Original Source: FD (FAIR DISCLOSURE) WIRE
HOWARD MASON, ANALYST, SANFORD BERNSTEIN: Good morning and thank you to everybody for joining us for the presentation by Countrywide Financial. My name is Howard Mason; I'm the analyst at Stanford Bernstein who covers specialty finance and large capitalization banks. And I'm very pleased to welcome this morning Angelo Mozilo, the Chairman and CEO of Countrywide Financial, and Dave Bigelow, the Managing Director of Investor Relations.
Obviously Angelo is coming to talk to us at a very significant time in the mortgage industry. Apart from the number of cyclical challenges we also have some industry structure changes with Wachovia's acquisition of Golden West. And I'm fascinated to hear how Angelo talks about Countrywide's strategy for addressing these challenges and in particular the diversification from the core mortgage business which now represents only about half of the Company's earnings into banking on the one hand, into capital markets and into insurance and some of the new business models that are emerging as firms like Countrywide explore end-to-end processing all the way from origination through to capital markets.
Angelo has told me that he's going to talk for about 40 minutes and then we'll throw the session open to Q&A. If you have a question please write it down on the cards in front of you; those will be brought up to the podium and I will read them across to Angelo. Thanks very much.
ANGELO MOZILO, CEO, COUNTRYWIDE FINANCIAL CORP.: Thank you, Howard. Good morning, everybody, and welcome to Jonathan [Gray], my very close and good friend who has profited from sticking with Countrywide for a long period of time. I was telling Howard that I made a presentation here in 1972 right in the same spot, same room, and just wondered who the analysts were at that time who sold Countrywide and didn't hang in there. I'm really pleased to be with you in my hometown this morning as well as those of you who are listening on the webcast.
And now I'd like you to turn to the agenda on slide 2. I'll begin with a review of the current macroeconomic environment and its impact on the mortgage industry. Next I'll provide a brief overview of Countrywide, specifically the evolution of our business model which Howard addressed, and who we are today. I will then highlight each of our primary business lines -- Loan Production, loan servicing, Countrywide Bank, capital markets and insurance -- and then review their performance and growth objectives. Finally, I'll provide a brief summary and then open the floor to your questions.
Let's begin with a review of the current economic environment beginning on slide 4. While times for the housing market are not as they were back in the good old days of 2003, a robust economy means that the housing market is still strong by historical standards. Real GDP for the first quarter of 2006 came in at 4.8%. Even if you combine the fourth quarter of 2005 and the first quarter of 2006 you get the average growth of over 3%. At 4.7% the unemployment rate remains relatively low.
And now looking briefly at the housing market, as compared to the first quarter of 2005 existing home sales were down 2% while new home sales fell 7%; however, home sales are still higher than the levels experienced in 2003. Homebuilders are keeping a close eye on inventory levels and hence it is not surprising to see new home starts are down. And you can see they're also discounting their homes to get rid of their inventory. But the average level of starts year-to-date through April is on track to be at least the third or fourth best year in American history.
Slowing sales and longer inventory periods have contributed to a slowing of home price appreciation. However, according to the National Association of Realtors, 40% of 149 tracked MSAs experienced double-digit price appreciation in the first quarter of 2006 as compared to the first quarter of 2005. 49% had single digit or flat appreciation and only 11% or 16 metro areas had price declines. However, we expect to still see nationwide home price appreciation in the low single digits. I don't necessarily agree with that by the way.
In looking at interest rates, it's not secret that over the past year interest rates have risen, in addition the yield curve remains relatively flat. As a result we are starting to see signs of consolidation in the market.
Let's take a look at some of the recent events on slide 5. As the chart on the left shows, the mortgage origination market has been consolidating over the past 10 plus years. Today the top ten originators account for 64% of the market, up from 26% in 1995. And this was obvious as I had talked about in 1995. And just as we have been saying for some time now, consolidation will take place as interest rates increase and the mortgage origination market normalizes.
Recently there have been several headlines in this regard -- Wachovia announced that they intend to buy Golden West; Capital One is in the process of buying North Fork Bank; Deutsche Bank announced the purchase of Chapel Funding; and Cerberus led a consortium which bought 51% of GMAC; Goldman Sachs entered the arena buying a minority stake in a
small startup wholesaler called Loan Home; Accredited Home Lenders just announced its intention to buy Ames, both are lenders specializing in the nonprime market. This is just the beginning of the major consolidation that will be taking place over the next several years.
Similarly Merrill Lynch, Morgan Stanley, JPMorgan Chase and Lehman have all made comments publicly that they're looking to acquire assets in the mortgage origination and/or servicing sector. But headlines have not just been focused on M&A. In fact, more headlines have been generated by those who are suffering from the effects of a more competitive market. These include Washington Mutual's announcement regarding its exit from the corresponding lending channel as well as recent announcements to layoff 1400 people.
AmeriQuest which surprised many when it announced it would be laying off 3800 employees and closing all of its 229 retail branches, although they are still doing some direct and Internet type originations. Other smaller players have also been affected such as Net Bank and Mortgage IT who have either strategically chosen to exit certain productlines or are contemplating putting business lines up for sale. And many REITs have missed earnings estimates and reduced their dividends.
Additionally many REITs have discussed derating as a way to further supplement their capital base. The REITs, in particular the sub-prime REITs are going to have serious problems over the net year because of what's happened in the marketplace.
So what does this mean to Countrywide? 2006 for the mortgage industry will continue to be a transition year. But this will be good for Countrywide. As market conditions will shake out weaker players offering Countrywide opportunities to expand its sales force and continue to grow its market share. That's the bottom line. This period of consolidation provides Countrywide an opportunity to advance its market share as consolidation continues and in fact will accelerate.
Let me now provide an overview of Countrywide itself. The graphs on slide 7 highlight Countrywide's evolution from an earnings perspective. From our founding in 1969 until the mid-1990s almost everything we did could be described as originating, securitizing, selling and servicing home loans. In 1995 96% of pretax earnings were generated by our Mortgage Banking segment. In the second half of the 1990s, however, we embarked upon a new path. In addition to our goal of becoming a dominant presence in Mortgage Banking we began to selectively enter strategically related businesses where we could leverage our Mortgage Banking competencies to create competitive advantages.
By 2000 earnings from businesses other than Mortgage Banking, primarily capital markets and insurance represented 20% of the consolidated total. By the end of 2005 with our bank strategy well underway that percentage rose to 41% of consolidated pretax earnings. And for the first quarter of 2006 earnings were evenly divided between those with Mortgage Banking and those from our other businesses.
At the same time this diversification was taking place the Company achieved tremendous growth as pretax earnings increased more than 12 times from $326 million in 1995 to $4.1 billion in 2005. It …