Countrywide Financial Corp. managed to boost profits by 27 percent in the second quarter of 2006 despite rising interest rates and a 3 percent decline in loan volume, the company announced today.

The Calabasas, Calif.-based lender reported earnings of $722 million for the quarter, up 27 percent from 2005. That brought earnings per share to $1.15, up 25 percent from the same quarter last year. Total loan fundings were down 3 percent to $118 billion.

Countrywide shares were trading at $38.76 Tuesday afternoon, down 1.5 percent from $39.35 at the close of trading Monday.

Countrywide reports it has $65 billion in mortgage loan applications in the pipeline, is introducing new products including reverse mortgages, and is originating new loans with production sales force of more than 16,000 people. With its $195 billion balance sheet and high investment grade credit ratings, “we are well positioned to be a beneficiary over the long term in this consolidating market,” said Chairman and CEO Angelo R. Mozilo.

At $325 million, earnings from loan production in Countrywide’s mortgage banking division were down 21 percent compared to the second quarter of 2005. The year-to-date drop was even more dramatic, with earnings from loan production falling 47 percent to $609 million for the first six months of 2006. That compares to $1.14 billion during the same period last year.

But Countrywide is making more money collecting payments and fees for other lenders. Earnings from loan servicing were up 213 percent to $279 million in the second quarter, and the $528 million in loan servicing for the year to date represents a 397 percent increase from 2005. The company said the increases were achieved largely by financial hedging and a $231 million improvement in valuation changes.

Mortgage servicing rights generate more money when interest rates go up, and Countrywide expects that servicing will continue to counterbalance the drop in loan production, which is hurt by rising interest rates.

Countrywide’s loan production sector includes prime and nonprime consumer-direct lending through 960 branches, call centers and the Internet. It also includes wholesale lending through mortgage brokers, and the purchase of closed loans from other mortgage companies and banks. The $1.3 billion gain on the sale of loans in the second quarter represents a 12.6 percent increase from the previous quarter and a 28.9 percent increase from the second quarter 2005. The increase was credited to increased profit margins on prime, nonprime and home equity loans. Gain-on-sale margins as a percentage of loans sold rose 10 basis points to 138 basis points.

Countrywide shares were down 59 cents Tuesday afternoon from $39.35 at the close of trading Monday.

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