Countrywide says subprime turmoil may harm results

NEW YORK (Reuters) - Countrywide Financial Corp.CFC.N, the largest U.S. mortgage lender, said on Monday that foreclosures rose to a five-year high and turmoil in the subprime market may hurt earnings, and its shares fell.

Late Monday, Countrywide also said it cut 108 subprime jobs in its wholesale lending unit. It follows New Century Financial Corp. NEW.N, Fremont General Corp. FMT.N and General Electric Co.'s (GE.N) WMC Mortgage unit among large subprime lenders to announce staffing cuts this month.

Rising foreclosures and job cuts are the latest signs of stress in the mortgage lending sector, which is struggling with mounting losses and rising defaults.

Subprime lenders, which make loans to people with poor credit histories, have been particularly hard hit. More than two dozen have quit the industry in the last year.

Countrywide said the foreclosure rate rose to 0.70 percent from January's 0.69 percent and last February's 0.47 percent.

It also said 4.71 percent of loans were at least 30 days past due, the same as in January and up from 4.29 percent last February. The rate matched the second-highest level over the last five years.

Calabasas, California-based Countrywide, the fourth-largest subprime lender, said "nonprime" loans in February fell 10 percent from a year earlier to $2.59 billion. Overall mortgage lending rose 10 percent to $34.57 billion.

"We are more concerned that the weakness has spread to other sectors of the residential mortgage market," wrote Wachovia Capital Markets LLC analyst Jim Shanahan. He lowered Countrywide to "underperform" from "market perform."

Countrywide Chief Operating Officer David Sambol said the company has undertaken a "further tightening of underwriting guidelines."

Sambol said Countrywide should benefit as weaker competitors exit the market, but it "may experience short-term earnings volatility" during the shakeout. The company said it added 326 employees last month, bringing the total to 55,311.

Countrywide sells many of the loans it makes, and said its residual exposure for nonprime loans was $402 million on December 31, or 0.2 percent of assets.

Shares of Countrywide fell 96 cents, or 2.7 percent, to close at $35.14 on the New York Stock Exchange.

EARNINGS IMPACT

Credit Suisse analyst Moshe Orenbuch said first-quarter earnings would fall by 60 cents per share if Countrywide wrote off its subprime residuals and sold no subprime loans in the quarter.

Analysts on average expect quarterly profit at Countrywide of 97 cents per share, according to Reuters Estimates. The company services $1.33 trillion of mortgage loans.

Countrywide on Friday told brokers to stop offering no-down-payment mortgages, according to a document obtained by Reuters. Other lenders have made similar changes.

Irvine, California-based New Century, the largest independent subprime lender, last week stopped making new loans. On Monday, it said it doesn't have enough cash to repay its lenders, raising bankruptcy speculation.

According to UBS analysts, lax underwriting standards made 2006 perhaps the worst year ever for mortgage credit quality.

Countrywide shares have fallen by more than one-fifth from their February 2 record high of $45.19.

(Additional reporting by Sonya Balasubramanyam in Bangalore and Christian Plumb in New York)