Countrywide Financial Corp. posted record earnings in 2006, even as profits in mortgage banking fell 15 percent from 2005.

Countrywide’s net earnings of $2.67 billion, or $4.30 per share, represents a 6 percent increase from the $2.53 billion posted in 2005. Earnings for fourth-quarter 2006 were $622 million, down 3 percent from the same quarter a year ago,

Countrywide’s mortgage loan servicing portfolio grew 17 percent in 2006 to $1.3 trillion, despite high prepayments among borrowers with adjustable-rate mortgages and slowing production volume, the company said today in a Securities and Exchange Commission filing.

Net earnings from mortgage banking were $453 million for the quarter, up 4 percent from fourth-quarter 2005. At $2.06 billion, earnings for the year were down 15 percent from $2.43 billion in 2005.

The year-over-year decline in profits from mortgage banking was attributed to declines in earnings from loan production (down 21 percent for the year), servicing (down 1 percent for the year) and closing services (down 13 percent for the year).

Higher interest expenses reduced profit margins on loans, the value of mortgage servicing rights dropped by $215 million, and an upswing in delinquencies and a need to set aside more money for loan losses were factors in the decline.

“Looking ahead to 2007, the industry will likely see continued pressure on margins as mortgage origination volumes decline and industry capacity is rationalized,” said Chairman and Chief Executive Officer Angelo R. Mozilo. “We are also preparing for increased borrower delinquencies and continued credit deterioration. We believe, however, that 2007 will likely be the trough year of the current housing cycle and that 2008 should represent the beginning of upward trends associated with the next cycle.”

Delinquencies in the servicing portfolio were 5.02 percent on Dec. 31, compared with 4.61 percent at the end of 2005. Foreclosures in the servicing portfolio were up 47 percent during the same period, rising from 44 to 65 basis points.

The year-over-year increase in foreclosures and delinquencies “is primarily the result of portfolio seasoning, product mix and changing economic and housing market conditions,” the company said, and Countrywide “believes its asset valuations and reserves for credit losses are appropriate for the increase in delinquencies.”

At $546 million, nonperforming assets represented .66 percent of total assets at the end of the year, compared with $158 million, or .22 percent of total assets at the end of 2005. Year-end allowances for loan losses more than doubled to $228.6 million, up from $102.7 million at the end of 2005.

Countrywide held $32.7 billion in pay-option adjustable-rate mortgages in its loan portfolio at the end of the year, compared with $26.1 billion at the end of 2005. The principal on pay-option ARM loans with negative amortization stood at $28.9 billion, up from $13.9 billion at the end of 2005.

For the year, Countrywide saw double-digit growth in earnings from its banking, capital markets and insurance segments, with the banking division establishing a new earnings record of $1.38 billion, up 28 percent from 2005.

Countrywide projects that the total U.S. mortgage market in 2007 will be $2.2 to $3 trillion, and that the company will originate between $375 billion and $525 billion in loans — capturing 12 percent to 24 percent of the market.

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