UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

Form 10-Q

|(Mark One)                                               |  |                                                                                         
|-------------------------------------------------------- |  | ----------------------------------------------------------------------------------------
|ý                                                        |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|For the quarterly period ended September 30, 2007       
|Or                                                      
|o                                                        |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                        to

Commission file number: 1-8422

Countrywide Financial Corporation(Exact name of registrant as specified in its charter)

|Delaware(State or other jurisdiction of
incorporation or organization)           |  | 13-2641992(IRS Employer Identification No.)
|-------------------------------------------------------------------------------- |  | -------------------------------------------
|4500 Park Granada, Calabasas, California(Address of principal executive offices) |  | 91302(Zip Code)                            

(818) 225-3000(Registrant's telephone number, including area code)

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past
90 days. Yes ý No o

Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated
filer" in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filer ý

Accelerated filer o

Non-accelerated filer o


Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

Yes o        No ý

Indicate
the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.

|Class                         |  | Outstanding at November 8, 2007
|----------------------------- |  | -------------------------------
|Common Stock, $0.05 par value |  | 578,700,245                    



---



COUNTRYWIDE FINANCIAL CORPORATION        FORM 10-Q        September 30, 2007        TABLE OF CONTENTS

|                              |  |                                                                                                         |  | Page
|----------------------------- |  | ------------------------------------------------------------------------------------------------------- |  | ----
|PART I. FINANCIAL INFORMATION |  | 1                                                                                                      
|Item 1.                       |  | Financial Statements:                                                                                   |  |     
|                              |  | Consolidated Balance SheetsSeptember 30, 2007 and December 31, 2006                                    |  | 1   
|                              |  | Consolidated Statements of OperationsThree and Nine Months Ended September 30, 2007 and 2006           |  | 2   
|                              |  | Consolidated Statement of Changes in Shareholders' EquityNine Months Ended September 30, 2007 and 2006 |  | 3   
|                              |  | Consolidated Statements of Cash FlowsNine Months Ended September 30, 2007 and 2006                     |  | 4   
|                              |  | Notes to Consolidated Financial Statements                                                              |  | 5   
|Item 2.                       |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                   |  | 47  
|                              |  | Overview                                                                                                |  | 47  
|                              |  | Results of Operations ComparisonQuarters Ended September 30, 2007 and 2006                             |  | 51  
|                              |  | Results of Operations ComparisonNine Months Ended September 30, 2007 and 2006                          |  | 74  
|                              |  | Quantitative and Qualitative Disclosures About Market Risk                                              |  | 93  
|                              |  | Credit Risk Management                                                                                  |  | 95  
|                              |  | Loan Servicing                                                                                          |  | 106 
|                              |  | Liquidity and Capital Resources                                                                         |  | 107 
|                              |  | Off-Balance Sheet Arrangements and Aggregate Contractual Obligations                                    |  | 112 
|                              |  | Prospective Trends                                                                                      |  | 113 
|                              |  | Regulatory Trends                                                                                       |  | 116 
|                              |  | New Accounting Standards                                                                                |  | 117 
|                              |  | Factors That May Affect Our Future Results                                                              |  | 118 
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                              |  | 119 
|Item 4.                       |  | Controls and Procedures                                                                                 |  | 119 
|PART II. OTHER INFORMATION    |  | 121                                                                                                    
|Item 1.                       |  | Legal Proceedings                                                                                       |  | 121 
|Item 1A.                      |  | Risk Factors                                                                                            |  | 121 
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                             |  | 122 
|Item 6.                       |  | Exhibits                                                                                                |  | 122 

---





PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                                                                                                                                                |                                            | September 30,
2007 |             | December 31,
2006 |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------ | ----------- | ----------------- | -
|
|
|ASSETS                                                                                                                                                                                                                                                                                          |                                            |                    |             |                   |  
|Cash                                                                                                                                                                                                                                                                                            |                                            | $                  | 4,768,363   |                   | $
|Mortgage loans held for sale                                                                                                                                                                                                                                                                    |                                            |                    | 30,857,778  |                   |  
|Trading securities owned, at fair value                                                                                                                                                                                                                                                         |                                            |                    | 13,148,722  |                   |  
|Trading securities pledged as collateral, at fair value                                                                                                                                                                                                                                         |                                            |                    | 1,789,450   |                   |  
|Securities purchased under agreements to resell, securities borrowed and federal funds sold                                                                                                                                                                                                     |                                            |                    | 14,890,965  |                   |  
|Loans held for investment, net of allowance for loan losses of $1,219,963 and $261,054, respectively                                                                                                                                                                                            |                                            |                    | 83,558,176  |                   |  
|Investments in other financial instruments, at fair value                                                                                                                                                                                                                                       |                                            |                    | 27,119,157  |                   |  
|Mortgage servicing rights, at fair value                                                                                                                                                                                                                                                        |                                            |                    | 20,068,153  |                   |  
|Premises and equipment, net                                                                                                                                                                                                                                                                     |                                            |                    | 1,632,818   |                   |  
|Other assets                                                                                                                                                                                                                                                                                    |                                            |                    | 11,402,883  |                   |  
|                                                                                                                                                                                                                                                                                                |                                            |                    |             |                   |  
|                                                                                                                                                                                                                                                                                                | Total assets                               |                    | $           | 209,236,465       |  
|                                                                                                                                                                                                                                                                                                |                                            |                    |             |                   |  
|LIABILITIES                                                                                                                                                                                                                                                                                     |                                            |                    |             |                   |  
|Deposit liabilities                                                                                                                                                                                                                                                                             |                                            | $                  | 54,749,389  |                   | $
|Securities sold under agreements to repurchase                                                                                                                                                                                                                                                  |                                            |                    | 16,389,611  |                   |  
|Trading securities sold, not yet purchased, at fair value                                                                                                                                                                                                                                       |                                            |                    | 2,385,048   |                   |  
|Notes payable                                                                                                                                                                                                                                                                                   |                                            |                    | 105,794,292 |                   |  
|Accounts payable and accrued liabilities                                                                                                                                                                                                                                                        |                                            |                    | 10,095,489  |                   |  
|Income taxes payable                                                                                                                                                                                                                                                                            |                                            |                    | 4,570,404   |                   |  
|                                                                                                                                                                                                                                                                                                |                                            |                    |             |                   |  
|                                                                                                                                                                                                                                                                                                | Total liabilities                          |                    |             | 193,984,233       |  
|                                                                                                                                                                                                                                                                                                |                                            |                    |             |                   |  
|Commitments and contingencies                                                                                                                                                                                                                                                                   |                                            |                    |            |                   |  
|SHAREHOLDERS' EQUITY                                                                                                                                                                                                                                                                            |                                            |                    |             |                   |  
|Preferred stock, par value $0.05authorized, 1,500,000 shares; issued and outstanding at September 30, 2007, 20,000 shares of 7.25% Series B non-voting convertible cumulative shares with a total liquidation
preference of $2,000,000                                                         |                                            |                    | 1           |                   |  
|Common stockauthorized, 1,000,000,000 shares of $0.05 par value; issued, 576,816,280 shares and 585,466,719 shares at September 30, 2007 and December 31, 2006, respectively; outstanding, 576,376,128 shares
and 585,182,298 shares at September 30, 2007 and December 31, 2006, respectively |                                            |                    | 28,841      |                   |  
|Additional paid-in capital                                                                                                                                                                                                                                                                      |                                            |                    | 4,110,950   |                   |  
|Retained earnings                                                                                                                                                                                                                                                                               |                                            |                    | 11,168,990  |                   |  
|Accumulated other comprehensive loss                                                                                                                                                                                                                                                            |                                            |                    | (56,550     | )                 |  
|                                                                                                                                                                                                                                                                                                |                                            |                    |             |                   |  
|                                                                                                                                                                                                                                                                                                | Total shareholders' equity                 |                    |             | 15,252,232        |  
|                                                                                                                                                                                                                                                                                                |                                            |                    |             |                   |  
|                                                                                                                                                                                                                                                                                                | Total liabilities and shareholders' equity |                    | $           | 209,236,465       |  
|                                                                                                                                                                                                                                                                                                |                                            |                    |             |                   |  

The accompanying notes are an integral part of these consolidated financial statements.

1

---





COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS

|                                    |                                                                                            | Three Months Ended September 30,                                                               |            | Nine Months
Ended September 30, |           
|----------------------------------- | ------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------- | ---------- | ------------------------------- | ----------
|
|
|Revenues                            |                                                                                            |                                                                                                |            |                                 |           
|                                    | (Loss) gain on sale of loans and securities                                                |                                                                                                | $          | (718,620                        | )         
|                                    | Interest income                                                                            |                                                                                                |            | 3,255,110                       |           
|                                    | Interest expense                                                                           |                                                                                                |            | (2,548,801                      | )         
|                                    |                                                                                            |                                                                                                |            |                                 |           
|                                    |                                                                                            | Net interest income                                                                            |            |                                 | 706,309   
|                                    | Provision for loan losses                                                                  |                                                                                                |            | (934,268                        | )         
|                                    |                                                                                            |                                                                                                |            |                                 |           
|                                    |                                                                                            | Net interest (expense) income after provision for loan losses                                  |            |                                 | (227,959  
|                                    |                                                                                            |                                                                                                |            |                                 |           
|                                    | Loan servicing fees and other income from mortgage servicing rights and retained interests |                                                                                                |            | 1,442,279                       |           
|                                    | Realization of expected cash flows from mortgage servicing rights                          |                                                                                                |            | (696,361                        | )         
|                                    | Change in fair value of mortgage servicing rights                                          |                                                                                                |            | (830,932                        | )         
|                                    | Impairment of retained interests                                                           |                                                                                                |            | (716,658                        | )         
|                                    | Servicing Hedge gains (losses)                                                             |                                                                                                |            | 1,183,543                       |           
|                                    |                                                                                            |                                                                                                |            |                                 |           
|                                    |                                                                                            | Net loan servicing fees and other income from mortgage servicing rights and retained interests |            |                                 | 381,871   
|                                    |                                                                                            |                                                                                                |            |                                 |           
|                                    | Net insurance premiums earned                                                              |                                                                                                |            | 389,921                         |           
|                                    | Other                                                                                      |                                                                                                |            | 124,821                         |           
|                                    |                                                                                            |                                                                                                |            |                                 |           
|                                    |                                                                                            | Total revenues                                                                                 |            |                                 | (49,966   
|                                    |                                                                                            |                                                                                                |            |                                 |           
|Expenses                            |                                                                                            |                                                                                                |            |                                 |           
|                                    | Compensation                                                                               |                                                                                                |            | 1,073,754                       |           
|                                    | Occupancy and other office                                                                 |                                                                                                |            | 284,474                         |           
|                                    | Insurance claims                                                                           |                                                                                                |            | 145,136                         |           
|                                    | Advertising and promotion                                                                  |                                                                                                |            | 88,350                          |           
|                                    | Other                                                                                      |                                                                                                |            | 326,022                         |           
|                                    |                                                                                            |                                                                                                |            |                                 |           
|                                    |                                                                                            | Total expenses                                                                                 |            |                                 | 1,917,736 
|                                    |                                                                                            |                                                                                                |            |                                 |           
|(Loss) earnings before income taxes |                                                                                            |                                                                                                | (1,967,702 | )                               |           
|                                    | (Benefit) provision for income taxes                                                       |                                                                                                |            | (767,009                        | )         
|                                    |                                                                                            |                                                                                                |            |                                 |           
|                                    |                                                                                            | NET (LOSS) EARNINGS                                                                            |            | $                               | (1,200,693
|                                    |                                                                                            |                                                                                                |            |                                 |           
|(Loss) earnings per share           |                                                                                            |                                                                                                |            |                                 |           
|                                    | Basic                                                                                      |                                                                                                | $          | (2.85                           | )         
|                                    | Diluted                                                                                    |                                                                                                | $          | (2.85                           | )         

The
accompanying notes are an integral part of these consolidated financial statements.

2

---





COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES        CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

|                                                                                   |                                                |                                                                |                            | Common Stock |             |   |   |        |   | Accumulated
Other
Comprehensive
Income (Loss) |           |   |  
|---------------------------------------------------------------------------------- | ---------------------------------------------- | -------------------------------------------------------------- | -------------------------- | ------------ | ----------- | - | - | ------ | - | --------------------------------------------- | --------- | - | -
|
|
|
|
|Balance at December 31, 2005                                                       |                                                | $                                                              |                           |              | 600,030,686 |   | $ | 30,008 |   | $                                             | 2,954,019 |   | $
|Remeasurement of mortgage servicing rights to fair value upon adoption of SFAS 156 |                                                |                                                                |                           |              |            |   |   |       |   |                                               |          |   |  
|                                                                                   |                                                |                                                                |                            |              |             |   |   |        |   |                                               |           |   |  
|Balance as adjusted, January 1, 2006                                               |                                                |                                                                |                           |              | 600,030,686 |   |   | 30,008 |   |                                               | 2,954,019 |   |  
|                                                                                   |                                                |                                                                |                            |              |             |   |   |        |   |                                               |           |   |  
|Comprehensive income:                                                              |                                                |                                                                |                            |              |             |   |   |        |   |                                               |           |   |  
|                                                                                   | Net earnings for the period                    |                                                                |                            |             |             |  |   |        |  |                                               |           |  |  
|                                                                                   | Other comprehensive income (loss), net of tax: |                                                                |                            |              |             |   |   |        |   |                                               |           |   |  
|                                                                                   |                                                | Net unrealized losses from available-for-sale securities       |                            |              |            |   |  |        |   |                                              |           |   | 
|                                                                                   |                                                | Net unrealized losses from cash flow hedging instruments       |                            |              |            |   |  |        |   |                                              |           |   | 
|                                                                                   |                                                | Net change in foreign currency translation adjustment          |                            |              |            |   |  |        |   |                                              |           |   | 
|                                                                                   |                                                |                                                                |                            |              |             |   |   |        |   |                                               |           |   |  
|                                                                                   |                                                |                                                                | Total comprehensive income |              |             |   |   |        |   |                                               |           |   |  
|                                                                                   |                                                |                                                                |                            |              |             |   |   |        |   |                                               |           |   |  
|Issuance of common stock pursuant to stock-based compensation plans                |                                                |                                                                |                           |              | 15,438,630  |   |   | 779    |   |                                               | 343,836   |   |  
|Excess tax benefit related to stock-based compensation                             |                                                |                                                                |                           |              |            |   |   |       |   |                                               | 106,372   |   |  
|Issuance of common stock, net of treasury stock                                    |                                                |                                                                |                           |              | 864,734     |   |   | 43     |   |                                               | 30,211    |   |  
|Issuance of common stock in conversion of convertible debt                         |                                                |                                                                |                           |              | 414,868     |   |   | 21     |   |                                               | 1,444     |   |  
|Cash dividends paid$0.45 per common share                                         |                                                |                                                                |                           |              |            |   |   |       |   |                                               |          |   |  
|                                                                                   |                                                |                                                                |                            |              |             |   |   |        |   |                                               |           |   |  
|Balance at September 30, 2006                                                      |                                                | $                                                              |                           |              | 616,748,918 |   | $ | 30,851 |   | $                                             | 3,435,882 |   | $
|                                                                                   |                                                |                                                                |                            |              |             |   |   |        |   |                                               |           |   |  
|Balance at December 31, 2006                                                       |                                                | $                                                              |                           |              | 585,182,298 |   | $ | 29,273 |   | $                                             | 2,154,438 |   | $
|Remeasurement of income taxes payable upon adoption of FIN 48                      |                                                |                                                                |                           |              |            |   |   |       |   |                                               |          |   |  
|                                                                                   |                                                |                                                                |                            |              |             |   |   |        |   |                                               |           |   |  
|Balance as adjusted, January 1, 2007                                               |                                                |                                                                |                           |              | 585,182,298 |   |   | 29,273 |   |                                               | 2,154,438 |   |  
|                                                                                   |                                                |                                                                |                            |              |             |   |   |        |   |                                               |           |   |  
|Comprehensive income:                                                              |                                                |                                                                |                            |              |             |   |   |        |   |                                               |           |   |  
|                                                                                   | Net loss for the period                        |                                                                |                            |             |             |  |   |        |  |                                               |           |  |  
|                                                                                   | Other comprehensive income (loss), net of tax: |                                                                |                            |              |             |   |   |        |   |                                               |           |   |  
|                                                                                   |                                                | Net unrealized losses from available-for-sale securities       |                            |              |            |   |  |        |   |                                              |           |   | 
|                                                                                   |                                                | Net change in foreign currency translation adjustment          |                            |              |            |   |  |        |   |                                              |           |   | 
|                                                                                   |                                                | Change in unfunded liability relating to defined benefit plans |                            |              |            |   |  |        |   |                                              |           |   | 
|                                                                                   |                                                |                                                                |                            |              |             |   |   |        |   |                                               |           |   |  
|                                                                                   |                                                |                                                                | Total comprehensive loss   |              |             |   |   |        |   |                                               |           |   |  
|                                                                                   |                                                |                                                                |                            |              |             |   |   |        |   |                                               |           |   |  
|Issuance of common stock pursuant to stock-based compensation plans                |                                                |                                                                |                           |              | 11,921,010  |   |   | 604    |   |                                               | 290,320   |   |  
|Excess tax benefit related to stock-based compensation                             |                                                |                                                                |                           |              |            |   |   |       |   |                                               | 76,874    |   |  
|Issuance of Series B preferred stock                                               |                                                |                                                                | 1                          |              |            |   |   |       |   |                                               | 1,999,999 |   |  
|Beneficial conversion feature on Series B preferred stock                          |                                                |                                                                |                           |              |            |   |   |       |   |                                               | 424,444   |   |  
|Issuance of common stock, net of treasury stock                                    |                                                |                                                                |                           |              | 776,332     |   |   | 39     |   |                                               | 27,356    |   |  
|Repurchase and cancellation of common stock                                        |                                                |                                                                |                           |              | (21,503,512 | ) |   | (1,075 | ) |                                               | (862,481  | ) |  
|Cash dividends paid$0.45 per common share                                         |                                                |                                                                |                           |              |            |   |   |       |   |                                               |          |   |  
|                                                                                   |                                                |                                                                |                            |              |             |   |   |        |   |                                               |           |   |  
|Balance at September 30, 2007                                                      |                                                | $                                                              | 1                          |              | 576,376,128 |   | $ | 28,841 |   | $                                             | 4,110,950 |   | $
|                                                                                   |                                                |                                                                |                            |              |             |   |   |        |   |                                               |           |   |  

The accompanying notes are an integral part of these consolidated financial statements.

3

---





COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                      |                                                                                                                    | Nine Months Ended
September 30,                                                                   |                                                                                                      
|------------------------------------- | ------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------
|
|
|Cash flows from operating activities: |                                                                                                                    |                                                                                                   |                                                                                                      
|                                      | Net (loss) earnings                                                                                                |                                                                                                   | $                                                                                                    
|                                      |                                                                                                                    | Adjustments to reconcile net (loss) earnings to net cash (used) provided by operating activities: |                                                                                                      
|                                      |                                                                                                                    |                                                                                                   | Gain on sale of loans and securities                                                                 
|                                      |                                                                                                                    |                                                                                                   | Accretion of discount on securities                                                                  
|                                      |                                                                                                                    |                                                                                                   | Interest capitalized on loans                                                                        
|                                      |                                                                                                                    |                                                                                                   | Amortization of deferred premiums, discounts, fees and costs, net                                    
|                                      |                                                                                                                    |                                                                                                   | Accretion of fair value adjustments and discount on notes payable                                    
|                                      |                                                                                                                    |                                                                                                   | Change in fair value of hedged notes payable and related interest-rate and foreign-currency swaps    
|                                      |                                                                                                                    |                                                                                                   | Amortization of deferred fees on time deposits                                                       
|                                      |                                                                                                                    |                                                                                                   | Provision for loan losses                                                                            
|                                      |                                                                                                                    |                                                                                                   | Change in MSR value due to realization of expected cash flows from mortgage servicing rights         
|                                      |                                                                                                                    |                                                                                                   | Change in fair value of mortgage servicing rights                                                    
|                                      |                                                                                                                    |                                                                                                   | Impairment of retained interests                                                                     
|                                      |                                                                                                                    |                                                                                                   | Servicing hedge losses                                                                               
|                                      |                                                                                                                    |                                                                                                   | Write-down of available-for-sale securities                                                          
|                                      |                                                                                                                    |                                                                                                   | Stock-based compensation expense                                                                     
|                                      |                                                                                                                    |                                                                                                   | Depreciation and other amortization                                                                  
|                                      |                                                                                                                    |                                                                                                   | Accrued restructuring charges                                                                        
|                                      |                                                                                                                    |                                                                                                   | Provision for deferred income taxes                                                                  
|                                      |                                                                                                                    |                                                                                                   | Origination and purchase of loans held for sale                                                      
|                                      |                                                                                                                    |                                                                                                   | Proceeds from sale and principal repayments of loans held for sale                                   
|                                      |                                                                                                                    |                                                                                                   | Decrease (increase) in trading securities                                                            
|                                      |                                                                                                                    |                                                                                                   | Net increase in retained interests and servicing hedge securities accounted for as trading securities
|                                      |                                                                                                                    |                                                                                                   | Increase in other assets                                                                             
|                                      |                                                                                                                    |                                                                                                   | (Decrease) increase in trading securities sold, not yet purchased, at fair value                     
|                                      |                                                                                                                    |                                                                                                   | Increase in accounts payable and accrued liabilities                                                 
|                                      |                                                                                                                    |                                                                                                   | (Decrease) increase in income taxes payable                                                          
|                                      |                                                                                                                    |                                                                                                   |                                                                                                      
|                                      |                                                                                                                    |                                                                                                   |                                                                                                      
|                                      |                                                                                                                    |                                                                                                   |                                                                                                      
|Cash flows from investing activities: |                                                                                                                    |                                                                                                   |                                                                                                      
|                                      | Decrease (increase) in securities purchased under agreements to resell, federal funds sold and securities borrowed |                                                                                                   |                                                                                                      
|                                      | Repayments (additions) to loans held for investment, net                                                           |                                                                                                   |                                                                                                      
|                                      | Sales of loans held for investment, net                                                                            |                                                                                                   |                                                                                                      
|                                      | Additions to investments in other financial instruments accounted for as available for sale                        |                                                                                                   |                                                                                                      
|                                      | Proceeds from sale and repayment of investments in other financial instruments accounted for as available for sale |                                                                                                   |                                                                                                      
|                                      | Purchases of mortgage servicing rights                                                                             |                                                                                                   |                                                                                                      
|                                      | Purchases of premises and equipment, net                                                                           |                                                                                                   |                                                                                                      
|                                      |                                                                                                                    |                                                                                                   |                                                                                                      
|                                      |                                                                                                                    | Net cash provided (used) by investing activities                                                  |                                                                                                      
|                                      |                                                                                                                    |                                                                                                   |                                                                                                      
|Cash flows from financing activities: |                                                                                                                    |                                                                                                   |                                                                                                      
|                                      | Net (decrease) increase in deposit liabilities                                                                     |                                                                                                   |                                                                                                      
|                                      | Net (decrease) increase in securities sold under agreements to repurchase and federal funds purchased              |                                                                                                   |                                                                                                      
|                                      | Net decrease in short-term borrowings                                                                              |                                                                                                   |                                                                                                      
|                                      | Issuance of long-term debt                                                                                         |                                                                                                   |                                                                                                      
|                                      | Repayment of long-term debt                                                                                        |                                                                                                   |                                                                                                      
|                                      | Excess tax benefit related to stock-based compensation                                                             |                                                                                                   |                                                                                                      
|                                      | Issuance of Series B preferred stock                                                                               |                                                                                                   |                                                                                                      
|                                      | Repurchase and cancellation of common stock                                                                        |                                                                                                   |                                                                                                      
|                                      | Issuance of common stock                                                                                           |                                                                                                   |                                                                                                      
|                                      | Payment of dividends                                                                                               |                                                                                                   |                                                                                                      
|                                      |                                                                                                                    |                                                                                                   |                                                                                                      
|                                      |                                                                                                                    | Net cash provided by financing activities                                                         |                                                                                                      
|                                      |                                                                                                                    |                                                                                                   |                                                                                                      
|Net increase in cash                  |                                                                                                                    |                                                                                                   | 3,361,363                                                                                            
|Cash at beginning of period           |                                                                                                                    |                                                                                                   | 1,407,000                                                                                            
|                                      |                                                                                                                    |                                                                                                   |                                                                                                      
|                                      |                                                                                                                    | Cash at end of period                                                                             |                                                                                                      
|                                      |                                                                                                                    |                                                                                                   |                                                                                                      

The accompanying notes are an integral part of these consolidated financial statements.

4

---





COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        (Unaudited)

Note 1Basis of Presentation

Countrywide Financial Corporation ("Countrywide") is a holding company which, through its subsidiaries (collectively, the "Company"), is engaged in mortgage
lending and other real estate finance-related businesses, including mortgage banking, banking and mortgage warehouse lending, dealing in securities and insurance underwriting.

The
accompanying consolidated financial statements have been prepared in compliance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and
with the Securities and Exchange Commission's instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all
of the information and notes required by U.S. GAAP for complete financial statements.

In
preparing financial statements in compliance with U.S. GAAP, management is required to make estimates and assumptions that materially affect the reported amounts of assets and
liabilities and the disclosure of contingent liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those
estimates.

In
the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine
months ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. For further information, including a description
of the Company's significant accounting policies, refer to the consolidated financial statements and notes thereto included in the
Annual Report on Form 10-K for the year ended December 31, 2006, for the Company (the "2006 Annual Report").

Certain
amounts reflected in the prior year consolidated financial statements have been reclassified to conform to the current year presentation.

Note 2Adoption of New Accounting Pronouncements

Statement of Financial Accounting Standards No. 155,Accounting for Certain Hybrid Financial Instruments,an amendment of SFAS 133 and SFAS 140 ("SFAS 155"), was effective for all financial instruments acquired or issued after December 31, 2006. This Statement:



The
application of SFAS 155 did not have a significant impact on the consolidated financial position or earnings of the Company.

5

---



FASB
Interpretation No. 48,Accounting for Uncertainty in Income Taxes,("FIN 48") was issued to clarify the requirements of
Statement of Financial Accounting Standards No. 109,Accounting for Income Taxes, relating to the recognition of income tax benefits.

FIN
48 provides a two-step approach to recognizing and measuring tax benefits when the benefits' realization is uncertain. The first step is to determine whether the benefit
is to be recognized; the second step is to determine the amount to be recognized:



FIN
48 was applicable beginning January 1, 2007. The opening balances of income taxes payable and retained earnings were adjusted for the cumulative effect of applying the
provisions of FIN 48 as follows:

Income Taxes
Payable

Retained
Earnings(in thousands)Balance at December 31, 2006

$
4,935,763

$
12,151,691Remeasurement of income tax liability upon adoption of FIN 48


12,719


(12,719
)Balance at January 1, 2007

$
4,948,482

$
12,138,972


The
total amount of unrecognized tax benefits on uncertain tax positions as of January 1, 2007 was $180.6 million. If recognized, $126.8 million of unrecognized tax
benefits would impact the Company's effective income tax rate. As of September 30, 2007, there have been no material changes to the unrecognized tax benefits, including those that would impact
the Company's effective income tax rate.

As
of January 1, 2007 and September 30, 2007, the Company is not aware of any tax positions for which it was reasonably possible that a change in the amount of unrecognized
tax benefits during the next twelve months would significantly impact the Company's effective income tax rate.

The
Company recognizes interest and penalties related to income tax uncertainties in its provision for income taxes and income taxes payable. The after-tax equivalent of
approximately $17.2 million for interest and penalties on uncertain tax positions was included in income taxes payable at January 1, 2007. As of September 30, 2007 there have been
no material changes to the amounts of interest and penalties recognized in the statement of earnings or balance sheet.

During
the quarter ended September 30, 2007, the administrative review of the IRS examination results for 2003 and 2004 was completed. Tax years after 2004 remain subject to
review by the IRS. The California Franchise Tax Board examination for 2003 and 2004 is not expected to be completed by December 31, 2007 and the 2002 tax year is still open to examination.

During
the quarter ended June 30, 2007, the Company recognized a non-recurring reduction of its deferred income tax liabilities in connection with moving certain
operations to other states. This

6

---



adjustment
resulted in a reduced income tax rate of 27.0 percent for the second quarter and was the principal factor contributing to a 53.2 percent income tax (benefit) rate on the
pretax loss for the nine months ended September 30, 2007.

Due
to the high degree of variability of the estimated annual effective tax rate when considering the range of projected income for the remainder of the year, the Company has determined
that the actual
year-to-date effective tax rate is the best estimate of the annual effective tax rate.

Note 3(Loss) Earnings Per Share

Basic (loss) earnings per share is determined using net (loss) earnings (adjusted for dividends declared on preferred stock) divided by the weighted-average
common shares outstanding during the period. Diluted earnings per share is computed by dividing net earnings available to common shareholders by the weighted-average shares outstanding, assuming all
dilutive potential common shares were issued.

The
Company has potentially dilutive shares in the form of employee stock-based compensation instruments (primarily stock options), convertible debentures and convertible preferred
stock. As detailed in Note 15Notes PayableConvertible Debentures, in May 2007, the Company issued two series of
convertible debentures totaling $4.0 billion. As detailed in Note 16Series B Convertible Preferred Stock, the Company
entered into an agreement and issued $2.0 billion of convertible preferred stock on August 22, 2007. Due to the loss attributable to common shareholders for the quarter and nine months
ended September 30, 2007, no potentially dilutive shares are included in loss per share calculations as including such shares in the calculation would be anti-dilutive.

The
terms of the preferred stock agreement allow the shares to be converted at any time at a conversion price of $18 per share, which was below the closing price of the Company's stock
of $21.82 on August 22, 2007, the date of the preferred stock agreement. Because of the beneficial conversion price in relation to the stock price on August 22, 2007 along with the
immediate convertibility of the shares of preferred stock, the loss attributable to common shareholders has been increased by the value of this beneficial conversion feature, which amounted to
$424.4 million, for the quarter and nine months ended September 30, 2007. The effect of this beneficial conversion feature has been reflected in shareholders' equity as a transfer from
retained earnings to additional paid-in capital during the three months ended September 30, 2007.

7

---



The
following table summarizes the basic and diluted (loss) earnings per share calculations for the periods indicated:

Three Months Ended
September 30,

Nine Months Ended
September 30,2007

2006

2007

2006(in thousands, except per share data)Net (loss) income:Net (loss) income

$
(1,200,693
)
$
647,564

$
(281,644
)
$
2,053,265Beneficial conversion feature of convertible preferred stock


(424,444
)




(424,444
)

Dividends on convertible preferred stock


(16,111
)




(16,111
)

Interest on convertible debentures











15Net (loss) income attributable to common shareholders

$
(1,641,248
)
$
647,564

$
(722,199
)
$
2,053,280Weighted-average shares outstanding:Basic weighted-average number of common shares outstanding


575,089


612,168


582,257


607,233Effect of dilutive securities:Dilutive stock-based compensation instruments





15,404





17,404Convertible debentures











72Diluted weighted-average number of common shares outstanding


575,089


627,572


582,257


624,709Net (loss) income per common share:Basic (loss) earnings per share

$
(2.85
)
$
1.06

$
(1.24
)
$
3.38Diluted (loss) earnings per share

$
(2.85
)
$
1.03

$
(1.24
)
$
3.29


During
the quarter ended September 30, 2006, stock appreciation rights and options to purchase 13,742,512 shares, were outstanding but not included in the computation of diluted
earnings per share because they were anti-dilutive. During the nine months ended September 30, 2006, stock appreciation rights and options to purchase 13,699,070 shares were
outstanding but not included in the computation of dilutive earnings per share because they were anti-dilutive.

Note 4Loan Sales

As more fully discussed in Note 3Loan Salesincluded in the consolidated financial statements
in the 2006 Annual Report, the Company retains financial interests in its loan sales activities in the form of interest-only, principal-only and subordinated interests. The
Company also obtains mortgage servicing rights ("MSRs") through its loan sales activities.

MSRs
and retained interests are carried at fair value. The Company estimates fair value through the use of discounted cash flow models. The key assumptions used in the valuation of MSRs
include mortgage prepayment speeds and discount rates. The key assumptions used in the valuation of retained interests include mortgage prepayment speeds, discount rates, and for those subordinated
interests

8

---



containing
credit risk, net credit losses over the expected lifetime of the security. The discounted cash flow models incorporate cash flow and prepayment projections based on data drawn from the
historical performance of the loans underlying the Company's MSRs and retained interests, which management believes are consistent with assumptions other major market participants would use in
determining the assets' fair value.

Key
assumptions used in measuring the fair value of the Company's MSRs at September 30, 2007 and December 31, 2006, and the effect on their fair value from adverse changes
in those assumptions, are as follows (weighted averages are based upon unpaid principal balance):

September 30,
2007

December 31,
2006(dollar amounts in thousands)Fair value of MSRs

$
20,068,153

$
16,172,064Weighted-average life (in years)


6.4


5.8Weighted-average annual prepayment speed


18.1
%

21.0
%Impact of 5% adverse change

$
377,734

$
293,639Impact of 10% adverse change

$
736,554

$
571,577Impact of 20% adverse change

$
1,402,871

$
1,085,394Weighted-average option-adjusted spread over LIBOR


6.1
%

6.2
%Impact of 5% adverse change

$
164,003

$
129,460Impact of 10% adverse change

$
325,280

$
256,746Impact of 20% adverse change

$
639,945

$
505,029


9

---





Key assumptions used in measuring the fair value of the Company's retained interests at September 30, 2007 and December 31, 2006, and the effect on
their fair value from adverse changes in those assumptions are as follows (weighted averages are based on unpaid principal balances):

September 30,
2007

December 31,
2006(dollar amounts in thousands)Fair value of retained interests

$
2,463,528

$
3,040,575Weighted-average life (in years)


6.8


3.1Weighted-average annual prepayment speed


20.1
%

30.6
%Impact of 5% adverse change

$
54,646

$
97,971Impact of 10% adverse change

$
104,719

$
184,866Impact of 20% adverse change

$
196,663

$
335,668Weighted-average annual discount rate


20.4
%

18.2
%Impact of 5% adverse change

$
41,595

$
33,809Impact of 10% adverse change

$
80,872

$
60,475Impact of 20% adverse change

$
152,896

$
127,056Weighted-average net lifetime credit losses


9.4
%

2.7
%Impact of 5% adverse change

$
58,075

$
48,550Impact of 10% adverse change

$
110,523

$
117,336Impact of 20% adverse change

$
199,954

$
224,616


These
sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a given percentage variation in individual assumptions
generally cannot be extrapolated. Also, in the preceding tables, the effect of a variation in a particular assumption on the fair value of the MSRs or retained interests is calculated independently
without changing any other assumption. In reality, changes in one factor may result in changes in another which might compound or counteract the sensitivities.

Note 5Derivative Financial Instruments

Derivative Financial Instruments

A significant market risk facing the Company is interest rate risk, which includes the risk that changes in market interest rates will result in unfavorable
changes in the value of our assets or liabilities ("price risk") and the risk that net interest income from our mortgage loan and investment portfolios will change in response to changes in interest
rates. The overall objective of the Company's interest rate risk management activities is to reduce the variability of earnings caused by changes in interest rates.

The
Company manages interest rate risk with derivative financial instruments and by the structure of its activities as follows:



10

---





Risk Management Activities Related to Mortgage Loan Inventory and Interest Rate Lock Commitments

To manage the price risk associated with the IRLCs, the Company generally uses a combination of net forward sales of Mortgage Backed-Securities ("MBS") and put
and call options on MBS, Treasury futures and Eurodollar futures. The Company generally makes forward sales of MBS in an amount equal to the portion of the IRLCs expected to close, assuming no change
in mortgage rates. The Company acquires put and call options to protect against the variability of loan closings caused by changes in mortgage rates. To manage the credit spread risk associated with
its IRLCs the Company may enter into credit default swaps.

The
Company manages the price risk related to the Mortgage Loan Inventory primarily by entering into forward sales of MBS and Eurodollar futures. The values of these forward MBS sales
and Eurodollar futures move in opposite direction to the value of the Mortgage Loan Inventory. To manage the credit spread risk associated with its Mortgage Loan Inventory, the Company may enter into
credit default swaps or similar instruments. The Company actively manages the risk profiles of its IRLCs and Mortgage Loan Inventory on a daily basis.

The
Company manages the price risk, including credit spread risk, related to its commercial mortgage loans, using interest rate, total rate of return and credit default swaps.

During
the nine months ended September 30, 2007, the interest rate risk management activities associated with 54% of the fixed-rate mortgage loan inventory and 40% of
the adjustable-rate mortgage loan inventory were accounted for as fair value hedges. For the nine months ended September 30, 2007 and 2006, the Company recognized net
pre-tax losses of $67.1 million and $84.0 million, respectively, representing the ineffective portion of the hedges of its Mortgage Loan Inventory that qualified as fair
value hedges.

Risk Management Activities Related to Mortgage Servicing Rights and Retained Interests

To moderate negative impacts on earnings caused by a rate-driven decline in fair value of its MSRs and retained interests from securitization, the
Company maintains a portfolio of financial instruments, including derivatives and securities, which generally increase in value when interest rates decline. In addition, the Company uses credit
default swaps or similar instruments to moderate the negative impact on earnings caused by a credit spread-driven decline in fair value. This portfolio of financial instruments is collectively
referred to herein as the "Servicing Hedge."

11

---



The
following table summarizes the activity for derivative contracts included in the Servicing Hedge expressed by notional amounts:

Balance,
December 31,
2006

Additions

Dispositions/
Expirations

Balance,
September 30,
2007(in millions)Interest rate swaptions

$
41,750

$
99,175

$
(52,000
)
$
88,925Interest rate swaps


29,025


75,385


(30,610
)

73,800Mortgage forward rate agreements


48,000


67,000


(91,000
)

24,000Long treasury futures





26,750


(6,750
)

20,000Long put options on interest rate futures





28,140


(17,850
)

10,290Long call options on interest rate futures


4,500


113,270


(108,770
)

9,000Credit default swaps





424


(424
)




Risk Management Activities Related to Issuance of Long-Term Debt

The Company has entered into interest rate swap contracts in which the rate received is fixed and the rate paid is adjustable and is indexed to LIBOR. These
interest rate swaps enable the Company to convert a portion of its fixed-rate long-term debt to U.S. dollar LIBOR-based floating-rate debt (notional amount of
$6.9 billion as of September 30, 2007) and a portion of its foreign currency-denominated fixed and floating-rate long-term debt to U.S. dollar LIBOR-based
floating-rate debt (notional amount of $4.2 billion as of September 30, 2007). These transactions are generally designated as fair value hedges under SFAS 133. For the
nine months ended September 30, 2007 and 2006, the Company
recognized net pre-tax gains of $25.9 million and $25.8 million, respectively, representing the ineffective portion of its fair value hedges of debt.

Risk Management Activities Related to Deposit Liabilities

The Company has entered into interest rate swap contracts that have the effect of converting a portion of its fixed-rate deposit liabilities to
LIBOR-based variable-rate deposit liabilities. These transactions are designated as fair value hedges. For the nine months ended September 30, 2007 and 2006, the Company recognized
net pre-tax losses of $0.5 million and $3.6 million, respectively, representing the hedge ineffectiveness relating to these swaps.

Risk Management Activities Related to the Broker-Dealer Securities Trading Portfolio

In connection with its broker-dealer activities, the Company maintains a trading portfolio of fixed-income securities, primarily MBS. The Company is exposed to
price changes in its trading portfolio arising from interest rate changes during the period it holds the securities. To manage this risk, the Company utilizes derivative instruments including forward
sales/purchases of To-Be-Announced ("TBA") MBS, short/long interest rate futures contracts, interest rate swaps, credit default swaps, long put/call options on interest rate
futures contracts, interest rate caps and receiver swaptions.

12

---



Note 6Mortgage Loans Held for Sale

Mortgage loans held for sale include the following:

September 30,
2007

December 31,
2006(in thousands)Prime

$
17,076,835

$
22,494,274Nonprime


5,665,930


4,917,895Commercial real estate


2,489,811


1,930,100Prime home equity


126,235


1,813,947Deferred premiums, discounts, fees and costs, net


(324,501
)

116,414Lower of cost or market valuation allowance


(235,513
)

Mortgage loans originated or purchased for resale


24,798,797


31,272,630Mortgage loans held in SPEs


6,058,981


$
30,857,778

$
31,272,630


The
Company generally estimates the fair value of loans held for sale based on quoted market prices for securities backed by similar types of loans. If quoted market prices are not
available, fair value is estimated based on other relevant factors, including dealer price quotations, prices available for similar instruments, and valuation models intended to approximate the
amounts that would be received from a third party. We regularly compare the values developed from our valuation models to executed trades to assure that the valuations are reflective of actual sale
prices. However, due to the illiquidity of the mortgage marketplace prevalent at September 30, 2007, it was necessary to look for alternative sources of value, including the whole loan purchase
market for similar loans, and to apply more judgment to the valuations of non-conforming prime, home equity and nonprime loans, which represented approximately 60% of mortgage loans
originated or purchased for resale excluding
commercial real estate at September 30, 2007, because of a lack of executed trades that could be used to assure that the valuations are reflective of fair value.

Countrywide
Securities Corporation ("CSC") may from time to time reacquire securities, which benefit from derivative instruments, which were previously sold to nonaffiliates in the
Company's securitization transactions. These transactions are part of CSC's normal market-making and trading activities and as such the securities are classified as trading securities. For such
reacquired securities not to cause the Company to re-recognize the securitization transaction on its balance sheet, such trading securities shall be held temporarily. If management
subsequently determines that the securities will be held longer than temporarily, the related securitization transaction must be re-recognized as a secured borrowings in Notes Payable with
the securities recorded as debt at their fair value and an offsetting entry to loans held for sale ("Mortgage Loans held in SPEs") until the repurchased securities are sold.

During
the nine months ended September 30, 2007, CSC reacquired securities with embedded derivatives in its market-making and trading activities. After reacquiring those
securities, the market for non-agency mortgage-backed securities was disrupted. Management concluded that certain securities it owned on September 30, 2007 no longer would be held
only temporarily. As a result, a liability for asset-backed secured financings in Notes Payable of $6.1 billion and related loans held for sale were included on the Company's balance sheet at
September 30, 2007.

13

---



At
September 30, 2007, the Company had pledged $0.3 billion, $2.3 billion, $0.2 billion, $4.6 billion and $2.1 billion in mortgage loans
originated or purchased for sale to secure asset-backed commercial paper, a secured revolving line of credit, securities sold under agreements to repurchase, collateral for asset-backed secured
financings and to secure Federal Home Loan Bank ("FHLB") advances, respectively and $6.1 billion of Mortgage Loans held in SPEs pledged as collateral for asset-backed secured financings.

At
December 31, 2006, the Company had pledged $7.9 billion, $0.6 billion and $0.03 billion in mortgage loans held for sale to secure asset-backed commercial
paper, a secured revolving line of credit and securities sold under agreements to repurchase, respectively.

Note 7Trading Securities and Trading Securities Sold, Not Yet Purchased

Trading securities, which consist of trading securities owned and trading securities pledged as collateral, include the following:

September 30,
2007

December 31,
2006(in thousands)Mortgage pass-through securities:Fixed-rate

$
9,222,886

$
13,502,403Adjustable-rate


201,285


1,381,675Total mortgage pass-through securities


9,424,171


14,884,078Collateralized mortgage obligations


2,683,594


3,307,594U.S. Treasury securities


1,080,340


1,801,221Obligations of U.S. Government-sponsored enterprises


736,149


781,657Derivative financial instruments


444,259


15,728Interest-only securities


260,063


287,206Asset-backed securities


191,136


203,979Mark-to-market on TBA securities


114,015


144,674Residual securities


1,768


52,097Other


2,677


23,951$
14,938,172

$
21,502,185


14

---



Trading
securities by credit rating were as follows:

|                                                     |                 | September 30, 2007                    
|---------------------------------------------------- | --------------- | --------------------------------------
|
|
|
|Mortgage pass-through securities:                    |                 |                                       
|                                                     | Fixed-rate      |                                       
|                                                     | Adjustable-rate |                                       
|                                                     |                 |                                       
|                                                     |                 | Total mortgage pass-through securities
|Collateralized mortgage obligations                  |                 |                                       
|U.S. Treasury securities                             |                 |                                       
|Obligations of U.S. Government-sponsored enterprises |                 |                                       
|Derivative financial instruments                     |                 |                                       
|Interest-only securities                             |                 |                                       
|Asset-backed securities                              |                 |                                       
|Mark-to-market on TBA securities                     |                 |                                       
|Residual securities                                  |                 |                                       
|Other                                                |                 |                                       
|                                                     |                 |                                       
|                                                     |                 | $                                     
|                                                     |                 |                                       

As
of September 30, 2007, $11.4 billion of the Company's trading securities had been pledged as collateral for financing purposes, of which the counterparty had the
contractual right to sell or re-pledge $1.8 billion.

As
of December 31, 2006, $19.5 billion of the Company's trading securities had been pledged as collateral for financing purposes, of which the counterparty had the
contractual right to sell or re-pledge $1.5 billion.

Trading
securities sold, not yet purchased, include the following:

September 30,
2007

December 31,
2006(in thousands)U.S. Treasury securities

$
1,296,107

$
2,803,030Obligation of U.S. Government-sponsored enterprises


503,138


305,826Derivative financial instruments


483,866


9,235Mark-to-market on TBA securities


98,752


181,119Mortgage pass-through securitiesfixed-rate





26,024Other


3,185


15$
2,385,048

$
3,325,249


15

---





Note 8Securities Purchased Under Agreements to Resell, Securities Borrowed and Federal Funds Sold

The following table summarizes securities purchased under agreements to resell, securities borrowed and federal funds sold:

September 30,
2007

December 31,
2006(in thousands)Securities purchased under agreements to resell

$
11,599,613

$
22,559,194Securities borrowed


541,352


3,460,703Federal funds sold


2,750,000


1,250,000$
14,890,965

$
27,269,897


As
of September 30, 2007, the Company had accepted collateral related to securities purchased under agreements to resell and securities borrowed with a fair value of
$19.1 billion that it had the contractual ability to sell or re-pledge, including $6.0 billion related to amounts offset by securities sold under agreements to repurchase
under master netting arrangements. As of September 30, 2007, the Company had re-pledged $17.8 billion of such collateral for financing purposes.

As
of December 31, 2006, the Company had accepted collateral related to securities purchased under agreements to resell and securities borrowed with a fair value of
$56.0 billion that it had the contractual ability to sell or re-pledge, including $30.0 billion related to amounts offset by securities sold under agreements to repurchase
under master netting arrangements. As of December 31, 2006, the Company had re-pledged $51.5 billion of such collateral for financing purposes.

16

---



Note 9Loans Held for Investment, Net

Loans held for investment include the following:

September 30,
2007

December 31,
2006(in thousands)Mortgage loans:Banking Operations:Prime

$
46,980,635

$
51,762,137Prime home equity


32,431,662


20,036,126Nonprime


46,664


Commercial real estate


385,238


19,41379,844,199


71,817,676Mortgage Banking:Nonprime


1,061,326


115,054Prime


669,782


252,731Prime home equity


262,410


57,5181,993,518


425,303Capital Marketscommercial real estate


20,000


53,000Total mortgage loans


81,857,717


72,295,979Defaulted FHA-insured and VA-guaranteed loans repurchased from securities


2,141,774


1,761,170Warehouse lending advances secured by mortgage loans


567,743


3,185,24884,567,234


77,242,397Premium and discounts and deferred loan origination fees and costs, net


210,905


1,104,414Allowance for loan losses


(1,219,963
)

(261,054
)Loans held for investment, net

$
83,558,176

$
78,085,757


During
the nine months ended September 30, 2007, the Company transferred prime, prime home equity and nonprime mortgage loans with an unpaid principal balance of
$3.9 billion, $9.8 billion and $1.0 billion, respectively, and a carrying value after recognition of impairment upon transfer of the loans of $3.8 billion,
$9.4 billion and $0.8 billion, respectively, from mortgage loans held for sale to loans held for investment, as the Company decided to hold those loans for the foreseeable future. The
impairment in the amount of $0.7 billion is recorded as a component of gain on sale of loans and securities.

Mortgage
loans totaling $62.4 billion and $57.5 billion were pledged to secure FHLB advances and to enable additional borrowings from the FHLB at September 30, 2007
and December 31, 2006, respectively.

Mortgage
loans held for investment totaling $4.0 billion and $2.9 billion were pledged to secure an unused borrowing facility at September 30, 2007 and
December 31, 2006, respectively.

17

---



Defaulted
FHA-insured and VA-guaranteed loans repurchased from securities totaling $1.2 billion and $0.5 billion were pledged to secure securities
sold under agreements to repurchase at September 30, 2007 and December 31, 2006, respectively.

As
of September 30, 2007 and December 31, 2006, the Company had accepted mortgage loan collateral of $0.6 billion and $3.5 billion, respectively, that it had
the contractual ability to re-pledge. The collateral secures warehouse lending advances. Of this collateral, $0.01 billion and $1.6 billion, respectively, has been
re-pledged to secure borrowings under a secured revolving line of credit as of September 30, 2007 and December 31, 2006.

Changes
in the allowance for loan losses are as follows:

|                                                                 |  | Three Months Ended
September 30, |           | Nine Months Ended
September 30, |  
|---------------------------------------------------------------- |  | -------------------------------- | --------- | ------------------------------- | -
|
|
|Balance, beginning of period                                     |  | $                                | 512,904   |                                 | $
|Provision for loan losses                                        |  |                                  | 934,268   |                                 |  
|Net charge-offs                                                  |  |                                  | (227,209  | )                               |  
|Reclassification of allowance for unfunded commitments and other |  |                                  |          |                                 |  
|                                                                 |  |                                  |           |                                 |  
|Balance, end of period                                           |  | $                                | 1,219,963 |                                 | $
|                                                                 |  |                                  |           |                                 |  

The
Company has recorded a liability for losses on unfunded loan commitments in accounts payable and accrued liabilities totaling $20.6 million and $8.1 million at
September 30, 2007 and December 31, 2006, respectively. The provision for these losses is recorded in other expenses. The following is a summary of changes in the liability:

|                                                            |  | Three Months Ended
September 30, |        | Nine Months Ended
September 30, |  
|----------------------------------------------------------- |  | -------------------------------- | ------ | ------------------------------- | -
|
|
|Balance, beginning of period                                |  | $                                | 18,222 |                                 | $
|Provision for losses on unfunded loan commitments           |  |                                  | 2,418  |                                 |  
|Reclassification of allowance for unfunded loan commitments |  |                                  |       |                                 |  
|                                                            |  |                                  |        |                                 |  
|Balance, end of period                                      |  | $                                | 20,640 |                                 | $
|                                                            |  |                                  |        |                                 |  

18

---



Note 10Investments in Other Financial Instruments, at Fair Value

Investments in other financial instruments include the following:

|                                                |                                                      | September 30,
2007                                   |                                            | December 31,
2006
|----------------------------------------------- | ---------------------------------------------------- | ---------------------------------------------------- | ------------------------------------------ | -----------------
|
|Securities accounted for as available-for-sale: |                                                      |                                                      |                                            |                  
|                                                | Mortgage-backed securities                           |                                                      | $                                          | 19,699,030       
|                                                | Municipal bonds                                      |                                                      |                                            | 411,491          
|                                                | Obligations of U.S. Government-sponsored enterprises |                                                      |                                            | 347,466          
|                                                | U.S. Treasury securities                             |                                                      |                                            | 97,567           
|                                                | Other                                                |                                                      |                                            | 72,916           
|                                                |                                                      |                                                      |                                            |                  
|                                                |                                                      | Subtotal                                             |                                            |                  
|                                                |                                                      |                                                      |                                            |                  
|                                                | Interests retained in securitization:                |                                                      |                                            |                  
|                                                |                                                      | Prime interest-only and principal-only securities    |                                            |                  
|                                                |                                                      | Prime residual securities                            |                                            |                  
|                                                |                                                      | Prime home equity retained interests                 |                                            |                  
|                                                |                                                      | Prime home equity interest-only securities           |                                            |                  
|                                                |                                                      | Nonprime residuals and other related securities      |                                            |                  
|                                                |                                                      | Nonprime interest-only securities                    |                                            |                  
|                                                |                                                      | Prepayment penalty bonds                             |                                            |                  
|                                                |                                                      | Subordinated mortgage-backed pass-through securities |                                            |                  
|                                                |                                                      |                                                      |                                            |                  
|                                                |                                                      |                                                      | Total interests retained in securitization |                  
|                                                |                                                      |                                                      |                                            |                  
|                                                | Total securities accounted for as available-for-sale |                                                      |                                            | 21,045,000       
|                                                |                                                      |                                                      |                                            |                  
|Securities accounted for as trading:            |                                                      |                                                      |                                            |                  
|                                                | Interests retained in securitization:                |                                                      |                                            |                  
|                                                |                                                      | Mortgage-backed pass-through securities              |                                            |                  
|                                                |                                                      | Prime interest-only and principal-only securities    |                                            |                  
|                                                |                                                      | Prime residual securities                            |                                            |                  
|                                                |                                                      | Prime home equity retained interests                 |                                            |                  
|                                                |                                                      | Prime home equity interest-only securities           |                                            |                  
|                                                |                                                      | Nonprime residuals and other related securities      |                                            |                  
|                                                |                                                      | Prepayment penalty bonds                             |                                            |                  
|                                                |                                                      | Subordinated mortgage-backed pass-through securities |                                            |                  
|                                                |                                                      | Interest rate swaps                                  |                                            |                  
|                                                |                                                      |                                                      |                                            |                  
|                                                |                                                      |                                                      | Total interests retained in securitization |                  
|                                                |                                                      |                                                      |                                            |                  
|                                                | Servicing hedge principal-only securities            |                                                      |                                            | 884,181          
|                                                | Other                                                |                                                      |                                            | 64,173           
|                                                |                                                      |                                                      |                                            |                  
|                                                | Total securities accounted for as trading            |                                                      |                                            | 2,995,352        
|                                                |                                                      |                                                      |                                            |                  
|Hedging and mortgage pipeline derivatives:      |                                                      |                                                      |                                            |                  
|                                                | Mortgage loans held for sale and pipeline related    |                                                      |                                            | 287,887          
|                                                | Mortgage servicing related                           |                                                      |                                            | 1,968,643        
|                                                | Notes payable related                                |                                                      |                                            | 822,275          
|                                                |                                                      |                                                      |                                            |                  
|                                                |                                                      | Total investments in other financial instruments     |                                            | $                
|                                                |                                                      |                                                      |                                            |                  

19

---



Investments
in other financial instruments by credit rating were as follows:

|                                                |                                                      | September 30, 2007                                  
|----------------------------------------------- | ---------------------------------------------------- | ----------------------------------------------------
|
|
|
|Securities accounted for as available-for-sale: |                                                      |                                                     
|                                                | Mortgage-backed securities                           |                                                     
|                                                | Municipal bonds                                      |                                                     
|                                                | Obligations of U.S. Government-sponsored enterprises |                                                     
|                                                | U.S. Treasury securities                             |                                                     
|                                                | Other                                                |                                                     
|                                                |                                                      |                                                     
|                                                |                                                      | Subtotal                                            
|                                                |                                                      |                                                     
|                                                | Interests retained in securitization:                |                                                     
|                                                |                                                      | Prime interest-only and principal-only securities   
|                                                |                                                      | Prime residual securities                           
|                                                |                                                      | Prime home equity retained interests                
|                                                |                                                      | Prime home equity interest-only securities          
|                                                |                                                      | Nonprime residuals and other related securities     
|                                                |                                                      | Nonprime interest-only securities                   
|                                                |                                                      | Prepayment penalty bonds                            
|                                                |                                                      | Subordinated mortgage-backed pass-through securities
|                                                |                                                      |                                                     
|                                                |                                                      |                                                     
|                                                |                                                      |                                                     
|                                                | Total securities accounted for as available-for-sale |                                                     
|                                                |                                                      |                                                     
|Securities accounted for as trading:            |                                                      |                                                     
|                                                | Interests retained in securitization:                |                                                     
|                                                |                                                      | Mortgage-backed pass-through securities             
|                                                |                                                      | Prime interest-only and principal-only securities   
|                                                |                                                      | Prime residual securities                           
|                                                |                                                      | Prime home equity retained interests                
|                                                |                                                      | Nonprime residuals and other related securities     
|                                                |                                                      | Prepayment penalty bonds                            
|                                                |                                                      | Subordinated mortgage-backed pass-through securities
|                                                |                                                      | Interest rate swaps                                 
|                                                |                                                      |                                                     
|                                                |                                                      |                                                     
|                                                |                                                      |                                                     
|                                                | Servicing hedge principal-only securities            |                                                     
|                                                | Other                                                |                                                     
|                                                |                                                      |                                                     
|                                                | Total securities accounted for as trading            |                                                     
|                                                |                                                      |                                                     
|Total                                           |                                                      | $                                                   
|                                                |                                                      |                                                     

---

20

---





At September 30, 2007, the Company had pledged $0.08 billion of MBS to secure securities sold under agreements to repurchase, which the counterparty
had the contractual right to re-pledge, $0.03 billion of MBS to secure margin calls on derivative instruments and $0.05 billion of MBS to secure an unused borrowing facility.

At
December 31, 2006, the Company had pledged $0.1 billion of MBS to secure securities sold under agreements to repurchase, which the counterparty had the contractual right
to re-pledge and $0.1 billion of MBS to secure an unused borrowing facility.

Amortized
cost and fair value of available-for-sale securities are as follows:

September 30, 2007Amortized Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair Value(in thousands)Mortgage-backed securities

$
19,944,820

$
9,301

$
(255,091
)
$
19,699,030Municipal bonds


411,281


2,157


(1,947
)

411,491Obligations of U.S. Government-sponsored enterprises


344,115


3,351





347,466U.S. Treasury securities


95,428


2,201


(62
)

97,567Interests retained in securitization


293,920


140,138


(17,528
)

416,530Other


72,561


423


(68
)

72,916$
21,162,125

$
157,571

$
(274,696
)
$
21,045,000


December 31, 2006Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair Value(in thousands)Mortgage-backed securities

$
7,111,045

$
4,091

$
(107,350
)
$
7,007,786Municipal bonds


414,249


1,649


(3,012
)

412,886Obligations of U.S. Government-sponsored enterprises


781,329


1,280


(5,892
)

776,717U.S. Treasury securities


167,724


1,414


(825
)

168,313Interests retained in securitization


589,501


111,722


(17,699
)

683,524Other


2,860





(2
)

2,858$
9,066,708

$
120,156

$
(134,780
)
$
9,052,084


21

---



The
Company's available-for-sale securities in an unrealized loss position are as follows:

September 30, 2007Less Than 12 Months

12 Months or More

TotalFair Value

Gross
Unrealized
Loss

Fair Value

Gross
Unrealized
Loss

Fair Value

Gross
Unrealized
Loss(in thousands)Mortgage-backed securities

$
12,870,498

$
(140,124
)
$
4,216,304

$
(114,967
)
$
17,086,802

$
(255,091
)Municipal bonds


32,501


(197
)

196,927


(1,750
)

229,428


(1,947
)Obligations of U.S. Government-sponsored enterprises

















U.S. Treasury securities








17,402


(62
)

17,402


(62
)Interests retained in securitization


3,930


(57
)

116,653


(17,471
)

120,583


(17,528
)Other


27,122


(68
)

50





27,172


(68
)Total impaired securities

$
12,934,051

$
(140,446
)
$
4,547,336

$
(134,250
)
$
17,481,387

$
(274,696
)


December 31, 2006Less Than 12 Months

12 Months or More

TotalFair Value

Gross
Unrealized
Loss

Fair Value

Gross
Unrealized
Loss

Fair Value

Gross
Unrealized
Loss(in thousands)Mortgage-backed securities

$
1,482,240

$
(4,580
)
$
5,106,195

$
(102,770
)
$
6,588,435

$
(107,350
)Municipal bonds


58,106


(317
)

212,973


(2,695
)

271,079


(3,012
)Obligations of U.S. Government-sponsored enterprises


87,472


(163
)

484,186


(5,729
)

571,658


(5,892
)U.S. Treasury securities


6,477


(22
)

103,018


(803
)

109,495


(825
)Interests retained in securitization


42,854


(4,114
)

84,978


(13,585
)

127,832


(17,699
)Other








48


(2
)

48


(2
)Total impaired securities

$
1,677,149

$
(9,196
)
$
5,991,398

$
(125,584
)
$
7,668,547

$
(134,780
)


The
Company's Asset/Liability Committee ("ALCO") assesses securities classified as available for sale for other-than-temporary impairment on a quarterly basis.
This assessment evaluates whether the Company intends and is able to recover the amortized cost of the securities when taking into account the Company's present investment objectives and liquidity
requirements and whether the creditworthiness of the issuer calls the realization of contractual cash flows into question.

22

---



During
the nine months ended September 30, 2007, ALCO determined that the Company no longer intends to hold certain obligations of U.S. Government-sponsored enterprises and
mortgage-backed securities until the impairment can be recovered. Such securities had a carrying value of $587.2 million and unrealized losses recorded in accumulated other comprehensive income
totaling $25.8 million at the time this determination was made. Accordingly, the Company transferred the impairment losses relating to these securities from accumulated other comprehensive
income to earnings during the nine months ended September 30, 2007. No other-than-temporary impairment was recorded during the nine months ended September 30,
2006.

Gross
gains and losses realized on the sales of available-for-sale securities (excluding recognition of other than temporary impairment) are as follows:

Nine Months Ended
September 30,2007

2006(in thousands)Mortgage-backed securities:Gross realized gains

$
11

$
Gross realized losses





Net


11


Municipal bonds:Gross realized gains


75


64Gross realized losses


(885
)

(162
)Net


(810
)

(98
)Obligations of U.S. Government-sponsored enterprises:Gross realized gains


1,015


6Gross realized losses


(16
)

(51
)Net


999


(45
)U.S. Treasuries:Gross realized gains


1,152


Gross realized losses





Net


1,152


Interests retained in securitization:Gross realized gains


1,615


6,956Gross realized losses


(12
)

Net


1,603


6,956Total gains and losses on available-for-sale securities:Gross realized gains


3,868


7,026Gross realized losses


(913
)

(213
)Net

$
2,955

$
6,813


23

---





Note 11Mortgage Servicing Rights, at Fair Value

The activity in MSRs is as follows:

Nine Months Ended
September 30,2007

2006(in thousands)Balance at beginning of period

$
16,172,064

$
12,610,839Remeasurement to fair value upon adoption of SFAS 156





109,916Fair value at beginning of period


16,172,064


12,720,755Additions:Servicing resulting from transfers of financial assets


5,653,354


4,082,935Purchases of servicing assets


195,522


48,817Total additions


5,848,876


4,131,752Change in fair value:Due to changes in valuation inputs or assumptions used in valuation model(1)


400,581


314,391Other changes in fair value(2)


(2,353,368
)

(2,148,483
)Balance at end of period

$
20,068,153

$
15,018,415


---

24

---



Note 12Other Assets

Other assets include the following:

September 30,
2007

December 31,
2006(in thousands)Reimbursable servicing advances, net

$
2,883,215

$
2,170,891Investments in FRB and FHLB stock


2,324,862


1,433,070Interest receivable


889,594


997,854Margin accounts


843,058


118,254Real estate acquired in settlement of loans


676,122


251,163Securities broker-dealer receivables


538,962


1,605,502Prepaid expenses


419,666


320,597Capitalized software, net


378,935


367,055Receivables from custodial accounts


327,087


719,048Cash surrender value of assets held in trust for deferred compensation plans


317,068


372,877Cash surrender value of Company-owned life insurance


226,872


5,894Restricted cash


200,389


238,930Mortgage guaranty insurance tax and loss bonds


165,066


128,293Receivables from sale of securities


100,042


284,177Other


1,111,945


828,185$
11,402,883

$
9,841,790


The
Company had pledged $0.5 billion and $1.2 billion of securities broker-dealer receivables to secure securities sold under agreements to repurchase at
September 30, 2007 and December 31, 2006, respectively.

25

---



Note 13Deposit Liabilities

Deposit liabilities include the following:

September 30,
2007

December 31,
2006(in thousands)Non-interest-bearing checking accounts

$
510,619

$
113,045Retail savings and money market accounts


7,183,965


5,943,927Commercial money market accounts


4,158,084


3,583,763Time deposits:Retail


18,492,386


17,973,792Brokered


7,943,767


11,612,674CommercialPremier business banking


496,281


635,927Other


392,537


888,818


635,92727,324,971


30,222,393Company-controlled custodial deposit accounts(1)


15,579,791


15,737,63254,757,430


55,600,760Basis adjustment through application of hedge accounting


(8,041
)

(22,078
)$
54,749,389

$
55,578,682


---

26

---



Substantially
all of the time deposits outstanding were interest-bearing. The contractual maturities of those deposits as of September 30, 2007, are shown in the following table:

Time Deposit
Maturities

Weighted
Average Rate(dollar amounts in thousands)Quarter ending:December 31, 2007

$
5,728,125

5.17
%March 31, 2008


5,783,561

5.22
%June 30, 2008


4,085,751

5.19
%September 30, 2008


6,106,722

5.32
%Total twelve months ending September 30, 2008


21,704,159

5.23
%Twelve months ending September 30,2009


2,500,294

4.58
%2010


740,678

4.66
%2011


430,640

5.04
%2012


342,601

5.09
%Thereafter


1,606,599

5.62
%27,324,971

5.17
%Basis adjustment through application of hedge accounting


(8,041
)$
27,316,930


Note 14Securities Sold Under Agreements to Repurchase

The Company routinely enters into short-term financing arrangements to sell securities under agreements to repurchase ("repurchase agreements"). The
repurchase agreements are collateralized by mortgage loans and securities. All securities underlying repurchase agreements are held in safekeeping by broker-dealers or banks. All agreements are to
repurchase the same or substantially identical securities.

At
September 30, 2007, repurchase agreements were secured by $0.2 billion of mortgage loans held for sale, $11.4 billion of trading securities, $17.8 billion
of securities purchased under agreements to resell and securities borrowed, $1.2 billion in loans held for investment, $0.08 billion in investments in other financial instruments and
$0.5 billion of other assets. At September 30, 2007, $6.0 billion of the pledged securities purchased under agreements to resell and securities borrowed related to amounts offset
against securities sold under agreements to repurchase pursuant to master netting agreements.

At
December 31, 2006, repurchase agreements were secured by $0.03 billion of mortgage loans held for sale, $19.5 billion of trading securities, $51.5 billion
of securities purchased under agreements to resell and securities borrowed, $0.5 billion in loans held for investment, $0.1 billion in investments in other financial instruments and
$1.2 billion of other assets. At December 31, 2006, $30.0 billion of the pledged securities purchased under agreements to resell and securities borrowed related to amounts offset
against securities sold under agreements to repurchase pursuant to master netting agreements.

27

---



Note 15Notes Payable

The following table summarizes notes payable:

September 30,
2007

December 31,
2006(in thousands)Asset-backed commercial paper

$
170,171

$
7,721,278Unsecured commercial paper


907,006


6,717,794Secured revolving lines of credit


2,496,232


2,174,171Unsecured revolving lines of credit


11,480,000


Secured overnight bank loans





105,049Asset-backed secured financings


10,200,732


241,211Unsecured bank loans





130,000Federal Home Loan Bank advances


51,050,000


28,150,000Medium-term notes:Floating-rate


13,124,375


13,155,231Fixed-rate


9,126,439


9,783,88122,250,814


22,939,112Convertible debentures


4,000,000


Junior subordinated debentures


2,175,822


2,232,334Subordinated debt


1,025,964


1,027,797Other


37,551


48,838$
105,794,292

$
71,487,584


Asset-Backed Commercial Paper

The Company has formed two special purpose entities (Park Granada and Park Sienna) to finance certain of its mortgage loans held for sale using commercial paper.
These entities issue commercial paper in the form of extendible short-term secured liquidity notes ("SLNs"). SLNs are issued with initial maturities of up to 180 days; under certain
conditions, the issuer can extend the maturity dates of the SLNs for an additional period of up to 180 days. The SLNs bear interest at prevailing money market rates approximating LIBOR. While
these facilities remain contractually available, given the lack of liquidity in the extendible SLN segment of the commercial paper market, borrowings under these facilities are not available at this
time.

For
the nine months ended September 30, 2007, the average borrowings under these facilities totaled $13.5 billion and the weighted-average interest rate of the SLNs was
5.36%. At September 30, 2007, the weighted-average interest rate of the SLNs was 5.36% and the Company had pledged $0.3 billion in mortgage loans held for sale and $0.1 billion of
loans held for investment to secure the SLNs.

For
the nine months ended September 30, 2006, the average borrowings under these facilities totaled $18.9 billion and the weighted-average interest rate of the SLNs was
5.01%. At September 30, 2006, the weighted-average interest rate of the SLNs was 5.44% and the Company had pledged $6.9 billion in mortgage loan inventory to secure the SLNs.

28

---



Unsecured Commercial Paper and Unsecured Revolving Lines of Credit

For the nine months ended September 30, 2007, the average unsecured commercial paper outstanding totaled $6.4 billion and the weighted-average
interest rate was 5.36%. At September 30, 2007, the weighted-average interest rate was 5.32%.

For
the nine months ended September 30, 2006, the average unsecured commercial paper outstanding totaled $6.7 billion and the weighted-average interest rate was 5.02%. At
September 30, 2006, the weighted-average interest rate was 5.40%.

As
of September 30, 2007, the Company had unsecured credit agreements (revolving credit facilities) with a group of commercial banks permitting the Company to borrow a maximum
total amount of $11.5 billion. In August 2007, the Company borrowed $11.5 billion from these revolving credit facilities, which represents the maximum permitted under the
agreements. For the nine months ended September 30, 2007, the average outstanding borrowings under these revolving credit facilities totaled $1.9 billion and the weighted-average
interest rate was 5.37%. At September 30, 2007, the weighted-average interest rate was 5.56%. No amount was outstanding under this facility at December 31, 2006.

Secured Revolving Lines of Credit

The Company has formed a special purpose entity (Park Monaco) to finance inventory with funding provided by a group of bank-sponsored conduits that
are financed through the issuance of asset-backed commercial paper. The entity incurs interest based on prevailing money market rates approximating the cost of asset-backed commercial paper. At
September 30, 2007, the entity had aggregate commitments from the bank-sponsored conduits totaling $10.4 billion and had $2.5 billion of outstanding borrowings,
secured by $2.3 billion of mortgage loans held for sale and $0.7 billion of mortgage loans held for investment. For the nine months ended September 30, 2007, the average
borrowings under this facility totaled $1.3 billion and the weighted-average interest rate was 5.64%. At September 30, 2007, the weighted-average interest rate was 5.93%.

For
the nine months ended September 30, 2006, the average borrowings under this facility totaled $1.2 billion and the weighted-average interest rate was 4.68%. At
September 30, 2006, the weighted-average interest rate was 5.32%.

The
Company entered into a $4.0 billion master trust facility on June 2, 2006, to finance Countrywide Warehouse Lending ("CWL") receivables backed by
mortgage loans. A multi-asset conduit finance company funds the purchase of notes backed by CWL receivables which are financed by issuing extendible maturity asset-backed commercial paper. At
September 30, 2007, the Company had pledged
$0.01 billion in loans held for investment to secure this facility. For the nine months ended September 30, 2007, the average borrowings under this facility totaled $0.9 billion
and the weighted-average interest rate was 5.40%. There were no borrowings under this facility at September 30, 2007. On October 10, 2007, the Company elected to terminate this facility.

For
the nine months ended September 30, 2006, the average borrowing under this facility totaled $0.4 billion. During the nine month ended September 30, 2006, the
weighted average interest rate was 5.44%.

In
April 2007, the Company entered into a secured master note purchase agreement to finance commercial real estate mortgage loan inventory. For the nine months ended
September 30, 2007, the

29

---



average
borrowings under this facility totaled $0.9 billion and the weighted-average interest rate was 5.44%. This facility was terminated in August 2007 and there were no borrowings
under this facility at September 30, 2007.

Asset-Backed Secured Financings

The Company recorded certain securitization transactions as secured borrowings because they did not meet the accounting criteria for sales treatment. The amounts
accounted for as secured borrowings totaled $4.1 billion and $0.2 billion at September 30, 2007 and December 31, 2006, respectively. At September 30, 2007, the
Company had pledged $4.6 billion of mortgage loans held for sale to secure these borrowings.

CSC
may from time to time reacquire securities, which benefit from derivative instruments, previously sold to nonaffiliates in the Company's securitization transactions. These
transactions are part of CSC's normal market-making and trading activities and as such the securities are classified as trading securities. For such reacquired securities not to cause the Company to
re-recognize the securitization transaction on its balance sheet, such trading securities shall be held temporarily. If management subsequently determines that the securities will be held
longer than temporarily, the related securitization transaction must be re-recognized as a secured borrowing with the securities recorded as debt at their fair value and an offsetting
entry to loans held for sale ("Mortgage Loans held in SPEs") until the repurchased securities are sold.

During
the nine months ended September 30, 2007, CSC reacquired securities with embedded derivatives in its market-making and trading activities. After reacquiring those
securities, the market for non-agency mortgage-backed securities was disrupted. Management concluded that
certain securities it owned on September 30, 2007 no longer would be held only temporarily. As a result, a liability of $6.1 billion and related loans held for sale were recognized on
the Company's balance sheet at September 30, 2007.

Federal Home Loan Bank Advances

During the nine months ended September 30, 2007, the Company obtained $54.4 billion of advances from the FHLB, of which $20.8 billion are
adjustable-rate advances, with the remainder being fixed-rate advances. Of these adjustable-rate advances, $0.9 billion are initially fixed-rate and provide the FHLB the option to
convert the advances to a floating rate no later than 2010. The remaining adjustable-rate advances have rates that will not exceed the initial rate, however, the rate may decrease if the 12-Month
Treasury Average Index rate increases above a specified level. At September 30, 2007, the Company had pledged $62.4 billion of mortgage loans to secure its outstanding FHLB advances and
enable future advances.

At
December 31, 2006, the Company had pledged $57.5 billion of mortgage loans to secure its outstanding FHLB advances and enable future advances.

30

---



Medium-Term Notes

During the nine months ended September 30, 2007, the Company issued the following medium-term notes:

|             |  | Outstanding Balance |           | Interest Rate |   | Maturity Date
|------------ |  | ------------------- | --------- | ------------- | - | -------------
|
|
|CFC Series B |  | $                   | 1,717,000 |               | $ | 2,222,935    
|             |  |                     |           |               |   |              

All of the fixed-rate medium-term notes issued by the Company during the nine months ended September 30, 2007 were
effectively converted to floating-rate debt using interest rate swaps.

During
the nine months ended September 30, 2007, the Company redeemed $5.0 billion of maturing medium-term notes.

As
of September 30, 2007, $4.2 billion of foreign currency-denominated medium-term notes were outstanding. Such notes are denominated in Euros, Pounds Sterling,
Australian Dollars, Canadian Dollars and Swiss Francs. These notes have been effectively converted to U.S. Dollars through currency swaps.

31

---





Convertible Debentures

As detailed in a Form 8-K filed with the Securities and Exchange Commission on May 29, 2007, in May 2007, the Company issued
$4.0 billion series A and B floating rate convertible debentures. The debentures bear interest at rates indexed to LIBOR and are guaranteed by one of the Company's subsidiaries,
Countrywide Home Loans. The following table summarizes certain terms of the convertible debentures:

|                                                                            
|----------------------------------------------------------------------------
|
|
|Securities offered                                                          
|                                                                            
|Maturity date                                                               
|                                                                            
|Annual interest rate                                                        
|                                                                            
|Conversion rights                                                           
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Conversion rate                                                             
|                                                                            
|Redemption                                                                  
|                                                                            
|                                                                            
|Repurchase of debentures by Countrywide at option of holder on certain dates
|                                                                            
|                                                                            

32

---



Junior Subordinated Debentures

As more fully discussed in "Note 15Notes Payable" included in the consolidated financial
statements of the 2006 Annual Report, the Company has issued junior subordinated debentures to non-consolidated subsidiary trusts. The trusts finance their holdings of the junior
subordinated debentures by issuing Company-guaranteed capital securities.

The
Company guarantees the indebtedness of Countrywide Home Loans to one of its subsidiary trusts, Countrywide Capital III, which is excluded from the Company's consolidated financial
statements. Following is summarized information for that trust:

September 30,
2007

December 31,
2006(in thousands)Balance Sheet:Junior subordinated debentures receivable

$
205,345

$
205,312Other assets


4,841


1,191Total assets

$
210,186

$
206,503Notes payable

$
6,174

$
6,173Other liabilities


4,841


1,191Company-obligated guaranteed redeemable capital trust pass-through securities


199,171


199,139Shareholder's equity





Total liabilities and shareholder's equity

$
210,186

$
206,503


Nine Months Ended September 30,2007

2006(in thousands)Statement of Earnings:Revenues

$
12,482

$
12,482Expenses


(12,482
)

(12,482
)Provision for income taxes





Net earnings

$


$



Subordinated Debt

The Company has outstanding $1.0 billion of 6.25% fixed-rate unsecured subordinated notes maturing in May 2016. The notes rank
subordinate and junior to all of the Company's senior indebtedness, and rank senior to the Company's junior subordinated debentures underlying the Company's trust preferred securities.

33

---



Maturities of Notes Payable

Maturities of notes payable are as follows:

Principal, Net
of Premiums and Discounts

Hedge Basis
Adjustment

Total(in thousands)Quarter ending:December 31, 2007

$
9,403,004

$
38,298

$
9,441,302March 31, 2008


3,251,136


73


3,251,209June 30, 2008


10,857,159


244,630


11,101,789September 30, 2008


2,550,927


35,946


2,586,873Total twelve months ending September 30, 2008


26,062,226


318,947


26,381,173Twelve months ending September 30,2009


11,297,565


117,092


11,414,6572010


15,574,085


689


15,574,7742011


27,149,878


258,735


27,408,6132012


7,140,318


44,705


7,185,023Thereafter


17,847,348


(17,296
)

17,830,052Total

$
105,071,420

$
722,872

$
105,794,292


Note 16Series B Convertible Preferred Stock

In August 2007, the Company issued 20,000 shares of Series B non-voting convertible preferred stock, par value $0.05 per share for an
aggregate price of $2.0 billion. Each preferred share is entitled to receive cash dividends, payable quarterly if declared, at the annual rate of 7.25% of the liquidation preference, which
initially is equal to $100,000 per share ("liquidation preference") or $1,812.50 per share per quarter. Dividends are cumulative and payable quarterly in arrears on February 15, May 15,
August 15 and November 15 of each year. If the dividends are not paid for six quarters, holders of the preferred stock are entitled to designate two directors to the Company's Board of
Directors until dividends have been paid for two consecutive quarters.

The
preferred stock ranks senior to the Company's common stock with respect to payment of dividends and distributions upon liquidation. Holders of the preferred shares are entitled to
receive, in the event that the Company is liquidated, dissolved or wound up, the liquidation preference plus all accumulated and unpaid dividends, regardless of whether they were declared.

Each
share of preferred stock is convertible, at any time, in whole or in part at the option of the holder, into shares of common stock equal to the liquidation preference divided by $18
("conversion price"), subject to adjustments, plus cash in an amount equal to any accumulated and unpaid dividends. The holders of the preferred stock may not sell, transfer or dispose of any shares
of common stock received upon conversion of the preferred stock at any time during the 18 month period following the date of conversion. The holders of the preferred stock are subject to
restrictions prohibiting them from, among other things, acquiring beneficial ownership of additional voting securities of the Company.

The
Company has the right, at its option, to redeem the outstanding preferred stock, if the daily closing price of the Company's common stock exceeds 150% of the conversion price for 30
consecutive

34

---



trading
days on or after August 22, 2017, by paying the liquidation preference in cash and any accumulated and unpaid dividends on the preferred stock.

Note 17Regulatory and Agency Capital Requirements

On March 12, 2007, the Bank converted its charter from a national bank to a federal savings bank. As a result of this conversion, the Company became a
savings and loan holding company, and is no longer a bank holding company. As a savings and loan holding company, Countrywide Financial Corporation is no longer subject to specific statutory capital
requirements. Countrywide Bank's capital is calculated in compliance with the requirements of the Office of Thrift Supervision ("OTS"), which are similar to those of the Office of the Comptroller of
the Currency, the Bank's former regulator. The Company is also subject to U.S. Department of Housing and Urban Development, Fannie Mae, Freddie Mac and Government National Mortgage Association
("Ginnie Mae") net worth requirements, which are lower than those of the OTS. Management believes the Company is in compliance with those requirements.

At
September 30, 2007, the Bank's regulatory capital ratios and amounts and minimum required capital ratios to maintain a "well capitalized" status are as follows:

September 30, 2007Minimum
Required(1)

Ratio

Amount(dollar amounts in thousands)Tier 1 Capital

5.0
%
7.3
%
$
8,870,010Risk-Based Capital:Tier 1

6.0
%
12.2
%
$
8,870,010Total

10.0
%
13.5
%
$
9,777,179


---

Management
intends to maintain capital at levels that are higher than those required to be considered "well capitalized."

Had
Countrywide Bank's capital been calculated in compliance with the OTS requirements at December 31, 2006, its regulatory capital ratios and amounts and minimum required capital
ratios would have been as follows:

December 31, 2006Minimum
Required (1)

Ratio

Amount(dollar amounts in thousands)
(Proforma)Tier 1 Capital

5.0
%
7.6
%
$
7,100,439Risk-Based Capital:Tier 1

6.0
%
12.4
%
$
7,100,439Total

10.0
%
12.8
%
$
7,337,235


---

35

---



Countrywide
Bank is required by OTS regulations to maintain tangible capital of at least 1.5% of assets. However, the Bank is also required to maintain a tangible equity ratio of at
least 2% to avoid being classified as "critically undercapitalized." Critically undercapitalized institutions are subject to the prompt corrective action provisions of the Financial Institution Reform
Recovery and Enforcement Act of 1989. The Bank's tangible capital ratio was 7.3% and 7.6% at September 30, 2007 and December 31, 2006, respectively.

The
OTS has prescribed that the Company and its affiliates are not authorized to receive, and the Bank is not authorized to pay such entities, capital distributions without receipt of
prior written OTS non-objection.

Note 18Supplemental Cash Flow Information

The following table presents supplemental cash flow information:

Nine Months Ended September 30,2007

2006(in thousands)Cash used to pay interest

$
7,831,608

$
6,512,785Cash (refunded) used to pay income taxes


(58,354
)

104,470Non-cash investing activities:Transfer of loans from mortgage loans held for sale to loans held for investment


13,950,678


Transfer of loans from held for investment to mortgage loans held for sale





672,809Servicing resulting from transfers of financial assets


5,653,354


4,082,935Retention of other financial instruments classified as available-for-sale in securitization transactions


2,254


44,663Unrealized loss on available-for-sale securities, foreign currency translation adjustments and cash flow hedges, and change in unfunded liability relating to defined benefit plans, net of tax


(38,994
)

(46,236
)Remeasurement of fair value of MSRs upon adoption of SFAS 156, net of tax





67,065Remeasurement of income taxes payable upon adoption of FIN 48


(12,719
)

Non-cash financing activities:Increase in Mortgage Loans Held in SPEs and asset-backed secured financings


6,058,981


Issuance of common stock for conversion of convertible debt





1,465


36

---





Note 19Net Interest Income

The following table summarizes net interest income:

Three Months Ended
September 30,

Nine Months Ended
September 30,2007

2006

2007

2006(in thousands)Interest income:Loans

$
2,068,844

$
2,237,502

$
6,338,949

$
5,961,815Trading securities


323,191


224,704


984,075


578,728Securities purchased under agreements to resell, securities borrowed and federal funds sold


425,615


586,877


1,700,304


1,530,618Investments in other financial instruments


290,823


89,103


651,575


282,652Other


146,637


149,974


431,833


373,685Total interest income


3,255,110


3,288,160


10,106,736


8,727,498Interest expense:Deposit liabilities


528,420


452,559


1,572,289


1,095,387Securities sold under agreements to repurchase and federal funds purchased


663,507


729,387


2,465,278


1,914,803Trading securities sold, not yet purchased


58,705


62,694


181,209


164,655Notes payable


1,197,635


1,112,459


3,371,080


3,095,995Other


100,534


132,091


351,638


272,779Total interest expense


2,548,801


2,489,190


7,941,494


6,543,619Total net interest income

$
706,309

$
798,970

$
2,165,242

$
2,183,879


Note 20Restructuring Charges

During the quarter ended September 30, 2007, the Company initiated a program to reduce costs and improve operating efficiencies in response to lower
mortgage market origination volumes and other market conditions. The Company presently expects that total U.S. mortgage market origination volumes will decline approximately 30% in 2008 compared to
2007 levels. As part of this plan, the Company announced workforce reductions of between 10,000 and 12,000 positions over three months, representing up to 20% of its workforce. Actual reductions could
be lower should the economic environment and related mortgage market volume outlook improve. As part of this plan, the Company expects to incur lease and other contract termination costs. Management
expects to record restructuring charges totaling $125 million to $150 million.

37

---



The
following table summarizes the restructuring liability balance, recorded in accounts payable and accrued liabilities at September 30, 2007, and related activity during the
nine months ended September 30, 2007:

UtilizedBalance
December 31,
2006





Balance
September 30,
2007Additions

Reversals

Cash

Non-Cash(in thousands)Severance and benefits

$


$
32,513

$


$
(5,935
)
$
(439
)
$
26,139Lease termination costs





15,784











15,784Other costs





8,915








(3,234
)

5,681$


$
57,212

$


$
(5,935
)
$
(3,673
)
$
47,604


Specific
actions taken in the quarter ended September 30, 2007, include reducing the workforce by approximately 6,000. These reductions occurred in most geographic locations and
levels of the organization and expenses were recorded in the Other Operating Segment. Management expects to recognize the remaining expected pre-tax restructuring charges of approximately
$68 million to $93 million, primarily in the fourth quarter of 2007.

Note 21Pension Plans

The Company provides retirement benefits to its employees using a variety of plans. For employees hired prior to January 1, 2006, the Company has a defined
benefit pension plan (the "Pension Plan"). For employees hired after December 31, 2005, the Company makes supplemental contributions to employee 401(k) Plan accounts.

The
Company's policy is to contribute the amount actuarially determined to be necessary to pay the benefits under the Pension Plan, and in no event to pay less than the amount necessary
to meet the minimum funding standards of ERISA. In September 2007, the Company concluded that no contribution was necessary for the 2006 plan year to meet the minimum funding standards of
ERISA. Accordingly, Countrywide did not make a contribution to the Pension Plan for the plan year 2006.

Net
periodic benefit cost for the pension plan during the three and nine months ended September 30, 2007 and 2006, includes the following components:

Three Months Ended
September 30,

Nine Months Ended
September 30,2007

2006

2007

2006(in thousands)Service cost

$
20,739

$
21,656

$
62,218

$
63,856Interest cost


6,168


5,331


18,505


15,719Expected return on plan assets


(5,487
)

(4,206
)

(16,461
)

(12,402
)Amortization of prior service cost


87


88


261


259Recognized net actuarial loss


109


1,790


326


5,279Net periodic benefit cost

$
21,616

$
24,659

$
64,849

$
72,711


38

---



Note 22Segments and Related Information

The
Company has five business segments: Mortgage Banking, Banking, Capital Markets, Insurance and Global Operations.

The
Mortgage Banking Segment is comprised of three sectors: Loan Production, Loan Servicing and Loan Closing Services.

The
Loan Production Sector originates prime and nonprime loans for sale or securitization through a variety of channels on a national scale. The Loan Production Sector is comprised of
three lending channels of Countrywide Home Loans and also includes the mortgage banking activities of Countrywide Bank. The three production channels are: the Retail Channel (Consumer Markets and Full
Spectrum Lending), the Wholesale Lending Channel and the Correspondent Lending Channel. The Retail Channel sources mortgage loans primarily from consumers through the Company's retail branch network
and call centers, as well as through real estate agents and homebuilders. The Wholesale Lending Channel sources mortgage loans primarily from mortgage brokers. The Correspondent Lending Channel
purchases mortgage loans from other mortgage lenders, including financial institutions, commercial banks, savings and loan associations, home builders and credit unions.

The
Loan Servicing Sector includes investments in MSRs and retained interests, as well as the Company's loan servicing operations and subservicing for other domestic financial
institutions. The Loan Closing Services Sector is comprised of the LandSafe companies, which provide credit reports, appraisals, title reports and flood determinations to the Company's Loan Production
Sector, as well as to third parties.

The
Banking Segment includes Banking Operationsprimarily the investment and fee-based activities of Countrywide Banktogether with the activities of
Countrywide Warehouse Lending and certain loans held for investment and owned by Countrywide Home Loans. Banking Operations invests in mortgage loans sourced from the Loan Production Sector and
mortgage loans and high-quality MBS purchased from non-affiliated entities. Countrywide Warehouse Lending provides third-party mortgage lenders with temporary financing secured
by mortgage loans.

The
Capital Markets Segment includes the operations of Countrywide Securities Corporation, a registered broker-dealer specializing in the mortgage securities market. It also includes the
operations of Countrywide Asset Management Corporation, Countrywide Commercial Real Estate Finance Inc., Countrywide Servicing Exchange, Countrywide Alternative Investments Inc., CSC
Futures Inc., Countrywide Capital Markets Asia (H.K.) Limited, CAA Management Inc., Countrywide Sunfish Management LLC and Countrywide Derivative Products, Inc.

The
Insurance Segment includes Balboa Life and Casualty Group, a national provider of property, casualty, life, disability and credit insurance; Balboa Reinsurance Company, a primary
mortgage reinsurance company; and Countrywide Insurance Services, Inc., a national insurance agency offering a specialized menu of insurance products directly to consumers.

The
Global Operations Segment includes Global Home Loans Limited, a provider of loan origination processing and loan subservicing in the United Kingdom until July 31, 2006;
UKValuation Limited, a provider of property valuation services in the UK until December 6, 2006; Countrywide International Technology Holdings Limited, a licensor of loan origination
processing, servicing and residential real estate value assessment technology; CFC India Private Limited, a provider of call

39

---



center,
data processing and information technology related services; and CFC International (Processing Services), Limited, located in Costa Rica, a provider of call center and data processing
services.

Segment
selection was based upon internal organizational structures, and the process by which these operations are managed and evaluated, including how resources are allocated to the
operations.

Intersegment
transactions are generally recorded on an arms-length basis. However, the fulfillment fees paid by Banking Operations to the Production Sector for origination
costs incurred on mortgage loans funded by Banking Operations are generally determined on an incremental cost basis, which may be less than the fees that Banking Operations would pay to a third party.

40

---



COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)

Financial highlights by operating segments are as follows:

|                        |              | Quarter Ended September 30, 2007 |           
|----------------------- | ------------ | -------------------------------- | ----------
|
|
|
|Revenues:               |              |                                  |           
|                        | External     |                                  | $         
|                        | Intersegment |                                  |           
|                        |              |                                  |           
|Total Revenues          |              | $                                | (275,835  
|                        |              |                                  |           
|Pre-tax (Loss) Earnings |              | $                                | (1,314,928
|                        |              |                                  |           
|Total Assets            |              | $                                | 46,521,882
|                        |              |                                  |           

|                        |              | Quarter Ended September 30, 2006
|----------------------- | ------------ | --------------------------------
|
|
|
|Revenues:               |              |                                 
|                        | External     |                                 
|                        | Intersegment |                                 
|                        |              |                                 
|Total Revenues          |              | $                               
|                        |              |                                 
|Pre-tax Earnings (Loss) |              | $                               
|                        |              |                                 
|Total Assets            |              | $                               
|                        |              |                                 

Included in the columns above labeled "Other" are the holding company activities and certain reclassifications to conform management reporting to
the consolidated financial statements.

41

---



COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)

|                        |              | Nine Months Ended September 30, 2007 |           
|----------------------- | ------------ | ------------------------------------ | ----------
|
|
|
|Revenues:               |              |                                      |           
|                        | External     |                                      | $         
|                        | Intersegment |                                      |           
|                        |              |                                      |           
|Total Revenues          |              | $                                    | 2,339,435 
|                        |              |                                      |           
|Pre-tax (Loss) Earnings |              | $                                    | (736,788  
|                        |              |                                      |           
|Total Assets            |              | $                                    | 46,521,882
|                        |              |                                      |           

|                        |              | Nine Months Ended September 30, 2006
|----------------------- | ------------ | ------------------------------------
|
|
|
|Revenues:               |              |                                     
|                        | External     |                                     
|                        | Intersegment |                                     
|                        |              |                                     
|Total Revenues          |              | $                                   
|                        |              |                                     
|Pre-tax Earnings (Loss) |              | $                                   
|                        |              |                                     
|Total Assets            |              | $                                   
|                        |              |                                     

Included in the columns above labeled "Other" are the holding company activities and certain reclassifications to conform management reporting to
the consolidated financial statements.

42

---





Note 23Summarized Financial Information

Summarized financial information for Countrywide Financial Corporation (parent only) and subsidiaries is as follows:

|                |                                                                                             | September 30, 2007          
|--------------- | ------------------------------------------------------------------------------------------- | ----------------------------
|
|
|Balance Sheets: |                                                                                             |                             
|                | Mortgage loans held for sale                                                                |                             
|                | Trading securities                                                                          |                             
|                | Securities purchased under agreements to resell, securities borrowed and federal funds sold |                             
|                | Loans held for investment, net                                                              |                             
|                | Investments in other financial instruments, at fair value                                   |                             
|                | Mortgage servicing rights, at fair value                                                    |                             
|                | Investments in subsidiaries                                                                 |                             
|                | Other assets                                                                                |                             
|                |                                                                                             |                             
|                |                                                                                             | Total assets                
|                |                                                                                             |                             
|                | Deposit liabilities                                                                         |                             
|                | Securities sold under agreements to repurchase and federal funds purchased                  |                             
|                | Notes payable                                                                               |                             
|                | Other liabilities                                                                           |                             
|                | Equity                                                                                      |                             
|                |                                                                                             |                             
|                |                                                                                             | Total liabilities and equity
|                |                                                                                             |                             

|                               |                                               | Nine Months Ended September 30, 2007 |  
|------------------------------ | --------------------------------------------- | ------------------------------------ | -
|
|
|Statements of (loss) earnings: |                                               |                                      |  
|                               | Revenues                                      |                                      | $
|                               | Expenses                                      |                                      |  
|                               | (Benefit) provision for income taxes          |                                      |  
|                               | Equity in net (loss) earnings of subsidiaries |                                      |  
|                               |                                               |                                      |  
|                               |                                               | Net (loss) earnings                  |  
|                               |                                               |                                      |  

43

---



|                |                                                                                             | December 31, 2006           
|--------------- | ------------------------------------------------------------------------------------------- | ----------------------------
|
|
|Balance Sheets: |                                                                                             |                             
|                | Mortgage loans held for sale                                                                |                             
|                | Trading securities                                                                          |                             
|                | Securities purchased under agreements to resell, securities borrowed and federal funds sold |                             
|                | Loans held for investment, net                                                              |                             
|                | Investments in other financial instruments, at fair value                                   |                             
|                | Mortgage servicing rights, at fair value                                                    |                             
|                | Investments in subsidiaries                                                                 |                             
|                | Other assets                                                                                |                             
|                |                                                                                             |                             
|                |                                                                                             | Total assets                
|                |                                                                                             |                             
|                | Deposit liabilities                                                                         |                             
|                | Securities sold under agreements to repurchase and federal funds purchased                  |                             
|                | Notes payable                                                                               |                             
|                | Other liabilities                                                                           |                             
|                | Equity                                                                                      |                             
|                |                                                                                             |                             
|                |                                                                                             | Total liabilities and equity
|                |                                                                                             |                             

|                        |                                        | Nine Months Ended September 30, 2006
|----------------------- | -------------------------------------- | ------------------------------------
|
|
|Statements of Earnings: |                                        |                                     
|                        | Revenues                               |                                     
|                        | Expenses                               |                                     
|                        | (Benefit) provision for income taxes   |                                     
|                        | Equity in net earnings of subsidiaries |                                     
|                        |                                        |                                     
|                        |                                        | Net earnings                        
|                        |                                        |                                     

Note 24Borrower and Investor Custodial Accounts

As of September 30, 2007 and December 31, 2006, the Company managed $20.8 billion and $23.3 billion, respectively, of borrower and
investor custodial cash accounts. These custodial accounts relate to the Company's mortgage servicing activities. Of these amounts, $15.6 billion and $15.7 billion, respectively, were
deposited at the Bank, and included in the Company's deposit liabilities as custodial deposit accounts. The remaining balances were deposited with other depository institutions and are not recorded on
the Company's balance sheets.

44

---



Note 25Legal Proceedings

Countrywide and certain subsidiaries are defendants in various legal proceedings involving matters generally incidental to their businesses. In addition, various
lawsuits alleging claims for derivative relief on behalf of the Company and securities, retirement plan, and other class action suits have recently been brought against Countrywide, and certain of its
current and former officers, directors and retirement plan administrators in either federal district court in Los Angeles, California or state superior court in Los Angeles. Among other things, these
lawsuits allege breach of state law fiduciary duties and violation of the federal securities laws and the Employee Retirement Income Security Act of
1976 ("ERISA"). These cases allege, among other things, that Countrywide did not disclose complete and accurate information about its mortgage lending practices and financial condition. The
shareholder derivative cases brought in federal court are brought on Countrywide's behalf and do not seek recovery of damages from the Company. A lawsuit alleging claims for derivative relief on
behalf of the Company is also pending in federal district court in Delaware, and alleges, among other things, that certain Company proxy filings contain incorrect statements relating to the
compensation of the Company's Chief Executive Officer.

Although
it is difficult to predict the resulting outcome of these proceedings, management currently believes that any resulting liability beyond that already recorded will not
materially affect the consolidated financial position or results of operations of the Company.

Note 26Loan Commitments

The following table summarizes the Company's outstanding loan commitments for the periods indicated:

September 30,
2007

December 31,
2006(in thousands)Undisbursed home equity lines of credit

$
8,945,236

$
9,516,713Undisbursed construction loans


1,692,706


1,460,757Commitments to fund mortgage loans


29,011,662


33,506,166Commitments to fund commercial real estate loans


1,323,096


1,991,204Commitments to buy mortgage loans


19,481,064


21,291,923Commitments to sell mortgage loans


28,042,413


39,664,918


Note 27Subsequent Events

On October 26, 2007, the Company announced that its Board of Directors declared dividends of $785.42 per share on its Series B preferred stock and
$0.15 per common share. The preferred stock dividend is payable on November 15, 2007 and the common stock dividend is payable on November 30, 2007, to shareholders of record on
November 13, 2007.

Subsequent
to September 30, 2007, the Company enhanced its liquidity position as follows:



45

---





COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        (Unaudited)



46

---





Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations

As used in this Report, references to "we," "our," "the Company" or "Countrywide" refer to Countrywide Financial Corporation and its consolidated subsidiaries
unless otherwise indicated. This discussion includes forward-looking statements concerning future events and performance of the Company, which are subject to certain risks and uncertainties as
discussed underManagement's Discussion and Analysis of Financial Condition and Results of OperationsFactors That May Affect Our Future
Results.

Overview

This section gives an overview of significant items that are discussed in more detail throughout Management's Discussion and Analysis of Financial Condition and
Results of Operations.



We recorded a net loss of $1.2 billion for the quarter ended September 30, 2007. Following is a summary of our key performance measures for the
quarters ended September 30, 2007 and 2006:

September 30,% Change2007

2006(dollar amounts
in thousands, except per share data)Consolidated CompanyRevenues

$
(49,966
)
$
2,822,495

N/MNet (loss) earnings

$
(1,200,693
)
$
647,564

N/MDiluted (loss) earnings per share(1)

$
(2.85
)
$
1.03

N/MTotal assets at period end

$
209,236,465

$
193,194,572

8
%Key Segment Pre-tax (Loss) EarningsMortgage Banking

$
(1,313,521
)
$
423,927

N/MBanking

$
(406,711
)
$
370,806

N/MCapital Markets

$
(344,402
)
$
141,099

N/MInsurance

$
150,180

$
91,343

64
%Key Operating StatisticsTotal loan fundings

$
96,433,000

$
117,902,000

(18
%)Mortgage Banking loan sales

$
84,845,613

$
107,118,824

(21
%)Loan servicing portfolio at period end

$
1,459,136,000

$
1,244,311,000

17
%Assets of Banking Operations at period end

$
105,176,751

$
88,103,857

19
%Nonperforming Assets(2)

$
2,481,060

$
1,727,423

44
%


---

47

---





September 30,2007

2006(in thousands)Loans held for sale

$
443,365

$
738,012Government guaranteed loans, held for investment


326,849


418,518$
770,214

$
1,156,530


During
the quarter ended September 30, 2007, our results were affected by significant disruptions in the U.S. mortgage market and the global capital markets, both of which we have
historically relied upon to finance our mortgage production. The combination of a weakening housing market and concern over certain industry-wide product offerings negatively impacted the expectations
of future performance and the value investors assign to mortgage loans and securities. Because of this, investor demand for non-agency mortgage-backed securities abruptly declined and participants in
the debt markets substantially curtailed financing of our mortgage loan inventories.

Mortgage
lenders, including Countrywide, responded by adjusting their loan program and underwriting standards, which had the effect of reducing the availability of mortgage credit to
borrowers. These developments further weakened the housing market and affected mortgage loan performance, resulting in increased losses in our portfolio of mortgage loans held for investment and
retained interests created in our loan sales activities. Because of these developments, we recognized inventory valuation adjustments and credit related costs as explained below.

Inventory Valuation Adjustments

During the quarter, disruption in the capital markets caused a severe lack of liquidity for non-agency loans held for sale and mortgage-backed
securities, which resulted in losses on the sale or write-downs of such loans and securities that aggregated to approximately $1.0 billion in the third quarter of 2007. Approximately
$12.3 billion of these non-agency loans were
moved to the Company's held-for-investment (HFI) portfolio after their write-down.

Credit-Related Costs

Increased estimates of inherent losses in our portfolio of loans held for investment and increased charge-offs resulted in significant increases to
credit costs during the third quarter of 2007. Higher estimates of inherent losses were attributable to continued deterioration in housing market conditions, worsening delinquency trends, and the
significant tightening of available credit which occurred during the third quarter and which is expected to further adversely impact credit performance. The revised expectations relative to credit
losses impacted third quarter results as follows:



48

---





The
current quarter's results of operations included the following charges:



|                                                    |  | Quarter Ended September 30, 2007
|--------------------------------------------------- |  | --------------------------------
|
|
|
|Inventory Valuation Charges:                        |  |                                 
|Inventory and pipeline write-downs(1)               |  | $                               
|Inventory write-down on loans economically sold(2)  |  |                                 
|                                                    |  |                                 
|                                                    |  |                                 
|                                                    |  |                                 
|Credit-Related Charges:                             |  |                                 
|Residual valuation adjustments                      |  |                                 
|Residential held for investment portfolio provision |  |                                 
|Representation and warranties reserve provision     |  |                                 
|                                                    |  |                                 
|                                                    |  |                                 
|                                                    |  |                                 
|Restructuring charges                               |  |                                 
|                                                    |  |                                 
|                                                    |  | $                               
|                                                    |  |                                 

---



We are exposed to credit risk primarily in our mortgage banking activities and our Banking Operations. With respect to our mortgage banking activities, a primary
source of credit risk stems from investments and obligations that we retain from sales and securitizations of loans in the form of credit-enhancing subordinated interests, representations and
warranties and corporate guarantees. Estimated credit losses over the expected lifetime of the security are considered in the valuation of these investments and obligations. In general, the entire
carrying value of our retained interests is at risk because the related cash flows are available to absorb credit losses in the loan pools underlying such subordinated interests. We held
$892.4 million of credit-sensitive subordinated interests at September 30, 2007, a decrease of 57% from December 31, 2006.

Our
liability for representations and warranties and corporate guarantees was $747.6 million at September 30, 2007 and $435.5 million at December 31, 2006.
The contractual limit of our corporate guarantees exceeded the liabilities recorded by $487.5 million and $490.5 million at September 30, 2007 and December 31, 2006,
respectively.

We
held $83.6 billion of mortgage loans for investment, primarily in our Banking Operations, at September 30, 2007. Our allowance for credit losses, which includes our
allowance for loan losses and a liability for losses relating to unfunded commitments, was $1,240.6 million at September 30, 2007, an

49

---



increase
of 361% from December 31, 2006. The increase reflects higher estimated losses stemming from higher delinquencies combined with higher estimates of default rates and loss severities,
and the seasoning of Banking Operations' investment loan portfolio. To help moderate our credit risk, we carry supplemental mortgage insurance. As of September 30, 2007, $23.1 billion of
the residential lending portfolio was covered by such insurance, an increase of 153% from December 31, 2006.



As discussed under the sectionLiquidity and Capital Resources, during the quarter ended September 30,
2007, we were affected by illiquidity in both the secondary mortgage market and in the debt markets that we have historically relied upon to meet our short-term financing needs. We
regularly plan for contingencies that include disruptions in the marketplace and we place major emphasis on the adequacy, reliability and diversity of our funding sources. However, the dislocations in
the secondary and debt markets that occurred during the quarter ended September 30, 2007, were
historically unusual, requiring us to take significant additional steps to maintain our access to financing during the period of disruption.

During
the quarter ended September 30, 2007, each of the three major credit rating agencies downgraded our credit ratings. Notwithstanding the downgrades, we maintain "investment
grade" credit ratings, with long-term ratings of A-, Baa3 and BBB+ by Standard & Poor's, Moody's Investors Service and Fitch, respectively. Subsequent to
September 30, 2007 Standard & Poor's further downgraded our long-term rating to BBB+.

At
September 30, 2007, the Bank exceeded the OTS regulatory capital requirements to be classified as "well capitalized," with a Tier 1 capital ratio of 7.3% and a total
risk-based ratio of 13.5%.



We expect continued weakness in the housing markets in the near-term and we anticipate lower mortgage market origination volumes for the remainder of
2007 and in 2008. We also expect our credit costs to remain at elevated levels through 2008. The value of our inventories of non-conforming loans held for sale, as well as other mortgage-related
assets, have continued to fluctuate after September 30, 2007 but credit spreads have generally widened. We expect that the values of these assets will continue to fluctuate in the foreseeable
future.

We
believe that over the longer-term changes that we have made during the quarter ended September 30, 2007 enhance the stability of the Company and lessen the risks
from further marketplace disruptions. We also believe that many opportunities will present themselves to the Company as a result of the market transition taking place, and that Countrywide is well
positioned to capitalize on these opportunities. For additional information regarding current conditions and our expectation of future trends, please see the section in this Report entitled Management's Discussion and Analysis
of Financial Condition and Results of OperationsProspective Trends.

Critical Accounting Policies

The accounting policies with the greatest impact on our financial condition and results of operations that require the most judgment, and which are most likely to
result in materially different amounts being recorded under different conditions or using different assumptions, relate to our mortgage securitization activities; our investments in MSRs and retained
interests; our measurement of valuation allowances and liabilities associated with credit risk inherent in our operations and our use of derivatives to manage interest rate risk. A discussion of the
critical accounting policies related to these activities is included in our 2006 Annual Report.

50

---



As
discussed throughout this Report, during the quarter ended September 30, 2007, the market for mortgage loans other than agency-eligible loans experienced varying degrees of
illiquidity and price declines. We generally estimate the fair value of loans held for sale based on quoted market prices for securities backed by similar types of loans. If quoted market prices are
not available, fair value is estimated based on other relevant factors, including dealer price quotations, prices available for similar instruments, and valuation models intended to approximate the
amounts that would be received from a third party. We regularly compare the values developed from our valuation models to executed trades to assure that the valuations are reflective of actual sale
prices. However, due to the illiquidity of the mortgage marketplace prevalent at September 30, 2007, it was necessary to look for alternative sources of fair value, including the whole loan
purchase market for similar loans, and to apply more judgment to the valuations of non-conforming prime, home equity and nonprime loans because of a lack of executed trades that could be
used to assure that the valuations are reflective of fair value. These loans included $12.3 billion of loans transferred to held for investment during the quarter ended September 30,
2007 and approximately 60% of mortgage loans originated or purchased for resale excluding commercial real estate at September 30, 2007.

Results of Operations ComparisonQuarters Ended September 30, 2007 and 2006



Our consolidated net loss for the third quarter of 2007 was $1,200.7 million, a decrease of $1,848.3 million from 2006's third quarter net earnings
of $647.6 million. Our diluted loss per share was
$2.85, as compared to diluted earnings per share of $1.03 for the year-ago period. Our results of operations were largely affected by both marketplace concerns about the credit performance
of securitized mortgage loans and the worsening credit performance of our loans as follows:



The
Mortgage Banking Segment generated a pre-tax loss of $1,313.5 million, a reduction in results of operations of $1,737.4 million from the
year-ago quarter. This decrease was largely due to inventory and interest rate lock commitments (IRLCs) write-downs and provisions for representation and warranty claims totaling
$690.5 million and $275.7 million, respectively, in our Loan Production Sector and $689.8 million in impairment of credit-sensitive residuals and a provision for loan losses of
$151.1 million in the Loan Servicing Sector.

51

---



The Banking Segment was also adversely impacted by increased credit-related costs, and produced a pre-tax loss of $406.7 million, a $777.5 million decline from
the year-ago quarter.

The
Capital Markets Segment was negatively affected by declining liquidity and prices in the mortgage-related securities market. As a result of these conditions, the Capital Markets
Segment recorded losses on sales of securities and inventory and reported a pre-tax loss of $344.4 million during the quarter.

Operating Segment Results

Pre-tax (loss) earnings by segment are summarized below:

Quarters Ended
September 30,2007

2006(in thousands)Mortgage Banking:Loan Production

$
(1,314,928
)
$
280,684Loan Servicing


(26,791
)

123,373Loan Closing Services


28,198


19,870Total Mortgage Banking


(1,313,521
)

423,927Banking


(406,711
)

370,806Capital Markets


(344,402
)

141,099Insurance


150,180


91,343Global Operations


8,060


3,451Other(1)


(61,308
)

5,586Total

$
(1,967,702
)
$
1,036,212


---

The
pre-tax (loss) earnings of each segment includes intercompany transactions, which are eliminated in the "other" category.

52

---



Total
loan production by segment and product, net of intersegment sales, is summarized below:

Quarters Ended
September 30,2007

2006(in millions)Segment:Mortgage Banking

$
90,351

$
106,252Banking Operations


3,856


5,982Capital Marketsconduit acquisitions(1)


424


4,322Total Mortgage Loan Fundings


94,631


116,556Commercial Real Estate


1,802


1,346$
96,433

$
117,902Product:Prime Mortgage

$
82,565

$
94,571Prime Home Equity


8,740


11,851Nonprime Mortgage


3,326


10,134Commercial Real Estate


1,802


1,346$
96,433

$
117,902


---

During
the quarter ended September 30, 2007 there was a substantial decline in loan production volume to $96.4 billion compared to $133.1 billion in the quarter
ended June 30, 2007 and $117.9 billion in the quarter ended September 30, 2006. This decline in production reflects a smaller origination market in the latter part of the quarter,
which is largely attributable to the tightening of underwriting and loan program guidelines as well as economic conditions which include a weakening housing market. The tightening of underwriting and
loan program guidelines included reductions in the availability of reduced documentation loans and loans on investor-owned properties and reduction in the maximum loan-to-value
or combined loan-to-value ratio. The impact of these changes was most significant to Nonprime Mortgage, Prime Home Equity and non-conforming prime mortgage loans.

The
following table summarizes loan production by purpose and by interest rate type:

Quarters Ended
September 30,2007

2006(in millions)Purpose:Non-purchase

$
50,002

$
62,523Purchase


46,431


55,379$
96,433

$
117,902Interest Rate Type:Fixed

$
72,625

$
64,447Adjustable


23,808


53,455$
96,433

$
117,902


53

---



Mortgage Banking Segment

The Mortgage Banking Segment includes the Loan Production, Loan Servicing and Loan Closing Services Sectors.



The Loan Production Sector sources mortgage loans through the three production channels of our mortgage banking subsidiary, Countrywide Home Loansthe
Retail Channel (Consumer Markets and Full Spectrum Lending), Wholesale Lending Channel and Correspondent Lending Channel. These loans are funded through any one of these channels or through
Countrywide Bank, FSB ("Countrywide Bank" or the "Bank"). As a result of the market disruption in the current quarter, we decided to fund a larger percentage of our loan production through the Bank,
which had greater access to sources of liquidity. During the quarter ended September 30, 2007, 70% of the loans funded in the Mortgage Banking Segment were funded through the Bank compared to
32% in the year-ago period. In September 2007, 89% of the Mortgage Banking loan production was funded through the Bank. We expect to continue funding almost all of our loan
production through the Bank.

The
following table summarizes Mortgage Banking loan production by channel, by mortgage loan type, by purpose and by interest rate type:

Quarters Ended
September 30,(1)2007

2006(in millions)Channel:Originated:Retail:Consumer Markets

$
25,856

$
29,003Full Spectrum Lending


7,200


9,21733,056


38,220Wholesale Lending


14,960


22,762Total originated


48,016


60,982PurchasedCorrespondent Lending


42,335


45,270$
90,351

$
106,252Mortgage Loan Type:Prime Mortgage

$
80,766

$
87,713Prime Home Equity


6,408


9,203Nonprime Mortgage


3,177


9,336$
90,351

$
106,252Purpose:Non-purchase

$
46,643

$
56,302Purchase


43,708


49,950$
90,351

$
106,252Interest Rate Type:Fixed

$
68,805

$
62,378Adjustable


21,546


43,874$
90,351

$
106,252


---

54

---



The
pre-tax (loss) earnings of the Loan Production Sector are summarized below:

Quarters Ended September 30,2007

2006Amount

Percentage
of Loan
Production
Volume

Amount

Percentage
of Loan
Production
Volume(dollar amounts in thousands)Revenues:Prime Mortgage

$
342,390



$
965,148Nonprime Mortgage


(143,940
)



180,374Prime Home Equity


(474,285
)



232,570Total revenues


(275,835
)
(0.31
%)

1,378,092

1.30
%Expenses:Compensation


545,175

0.60
%

589,210

0.56
%Other operating


367,775

0.41
%

355,376

0.33
%Allocated corporate


126,143

0.14
%

152,822

0.15
%Total expenses


1,039,093

1.15
%

1,097,408

1.04
%Pre-tax (loss) earnings

$
(1,314,928
)
(1.46
%)
$
280,684

0.26
%Total Mortgage Banking loan production

$
90,351,000



$
106,252,000


The
Loan Production sector incurred a pre-tax loss of $1.3 billion compared to pre-tax earnings of $280.7 million in the year-ago
quarter. The third quarter loss resulted primarily from the disruption in the secondary markets during the quarter for non-agency loans, including prime non-conforming, prime
home equity and nonprime mortgage loans. The illiquidity and credit spread widening caused by the market disruption had a significant negative impact on the value of such loans and the amount of loans
that were sold. As a result, we recorded inventory valuation and pipeline write-downs of $690.5 million, including write-downs on loans transferred to held for investment, during the quarter
ended September 30, 2007 and the volume of loans sold declined to $84.8 billion in the current quarter compared to $107.1 billion in the year-ago quarter, causing
revenues to decline.

Although
expenses decreased from the year-ago period driven primarily by a reduction in variable compensation expenses that resulted from the decline in the volume of loans
produced, they increased as a percentage of loans produced. The decline in the volume of loans produced reflects a smaller origination market in the latter part of the quarter, which was largely
attributable to the tightening of underwriting and loan program guidelines as well as economic conditions including a weakening housing market. We are adjusting our infrastructure and staffing levels
as appropriate for a smaller origination market. However, we do not expect the benefits of such expense reductions to be realized until the first quarter of 2008. These reductions notwithstanding, we
continue to invest in expanding the loan sales force in our Consumer Markets Division as we shift our emphasis toward originated rather than purchased production and in support of our
long-term strategy of increasing our share of the mortgage market.

55

---



Following
is a summary of our loan origination channels' sales organizations:

September 30,2007

2006Facilities



FacilitiesSales
Force

Branches

Call
Centers

Sales
Force

Branches

Call
CentersChannel:Retail:Consumer Markets

9,571

754

5

8,904

772

4Full Spectrum Lending

4,462

167

8

5,874

224

814,033

921

13

14,778

996

12Wholesale Lending

948

52



1,478

52

Correspondent Lending

123





190



15,104

973

13

16,446

1,048

12


The
following table summarizes the number of people included in the Loan Production Sector workforce:

September 30,2007

2006Sales

15,104

16,446Operations:Regular employees

9,371

10,342Temporary staff

640

1,45310,011

11,795Administration and support

3,207

3,772Total Loan Production Sector workforce

28,322

32,013




The results of our Loan Servicing Sector include fees and other income earned and expenses incurred for servicing loans for others; the financial performance of
our investments in MSRs and retained interests and the risk management activities related to these assets; and profits from our subservicing activities. The long-term performance of this
sector is affected primarily by the level and direction of interest rates, the level of projected and actual prepayments in our servicing portfolio, projected and actual credit losses, our operational
effectiveness and our ability to manage interest-rate and credit-spread risk.

Our
servicing portfolio grew to $1.5 trillion at September 30, 2007, a 17% increase from September 30, 2006. At the same time, the overall weighted-average note rate of
loans in our servicing portfolio increased to 6.6% from 6.4% at September 30, 2006.

56

---



The following table summarizes the results for the Loan Servicing Sector:

Quarters Ended September 30,2007

2006Amount

Percentage of
Average
Servicing
Portfolio(1)

Amount

Percentage of
Average
Servicing
Portfolio(1)(dollar amounts in thousands)Servicing fees, net of guarantee fees

$
1,185,822

0.331
%
$
940,831

0.311
%Escrow balance income


232,206

0.065
%

238,082

0.079
%Miscellaneous fees


161,830

0.045
%

167,719

0.055
%Income from retained interests


122,424

0.034
%

123,816

0.041
%Realization of expected cash flows from mortgage servicing rights


(696,361
)
(0.194
%)

(749,155
)
(0.248
%)Operating revenues


1,005,921

0.281
%

721,293

0.238
%Direct expenses


222,867

0.062
%

181,799

0.060
%Allocated corporate expenses


19,475

0.006
%

21,291

0.007
%Total expenses


242,342

0.068
%

203,090

0.067
%Operating earnings


763,579

0.213
%

518,203

0.171
%Interest expense


(426,323
)
(0.119
%)

(164,049
)
(0.054
%)Change in fair value of mortgage servicing rights


(830,932
)
(0.232
%)

(1,124,750
)
(0.372
%)Impairment of non credit-sensitive retained interests


(26,882
)
(0.008
%)

(166,805
)
(0.055
%)Servicing hedge gains(2)


1,201,143

0.336
%

1,034,353

0.342
%Valuation changes, net of Servicing Hedge


343,329

0.096
%

(257,202
)
(0.085
%)Pre-tax earnings before credit-sensitive retained interests


680,585

0.190
%

96,952

0.032
%(Impairment) recovery of credit-sensitive retained interests


(689,776
)
(0.193
%)

26,421

0.009
%Allocated hedge(2)


(17,600
)
(0.004
%)



Credit-sensitive valuation changes


(707,376
)
(0.197
%)

26,421

0.009
%Pre-tax (loss) earnings

$
(26,791
)
(0.007
%)
$
123,373

0.041
%Average servicing portfolio

$
1,431,813,000



$
1,209,255,000


---

Before
the impact of valuation adjustments to credit-sensitive retained interests, Loan Servicing sector pre-tax earnings were $680.6 million for the quarter ended
September 30, 2007 compared to $97.0 million in the year-ago quarter. The improvement is due primarily to the benefit of slower prepayment speeds during the current quarter
which were largely driven by the same factors that negatively impacted the Loan Production sector. These factors include lower levels of housing turnover

57

---



and
lesser refinance activity due to weakening housing market conditions, reduced secondary market liquidity and tighter underwriting guidelines. Slower prepayments resulted in lower realization of
expected cash flows from MSRs that, combined with a larger servicing portfolio, contributed to an improvement in operating earnings for the sector of $245.4 million from the
year-ago quarter. In addition, the MSR valuation was positively impacted by an expectation of slower future prepayment speeds and as a result the valuation change of MSRs and non
credit-sensitive retained interests, net of the Servicing Hedge, was a gain $343.3 million in the quarter despite a decline in interest rates during the quarter. In the year-ago quarter
valuation changes of MSRs and non credit-sensitive retained interests, net of the Servicing Hedge, was a loss of $257.2 million. These positive factors were partially offset by an increase in
interest expense resulting from higher servicing assets and an increase in the provision for loan losses of $151.1 million related to Mortgage Banking loans held for investment.

Offsetting
improved operating earnings and MSR asset performance, Loan Servicing sector results were negatively impacted by impairment losses of $689.8 million related to
credit-sensitive residual securities, largely related to subordinated interests backed by prime home equity loans and to a lesser extent, nonprime residual securities. These charges resulted from
increases in estimates of future credit losses on the underlying loans as well as increased discount rates reflecting higher market yield requirements on these investments. The aggregate carrying
value of the Company's investments in credit-sensitive residuals at September 30, 2007 was $892.4 million compared to $2.1 billion at September 30, 2006.



This sector is comprised of the LandSafe companies, which provide credit reports, flood determinations, appraisals and title reports primarily to the Loan
Production Sector and to third parties as well.

The
LandSafe companies produced $28.2 million in pre-tax earnings in the quarter ended September 30, 2007, representing an increase of 42% from the
year-ago period. The increase in LandSafe's pre-tax earnings was primarily due to the increase in its title and default and appraisal businesses due to increased foreclosure
activity.

Banking Segment

The Banking Segment includes Banking Operationsprimarily the investment and fee-based activities of Countrywide Bankalong
with the activities of Countrywide Warehouse Lending ("CWL"). Banking Operations invests in mortgage loans sourced from the Loan Production Sector, as well as loans and mortgage-backed
securities purchased from nonaffiliates. CWL provides other mortgage

58

---



lenders
with temporary financing secured by mortgage loans. Following is a summary of Banking Operations' loan acquisitions by source:

Quarters Ended
September 30,2007

2006(in millions)Consumer Markets

$
1,769

$
1,215Correspondent Lending


1,139


1,472Purchases from non-affiliates


454


2,849Wholesale Lending


307


446Full Spectrum Lending


187


3,856


5,982Transfer of mortgage loans from held for sale to held for investment


12,315


$
16,171

$
5,982


As
a result of the market disruption, a significant portion of non-conforming Adjustable-Rate Mortgage ("ARM") and Prime Home Equity loans held for sale were written down and then
transferred from the Mortgage Banking Segment to Banking Operations' investment portfolio during the quarter ended September 30, 2007. These loans were transferred at the lower of cost or fair
value.

The
Banking Segment incurred a pre-tax loss of $406.7 million during the quarter ended September 30, 2007, compared to pre-tax earnings of
$370.8 million for the year-ago period. Following is the composition of pre-tax (loss) earnings:

Quarters Ended
September 30,2007

2006(in thousands)Banking Operations

$
(388,630
)
$
378,455CWL


(288
)

11,619Allocated corporate expenses


(17,793
)

(19,268
)Total Banking Segment pre-tax (loss) earnings

$
(406,711
)
$
370,806


59

---



The
revenues and expenses of Banking Operations are summarized in the following table:

Quarters Ended
September 30,2007

2006(dollar amounts in thousands)Interest income

$
1,557,635

$
1,422,514Interest expense


(1,027,687
)

(946,172
)Net interest income


529,948


476,342Provision for credit losses(1)


(784,370
)

(27,754
)Net interest (expense) income after provision for credit losses


(254,422
)

448,588Non-interest income


27,247


36,447Non-interest expense:Mortgage insurance expense


(25,883
)

(8,706
)Other non-interest expense


(135,572
)

(97,874
)Pre-tax (loss) earnings

$
(388,630
)
$
378,455Efficiency ratio(2)


29
%

21
%After-tax return on average assets


(1.12
%)

1.08
%


---

Banking
Operations recorded a pre-tax loss of $388.6 million for the quarter ended September 30, 2007, a decrease in results of operations of
$767.1 million from the year-ago period, primarily driven by a higher provision for credit losses. The Banking Operations' provision for credit losses increased to
$784.4 million during the quarter ended September 30, 2007 from $27.8 million during the quarter ended September 30, 2006. The increase in the provision for credit losses
was primarily due to higher losses inherent in the portfolio driven by the impact of the weakening housing market and significant tightening of available credit on delinquency and default trends
during the current quarter as well as portfolio seasoning. The provision for credit losses and the related allowance for credit losses is affected by many factors, including economic conditions (for
example, housing prices, interest rates and unemployment rates), borrower credit profiles, delinquency, and loan seasoning and prepayments.

60

---



The
components of net interest income of Banking Operations are summarized below:

|                                             |                                            | Quarters Ended September 30,                      |  
|-------------------------------------------- | ------------------------------------------ | ------------------------------------------------- | -
|
|
|
|Interest-earning assets:                     |                                            |                                                   |  
|                                             | Loans(1)                                   |                                                   | $
|                                             | Securities available for sale(2)           |                                                   |  
|                                             | Short-term investments                     |                                                   |  
|                                             | FHLB securities and FRB stock              |                                                   |  
|                                             |                                            |                                                   |  
|                                             |                                            | Total earning assets                              |  
|                                             | Allowance for loan losses                  |                                                   |  
|                                             | Other assets                               |                                                   |  
|                                             |                                            |                                                   |  
|                                             |                                            | Total assets                                      |  
|                                             |                                            |                                                   |  
|Interest-bearing liabilities:                |                                            |                                                   |  
|                                             | Money market deposits and savings accounts |                                                   | $
|                                             | Company-controlled custodial deposits(3)   |                                                   |  
|                                             | Time deposits                              |                                                   |  
|                                             |                                            |                                                   |  
|                                             |                                            | Total interest-bearing deposits                   |  
|                                             | Borrowings                                 |                                                   |  
|                                             |                                            |                                                   |  
|                                             |                                            | Total interest-bearing liabilities                |  
|Non interest-bearing liabilities and equity: |                                            |                                                   |  
|                                             | Non interest-bearing checking accounts     |                                                   |  
|                                             | Other liabilities                          |                                                   |  
|                                             | Shareholder's equity                       |                                                   |  
|                                             |                                            |                                                   |  
|                                             |                                            | Total non interest-bearing liabilities and equity |  
|                                             |                                            |                                                   |  
|                                             |                                            | Total liabilities and shareholder's equity        |  
|                                             |                                            |                                                   |  
|Net interest income                          |                                            |                                                   |  
|                                             |                                            |                                                   |  
|Net interest spread(4)                       |                                            |                                                   |  
|Net interest margin(5)                       |                                            |                                                   |  

---

61

---



The dollar amounts of interest income and interest expense vary depending upon changes in interest rates and upon the relative volumes of our
various interest-earning assets and interest-bearing liabilities. Changes attributable to (i) changes in volume (changes in average outstanding balances multiplied by the prior period's rate),
(ii) changes in rate (changes in average interest rate multiplied by the prior period's volume), and (iii) changes in rate/volume (changes in rate multiplied by the change in
volume)which were allocated proportionately to the changes in volume and the changes in rate and included in the relevant column beloware as follows:

Quarter Ended
September 30, 2007 vs. September 30, 2006Increase (Decrease) Due toTotal ChangesVolume

Rate(in thousands)Interest-earning assets:Loans

$
(119,014
)
$
42,805

$
(76,209
)Securities available for sale


178,562


14,461


193,023Short-term investments


11,882


526


12,408FHLB securities and FRB stock


5,538


361


5,899Total interest income

$
76,968

$
58,153

$
135,121Interest-bearing liabilities:Money market deposits and savings accounts

$
103,468

$
(569
)
$
102,899Company-controlled custodial deposits


(6,376
)

4,478


(1,898
)Time deposits


(43,015
)

16,569


(26,446
)Total deposits


54,077


20,478


74,555Borrowings


13,626


(6,666
)

6,960Total interest expense


67,703


13,812


81,515Net interest income

$
9,265

$
44,341

$
53,606


The
increase in net interest income was primarily due to a 5 basis point increase in net interest margin combined with a $7.4 billion, or 9%, increase in average interest-earning
assets. The increase in the net interest margin was primarily a result of a smaller rate lag impact as the spread between the 12-Month Treasury Average index, which is the index to which most of the
Bank's assets are priced, and LIBOR, which is the index to which most of the Bank's liabilities are priced, tightened. In addition, the reduced impact of introductory rates earned on recently funded
pay-option loans contributed to the increase in net interest margin as fewer such loans were originated in the quarter ended September 30, 2007 compared to the quarter ended
September 30, 2006. These positive factors were partially offset by a shift in asset mix to include a larger portion of lower-yielding high-credit quality mortgage-backed
securities.

62

---



Banking Operations balance sheets are as follows:

September 30, 2007

December 31, 2006Amount

Rate

Amount

Rate(dollar amounts in thousands)AssetsShort-term investments

$
1,872,761

5.67
%
$
50,974

5.14
%Loans, net of allowance for loan losses of $1,106,300 and $228,692, respectively


79,313,048

7.66
%

73,481,762

7.39
%Securities available for sale


18,273,012

5.60
%

6,208,477

4.63
%FHLB securities and FRB stock


2,322,558

6.00
%

1,431,403

5.91
%Total interest-earning assets


101,781,379

7.22
%

81,172,616

7.16
%Other assets


3,395,372




1,601,952Total assets

$
105,176,751



$
82,774,568Liabilities and EquityDeposits:(1)Customer

$
43,567,071

4.66
%
$
39,904,633

5.08
%Company-controlled escrow deposit accounts


13,319,709

5.24
%

14,609,269

5.28
%Borrowings


38,229,471

4.97
%

18,997,967

4.35
%Total interest-bearing liabilities


95,116,251

4.87
%

73,511,869

4.93
%Non-interest bearing deposits:Company-controlled escrow deposit accounts


2,260,082




1,128,363Other


594,076




344,951Other liabilities


831,167




1,451,003Shareholder's equity


6,375,175




6,338,382Total liabilities and equity

$
105,176,751



$
82,774,568Primary spread(2)




2.35
%



2.23
%Nonaccrual loans

$
1,432,501



$
519,083


---

Interest-earning
assets growth came from the acquisition of high-credit quality mortgage-backed securities from non-affiliates and additions of
$16.2 billion of loans to the loans held for investment portfolio, including $12.3 billion of loans transferred to the Banking Operations' investment portfolio during the quarter ended
September 30, 2007.

The
Banking Segment also includes the operations of CWL. CWL's pre-tax results of operations decreased by $11.9 million during the quarter ended
September 30, 2007 in comparison to the year-ago period. This decline primarily was due to a 71% decrease in average mortgage warehouse advances, which resulted primarily from a
decrease in overall market funding. Warehouse lending advances were $0.6 billion at September 30, 2007, and had an average yield of 6.6% during the quarter ended September 30,
2007.

Capital Markets Segment

Our Capital Markets Segment recorded pre-tax losses of $344.4 million for the quarter ended September 30, 2007, a decrease of
$485.5 million from pre-tax earnings of $141.1 million for the

63

---



year-ago
quarter. This decrease was caused by a decline in revenues and recognition of losses on loans and securities held at period end as the business adjusted to weakening market
conditions, partially offset by a $22.7 million, or 19% decrease in expenses, primarily variable revenue-related compensation.

The
market dislocation experienced during the third quarter caused significant disruption to the activities of our Capital Markets Segment. Specifically, the markets in which our Capital
Markets Segment operates became less liquid and financing for certain of the segment's activities was severely curtailed. As a result, it was necessary to curtail certain of our business activities,
to sell a significant portion of our trading assets at depressed prices, and to write down inventory of mortgage loans held for sale which resulted in losses of approximately $295.2 million,
net of a $161.9 million gain from credit default swaps.

The
inventory write-downs consisted of a $22.1 million write-down of loans held in inventory managed in the Capital Markets Segment on behalf of CHL, and a valuation allowance of
$150.3 million on loans that have been economically sold in securitizations. However, the transactions did not qualify for sales accounting under SFAS 140 and are accounted for as
secured borrowings. A gain will be recognized when the securitizations qualify as sales under SFAS 140.

The
following table shows revenues, expenses and pre-tax (loss) earnings of the Capital Markets Segment:

Quarters Ended
September 30,2007

2006(in thousands)Revenues:Commercial real estate

$
48,074

$
26,166Brokering


13,421


10,293Conduit


(239,355
)

121,126Underwriting


(32,211
)

71,727Securities trading


(17,289
)

23,039Other


(22,853
)

5,636Total revenues


(250,213
)

257,987Expenses:Operating expenses


88,674


106,953Allocated corporate expenses


5,515


9,935Total expenses


94,189


116,888Pre-tax (loss) earnings

$
(344,402
)
$
141,099


During
the current reporting period, the commercial real estate finance activities of the Capital Markets Segment generated revenues totaling $48.1 million primarily from sales of
commercial real estate loans compared to $26.2 million in the year-ago period. The increase in revenue was primarily due to the performance of certain financial hedges which are a
component of the gain on sale.

During
the quarter ended September 30, 2007, the Capital Markets Segment recorded net losses totaling $239.4 million from its conduit activities, primarily managing the
acquisition and sale or securitization of loans on behalf of CHL. These revenues, primarily as they relate to nonprime loans, were adversely impacted by a decline in the volume of loans sold of
$10.1 billion, or 67%, combined with write-downs of our inventory. Underwriting revenues were also negatively impacted by the reduced volume of conduit securitizations and a decline in nonprime
and prime home equity securitization activity on behalf of the Mortgage Banking Segment.

64

---



The
following table shows the composition of Countrywide Securities Corporation securities trading volume, which includes intersegment trades with the Mortgage Banking Segment, by
instrument:

Quarters Ended
September 30,2007

2006(in millions)Mortgage-backed securities

$
604,249

$
539,165Asset-backed securities


7,224


63,650Other


29,598


29,687Subtotal(1)


641,071


632,502U.S. Treasury securities


415,570


300,408Total securities trading volume

$
1,056,641

$
932,910


---

Insurance Segment

The Insurance Segment's pre-tax earnings increased by $58.8 million over the year-ago period, to $150.2 million during the
quarter ended September 30, 2007. The following table shows pre-tax earnings by component:

Quarters Ended
September 30,2007

2006(in thousands)Balboa Reinsurance Company

$
68,206

$
60,003Balboa Life & Casualty(1)


89,027


42,563Allocated corporate expenses


(7,053
)

(11,223
)Total Insurance Segment pre-tax earnings

$
150,180

$
91,343


---

The
following table shows net insurance premiums earned:

Quarters Ended
September 30,2007

2006(in thousands)Balboa Reinsurance Company

$
74,013

$
56,676Balboa Life & Casualty


315,908


244,098Total net insurance premiums earned

$
389,921

$
300,774


65

---



The
following table shows insurance claim expenses:

Quarters Ended September 30,2007

2006Amount

As Percentage
of Net
Earned
Premiums

Amount

As Percentage
of Net
Earned
Premiums(dollar amounts in thousands)Balboa Reinsurance Company

$
15,882

21
%
$
3,558

6
%Balboa Life & Casualty


129,254

41
%

98,393

40
%Total insurance claim expenses

$
145,136



$
101,951


Our
mortgage reinsurance business produced $68.2 million in pre-tax earnings, an increase of 14% over the year-ago quarter, driven primarily by growth of
11% in the mortgage loans included in our loan servicing portfolio that are covered by reinsurance contracts. Our insurance claim expense increased as a percentage of net earned premiums in 2007
compared to 2006 due to a reversal of loss reserves related to the 2002 reinsurance book of business in 2006.

Our
Life and Casualty insurance business produced pre-tax earnings of $89.0 million, an increase of $46.5 million, or 109%, from the year-ago
quarter. The increase in earnings was primarily driven by a $71.8 million, or 29%, increase in net earned premiums during the quarter ended September 30, 2007 in comparison to the
year-ago quarter. The increase in net earned premiums was primarily attributable to growth in lender-placed property and auto insurance. Insurance claim expenses increased by
$30.9 million driven by growth in premiums, however these expenses as a percentage of net earned premiums were comparable with the year-ago quarter. During October of 2007, our Life & Casualty
business incurred losses estimated between $19.5 million and $27.5 million relating to the California wildfires.

Our
Life and Casualty operations seek to earn profits by capitalizing on Countrywide's customer base and institutional relationships, as well as through operating efficiencies and sound
underwriting. Insurance risk is managed through the use of reinsurance.

Global Operations Segment

Global Operation's pre-tax earnings totaled $8.1 million during the quarter ended September 30, 2007, an increase of $4.6 million
from the year-ago period. The increase in earnings was primarily due to an increase in revenue recognized from the licensing of software and offshore services provided for other segments
of the Company.

66

---



Detailed Line Item Discussion of Consolidated Revenue and Expense Items



(Loss) gain on sale of loans and securities is summarized below:

Quarters Ended September 30,2007

2006(Loss) Gain on Sale



Gain on SaleLoans Sold

Amount

Margin(2)

Loans Sold

Amount

Margin(2)(dollar amounts in thousands)Mortgage Banking:Prime Mortgage Loans

$
82,579,732

$
223,519

0.27
%
$
84,656,067

$
847,427

1.00
%Nonprime Mortgage Loans


673,626


(158,586
)
N/M


10,584,928


143,607

1.36
%Prime Home Equity Loans:Initial Sales


586,183


(518,230
)
N/M


10,855,628


137,523

1.27
%Subsequent draws


1,006,072


15,155

1.51
%

1,022,201


37,159

3.64
%1,592,255


(503,075
)
N/M


11,877,829


174,682

1.47
%Total Production Sector


84,845,613


(438,142
)
(0.52
%)

107,118,824


1,165,716

1.09
%Reperforming loans







0.00
%




(26
)
0.00
%$
84,845,613


(438,142
)
(0.52
%)
$
107,118,824


1,165,690

1.09
%Capital Markets:Conduit activities(1)

$
4,907,018


(241,941
)
(4.93
%)
$
15,036,425


102,517

0.68
%Underwriting


N/A


(37,284
)
N/A


N/A


65,556

N/ACommercial real estate

$
1,319,293


36,006

2.73
%
$
1,219,279


19,357

1.59
%Securities trading and other


N/A


(56,983
)
N/A


N/A


(6,334
)
N/A(300,202
)






181,096Other


N/A


19,724

N/A


N/A


27,115

N/A$
(718,620
)





$
1,373,901


---

The third quarter of 2007 loss on sale resulted primarily from the disruption in the secondary market during the quarter for
non-agency loans and related securities, including prime non-conforming, prime home equity and nonprime mortgage loans. The illiquidity and credit spread widening caused by the
market disruption negatively impacted the value of such loans and securities and the amount of loans and securities that were sold. As a result, we recorded write-downs and losses on sales of loans
and securities in the amount of $985.7 million as a component of (loss) gain on sale of loans and securities during the quarter ended September 30, 2007. Of this amount
$690.5 million was related to our Mortgage Banking Segment and $295.2 million was related to our Capital Markets Segment.

Gain
on sale of Prime Mortgage Loans decreased in the quarter ended September 30, 2007 as compared to the quarter ended September 30, 2006. Lower sales volume and decreased
margins on such sales contributed to the decline in prime gain on sale. Write-downs in the amount of $129.9 million resulting from the secondary market disruption also reduced prime gain on
sale. In addition, a provision of $177.3 million for prime representations and warranties is included as a

67

---



component
of prime gain on sale. This provision relates to increased expectations of future representation and warranty claims on loans sold or securitized resulting from higher levels of expected
future defaults.

During
the quarter ended September 30, 2007, we incurred a loss on sale of Nonprime Mortgage Loans compared to a gain of $143.6 million in the year-ago period.
The decline in revenues is due to lower sales volume and decreased margins on such sales combined with write-downs of $90.4 million resulting from the secondary market disruption. In addition,
a provision of $67.1 million for nonprime representations and warranties is included as a component of nonprime loss on sale. This provision relates to increased expectations of future
representation and warranty claims on loans sold or securitized resulting from higher levels of expected future defaults.

During
the quarter ended September 30, 2007, we incurred a loss on sale of Prime Home Equity Loans compared to a gain of $174.7 million in the year-ago period.
The decline in revenues is due to lower sales volume and decreased margins on such sales combined with inventory write-downs of $470.2 million resulting from the secondary market disruption.

In
our Capital Market Segment, the market disruption resulted in volume decreases in each of the segment's trading operations, particularly the non-agency conduit business,
and also
resulted in inventory write-downs and losses from sales of securities at depressed prices. The loss on sale related to conduit activities includes a valuation adjustment of $150.3 million on
loans that have been economically sold in securitizations. However, the transactions did not qualify for sales accounting under SFAS 140 and are accounted for as secured borrowings. A gain will
be recognized when the securitizations qualify as sales under SFAS 140.

Net Interest (Expense) Income and Provision for Loan Losses

Net interest (expense) income is summarized below:

Quarters Ended
September 30,2007

2006(in thousands)Net interest (expense) income:Banking Segment loans and securities

$
534,266

$
490,557Mortgage Banking Segment:Loans and securities


115,653


165,178Loan Servicing Sector:Net interest income on custodial balances


232,206


238,082Interest expense


(307,006
)

(179,871
)Capital Markets Segment securities inventory


25,816


39,957Other


105,374


45,067Net interest income


706,309


798,970Provision for loan losses


(934,268
)

(37,996
)Net interest (expense) income after provision for loan losses

$
(227,959
)
$
760,974


The
increase in net interest income from the Banking Segment was attributable to both an increase in the net interest margin and growth in the amount of average interest-earning assets.
Net interest margin in the Banking Segment increased to 2.31% during the quarter ended September 30, 2007, from 2.25% during the year-ago quarter. Net interest margin was positively
impacted by a smaller interest rate repricing lag compared to the year-ago quarter as well as a smaller proportion of the portfolio comprising pay-option ARM loans with reduced
introductory interest rates. Average interest-earning assets in the Banking Segment increased to $93.1 billion during the quarter ended

68

---



September 30,
2007, an increase of $4.6 billion, or 5%, over the year-ago quarter. These positive factors were partially offset by a shift in asset mix to include a larger
portion of lower-yielding high-credit quality mortgage-backed securities.

The
decrease in net interest income from Mortgage Banking Segment loans and securities reflects a decrease in the average earnings-assets from the year-ago quarter combined with a
decrease in net interest margin, which was triggered by a shift in asset mix to include a higher proportion of short-term investments.

Net
interest income from custodial balances decreased in the current period due to a decrease of $1.3 billion in average custodial balances from the year-ago quarter
partially offset by an increase in the earnings rate from 5.36% during the quarter ended September 30, 2006 to 5.52% during the quarter ended September 30, 2007. Interest income on
custodial balances is reduced by the interest we are required to pass through to security holders on paid-off loans, which was $72.0 million and $75.3 million in the quarters
ended September 30, 2007 and 2006, respectively.

Interest
expense allocated to the Loan Servicing Sector increased primarily due to an increase in total Servicing Sector assets.

The
decrease in net interest income from the Capital Markets Segment securities inventory is attributable to a 10% decrease in the average inventory of securities held, along with a
decrease in the
net interest margin from 0.29% in the quarter ended September 30, 2006 to 0.21% in the quarter ended September 30, 2007. The decrease in the net interest margin earned on the securities
portfolio is primarily due to a flatter yield curve in the current period and the effects of downgrades of our credit ratings.

The
increase in the provision for loan losses was primarily due to higher expectations of losses inherent in our portfolio driven by the impact of the weakening housing market and
significant tightening of available credit on delinquency and default trends as well as portfolio seasoning. The impact was most significant on prime home equity loans and pay-option loans
in the held for investment portfolio of Banking Operations.



Loan servicing fees and other income from MSRs and retained interests are summarized below:

Quarters Ended
September 30,2007

2006(in thousands)Servicing fees, net of guarantee fees(1)

$
1,150,056

$
940,831Income from retained interests


123,165


123,816Late charges


93,599


73,804Prepayment penalties


41,297


70,495Ancillary fees


34,162


19,595Total loan servicing fees and income from MSRs and retained interests

$
1,442,279

$
1,228,541


---

The
increase in servicing fees, net of guarantee fees, was principally due to a 12% increase in the average servicing portfolio, combined with an increase in the annualized net service
fee earned from 0.311% of the average portfolio balance during the quarter ended September 30, 2006 to 0.339% during the quarter ended September 30, 2007.

69

---



The slight decrease in income from retained interests was primarily due to a reduction in the average yield on such instruments from 20% in the year-ago quarter to 16% in the
current quarter, partially offset by a 20% increase in the average investment in these assets from the quarter ended September 30, 2006 to the quarter ended September 30, 2007. Income
from retained interests excludes any impairment charges or recoveries, which are included in impairment of retained interests in the consolidated statement of earnings. These investments include
interest-only, principal-only and subordinated interests that arise from the securitization of mortgage loans, primarily Nonprime Mortgage and Prime Home Equity Loans.



The change in fair value of MSRs that is included in earnings for the quarters ended September 30, 2007 and 2006 consists of two primary
componentsa reduction in fair value due to the realization of expected cash flows from the MSRs and a change in fair value resulting from changes in interest rates and other market
factors. The realization of expected cash flows from MSRs resulted in a value reduction of $696.4 million and $749.5 million during the quarters ended September 30, 2007 and 2006,
respectively. The decline in realization of expected cash flows from MSRs during the current quarter was due to slower prepayment speeds.



We recorded decreases in the fair value of the MSRs in the quarters ended September 30, 2007 and 2006 of $830.9 million and $1,125.1 million,
respectively, primarily as a result of decreasing mortgage rates during both quarters which increased expected future prepayment speeds. In the quarter ended September 30, 2007, the impact of
decreasing interest rates on expected future prepayments was mitigated by lower levels of housing turnover and lesser refinance activity due to weakening housing market conditions, reduced secondary
market liquidity and significant tightening of available credit.



Impairment of retained interests is summarized below:

Quarters Ended September 30,2007

2006(Impairment)
Recovery

Asset
Balance at
Period End

(Impairment)
Recovery

Asset
Balance at
Period End(in thousands)Credit-sensitive retained interests

$
(689,776
)
$
892,414

$
26,421

$
2,062,528Non credit-sensitive retained interests


(26,882
)

1,571,114


(168,278
)

917,427Impairment of retained interests

$
(716,658
)
$
2,463,528

$
(141,857
)
$
2,979,955


In
the quarter ended September 30, 2007, we recognized impairment of credit-sensitive retained interests of $689.8 million, including $540.6 million related to
subordinated interests on prime home equity securitizations and $156.2 million related to nonprime securitizations. The impairment charges were driven by weakening housing market conditions
combined with significant tightening of available
credit, which resulted in increased estimates for future losses on the loans underlying these securities, as well as higher market yield requirements. The loss estimate, as measured by gross
undiscounted losses embedded in the valuation of subordinated interests as a percentage of the unpaid principal balance of the loans underlying such interests, increased from 5.7% to 9.5% from
June 30, 2007 to September 30, 2007.

In
the quarters ended September 30, 2007 and 2006, we recorded decreases in value of non credit-sensitive retained interests amounting to $26.9 million and
$168.3 million respectively. The decrease in

70

---



the
current quarter is due mainly to a reduction in value of prepayment penalty bonds resulting from slower prepayments. The decrease in the year-ago quarter was related primarily to
interest-only securities and was the result of decreasing interest rates in the period.



The Servicing Hedge is designed to supplement the macro hedge and to offset a portion of the change in value of MSRs and retained interests recorded in current
period earnings. The values of the derivatives and securities that are the primary components of the Servicing Hedge are tied to long-term mortgage, swap and Treasury rates. These rates
decreased during the quarters ended September 30, 2007 and 2006. As a result, the Servicing Hedge recognized a gain of $1,183.5 million, net of $231 million of time value decay of
the options included in the Servicing Hedge (our "hedge cost"), in the quarter ended September 30, 2007 and a gain of $1,034.4 million, net of $131 million of hedge cost, in the
quarter ended September 30, 2006.

In
a stable interest rate environment, we expect to incur no significant declines in value of MSRs other than recovery of our investment through the realization of cash flows. However,
we expect to incur hedge cost. The level of Servicing Hedge gains or losses in any period depends on various factors such as the size and composition of the hedge, the shape of the yield curve and the
level of implied interest rate volatility.



An increase in premiums earned on the lender-placed property and auto insurance lines of business, along with an increase in reinsurance premiums earned,
contributed to the $89.1 million increase in net insurance premiums earned.



Other revenue consists of the following:

Quarters Ended September 30,2007

2006(in thousands)Appraisal fees, net

$
44,091

$
33,972Title services


18,460


10,715Credit report fees, net


14,946


18,313Increase in cash surrender value of life insurance


10,944


5,435Insurance agency commissions


7,537


7,384Global Operations Segment processing fees


1,628


2,480Other(1)


27,215


62,186Total other revenue

$
124,821

$
140,485


---

71

---





Compensation expenses decreased 6%, or $65.1 million in the quarter ended September 30, 2007 as compared to the year-ago period. Details
are presented below:

Quarters Ended September 30,2007

2006(in thousands)Base salaries

$
648,456

$
591,009Incentive bonus and commissions


358,676


476,559Payroll taxes and other benefits(1)


224,552


239,400Deferral of loan origination costs


(157,930
)

(168,067
)Total compensation expenses

$
1,073,754

$
1,138,901


---

Average
workforce by segment is summarized below:

Quarters Ended September 30,2007

2006Mortgage Banking

42,575

40,935Banking

2,419

2,471Capital Markets

1,063

846Insurance

2,280

2,133Global Operations

3,959

2,148Corporate Administration

7,138

7,311Average workforce, including temporary staff

59,434

55,844


Compensation
expense reductions occurred in the Mortgage Banking Segment, Corporate Administration and the Capital Markets Segment as follows:



Incremental
direct costs associated with the origination of loans are deferred when incurred. Subsequent treatment of these costs is based on whether the loans are held for sale or held
for investment. If the loan is sold, the costs deferred are included as a component of gain on sale in the period sold; if the loan is held for investment, the deferred costs are amortized to interest
income over the life of the loan.

72

---





Occupancy and other office expenses are summarized below:

Quarters Ended September 30,2007

2006(in thousands)Office and equipment rentals

$
66,892

$
56,843Depreciation


59,741


52,997Utilities


46,416


42,424Postage and courier service


27,457


28,339Office supplies


20,076


20,007Dues and subscriptions


16,358


14,607Repairs and maintenance


13,990


18,988Other(1)


33,544


23,703Total occupancy and other office expenses

$
284,474

$
257,908


---

Occupancy
and other office expenses for the quarter ended September 30, 2007 increased by 10%, or $26.6 million, reflecting growth in facilities.



Insurance claim expenses were $145.1 million for the quarter ended September 30, 2007 as compared to $102.0 million for the
year-ago period. The increase in insurance claims expense was due to growth in our insurance book of business.



Advertising and promotion expenses increased 28% from the quarter ended September 30, 2006, as a result of the increasing competition for lending business
as the mortgage market volume declines.



Other operating expenses are summarized below:

Quarters Ended September 30,2007

2006(in thousands)Legal, consulting, accounting and auditing expenses

$
52,438

$
47,367Insurance commission expense


45,861


50,919Travel and entertainment


26,546


26,398Mortgage insurance


25,883


8,706Losses on servicing-related advances


24,839


16,728Software amortization and impairment


19,477


14,414Insurance


19,469


6,651Taxes and licenses


19,185


14,814Other


125,960


60,612Deferral of loan origination costs


(33,636
)

(28,041
)Total other operating expenses

$
326,022

$
218,568


73

---



The
increase in operating expenses reflects an increase of $17.2 million in purchased mortgage insurance expense relating to the Banking Operations portfolio of loans held for
investment, as well as
overall growth in the Company from the quarter ended September 30, 2006 to the quarter ended September 30, 2007.

Results of Operations ComparisonNine Months Ended September 30, 2007 and 2006



We recorded a net loss for the nine months ended September 30, 2007 of $281.6 million, as compared to net earnings of $2,053.3 million in the
nine months ended September 30, 2006. Our diluted loss per share was $1.24 compared to diluted earnings per share of $3.29 from the year-ago period.

The
results for the nine-month period ended September 30, 2007 were influenced by the same factors that affected the quarter ended September 30,
2007marketplace concerns about the credit performance of securitized mortgage loans and the worsening credit performance of our loans:



These
decreases were partially offset by an increase in the profitability of the Insurance Segment, due to an increase in the net earned premiums and a reversal of loss reserves related
to the 2003 book of reinsurance business on which negligible remaining loss exposure was deemed to exist in the first nine months of 2007.

Operating Segment Results

Pre-tax (loss) earnings by segment are summarized below:

Nine Months Ended September 30,2007

2006(in thousands)Mortgage Banking:Loan Production

$
(736,788
)
$
889,397Loan Servicing


(243,242
)

651,374Loan Closing Services


86,415


68,302Total Mortgage Banking


(893,615
)

1,609,073Banking


10,293


1,037,263Capital Markets


(102,684
)

454,262Insurance


428,559


245,033Global Operations


18,754


16,439Other(1)


(63,516
)

(12,472
)Total

$
(602,209
)
$
3,349,598


---

74

---



The
pre-tax (loss) earnings of each segment includes intercompany transactions, which are eliminated in the "other" category above.

Total
loan production by segment and product, net of intercompany sales, is summarized below:

Nine Months Ended September 30,2007

2006(in millions)Segment:Mortgage Banking

$
323,986

$
303,339Banking Operations


10,885


22,316Capital MarketsConduit acquisitions from nonaffiliates


4,887


14,942Total Mortgage Loan Fundings


339,758


340,597Commercial Real Estate


6,714


3,309$
346,472

$
343,906Product:Prime Mortgage

$
292,955

$
272,960Prime Home Equity


29,875


37,092Nonprime Mortgage


16,928


30,545Commercial Real Estate


6,714


3,309$
346,472

$
343,906


Our
total loan production was $346.5 billion for the nine months ended September 30, 2007, as compared to $343.9 billion in the year-ago period. The
increase was primarily due to an increase in our market share from 14.1% to 16.2% (based on our internal market estimates) in a mortgage market that declined approximately 13% from the
year-ago period. The increase in our market share was primarily driven by increased market share in our Correspondent Lending Channel.

The
following table summarizes loan production by purpose and by interest rate type:

Nine Months Ended September 30,2007

2006(in millions)Purpose:Non-purchase

$
199,139

$
184,426Purchase


147,333


159,480$
346,472

$
343,906Interest Rate Type:Fixed

$
245,950

$
178,195Adjustable


100,522


165,711$
346,472

$
343,906


Mortgage Banking Segment

The mortgage banking segment includes Loan Production, Loan Servicing and Loan Closing Services Sectors.

75

---







The following table summarizes Mortgage Banking loan production by channel, by mortgage loan type, by purpose and by interest rate type:

Nine Months Ended
September 30,(1)2007

2006(in millions)Channel:Originated:Retail:Consumer Markets

$
86,177

$
88,003Full Spectrum Lending


26,311


25,280112,488


113,283Wholesale Lending


60,013


67,520Total originated


172,501


180,803PurchasedCorrespondent Lending


151,485


122,536$
323,986

$
303,339Mortgage Loan Type:Prime Mortgage

$
285,819

$
245,767Prime Home Equity


22,421


29,966Nonprime Mortgage


15,746


27,606$
323,986

$
303,339Purpose:Non-purchase

$
185,610

$
161,902Purchase


138,376


141,437$
323,986

$
303,339Interest Rate Type:Fixed Rate

$
232,397

$
170,233Adjustable Rate


91,589


133,106$
323,986

$
303,339


---

76

---



The
pre-tax (loss) earnings of the Loan Production Sector are summarized below:

Nine Months Ended September 30,2007

2006Amount

Percentage of
Loan
Production
Volume

Amount

Percentage of
Loan
Production
Volume(dollar amounts in thousands)Revenues:Prime Mortgage

$
2,453,696



$
3,030,009Nonprime Mortgage


63,560




600,498Prime Home Equity


(177,821
)



571,628Total revenues


2,339,435

0.72
%

4,202,135

1.38
%Expenses:Compensation


1,659,641

0.51
%

1,816,280

0.60
%Other operating


1,053,730

0.33
%

1,064,541

0.35
%Allocated corporate


362,852

0.11
%

431,917

0.14
%Total expenses


3,076,223

0.95
%

3,312,738

1.09
%Pre-tax (loss) earnings

$
(736,788
)
(0.23
%)
$
889,397

0.29
%Total Mortgage Banking loan production

$
323,986,000



$
303,339,000


The
Loan Production sector incurred a pre-tax loss of $736.8 million in the nine months ended September 30, 2007 compared to pre-tax earnings of
$889.4 million in the year-ago period. The current period loss resulted primarily from the disruption in the secondary market during the third quarter of 2007 for
non-agency loans, including prime non-conforming, prime home equity and nonprime mortgage loans. The illiquidity and credit spread widening caused by the market disruption had
a significant negative impact on the value of such loans and the amount of loans that were sold. As a result, we recorded inventory valuation and pipeline write-downs during the nine months ended
September 30, 2007 of $929.2 million, net of a credit hedge in place for part of the period. In addition, the volume of nonprime loans and home equity loans sold declined to
$26.2 billion in the current period compared to $52.8 billion in the year-ago period, causing revenues to decline.

Expenses
decreased from the year-ago period (both in dollars and as a percentage of loans produced), primarily due to a change in the production channel mix throughout most
of the period towards our Correspondent Lending Channel, which has a lower cost structure than our origination channels and to cost cutting initiatives.

77

---





The following table summarizes the results for the Loan Servicing Sector:

|                                                                  |                                    | Nine Months Ended September 30,           |              
|----------------------------------------------------------------- | ---------------------------------- | ----------------------------------------- | -------------
|
|
|
|Servicing fees, net of guarantee fees                             |                                    | $                                         | 3,411,014    
|Escrow balance income                                             |                                    |                                           | 660,223      
|Miscellaneous fees                                                |                                    |                                           | 561,598      
|Income from retained interests                                    |                                    |                                           | 393,092      
|Realization of expected cash flows from mortgage servicing rights |                                    |                                           | (2,353,368   
|                                                                  |                                    |                                           |              
|                                                                  |                                    | Operating revenues                        |              
|                                                                  |                                    |                                           |              
|Direct expenses                                                   |                                    |                                           | 605,027      
|Allocated corporate expenses                                      |                                    |                                           | 56,365       
|                                                                  |                                    |                                           |              
|                                                                  |                                    | Total expenses                            |              
|                                                                  |                                    |                                           |              
|Operating earnings                                                |                                    |                                           | 2,011,167    
|Interest expense                                                  |                                    |                                           | (938,356     
|Change in fair value of mortgage servicing rights                 |                                    |                                           | 400,581      
|Recovery (impairment) of non credit-sensitive retained interests  |                                    |                                           | 58,722       
|Servicing hedge loss(2)                                           |                                    |                                           | (371,384     
|                                                                  |                                    |                                           |              
|                                                                  |                                    | Valuation changes, net of Servicing Hedge |              
|                                                                  |                                    |                                           |              
|Pre-tax earnings before credit-sensitive retained interests       |                                    |                                           | 1,160,730    
|Impairment of credit-sensitive retained interests                 |                                    |                                           | (1,472,072   
|Allocated hedge(2)                                                |                                    |                                           | 68,100       
|                                                                  |                                    |                                           |              
|                                                                  | Credit-sensitive valuation changes |                                           |              
|                                                                  |                                    |                                           |              
|Pre-tax (loss) earnings                                           |                                    | $                                         | (243,242     
|                                                                  |                                    |                                           |              
|Average servicing portfolio                                       |                                    | $                                         | 1,374,064,000
|                                                                  |                                    |                                           |              

---

Before
the impact of valuation adjustments to credit-sensitive retained interests, Loan Servicing sector pre-tax earnings were $1,160.7 million for the nine months
ended September 30, 2007 compared to $716.3 million in the year-ago period. The increase is due to a larger servicing portfolio and improvement in the value of the MSRs and
non credit-sensitive retained interests, net of the Servicing Hedge. These positive factors were partially offset by an increase in interest expense resulting from higher servicing assets and an
increase in the provision for loan losses related to Mortgage Banking

78

---



loans
held for investment. The MSR valuation was positively impacted by an expectation of slower future prepayment speeds resulting from the market disruption in the third quarter of 2007 and as a
result the valuation change of MSRs and non credit-sensitive retained interests, net of servicing hedge loss was a gain of $87.9 million in the nine months ended September 30, 2007
compared to a loss of $302.5 million in the year-ago period.

Offsetting
improved operating earnings and MSR asset performance, Loan Servicing sector results were negatively impacted by impairment losses of $1,472.1 million related to
credit-sensitive residual securities, largely related to subordinated interests backed by prime home equity loans and to a lesser extent nonprime loans. These charges resulted from increases in
estimates of future credit losses on the underlying loans as well as increased discount rates reflecting higher market yield requirements on these investments.



The LandSafe companies produced $86.4 million in pre-tax earnings in the nine months ended September 30, 2007, representing an increase
of 27% from the year-ago period. The increase in LandSafe's pre-tax earnings was primarily due to the increase in its title and default and appraisal businesses due to
increased foreclosure activity.

Banking Segment

Following is a summary of Banking Operations' loan acquisitions by source:

Nine Months Ended
September 30,2007

2006(in millions)Purchases from non-affiliates

$
3,723

$
6,863Consumer Markets


3,345


2,069Correspondent Lending


2,734


7,262Wholesale Lending


896


6,122Full Spectrum Lending


187


10,885


22,316Transfer of mortgage loans held for sale to loans held for investment


12,315


$
23,200

$
22,316


The
Banking Segment recorded pre-tax earnings of $10.3 million during the nine months ended September 30, 2007, compared to $1,037.3 million for the
year-ago period. Following is the composition of pre-tax earnings:

Nine Months Ended
September 30,2007

2006(in thousands)Banking Operations

$
41,753

$
1,037,928CWL


19,268


43,151Allocated corporate expenses


(50,728
)

(43,816
)Total Banking Segment pre-tax earnings

$
10,293

$
1,037,263


79

---



The
revenues and expenses of Banking Operations are summarized in the following table:

Nine Months Ended September 30,2007

2006(dollar amounts in thousands)Interest income

$
4,365,287

$
3,785,783Interest expense


(2,875,260
)

(2,470,043
)Net interest income


1,490,027


1,315,740Provision for credit losses(1)


(1,159,877
)

(92,286
)Net interest income after provision for credit losses


330,150


1,223,454Non-interest income


117,628


109,929Non-interest expense:Mortgage insurance expense


(69,215
)

(24,710
)Other non-interest expense


(336,810
)

(270,745
)Pre-tax earnings

$
41,753

$
1,037,928Efficiency ratio(2)


26
%

21
%After-tax return on average assets


0.04
%

1.05
%


---

Banking
Operations recorded pre-tax earnings of $41.8 million for the nine months ended September 30, 2007, a decrease of $996.2 million, or 96%, from
the year-ago period. This decrease resulted primarily from a higher provision for credit losses and an increase in non-interest expense, partially offset by an increase in net
interest income. The Banking Operations' provision for credit losses increased by $1,067.6 million during the nine months ended September 30, 2007 compared to the nine months ended
September 30, 2006. The increase in the provision for credit losses was primarily due to higher inherent losses in our loan portfolio driven by the impact of the weakening housing market and
significant tightening of available credit on delinquency and default trends as well as portfolio seasoning. Non-interest expense increased $110.6 million reflecting Banking
Operations' continuing growth, increased purchases of mortgage insurance for its portfolio of loans held for investment and a $29.0 million increase in deposit insurance expense.

80

---



The
components of net interest income of Banking Operations are summarized below:

|                                             |                                            | Nine Months Ended September 30,                   |  
|-------------------------------------------- | ------------------------------------------ | ------------------------------------------------- | -
|
|
|
|Interest-earning assets:                     |                                            |                                                   |  
|                                             | Loans(1)                                   |                                                   | $
|                                             | Securities available for sale(2)           |                                                   |  
|                                             | Short-term investments                     |                                                   |  
|                                             | FHLB securities and FRB stock              |                                                   |  
|                                             |                                            |                                                   |  
|                                             |                                            | Total earning assets                              |  
|                                             | Allowance for loan losses                  |                                                   |  
|                                             | Other assets                               |                                                   |  
|                                             |                                            |                                                   |  
|                                             |                                            | Total assets                                      |  
|                                             |                                            |                                                   |  
|Interest-bearing liabilities:                |                                            |                                                   |  
|                                             | Money market deposits and savings accounts |                                                   | $
|                                             | Company-controlled custodial deposits(3)   |                                                   |  
|                                             | Time deposits                              |                                                   |  
|                                             |                                            |                                                   |  
|                                             |                                            | Total interest-bearing deposits                   |  
|                                             | Borrowings                                 |                                                   |  
|                                             |                                            |                                                   |  
|                                             |                                            | Total interest-bearing liabilities                |  
|Non interest-bearing liabilities and equity: |                                            |                                                   |  
|                                             | Non interest-bearing checking accounts     |                                                   |  
|                                             | Other liabilities                          |                                                   |  
|                                             | Shareholder's equity                       |                                                   |  
|                                             |                                            |                                                   |  
|                                             |                                            | Total non interest-bearing liabilities and equity |  
|                                             |                                            |                                                   |  
|                                             |                                            | Total liabilities and shareholder's equity        |  
|                                             |                                            |                                                   |  
|Net interest income                          |                                            |                                                   |  
|                                             |                                            |                                                   |  
|Net interest spread(4)                       |                                            |                                                   |  
|Net interest margin(5)                       |                                            |                                                   |  

---

81

---



The dollar amounts of interest income and interest expense vary depending upon changes in interest rates and upon the relative volumes of our interest-earning assets and interest-bearing
liabilities. Changes attributable to (i) changes in volume (changes in average outstanding balances multiplied by the prior period's rate), (ii) changes in rate (changes in average
interest rate multiplied by the prior period's volume), and (iii) changes in rate/volume (changes in rate multiplied by the change in volume)which were allocated proportionately to
the changes in volume and the changes in rate and included in the relevant column beloware as follows:

|                              |                                        | Nine Months Ended
September 30, 2007 vs. September 30, 2006 |  
|----------------------------- | -------------------------------------- | ----------------------------------------------------------- | -
|
|
|
|Interest-earning assets:      |                                        |                                                             |  
|                              | Loans                                  |                                                             | $
|                              | Securities available for sale          |                                                             |  
|                              | Short-term investments                 |                                                             |  
|                              | FHLB securities and FRB stock          |                                                             |  
|                              |                                        |                                                             |  
|                              |                                        | Total interest income                                       |  
|                              |                                        |                                                             |  
|Interest-bearing liabilities: |                                        |                                                             |  
|                              | Money market deposits savings accounts |                                                             | $
|                              | Company-controlled custodial deposits  |                                                             |  
|                              | Time deposits                          |                                                             |  
|                              |                                        |                                                             |  
|                              |                                        | Total deposits                                              |  
|                              | Total borrowings                       |                                                             |  
|                              |                                        |                                                             |  
|                              |                                        | Total interest expense                                      |  
|                              |                                        |                                                             |  
|                              |                                        | Net interest income                                         |  
|                              |                                        |                                                             |  

The
increase in net interest income is primarily due to an 11 basis point increase in net interest margin and to a $6.0 billion, or 8%, increase in average interest-earning
assets. The increase in the net interest margin from the year-ago period was a result of the effect of a smaller interest rate repricing lag and the reduced impact of introductory rates
earned on recently funded pay-option loans as such loans comprised a smaller portion of the portfolio in the nine months ended September 30, 2007 compared to the
year-ago period, partially offset by a change in asset mix to include a larger portion of lower-yielding high-credit quality mortgage-backed securities.

The
Banking Segment also includes the operations of CWL. CWL's pre-tax earnings decreased by $23.9 million during the nine months ended September 30, 2007 in
comparison to the year-ago period. This decline was primarily due to a 44% decrease in average mortgage warehouse advances, which resulted primarily from a decrease in overall market
funding activity and to competitive pricing pressure. Warehouse lending advances were $0.6 billion at September 30, 2007 and had an average yield of 6.5% during the nine months ended
September 30, 2007.

Capital Markets Segment

Our Capital Markets Segment recorded pre-tax losses of $102.7 million for the nine months ended September 30, 2007, a decrease of
$556.9 million, or 123%, from the year-ago period caused by an overall decline in revenue and a $33.4 million, or 10% increase in expenses to support newer lines of business.

82

---



The
following table shows revenues, expenses and pre-tax (loss) earnings of the Capital Markets Segment:

Nine Months Ended
September 30,2007

2006(in thousands)Revenues:Commercial real estate

$
136,037

$
70,279Underwriting


71,629


221,897Securities trading


64,716


84,322Brokering


40,751


26,435Conduit


(77,887
)

347,966Other


19,954


27,893Total revenues


255,200


778,792Expenses:Operating expenses


338,641


303,366Allocated corporate expenses


19,243


21,164Total expenses


357,884


324,530Pre-tax (loss) earnings

$
(102,684
)
$
454,262


During
the current reporting period, the commercial real estate finance activities of the Capital Markets Segment generated revenues totaling $136.0 million compared to
$70.3 million in the year-ago period. The increase in revenue was due primarily to an increase in the volume of loans sold. Our commercial real estate lending activities were also
substantially curtailed because of the loss of available outside financing late in the period.

Our
conduit revenues declined by $425.9 million, including a $172.4 million write-down of our inventory managed in our Capital Markets Segment on behalf of CHL.
The inventory write-downs consisted of a $22.1 million write-down of loans held in inventory and a valuation allowance of $150.3 million relating to loans that had been
economically sold in securitizations. However, the transactions did not qualify for sales accounting under SFAS 140 and are accounted for as secured borrowings. A gain will be recognized when
the securitizations qualify as sales under SFAS 140. Conduit revenues were also affected by declining sales volume and gain on sale margin and a lower net interest margin. These factors relate
to credit spreads that began to widen in early 2007 with respect to to nonprime loans and by the end of the period with respect to all non-conforming products.

Our
underwriting revenues decreased primarily due to losses in our inventory of securities due to the effects of the market dislocation on the value of our holdings from previous
underwritings, as well as a 42% reduction in the volume of underwritings during the period.

83

---



The
following table shows the composition of Countrywide Securities Corporation ("CSC") securities trading volume, which includes intersegment trades with the Mortgage Banking Segment,
by instrument:

Nine Months Ended
September 30,2007

2006(in millions)Mortgage-backed securities

$
1,848,981

$
1,638,393Asset-backed securities


62,665


125,387Other


106,395


116,486Subtotal(1)


2,018,041


1,880,266U.S. Treasury securities


1,146,286


965,335Total securities trading volume

$
3,164,327

$
2,845,601


---

Insurance Segment

The Insurance Segment's pre-tax earnings increased by $183.5 million over the year-ago period, to $428.6 million during the
nine months ended September 30, 2007. The following table shows pre-tax earnings by component:

Nine Months Ended
September 30,2007

2006(in thousands)Balboa Reinsurance Company

$
255,621

$
159,161Balboa Life & Casualty(1)


197,013


109,911Allocated corporate expenses


(24,075
)

(24,039
)Total Insurance Segment pre-tax earnings

$
428,559

$
245,033


---

The
following table shows net insurance premiums earned:

Nine Months Ended
September 30,2007

2006(in thousands)Balboa Reinsurance Company

$
202,707

$
163,627Balboa Life & Casualty


873,775


701,166Total net insurance premiums earned

$
1,076,482

$
864,793


84

---



The
following table shows insurance claim expenses:

Nine Months Ended September 30,2007

2006Amount

As Percentage
of Net
Earned
Premiums

Amount

As Percentage
of Net
Earned
Premiums(dollar amounts in thousands)Balboa Reinsurance Company

$
(27,990
)
N/M

$
24,293

15
%Balboa Life & Casualty


385,200

44
%

304,509

43
%Total insurance claim expenses

$
357,210



$
328,802


Our
mortgage reinsurance business produced an increase in pre-tax earnings of $96.5 million, or 61%, over the year-ago period, resulting primarily from a
$74.0 million reversal of loss reserves related to the 2003 book of business, on which negligible remaining loss exposure was deemed to exist in the first nine months of 2007. Also contributing
to the increase in pre-tax earnings was growth of 11% in the mortgage loans included in our loan servicing portfolio that are covered by reinsurance contracts.

Our
Life and Casualty insurance business produced pre-tax earnings of $197.0 million, an increase of $87.1 million, or 79%, from the year-ago
period. The increase in earnings was primarily driven by a $172.6 million, or 25%, increase in net earned premiums during the nine months ended September 30, 2007 in comparison to the
year-ago period. The increase in net earned premiums was primarily attributable to growth in lender-placed insurance and voluntary auto insurance. Insurance claim expenses increased by
$80.7 million driven by growth in premiums, however these expenses as a percentage of net earned premiums were comparable with the year-ago period.

Global Operations Segment

Global Operation's pre-tax earnings totaled $18.8 million during the nine months ended September 30, 2007, an increase of
$2.3 million from the year-ago period. The increase in earnings was primarily due to an increase in revenue recognized from the licensing of software and offshore services provided
for other segments of the Company, partially offset by the termination of the joint venture with Barclays Bank, PLC in 2006.

85

---



Detailed Line Item Discussion of Consolidated Revenue and Expense Items



Gain on sale of loans and securities is summarized below:

Nine Months Ended September 30,2007

2006Gain on Sale



Gain on SaleLoans Sold

Amount

Margin(2)

Loans Sold

Amount

Margin(2)(dollar amounts in thousands)Mortgage Banking:Prime Mortgage Loans

$
284,884,449

$
2,161,076

0.76
%
$
240,007,756

$
2,717,250

1.13
%Nonprime Mortgage Loans


13,727,749


(9,330
)
(0.07
%)

29,570,762


493,047

1.67
%Prime Home Equity Loans:Initial Sales


9,371,417


(329,617
)
(3.52
%)

20,000,572


307,251

1.54
%Subsequent draws


3,091,565


65,593

2.12
%

3,195,861


116,863

3.66
%12,462,982


(264,024
)
(2.12
%)

23,196,433


424,114

1.83
%Total Production Sector


311,075,180


1,887,722

0.61
%

292,774,951


3,634,411

1.24
%Reperforming loans







0.00
%

247,162


2,635

1.07
%$
311,075,180


1,887,722

0.61
%
$
293,022,113


3,637,046

1.24
%Capital Markets:Conduit activities(1)

$
20,189,865


(101,946
)
(0.50
%)
$
50,891,454


312,614

0.61
%Underwriting


N/A


59,744

N/A


N/A


202,163

N/ACommercial real estate

$
5,547,532


102,221

1.84
%
$
3,177,349


50,586

1.59
%Securities trading and other


N/A


10,217

N/A


N/A


10,886

N/A70,236







576,249Other


N/A


50,984

N/A


N/A


49,234

N/A$
2,008,942






$
4,262,529


---

The
disruption in the secondary markets during the third quarter of 2007 for non-agency loans and related securities, including prime non-conforming, prime home
equity and nonprime mortgage loans, reduced gain on sale realized in the nine months ended September 30, 2007. The illiquidity and credit spread widening caused by the market disruption
negatively impacted the value of such loans and securities and the amount of loans and securities that were sold.

Gain
on sale of Prime Mortgage Loans decreased in the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006, due primarily to lower
margins partially offset by higher sales volume. The decline in margins was due to increased price competition, change in product mix to lower-margin products and a shift in channel mix towards our
Correspondent Lending Channel, which has lower margins than our origination channels. Also contributing to the decline in

86

---



prime
gain on sale were write-downs of inventory and pipeline in the amount of $175.5 million resulting primarily from the secondary market disruption in the latter part of the period and an
increase in the provision for prime representations and warranties. This provision relates to increased expectations of future representation and warranty claims on loans sold or securitized resulting
from higher levels of expected future defaults.

During
the nine months ended September 30, 2007, we incurred a loss on sale of Nonprime Mortgage Loans compared to a gain of $493.0 million in the year-ago
period. The decline in revenues is due to lower sales volume and decreased margins on such sales. Also contributing to the decline were write-downs of $329.4 million primarily resulting from
the secondary market disruption in the third quarter of 2007 and the transfer of Nonprime Mortgage Loans held for sale to loans held for investment in the first quarter of 2007. The loans transferred
to loans held for investment had declined in value as a result of deteriorating market conditionsspecifically higher investor yield requirements as well as increased loss
assumptionsduring the first quarter of 2007. The negative effect of this write-down was partially offset by a $104.2 million gain in credit default swaps, used to
moderate credit spread risk.

During
the nine months ended September 30, 2007, we incurred a loss on sale of Prime Home Equity Loans of $264.0 million compared to a gain of $424.1 million in the
year-ago period. The decline in revenues is due to lower sales volume and decreased margins on such sales combined with write-downs of $528.8 million resulting primarily from the
secondary market disruption in the third quarter of 2007.

In
our Capital Market Segment, the market disruption in the third quarter resulted in volume decreases in each of the segment's trading operations, but particularly the
non-agency conduit business; and also resulted in inventory write-downs and loss from sales at depressed prices. The loss on sale related to conduit activities includes a
$150.3 million valuation adjustment on loans included in securities that had been economically sold in securitizations. However, the transactions did
not qualify for sales accounting under SFAS 140 and are accounted for as secured borrowings. A gain will be recognized when the securitizations qualify as sales under SFAS 140.



Net interest income is summarized below:

Nine Months Ended
September 30,2007

2006(in thousands)Net interest income (expense):Banking Segment loans and securities

$
1,521,276

$
1,365,012Mortgage Banking Segment:Loans and securities


373,683


447,409Loan Servicing Sector:Net interest income on custodial balances


660,223


605,263Interest expense


(785,000
)

(491,530
)Capital Markets Segment securities inventory


70,211


90,122Other


324,849


167,603Net interest income


2,165,242


2,183,879Provision for loan losses


(1,379,154
)

(163,032
)Net interest income after provision for loan losses

$
786,088

$
2,020,847


87

---



The
increase in net interest income from the Banking Segment was attributable to both an increase in the net interest margin and growth in the amount of average interest-earning assets.
Net interest margin increased to 2.30% during the nine months ended September 30, 2007, from 2.18% during the year-ago period primarily as a result of a smaller interest rate
repricing lag compared to the prior period as well as the segment's portfolio containing a smaller proportion of pay-option ARM loans with reduced introductory interest rates. Average
interest-earning assets in the Banking Segment increased to $87.6 billion during the nine months ended September 30, 2007, an increase of $4.2 billion, or 5%, over the
year-ago period. These positive factors were partially offset by a shift in asset mix to include a larger portion of lower-yielding high-credit quality mortgage-backed
securities.

The
decrease in net interest income from the Mortgage Banking Segment loans and securities reflects a decrease in net interest margin from the year-ago period, partially
offset by a higher balance of average earning-assets. The Mortgage Banking Segment loan and securities inventory is primarily financed with borrowings tied to short-term indices. During
the current period the difference between long-term and short-term interest rates was smaller than in the year-ago period, causing the decrease in net interest margin.

Net
interest income from custodial balances increased in the current period due to an increase in the earnings rate from 4.97% during the nine months ended September 30, 2006 to
5.42% during the nine months ended September 30, 2007, and by an increase of $746.5 million in average custodial balances from the year-ago period. Interest income on
custodial balances is reduced by the interest we are required to pass through to security holders on paid-off loans, which was $274.9 million and $224.7 million in the nine
months ended September 30, 2007 and 2006, respectively.

Interest
expense allocated to the Loan Servicing Sector increased primarily due to an increase in total Loan Servicing Sector assets.

The
decrease in net interest income from the Capital Markets securities inventory is attributable to a decrease in the net interest margin from 0.23% in the nine months ended
September 30, 2006 to 0.15% in the nine months ended September 30, 2007, partially offset by a 24% increase in the average inventory of securities held. During the current period the
difference between long-term and short-term interest rates was smaller than in the year-ago period, causing the difference in net interest margin.

The
increase in the provision for loan losses was primarily due to higher losses inherent in our portfolio of loans held for investment driven by the impact of the weakening housing
market and significant tightening of available credit on delinquency and default trends as well as portfolio seasoning. The impact was most significant on prime home equity loans and
pay-option loans held in investment portfolio in Banking Operations.

88

---





Loan servicing fees and other income from MSRs and retained interests are summarized below:

Nine Months Ended
September 30,2007

2006(in thousands)Servicing fees, net of guarantee fees(1)

$
3,291,406

$
2,794,071Income from retained interests


395,428


386,331Late charges


274,009


203,068Prepayment penalties


190,111


182,429Global Operations Segment subservicing fees





12,034Ancillary fees


99,869


57,654Total loan servicing fees and income from MSRs and retained interests

$
4,250,823

$
3,635,587


---

The
increase in servicing fees, net of guarantee fees, was principally due to an 11% increase in the average servicing portfolio, combined with an increase in the overall annualized net
service fee earned from 0.320% of the average portfolio balance during the nine months ended September 30, 2006 to 0.338% during the nine months ended September 30, 2007.

The
increase in income from retained interests was due primarily to a 27% increase in the average investment in these assets from the nine months ended September 30, 2006 to the
nine months ended September 30, 2007, partially offset by a reduction in the average yield on such instruments from 21% in the nine months ended September 30, 2006 to 17% in the nine
months ended September 30, 2007. Income from retained interests excludes any impairment charges or recoveries, which are included in impairment of retained interests in the consolidated
statement of earnings. These investments include interest-only, principal-only and residual securities that arise from the securitization of mortgage loans, primarily Nonprime
Mortgage and Prime Home Equity Loans.



The change in fair value of MSRs that is included in earnings for the nine months ended September 30, 2007 and 2006 consists of two primary
componentsa reduction in fair value due to the realization of expected cash flows from the MSRs and a change in fair value resulting from changes in interest rates and other market
factors. The realization of expected cash flows from MSRs resulted in a value reduction of $2,353.4 million and $2,148.5 million during the nine months ended September 30, 2007
and 2006, respectively.



We recorded an increase in the fair value of MSRs in the nine months ended September 30, 2007 of $400.6 million, primarily due to increased mortgage
rates during the period which lowered expected future prepayment speeds. In the latter part of the period lower levels of housing turnover and lesser refinance activity due to weakening housing market
conditions and significant tightening of available credit also contributed to lower expected prepayment speeds. Mortgage rates also increased in the nine months ended September 30, 2006 and as
a result we recorded an increase in the fair value of the MSRs of $314.4 million.

89

---





Impairment of retained interests is summarized below:

Nine Months Ended September 30,2007

2006(Impairment)
Recovery

Asset
Balance at
Period End

(Impairment)
Recovery

Asset
Balance at
Period End(in thousands)Credit-sensitive retained interests

$
(1,472,072
)
$
892,414

$
(64,918
)
$
2,062,528Non credit-sensitive retained interests


57,696


1,571,114


(146,095
)

917,427Impairment of retained interests

$
(1,414,376
)
$
2,463,528

$
(211,013
)
$
2,979,955


In
the nine months ended September 30, 2007, we recognized impairment of credit-sensitive retained interests of $1,472.1 million, including $1,061.6 million related
to subordinated interests on prime home equity securitizations and $412.1 million related to nonprime and related residual interests. These impairment charges were the result of the effect of
weakening housing market conditions combined with significant tightening of available credit on increased estimates for future losses on the loans underlying these securities. In addition, increased
market yield requirements for these securities contributed to the decline in their value.

In
the nine months ended September 30, 2006, we recognized impairment of credit-sensitive retained interests of $64.9 million. This impairment was primarily the result of a
decline in the value of certain nonprime securities due to compression of the interest rate spread on the residuals we hold because the interest on the collateral is fixed-rate while the
pass-through rate is floating.

In
the nine months ended September 30, 2007, we recognized increases in values of the non credit-sensitive retained interests, consisting primarily of interest-only
and principal-only retained interests as compared to a decrease in the nine months ended September 30, 2006.



The Servicing Hedge is designed to supplement the macro hedge and to offset a portion of the change in value of MSRs and retained interests recorded in current
period earnings. The values of the derivatives and securities that are the primary components of the Servicing Hedge are tied to long-term mortgage, swap and Treasury rates. Overall, these
rates increased slightly during the nine months ended September 30, 2007. In addition, we used credit default swaps to
moderate a negative impact on earnings caused by credit spread-driven declines in fair value during the early part of the period. During this period, credit spreads widened, resulting in a gain
related to the credit default swaps. The Servicing Hedge incurred a loss of $303.3 million, including $470 million of hedge cost and a $57.2 million gain related to the credit
default swaps.

In
the nine months ended September 30, 2006, long-term mortgage, swap and Treasury rates increased. As a result, the Servicing Hedge incurred a loss of
$472.6 million, including $376 million of hedge cost.

Net Insurance Premiums Earned

An increase in premiums earned on the lender-placed and voluntary auto insurance lines of business, along with an increase in reinsurance premiums earned,
contributed to the $211.7 million increase in net insurance premiums earned.

90

---



Other Revenue

Other revenue consists of the following:

Nine Months Ended
September 30,2007

2006(in thousands)Appraisal fees, net

$
125,900

$
100,057Credit report fees, net


51,248


57,270Title services


48,586


30,796Increase in cash surrender value of life insurance


30,631


9,533Insurance agency commissions


21,590


22,480Global Operations Segment processing fees


5,003


15,424Other(1)


169,361


157,039Total other revenue

$
452,319

$
392,599


---



Compensation expenses decreased $99.2 million, or 3%, during the nine months ended September 30, 2007 as compared to the year-ago period
as summarized below:

Nine Months Ended September 30,2007

2006(in thousands)Base salaries

$
1,846,942

$
1,732,268Incentive bonus and commissions


1,281,560


1,442,081Payroll taxes and benefits(1)


643,741


691,010Deferral of loan origination costs


(514,065
)

(507,933
)Total compensation expenses

$
3,258,178

$
3,357,426


---

Average
workforce by segment is summarized below:

Nine Months Ended
September 30,2007

2006Mortgage Banking

41,722

40,873Banking

2,198

2,355Capital Markets

1,006

778Insurance

2,167

2,127Global Operations

3,445

2,200Corporate Administration

6,992

7,164Average workforce, including temporary staff

57,530

55,497


91

---



Compensation
expense reductions in the Mortgage Banking Segment and in Corporate Administration were partially offset by increases in the Capital Markets Segment.



Incremental
direct costs associated with the origination of loans are deferred when incurred. Subsequent treatment of these costs is based on whether the loans are held for sale or held
for investment. If the loan is sold, the costs deferred are included as a component of gain on sale in the period sold; if the loan is held for investment, the deferred costs are amortized to interest
income over the life of the loan. Deferral of loan origination costs increased due to an increase in the volume of loans produced.



Occupancy and other office expenses are summarized below:

Nine Months Ended
September 30,2007

2006(in thousands)Office and equipment rentals

$
198,511

$
165,214Depreciation


176,229


150,595Utilities


128,263


120,757Postage and courier service


80,176


84,599Office supplies


61,988


65,456Dues and subscriptions


46,546


48,241Repairs and maintenance


44,840


56,757Other(1)


81,151


72,700Total occupancy and other office expenses

$
817,704

$
764,319


---

Occupancy
and other office expenses for the nine months ended September 30, 2007, increased by 7%, or $53.4 million, reflecting growth in facilities.



Insurance claim expenses were $357.2 million for the nine months ended September 30, 2007 as compared to $328.8 million for the
year-ago period. The increase in insurance claim expenses was driven by growth in earned premiums. The increase was partially offset by a $74.0 million reversal of loss reserves
related to the 2003 reinsurance book of business, on which negligible remaining loss exposure was deemed to exist in the current period compared to a reversal of $20.8 million of loss reserves
related to the 2002 reinsurance books of business in the year-ago period.

92

---







Advertising and promotion expenses increased 22% from the nine months ended September 30, 2006, as a result of the increasing competition for lending
business as mortgage market volumes decline.



Other operating expenses are summarized below:

Nine Months Ended
September 30,2007

2006(in thousands)Insurance commission expense

$
139,438

$
141,809Legal, consulting, accounting and auditing expenses


138,224


160,870Travel and entertainment


75,403


100,960Mortgage insurance


69,215


24,710Losses on servicing-related advances


57,227


41,124Software amortization and impairment


56,277


41,485Taxes and licenses


54,693


43,787Insurance


54,071


19,284Other


279,966


173,339Deferral of loan origination costs


(89,097
)

(83,725
)Total other operating expenses

$
835,417

$
663,643


Quantitative and Qualitative Disclosures About Market Risk

The primary market risk facing the Company is interest rate risk, which includes the risk that changes in interest rates will result in changes in the value of
our assets or liabilities ("price risk") and the risk that net interest income from our mortgage loan and investment portfolios will change in response to changes in interest rates. The overall
objective of our interest rate risk management activities is to reduce the variability of earnings caused by changes in interest rates. Our Corporate Asset/Liability Management Committee, which is
comprised of several of the Company's senior financial executives, is responsible for management of this risk.

We
manage price risk through the natural counterbalance of our loan production and servicing businesses. We also use various financial instruments, including derivatives, to manage price
risk related specifically to the values of our IRLC, mortgage loans and MBS held pending sale ("Mortgage Loan Inventory"), MSRs and retained interests and trading securities, as well as a portion of
our debt.

We
manage interest rate risk in our Banking Segment by funding the segment's interest-earning assets with liabilities of similar duration or a combination of derivative instruments and
certain liabilities that create repricing characteristics that more closely reflect the repricing behaviors of those assets than do the liabilities alone.

Impact of Changes in Interest Rates on the Net Value of the Company's Interest Rate-Sensitive Financial Instruments

We perform various sensitivity analyses that quantify the net financial impact of changes in interest rates on our interest rate-sensitive assets,
liabilities and commitments. These analyses incorporate assumed changes in the interest rate environment, including selected hypothetical, instantaneous parallel shifts in the yield curve.

93

---



We
employ various commonly used modeling techniques to value our financial instruments in connection with these sensitivity analyses. For mortgage loans, MBS, MBS forward contracts,
collateralized mortgage obligations, interest-only securities and MSRs, we use option-adjusted spread models. The primary assumptions used in these models for the purpose of these
sensitivity analyses are the prepayment speeds and implied market volatility of interest rates. For options and interest rate floors, we use an option-pricing model. The primary assumption used in
this model is implied market volatility of interest rates. For retained interests, with the exception of interest-only securities, we use a zero volatility discounted cash flow model. The
primary assumptions used in these models are prepayment rates, discount rates and credit losses.

The
following table summarizes the estimated change in fair value of our interest-rate-sensitive assets, liabilities and commitments as of September 30,
2007, given several hypothetical, (instantaneous) parallel shifts in the yield curve:

|                                                                     |                                              | Change in Fair Value               |                                                                
|-------------------------------------------------------------------- | -------------------------------------------- | ---------------------------------- | ---------------------------------------------------------------
|
|
|
|MSRs and financial instruments:                                      |                                              |                                    |                                                                
|                                                                     | MSRs                                         |                                    | $                                                              
|                                                                     | Retained interests                           |                                    |                                                                
|                                                                     | Impact of Servicing Hedge:                   |                                    |                                                                
|                                                                     |                                              | Mortgage-based                     |                                                                
|                                                                     |                                              | Swap-based                         |                                                                
|                                                                     |                                              | Treasury-based                     |                                                                
|                                                                     |                                              |                                    |                                                                
|                                                                     |                                              |                                    | MSRs and retained interests, net                               
|                                                                     |                                              |                                    |                                                                
|                                                                     | Interest rate lock commitments               |                                    |                                                                
|                                                                     | Mortgage Loan Inventory                      |                                    |                                                                
|                                                                     | Impact of associated derivative instruments: |                                    |                                                                
|                                                                     |                                              | Mortgage-based                     |                                                                
|                                                                     |                                              | U.S. Treasury-based                |                                                                
|                                                                     |                                              | Eurodollar-based                   |                                                                
|                                                                     |                                              |                                    |                                                                
|                                                                     |                                              |                                    | Interest rate lock commitments and Mortgage Loan Inventory, net
|                                                                     |                                              |                                    |                                                                
|                                                                     | Banking Operations:                          |                                    |                                                                
|                                                                     |                                              | Securities portfolio               |                                                                
|                                                                     |                                              | Mortgage loans held for investment |                                                                
|                                                                     |                                              | Deposit liabilities                |                                                                
|                                                                     |                                              | Federal Home Loan Bank advances    |                                                                
|                                                                     |                                              |                                    |                                                                
|                                                                     |                                              |                                    | Countrywide Bank, net                                          
|                                                                     |                                              |                                    |                                                                
|                                                                     | Notes payable and capital securities         |                                    |                                                                
|                                                                     | Impact of associated derivative instruments: |                                    |                                                                
|                                                                     |                                              | Swap-based                         |                                                                
|                                                                     |                                              |                                    |                                                                
|                                                                     |                                              |                                    | Notes payable and capital securities, net                      
|                                                                     |                                              |                                    |                                                                
|                                                                     | Insurance company investment portfolios      |                                    |                                                                
|                                                                     |                                              |                                    |                                                                
|Net change in fair value related to MSRs and financial instruments   |                                              | $                                  | (688                                                           
|                                                                     |                                              |                                    |                                                                
|Net change in fair value related to broker-dealer trading securities |                                              | $                                  | 56                                                             
|                                                                     |                                              |                                    |                                                                

94

---



The
following table summarizes the estimated change in fair value of the Company's interest-rate-sensitive assets, liabilities and commitments as
of December 31, 2006, given selected hypothetical (instantaneous) parallel shifts in the yield curve:

|                                                                     |  | Change in Fair Value |    
|-------------------------------------------------------------------- |  | -------------------- | ---
|
|
|
|Net change in fair value related to MSRs and financial instruments   |  | $                    | 205
|                                                                     |  |                      |    
|Net change in fair value related to broker-dealer trading securities |  | $                    | 26 
|                                                                     |  |                      |    

These
sensitivity analyses are limited in that they were performed at a particular point in time; are based on the hedge position in place at that particular point in time; only
contemplate certain movements in interest rates; do not incorporate changes in interest rate volatility or changes in the relationship of one interest rate index to another; are subject to the
accuracy of various assumptions used, including prepayment forecasts and discount rates; and do not incorporate other factors that would impact the Company's overall financial performance in such
scenarios, most significantly the impact of changes in loan production earnings that result from changes in interest rates. Not all of the changes in fair value would affect current period earnings.
For example, changes in fair value of securities accounted for as available-for-sale are recognized as a component of shareholders' equity, net of income taxes, and our debt is
carried at its unpaid balances net of issuance discount or premium. Absent hedge accounting, changes in the market value of our debt are not recorded in current-period earnings. For these reasons, the
preceding estimates should not be viewed as an earnings forecast.

Market RiskForeign Currency Risk

To diversify our funding sources on a global basis, we issue a portion of our medium-term notes denominated in foreign currencies. We manage the
associated foreign currency risk through cross-currency swap transactions. The terms of the cross-currency swaps have the effect of converting all foreign currency-denominated medium-term
notes into U.S. dollar obligations, thereby eliminating the associated foreign currency risk. As a result, potential changes in the exchange rates of foreign currencies denominating such
medium-term notes are not expected to have a financial impact on future earnings, fair values or cash flows.

Credit Risk Management

Credit risk is the potential for financial loss resulting from the failure of a borrower or an institution to honor its contractual obligations to us. Credit risk
arises in many of our business activities including lending activities, mortgage banking, securities trading activities and interest rate risk management activities. We actively manage credit risk to
maintain expected credit losses within levels that achieve our profitability and return on capital objectives.



A significant amount of the mortgage loans that we originate or purchase in our Mortgage Banking and Capital Markets Segments are sold into the secondary mortgage
markets. When we sell our mortgage loans, we retain varying degrees of credit risk. As described in more detail in our 2006 Annual Report, the degree to which credit risk on the underlying loans is
transferred in a loan sale depends on the
terms of the sales transactionincluding the structure of any securities created and retained.

We
generally retain two types of credit risk: credit risk embedded in subordinated interests that we retain and that are structured to absorb losses before the senior securities we
create and sell to

95

---



investors;
and recourse arising from representations and warranties we provide in loan sale agreements or from corporate guarantees we issue.

Our
Prime Mortgage Loans generally are sold on a non-recourse basis, while Prime Home Equity and Nonprime Mortgage Loans generally are sold with limited recourse for credit
losses. Almost all of our loan sales transactions retain credit risk in the form of the representations and warranties we provide and that are customary for loan sales transactions.



Our exposure to credit losses related to subordinated interests is limited to the assets' carrying values. We carry subordinated interests at their estimated fair
values. The carrying values of our subordinated interests are as follows:

September 30,
2007

December 31,
2006(in thousands)Prime home equity retained interests

$
599,103

$
1,506,109Subordinated mortgage-backed pass-through securities


281,654


1,382Nonprime residuals and other related securities


270,168


541,708Prime residual securities


23,143


12,756$
1,174,068

$
2,061,955


The
carrying values of our subordinated interests take into account our estimates of losses to be absorbed by the subordinated interests.

The
losses absorbed by our subordinated interests during the period are summarized as follows:

Nine Months Ended September 30,2007

2006(in thousands)Prime home equity residual securities

$
374,309

$
46,994Nonprime residuals and other related securities


229,348


76,906Prime residual securities


6,695


$
610,352

$
123,900




When we sell a loan, we make various representations and warranties relating to, among other things, the following:



96

---





The
specific representations and warranties made by us depend on the nature of the transaction and the requirements of the buyer. Market conditions and credit-rating agency requirements
may also impact representations and warranties and the other provisions we may agree to in loan sales. For example, in some transactions, such as sales of nonprime and second-lien loans,
we may agree to repurchase a loan if a payment default occurs within a specified period of time (e.g., 30 days) after sale.

In
the event of a breach of our representations and warranties, we may be required to either repurchase the mortgage loans with the identified defects or indemnify the investor or
insurer. In such cases, we bear any subsequent credit loss on the mortgage loans. Our representations and warranties are generally not subject to stated limits. However, our contractual liability
arises only when the representations and warranties are breached. We attempt to limit our risk of incurring these losses by structuring our operations to ensure consistent production of quality
mortgages and servicing those mortgages at levels that meet secondary mortgage market standards. We make significant investments in personnel and technology to ensure the quality of our mortgage loan
production.

We
estimate our liability for representations and warranties when we sell loans and update our estimate quarterly. Our provision for estimated losses arising from loan sales is recorded
as an adjustment to gain on sale of loans. Following is a summary of our liability for representations and warranties for the periods presented:

Nine Months Ended
September 30,2007

2006(in thousands)Balance, beginning of period

$
390,111

$
169,773Provision for losses


380,108


209,269Charge-offs


(81,319
)

(75,554
)Balance, end of period

$
688,900

$
303,488




Our corporate guarantees are contracts written to protect purchasers of our loans from credit losses up to a specified amount. We estimate the losses to be
absorbed by the guarantees when we sell loans with guarantees and update our estimates every quarter. We record our provision for losses arising from the guarantees as a component of gain on sale of
loans and securities. Following is a summary of our corporate guarantees for the respective dates:

Nine Months Ended
September 30,2007

2006(in thousands)Balance, beginning of period

$
45,425

$
27,614Provision for losses


18,526


27,003Charge-offs


(5,219
)

(7,329
)Balance, end of period

$
58,732

$
47,288Corporate guarantees in excess of recorded liability, end of period

$
487,521

$
523,497




In our Banking Segment, our portfolio of loans held for investment generally includes mortgage loans originated or purchased for investment purposes and mortgage
loan warehouse lending advances.

97

---



As
a result of the market disruption in the third quarter of 2007, $12.3 billion of non-conforming ARM and home equity loans held for sale were transferred from the Mortgage Banking Segment to
the Banking Operations Segment held for investment loan portfolio. These loans were transferred at the lower of cost or estimated fair value. In our Mortgage Banking Segment, loans held for investment
include mortgage loans repurchased due to violations of representations and warranties; government-guaranteed or insured loans repurchased from Ginnie Mae securitizations in place of continuing to
advance delinquent principal and interest installments to security holders; and loans transferred from loans held for sale at the lower of cost or estimated fair value.



Our portfolio of mortgage loans held in our Banking Operations consists primarily of Prime Mortgage and Prime Home Equity Loans, and had unpaid principal balances
that amounted to $79.8 billion at September 30, 2007.

Our
primary credit risk management tool for our portfolio loans is the origination and purchase of loans underwritten to achieve high credit quality and collateral support. We assess a
loan's quality by considering the borrower's credit profile and the value of collateral securing the loan. Where a proposed first mortgage loan's loan-to-value ratio is higher
than a specified level, which is usually 80% for conventional loans, we generally require the borrower to supplement the collateral with primary mortgage insurance. When we originate such loans
without mortgage insurance, we generally increase the interest rate as compared to a loan with mortgage insurance to compensate for the increased credit risk.

We
actively monitor our portfolio of loans held for investment and work with borrowers who contact us or who become delinquent on their loans in order to minimize credit losses. We use
several tools to establish communication with and assist borrowers in curing defaults on our loans, including frequent outreach efforts throughout the collection process using tools such as brochures,
housing fairs, counseling letters and DVD mailings. Our objective in the loss mitigation process is to develop payment plans or workout options that have both the highest probability of successful
resolution and
minimal risk of loss to Countrywide. We have also developed loan modification programs designed to assist borrowers with refinancing their ARM and pay-option ARM loans before their loans reset.

We
have taken steps in recent years to reduce the credit risk in our investment loan portfolio by acquiring supplemental mortgage insurance coverage. As of September 30, 2007,
$23.1 billion of Banking Operations' residential loan portfolio was covered by supplemental mortgage insurance purchased by the Bank on specified pools of loans, of which $15.7 billion
represents first loss coverage. The maximum loss coverage available under these policies on a combined basis is $1.5 billion. While these policies generally provide for first loss coverage,
some policies require premium adjustments if claims exceed specified levels. Furthermore, coverage limits vary by policy, with some policies having limits at the pool level, and others at the loan
level.

98

---



Following is a summary of our Banking Operations' residential mortgage loans, together with applicable mortgage insurance, by original combined loan-to-value
ratio at September 30, 2007:

September 30, 2007Original Combined Loan-to-Value:(1)

Unpaid
Principal
Balance
("UPB")

UPB with
Lender
Purchased
Mortgage
Insurance(2)

UPB with
Borrower
Purchased
Mortgage
Insurance(in thousands)< 50%

$
3,532,591

$
320,515

$
50.01 - 60.00%


3,141,437


673,664


60.01 - 70.00%


7,931,630


2,311,670


70.01 - 80.00%


22,489,369


8,242,680


80.01 - 90.00%


23,839,840


7,842,356


2,110,41490.01 - 100.00%


18,389,482


3,654,855


1,238,151>100.00%


134,612


8,434


11,520$
79,458,961

$
23,054,174

$
3,360,085


---

We
purchase credit enhancement from those mortgage insurance providers that have an AA- rating or equivalent from the credit rating agencies. This requirement is consistent
with the eligibility requirements of the government-sponsored enterprises for mortgage insurers. While the mortgage insurance industry has experienced recent adverse financial results with the
likelihood of further deterioration over the near term, we continue to monitor the respective capital positions of our mortgage insurance providers to assess their claims paying ability.

Banking
Operations holds a substantial investment in pay-option ARM and payment advantage ARM loans (together referred to as "Pay-option loans").



The
difference between the frequency of changes in the loans' interest rates and payments along with a limitation on changes in the minimum monthly payments to 71/2% per
year can result in payments that are not sufficient to pay all of the monthly interest charges. Unpaid interest charges are added to the loan balance until the loan's balance increases to a specified
limit, which is no more than 115% of the original loan amount, at which time a new monthly payment amount adequate to repay the loan over its remaining contractual life is established.

99

---



Assuming
today's interest rates remain unchanged, most borrowers who consistently make the minimum required payment will have the contractual right to make less than the full interest
payment for three to four years from the date of funding, at which time the loan balance limit will be reached and a new monthly payment amount will be required. Our borrowers' ability to defer
portions of the interest accruing on their loans may expose us to increased credit risk. This is because when the required monthly payments for these loans eventually increase, borrowers may be less
able to pay the increased amounts and more likely to default than a borrower with a loan whose initial payment provides for full amortization. Our exposure to this higher credit risk is increased by
the amount of negative amortization that has been added to the principal balance.

We
supplement our credit risk management practices relating to negatively amortizing ARM loans through a variety of methods, including active borrower communications both before and
after funding, through our underwriting standards and through the purchase of mortgage insurance. Our underwriting standards conform to those required to make the negatively amortizing ARM loans
salable into the secondary market at the date of funding, including a requirement that the borrower meet secondary market debt-service ratio tests based on the borrower making the fully
amortizing loan payment and assuming the loan's interest rate is fully indexed. (A fully indexed note rate equals the sum of the current index rate plus the margin applicable to the loan.) However,
secondary market standards also allow for stated or limited income documentation. We have tightened our underwriting standards during 2007 to reduce the availability of reduced documentation loans and
loans on investor-owned properties and reduction in the maximum loan-to-value or combined loan-to-value ratio.

Following
is a summary of negatively amortizing ARM loans held for investment by Banking Operations:

|                                                                                           |                                                                                    | September 30,
2007                                             |            | December 31,
2006 |          
|------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------- | -------------------------------------------------------------- | ---------- | ----------------- | ---------
|
|Total Pay-Option loan portfolio                                                            |                                                                                    | $                                                              | 28,257,903 |                   | $        
|                                                                                           |                                                                                    |                                                                |            |                   |          
|                                                                                           | Total principal balance of Pay-Option loans with accumulated negative amortization |                                                                | $          | 24,804,257        |          
|                                                                                           |                                                                                    |                                                                |            |                   |          
|                                                                                           |                                                                                    | Accumulated negative amortization (from original loan balance) |            | $                 | 1,068,122
|                                                                                           |                                                                                    |                                                                |            |                   |          
|Unpaid principal balance of Pay-Option loans with supplemental mortgage insurance coverage |                                                                                    | $                                                              | 19,165,901 |                   | $        
|                                                                                           |                                                                                    |                                                                |            |                   |          
|Average original loan-to-value ratio(1)                                                    |                                                                                    |                                                                | 76         | %                 |          
|Average original combined loan-to-value ratio(2)                                           |                                                                                    |                                                                | 79         | %                 |          
|Average original FICO score(3)                                                             |                                                                                    |                                                                | 716        |                   |          
|Loans with low or no stated income documentation                                           |                                                                                    |                                                                | 82         | %                 |          
|Loans delinquent 90 days or more(4)                                                        |                                                                                    |                                                                | 3.17       | %                 |          

---

During
the nine months ended September 30, 2007, 76% of borrowers elected to make less than full interest payments, an increase from 66% during the nine months ended
September 30, 2006.

100

---



The
Company routinely forecasts its exposure to payment recast on negatively amortizing loans. The following assumptions were used to forecast this exposure as of September 30,
2007:



Using
these assumptions as of September 30, 2007, Pay-Option loans that are expected to reset are shown in the following table:

Twelve months ended September 30,

Projected Balance at Recast or Payoff(in thousands)2008

$
72,8682009


3,476,2482010


6,460,241Thereafter


3,907,146Loans expected to repay before recast


11,004,13924,920,642Loans serviced by others(1)


3,945,874$
28,866,516


---

This
analysis is limited in that it was performed at a particular point in time and is subject to the accuracy of various assumptions used, including prepayment speeds, interest rates
and the percentage of loans that negatively amortize.

Banking
Operations' nonperforming assets (comprised of nonaccrual loans and foreclosed assets) and the allowance for loan losses related to mortgage loans originated or purchased for
investment at period end are summarized as follows:

September 30, 2007

December 31, 2006Amount

% of Banking
Operations
Assets

Amount

% of Banking
Operations
Assets(dollar amounts in thousands)Nonaccrual loans:Residential:With third party credit enhancements(1)

$
627,165

0.60
%
$
109,218

0.13
%Without third party credit enhancements


805,336

0.76
%

409,865

0.50
%Total residential


1,432,501

1.36
%

519,083

0.63
%Foreclosed real estate:Residential


304,386

0.29
%

27,416

0.03
%Total nonperforming assets

$
1,736,887

1.65
%
$
546,499

0.66
%


Amount

% of
Nonaccrual
Loans

Amount

% of
Nonaccrual
LoansAllowances for credit losses:Allowance for loan losses:Residential

$
1,106,300

77.23
%
$
228,692

44.06
%Liability for unfunded loan commitments


20,640




8,104Total allowances for credit losses

$
1,126,940

78.67
%
$
236,796

45.62
%


101

---



Nine Months Ended
September 30, 2007

Nine Months Ended
September 30, 2006Amount

Annualized
Net Charge-offs
as % Average
Investment
Loans

Amount

Annualized
Net Charge-offs
as % Average
Investment
LoansNet charge-offs:Banking Operations

$
268,620

0.52
%
$
20,133

0.04
%


---

The
following table shows Banking Operations charge-offs by product:

Nine Months Ended
September 30,2007

2006(in thousands)Prime Home Equity

$
202,674

$
15,613Prime Mortgage:Pay-option


48,260


1,596Other


17,686


2,924Total charge-offs

$
268,620

$
20,133


The
increase in our nonperforming assets, the allowance for loan losses and charge-offs from the year-ago period was driven by the impact of the weakening
housing market and significant tightening of available credit on delinquency and default trends during the current quarter as well as portfolio seasoning. We expect the level of nonperforming assets
and credit losses to increase, both in absolute terms and as a percentage of our loan portfolio as current weakness in the housing market develops and as our loan portfolio continues to season.



We hold a portfolio of commercial loans made to other mortgage lenders to finance their inventories pending sale to Countrywide and other lenders. Our portfolio
of mortgage loan warehouse advances totaled $0.6 billion and the average loan balance was $6.0 million at September 30, 2007. These loans are underwritten by assessing the
creditworthiness of the warehouse lending borrowers. This includes reviewing both borrower-provided financial information and publicly available credit rating information and press coverage, as well
as understanding the borrowers' operational controls and product risk and assessments of collateral.

We
monitor the length of time that advances are outstanding against specific residential loans and may require the borrower to pay off aged advances. We also monitor the fair value of
our collateral to ensure that the level of collateral posted is adequate to repay our advance in the event of default by our borrower and we require our warehouse lending borrowers to post specified
levels of cash collateral to supplement the mortgage loan collateral. We also regularly review updated financial information of borrowers, including pipeline and hedging positions. We incurred
$1.0 million of credit losses related to this activity during the nine months ended September 30, 2007 and no credit losses in nine months ended September 30, 2006.



Other loans held for investment are in our Mortgage Banking Segment and include loans we have repurchasedeither to remedy a violation of a
representation or warranty made in a loan sale, to minimize the cost of servicing a severely delinquent loan insured or partially guaranteed by the FHA or VA or in connection with a
clean-up call (a clean-up call represents the repurchase of mortgage loans

102

---



when
the remaining outstanding balance of the mortgage loans falls to a level where the cost of servicing the loans becomes burdensome in relation to the benefits of servicing.) As discussed in the
preceding sectionLending ActivitiesSale of LoansRepresentations and Warrantieswe make provisions for
losses that may arise from breaches of representations and warranties when we record the sale of these loans and we adjust our estimates for losses on these loans quarterly. We record repurchased
loans at fair value when they are repurchased and any resulting loss is charged against the liability.

We
may determine that a small percentage of the loans that we originate or purchase for sale will not be sold because of a defect, which may include a document deficiency, changes in
secondary market conditions or deterioration of the credit status of the loan while it was held for sale. Such loans are transferred to the held for investment category at the lower of cost or
estimated fair value on an individual loan basis and any loss is recorded as a component of gain on sale of loans or securities in current period earnings. Subsequent losses that may result from
deterioration in the credit quality of the loans are included in our provision for loan losses.

Our
non-Banking Operations' nonperforming assets, including mortgage warehouse lending advances and loans held for investment (other than those originated or purchased for investment in
our Banking Operations), and foreclosed assets, and the related allowance for loan losses are summarized as follows:

September 30, 2007

December 31, 2006Amount



Amount(dollar amounts in thousands)Nonaccrual loans(1)(2):ResidentialLoans held for investmentcredit risk retained by Countrywide(3)

$
371,582



$
158,802Commercial


855




Total nonaccrual loans


372,437




158,802Foreclosed real estate:OtherResidential


371,736




223,747Commercial







Total foreclosed real estate


371,736




223,747Total nonperforming assets

$
744,173



$
382,549Amount

% of
Nonaccrual
Loans

Amount

% of
Nonaccrual
LoansAllowances for loan losses(4):Residential

$
99,359

26.74
%
$
19,524

12.29
%Commercial


14,304

N/M


12,838

N/M$
113,663

30.52
%
$
32,362

20.38
%


103

---



Nine Months Ended
September 30, 2007

Nine Months Ended
September 30, 2006Amount

Annualized
Net Charge-offs
as % Average
Investment
Loans

Amount

Annualized
Net Charge-offs
as % Average
Investment
LoansNet charge-offs:Mortgage Banking & Other

$
151,625

3.61
%
$
118,960

3.53
%


---

The
increase in the allowance for loan losses from December 31, 2006 is due to higher expectations of losses inherent in our portfolio driven by the impact of the weakening
housing market and significant tightening of available credit on delinquencies and default trends as well as portfolio seasoning.



Following is a summary of our consolidated allowance for loan losses by activity for the periods presented:

Nine Months Ended
September 30, 2007Banking OperationsMortgage
Lending

Commercial
Real Estate

Warehouse
Lending

Mortgage
Banking

Total(in thousands)Balance, beginning of period

$
228,647

$
45

$
12,838

$
19,524

$
261,054Provision for loan losses


1,146,869


472


1,323


230,490


1,379,154Net charge-offs


(268,620
)




(970
)

(150,655
)

(420,245
)Reclassifications and other


(1,113
)




1,113





Balance, end of period

$
1,105,783

$
517

$
14,304

$
99,359

$
1,219,963Allowance as a percentage of loans receivable


1.4
%

0.1
%

2.5
%

5.0
%

1.5
%


104

---



Nine Months Ended
September 30, 2006Banking OperationsMortgage
Lending

Commercial
Real Estate

Warehouse
Lending

Mortgage
Banking

Total(in thousands)Balance, beginning of period

$
102,680

$


$
12,838

$
73,683

$
189,201Provision for loan losses


91,305








71,727


163,032Net charge-offs


(20,133
)







(118,960
)

(139,093
)Reclassifications and other


5,684








(10,837
)

(5,153
)Balance, end of period

$
179,536

$


$
12,838

$
15,613

$
207,987Allowance as a percentage of loans receivable


0.2
%

0.0
%

0.4
%

8.4
%

0.3
%


Charge-offs
increased due to increasing rates of default and loss severity, along with acceleration in the timing of chargeoff recognition as a result of recent trends in
delinquency and foreclosures.



At September 30, 2007, mortgage loans held for sale amounted to $30.9 billion. While the loans are in inventory, we bear credit risk after taking
into consideration primary mortgage insurance (which is generally required for conventional first mortgage loans with a loan-to-value ratio greater than 80%), FHA insurance or
VA guarantees except for $6.1 billion of mortgage loans held in SPEs which have been securitized where the beneficial holder bears the credit risk.

Loans
held for sale that have been placed on nonaccrual status include distressed loans that are generally purchased at a discount as part of the conduit activities of the Capital
Markets Segment and loans whose credit quality has deteriorated during the time that they have been held for sale. Nonaccrual loans totaled $443.6 million and $566.6 million at
September 30, 2007 and December 31, 2006, respectively. Mortgage loans held for sale are carried at the lower of cost or fair value in the aggregate, which incorporates a reduction in
value for impaired loans.



We provide mortgage reinsurance on certain mortgage loans included in our servicing portfolio through contracts with several primary mortgage insurance companies.
Under these contracts, we provide aggregate excess loss coverage in a mezzanine layer in exchange for a portion of the pool's mortgage insurance premium. As of September 30, 2007, approximately
$109.5 billion of mortgage loans in our servicing portfolio are covered by such mortgage reinsurance contracts. The reinsurance contracts place limits on our maximum exposure to losses. At
September 30, 2007, the maximum aggregate losses under the reinsurance contracts were limited to $1,018.8 million. We are required to pledge securities to cover this potential liability.
The accumulated liability recorded for estimated reinsurance totaled $128.2 million and $156.2 million at September 30, 2007 and December 31, 2006, respectively. For the
nine months ended September 30, 2007, we did not experience any losses under our reinsurance contracts.



We have exposure to credit loss in the event of contractual non-performance by our trading counterparties and counterparties to the
over-the-counter derivative financial instruments that we use in our interest rate risk management activities. We manage this credit risk by selecting only counterparties we
believe to be financially strong, spreading the credit risk among many such counterparties, by placing contractual limits on the amount of unsecured credit extended to any single counterparty and by
entering into netting agreements with the counterparties, as appropriate.

105

---



The
aggregate amount of counterparty credit exposure after consideration of relevant netting agreements at September 30, 2007, before and after collateral held by us, is as
follows:

September 30,
2007

December 31,
2006(in millions)Aggregate credit exposure before collateral held

$
4,350

$
1,777Less: collateral held


(2,399
)

(1,223
)Net aggregate unsecured credit exposure

$
1,951

$
554


For
the nine months ended September 30, 2007 and 2006, we incurred no credit losses due to non-performance of any of our counterparties.

Loan Servicing

The following table sets forth certain information regarding our servicing portfolio of single-family mortgage loans, including loans held for sale, loans held
for investment and loans serviced under subservicing agreements, for the periods indicated.

Nine Months Ended September 30,2007

2006(in millions)Beginning owned servicing portfolio

$
1,280,119

$
1,081,189Add: Residential loan production(1)


337,685


336,000Purchased MSRs (bulk acquisitions)


21,662


3,115Less: Principal repayments


(203,251
)

(196,545
)Ending owned servicing portfolio


1,436,215


1,223,759Subservicing portfolio


22,921


20,552Total servicing portfolio

$
1,459,136

$
1,244,311MSR portfolio

$
1,331,530

$
1,118,117Mortgage loans owned


104,685


105,642Subservicing portfolio


22,921


20,552Total servicing portfolio

$
1,459,136

$
1,244,311


---

106

---





September 30,2007

2006(dollar amounts in millions)Composition of owned servicing portfolio at period end:Conventional mortgage

$
1,212,751

$
1,010,606Nonprime Mortgage


118,364


111,625FHA-insured mortgage


46,097


38,109Prime Home Equity


42,870


49,731VA-guaranteed mortgage


16,133


13,688Total owned portfolio

$
1,436,215

$
1,223,759Delinquent mortgage loans(1):30 days


3.12
%

2.62
%60 days


1.19
%

0.85
%90 days or more


1.56
%

1.03
%Total delinquent mortgage loans


5.87
%

4.50
%Loans pending foreclosure(1)


0.92
%

0.52
%Delinquent mortgage loans(1):Conventional


3.27
%

2.50
%Nonprime Mortgage


23.94
%

16.93
%Prime Home Equity


4.62
%

2.10
%Government


13.37
%

13.41
%Total delinquent mortgage loans


5.87
%

4.50
%Loans pending foreclosure(1):Conventional


0.53
%

0.22
%Nonprime Mortgage


4.91
%

2.86
%Prime Home Equity


0.13
%

0.10
%Government


1.24
%

1.17
%Total loans pending foreclosure


0.92
%

0.52
%


---

We
attribute the overall increase in delinquencies in our servicing portfolio from September 30, 2006 to September 30, 2007 to weakening in housing market conditions,
increased production of loans in recent years with higher loan-to value ratios and reduced documentation requirements, changing economic conditions and to portfolio seasoning. Changing
borrower profiles and trends toward higher initial combined loan-to-value ratios have also contributed
to the increased nonprime delinquency. We believe the delinquency rates in our servicing portfolio are consistent with rates for similar mortgage loan portfolios in the industry.

Liquidity and Capital Resources

Our primary sources of debt have been deposits taken by our Bank, FHLB advances, repurchase agreements, and the public corporate debt markets. We also rely on the
secondary mortgage market to purchase most of the mortgage loans we originate. During the quarter ended September 30, 2007, the non-agency segments of the secondary mortgage market
were severely restricted by illiquidity driven by widening credit spreads. As a result, the commercial paper and repurchase agreement segments of the public corporate debt markets for mortgage
companies and other financial institutions were severely restricted.

107

---



The
illiquidity in the secondary market for non-conforming loan originations that comprised 48% our loan production during the first six months of 2007 removed the expected
outlet for these loans in the Mortgage Banking segment of our mortgage banking operations' loans. This caused illiquidity in the commercial paper and repurchase agreement markets that made
short-term debt that we normally relied upon to finance substantial portions of our mortgage loan inventory unavailable or prohibitively expensive. The sudden development and convergence
of these factors during the third quarter challenged our ability to finance our loan origination operations without incurring significant daily refinancing risk. In response to market conditions and
constrained liquidity, Countrywide's debt ratings were downgraded by the major credit agencies.

In
response, we modified our funding structure by reducing our reliance on the public debt and non-agency secondary mortgage markets. Specifically we took the following
actions:



As
previously discussed, the public debt markets are no longer a practical source of short-term inventory financing owing to the current illiquidity in that market, our
current short-term credit ratings and our recent operational liquidity challenges. While we have procured other, more stable sources of funding, future access to the public corporate debt
markets remains an important potential source of financing to us when market conditions permit.

To
retain access to the public debt markets it is critical for us to maintain investment-grade credit ratings. Among other things, maintenance of our current investment-grade ratings
requires that we have high levels of liquidity, including access to alternative sources of funding such as deposits and committed lines of credit provided by highly rated banks. We must also maintain
adequate capital that exceeds current rating agency requirements. While we retain our investment grade ratings, all three rating agencies have placed our ratings on some form of negative outlook.

In
the event our credit ratings were to drop below "investment grade," our access to the public corporate debt markets could be severely limited. The cutoff for investment grade is
generally considered a long-term rating of "BBB" (or Baa3 Moody's Investors Service), which is equal to our lowest current rating. Furthermore, we expect that renegotiation or
replacement of our existing financing arrangements beyond their current maturity dates will involve more restrictive terms and higher relative rates than those presently in place.

108

---



Our
ability to place custodial deposit accounts on deposit with our bank subsidiary could be affected if our credit ratings were reduced below investment grade. As of
September 30, 2007, up to $5.5 billion of our custodial deposits may be subject to placement with another bank if our credit ratings were reduced below investment grade. We also expect
that a reduction in our ratings below investment grade would have a negative effect on our ability to retain our commercial deposits. In addition, our broker-dealer may experience difficulty in
conducting its trading operations if its parent is unable to maintain its investment grade credit ratings. We have responded to these risks by procuring additional sources of liquidity as shown in the
summary of highly reliable liquidity sources on the following page, including $9.2 billion of cash and cash equivalents in the Bank as of September 30, 2007.

Ratings
as of November 7, 2007 are as follows:

|                          |  | Countrywide Financial Corporation |  | Countrywide Home Loans |  | Countrywide Bank     
|------------------------- |  | --------------------------------- |  | ---------------------- |  | ---------------------
|
|Rating Agency             |  |                                   |  |                        |  |                      
|Standard & Poor's         |  | A-2                               |  | BBB+                   |  | Credit Watch Negative
|Moody's Investors Service |  | P3                                |  | Baa3                   |  | Review Down          
|Fitch                     |  | F2                                |  | BBB+                   |  | Negative             

109

---



The following table summarizes our highly reliable liquidity sources:

|                                                              |                                                                    | September 30, 2007
|------------------------------------------------------------- | ------------------------------------------------------------------ | ------------------
|
|
|Countrywide Financial Corporation                             |                                                                    |                   
|Unsecured commercial paper                                    |                                                                    | Market Disrupted  
|Committed bank lines                                          |                                                                    | High              
|Cash and cash equivalents(4)                                  |                                                                    | High              
|Countrywide Home Loans                                        |                                                                    |                   
|Multi-seller Gestation Conduit                                |                                                                    | High              
|Multi-seller Park Monaco                                      |                                                                    | High              
|Total extendible ABCP (3rd party support)                     |                                                                    | Market Disrupted  
|Committed whole-loan repo                                     |                                                                    | High              
|Agency repo                                                   |                                                                    | High              
|Cash and cash equivalents(4)                                  |                                                                    | High              
|                                                              |                                                                    |                   
|                                                              | Total Countrywide Financial Corporation and Countrywide Home Loans |                   
|                                                              |                                                                    |                   
|Countrywide Bank                                              |                                                                    |                   
|FHLB advances                                                 |                                                                    | High              
|Whole-loan collateral pledged to highly reliable counterparty |                                                                    | High              
|Committed whole-loan repo                                     |                                                                    | High              
|Committed AAA securities repo                                 |                                                                    | High              
|Park Monaco                                                   |                                                                    | High              
|Cash and cash equivalents(4)                                  |                                                                    | High              
|                                                              |                                                                    |                   
|                                                              | Total Countrywide Bank                                             |                   
|                                                              |                                                                    |                   
|Countrywide Securities Corporation                            |                                                                    |                   
|Unsecured treasury and agency collateral financing agreements |                                                                    | High              
|Committed AAA securities repo                                 |                                                                    | High              
|Cash and cash equivalents(4)                                  |                                                                    | High              
|                                                              |                                                                    |                   
|                                                              | Total Countrywide Securities Corporation                           |                   
|                                                              |                                                                    |                   
|Total highly reliable short-term liquidity                    |                                                                    |                   
|                                                              |                                                                    |                   

---

Following September 30, 2007, we have renewed one of the asset-backed commercial paper facilities inventory financing facilities (Park
Monaco) that we use to finance our mortgage loan inventory at the full amount ($10.4 billion) and have obtained a new, committed $5 billion repurchase facility.

110

---



On March 12, 2007, the Bank converted its charter from a national bank to a federal savings bank. As a result of this conversion, the Company became a savings and loan holding
company, and is no longer a bank holding company. As a savings and loan holding company, Countrywide Financial Corporation is no longer subject to specific capital requirements. Countrywide Bank's
capital is calculated in compliance with the requirements of the Office of Thrift Supervision ("OTS"), which are similar to those of the Office of the Comptroller of the Currency, the Bank's former
regulator. At September 30, 2007, the Bank's regulatory capital ratios and amounts and minimum required capital ratios for the Bank to maintain a "well capitalized" status are as follows:

Countrywide BankMinimum
Required(1)Ratio

Amount(dollar amounts in thousands)Tier 1 Capital

5.0%

7.3%

$
8,870,010Risk-Based Capital:Tier 1

6.0%

12.2%

$
8,870,010Total

10.0%

13.5%

$
9,777,179


---

Management
intends to maintain capital at levels that are higher than those required to be considered "well capitalized."

Had
Countrywide Bank's capital been calculated in compliance with the OTS requirements at December 31, 2006, its regulatory capital ratios and amounts and minimum required capital
ratios would have been as follows:

Countrywide BankMinimum
Required(1)Ratio

Amount(dollar amounts in thousands)
(Proforma)Tier 1 Capital

5.0%

7.6%

$
7,100,439Risk-Based Capital:Tier 1

6.0%

12.4%

$
7,100,439Total

10.0%

12.8%

$
7,337,235


---

Countrywide
Bank is required by OTS regulations to maintain tangible capital of at least 1.5% of assets. However, the Bank is also required to maintain a tangible equity ratio of at
least 2% to avoid being classified as "critically undercapitalized." Critically undercapitalized institutions are subject to the prompt corrective action provisions of the Financial Institution Reform
Recovery and Enforcement Act of 1989. The Bank's tangible capital ratio was 7.3% and 7.6% at September 30, 2007 and December 31, 2006, respectively.

The
OTS has prescribed that the Company and its affiliates are not authorized to receive, and the Bank is not authorized to pay such entities, capital distributions without receipt of
prior written OTS non-objection.

Cash Flows

Cash used by operating activities was $5.1 billion for the nine months ended September 30, 2007, compared to cash provided by operating activities
of $3.1 billion for the nine months ended September 30, 2006. Cash used by operating activities includes the cash used for the origination and purchase of mortgage loans held for sale
and the proceeds from the sales and principal repayments of such mortgages. We generally retain servicing rights and may retain other interests when these loans

111

---



are
sold. The recognition of the amounts retained is a non-cash investing activity. See Note 18Supplemental Cash Flow
Informationin the financial statement section of this report. In the nine months ended September 30, 2007, funds used to originate and purchase mortgage loans exceeded
proceeds from the sales of mortgage loans by $10.8 billion, which resulted in cash used by operating activities. In the nine months ended September 30, 2006, proceeds from the sales and
principal repayments of mortgage loans exceeded funds used to originate and purchase mortgage loans by $8.7 billion.

Net
cash provided by investing activities was $5.9 billion for the nine months ended September 30, 2007, compared to cash used by investing activities of
$13.9 billion for the nine months ended September 30, 2006. The increase in net cash provided by investing activities was attributable to a $19.0 billion increase in net repayment
of loans held for investment, combined with a $14.2 billion decrease in securities purchased under agreements to resell, securities borrowed and federal funds sold, partially offset by a
$13.4 billion increase in net additions to investments in other financial instruments.

Net
cash provided by financing activities for the nine months ended September 30, 2007 totaled $2.5 billion, compared to $11.3 billion for the nine months ended
September 30, 2006. The $2.5 billion included drawing the full $11.5 billion of available backup credit lines we obtained to provide liquidity in the event of disruptions in the
commercial paper markets. In the nine months ended September 30, 2007, deposit liabilities decreased $0.8 billion, compared to an increase of $16.4 billion in the
year-ago period. In the nine months ended September 30, 2007, there was a $28.2 billion decrease in cash provided by short-term borrowings, including securities
sold under agreements to repurchase. Partially offsetting these decreases, long-term debt increased $35.5 billion compared to a decrease in long-term debt of
$0.1 billion in the nine months ended September 30, 2006, and during the nine months ended September 30, 2007, $2 billion of preferred stock was issued.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

In the ordinary course of our business we engage in financial transactions that are not reflected on our balance sheet. (See
Note 2Summary of Significant Accounting Policiesin our 2006 Annual Report for a description of our consolidation policy.) Such
transactions are structured to manage our interest rate, credit or liquidity risks, to diversify funding sources or to optimize our capital.

Most
of our off-balance sheet arrangements relate to the securitization of mortgage loans. Our mortgage loan securitizations are normally structured as sales in accordance
with Statement of Financial Accounting Standards No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities("SFAS 140"), and involve the transfer of mortgage loans to qualifying special-purpose entities that are not subject to consolidation. In a securitization,
an entity transferring the assets is able to sell those assets for cash. Special-purpose entities used in such securitizations obtain cash by issuing securities representing beneficial interests in
the transferred assets to investors. In a securitization, we customarily provide representations and warranties with respect to, and we generally retain the right to service, the transferred mortgage
loans.

We
also generally have the right to repurchase mortgage loans from the special-purpose entity pursuant to a clean-up call, which is exercised when the costs exceed the
benefits of servicing the remaining loans.

Our
Prime Mortgage Loans generally are securitized on a non-recourse basis, while Prime Home Equity and Nonprime Loans generally are securitized with limited recourse for
credit losses. During the nine months ended September 30, 2007, we securitized $23.0 billion in Nonprime Mortgage and Prime Home Equity Loans with limited recourse for credit losses. Our
exposure to credit losses related to our limited recourse securitization activities is limited to the carrying value of our subordinated interests and to the contractual limit of reimbursable losses
under our corporate guarantees less the recorded liability for such guarantees. For a further discussion of our exposure to credit risk, see the section in

112

---



this
Report entitledManagement's Discussion and Analysis of Financial Condition and Results of OperationsCredit Risk Management.

We
do not believe that any of our off-balance sheet arrangements have had, or are reasonably likely to have, a current or future material effect on our financial condition,
results of operations, liquidity, capital expenditures or capital resources.

Our
material contractual obligations were summarized and included in our 2006 Annual Report. There have been no material changes outside the ordinary course of our business in the
contractual obligations as summarized in our 2006 Annual Report during the nine months ended September 30, 2007.

Prospective Trends



We believe the current environment of rapidly changing and evolving markets will provide significant continuing challenges for the financial services sector,
including Countrywide. Specifically, in the near term, we have experienced and are likely to continue to experience:



As
a result of these conditions, Countrywide and other lenders may be experiencing, among other things, the following:



In
response to the current environment, Countrywide has made changes to tighten the underwriting guidelines for loan products offered and has adjusted loan pricing to reflect market
conditions. The tightening of underwriting guidelines included reductions in the availability of reduced documentation loans and loans on investor-owned properties and in the maximum
loan-to-value or combined loan-to-value ratio. The impact of these changes was most significant to Nonprime Mortgage, Prime Home Equity
and non-conforming prime loans. Further reductions in the Company's funding volume could result. Additionally, we expect to retain more loans in our portfolio of loans held for investment
or to hold additional loan or security inventory until market conditions improve. We have also increased our loss mitigation efforts through proactive outreach to borrowers, partnering with
non-profit home ownership counseling groups and increasing our staff dedicated to working with our borrowers to prevent or cure loan defaults. In an effort to ensure the adequacy of our
funding liquidity, we continue to transition to more reliable funding sources, which may be more costly. We are also optimizing our organizational structure through, among other things, the planned
integration of Countrywide Bank and Countrywide Home Loans.

As
a result of these conditions we expect our earnings and returns through 2008 to be below our long-term target levels. However, we believe that the challenges facing the industry
should ultimately benefit Countrywide as the mortgage lending industry continues to consolidate.

113

---



Our
outlook is subject to risks and uncertainties as discussed in the section, "Factors That May Affect Our Future Results" following.



In the short term, the U.S. housing market is undergoing a significant contraction and lenders and investors are tightening their credit standards. Therefore,
mortgage origination volumes are likely to continue decreasing and growth in total mortgage indebtedness is likely to slow in the short term. Over the long term, we believe that continued population
growth, ongoing developments in the mortgage market and the prospect of relatively low interest rates will support growth in the market.

Over
time, the level of complexity in the mortgage lending business has increased significantly due to several factors:



To
compete effectively in this environment, mortgage lenders must have a very high level of operational, technological and managerial expertise. In addition, the residential mortgage
business has become more capital-intensive and therefore access to capital at a competitive cost is critical. As a result of reduced access to capital, general housing trends, rising delinquencies and
defaults and other factors, many mortgage lenders have recently experienced severe financial difficulty, with some exiting the business or filing for bankruptcy protection. Primarily because of these
factors, the industry continues its consolidation trend.

Today,
large and sophisticated financial institutions dominate the residential mortgage industry. These industry leaders are primarily commercial banks operating through their mortgage
banking subsidiaries. According to the trade publicationInside Mortgage Finance, the top five originators produced 52% of all loans originated during
the first nine months of the calendar year 2007, as compared to 48% during the nine months ended December 31, 2006. (Reprinted with the permission of IMF Copyrighted. All rights reserved by
IMF.)

114

---



The
loan volume for the top five originators, according toInside Mortgage Finance, is as follows: (Reprinted with the permission of IMF
Copyrighted. All rights reserved by IMF.)

Institution

Nine Months Ended
September 30, 2007

Nine Months Ended
December 31, 2006(in billions)Countrywide

$
340

$
359Wells Fargo Home Mortgage


216


307CitiMortgage


161


148Chase Home Finance


160


133Washington Mutual(1)





143Bank of America Mortgage(1)


144


Total for Top Five

$
1,021

$
1,090


---

We
believe the consolidation trend in the mortgage industry will continue, as the aforementioned market forces will continue to drive out weak competitors. We believe Countrywide will
benefit from
consolidation over the long term through increased market share and enhanced ability to recruit talented personnel.

Compared
to Countrywide, the other industry leaders are less reliant on the secondary mortgage market as an outlet for mortgages, due to their greater portfolio lending capacity. This
has placed us at a competitive disadvantage in the current disruption of the secondary mortgage market, which has removed a competitive outlet for our loans. We responded by shifting our production
and related financing to our Bank.



Housing values affect us in several ways. Declines in housing values affect us by negatively impacting the demand for mortgage financing, increasing risk of
default by mortgagors and increasing risk of loss on defaulted loans. These factors are somewhat offset by reduced prepayments in our loan servicing portfolio. Conversely, rising housing values point
to healthy demand for purchase-money mortgage financing and increased average loan balances and a reduction in the risk of loss on sale of foreclosed real estate in the event a loan defaults. However,
as housing values appreciate, prepayments of existing mortgages tend to increase as borrowers look to monetize the additional equity in their homes.

Recently,
we have seen broad-based declines in housing values. We expect housing values to decrease during the near term which will affect our credit loss experience and has affected our
willingness to offer certain mortgage loan products, both of which could impact our earnings, particularly in the short term. Over the long term, we expect that housing appreciation will be positively
correlated with both consumer price inflation and growth in personal income.



Changes in investor demand for mortgage loans can have a significant impact on our ability to access the secondary mortgage market as a competitive outlet. In
2007, we have seen an increase in investor required yields, first for nonprime loans or securities followed by prime home equity loans and then non-conforming loans, together with a lessening in the
liquidity of such loans and securities caused by reduced investor demand. In the third quarter the secondary mortgage market for nonagency eligible loans became largely illiquid. In addition, certain
credit rating agencies have downgraded their securitization ratings of large numbers of mortgage-backed securities. These factors have combined to

115

---



severely
impact demand for and profitability of a large portion of the products we have historically produced. In response to these developments we have tightened our underwriting and program
guidelines, significantly limiting our production of non-agency eligible loans. We expect these changes to impact gain on sale margin in the short term.



With the current contraction in the U.S. housing market and the resulting declining housing prices, along with worsening economic conditions, we expect elevated
credit losses in the near term. In 2007, we have observed a marked decline in credit performance (as adjusted for age) for recent vintages, especially those loans with higher risk characteristics,
including reduced documentation, higher loan-to-value ratios or weak credit scores. Deterioration in the credit performance of these loans has resulted in increased credit
losses and impairment of our related credit-subordinated interests and higher claims under our representations and warranties. Credit markets are rapidly changing and evolving and we expect these
changes to impact the housing market, demand for our mortgage-backed securities, our future credit losses and the availability of credit enhancements for the loans and securities we sell and invest
in, which may impact future earnings.



We have contingency planning protocols for funding liquidity that were designed to encompass a wide variety of market conditions. We place major emphasis on the
adequacy, reliability and diversity of our funding sources.

Starting
in the second quarter, funding liquidity in the financial services sector was constrained primarily due to changes in secondary mortgage market investor demand. During the third
quarter, this condition worsened and expanded to include the debt markets we have traditionally relied upon to meet our short-term funding needs.

As
discussed in the preceding section underLiquidity and Capital Resources, we have adjusted our operations and financing sources to
adapt to the current market conditions, including accessing other pre-existing funding liquidity sources, procuring new sources and accelerating the integration of our mortgage company
with the Bank. As a result of this accelerated integration, a significantly higher percentage of our mortgage banking fundings are occurring in the Bank sooner than originally planned. The Bank has
significant liquidity sources available to fund our mortgage banking operations. While we believe we have adequate funding liquidity, the effect of future developments on the Company may require us to
make additional operational adjustments and/or procure additional sources of financing.

Regulatory Trends

The regulatory environments in which we operate have an impact on the activities in which we may engage, how the activities may be carried out and the
profitability of those activities. Therefore, changes to laws, regulations or regulatory policies can affect whether and to what extent we are able to operate profitably.

On
June 29, 2007, the federal financial regulatory agencies issued a Statement on Subprime Mortgage Lending (the "Statement") to address issues relating to certain subprime
mortgage products and lending practices, especially as they relate to certain adjustable-rate mortgage products. This statement requires mortgage lenders to:



116

---





Recent
changes in the nonprime mortgage market have had an effect similar to the changes contemplated by the Statement on product offerings and underwriting of nonprime loans. Therefore,
we do not expect the Statement to have a significant short-term impact on our ability to make nonprime loans. However, over the longer term, these guidelines will influence the terms and
underwriting of products that will be offered to nonprime loan applicants and are therefore likely to limit growth of nonprime lending.

Furthermore,
proposed local, state and federal legislation targeted at predatory lending could have the unintended consequence of raising the cost or otherwise reducing the availability
of mortgage credit for those potential borrowers with less than prime-quality credit histories. In addition, there may be future local, state and federal legislation that restricts our ability to
communicate with and solicit business from current and prospective customers in such a way that we are not able to originate new loans or sell other products at current profit margins.

New Accounting Standards

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157,Fair Value
Measurements,("SFAS 157"). SFAS 157 provides a framework for measuring fair value when such measurements are used for accounting purposes. The framework focuses
on an exit price in the principal (or, alternatively, the most advantageous) market accessible in an orderly transaction between willing market participants. SFAS 157 establishes a three-tiered
fair value hierarchy with Level 1 representing quoted prices for identical assets or liabilities in an active market and Level 3 representing estimated values based on unobservable inputs. Under
SFAS 157, related disclosures are segregated for assets and liabilities measured at fair value based on the level used within the hierarchy to determine their fair values. The Company has
determined that it will adopt SFAS 157 on its effective date of January 1, 2008 and the financial impact, if any, upon adoption has not yet been determined.

In
February 2007, the FASB issued Statement of Financial Accounting Standards No. 159,The Fair Value Option for Financial Assets and Financial
Liabilities, including an amendment of FASB Statement No. 115,("SFAS 159"). SFAS 159 permits fair value accounting to be irrevocably elected for certain financial assets and liabilities on an individual contract basis at the time of acquisition or
at a remeasurement event date. Upon adoption of SFAS 159, fair value accounting may also be elected for existing financial assets and liabilities. For those instruments for which fair value
accounting is elected, changes in fair value will be recognized in earnings and fees and costs associated with origination or acquisition will be recognized as incurred rather than deferred.
SFAS 159 is effective January 1, 2008, with early adoption permitted as of January 1, 2007. The Company has determined that it will adopt SFAS 159 concurrent with the
adoption of SFAS 157 on January 1, 2008, but has not yet determined the financial impact, if any, upon adoption.

In
April 2007, the FASB issued FASB Staff Position No. FIN 39-1,Amendment of FASB Interpretation No. 39, ("FSP
FIN 39-1"). FSP FIN 39-1 amends certain paragraphs of FASB Interpretation Number 39,Offsetting of Amounts Related to Certain
Contracts,an interpretation of APB Opinion No. 10 and FASB Statement No. 105 ("FIN 39"), to permit a reporting entity to offset fair value amounts
recognized for the right to reclaim cash collateral or the obligation to return cash collateral against fair value amounts recognized for derivative instruments executed with the same counterparty
under the same master netting arrangement. FSP FIN 39-1 is effective for fiscal years beginning after November 15, 2007, with early application permitted. Upon application, the
Company shall be permitted to change its accounting policy to offset or not offset fair value amounts recognized for derivative instruments under master netting arrangements. The Company has
determined that it will adopt FSP FIN 39-1 on its effective date of January 1, 2008, but has not yet determined the financial impact, if any, upon adoption.

117

---



In
November 2007, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 109 (SAB 109). SAB 109 supersedes Staff Accounting Bulletin No. 105 (SAB
105), "Application of Accounting Principles to Loan Commitments." It clarifies that the expected net future cash flows related to the associated servicing of a loan should be included in the
measurement of all written loan commitments that are accounted for at fair value through earnings. However, it retains the guidance in SAB 105 that internally-developed intangible assets should not be
recorded as part of the fair value of a derivative loan commitment. The guidance is effective on a prospective basis to derivative loan commitments issued or modified in fiscal quarters beginning
after December 15, 2007. In conjunction with the adoption of SFAS 157 and SFAS 159, this guidance generally would result in higher fair values being recorded upon initial
recognition of derivative loan commitments. The estimated financial impact upon adoption has not yet been determined.

Factors That May Affect Our Future Results

We make forward-looking statements in this Report and in other reports we file with the SEC and in press releases. Our management may make forward-looking
statements orally in a public forum to analysts, investors, the media and others. Generally, forward-looking statements include:



Forward-looking
statements give management's expectation about the future and are not guarantees. Words like "believe," "expect," "anticipate," "promise," "plan" and other expressions or
words of similar meanings, as well as future or conditional verbs such as "will," "would," "should," "could" or "may" are generally intended to identify forward-looking statements. There are a number
of factors, many of which are beyond our control, that could cause actual results to differ significantly from management's expectations. Some of these factors are discussed below.

Readers
are cautioned not to place undue reliance on forward-looking statements. Forward-looking statements speak only as of the date they are made. We do not undertake to update them to
reflect changes that occur after the date they are made.

Factors
that could cause actual results to differ materially from historical results or those anticipated include, but are not limited to the following:



118

---





Other
risk factors are described elsewhere herein, such as Part II, Item 1ARisk Factorsas well as in other
reports and documents that we file with or furnish to the SEC including the 2006 Annual Report. Other factors that could also cause results to differ from our expectations may not be described in any
such report or document. Each of these factors could by itself, or together with one or more other factors, adversely affect our business, results of operations and/or financial condition.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

In response to this Item, the information set forth on pages 93 to 95 of this Form 10-Q is incorporated herein by reference.

Item 4.Controls and Procedures

Disclosure Controls and Procedures

Our management has conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures (as such term is defined in Rules 13a-15 (e) and 15d-15 (e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), as of the end of the period covered by this Report as required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act. Based on this
evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Report.

119

---



Internal Control over Financial Reporting



During the quarter ended September 30, 2007, we revised our method used to estimate the fair value of certain mortgage loan assets due to a reduction in
the level of or the absence of trades in the markets that have traditionally served as the primary basis for the Company's valuations. In the past, management has looked to the asset and
mortgage-backed securities markets to estimate the fair value of our mortgage loan assets. Because of the lack of trading in the markets for certain loan products, it was necessary to look for
alternative sources of value, including the whole loan purchase market, and to apply more judgment to the valuations of our non-conforming prime, home equity and nonprime loans because of lack of
executed trades that could be used to assure that the valuations are reflective of fair value. Management believes that the revised approach to valuing mortgage loan assets, implemented during the
quarter ended September 30, 2007, was supported by effective internal controls over financial reporting.

There
has been no change in our internal control over financial reporting, other than discussed above, during the quarter ended September 30, 2007 that has materially affected, or
is reasonably likely to materially affect, our internal control over financial reporting.

120

---





PART II. OTHER INFORMATION

Item 1.Legal Proceedings

We are defendants in various legal proceedings involving matters generally incidental to our businesses. In addition, various lawsuits, alleging claims for
derivative relief on behalf of the Company and securities, retirement plan, and other class action suits have recently been brought against us, and certain of our current and former officers,
directors and retirement plan administrators in either federal district court in Los Angeles, California or state superior court in Los Angeles. Among other things, these lawsuits allege breach of
state law fiduciary duties and violation of the federal securities laws and the Employee Retirement Income Security Act of 1976 ("ERISA"). These cases allege, among other things, that we did not
disclose complete and accurate information about our mortgage lending practices and financial condition. The shareholder derivative cases brought in federal court are brought on our behalf and do not
seek recovery of damages from us. A lawsuit alleging claims for derivative relief on behalf of the Company is also pending in federal district court in Delaware, and alleges, among other things, that
certain of our proxy filings contain incorrect statements relating to the compensation of our Chief Executive Officer.

Although
it is difficult to predict the resulting outcome of these proceedings, our management currently believes that any resulting liability beyond that already recorded will not
materially affect our consolidated financial position and results of operations.

Item 1A.Risk Factors

Item 1A of our 2006 Annual Report presents risk factors that may impact the Company's future results. In light of recent developments in the mortgage, housing and
secondary markets, those risk factors are supplemented by the following risk factor:

Debt and secondary mortgage market conditions could have a material adverse impact on our earnings and financial condition

We
have significant financing needs that we meet through the capital markets, including the debt and secondary mortgage markets. These markets are currently experiencing unprecedented
disruptions, which have had and may continue to have an adverse impact on the Company's earnings and financial condition, particularly in the short term.

Current
conditions in the debt markets include reduced liquidity and increased credit risk premiums for certain market participants. These conditions, which increase the cost and reduce
the availability of debt, may continue or worsen in the future. The Company attempts to mitigate the impact of debt market disruptions by obtaining adequate committed and uncommitted facilities from a
variety of reliable sources. There can be no assurance, however, that the Company will be successful in these efforts, that such facilities will be adequate or that the cost of debt will allow us to
operate at profitable levels. The Company's cost of debt is also dependent on its maintaining investment-grade credit ratings. Since the Company is highly dependent on the availability of credit to
finance its operations, disruptions in the debt markets or a reduction in our credit ratings, could have an adverse impact on our earnings and financial condition, particularly in the short term.

The
secondary mortgage markets are also currently experiencing unprecedented disruptions resulting from reduced investor demand for mortgage loans and mortgage-backed securities and
increased investor yield requirements for those loans and securities. These conditions may continue or worsen in the future. In light of current conditions, we expect to retain a larger portion of
mortgage loans and mortgage-backed securities than we would in other environments. While we believe our capital and liquidity positions are currently adequate and we have sufficient capacity to hold
additional mortgage loans and mortgage backed securities until investor demand improves and yield requirements moderate, our capacity to retain mortgage loans and mortgage backed securities is not
unlimited. As a

121

---



result,
a prolonged period of secondary market illiquidity may continue to reduce our loan production volumes and could have an adverse impact on our future earnings and financial condition.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

The following table shows repurchases by the Company of its common stock for each calendar month during the quarter ended September 30, 2007.

Calendar Month

Total Number
of Shares
Purchased(1)

Average
Price Paid
per Share

Total Number of
Shares Purchased
as Part of Publicly
Announced Plan
or Program(2)

Maximum Amount
That May
Yet be Purchased
Under the Plan or
Program(2)July

545

$
32.99

n/a


n/aAugust

1,606

$
27.34

n/a


n/aSeptember

329

$
19.87

n/a


n/aTotal

2,480

$
27.59

n/a

$
0.1 billion


---

Item 6.Exhibits



See
Index of Exhibits on page 124.

122

---



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

|                        |  | COUNTRYWIDE FINANCIAL CORPORATION (Registrant)
|----------------------- |  | ----------------------------------------------
|Dated: November 9, 2007 |  | By:                                           
|Dated: November 9, 2007 |  | By:                                           

123

---





COUNTRYWIDE FINANCIAL CORPORATION        FORM 10-Q  September 30, 2007        INDEX OF EXHIBITS

|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.4         |  | Restated Certificate of Incorporation of Countrywide Financial Corporation (the "Company"), as amended.                                                                                                                                                                                                                                                                                                                                                                                                       
|4.57*       |  | Registration Rights Agreement, dated as of August 22, 2007, by and between Bank of America, N.A. and the Company (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K, filed
with the SEC on August 28, 2007).                                                                                                                                                                                                                                                               
|4.58*       |  | Third Amendment to Amended and Restated Rights Agreement, dated as of August 22, 2007, by and between the Company and American Stock Transfer & Trust Company, as rights agent (incorporated by reference to
Exhibit 10.2 to the Company's Current Report on Form 8-K, filed with the SEC on August 28, 2007).                                                                                                                                                                                                
|10.146*     |  | 364-Day Credit Agreement, dated as of May 9, 2007, among the Company, Countrywide Home Loans, Inc. ("CHL"), JPMorgan Chase Bank, N.A., as managing administrative
agent, Bank of America, N.A., as administrative agent, ABN AMRO Bank N.V., as syndication agent, Citibank, N.A. and Deutsche Bank AG New York Branch, as documentation agents, and the lenders party thereto (incorporated by reference to
Exhibit 99.1 to the Company's Current Report on Form 8-K, filed with the SEC on August 16, 2007).
|10.147*     |  | First Amendment to the Five-Year Credit Agreement, dated as of May 9, 2007, by and among the Company, CHL, the lenders party thereto, Bank of America, N.A., as administrative agent for the lenders party thereto, and
JPMorgan Chase Bank, N.A., as managing administrative agent for the lenders party thereto (incorporated by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K, filed with the SEC on August 16, 2007).                                                             
|+10.151     |  | First Amendment to the Countrywide Bank, N.A. Non-Employee Directors' Fee Plan, dated July 26, 2007.                                                                                                                                                                                                                                                                                                                                                                                                          
|10.152*     |  | Investment Agreement, dated as of August 22, 2007, by and between the Company and Bank of America, N.A. (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed with the
SEC on August 28, 2007).                                                                                                                                                                                                                                                                       
|12.1        |  | Computation of the Ratio of Earnings to Fixed Charges.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|31.1        |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                           
|31.2        |  | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                           
|32.1        |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                                                                                                                                                                                                                                                                  
|32.2        |  | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                                                                                                                                                                                                                                                                  

---

124

---



QuickLinks