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Have healthier U.S. mortgage lenders hit bottom?

NEW YORK (Reuters) - The U.S. housing slowdown has battered mortgage lenders and put many out of business, yet some of the survivors say the worst may be over.

"You have less competition, (and) rational competition," said Angelo Mozilo, chief executive of Countrywide Financial Corp. CFC.N, the largest mortgage lender, on a Thursday conference call.

“Your margins are going to improve.... That appears at least to me at the moment to be a trend, and one that we can see for the next several years,” he said.

Countrywide, a Calabasas, California company with 18 percent of the U.S. mortgage market, and IndyMac Bancorp Inc. NDE.N, a Pasadena, California lender with 3.9 percent, said on Thursday quarterly profits fell a respective 37 percent and 34 percent. Countrywide also cut its 2007 profit forecast.

Yet industry observers say investor demand on the secondary market to buy loans is rising, following a long decline that had accelerated in March. That suggests that at least for responsible lenders, the operating environment might be at or past a bottom.

“If, and this is a big if, there is not a meltdown in the housing market, that seems to be correct,” said Stuart Plesser, a Standard & Poor’s analyst. “It all turns on where housing prices go.

“If there is a significant drop, then default rates could pick up. If not, then lenders that survived the subprime meltdown should realize higher gains on sale.”

MORE RATIONALITY

In a week the Dow Jones industrial average .DJI topped 13,000 for the first time and the Standard & Poor's 500 .SPX came within 4 percent of a record high, many mortgage lenders' shares remained well in the red for 2007. Through Thursday, Countrywide shares were off 8 percent, and IndyMac 29 percent.

Lenders’ travails are no secret.

Many lent irresponsibly, making loans to people who couldn’t afford them. Borrowers began missing more payments. Thousands couldn’t refinance adjustable-rate loans as rates moved higher, and housing prices began to rise more slowly, or fall.

Most of the problems affected "subprime" mortgages, the riskiest home loans. Subprime defaults have hit a four-year high. New Century Financial Corp. NEWC.PK and several subprime rivals went bankrupt. Foreclosures reached record levels.

But delinquencies are also up among lower-risk borrowers. This hurt IndyMac, Capital One Financial Corp. COF.N and others exposed to many loans between prime and subprime in quality.

Recognizing market pressures, Countrywide, IndyMac, Citigroup Inc. C.N, Wells Fargo & Co. WFC.N and Washington Mutual Inc. WM.N have tightened lending standards, especially in subprime.

"Remaining (subprime lenders) tend to be the larger financial institutions, large banks like Countrywide and JPMorgan Chase JPM.N and Washington Mutual and Wells and the Wall Street firms," Countrywide Chief Operating Officer David Sambol said. "Players who we view to be more rational and responsible."

BLAH BLAH BLAH

Not everyone is so sanguine about the mortgage industry.

“While we are hopeful that the worst of this turn in the mortgage cycle is behind us, we are concerned that credit losses will continue to build,” Lehman Brothers Inc. analyst Bruce Harting wrote.

And Keefe, Bruyette & Woods Inc. analyst Frederick Cannon downgraded Countrywide on Friday to “underperform.” He said the lender did the “right thing” in tightening its underwriting standards, yet said industrywide tightening “will have a ripple effect on borrowers, creating more problem loans.”

IndyMac Chief Executive Michael Perry is less worried.

“There are a lot of doomsayers out there predicting housing is going down 20 percent, millions of foreclosures, blah, blah, blah, blah, blah,” he said on Thursday.

“If you take the doomsayer scenario out, (it is) likely that the first or second quarter will mark the trough in our earnings, because these credit losses will go away, and spreads won’t keep widening,” he added.

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