Countrywide posts loss, stock soars on outlook

NEW YORK (Reuters) - Countrywide Financial Corp CFC.N posted a $1.2 billion third-quarter loss on Friday, but its shares soared after the largest U.S. mortgage lender said it expects to be profitable in the fourth quarter and in 2008, and has weathered the worst of the housing downturn.

The shares rose 32.4 percent, the largest gain in at least two decades according to Reuters data, and helped push broader stock market indexes higher. Investors gained confidence that Countrywide will be able to rebound from its first quarterly loss in 25 years, which it called an "earnings trough."

Countrywide suffered through a mortgage and capital markets crisis that peaked in August and which some critics say it helped create. But it said investors are now comfortable buying more loans it makes, reducing fear it will be stuck holding too many delinquent and defaulted mortgages on its books.

"In no way did I expect what happened in August, where it was a complete collapse, a seizing up," Chief Executive Angelo Mozilo said on a conference call. "There has been, in my opinion, a significant structural change in the market, a permanent structural change."

Mozilo said that, after adding liquidity, reducing market risk and eliminating an expected 10,000 to 12,000 jobs, "I think we have a much better chance of success than any other player in the mortgage space today."

The quarterly net loss totaled $2.85 per share, or $1.20 more than Reuters Estimates said analysts on average expected and reflected $2.9 billion of write-downs and credit losses. A year earlier, profit was $647.6 million, or $1.03 per share.

Countrywide wrote down $1 billion related to capital market disruptions. It set aside $934.3 million for credit losses, up from $38 million a year earlier, as more borrowers fell behind on payments, particularly on adjustable-rate and prime home equity loans. Other credit costs totaled $981 million.

"They took their medicine decisively," said analyst Howard Shapiro of Fox-Pitt Kelton Cochran Caronia Waller LLC.

Results included a $57 million charge for a restructuring, including some of the job cuts. Reported revenue was negative $50 million, because of the write-downs and loan losses.

'PERFECT STORM'

The lender forecast fourth-quarter profit of 25 cents to 75 cents per share and a profitable 2008 with a 10 percent to 15 percent return on equity. It also said it negotiated $18 billion of "highly reliable" new liquidity.

"There was so much negative sentiment that a whiff of anything positive would help the stock," Standard & Poor's equity analyst Stuart Plesser said. "A big concern remains how much it may need to set aside for credit losses in the future. That will depend largely on housing prices."

S&P credit analysts downgraded Countrywide on Friday.

Calabasas, California-based Countrywide joined other major financial companies to report big write-downs for subprime and other mortgages, including Citigroup Inc (C.N), Merrill Lynch & Co Inc MER.N and Washington Mutual Inc (WM.N).

Countrywide said borrowers were delinquent on 29.08 percent of subprime loans it serviced as of September 30, up from 23.71 percent in June. The rate of late payments rose to 5.76 percent from 4.56 percent on prime home equity loans, and to 4.41 percent from 3.35 percent on conventional first mortgages.

"We've seen the perfect storm," Chief Operating Officer David Sambol said on the conference call.

Pretax losses totaled $1.31 billion in mortgage banking, $407 million in banking and $344 million in capital markets. Insurance operations generated a $150 million profit.

While the outlook soothed investors, Mozilo remains a lightning rod and some critics want him to step down.

"Mozilo's credibility is sinking fast," said Richard Ferlauto, director of corporate governance at the American Federation of State, County and Municipal Employees.

He called on investors to help change the "short-sighted leadership."

Countrywide shares rose $4.23 to $17.30 on the New York Stock Exchange, although they remain down 59 percent this year. They are also down 21 percent since Countrywide received a $2 billion injection from Bank of America Corp (BAC.N) on August 22. Mozilo said "they've been very supportive partners." Scott Silvestri, a bank spokesman, declined to comment.

SEC PROBE

To cope with the housing downturn, Countrywide has focused on smaller, safer, but less profitable loans that Fannie Mae (FNM.N) and Freddie Mac (FRE.N) will buy. It also shifted most lending to its bank unit, so it can tap more funding sources.

"Earnings were ugly, but they are taking the appropriate steps to ensure the business stays around long-term," said Erin Swanson, an equity analyst at Morningstar Inc in Chicago.

Critics fault Countrywide for being partly responsible for the housing slump by extending credit too readily earlier in the decade, in the pursuit of profit and market share.

Members of Congress are proposing legislation to weed out excesses in the $2.3 trillion U.S. mortgage industry and give new rights to borrowers stuck with unaffordable loans.

Countrywide, for its part, this week offered to help struggling borrowers refinance or modify $16 billion of adjustable-rate mortgages.

Mozilo also said the company was cooperating with an informal U.S. Securities and Exchange Commission inquiry into his sales of Countrywide stock under a year-old trading plan, resulting in well over $100 million of gains.

"I would like to state categorically that at no time did I make any trading decisions based on material, nonpublic information, and I fully complied with all company policies and applicable securities laws," Mozilo said.

(Additional reporting by Karen Brettell, Jennifer Coogan, Joseph A. Giannone and Dan Wilchins)