty; JessLederman, our Chief Risk Officer; and Anne McCallion, our Chief ofFinancial Operations and Planning.

Many of you have seen the thorough and detailed thirdquarter supplemental presentation that Countrywide’s management team hasprepared to help you understand the events that took place during thischallenging quarter. The presentation helps set in context the financial andoperational challenges our company has faced and the decisive actions thismanagement team has taken in response.

In place of the investor day that has been scheduled forNovember 12th, we have decided to provide the investment community with anextensive and detailed overview today. In just a moment, Dave Sambol and EricSieracki will go through this presentation with you, so if you haven’tdownloaded it from our website yet, please do so now. But first, I would liketo address a few issues that are not directly related to our quarterly resultsbut are important --

[Technical Difficulties]


Yes, sir, please continue, I apologize.

Angelo R. Mozilo

But what happened? I don’t know where I left off here.


And I apologize, Mr. Mozilo. I don’t know where you leftoff.

Angelo R. Mozilo

Let me just go back to this point -- I don’t know whathappened here, but -- let me just go back to this point here. But first, Iwould like to address a few issues that are not directly related to ourquarterly results but are important nonetheless. As all of you know, SouthernCalifornia has been in a state of emergency in recent days because of thewildfires. Our thoughts and prayers are with everyone who has been affected bythis crisis. I would also like to commend the brave firefighters and emergencyworkers who have responded to the call to action.

Now I would like to make a few other comments. Considerablecontroversy has risen about my trading plans and the sales of company stockmade under those plans. I want to take this opportunity to set out the facts,clearly and simply, so that we can focus on discussing the company’s performance,operations, and future prospects. I am sure you all appreciate it would not beappropriate for me to answer questions relative to this specific matter duringthe Q&A period.

Many of you on the call today know that I have spent 40years of my life building on a dream that David [Lobe] and I had in 1968. Ourdream was to expand home ownership in America and by creating the largestmortgage provider in this country. We have brought that dream to tens ofmillions of Americans.

During these four decades with the company, I was awardedequity in the primary form of stock options as part of my compensation. HasCountrywide has grown and prospered, that equity has appreciated substantiallyin value, as all of our long-term shareholders know and understand.

In view of my expected retirement in 2006, a process was begun in 2004 toplan for this event. Clearly it would not have been in the best interest ofanyone -- the shareholders or mine -- to be in the position of having to unloadall or a substantial portion of my holdings into the market at the same time ofmy retirement. In light of this, in fact, I had a substantial number ofexpiring options. I would as advised to begin further diversifying myinvestments.

To make sure that my sales were done in an orderly fashion,in 2004 I established a prearranged stock trading plan under the SEC rules.Then, towards the end of 2006, the board requested that I postpone myretirement and serve as CEO for an additional three years.

In connection with my agreement to stay on with the company,I signed a new employment agreement. That new contract and my decision to deferretirement in turn necessitated changes in my financial planning and led to myadopting new trading plans in 2006. These plans were put in place at therecommendation of my financial advisor and all of these plans were establishedin accordance with the procedures and requirements of the SEC, the company, andmy brokers. The reason I entered into these plans is to provide for thedisposition of Countrywide stock and at the same time, remove myself fromactively participating in any trading decisions.

I would like to state categorically that at no time did Imake any trading decisions based on any material, non-public information and Ifully complied with all company policies and applicable securities laws inconnection with my trading plans. I would also like to confirm that theSecurities and Exchange Commission has opened an informal inquiry and that Iwelcome its review of my trading plans.

Let me emphasize that the Board of Directors, companymanagement and I are fully cooperating with this inquiry. I am confident thatthis review will demonstrate that I have complied with all protocols relativeto the establishment and execution of my 10B51 plans.

I am very proud of our accomplishments. I remain committedto doing everything possible to help Countrywide get through these currentchallenges affecting the housing and mortgage sectors and the related issues inthe global credit markets. I firmly believe that we will be as successful inthe future as we have been in the past. That is why since founding the companynearly 40 years ago, I have consistently remained one of the largest individualshareholders in our company and remain so today.

The second issue I would like to discuss is foreclosures. Ibelieve very strongly that no entity in this nation has done more to helpAmerican homeowners achieve and maintain the dream of home ownership thanCountrywide. That being said, we understand that in extraordinary times such asthese, everyone, especially industry leaders like Countrywide, must step up anddo more.

Countrywide is a leader and leaders take action andresponsibility for finding solutions when difficult challenges face theirindustry and the customers they serve. In that spirit, earlier this week weannounced a $16 billion home ownership preservation commitment to helpborrowers facing or who have already experienced interest rate recess. We havealso teamed up with well-respected consumer advocacy groups and a particulargroup, the National Assistance Corporation of America, known as NACA, topromote counseling and other home retention services for borrowers who are infinancial distress.

These are just two of many initiatives that we have underwayto help our borrowers and our families avoid the painful and often devastatingexperience of losing their homes.

Finally, before we get into third quarter results, I want tobriefly mention the recently announced departure of Henry Cisneros from our board.I am very grateful to Henry for all of his contributions to Countrywide overthe years. He has given us great insights and guidance during his term asdirector. I fully understand his responsibilities to his home building company,CityView, during these very difficult times. I again would like to express mygratitude to Henry and wish him the best. The board’s nominating committee hasbegun to identify potential independent director candidates who can bringadditional financial experience and expertise to Countrywide, and has retainedan executive firm to assist with this process.

Now let’s turn out attention to third quarter results.During the quarter, we incurred a loss -- the first quarterly loss in 25 yearsor approximately 100 consecutive quarters. The loss was primarily attributableto the extraordinary volatile market conditions that we experienced during thequarter. However, as you have seen from our press release this morning, weexpect to return to profitability in the fourth quarter and we anticipate that2008 will also be profitable.

Perhaps more importantly, Countrywide and our very capablemanagement team have taken the steps we believe that are necessary to positionCountrywide to continue our long-term track record of success. In addition, asthe industry leader, we continue to be bullish about the long-term prospects ofboth Countrywide and our industry.

I will now turn it over to Dave Sambol, who will thenmigrate it over to Eric Sieracki to go through the third quarter of 2007 earningspresentation. David.

David Sambol

Thank you, Angelo. As Angelo mentioned, we have prepared avery comprehensive presentation for this morning that should answer many, ifnot most of the questions that you likely have before we open it up to Q&A.

Starting on slide 2 on the presentation on the web, wesummarized the topics that we intend to go over this morning. I will start bycommenting on the environment and the developments in the third quarter, theactions that we’ve taken in response to market developments, how the company ispositioned today, and then comment on the outlook for both the near-term andthe long-term. Then I will hand it over to Eric who will go over our Q3 resultsand provide a perspective on the primary drivers of the loss that we reportedin the quarter. And then we’ll spend some time going over our business modeland some of the important changes that we’ve made to that model. We’ll go overour current production trends and then we’ll finish by updating you on capital,liquidity, and we’ll discuss forward earnings outlook.

So moving to slide 3, here we summarized the key messagesthat we want to convey this morning and the takeaways that we hope you leavethe call with. First is that the company, as Angelo mentioned, has taken theactions which were necessary in response to the unprecedented market turmoilthat we saw in the third quarter. That the primary drivers of the third quarterloss were charges which, for the most part, fell into one of three categories.They were either non-economic or non-cash, as was the case with inventory markson loans transferred into our HFI portfolio, where we shifted yield,essentially, from the third quarter into future quarters, or they representedcharges that are expected to be non-recurring, as is the case with ourrestructuring and related charges and the inventory marks as well. Orimportantly, they represented material increases in our reserves and creditvaluation adjustments that will lessen the future P&L impact of expectedrise in mortgage defaults.

We expect that the third quarter will be a trough quarter interms of earnings and profitability will resume in Q4 and throughout 2008. Andwhile profitable, returns through 2008 however are anticipated to be belowlong-term target levels, primarily due to the expected declines in marketvolumes and elevated near-term levels of credit costs.

However, we see long-term prospects for housing, themortgage market, and Countrywide to remain very attractive.

The company has sufficient capital, liquidity and financingcapacity for its operating needs and its growth needs and coming through thisenvironment, CFC continues to possess all of its key historical competitiveadvantages -- our management team with its experience and expertise or distributionnetwork, our fulfillment model, product breadth, technology, and the company’scentral focus on real estate finance.

And then lastly, we want to convey that we believe that weare very well-positioned for continued growth when this down cycle begins aturnaround.

So with that preview, moving to slide 5, let me just commenton the environment during this past quarter. I know that it’s not news toanyone that since the beginning of August, we’ve seen the perfect storm in themortgage sector. Unprecedented disruption in the capital markets, whichimpacted both the mortgage-backed securities market and the short-term publicdebt markets. We’ve seen a continued worsening of credit performance, withdelinquencies and foreclosures on the rise, and market origination volumes havedeclined materially, with current projections for 2008 anticipating a drop inthe origination market of 30% or more versus 2007.

Now, the impact that these market conditions had onCountrywide during the third quarter were really profound. As a public mortgagebanker, our production funding has come in the past primarily from two sources-- the selling of our loans shortly after their origination in the secondarymarket, and the commercial paper market on the front-end to finance our inventory.

Well, in the first two weeks of August, we lost access toboth. We couldn’t sell non-agency loans or securities, representing asignificant portion of our production at that point and our inventory, and wecouldn’t reliably access the asset-backed commercial paper or the unsecuredcommercial paper markets.

Exacerbating this, negative press that followed onesell-side analyst’s report suggesting possible bankruptcy at the company led toa short period of deposit outflow in our bank. So our back-up liquidityframework was certainly very much tested in the third quarter.

On slide 6, we summarize the actions that the company tookin response to those market developments. And the first and more importantthing we did was to accelerate the integration of our mortgage operation intoour bank, a process which at the time was approximately 50% complete andscheduled to have been completed by year-end. We then injected the company with$11.5 billion of cash by borrowing against our bank lines of credit.

Since August, we’ve arranged for approximately $18 billionof additional secured borrowing capacity. We recently negotiated the renewal oftwo facilities, borrowing facilities which expired during the quarter,representing another $10 billion of borrowing capacity.

We brought in the Banc of America, who made a $2 billionequity investment in the company, and this not only provided us with additionalequity and additional liquidity cushion, but more importantly we felt that astrategic investment by a marquee and respected name like the B-of-A would lessthe external anxiety and questions of viability which existed at the time, andit did.

We quickly implemented an aggressive and successful campaignto stem and reverse the deposit outflow that we saw for that short period inthe bank. We materially tightened our underwriting guidelines and enhanced ourcontrols, such that we immediately took the steps not to fund any loans thatweren’t saleable in the secondary market, or that we desired for the bank’s investmentportfolio.

And then we developed and quickly began implementing a planto downsize our infrastructure in line with the lower anticipated volumelevels.

And so on slide 9, we summarized where the company standstoday. Today, almost all residential originations are now funded by our bank.In fact, the current run-rates in October are approximately 95%. The companyhas ample and growing liquidity.

Importantly, we no longer have or plan to have any relianceon the commercial paper markets for funding. We successfully and quickly, as Imentioned, reversed the short period of deposit outflows as a result of ourcampaign, and in fact retail deposits since then have been growing at a recordpace in September and October.

The company is well capitalized, with significant equity tosupport our operating needs, as well as our balance sheet growth plans. Our newthrift model and capital structure will less our risks and enhance ourcompetitiveness going forward, relative to funding costs and operating efficiencies,and we will now be able to fully enjoy the benefits that many of ourcompetitors, large bank competitors do, relative to federal pre-emption.

We have a deep and experienced executive team to managethrough this transitional period, and again we believe that we arewell-positioned to capitalize on the recovery in the housing market when ithappens and also on opportunities that we believe will surface as a result ofmarket dislocations.

On slide 8, there is certainly no shortage of near-termchallenges for us and for our industry. Housing is expected to continue toweaken by all accounts, at least through 2008, with expected continued homeprice declines. Unless interest rates also decline, we expect material declinesin our origination volumes, as I mentioned. Delinquencies and defaults areexpected to continue to rise, keeping credit costs at elevated levels in thenear-term, and secondary market liquidity is not yet fully recovered.

However, as listed on slide 9, there are also positivetrends and opportunities that are being created from these market conditions.Numerous of our competitors have exited the origination market and more areexpected to exit in the coming months. Countrywide anticipates that as aresult, we will grow our market share in the more profitable retail andwholesale channels through 2008.

The primary remaining competitors of the company tend to belarge publicly traded banks and thrifts, which we view as more responsible.Product pricing margins on originations targeted for sale have improvedmaterially relative to margins we were seeing in the first half of the year.

Current originations are a very high quality. Wider mortgagespreads on high quality, non-agency production is creating very attractiveinvestment opportunities for our banks whole loan investment portfolio, andimportantly, we have seen and expect a material increase in the earnings fromour servicing portfolio and an increase in the economic value of our MSR assetdue to slower prepayment speeds, which are expected to further decline.

Now, slide 10, as for the longer term outlook for themortgage market and the industry, the picture is also very favorable. Thenumber of households in the U.S., the most basic demographic driver of ourmarket, is expected to increase by about $1.4 million per year. Furthermore,the number of households headed by 25 to 35 year olds, the primary age groupfor first-time home buyers, is expected to steadily increase as well.

Income is rising. Disposable income is expected to grow at abouta 5% pace in the aggregate, or about 4% per household. Household wealth, whichis a major driver of housing demand, is rising faster than income.

In the near-term, housing prices are expected to decline andthat, combined with rising income, implies rising affordability. Thus the homeownership rates should stabilize and resume a rising trend.

In the long run, we expect housing appreciation at a rate ofabout 3%, just a bit slower than income growth per household, and this isconsistent with a long run rising rate of home ownership.

And finally, there remains a very large stock of home equitythat has not yet been tapped, greater than $10 trillion, which can be tapped tofinance home improvements and other expenditures, such as education investment,small business development, and retirement spending.

So long-term, we see a growing market with strong underlyingdemographic and other drivers of market growth, and we also see compellinglong-term share growth prospects for the company as a result of rapid industryconsolidation.

Before I turn it over to Eric to go over Q3 earnings, let mejust provide a brief update on the current secondary market conditions as wesee them. Slide 9 highlights that the current market for non-agency securitiesis improving, at least as it relates to securities backed by newer production,where the market is really bifurcated between older and newly issuedsecurities.

Securities formed before the rating agencies changed theirratings methodology in Q3 are still trading at very wide levels, if at all, butliquidity has returned and spreads have been tightening, at least for AAAsecurities backed by newly originated loans, and that includes both sub-primeas well as prime. Below AAA, liquidity exists but mostly on newly originated --what we would refer to as core product, meaning fully documented, prime firstlien mortgages.

And as a result of this market improvement, we are nowanticipating that we will securitize most of our non-agency inventory that weheld at the end of the third quarter and begin selling at least the AAAsecurities as early as the coming month, ahead of where we’ve previouslysuggested our plan was, which was the first quarter of 2008.

And so with that general update, I’ll hand it over to Ericto talk about Q3 earnings.

Eric P. Sieracki

Thanks, Dave. Putting Countrywide’s third quarter earningsin perspective requires a focus on credit costs. On page 13 of thepresentation, we have reflected the last five quarters statement of operationsmodified to emphasize the impact of credit costs on our performance. Thehorizontal line shaded yellow pulls the credit cost out of other line items,principally net loans, servicing income, and gain on sale.

The increasing impact of credit cost is evident across thequarters and was one of the major drivers of third quarter performance. We’llreview these credit costs in more detail shortly.

At the bottom of the third quarter column, which is alsoshaded yellow, you will note that there are two EPS amounts reflected. The topcalculation is the diluted EPS calculation for the third quarter reflecting aloss of $2.85 per diluted share. The bottom calculation omits the impact of animplied dividend related to the convertible preferred stock we issued duringthe third quarter.

The implied dividend doesn’t appear on the statement ofoperations but is deducted from the numerator for the EPS calculation and theimpact is a $0.73 additional loss for the quarter. Added to the $2.12 lossrelated to the $1.2 billion loss, we get the total loss of $2.85 per dilutedshare.

Turning to page 14, we focused on the major drivers of thirdquarter earnings. This is a key page in the presentation that gives very deepinsight into our third quarter performance. Disruption in the markets complicatedalready complex valuation issues ever further in the third quarter.Management’s intent was to be as conservative as GAAP permits when preparingits financial statements for the third quarter.

We endeavored to conservatively value the balance sheet andreflect the full impact of current market conditions and not burden futureperiods with deferred costs.

Three categories of drivers are listed on page 14; valuationadjustments, credit costs, and restructuring charges. Management views theseaccounting charges for the most part as non-recurring in nature, or theyrepresent significant increases to valuation adjustment for future creditlosses not yet incurred and to reserves.

At the bottom of the two columns, you will note that thesemajor drivers increased $2.1 billion in the third quarter compared to thesecond. Pretax earnings declined $2.6 billion overall, so you can see thesignificance of these items, $2.1 billion of the $2.6 billion decline.

The other $500 million in pretax earnings decline isprincipally driven by a foregone gain on sale, non-deferrable FAS-91 costs asloan sales decreased significantly during the quarter.

Focusing first on the valuation adjustments, $857 million ofthe charges were related to inventory and pipeline write-down; $150 million wasrelated to a LOCOM loss on loans included in securities that had beenpreviously sold but didn’t qualify for sales accounting.

While we only owned $84 million of bonds from deals totaling$3.2 billion, FAS-140 required bonds previously sold to be added back to thebalance sheet at September 30th. The mark on the collateral added back to thebalance sheet but previously sold amounted to $150 million. An offsetting gainwill be recognized when the securitization qualifies as a sale, which wouldinvolve selling the remaining $84 million of securities.

The second driver, and a more important driver, were creditcosts, which amounted to $1.9 billion for the third quarter.

The held for investment, of HIF, as I will refer to it,credit provision was $937 million; $790 million of this provision was at thebank; $150 million at the mortgage company. The bank provision was extremelyconservative and was over six times the charge-offs for the quarter. I’ll giveyou more on that later.

Residual valuation adjustments were $690 million; $540million from home equity loans, $150 million from sub-prime. The other creditcharge was $291 million for reps and warranties on loans and securities sold.The reps and warranties provision was nine timed charge-offs for the thirdquarter. While this reserve is very conservative, we nonetheless intend to veryvigorously defend our claims.

The final major earnings driver is a restructuring charge of$57 million. This is related to the announced reductions in force of 10,000 to 12,000employees in reaction to a declining mortgage market. $90 million to $100million of additional restructuring charges are expected in the fourth quarter,as described and deferred by GAAP.

Now, concluding on page 14, it provides a very conciseoverview of the impact of current market conditions on Countrywide’sperformance in the third quarter. I urge you to remember that management viewsthese accounting charges for the most part as non-recurring in nature, or theyrepresent significant increases to valuation adjustments for future creditlosses not yet incurred and to reserves.

Moving forward to page 15, this page reflects the majordrivers of third quarter loss by the business segment format we popularly use.You will note that production servicing and banking operations somewhat equallyshare the burden.

Moving forward, page 16 provides more detail on the $1billion evaluation adjustment, the first of our three major earnings drivers. A$418 million write-down was recorded on $12.8 billion of loans transferred fromheld-to-sale to held-for-investment during the quarter.

At the bottom of page 16, you can see that $9 billion ofprime home equity loans and $3.7 billion of prime arms were transferred. Themark-to-market results in expected yields in the robust 20% to 30% range on theremaining basis of the HFI loans. Also, $420 million was written down on HFS,held-for-sale loans, that remained on hand at September 30th.

The $150 million I discussed earlier that we’ll reverse whenthe securitization qualifies as a sale is in capital markets.

Continuing with our goal of putting third quarter earningsin perspective, we turn to credit costs on page 17. Credit costs were the mostimpactful driver of third quarter performance. They will remain an importantdriver in the future as well. Accordingly, we dedicated a brief section of thepresentation to credit.

In determining our credit provisioning, management was asconservative as GAAP allowed. Factors we considered were: lower home sales andgrowing inventories of unsold homes; continuing declines in HPA; risingdelinquencies and defaults; and notably, the tightening of mortgage credit.

The tightening of mortgage credit has an especially profoundaffect, since it constrains the option mortgage owners have to refinance or geta home equity loan to solve their financial problems.

The factors we considered reflect a significantdeterioration in the third quarter beyond what was discernible previously, andthat required conservative credit charges in the third quarter.

On page 18 we begin the credit discussion with analysis ofhome price appreciation trends, a key factor in recent and future creditperformance. The light orange shaded area on the left hand side of the chartreflects actual HPA, home price appreciation activity, from 2004 through thesecond half of 2007, according to OFHEO.

In addition to the national average, which is depicted bythe red line with yellow dots, the four most troublesome states, California,Florida, Arizona, and Nevada, are also graphed. The right side of the chart,shaded grey, is a projection prepared by based on the OFHEO actualdata.

The projection doesn’t reflect positive national HPA untilthe end of 2009. The loan level [cume] default model at Countrywide is fed withMSA specific HPA data from this independent third party projection in ourcredit provisioning process.

We also use other models to interpret, among other things,roll rate migration trends to check for inconsistencies and ensure that theintegrity of our reserve calculations is intact.

Management conservatively chose the slow growth scenariodescribed by Moody’s that reflects home price appreciation, or HPA,decline of 7.6% through the end of 2008.

The bottom line on HPA is that it is a critical factorexpected to deteriorate further that we conservatively contemplate through anMSA-specific third-party source.

Turning to page 19, we examined credit performance trends totry to determine what the stats tell us. The top half of the page shows 90-plusday delinquencies for banking operation HFI, held for investment, on the leftand a residual portfolio on the right. We focused on these portfolios becauseof their significance at CFC.

Starting with banking operations HFI on the left, note thetotal 2006 and prior vintage 90-plus day delinquencies, that’s the bottom lineshaded in grey, we’re growing three-tenths of a percent to four-tenths of apercent for the period from the third quarter of ’06 through last quarter. Theincrease in the third quarter was nine-tenths of a percent, triple that rate.

Drivers of increasing delinquencies, among other things,have been the 2006 vintage. Over 80% LTV low dock loans, and geographicallyCalifornia and Florida loans.

Similar to the HFI, the residual portfolio in 90-plus daydelinquencies shown on the top right of page 19 were growing roughly 1% perquarter until they grew 2.4%, all the way up to 8.2% in the third quarter.

These stats demonstrate the significance of rising delinquencyrates most acutely in the third quarter.

Charge-offs for the last five quarters are on the bottom ofpage 19. Banking operations HFI on the lower left grew from $6 million lastyear to $126 million this quarter. Theresidual portfolio charge-offs grew from $45 million for the third quarter lastyear to $249 million this quarter, up 20% from just last quarter.

The bottom line on credit performance trends is that 90-plusday delinquencies and charge-offs have reflected declining trends that spikedin the third quarter, which required conservative provisioning.

We’ve looked at HPA now and credit performance trends, solet’s move forward and look at a summary of our key credit exposures on page20.

The summary reflects the balance sheet asset, the unpaidprincipal balance, the provision and the reserves for our key credit exposuresas of September 30 and June 30, 2007, and the quarters then ended.

CFC’s credit exposure, as mentioned earlier, is concentratedin its HFI port and residuals. Contemplating declining HPA and deterioratingcredit performance that we just addressed, we conservatively increased ourreserves through the provisions for HFI at 937 for HFI, residuals at $690million, and reps and warranties at $291 million. That’s the $1.9 billioncredit cost we discussed earlier on the major drivers page.

The last two columns demonstrate the significant growth inthe reserves in the third quarter.

Drilling down first into our HFI portfolio, let’s examineportfolio credit characteristics on page 21.

The shaded yellow line highlights the characteristics of ourtotal bank operations portfolio, which has a UPB of $79 billion at September30th. I’ll point out some noteworthy points: 32% of all loans have creditenhancement, with 71% of pay option arms having credit enhancement. That levelof credit enhancement was strategic as pay option arms have shown elevateddelinquencies recently.

Despite falling home values and negative amortization, thebank operations portfolio has a current CLTV of 79%. Even home equity loanshave a relatively modest 84% current CLTV.

The port also has a strong 727 average FICO. We also reflectsome other strong portfolio attributes here, namely less than 20% of the loanshave CLTVs over 90%; only 6% have FICOs under 660; and only 5% of the loanshave reduced doc and CLTVs over 90%.

It’s important to note that the bank proactively restrictedvolume in recent years in overheated markets such as Clark County in Nevada andDade and Broward counties in Florida.

The mortgage banking HFI portfolio is a modest $2.5 billionthat is comprised primarily of Jenny May buy-outs and sub-prime seconds.

There’s two points to take away here; we are observingcredit performance deterioration despite these high quality borrowercharacteristics and the quality of the portfolio will hopefully mitigate futurelosses.

Page 22 provides detail on the HFI loss provisions andreserves. The left-hand side of the chart focuses on the banking operations HFIport as of September 30 and June 30. Inthe middle of the page, you can see the significant growth in reserve of over$1 billion in the last 90 days. This had driven significantly improved reservecoverage, as indicated by the ratios at the bottom of the page on the left-handside.

The reserve as a percentage of UPB has risen fromseven-tenths of a percent to 1.9%, which compares very favorably tocompetitors. The reserve as a percentage of NPLs has increased from 47% to103%. Further, the reserve as a percentage of NPLs without credit enhancement hasincreased from 66% to 216%.

While the provision as a multiple of charge-offs was a veryhealthy 2.2 times in the second quarter, the multiple jumped up to 6.2 times inthe third quarter. Once again, I repeat -- the third quarter provision is over6 times the third quarter charge-offs for our banking operation’s HFI port.Significant improvement has occurred in just the last 90 days, anothertestament to management’s conservatism on provisioning.

The bottom line on the HFI loan loss reserves is they arevery conservative, which is clearly indicated by the ratios in the bottom leftcorner of page 22.

Having completed our review of the HFI port, we now turn ourattention to residuals. Page 23 has a residual summary that includes thebalance sheet carrying values, the unpaid principal balance, undiscountedlosses embedded in the valuation, and a distribution by vintage and loan type.

In the top left corner of page 23, you can see that only$907 million of carrying value remains on the books at this time for residuals;$285 million of sub-prime and $622 million of home equity loans. While the UPBhasn’t declined significantly quarter to quarter, the carrying value is downalmost $600 million.

In the top right corner of page 23, we reflect theundiscounted losses embedded in the valuation for the residuals. Note that theundiscounted loss percentage has increased from 5.4% at June 30 to 9.9% atSeptember 30 for sub-prime residuals. By the way, this includes almost 13% forthe 2006 sub-prime vintage.

Similarly, undiscounted losses for home equity loans rosefrom 5.9% to 8.9% at September 30th. The undiscounted losses embedded in thevaluation of the 2006 vintages for both sub-prime and home equity combined isover 12%.

An interesting note; on an overall basis for all productsand vintages, 62% of the losses embedded in the valuation for residuals are onloans that are current at this time.

Highlighted in yellow at the bottom center of page 23, thevintage chart shows that only $256 million of exposure remains to the 2006 andfirst quarter 2007 vintages, which were the trough in underwriting guidelines.

The bottom line on residuals is that balance sheet exposureis down to only $907 million, very conservative losses are embedded in thevaluation, and exposure to the 2006 and first quarter 2007 vintages is down to$256 million.

That completes the review of credit costs and trends. Onpage 24, we address a macro intrinsic hedge driven by current marketconditions. That is the inverse correlation between MSR prepayments andservicing earnings versus HPA and credit cost trends.

During tightened credit markets like today, where fewerconsumers qualify for new mortgages that might drive a pay-off, slower MSRprepayment speeds arise. We show the last five months prepayment speeds forfour broad product categories -- agency, prime non-agency, sub-prime, and primehome equity on page 24. All four categories reflect significant slowdowns inspeeds due to the tightening of credit.

Speeds have almost been cut in half for each category overthe last five months. Significant slowing is observed specifically from Augustto September as well. Overall portfolio speeds slowed from 18 CPR in the secondquarter to 12% CPR in the third quarter for Countrywide.

Speeds are expected to slow even more, since Julyapplications were still funding in September and empowering prepayments.Nonetheless, Countrywide’s MSRs were written down $830 million in the thirdquarter, driving the MSR cap rate from 1.54% in the second quarter down to 1.51%in the third quarter. This valuation was in line with the rest of the market.

It is management’s view that the market is not fullycontemplating the economic benefit of slower speeds, however, and is slow toreact as usual. Our models reflect significantly slowing in future prepaymentspeeds.

We performed an analysis using September actual speeds,again although we expect to see more slowing, and used various states to beginmean reversion and determine the increase in the intrinsic value of the MSRs.As you can see on page 24, depending on the mean reversion date, the economicvalue of the MSRs at Countrywide that have not reflected on the books atSeptember 30 ranges from $900 million to $2.7 billion.

It is our hope and anticipation that this un-reflected valuewill be reflected in the near future.

With that, I will turn it back over to Dave for the businessmodel update.

David Sambol

Okay, in the next section I’ll review with you our businessmodel and talk about that which has changed or is changing relative to themodel and that which remains the same regarding our model.

On slide 26, the best way to characterize the company’smodel prospectively is that we will be a large, well-capitalized thrift with acompelling national residential mortgage franchise and with affiliatedbusinesses that are linked and highly synergistic to our core lending business.

So going forward, our primary residential and commerciallending platform will reside in our FSB, and starting this quarter, the fourthquarter, all securitizations will be done directly out of the bank and the bankwill begin carrying and funding all new MSRs and retained interests on its ownbalance sheet.

And as it relates to CHL, in the immediate term, it willessentially look like an investment holding company. It will carry existingMSRs and loans that were on our balance sheet in CHL before we moved ourproduction operations under the bank, until those assets run down or are sold.

However, I want to emphasize that it is our intent to retainCHL’s licensing and its ability to support non-bank lending and other businessactivities as we may deem necessary or desirable down the road.

We also, I want to emphasize, are committed to maintainingsufficient capital and liquidity in CHL and at the parent as well, and workingto improve our investment grade rating at those two entities.

As for our other subsidiaries outside of the bank, in termsof our capital markets business, there will be really no changes to our corecapabilities or activities, except that we did exit the derivatives tradingbusiness during the quarter. That was not a material business for us. It wasrelatively new and small and was a break-even business that wasn’tstrategically important.

And the other notable change in capital markets is that weexpect to move our commercial real estate lending activity in our conduit ofbusiness under the bank in the near term, and that business will, however, bemanaged -- continue to be managed by our capital market segment.

And as it relates to our insurance franchise, really nomaterial changes to our business model or strategy in that segment, which isdoing very well.

On slide 27, arguably the most material change in ourbusiness model relates to the company’s funding model. We successfullytransitioned from a funding model highly reliance on capital markets funding,such as CP, as I mentioned, and MTM, to a model driven by traditional thriftsources of funding. Presently, that’s primarily deposits and FHLB advances.

Our primary strategy relative to the bank’s funding goingforward will be to grow our retail deposit franchise. We view this franchise tobe very unique and highly efficient and scalable. As many of our investorsknow, our retail financial centers, our small kiosks occupying maybe severalhundred square feet within our retail mortgage branches, which we generallystaff with two representatives who simply take applications and discuss oursavings and investment products and answer questions, we do not take or handleany cash in our financial centers, so therefore we are not technically bankbranches.

The compelling value proposition that we have is to offerour customers a local presence, which is very important to seniors, our primaryconstituents, with higher rates enabled by the lower cost of our financialcenter model.

So our operating expense structure for our retail depositinfrastructure runs approximately 27 basis points of the deposit portfolio, andthat is a fraction of the costs associated with a traditional bank branchinfrastructure.

And we also have and view the scalability of our financialcenter model to be superior to the scalability of traditional bankbrick-and-mortar branches. Our average deposit levels per financial centersurpass industry averages for bank branches after just 13 months in operation.

I’ll point out again that since we experienced that shortperiod of deposit outflow that I mentioned in August, over the lastone-and-a-half months, our new deposit production and retail deposit growthlevels have been running at record levels in the bank, well ahead of thebudgeted levels which our plan calls for, including what we budgeted for 2008daily and weekly run-rates that we needed.

And we plan on opening up 50 new financial centers byyear-end. Today, we have approximately 150 financial centers, up from 100 atthe end of the second quarter.

And as it relates to other funding sources, we expect thatour deposit and FHLB funding will be supplemented by other secured andunsecured borrowings when they become available at acceptable cost levels tothe company. In fact, it’s our intent to begin working on a covered bondtransaction as early as the fourth quarter.

On slide 28, as it relates to our residential originationsfranchise, most of our key strategies in our production franchise really remainunchanged. We’ll continue to source loans for both resale and for ourinvestment portfolio through all three of our channels -- retail, wholesale andcorrespondent. And while the near-term emphasis will be on resuming growth ofthe bank’s loan portfolio and retaining non-agency loans originated there,where we are seeing attractive opportunities relative to both asset quality andyield. Long-term, our decision as to whether to retain or to sell the loans thatwe originate will be based on a number of considerations, including marketyields that are available to us in the pricing of those loans, relative to ourreturn hurdles, as well as capital and current period earning considerations.

We believe that this hybrid mortgage banking portfoliolending model enhances the company’s competitiveness, our scalability, andprovides us with maximum flexibility relative to both capital and to earningsoptimization.

One notable change to our channel strategy is that we arepulling back from the lower margin segment of our correspondent channel. Wehave historically bifurcated the business in that channel between what we referto as spot business, higher margin purchases of one loan at a time, and flowbusiness commitments that we have in the past made to larger mortgage companiesunder transactions we typically refer to as assignment of trade transactions,which is a lower margin business and it’s a capital intensive business and weare materially pulling back from that latter business and intend to redeploythe capital that will be released into our other business activities,particularly the growth of the HFI portfolio. This is, however, expected toreduce our market share in the correspondent channel.

Now, our primary focus going forward will be to grow sharein the more profitable retail and wholesale channels, as well as the spotsegment of the correspondent channel, with particular and primary emphasis onretail share growth, where we expect to see significant opportunities in thenear-term. In fact, I would point out that even during the disruption that wewere managing in the third quarter, we saw gross headcount increases amongstour retail sales force at an all-time record in the third quarter.

As it relates to product strategy, today we are originatingprimarily GSC eligible products and high quality attractive yielding, shortduration loans for the bank’s investment portfolio. And we expect that to bethe case until the non-agency market reliably returns.

I’ll point out that that strategy does not make us unique --that is the strategy that most of our bank competitors are also pursuing.

On the next slide, 29, we highlight out our servicingfranchise and when we talk about our servicing franchise at Countrywide, we arereally referring to two things -- our MSR investments and our servicingplatform.

As it relates to the MSRs, they are the key component of thecompany’s macro hedge, and as Eric mentioned, we expect that our MSR investmentwill enjoy material earnings growth through 2008, such that it will partly ifnot fully offset the decline in our origination earnings.

As Eric also discussed, recent prepayment speeds have slowedto levels ranging from 40% to 55% of speeds earlier this year and we expectspeeds to slow further. In fact, I just yesterday read a research report issuedby Bear Stearns and it was Bear’s view and projection that MBS prepaymentspeeds in 2008 will be the lowest in history.

Going forward, it is likely that growth in our MSR assetwill slow relative to the growth rate that we have experienced over the lastseveral years, and that’s primarily a result of the lower correspondentdivision volume I describe, and also the lesser retention of excess servicing,which we have been retaining over the last year and beginning in the comingquarters will lessen.

And the reason for that really relates to the fact that it’s-- several things; our view that spreads on those investments, IO spreads aregoing to begin to tighten as the market increasingly recognizes the inherentvalue of IOs and MSRs; and also it’s the case that over the last several years,as we intentionally deployed capital away from investments with credit risk andallowed the bank balance sheet to shrink, we redeployed it to prepayment risk,which has worked out very well. However, in the prospective or forward-lookingenvironment, we intend to redeploy that capital back into the bank HFI growth.

Now, the other important dimension of our servicingfranchise is our large servicing operations, which are highly efficient andhighly automated, and where we are today particularly focused on leveraging ourloss mitigation proficiencies and extensive work out of progress in this -- Imeant programs, excuse me -- in this difficult environment, and of courseworking to help our borrowers who are having financial difficulties in avoidingforeclosure.

In this regard, as Angelo mentioned earlier this week, weannounced a $16 billion program to help sub-prime borrowers predominantly whoare facing ARM resets to avoid foreclosure through a variety of refinance andmodification initiatives.

Now, we are frequently asked what the impact on ourservicing costs and earnings will be from increased delinquencies and lostmitigation efforts, and what happens to costs. And what we point out is, as Iwill now, is that increased operating expenses in times like this tend to befully offset by increases in ancillary income in our servicing operation,greater fee income from items like late charges, and importantly fromin-sourced vendor functions that represent part of our diversificationstrategy, a counter-cyclical diversification strategy such as our businessesinvolved in foreclosure trustee and default title services and propertyinspection services.

On the next slide, a couple of comments on our strategicallyimportant capital market segment. This segment consists of really four businesslines: what we refer to as our rates business, which is agency MBS, agencydebentures and U.S. treasury securities trading; our residential [hold on]conduit and private label securities underwriting and trading business, whichhas been most impacted by this market; our commercial real estate conduit andCNBS trading, also very much impact; and then our asset management business.

The strategic rationale behind these activities is togenerate earnings and add value to the mortgage franchise and to CFC bydistributing Countrywide’s production at the offered side of the market, andmore importantly providing in-house securitization and capital marketsresources and expertise that benefit our mortgage origination franchise.

Long-term, the plan is to opportunistically grow existingbusiness lines with emphasis on the growth of our asset management business.

In the near-term, purchases and originations in ourresidential and commercial conduit do remain negligible and will until reliableliquidity returns to the non-agency securities market on which those businessesare dependent.

And so near-term earnings will be primarily driven by ourrates business in that segment.

The last franchise I want to touch on is our insurancebusiness, which is doing very well in terms of both profitability and earningsgrowth. That segment has two primary businesses, our property and casualty businessand our mortgage reinsurance business. And both of these businesses arebenefiting and we expect them to continue to benefit from the currentenvironment.

In our P&C business, one of the primary earnings driversis our lender place property channel, which writes force-placed insurancepolicies for mortgage servicers when homeowners fail to keep their homeownersinsurance in place. And this business is again a counter-cyclical business tothe mortgage credit cycle and does very well in periods like the one we are intoday where delinquencies are rising.

As it relates to our reinsurance business, also a veryprofitable business, it will particularly benefit from the current market’stransition from second mortgage piggy-back lending back to traditional firstlien lending with PMI policies for higher loan-to-value transactions.

We are already seeing a significant pick-up in thepercentage of business that we are doing with PMI and in the related growth inour reinsurance portfolio.

As it relates to credit risk in this business, it isimportant to emphasize that Balboa Re only takes a mezzanine layer of risk,meaning the primary mortgage insurance carrier takes the first loss. And whileit’s the case that we have not paid any claims to date on our reinsuranceportfolio, we do expect claims likely in ’08 or ’09, particularly on the 2006,possibly 2005 book. But we believe that we are very well-reserved for futurelosses on that book.

On slide 32, we’ve summarized our right-sizing initiativesthat were announced this last quarter. Initiatives that will materially reduceour expenses and align our cost structure with the expected declines in ourorigination volumes. We expect expense reduction -- the expenses reductioninitiatives to be substantially completed by year-end and we expect that theywill result in a workforce reduction that we’ve estimated to be between 10,000and 12,000 employees, and to generate annualized cost-savings, which exceed $1billion annually.

Now, the last and maybe most important aspect of ourbusiness model that I want to touch on some more relates to aspects that we’vealready discussed and that relates to the various macro and intrinsic hedgesthat exist within our business model and the inversely correlated dynamics thatare designed or that serve to dampen earnings volatility and generally createeither support or resistance levels to our earnings.

So as we’ve pointed out, our origination volumes andearnings are inversely correlated to servicing earnings. Our MSR prepayments inservicing earnings are inversely correlated to home price appreciation andcredit cost trends. Broader economic slowdown generally stimulates interestrate declines, which then tends to stimulate growth in origination volumes andearnings, particularly in refinance activity.

Our vertical diversification businesses, some of which Imentioned, are counter-cyclical to credit cycles, like the lender-placedproperty business in Balboa and like the in-source vendor businesses in ourloan administration unit.

So this is a very important part of the Countrywide businessmodel and in part explains why we are projecting a return to profitability inthe fourth quarter and in 2008.

Now let me transition and talk a little bit about productiontrends as they relate to volumes and margins and also to the credit qualitythat’s being originated.

I’ll start with quality on slide 35. Here, it’s important toemphasize that we did not start our guideline and underwriting tightening inthe third quarter. In fact, it was started in the second half of 2006 as wefirst saw signs that home price appreciation trends or growth were slowing. Andit of course accelerated in the first quarter of 2007 with the sub-primecorrection. It continued throughout the second quarter, but in the thirdquarter, we certainly did make changes that could best be described as awholesale revamping and tightening of our programs and guidelines. And thetightening focused primarily on limiting higher leverage or LTV loans with alower FICO or credit profile borrowers and reduced documentation loans,particularly when these risk factors exist in combination.

We also eliminated almost all sub-prime production, exceptthat which is saleable to the GSEs, and then beyond program and underwritingguidelines, we instituted very significant enhancements into operating controlsas well.

Now, on slide 36, we attempt to illustrate the impact of ourguideline changes on future credit costs by looking at what historical creditcosts would have been had we made those guideline changes or had those changesbeen applicable to prior books of business.

So the rows represent the four product types where we havefor the most part invested in credit risk in the bank at Countrywide,PayOption, HELOCs, Fixed Rate 2nds, and then hybrid arms.

The first set of columns reflects the original loan amount,the loans, the book of business that we originated in 2006 and 2005, and thenwhat we sought to do was to break up that book into loans that would have beeneligible under our new guidelines and those that would have been ineligibleunder our new guidelines to see what performance subsequently was on those twobreaks.

So for example, if you look at the HELOCs section, weoriginated $26 billion and $36 billion in 2005, of which 62% of the ’06 vintagewould have not been eligible under our current guidelines, only $10 billion ofthe 26 would have been eligible, and if you look across to the very far rightcolumn, you’ll notice that the -- where the accumulative defaults on the ’06 and’05 HELOC books were 174 and 155 basis points, if we excluded the loans thatwouldn’t be allowed, the defaults on the remaining loans is a proxy for what weare originating today would have been only 30 basis points on the ’06originations and 47 basis points on ’05, really a very small fraction of thedefaults that we’ve seen to date.

And I’ll point out that in terms of our credit models thatwe use for reserving and pricing prospectively, the loss assumptions embeddedin our valuation of newly originated loans are more conservative than thenumbers you see here, materially more conservative, in fact, for defaults todate on the loans that would remain.

On slide 37, we highlight the characteristic shifts in ourproduction as a result of the guideline and program changes that we made, andso we compare various characteristics, collateral characteristics on ouroriginations in the second quarter of ’07 to what we are sourcing andapplications we’ve taken in the month of September, just to contrast and comparewhat has happened.

As can be seen from this slide, we have seen a significantimprovement in credit quality, an increase in FICO scores, lower LTVs andCLTVs, and a significant drop in reduced documentation loans, where we havevirtually eliminated reduced documentation loans on higher loan to valuetransactions.

On slide 38, we summarize recent volume trends in our dailyapplication activity, so again we compare daily average applications or locksin Q2 versus the run-rate that we have seen through September, and a couple ofobservations.

First, as can be seen on this slide, overall daily lotvolume is down approximately 42% in September versus Q2 run-rates. Butsignificantly less so in our retail business, where it is down approximately25% and where most of the volume decline is being seen is in our third partyorigination channels where volumes are down 50% or thereabouts and in our AOTbusiness, which I mentioned, close to 70%.

Also, you can see from this slide that the volume drop isalmost entirely -- in fact, entirely in the non-agency category, where volumedeclines are 80% over those two periods, where agency eligible production isactually up in September in terms of the September daily run-rates versus Q2.

The slide also reflects that virtually all of our non-agencyproduction is production which is eligible for the HFI investment in our bank,and that volume represents approximately 15% of our total volume run-ratestoday.

The next slide, slide 39, summarizes margin trends thatwe’ve seen. We have an acronym that we manage to and that we use here when weprice loans that we refer to as the net pricing margin, and what thatrepresents is what we price into our rate sheets in revenue before customer fees,economic revenue before customer fees, such as includes gain on sale, netinterest, and also the present value of captive reinsurance income.

And again, comparing margin trends or NPMs from the secondquarter to what we are seeing today, a significant improvement in marginsacross all of our divisions individually and in total.

Now, it has been suggested and on some of the reports thatI’ve read and the speculation that our migration towards agency volume with alesser concentration of non-agency production will hurt our margin. Thespeculation being that our margins for non-agency loans were higher than theywere for agency loans. To dispel that, that is not the case. It might have beenthe case at one point in one or maybe two divisions, maybe it was applicable toPayOption ARM margins at their peak, but earlier this year, in fact, non-agencymargins were running below agency margins, and so the improvement that we haveseen in the agency margins, you could see also is reflected in the improvementin overall margins expressed in basis points, on all first mortgages that weare originating again in each of our channels and in total.

So very attractive trends relative to margin improvementthat we are seeing as a result of significantly lesser competition in themarket.

The last slide indicates similar pricing and margin trendsbut relative to the production that we are sourcing for investment portfolio,and here again we show the four products that we are originating, with theintent on holding in the bank’s HFI portfolio, and as you can see, comparingour margins expressed as ROEs that we have priced into our rate sheet, thetrend is significantly a positive. Where we were seeing returns on equity inthe low to mid-teens embedded in our pricing and of those products in thesecond quarter, we are seeing now ROEs in the high teens to mid-20s on thoseproducts.

And so with that update on production trends, I’ll pass itback to Eric to talk about capital and liquidity.

Eric P. Sieracki

Thanks, Dave. We begin our discussion of liquidity and capitalon page 41. Funding the company was a challenge in the third quarter of ’07.Secondary market liquidity dissipated, the credit crisis crept to our front-endfunding liquidity, namely commercial paper. Treasury’s contingency planningprevailed, however, and there were two key factors; one was accelerating ourbank integration plan, which is already in place. Five years in the making,five months from completion. Very supportive help from our regulator ensuredour success with that plan.

The second item was we drew on bank lines $11.5 billion thatprovided a safety net to ensure the transition of our funding model. We nowhave ample and growing funding liquidity and our current focus is on growingcontingent liquidity at the bank.

On page 42, we give you a funding liquidity overview. Wecurrently have $33.6 billion of highly reliable liquidity available. We’vesignificantly enhanced our liquidity in the last 30 days, in addition to the$12 billion we’ve previously disclosed in our September operations release.

We renewed a $10.4 billion multi-seller ABCP facility forone year and we procured $6.25 billion of new whole loan securities repofacilities.

I mentioned earlier we have ample and growing contingentliquidity at the bank to fund operating and growth needs and to managepotential future stresses. There may be additional shoes to drop.

The mortgage company has adequate liquidity to fund all debtmaturities through 2008 without raising any new debt.

Turning over to page 43, we provide you a schedule that wehave been filing in Form 8-K updated through September 30. I draw yourattention to the bottom line of page 43, total highly reliable short-termliquidity.

The maximum borrowing capacity you can see is $157 billion.Outstanding at this time, $89 billion. The amount undrawn on facilities -- Iwould call this gross liquidity -- $69 billion. The far right column, excessborrowing capacity, I would call that net liquidity. That’s either available orwe have unencumbered collateral to [pledge to] facilities. That’s the $33.6billion that I mentioned previously. So you can see the liquidity situation isvery strong at Countrywide at September 30, 2007.

Moving forward to page 44, we review our capital adequacy,provide you with a few stats on the excess capital at Countrywide Bank. You cansee at September ’07 tier one capital at 7.3%, total risk-based capital at13.7%, rating agency excess, $1.9 billion to $6.6 billion.

For the parent, excess tier one capital of $2.6 billion,excess total risk-based capital of $4 billion. More importantly, for theparent, rating agency excess capital, depending on the rating agency, of $1.1billion to $4.7 billion -- this, despite the marks that were taken at September30. So we have a very strong capital position at Countrywide at September 30.

On page 45, we take a look at earnings guidance atCountrywide. For the fourth quarter, and moving forward to page 46, for thefourth quarter, consolidated earnings are expected to range between $0.25 and$0.75 per diluted share for the fourth quarter. We cite on page 46 a wide range maybe caused bysignificant potential volatility arising from the factors listed -- generalmarket conditions, MSR valuation and hedge performance, residual valuation,credit performance, secondary market liquidity, LOCOM adjustments of inventory.

To drill down in a little bit more depth on earningsguidance for the fourth quarter, production is not likely to return toprofitability in the fourth quarter and incurred significant expenses relatedto fundings in the bank that are not reimbursed. Servicing should be extremelyprofitable in the fourth quarter. We’ve been very conservative with ourmodeling, still reflecting double-digit TPR, and reflecting significantprofitability in the servicing sector. We expect mortgage banking overall to beprofitable for the quarter.

Moving forward to the bank, a fact I saved until now is thatthe provision for the bank’s credit losses in the fourth quarter is expected tobe in the low $200 million range, back to the $228 million level we observed inthe second quarter. The bank profitability will be significant in the fourthquarter.

Capital markets enjoys the potential reversal of the $150million FAS-140 amount we talked about earlier, but may return to profitabilityon its own.

Insurance should have another highly profitable quarter,despite the higher losses due to the California wildfires, so again we expectsignificant profitability to return in the fourth quarter.

As far as 2008, we wanted to give observers some insightinto our outlook. We expect 10% to 15% ROEs for 2008. We do extensive modeling,looking at a base case optimistic scenarios, recession scenarios that are morepessimistic.

As I mentioned earlier, we are contemplating HPA of minus7.6 through the end of 2008. We stretched that by an additional 5% HPA declinefrom there. We [shot rates] in our modeling.

We do reflect double-digit CPRs very conservatively in ourportfolio. We do reflect the impact of HPA increasing 5%, as I mentioned. Thatpretty much gives you some perspective on where we see earnings guidance for2008, and on that note, I’ll turn it back over to Dave to summarize.

David Sambol

Just in concluding our prepared remarks, thank you, Eric,again, I want to just summarize the message that we were hoping to impart inthis presentation, and that is that Countrywide has successfully managed therecent environmental challenge. The company’s liquidity is stable andimproving. We have strong capital adequacy. Our new business and funding modelis expected to reduce risk prospectively. We’ve begun and taken the steps toright-size the company for lower production volume. Importantly, Q3 is expectedto be a trough quarter and we expect profitability to resume, as we’ve said, inQ4 and throughout 2008.

And Countrywide we expect will be a major beneficiary ofindustry consolidation and we are, we believe, well-positioned to exploitconsolidation and well-positioned for future growth. We are seeing reducedcompetition which will assist our market-share growth plans. We’re seeing atleast currently a very healthy origination margin, and as we’ve pointed out,we’re seeing a very high quality on our originations with improved yields andopportunities to grow our bank investment portfolio in the near-term.

But really most importantly, I think that the message thatwe would convey is that while we certainly hope that we don’t see anothermarket stress event like we did in the third quarter, it is very much the casethat we are much more prepared and in better shape should one come.

With that, I will give it to Angelo.

Angelo R. Mozilo

Thanks, David. Thanks, Eric -- very thorough presentations.Hopefully that gives you a view, the investors a view of our current status andmanagement’s view of the prospects for Countrywide going forward.

I now -- Brent, if you would open it up for questions, we’llstart taking them.



(Operator Instructions) Your first question comes from KenPosner – Morgan Stanley.

Ken Posner – MorganStanley

Good afternoon, and thanks for the thoroughpresentation. I will say it was nice tosee the $4.8 billion in cash sitting on the balance sheet. That really, I think, suggests some helpfulstabilization.

What I wanted to ask is going forward, you have builtCountrywide on a very solid financial foundation. It is hard to imagine Countrywide longer termwithout access to the capital markets, and it seems to me the first step therewould probably be paying off your bank lines. I am just curious how you thinkabout that and what even the initial plans would be to address thoseoutstanding bank commitments?

Angelo R. Mozilo

Hi, Ken. The way we look at it is, it is not that we don'texpect to get access to the capital markets in the long term. In fact, it is our plan as I mentioned towork on improving our ratings and hopefully getting back to where we were, suchthat our cost of access, particularly the unsecured funding, becomes amanageable cost for us.

The message is that having moved the business into the bank,we are not reliant on capital markets funding as our competitors are notrelying on capital markets funding to fund a residential mortgage lending andinvestment business.

That is really the way we look at access to the capitalmarkets. As it relates to the bank debt that you mentioned, the borrowings thatwe have as a result of our drawing on the $11.5 billion of lines do not mature,really for several years. I think 70% ofthe amount owed does not mature for four-and-a-half years. However, as we have conveyed to our bankgroup, it's our desire to begin paying them back before then.

We have more than enough liquidity in our projections ifeverything goes as we anticipate to begin repaying the banks before then. Oneof the dependencies, in fact, will be when we get resumed access to the capitalmarkets at cost effective levels.

Ken Posner – MorganStanley

The FHLB has obviously been very key to stabilizing theliquidity with $50 billion odd in advances. You must be pretty much at the maximum level, the 50% level that you canborrow from the FHLB. What kinds ofstandards or speed bumps do you have to observe in maintaining that 50% ratio?

Eric P. Sieracki

I think a more appropriate question, Ken, may be we put thisthrough a stress test, but why don't you go through the rules that we areoperating under now with FHLB?

Carlos Garcia

First of all, we still have excess borrowing capacity at theFHLB, but importantly, our current liquidity situation does not require us ormake us dependent on actually drawing down on that in the near term or even inour plans for next year. Our fundingplans contemplate that we will fund most of our balance sheet next year withthe deposit franchise.


Your next question comes from Bob Napoli - Piper Jaffray.

Bob Napoli - PiperJaffray

Thank you for the in-depth presentation. First of all, I think it is on page 16, Iwould like to understand the mark-to-market, how you went through in decidingwhat the mark you took was when you moved loans into held for investment fromheld to sell? Am I looking at this right; you transferred $12 billion in, andthe writedown on the transfer was $400 million?

Kevin W. Bartlett

Look, in terms of the marks, both for the HFI, HFS/HFI transferand also just for the general inventory marks, we recognize in the currentenvironment, a market disruption, determining the marks on financial assets isdifficult. The historical relationshipsbetween asset classes and indexes have decoupled and therefore, past valuationpractices needed to be modified.

That being said, there is relative evidence of values in themarketplace. Our primary goal was tosearch the marketplace for all information that could be considered relevant indetermining values. We considered quoted market prices of both thesecuritization or whole-loan market; we considered actual trades; marketinformation provided by Street firms; whole loan prices and indexes whereapplicable. Whenever quoted prices wereavailable, we used those as the primary source of our values. When quoted prices were not available, weconsidered quoted prices of similar assets, when available. We consideredindexes where applicable; we considered historical relationships between assetclasses, although we used the extreme end of those relationships due to thedecoupled nature of today's environment.

We considered the origination vintage of the assets beingvalued. We considered both past ratingagency actions on the relationships between the vintages, and we alsoconsidered the future rating agency actions on the current vintages. As a lastresort, we considered discounted cash flow models. So this process resulted in a set of spreadsthat were used to value the positions used in terms of the HFS to HFI transfer,and also the HFS inventory at the end of the quarter.

So we took all the market information that we could, andobviously it was a challenging environment. We came up with spreads that we thought were appropriate that wouldestablish a fair value, and that is what we used for both the valuationtransfers and also the valuation at the end of the quarter.

Bob Napoli - PiperJaffray

Thank you. Yourguidance for next year, 10% to 15% return on equity, your shareholders' equityat the end of the quarter was $15 billion, but I think that includes the $2billion from Bank of America. Is the 10%to 15% excluding the $2 billion?

Eric P. Sieracki

Bob, it is based on the common equity.

Bob Napoli - PiperJaffray

The servicing profit margins, what type of servicing profitmargins are you expecting in the fourth quarter and in 2008?

Eric P. Sieracki

Well, I mentioned that we're contemplating double-digitCPRs, which in view of what our models tell us, is relatively conservative. Wedeparted from the normal protocol of giving you very detailed information aboutmarket share and market size and production sector margins and then servicingportfolio average size and servicing sector margin.

The fact of the matter is we have historically highprofitability contemplated for the fourth quarter and beyond, still keepingwith double-digit CPRs.

David Sambol

Bob, let me also say this: as we run the various scenariosthat comprise our view of next year's projection, within the range that we gavewe did not contemplate any scenario where there would be a material write-up inthe carrying value of the asset as a result of tightening spreads in themarket. So the only benefit that we gavethe servicing segment was the benefit of improved cash flows and lowerCPRs.

In that respect, to the extent that the market recognizesthe enhanced value of the assets, that would be something that would be acushion that we did not consider in our range.

Bob Napoli - PiperJaffray

Have you adjusted your hedging because of that?

Kevin W. Bartlett

Yes, somewhat. Ithink we are certainly reflecting in our views of how we lean in the directionof the hedge, based on what we think the speed environment will be goingforward. But it hasn't resulted in amaterial change to the hedge profile at this point.

Bob Napoli - PiperJaffray

The Fannie, Freddie, the agency loans, what type of gain onsale margins are you getting on those currently?

David Sambol

Well, it's tough to answer that question because I look atthings in terms of NPM, as I mentioned in my update on margins. Where we end up from a gain on saleperspective very much has to do with the mix of channel. Because as you saw, the top line pricingmargin and correspondent is a fraction of CMD, and I have not weighted that outyet to project where it blends out.

Kevin W. Bartlett

Bob, let me also comment as it relates to the markquestion. I wanted to point out thatwith respect to sales that we put on subsequent to quarter end, which are quiteextensive, in fact, We put on sales of AAA securities on sub-prime and fixed-rate and adjustable-rate loans as aresult of some improving liquidity in the market. In all cases, we sold at orinside of our marks at 930.


Your next question comes from Paul Miller - FBR CapitalMarkets.

Paul Miller - FBR Capital Markets

Thank you very much. Angelo, this is a question foryou. One of the things that I think yougot a lot of credit for a year ago is that you predicted somewhat this bigdownfall in the mortgage market. Youthought the market was expanding rather than contracting, and you felt at somepoint that some things were going to go wrong. You made a statement, “I havenever seen a soft landing in housing.”

But yet again, it seems like you guys got caught off balancehere in August; I know everybody did. But you guys also expanded tremendously and you're still expanding, butcan you just go through, what did you guys miss? What went wrong with your modelrelative to what you thought would happen?

Angelo R. Mozilo

I don't think anything went wrong. First of all, the question I think was askedat that teleconference was either the person asking the question said “webelieve” there's going to be a soft landing or “is there going to be a softlanding” and my response was “in the 55 years I have been in the business, Ihave never seen a soft landing”, which is true. It doesn't lend itself to a soft landing. It's too disparate and youcan't control it, there's too many players and it is a very complex formulathat keeps all of housing together, whether it is homebuilding, existing homes,home buyers, psychology, interest rates. That was my comment.

However, I must tell you that in no way did I expect whathappened in August where it was a complete collapse, and seizing up of theworldwide credit markets. It is an issuethat was not Countrywide-centric in any way. As you witnessed yourself, the recent news of Merrill Lynch having theirissues, American Express having their issues, Bear Stearns, Citi, Lehman,Goldman… it hit everyone by surprise. That was not anticipated. My remarks wererelated to what I thought would be a normal hard landing that I had seen in thepast.

In terms of our model, I think our model was one that hasdemonstrated that it was able to be sustained during the most difficult periodI have ever seen in my business life. Weare the only survivor of any major mortgage company in the United States. I think the fact that we survived and nobody else did, and we came outof it as Eric pointed out, with more liquidity and more capital than we havehad in the past, is a testimony to our model; or more so a testimony to themanagement team. That is my view of it.

Paul Miller - FBRCapital Markets

Can you just address real quick the expansion? It just seems like originations are going togo down across the board on a macro level, but you're still opening up, Ithink, 50 financial centers. I mean, doesn't the industry as a whole have todownsize? Why doesn't Countrywide?

Angelo R. Mozilo

Let me separate that for you, if I can. Let me separate thebank. What David was talking about andCarlos was the bank financial centers. Those are deposit-taking mechanisms, unique in its nature, no othernational institution has that model. That is what adds to our liquidity. What we want to do is continue to expand ourability to create liquidity and liquidity that we can control and is reliablefor us. That is what those 50 financial centers are about.

The second thing that David talked about was the retail areaof our operation, which is dealing with the consumer directly either throughreal estate brokers or through homebuilders. It is extremely important that we continue to expand that aspect of ourbusiness, to pick up market share that will be left behind by those leaving theindustry.

Secondly, it is our most profitable portion, most profitablechannel that we have.

Thirdly, it is the best quality of loans that weoriginate. So it is the most powerfulweapon that we have as an origination company, and that is what we are about.We are about originating and servicing loans. So it is very important that we stay focused on our retail section. You'll see us continue to expand there, asyou will in the bank, in the financial centers, to generate liquidity to fundthose loans in the retail section, as well as the wholesale operation of thecompany.

Paul Miller - FBRCapital Markets

Thank you very much, Angelo.

David Sambol

I would also add that the financial center expansionrepresents the opening up of additional kiosks within existing mortgagebranches of Countrywide. So this is avery efficient and low-cost effort to expand our deposit franchise.


Your next question comes from Brad Ball - Citigroup.

Brad Ball - Citigroup

Thanks. Eric, you mentioned a couple of times that you tookactions in the quarter that were conservative, or as conservative as waspermissible under GAAP. Did that apply to your provisioning, and if that is thecase, how do you take the permissible under GAAP versus what your actualexpectations are? In other words, are you providing more or less than youotherwise would, due to the GAAP conventions?

Eric P. Sieracki

Well as you might imagine, Brad, GAAP is very important tous and we are beholden to it. A couple of points I would make to you are, let'stake the bank HFI portfolio. The provision in the third quarter was $790million, up from $228 million in the second quarter, up from $77 million in thefirst quarter. I gave you a glimpse ofwhat we expect in the fourth quarter in the low 200s as a credit provision.Other institutions have announced that they expect to see meaningful increasesin their credit provision. We tried to contemplate all the information that wehad at 930, the impact it would have on our existing portfolio, and capturethat provision in this quarter, and not burden the fourth quarter with what weknow now in the third quarter.

There may be further deterioration in the credit marketsthat drive our credit performance down that require increases in that provisionfrom the $200 million plus level that I gave you. But based on what we know now, we believethat we are capturing all that we can in terms of expense. These are all lossesthat are inherent in the portfolio.

To give you some insight on pay option ARMs, we look at theroll rates that we expect, and they show increases for say the next fourquarters, and that drives a significant provision this quarter.

Brad Ball - Citigroup

Your assumption for 7.6% decline in HPA, can you give us asense as to what the impact would be if that were to come in higher, let's say10%, or come in lower, say down 5%?

Eric P. Sieracki

Well, I would tell you that if HPA was down 5% additionalbeyond the 7.6, that the incremental losses would range in the order of $600million to $800 million.

Brad Ball - Citigroup

$600 million to $800 million of additional losses within thebank HFI?

Eric P. Sieracki

That's in the aggregate.

Brad Ball - Citigroup

In the aggregate, okay. Just finally, the table you showed on page 44 indicating that theagencies or that your capital is in excess of what the agencies would requireof you, seems to be a little disconnected from what we have seen this morningfrom at least one of the rating agencies who apparently are focused on yourearnings and have threatened to downgrade if you incur an operating loss nextquarter.

Could you give us a sense as to, is there a disconnectthere? Are the rating agencies morefocused on earnings than on capital?

Eric P. Sieracki

Well, capital adequacy is one of the factors that the ratingagencies consider in their ratings. If we take CHL's ratings, for instance --and we won't name names -- but there was disparity between the three ratingagencies and how they reacted in the month of August. One agency took CHL downone notch, another agency two notches, another agency three. So you may have aphenomenon here where one agency felt as if they were perhaps out of line withthe general context of the other agencies, and this was an opportunity for themto get more in line.

They are very secretive about their formulas. Liquidity is something that is very, veryimportant to them. I'd keep an eye out there for releases from other agenciesas well, and see if they make comments about liquidity and capital, and thatwill give you more insight into the way they think.

Kevin W. Bartlett

But earnings is a component of it.

Brad Ball - Citigroup

Of course, yes. Thanks very much, guys.


Your next question comes from Moshe Orenbuch - CreditSuisse.

Moshe Orenbuch -Credit Suisse

As it relates to your comments about liquidity and capitalmarkets and external funding, you did say I think that you would hope in thenext month or so to start selling at least the AAA tranches of deals. Could youtalk about that a little more? Because Ithink that is what the original plan was three months ago when the marketstarted to deteriorate, and talk a little bit about how much capital that wouldneed versus where you are now? And what that might mean for your plans tooriginate?

Kevin W. Bartlett

Let me just give you a sense of the sales plans. We have already put on sales so far thisquarter in excess of $1 billion of some of the inventory that remained at9/30. The market, though, just generallyto give you a sense of what has happened to the senior spreads, I'm going togive it to you two ways. On the jumbo core fixed-rate stuff, the seniors mighthave been, in terms of a spread to agency securities, in June would have beenlet's say 0.75 point back of the agency securities. In August, they got to the 2.5 point backrange, and in October what we have seen so far is it is around 1 3/8 back. Soit is more than halfway returned on the fixed rate side, which given there'sreally no negative press on fixed rate lending, I think that that probablymakes the most sense.

On the 5.1 product, the hybrids, you probably could havesold those in the June area at about swaps plus 50 in yield. August got to around swaps plus 1.25 and nowyou can probably sell those around swaps plus 100. That hasn't totally fullyrecovered and neither one of those has really fully recovered. Those are thetwo major products that we're selling now.

We have also been successful in selling AAAs on pay optionsrecently and so that is an interesting event. So the market has come back a little bit and there is decent flow andcertainly the federal home loan banks have been very important in the processand I think that we will see how things shape up given all of the other issuesout there in the market.

Moshe Orenbuch -Credit Suisse

Does that mean you are securitizing existing pay options orthat you are actually originating them now?

Kevin W. Bartlett

We don't originate much in the way of pay options. It issmall amounts of pay options, both the monthly and the hybrid program. It isprobably less than 2% of our total production combined. But no, these are salesof the existing pay options that were produced in the third quarter.


Your next question comes from Howard Shapiro – Fox PittKelton.

Howard Shapiro – FoxPitt Kelton

Thanks very much. Twoquestions if I could. The first relates to your loan modification program, the$16 billion program you announced a couple days ago. Can you just tell us who has the legalauthority or has to sign off for a modification, for example, if a loan is in asecuritization and there is mortgage insurance? Do all the bondholders have tosign up? Is it just the servicer or does the mortgage insurer have to sign up?

Angelo R. Mozilo

Just the servicer.

Howard Shapiro – FoxPitt Kelton

So you have complete authority to do the modifications?

Angelo R. Mozilo


Howard Shapiro – FoxPitt Kelton

Okay, perfect. The other question just has to do with thevaluation on the mortgage servicing in the quarter. Given the decline inprepayment rates and what you expect going forward, how did you get to thenegative $800 million plus fair value mark? I would have thought you would haveperhaps even shown a positive mark on your mortgage servicing fair value?

David Sambol

That is a good question. The accounting that is prescribedfor the marking of servicing requires us to mark the asset to what we believethe market value is at that quarter. That is a difficult thing to do becauseMSRs are not actively traded. So what we instead do is we look at surveysgenerally that are lagging that come in from sources such as KPMG or PW has asurvey and other surveys that tell us what other people are doing relative tomarking their portfolio. We have to go through this process to determine whereother people would end up and in that way establish that as the market value.

We were not sufficiently comfortable marking it up furtherbefore we saw what the market did, and that really explained why we didn't markit up more. We really widened the yieldout dramatically on the assets. Ourmodels did project that prepayments would slow down, and the fact that wedidn't anticipate others adjusting their asset by more, really translated intoa much higher yield on the asset, which is what we anticipated the market valueat 9/30 to be. The key question is, what happens at the end of Q4 andsubsequently, and to what extent will the market recognize the value?

By the way, the writedown was driven really by the fact thatinterest rates rallied, the ten-year rallied by approximately 40 basis pointsin the quarter.

Howard Shapiro – FoxPitt Kelton

So if I'm understanding correctly, as the market plays catchup, so to speak, the economic value you feel is embedded in your servicingassets should be reflected in earnings over time?

Kevin W. Bartlett

It will either be reflected in ongoing operating earnings orit will be reflected through a mark-up in the asset. But yes, either way over time the lifetimeearnings from the portfolio will be greater as a result of the changes that wehave described and the slowing speed.

Angelo R. Mozilo

Let me just clarify the question about the modifications andservicing, having the authority. Let mejust refine that response. We have the authority to modify the loans within theparameters of the servicing contract. Those contracts differ from time to time,but on balance we have the authority and this will again vary from investor toinvestor. We will manage the loanmodification process. We manage that onbehalf of the investor. So that givesyou a more global answer to the question about modification. But the bottom line is as a practical matter,operationally we manage the entire process.


Your next question comes from Mark Patterson - NWQInvestment Management.

Mark Patterson - NWQInvestment Management

On the '08 comment about the 10% to 15% ROE guidance, I'mjust curious if you guys could comment on how some of the current rumblings inCongress are factored into that expectation, and how the market might changenext year based on anything that might come out of Congressional discussionsright now?

Also maybe in conjunction with that, what form you mightexpect the non-agency market, when it would come back or in what form it mightcome back potentially next year?

Angelo R. Mozilo

I can take the first part. There are several bills floatingthrough Congress, one by Schumer, one by Marty Frank, one by Dodd, and theyhave a lot of similarities, some differences. These yet have to be vetted through because there are certain thingsabout these bills that I think are very helpful to the market, particularly toconsumers who are having difficulty getting funding to even purchase a hometoday, particularly in high cost areas. There are some areas that are problematic relative to liability, tosecurity holders, that have to be vetted out.

There are several provisions in there that are very helpfulto the overall market. For example, oneis to lift the caps, at least on a temporary basis, from Fannie and Freddie'sbalance sheet, which I think is incredibly important today when the marketreally needs liquidity, particularly for first-time home buyers who are at thebeginning of the housing chain.

Secondly -- and this is a very controversial issue, I'mgiving you my viewpoint. I think it is very important that Fannie and Freddiebe allowed to increase their loan amount substantially above where it is todayon some basis that relates to home prices in various MSAs, because they'retotally irrelevant in an area in the State of California, for example, or manyparts of New England and New York in high cost areas of the country, and theyshould be irrelevant.

So we support aspects of those bills. Other areas of thosebills we consider problematic, and we are working with the Congressmen andtheir advocates to see if we can ultimately come out with a bill that makessense to everybody, and everybody wins. But it takes a long time to get these things through because they haveto get through the House, get through the Senate, be compromised, and Iwouldn't expect anything -- if anything comes out -- until 2008.

Eric P. Sieracki

In terms of your question, Mark, on the secondary market andwhen non-agency demand will come back, it is my opinion that it is really justa matter of time before we see more liquidity come back and spreads normalized.In fact, as it yields, particularly on the new originations and the securitiesbacked by new originations are anomalously high relative to other investmentswith similar risk profile. We believethat supply/demand conditions, as is always the case in a market economy, willrevert to equilibrium. These yields will attract demand, as they already have.

So the signs are positive. Whether we return to the samecredit spreads we were at before the disruption, or there is a premium fornon-agency securities to agency securities, there will likely be maybe a slightlywider premium. But we believe spreadswill continue to tighten; the timing, however, is uncertain.

What is certain is that the quality of the underlyingcollateral, backed by those mortgage-backed securities, will certainly notrevert and we do not expect to see the kinds of loans being made going forwardthat were made over the last several years that has underperformed sodramatically.

Mark Patterson - NWQInvestment Management

So Dave, you put up the slide that talked about how theagency and non-agency originations, at least the form that you were looking at,the returns on that type of origination weren’t materially different, at leastas it related to just the prior fewquarters. So maybe it is not that important about what is factored into your’08 expectations, but I would assume that you guys were conservative inthinking that maybe not necessarily that we have an August environment, but wedon’t have something that returns back to a year ago.

David Sambol

I think it certainly will be helpful for the market, and byextension for the company for the secondary market to return, because I thinkvolume, overall origination volume in the markets will improve as aresult. Our own share, percentage of non-agencyproduction, we don’t view to be all that different in the overall market. Wethink credit has been constrained in that sector, and so to the extent thatliquidity returns, it will help volumes and we think it will help credit costsfor the industry.

I think anything to bring credit back to those markets whereit has been constrained, including Angelo’s view on the increasing loanbalances for the agencies is going to be helpful for the industry and for us.

The way it would manifest itself, in our projections, islikely higher volume levels and by extension, higher gain on sales and maybe amix shift that approaches what it was historically, if not to the same extent.

Mark Patterson - NWQInvestment Management

One last thing; I thought I might just solicit your commentson the subject, the theme that I think you guys have thrown out to the marketfor so long of surviving and thriving. Angelo, you made the comment a littlebit earlier in the call about being the only survivor; well, there is probablyanother one in Pasadena, but that there were going to be opportunities.

I think in your slide deck you talked about beingwell-positioned to capitalize on opportunities from market dislocations. Ithought you might elaborate on those opportunities. Was this organic growth, isit asset purchases, is it building the retail salesforce like you have been bypicking up people? Is it all of the above?

Angelo R. Mozilo

First of all, let me comment because I have the highestregard for IndyMac and the management of IndyMac, Mike Perry. They are certainly an important player. ButCountrywide is a very significant size in relationship to IndyMac, and I'mtalking about any companies who are even close to Countrywide. It was in no wayto demean IndyMac; that's our child. We gave birth to that company in 1985.

I'd like to make three comments to add on to what David saidand then I will answer your question in terms of opportunities for us. One isthat I believe that even though it the supply/demand curve ultimately it is atruism and it does ultimately come back to what is considered normalcy, I thinknormal is going to be very different than what we considered normal prior.There's been, in my opinion, a significant structural change in the market, apermanent structural change, and it will not return to that.

One of the changes is that whether it be corporate debt,mortgage debt, or any other kind of debt, private equity has been materiallyimpacted by this, nothing was being priced to risk in any form of debt, and Ithink that game is over. I think things are going to be priced to risk, so asDave pointed out, that may not come back to where it was. Liquidity willreturn, but not in the manner in which it was before.

The third thing that is a deep concern of Countrywidebecause it has been its mission from its founding is to provide homeownershipopportunities to low income and minority borrowers, and have spent 40 years ofits life trying to close the gap between white homeownership and minorityhomeownership. My great fear, and I think until something is done significantlyhere relative to, again, Fannie and Freddie's participation in the marketplace,FHA, the reconstruction of FHA, that in a three to five-year period, the gapwill return and in fact, worsen between white homeownership and minority homeownershipin this country, which carries with it huge social implications. Because thereis virtually no liquidity to first-time home buyers today in high cost areaslike California.

Getting back to your question about the advantages that wehave as a result of what is happening, one is that there are just a few playersleft of significant size in this country that are in the mortgage space. Theadvantage Countrywide has always had is that we're the only large institution,and large in terms of a JP Morgan or a Citi or a BofA, as a major player in themortgage space -- huge volumes -- that has a sole focus of mortgages. Everyother major financial institution has a lot of things on their plate, and doesthem quite well, but having the focus of doing mortgages the most efficient waypossible has always been an advantage to Countrywide, and I think it will beeven a greater advantage going forward because of the consolidation in theindustry.

The other is that you are talking today to a time-testedteam. The average time that the management team has been with me is about 23years. We have been through a lot, nothing like August certainly, but we havebeen through a lot. Now we have been through August, and learned a lot, as Davepointed out. So I think with the quality of the management team, the focus thatwe have, the mission that we are on, I think that we have a much better chanceof success than any other player in the mortgage space today.

Mark Patterson - NWQInvestment Management

Thank you very much.


Your next question comes from Chris Brendler - StifelNicolaus.

Chris Brendler - Stifel Nicolaus

Hi, thanks. A couple of questions. Eric or David, on slide39 the agency margins, the increase in the net pricing margin from second tothird quarter, can you just explain to me in a little bit more detail why thatis happening? Because I would have thought with the entire market going agency,everyone scrambling to go agency paper, agency execution, that you would seepressure on those margins. With the competitive environment not giving you thenon-agency execution I would have thought those margins would go down. Maybewhere they were a year ago also in terms of what is driving that improvement second to third quarter?

David Sambol

The main reason, Chris, is that we have seen a significantamount of capacity exit the markets and competition has lessened. Where we hadovercapacity that put downward pressure on margins for the last several years,the reverse is being seen right now and the market is giving us these marginopportunities as a result of that.

Chris Brendler - Stifel Nicolaus

I would have thought that would have come more on thewholesale side, but it seems like it is pretty well-balanced across all threechannels.

David Sambol

Well, to the extent that there is less competition on thewholesale side, it benefits the retail side as well. When our retail loanofficers compete with a loan officer that works for a mortgage broker or for acorrespondent, the pricing that is quoted by the broker or correspondent alsoimpacts the price that we need to show on the retail side, and so there is avery strong link.

Chris Brendler - Stifel Nicolaus

Second question would be, can you talk about your depositpricing, any changes you have made recently to your deposit pricing strategy? Ihave heard that it has increased, but just wondered if you could comment onthat?

Angelo R. Mozilo

The deposit strategy, the vast majority of deposits taken inover the past month, month-and-a-half, have been in the 12-month category totry to stretch the deposits out; more reliable funding for the bank andtherefore the pricing has been geared towards attracting the one-year money.

Kevin W. Bartlett

The only thing I would add to that is with the more significantgrowth in assets experienced at Countrywide Bank in the quarter from theaccelerated transition or integration of the mortgage banking operations, wehave accelerated or been more competitive in terms of our pricing over the past60 days. We anticipate that will moderate somewhat in the coming month or two,as we bring on additional productive capacity. We have added 50 new financialcenters over the past 60 days and we're going to add 50 more. With moreproductive capacity, we can reduce our competitive position and reduce ourpricing.

Chris Brendler - Stifel Nicolaus

I don't know if this is in the slide deck or somewhere inthe release, but what is currently in the held for sale portfolio that youstill have remaining? Is it mostly agency at this point?

Eric P. Sieracki

Yes, most of it is agency. There are some remnants from theJuly, August, September production that relate to pay options, some expandedcriteria, but for the most part, it is agency now.

Chris Brendler - Stifel Nicolaus

Can you quantifythat?

Eric P. Sieracki

Our non-agency inventory at 9/30 was approximately $10billion.

Chris Brendler - Stifel Nicolaus

This is sort of a broader question and one that I'mstruggling with. I think you've taken a lot of very positive steps to improveyour financial condition in the last several months, and I don't blame you forfeeling better about the outlook. But I struggle with that we still seem to beearly in the process of this housing situation. The prices really haven'tstarted falling yet. We have last month's sales and inventories still at recordlevels and building; the reduction in mortgage credit that you talked about Ithink is a huge negative for the future outlook.

What has been striking to me -- I think most recently -- isjust how rapidly mortgage credit is deteriorating over not even the last quarter, but just the lastcouple of months, you've seen such tremendous increases in NPAs. How do you getcomfortable with the '08 outlook given what is happening or what is likely tohappen or continue to happen in terms of the credit picture? Do you have anysort of sense or can you share with me when do you think this is going to peakout and start to stabilize in terms of the non-performers that we're seeingincrease so rapidly right now?

Angelo R. Mozilo

Well, you lay out a fairly pessimistic scenario which couldbe the case, because I agree that you do see elements that are troubling interms of house price depreciation. But you have to remember that there areother moving parts here. In fact, if that scenario is played out, you wouldhave to expect a substantial lowering of rates by the Fed. So you can’t -- sortof the theory of indeterminability, you can't just change one thing and don'texpect a whole bunch of other things to change in the process.

There will be compensating issues, but I think we have triedto be as conservative -- as Eric I think used that word about seven times inhis presentation -- and staying within GAAP as well to try to prepare for thefuture.

I think our quest for greater market share in a market wherewe are generating much higher quality loans, and having a servicing portfolioof $1.5 trillion are important back-stops for us against these other -- theirother issues. But I don’t know if you canget comfortable, in light of all the events taking place, but I can assure youthat six months from now, things are going to take place -- certain things aregoing to take place in a positive way that we cannot predict today. All we’refocused in, for the obvious reasons, are on the negatives.

Do you want to -- I also want to -- by the way, let me justclarify one thing. Eric may have or Dave may have another comment on this, butjust to clarify the issue when I talked about surviving, I didn’t put [EddieMac] in the same class at Countrywide, not at the size but also, you mustremember that they were not dependent upon outside funding. They’ve been a bankfor many years now and had a deposit franchise that funded all of their loans,so they didn’t have any need for the capital markets whatsoever for theirfunding and therefore weren’t impacted like the other companies have been, likethe Merrills and the Lehmans, because of a lack of commercial paper and lack ofNPMs and repo lines.

So they were really a [thread] that was totally self-fundedand not -- although impacted by the storm in the secondary markets, were notaffected for their primary funding sources, which we were.

Do you have any comment?

David Sambol

I would like to say a couple of things. Just to clarify, ourforecast, when we talked about some of the opportunities, it wasn’t to suggestthat we wanted to convey an optimistic outlook on the whole. While there aresome opportunities that maybe can lessen some of the pain, in fact, our forecast,our reserving methodology, and our plans all contemplate a continuing deterioration in the housingmarkets and we have attempted to be conservative in our projections oforigination volume, of credit costs, and that’s incorporated in our reserves.

And so, I don’t like to use the term conservative becauseyou never know, but our exposures relative to the forecast that we’ve given,which do provide for returns that are not acceptable to us from a long-termstandpoint, are based on some degree of expected continued deterioration and soour risk is worse deterioration than what we have contemplated.

And what I would like to do is I would like Jess Lederman, our Chief Risk Officer, to also maybe comment alittle bit on his view of housing and talk about what he sees and what othersare projecting. Jess, do you want to make a comment here?


Sure. I think it’s important in looking at how we reserveand the adequacy of those reserves to understand that the biggest portion ofthe reserve actually relates to loans that are current that we have reason tobelieve because of how we look at the environment and how we look at ourforecast will become defaulted loans. So we’ve talked about a couple of factors-- the credit tightening that occurred in the middle of the third quarter,which is going to have the big -- we’re assuming will have a continued negativeimpact on future credit behavior. Obviously borrowers who get into trouble,some portion of those will not have as may options to refinance.

But what I think you could look back on is the slide that wepresented which had the Moody’s home price appreciation forecast that wepresented earlier. And if you think about it, as Eric points out, the negativeHPA hits its low point, maximum negative home price deterioration in the middleof Q3 and does not return to home price stability until the second half of2009. So you’ve got over a year-and-a-half in our basic projections that feedinto our statistical models that relate to how we reserve, that you don’treturn to home price stability until the second half of 2009.

And it’s a forecast of really what would be the most severedrop in housing values in 50 years that is built into our models, which arereally in sync with exactly that forecast. And what that translates to is thatwe showed you some of the accelerating rate of 90-day delinquencies recently,and if you take a key portfolio like PayOptions, or credit models based onthese home price appreciation forecasts, expect that that new rate of 90-daydelinquencies to actually increase for the next year, and for that new rate of90-day delinquencies that’s the driver of defaults that’s built into ourreserves, to be at levels higher than today’s levels for another two quartersafter that. So really corresponding to hat six, seven quarters out before homeprices stabilize.

So you know, it’s built into our reserves, this assumptionthat things don’t really start to get better until the second half of 2009.

And I’ll just add one other point, which is that I thinkit’s worth noting that the credit cycle, it affects both the level and thetiming of delinquencies, so weaker borrowers who are likely to have gonedelinquent under normal circumstances in future periods, default earlier in thelifecycle. And what that suggests is that once we do see signs ofstabilization, that subsequent performance should be more positive than itwould have been without the down cycle. But that’s a future positive and is notsomething that is factored at all into our current reserve calculations, whichwe are confident are adequate and prudent.


We have a question now from Gary Gordon with PortalesPartners. Mr. Gordon, if you are speaking, we can’t hear you. Please check yourmute key. And we have no response. If you can hear me, Mr. Gordon, pleasere-queue. Next we’ll go to Vincent Daniel with Frontpoint. Please go ahead.

Vincent Daniel - Frontpoint

It’s Steve [inaudible] for Vincent. Just a question on whatwas said very early in the call about the ability to start selling AAAsecurities but really not much else. I’m just wondering if, assuming that thecapital markets say like that, that you can sell most of the AAA securities inyour newly originated loans, but you have to keep everything below in the capitalstructure, in terms of a capital position, how long can you do that withouteven having to come back to the market for more capital?

David Sambol

Right now, what we’re originating, Steve, that’s not agencyare loans that fall into two categories: 85% -- or say 90%-plus of thenon-agency is being originated for the bank’s HFI portfolio and that representshome equity loans originated under our new guidelines as well as attractiveyield and short duration ARMs.

And candidly, our challenge is and our desire is to get moreof those loans for our portfolio than we are now originating.

That which we are originating with the intent to resellthrough a securitization is for the most part longer duration, jumbo fixed-rateproduct and on that product, we are able to sell both the seniors and the subs.

Where the less liquidity for subordinate securities lies ismore so in the older vintage product, securities outstanding and in productsthat we do not desire to securitize and sell.


Thank you very much, sir. Next we’ll go to the line of RonMandel. Please go ahead.

Ron Mandel

Thank you. In regard to the HPA, I just want to make sure Iunderstand it that -- I think on the chart on page 18, you said the worstquarter is down 8% or 9%, 7% or 8%. Or was that the cumulative decline? I’mjust wondering what you see as the cumulative decline.

David Sambol

What you see on the chart is an annualized rate. When itweights out on our portfolio over the next five quarters, you’re talking abouta cumulative 8%.

Ron Mandel

Oh, I see. That is the cumulative. And then, in regard togetting back to the credit outlook, as you say on slide 19, you’ve seen a jumpin the delinquencies and in the rate at which delinquencies are increasing andso on. You know, in a way it strikes me that the worst, as you said, were the’06 and ’07, first half of ’07 production, and in a way, it’s like a pig and apython. And I’m wondering how long you think it takes that pig to go throughthe python, how high you think delinquencies will get and maybe morespecifically, what you are using as a loan loss provision and charge-off ratefor next year.

Angelo R. Mozilo

Give us a sense of how big you think that python is.

Ron Mandel

Well, I think the pig is really the key element rather thanthe python. The pig is what you have on your books from ’06 and ’07.

Angelo R. Mozilo

The pig’s got to be the one traveling, right?

Ron Mandel


Angelo R. Mozilo

Okay. You want to answer that question.

David Sambol

I’ll let Jess comment as well, but what we’ve done in termsof increased provision and reserve build-up this quarter is not explained bythe increase in charge-offs, as you might have seen, quarter over quarter.

It’s explained by the leading indicator that we saw inlooking at delinquencies and 90-pluses, which increased more dramatically. Onepoint, offsetting point that we’ll see what happens in October, is there aremany that believe that the September 30th delinquencies were in part impactedby lesser days in the month, so we don’t know where that will come out. But ourview in our reserving was heavily weighed by the early indicators indelinquency trends.

The other thing that I would point out relative to ’06 and’07 is with respect to -- we have two major risk books. We have the residualsand the HFI portfolio. As Eric pointed out, with respect to the residual book,our exposure, no matter how worse it gets, is floored at approximately $250million if you take the entirety of the assets backed by ’06 collateral and Q1collateral.

With respect to the bank’s HFI portfolio, your guess is asgood as ours as to where this thing goes, but one other aspect of our reservesthat is worth mentioning is we have a reserve methodology, at least we’ve hadto date, and may change it in subsequent quarters, that we think is somewhatconservative relative to what most of our peers do. And what we do is wheremaybe some of our peers book in the reserve what they believe to be one year’sworth of forward charge-offs, maybe five quarters in the case I think as we’velooked at the landscape, the most conservative guide.

We have a reserve methodology that books more than fivequarters of expected losses, and it’s because what we do is we book kind of areserve for the lifetime losses on loans that are delinquent today, 90-plusdelinquent, as well as the lifetime expected losses on loans that will godelinquent within the next 12 months. That includes certainly all the 12 monthcharge-offs and it includes subsequent charge-offs on loans that go delinquentduring the latter part of the next 12 months.

So it is something that you should consider when reflectingon our reserves.

Ron Mandel

And in regard to your forecast of a 10% to 15% ROE for nextyear, what range of loan loss provision are you using in that modeling?

David Sambol

I’ll give that to Eric.

Eric P. Sieracki

The credit-related provision at the base case of minus 7.6nationally through the end of ’08 is in the order of $1.2 billion in theaggregate for all our credit sensitivity.

Ron Mandel

And that compares with the 937 this quarter, or which numberthis quarter?

Eric P. Sieracki

That’s the totality of our credit-related provisions, be theHFI at the bank, at PHL, residual write-downs -- everything.

David Sambol

In the bank’s HFI, I think Eric previewed that we expect thefourth quarter provision to be approximately $200 million, down materially fromwhat we needed to build the reserves to where we wanted them, or where theyneeded to be at the end of September, and we expect that those reserve levelsor those provision levels, the fourth quarter levels will persist through mostof 2008 and maybe start falling thereafter.

So that might give you a little bit of insight as to what weenvision for the bank’s HFI portfolio. We do not provide, on the residualportfolio, for any additional impairment, on the premise that the existingvaluation is intended to provide for cumulative losses. So unless we seedeterioration worse than what is expected and what we can reasonably justify at930, which is certainly possible, we don’t expect to see -- in the base caseforecast, we’re not providing for impairment of the residual asset and we’reproviding for somewhere in the $700 million to $800 million of provision on thebank’s existing HFI portfolio.

Ron Mandel

Thanks very much.


Thank you, Mr. Mandel. Next, representing KBW, we have aquestion from Fred Cannon. Please go ahead, sir.

Frederick Cannon -Keefe, Bruyette & Woods

Thank you. I just want to go back a bit on the bank funding.Out here, we are seeing rates at your bank branches at around 570 I think onthe one-year CD that you mentioned. I think on the Internet, you’re around 565,which is well above market rates and it looks like you raised those rates alittle bit as early as last week.

I was wondering, is that the rate -- how long do you thinkyou’ll have to maintain those kinds of rates? And what kind of incrementalspread are you earning when you are having to pay that level on your funding?

Angelo R. Mozilo

Eric is going to respond to that.

Eric P. Sieracki

We anticipate that we’ll be moving off 12-month term here inthe coming weeks and moderating our price. One of the ways to think about thefunding is that the majority of the asset growth in the third quarter came inthe form of Fixed Rate 2nds and HELOCs second rate product, which is generallytied to prime and the margins are reasonable from that perspective.

But we will be managing the net interest margin and our costof funds very carefully over the coming five quarters, but we have looked overthe past two months to ramp up our deposit production ahead of ourinfrastructure to make sure that we can support the asset growth with theaccelerated integration.

Frederick Cannon -Keefe, Bruyette & Woods

How does -- you mentioned just for comparison’s sake thatyou have about $25 billion of available liquidity for the bank. How does thecurrent rates that you are paying for that 12 month deposits compared to whatthe other funding costs would be?

David Sambol

What you should know, Fred, is that our strategy over thecourse of the quarter, including through today and it’s a strategy that willlikely subside, is that we have been motivated to expand liquidity dramaticallyand to source liquidity from all available sources. We felt it was the smartthing to do in an environment of uncertainty and stress such as we’re in. Andthat liquidity has not been cheap in the near term, and we expect as thingsnormalize here hopefully very quickly, that you’ll see that reflected in ourpricing and deposits and the cost of incremental liquidity will go down.

Frederick Cannon -Keefe, Bruyette & Woods

Thanks. Just one final question; you guys present a fairlypositive outlook today in terms of getting back to a 10% to 15% ROE, and yourstock is still trading well below your September 30 book value. Are you -- isthere any contemplation of management stock purchases?

David Sambol

Yes, I know a lot of managers are contemplating that.

Frederick Cannon -Keefe, Bruyette & Woods



Thank you very much, Mr. Cannon. Next in queue, Mr. Mozilo,we have James Fotheringham with Goldman Sachs. Please go ahead.

James Fotheringham -Goldman Sachs

Thank you very much. I understand that 71% of the pay optionARM portfolio and 12% of the home equity portfolio has some level of creditenhancement, and could you just let us know on average, what level of lossesthe credit enhancement covers and how that differs by product line?

Carlos Garcia

I don’t have the exact numbers off the top of my head hereor on a piece of paper, but the general range I think is for the creditenhancement on the second liens is in the neighborhood of, depending on thepolicy, anywhere from I think it’s 7% to 9% loss coverage, [cume] losscoverage, if that gives you a sense.

On the PayOptions, where 71% of our portfolio is covered, wehave both first lost coverage and I think it’s two-thirds of that 71% is firstlost and the other third is mezzanine. And I think that the first lost coveragewas typically around three points of [cume] loss and the mezzanine coveragestarts in some cases, I think, if I recall --

David Sambol

It’s 1% and 1.75% are the two attachment points. It limitsour losses to 1% or 1.75%.

James Fotheringham -Goldman Sachs

Okay, thanks. Just one follow-up on Mark’s question onlegislation; the Barney Frank Bill, and this mortgage reform and anti-predatorylending act introduced to Congress this week, it proposes, as I read it,anyway, the standardization of sales commission rates across products, as wellas securitizer liability. Now, if the bill were passed, and I realize, Angelo,it might take some time, but how might these two changes in particular affectyour ROE outlook relative to the 10% to 15% guidance? Thanks.

Angelo R. Mozilo

I have no idea. There’s been a lot of safe harbors carvedout of that, at that liability issue, although we don’t believe enough safeharbors. Because I think you’d have a real problem in liquidity in thesecondary market based upon the provisions that Barney Frank has in there.

As I said, I think this bill has a long way to go, you’dagree with that. We have a staff working on it. We have a -- at the end of theday, I happen to know Barney Frank personally. He’s a reasonable guy. He getsit. He does have his constituents that he has to obviously pay attention to andI think we’ll come out with a reasonable bill that will work for everyone,because the one thing you don’t want to do is create the situation they had inGeorgia just about a year ago, when they had a similar provision for securityholder liability and the market just shut down and we had to shut down ouroperations. Everybody did and obviously he doesn’t want that.

I think we just have a long way to go before we have to getthe bill formalized and then assess what that means to Countrywide.

My experience with this over the years is that the initialreaction is panic, but at the end of the day, things are worked out in areasonable manner so that we can operate within the framework of thelegislation and that’s my hope here. But we’ve got a long way to go.

James Fotheringham -Goldman Sachs

Thank you very much, Angelo.


Thank you, sir, and representing KBW, a question now fromJay Weintraub. Please go ahead, sir.

Jay Weintraub -Keefe, Bruyette & Woods

Thank you very much and thank you for having this call. Yousaid in the past that you hold liquidity sufficient to pay all of your maturingobligations through the end of 2008, I believe. Could you confirm that that isstill the case?

Eric P. Sieracki

That comment was made with respect to CHL, our mortgagecompany and the bottom line is that we do have sufficient cash on hand andliquidity to service all debt through the end of 2008 that would contemplatesales of some non-agency product, the $10 billion that Dave referred toearlier.

Jay Weintraub -Keefe, Bruyette & Woods

Okay, and does that include contemplating the $2 billion ofconverts that are likely to be put in October 15th of ’08?

Eric P. Sieracki

Those are contemplated in the cash flow analysis.

Jay Weintraub -Keefe, Bruyette & Woods

Okay, and one final question; on your balance sheet, youshow $5 billion of cash and in your highly reliable liquidity sources, you show$15 billion of cash and equivalents. What is the definition you’re using ofcash equivalent?

Eric P. Sieracki

The equivalents were excluded from cash on the balancesheet.

Jay Weintraub -Keefe, Bruyette & Woods

Right, but what are the equivalents? What type ofinstruments are they?

Anne D. McCallion

The equivalents that we’re using are those that areconvertible to cash immediately, should the need arise.

Jay Weintraub -Keefe, Bruyette & Woods

Okay. Thank you very much.

Eric P. Sieracki

One last point, Jay; remember that the HFS has been markedand we contemplate having that collateral sell at the marked levels. We don’tcontemplate any gain on that, but we do contemplate being able to sell it.

Jay Weintraub -Keefe, Bruyette & Woods

Right, okay. Thanks a lot, Eric.


Thank you very much, Mr. Weintraub. Next, representing LotusPartners, we have a question from [Shomu Sadokahn]. Please go ahead, sir.

Shomu Sadokahn -Lotus Partners

Angelo, I’m wondering if you can comment on the Banc ofAmerica financing. As I read your financial statements right now, it seems likeyou almost really didn’t need the Banc of America financing. And I’m wondering,sort of in retrospect, how you feel about that?

Angelo R. Mozilo

First of all, I feel very good about it. They are terrificpeople to have as partners in the company. And I think it’s easy to look back-- and this is not a criticism at all, because I think what you are saying hassome relevancy, but at the time, nobody knew where this market was going. Itwas -- the secondary market had dried up entirely. We had been downgraded.There were a lot of negative aspects to what we were trying to do here and wefelt, as important as anything else, that being attached to a name like Banc ofAmerica, that that was a major endorsement that we needed in order to calm themarkets, whether it be the equity or the debt, secondary, primary, bank. Weneeded that marquee name, so I don’t -- in looking back it was the absoluteright move to make. It’s been very helpful, by the way, since that time.They’ve been very, very supportive partners in Countrywide, very constructiveand I think it was a -- not only a constructive step but I think it was one ofthe most important steps that Countrywide has made in its 40-year history.

Shomu Sadokahn -Lotus Partners

Are there any reset provisions on the pricing of theconversion? Because the stock did fall below for a period, or will the convertprice stay at $18?

Angelo R. Mozilo

Is it $18? It’s $18.

Shomu Sadokahn -Lotus Partners

It stays at $18, okay. Listen, I just want to say that youguys have taken a lot of heat in the media and I think that the results todayshow the quality of the management team and they speak for themselves.

Angelo R. Mozilo

Okay, thanks. Write some nice letters to the papers, willyou?


Thank you, Mr. Sadokahn. Next, representing Columbia,we go to the line of Nick [Vasselakos]. Please go ahead.

Nick Vasselakos - Columbia

Thank you. I just wanted to see, do you guys happen to havethe book equity number for Countrywide Home Loan?

Eric P. Sieracki

We’ll have that for you momentarily. Do you want the totaldollars of common equity for CHL? It’s about $3.4 billion at September 30 ’07, and --

Nick Vasselakos - Columbia

Great. Thank you.

Eric P. Sieracki

I would advise you though, there are many equivalents in CHLas well, so it’s rating agency equity and other calculations of availableequity are far north of that number.

Nick Vasselakos - Columbia

I guess I was looking for the number to gain some comfortwith regard to the net worth covenant test in your bank lines, and it seemslike you have ample room there.


Thank you very much, Mr. Vasselakos. Our final questiontoday, ladies and gentlemen, we go to the line of Tom Atteberry with FirstPacific Advisors. Please go ahead, sir.

ThomasAtteberry - First Pacific Advisors

Thank you. Gentlemen, I do appreciate you giving more detailon a conference call than normally arises from you and from most others, but Ido want to follow-up with one question that was made earlier, and then I have adifferent question to ask. I would like to know from each of management whattheir intention is or how much money they are going to go purchase in the amountof stock in this company, given the glowing reports you think you are going tohave going forward?

Angelo R. Mozilo

That’s an individual, personal decision that each of themanagement will make and I don’t think it’s appropriate for me, as Chairman andCEO, to commit anybody to that. I’ve always considered the employees’participation in stock or the handling of stock options to be very personal tothem, and so it’s a question that we just won’t answer. I don’t think we’recapable of answering, frankly.

Thomas Atteberry -First Pacific Advisors

Well, I’ll ask another question, but I will have onefollow-up -- you have asked us as investors to put more money forward and I,merely as an investor, are asking you to put money forward also, because fromwhat you’ve presented, it appears to be the beginnings of a turnaroundsituation.

Angelo R. Mozilo

I think that you -- are you a money manager? Is that whatyou are? Or an analyst? What are you?

Thomas Atteberry -First Pacific Advisors

I’m a money manager and I also have personal money.

Angelo R. Mozilo

Okay, and I think that that’s -- that’s a decision that,after reviewing our presentation, whether it be us or any other company thatyou might invest in, you have to make a determination whether or not you thinkthat Countrywide is a worthy investment for you and will fulfill yourinvestment objectives, both on a personal level and as a money manager.

We just present the story -- your decision to buy or sell isyours.

Thomas Atteberry -First Pacific Advisors

My other question deals with rep and warrant. You put a muchlarger reserve for rep and warrant this quarter. And what struck me a littlebit was, when I was reading the press release on the earnings, was one of itseems that you’re expecting a much higher call on that rep and warrant, and Iwould have thought that kind of call would have happened earlier when the --sort of some of the less quality activities were going on, and I was justcaught a little bit by surprise at why you jumped it so much. Are you expectingto see a lot of claims from a lot of people trying to put loans back to youbecause they were misrepresented or you’ve warranted them to be one way andthey actually turned out to be another way?

Eric P. Sieracki

Our projection of the necessary reserve for rep and warrantyliability is a product of our projection of future delinquencies times a claimrate. And that’s -- the two correlate. We tend to see claims only when loans godown, and so the increase in the reserve and the rep and warranty area wasattributable to the same dynamic that impacted all the other reserves, which isan increase in future defaults, primarily.


Thank you very much, sir. With that, Mr. Mozilo, I’ll turnthe call back to you for any closing remarks.

Angelo R. Mozilo

Thank you very much, Brent, and thank you for all whoparticipated in the call. If you put this all together over the last two hours,you’ll see that this company, this management team is committed to continue tostrengthen our liquidity, strengthen our capital position, our balance sheet,and increase our earnings going forward. That objective Countrywide has neverchanged. It’s more true today than ever, since we’ve now faced an event thatwe’ve never seen before, or nobody’s ever seen before.

And as a result of the continuing consolidation in thebusiness, we do see substantial opportunities for us to move forward and pickup market share and we are going to take advantage of that.

And again, this company has the advantage of a very seasonedteam who is very focused on one primary objective, and that’s to put peopleinto homes and to keep them there.

Again, I want to take this opportunity to thank everybodywho participated and I look forward to our next quarterly teleconference. Thankyou very much.


And you’re welcome. Thank you, Mr. Mozilo and to ourmanagement team. We do appreciate that and ladies and gentlemen, Mr. Mozilo ismaking management’s discussion available for replay through 11:59 p.m. Pacific Time on November 9, 2007. The replay dial-innumbers and access code are domestically, toll free 800-475-6701, and at thevoice prompt, enter today’s conference ID 885787. Internationally, please dial320-365-3844, again with the conference ID of 885787. And that does concludeour call for this third quarter. Thank you very much for your participation, aswell as for using AT&T’s executive teleconference service. You may nowdisconnect.

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