Countrywide Financial Corp. said second-quarter earnings fell 33 percent from last year to $485 million, in part because rising delinquencies forced the company to write down by $388 million the value of securities backed by prime home-equity loans.

“During the quarter, softening home prices continued to affect many areas of the country, and delinquencies and defaults continued to rise across all mortgage product categories as a result,” Chief Executive Officer Angelo R. Mozilo said in a Securities and Exchange Commission filing.

Countrywide projects that unless mortgage interest rates fall, the company’s production volumes will decline and price competition will increase. Increased competition, combined with reduced demand for mortgage-backed securities in the secondary market, are expected to hurt profit margins, the company said. Additional deterioration in the housing market could impact credit costs.

Countrywide cut its earnings forecast for the year to between $2.70 and $3.30 per share, down from $3.50 to $4.30 projected in April.

Mozilo said Countrywide remains committed to its strategy of increasing its market share during the downturn as competitors are forced to scale back loan production or close their doors. Countrywide recently reported that its loan originations sales force numbered 33,796 in June — up 1,281 workers from a year ago.

Although Countrywide expects difficult housing and mortgage market conditions to persist in the second half of 2007, Mozilo said, “Management remains optimistic about the long-term future growth prospects and profitability of the company as industry consolidation continues.”

For now, the strategy appears to be producing mixed results, with earnings from mortgage loan production and closing services up 33 percent in the second quarter from a year ago, to $467 million. Countrywide posted losses of $147 million in loan servicing, however, compared to profits of $279 million a year ago.

Losses in servicing were driven by a $388 million write-down on securities backed by prime home-equity loans, and $25 million on subprime residuals and other related securities due to increased delinquencies and increased projections of future defaults.

The widening credit spreads on home-equity loans in the secondary market made keeping the loans in Countrywide’s portfolio “economically more attractive,” than securitizing and selling them to Wall Street investors, the company said.

Countrywide retained $3.8 billion of prime home-equity loan production in its portfolio in the second quarter of 2007, compared with about $300 million in the same quarter a year ago.

All told, pre-tax earnings from mortgage banking for the quarter totaled $320 million, up 220 percent from the previous quarter but down 49 percent from the same quarter a year ago

Reduced price competition helped Countrywide increase its gain on sale on subprime loans to 3.54 percent, but subprime fundings of $5.7 billion were the lowest since the third quarter of 2003 and only 4 percent of overall volume.

The 0.95 percent gain-on-sale margin for prime loans was down 28 basis points from the same quarter a year ago. Countrywide blames increased price competition, a higher percentage of production from the lower-margin correspondent channel, and a decrease in originations of more profitable pay-option loans.

The company has also seen significant deterioration in credit quality.

The balance of loans delinquent by 90 days or more in Countrywide’s total servicing portfolio stood at 2.02 percent, compared with 1.18 percent in the same quarter last year.

Delinquencies of 90 days or more stood at 9.45 percent for subprime loans, up from 5.35 percent last year; 2.15 percent on prime home-equity loans, up from .75 percent last year; 4.39 percent on government-backed first-lien loans, down from 4.59 percent last year; and 1.02 percent on conventional first-lien loans, up from .49 percent last year.

Nonperforming residential loans totaled $940.8 million, up 81 percent from the start of the year, while foreclosed real estate on Countrywide’s books was up 587 percent, to $188.5 million.

All told, nonperforming loans and foreclosed real estate represented 1.26 percent of Countrywide’s assets, nearly double the .66 percent ratio at the start of the year.

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