With profits from mortgage banking down 40 percent for the quarter, Countrywide Financial Corp. said it is moving forward with plans to lay off more than 2,500 workers and keep revenue flowing by emphasizing products like refinance, reverse mortgage, commercial and construction loans.

In part because those measures are already underway, Countrywide was able to post third-quarter profits of $648 million, a 2 percent increase from the same quarter last year. Earnings per share remained flat at $1.03, but the $2.05 billion profit for the year to date represents a 9 percent increase from this time last year.

In announcing third-quarter results, Countrywide revealed details of a plan to buy back $2.5 billion of its own stock. The company said it would spend $1 billion to $2 billion on the effort in the last quarter of 2006, and could issue up to $1.8 billion in debt securities to finance the buyback.

Countrywide CEO Angelo Mozilo said the mortgage banking industry is going through a period of consolidation, with many small- and medium-sized companies being acquired or going out of business. He said the housing market has already experienced a “hard landing” and that 2008 will be a “breakout year” for companies that remain.

“I estimate that we’re going to be through with this probably in next few months and then start treading water over the 2007 period, as the industry consolidates, and in 2008 we’re going to have one hell of a year for the people who remain in the industry,” Mozilo said. “It will be a smaller industry by that time, less capacity, we’ll have reasonable margins return, so I’m looking for 2008 to be a breakout year.”

Chief Financial Officer David Sambol said Countrywide is undertaking a $500 million cost-cutting initiative that will result in more than 2,500 layoffs, a large portion of which will occur in the fourth quarter. Many of the jobs to be eliminated are in loan production, and Countrywide is also moving jobs out of California, where it pays higher state income tax rates for workers.

In reporting third-quarter results Tuesday, Countrywide said year-over-year profits from mortgage banking were down 40 percent for the quarter, to $424 million, and 20 percent for the year to date, to $1.61 billion.

Although earnings from mortgage lending were down, Countrywide saw increased profits in its banking, capital markets and insurance operations. At $371 million, third-quarter earnings in banking were up 33 percent compared to the same quarter last year. Third-quarter earnings from capital markets were up 53 percent to $141 million, and the $91 million in profits from insurance represents a turnaround from $32 million in losses in the same quarter last year. 

Countrywide said it has “invested in new business lines to supplement its current residential mortgage operations, as evidenced by the recent introduction of its Reverse Mortgage, Commercial Real Estate Lending and Builder Finance Lending units.”

Decreased earnings in loan production, loan servicing and loan closing services drove the declining profitability of Countrywide’s mortgage banking division, the company said. Third-quarter earnings from loan production were down 32 percent to $281 million, while profits from loan servicing were down 52 percent to $123 million. Loan closing services generated $20 million for the quarter, down 36 percent from the same period last year.

One reason for the big drop in mortgage banking profits for the quarter was that the value of mortgage servicing rights fell by $173 million, as borrowers refinanced loans to take advantage of lower interest rates. Countrywide expects those losses to be mitigated by hedging. Profits from loan servicing for the year-to-date remain 79 percent ahead of last year, at $651 million.

Delinquencies were up 47 basis points to 4.5 percent from the same time last year, and foreclosures in the servicing portfolio stood at 52 basis points, up from 42 basis points at the end of September 2005. The year-over-year increase in delinquencies and foreclosures was the result of portfolio seasoning, product mix and changing economic and housing market conditions, the company said.

Delinquencies are expected to rise as more loans reset to higher interest rates, but Sambol told investment analysts that it’s “very tough” to predict by how much. Prepayment speeds, unemployment, home prices and interest rates can all have an effect.

But the company maintains that asset valuations and reserves for credit losses are “appropriate for the increase in delinquencies.”

Profits from loan closing services are generated by Countrywide’s LandSafe companies, which provide credit reports, appraisals and flood determinations. The $11 million drop in quarterly earnings from last year’s $31 million was due to reduced consumer and wholesale loan fundings, and an increase in expenses as Countrywide hired 100 additional staff appraisers and reviews to enhance quality control.

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