Countrywide Financial Corp. today reported $1.2 billion in third-quarter losses — the first time the company has dipped into the red in 25 years — but said it will be profitable in the fourth quarter after tightening underwriting guidelines and shedding workers to reflect lower loan volumes.

Third-quarter losses were driven by adjustments to the value of loans, an abrupt loss in demand for nonagency loans and securities, and increased credit costs related to continued deterioration in the housing market, said David Sambol, president and chief operating officer.

Countrywide blamed disruption in capital markets for a severe lack of liquidity for nonagency loans and mortgage-backed securities, resulting in $1 billion in losses on the sale or write-downs of such loans.

The Calabasas, Calif.-based lender moved about $12 billion in nonagency loans — mortgages not eligible for purchase by Fannie Mae and Freddie Mac — into the company’s held-for-investment portfolio after their write down, and boosted loan loss provisions on the portfolio to $934 million, compared to $293 million last quarter and $38 million in the third quarter of 2006.

Those costs — along with charges resulting from massive layoffs and company restructuring — are for the most part nonrecurring, or represent planning for future losses not yet incurred, Sambol said.

“We view the third quarter of 2007 as an earnings trough, and anticipate that the company will be profitable in the fourth quarter and in 2008,” Sambol said in a statement accompanying the release of third-quarter results. “Over the longer term, we believe that prospects for the U.S. housing and mortgage markets, as well as for Countrywide, remain very attractive.”

Countrywide issued guidance estimating fourth-quarter consolidated earnings will range between $0.25 and $0.75 per diluted share.

The company faced a liquidity crisis in August, after investors stopped buying the short-term “commercial paper” debt Countrywide and other mortgage lenders used to finance their ongoing operations, because of concerns about rising delinquencies and foreclosures.

After it was forced to draw down an $11.5 billion line of credit with 40 banks, Countrywide gave Bank of America the right to buy a minority interest in the company in exchange for a $2 billion loan, and lined up another $12 billion in financing in September.

Once the nation’s largest mortgage lender, Countrywide says its strategy to survive the credit crunch is to move its mortgage loan production from Countrywide Home Loans Inc. to Countrywide Bank, a federally chartered thrift, while eliminating the riskiest loan products and tightening underwriting standards.

Countrywide now mostly originates loans eligible for repurchase by Fannie Mae and Freddie Mac, or that can be held as investments by its banking division, rather than sold to secondary market investors.

The tightened underwriting standards and reduced demand for mortgage loans mean Countrywide is making fewer loans. In announcing plans to lay off up to 12,000 employees on Sept. 7 — or 20 percent of the company’s workforce — Countrywide said it expected loan volume to decline by 25 percent in 2008. Third-quarter loan production totaled $90 billion, the company said today, compared with $123 billion in the second quarter and $106 billion in the third quarter of 2006.

Countrywide said it took a $57 million charge in the third quarter related to the costs of the layoffs and company restructuring, and expects another $70 million to $90 million in related charges, mostly in the fourth quarter.

“Countrywide has responded decisively and taken the steps we believe are necessary to address the current challenging market environment,” Countrywide Chief Executive Officer Angelo Mozilo said in a statement. During the quarter, Mozilo said, Countrywide stabilized its liquidity, strengthened its capital position, tightened its loan program and underwriting guidelines, and “began the process of right-sizing operations for today’s lower-volume mortgage market.”

Countrywide has “accelerated the integration of our mortgage banking operations into Countrywide Bank, a strategy which we believe provides a more stable and reliable funding model to support our core lending business,” Mozilo said, and the company still expects to benefit from opportunities that arise from industry consolidation.

Countrywide said it funded nearly 90 percent of mortgage loans in September through its bank, the third-largest federal savings bank.

In an attempt to grow the bank’s $60 billion in deposits, Countrywide has opened 46 new financial centers since the end of June. Bank deposits grew by $1.7 billion in September, and the company says it’s on track to have 200 financial centers operating by year end, up from 150 today.

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