Updated from 11:19 a.m. EDT

Despite a decline in long-term interest rates,

Countrywide Financial


reported a sharp drop in refinancing volume in the third quarter, and warned that earnings would miss expectations for the full year.

Investors reacted to the news by sending shares of the California-based mortgage bank down $4.49, or 12%, to $33.01. Other stocks in the group were also punished, with

Fremont General Corp.


down 4% and

American Home Mortgage Investment Corp.


down 5%.

In the third quarter, Countrywide said it earned just $582 million, or 94 cents a share, down from $1.1 billion, or $1.93 cents a share, a year ago. Analysts had expected earnings to fall to $1.01 a share.

For the full year, the company said profits should range from $3.75 a share to $4 a share, below the target of $4.15.

Although the

Federal Reserve

raised interest rates by 50 basis points last quarter, the yield on the 10-year Treasury note fell 46 basis points to 4.12%, according to Baseline.

Declining long-term rates hurt Countrywide's mortgage servicing business because homeowners typically refinance their mortgages or pay them off early, decreasing the life of the portfolio. But Countrywide expected any weakness in that segment to be offset by increased refinancing activity. Instead, refinancing volume fell 55% in the quarter and total loan production slid 27% to $92 billion.

Chief Executive Angelo Mozilo said the decline in long-term rates forced the company to record a $796 million impairment of the mortgage servicing rights asset. But rates "are not down to the level where they would stimulate refinancings," he said on a conference call.

In the third quarter of last year, the yield on the 10-year note rose by 42 basis points but ended the period at just 3.94%.

Countrywide's results were also hurt by an 18% increase in compensation expenses and a $23 million charge related to hurricane losses.

"Soaring compensation and benefits line and insurance losses related to the Florida hurricanes" more than offset higher than expected revenue and a lower tax rate, according to Michael Vinciquerra, an analyst at Raymond James.

Revenue rose to $2.25 billion in the quarter, compared with the consensus estimate of $2.23 billion. A year ago, revenue totaled $2.9 billion.

J.P. Morgan analyst George Sacco downgraded Countrywide to neutral from overweight Wednesday, saying while the origination business should continue to gain market share, "the servicing business and gain on sale margins are likely to fall below street expectations in the fourth quarter and in 2005."

He also noted that Countrywide's bank balance sheet -- the key driver for long-term earnings growth, in his opinion -- is not large enough to offset the decline in mortgage originations that he foresees.

In a press release, Countrywide called the quarter its "fourth-best'' ever. The firm, which repeatedly raised expectations throughout the mortgage refinancing bubble, now paints that period as something of an aberration.

"Third-quarter earnings are difficult to compare given the record refinance volume and the convergence of other favorable events experienced during last year's third quarter, which generated by far the best financial results in the company's history,'' said Mozilo.