As the U.S. mortgage market continues its ugly decline, Countrywide Financial Corp. is looking to find profits in other lines of business - particularly those within capital markets. In a move that would further align it with the vertical integration strategy currently underway among Wall Street investment banks, the Calabasas, Calif.-based mega-lender may be looking to acquire an asset management business. This move is coupled with continuing to extend its U.S. Treasurys primary dealership to include derivatives and futures.

"We are looking at specific opportunities (in the capital markets area), and hopefully some of these deals will reach fruition in the next couple months," said Angelo Mozilo, Countrywide's chairman and chief executive, during the company's third quarter earnings conference call last week.

Countrywide executives have said they plan to leverage their access to mortgage product and related infrastructure by expanding further into fee-based asset management such as CDOs and private equity funds, among other sectors.

"As we get into the asset management business, it is not our desire to compete with core fixed income asset managers, but rather to look at where we can bring value in our knowledge of the product, our access to the product and the ability to add these new products like the private equity fund and CDOs," said Ron Kripalani, president and chief executive of Countrywide Securities Corp., at an equity investor forum presentation held in New York on Sept. 12.

Mortgage banking biz sours

The world's largest mortgage lender last week announced earnings rose 2%, which is less than average market expectation. Mortgage banking profits plunged 40% in the third quarter to $424 million from $703 million, and fell 20% over the last nine months. Overall revenues rose 4%, while net income in the third quarter rose to $646.7 million from $633.9 million a year ago. Countrywide revised earnings estimates for the year down to $4.10 to $4.50 per share from earlier guidance of $4.00 to $4.80 per share. The mortgage bank plans to cut some 2,500 jobs, part of a cost-reduction strategy that is expected to save the company an annualized cost savings run rate of more than $500 million. It also plans to buy back up to $2 billion in shares - a move that was mostly favored by analysts.

"We've already had the hard landing," Mozilo said, "When you are down 25% to 30%, to me, that is a hard landing." Mozilo expects 2008 to be the "break-out" year for the housing market, after a period of "treading water" in 2007 while the mortgage industry consolidates.

Aside from consolidation, as Credit Suisse noted last week, originators that diversify their income sources are likely to be the best suited to survive the housing market downturn. Third quarter earnings from mortgage lenders are not expected to be so rosy, according to market sources, who say a combination of accelerated defaults among recent vintages and an overall decline in origination activity are beginning to take their toll on the bottom line.

Accredited Home Lenders, which releases earnings on Nov. 6, earlier this month announced that 2006 earnings per share are unlikely to reach the lower end of already downwardly revised guidance of $4.50 to $5.00. The San Diego-based subprime lender had lowered guidance in the first quarter from an earlier range of $7.70 to $8.00. The company lost money due to a larger portion of charge-offs resulting from non-performing loans in the second quarter. This month Washington Mutual also announced a $33 million net loss in its home loans division, down from net income of $31 million in the first quarter.

Management plans

Along with a focus on Alt-A lending and reverse mortgages, Countrywide mentioned last week that commercial real estate, namely extending origination into smaller balance loans, could be a particularly lucrative area for the company, which opened its commercial real estate business in 2004.

"The commercial real estate business I think is probably one of the biggest opportunities that Countrywide has in the coming years across various divisions, the bank, the broker-dealer, potentially in the insurance company and clearly leveraging our production channels," Kripalani said, speaking at the investors meeting in New York last month.

Countrywide opened a Tokyo office in 2005 and plans to open one in Hong Kong this year, he added. Countrywide Alternative Investments counts among its business a private equity fund arm it jointly manages with C-BASS called Countrywide Sunfish Management LLC, which maintains a CDO partnership. This year Countrywide started a derivatives platform to complement its cash treasury and futures businesses. It plans to ultimately move into mortgage-related credit default swaps and product development swaps, partly through this year's launch of Countrywide Derivatives Products.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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