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Countrywide Misses Forecast

A weak secondary market for mortgage bonds is to blame.
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Countrywide Financial's


fourth-quarter earnings rose 73% from last year but missed estimates, as the company grappled with a tough secondary market for mortgages.

Countrywide, which lends money for houses, collects interest payments for other lenders, and buys and sells mortgages and mortgage bonds, earned $638.9 million, or $1.03 a share, in the quarter, compared with $369.9 million, or 61 cents a share, a year ago. Analysts were forecasting earnings of $1.05 a share in the latest quarter.

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Fourth-quarter revenue rose 29% from a year ago to $2.59 billion, missing estimates for $2.71 billion, as compiled by Thomson First Call. The revenue increase reflected a 51% rise in net interest income, a 32% rise in loan servicing fees, a 17% decline in the gain on sale of securities and loans, and a 15% narrowing of a hedging loss related to the servicing portfolio. Insurance premiums rose 45% from a year ago.

Countrywide's mortgage banking unit had pretax earnings of $434 million in the quarter, up 67% from a year ago. The improvement reflects the company's loan servicing division, which had pretax earnings of $306 million, compared with a loss of $278 million a year ago. Growth in the portfolio drove the turnaround.

The other arm of mortgage banking, loan production, had $102 million in pretax earnings in the quarter, down from $517 million a year ago. The decrease reflected a reduction in the profitability of mortgages and mortgage bonds sold in the secondary market.

"The primary cause of the decline was a lower gain on sales driven by front-end competitive pricing pressure and weaker secondary market conditions, as well as a 10-basis-point decrease in warehouse spread driven by a flattening yield curve. Normally, declining warehouse spreads caused by a flatter yield curve would likely be mitigated by an accompanying increase in gains on sale, but in the fourth quarter this was hindered by pricing pressure and weak secondary market conditions," Countrywide said.

The company said it expects to earn $3.80 to $4.80 a share in 2006. The Thomson First Call consensus estimate is $4.41 a share.