CFC Sees Servicing Gain.(mortgage banks)

Calabasas, CA -- Mortgage servicing played a big part in Countrywide's year-end 2005 results, helping to offset the impact of lower loan production margins.

In the fourth quarter, Countrywide reported pretax earnings of $306 million from mortgage servicing, a wide swing from the $278 million loss reported a year earlier. Servicing accounted for a big chunk of Countrywide's pretax mortgage banking earnings of $434 million in the quarter.

Countrywide grew its servicing portfolio by 33% from a year earlier, and now services north of $1.1 trillion in home loans. Additionally, lower prepayments and higher-spread income from escrow balances contributed to the turnaround in servicing results, according to Mike McMahon, an analyst who follows Countrywide for Sandler O'Neill & Partners.

"We expect continuing earnings improvement from CFC's servicing segment," Mr. McMahon said in a research report.

In its outlook, Countrywide said it expects its average servicing portfolio to reach $1.2 trillion to $1.3 trillion this year, with profit margins on the portfolio averaging one to 10 basis points depending upon interest rate conditions.

However, accounting changes are expected to affect servicing results. The Financial Accounting Standards Board is expected to implement FAS 156 this year, which will lead to fair value accounting for servicing portfolios and may lead to a retroactive write up of Countrywide's portfolio.

During the company's quarterly conference call, chairman and CEO Angelo Mozilo noted that Countrywide valued its MSR asset at a capitalization rate of 129 basis points at the end of last year. The weighted average coupon rate on Countrywide's $1.1 trillion portfolio was 6.1% at the end of 2005. The portfolio consists of 60% fixed-rate loans and 40% adjustable-rate products.