**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

**Form 10-Q**

**(MarkOne)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**For**the quarterly period ended March 31,2007

**Or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe transition periodfrom              to**

**Commission file number: 1-8422**

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

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

 

**(818) 225-3000**(Registrant’stelephone number, including area code)

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject tosuch filing requirements for the past 90 days. Yes x    Noo

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act (checkone):

| Large accelerated filer x      Accelerated  filer o      Non-accelerated  filer o |
|------------------------------------------------------------------------------------------------------------------------------------------|

 

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

| Yes o      No x |
|-----------------------------------------------|

 

Indicate the numberof shares outstanding of each of the registrant’s classes of common stock, asof the latest practicable date.

| Class                        | ** ** | **Outstanding at May 7, 2007** |
|------------------------------|------------|-------------------------------------|
| Common Stock $.05  par value |       | 593,391,994                         |

 

 

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**COUNTRYWIDEFINANCIAL CORPORATION**

**FORM 10-QMarch 31, 2007**

**TABLEOF CONTENTS**

|                                         | ** ** | ** **                                                                                                        | ** ** | **Page** |
|-----------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I.  FINANCIAL INFORMATION** |       | 1                                                                                                                 |
| Item 1.                                 |       | Financial Statements:                                                                                             |       |     |
|                                    |       | Consolidated  Balance Sheets—March 31, 2007 and December 31, 2006                                  |       | 1        |
|                                    |       | Consolidated  Statements of Earnings—Quarters Ended March 31, 2007 and 2006                             |       | 2        |
|                                    |       | Consolidated  Statement of Changes in Shareholders’ Equity—Quarters Ended March 31,  2007 and 2006 |       | 3        |
|                                    |       | Consolidated Statements of Cash Flows—Quarters Ended  March 31, 2007 and 2006                      |       | 4        |
|                                    |       | Notes to  Consolidated Financial Statements                                                                       |       | 5        |
| Item 2.                                 |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                       |       | 30       |
|                                    |       | Overview                                                                                                          |       | 30       |
|                                    |       | Results of  Operations Comparison—Quarters Ended March 31, 2007 and 2006                                |       | 33       |
|                                    |       | Quantitative  and Qualitative Disclosures About Market Risk                                                       |       | 53       |
|                                    |       | Credit Risk Management                                                                                            |       | 55       |
|                                    |       | Loan Servicing                                                                                                    |       | 62       |
|                                    |       | Liquidity and  Capital Resources                                                                                  |       | 63       |
|                                    |       | Off-Balance  Sheet Arrangements and Aggregate Contractual Obligations                                             |       | 64       |
|                                    |       | Prospective Trends                                                                                                |       | 65       |
|                                    |       | Regulatory Trends                                                                                                 |       | 67       |
|                                    |       | New Accounting Standards                                                                                          |       | 67       |
|                                    |       | Factors That  May Affect Our Future Results                                                                  |       | 68       |
| Item 3.                                 |       | Quantitative  and Qualitative Disclosures About Market Risk                                                       |       | 69       |
| Item 4.                                 |       | Controls and  Procedures                                                                                          |       | 69       |
| **PART II. OTHER  INFORMATION**    |       | 70                                                                                                                |
| Item 2.                                 |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                      |       | 70       |
| Item  6.                                |       | Exhibits                                                                                                          |       | 70       |

 

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**PART I.FINANCIAL INFORMATION**

**Item 1.**                        *Financial Statements*

**COUNTRYWIDEFINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS**

| ** **                                                                                                                                                                                                                                                                                                           | ** ** | **March 31,  2007**                                  | ** **  | **December 31,  2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|-------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                           | ** ** | **(Unaudited)**                                           | ** **  | **(Audited)**               | ** ** |
| ** **                                                                                                                                                                                                                                                                                                           | ** ** | **(in thousands, except share data)** | ** **  |
| **ASSETS**                                                                                                                                                                                                                                                                                                           | ** ** | ** **                                                | ** **  | ** **                  | ** ** |
| Cash                                                                                                                                                                                                                                                                                                                 |       | $                                                         | 1,202,114   |                        | $          | 1,407,000 |   |
| Mortgage loans  held for sale                                                                                                                                                                                                                                                                                        |       | 32,282,579                                                |        | 31,272,630                  |       |
| Trading  securities owned, at fair value                                                                                                                                                                                                                                                                             |       | 16,794,223                                                |        | 20,036,668                  |       |
| Trading  securities pledged as collateral, at fair value                                                                                                                                                                                                                                                             |       | 4,839,902                                                 |        | 1,465,517                   |       |
| Securities  purchased under agreements to resell, securities borrowed and federal funds  sold                                                                                                                                                                                                                        |       | 28,851,069                                                |        | 27,269,897                  |       |
| Loans held for  investment, net of allowance for loan losses of $374,367 and $261,054,  respectively                                                                                                                                                                                                                 |       | 75,177,094                                                |        | 78,085,757                  |       |
| Investments in  other financial instruments, at fair value                                                                                                                                                                                                                                                           |       | 19,445,697                                                |        | 12,769,451                  |       |
| Mortgage  servicing rights, at fair value                                                                                                                                                                                                                                                                            |       | 17,441,860                                                |        | 16,172,064                  |       |
| Premises and  equipment, net                                                                                                                                                                                                                                                                                         |       | 1,653,233                                                 |        | 1,625,456                   |       |
| Other assets                                                                                                                                                                                                                                                                                                         |       | 10,262,832                                                |        | 9,841,790                   |       |
| Total assets                                                                                                                                                                                                                                                                                                         |       | $                                                         | 207,950,603 |                        | $          | 199,946,230 |   |
| **LIABILITIES**                                                                                                                                                                                                                                                                                                      | ** ** | ** **                                                | ** **  | ** **                  | ** ** |
| Deposit  liabilities                                                                                                                                                                                                                                                                                                 |       | $                                                         | 57,525,061  |                        | $          | 55,578,682 |   |
| Securities sold  under agreements to repurchase and federal funds purchased                                                                                                                                                                                                                                          |       | 44,085,743                                                |        | 42,113,501                  |       |
| Trading  securities sold, not yet purchased, at fair value                                                                                                                                                                                                                                                           |       | 3,380,852                                                 |        | 3,325,249                   |       |
| Notes payable                                                                                                                                                                                                                                                                                                        |       | 74,322,902                                                |        | 71,487,584                  |       |
| Accounts payable  and accrued liabilities                                                                                                                                                                                                                                                                            |       | 8,650,035                                                 |        | 8,187,605                   |       |
| Income taxes  payable                                                                                                                                                                                                                                                                                                |       | 5,167,561                                                 |        | 4,935,763                   |       |
| Total liabilities                                                                                                                                                                                                                                                                                                    |       | 193,132,154                                               |        | 185,628,384                 |       |
| Commitments and  contingencies                                                                                                                                                                                                                                                                                       |       | —                                                    |        | —                      |       |
| **SHAREHOLDERS’ EQUITY**                                                                                                                                                                                                                                                                                        | ** ** | ** **                                                | ** **  | ** **                  | ** ** |
| Preferred  stock—authorized, 1,500,000 shares of $0.05 par value; none issued and  outstanding                                                                                                                                                                                                                  |       | —                                                    |        | —                      |       |
| Common stock—authorized,  1,000,000,000 shares of $0.05 par value; issued, 591,596,654 shares and  585,466,719 shares at March 31, 2007 and December 31, 2006,  respectively; outstanding, 591,201,542 shares and 585,182,298 shares at  March 31, 2007 and December 31, 2006, respectively |       | 29,580                                                    |        | 29,273                      |       |
| Additional  paid-in capital                                                                                                                                                                                                                                                                                          |       | 2,320,760                                                 |        | 2,154,438                   |       |
| Accumulated other  comprehensive loss                                                                                                                                                                                                                                                                                |       | (16,535                                                   | )           | (17,556                     | )          |
| Retained earnings                                                                                                                                                                                                                                                                                                    |       | 12,484,644                                                |        | 12,151,691                  |       |
| Total shareholders’ equity                                                                                                                                                                                                                                                                                      |       | 14,818,449                                                |        | 14,317,846                  |       |
| Total liabilities  and shareholders’ equity                                                                                                                                                                                                                                                                     |       | $                                                         | 207,950,603 |                        | $          | 199,946,230 |   |

 

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

1

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**COUNTRYWIDEFINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF EARNINGS**

| ** **                                                                                      | ** ** | **Quarters Ended March 31,**                    | ** ** |
|-------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                                      | ** ** | **2007**                                                       | ** ** | **2006** | ** ** |
| ** **                                                                                      | ** ** | **(Unaudited)**                                                | ** ** |
| ** **                                                                                      | ** ** | **(in thousands, except per  share data)** | ** ** |
| **Revenues**                                                                                    |       |                                                           |       |   |   |
| Gain on sale of loans and securities                                                            |       | $                                                              | 1,234,104  |   | $ | 1,361,178 |   |
| Interest income                                                                                 |       | 3,351,982                                                      |       | 2,593,758 |   |
| Interest expense                                                                                |       | (2,621,045                                                     | )          | (1,899,323 | ) |
| Net interest income                                                                             |       | 730,937                                                        |       | 694,435 |   |
| Provision for loan losses                                                                       |       | (151,962                                                       | )          | (63,138 | ) |
| Net interest income after provision for loan losses                                             |       | 578,975                                                        |       | 631,297 |   |
| Loan servicing fees and other income from mortgage  servicing rights and retained interests     |       | 1,387,289                                                      |       | 1,199,887 |   |
| Realization of expected cash flows from mortgage  servicing rights                              |       | (924,706                                                       | )          | (738,567 | ) |
| Change in fair value of mortgage servicing rights                                               |       | 179,007                                                        |       | 978,281 |   |
| Impairment of retained interests                                                                |       | (429,601                                                       | )          | (120,654 | ) |
| Servicing Hedge losses                                                                          |       | (113,738                                                       | )          | (885,870 | ) |
| Net loan servicing fees and other income from  mortgage servicing rights and retained interests |       | 98,251                                                         |       | 433,077 |   |
| Net insurance premiums earned                                                                   |       | 334,177                                                        |       | 279,793 |   |
| Other                                                                                           |       | 160,269                                                        |       | 130,603 |   |
| Total revenues                                                                                  |       | 2,405,776                                                      |       | 2,835,948 |   |
| **Expenses**                                                                                    | ** ** | ** **                                                     | ** ** | ** ** | ** ** |
| Compensation                                                                                    |       | 1,075,408                                                      |       | 1,074,818 |   |
| Occupancy and other office                                                                      |       | 264,213                                                        |       | 245,331 |   |
| Insurance claims                                                                                |       | 57,305                                                         |       | 124,042 |   |
| Advertising and promotion                                                                       |       | 70,017                                                         |       | 60,230 |   |
| Other                                                                                           |       | 238,038                                                        |       | 212,164 |   |
| Total expenses                                                                                  |       | 1,704,981                                                      |       | 1,716,585 |   |
| Earnings before  income taxes                                                                   |       | 700,795                                                        |       | 1,119,363 |   |
| Provision for income taxes                                                                      |       | 266,814                                                        |       | 435,852 |   |
| **NET EARNINGS**                                                                                |       | $                                                              | 433,981    |   | $ | 683,511 |   |
| **Earnings per share**                                                                          |       |                                                           |       |   |   |
| Basic                                                                                           |       | $                                                              | 0.74       |   | $ | 1.14 |   |
| Diluted                                                                                         |       | $                                                              | 0.72       |   | $ | 1.10 |   |

 

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

2

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**COUNTRYWIDEFINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY**

| ** **                                                                          | ** ** | **Number of  Shares of  Common Stock**     | ** **  | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Retained  Earnings** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|-------------|-------------------|------------|----------------------------------|------------|-----------------------------------------------------------|------------|------------------------|------------|-----------|------------|
| ** **                                                                          | ** ** | **(Unaudited)**                                           | ** **  |
| ** **                                                                          | ** ** | **(in thousands, except share data)** | ** **  |
| **Balance at December 31, 2005**                                               |       |                                                      | 600,030,686 |              |       |                             | $          | 30,008                                                    |       |                   |       | $         | 2,954,019  |   |   |   | $ | 61,114 |   |   | $ | 9,770,719 |   | $ | 12,815,860 |   |
| Remeasurement of mortgage servicing rights to fair  value upon adoption of SFAS 156 |       |                                                      | —      |              |       |                             | —     |                                                      |       |                   | —     |      |       |   | — |   |   | 67,065 |   | 67,065 |   |
| Balance as adjusted, January 1, 2006                                           |       |                                                      | 600,030,686 |              |       |                             | 30,008     |                                                      |       |                   | 2,954,019  |      |       |   | 61,114 |   |   | 9,837,784 |   | 12,882,925 |   |
| Comprehensive income:                                                               |       |                                                      |        |              |       |                             |       |                                                      |       |                   |       |      |       |   |   |   |   |   |   |   |   |
| Net earnings for the period                                                         |       |                                                      | —      |              |       |                             | —     |                                                      |       |                   | —     |      |       |   | — |   |   | 683,511 |   | 683,511 |   |
| Other  comprehensive income (loss), net of tax:                                     |       |                                                      |        |              |       |                             |       |                                                      |       |                   |       |      |       |   |   |   |   |   |   |   |   |
| Net unrealized losses from  available-for-sale securities                      |       |                                                      | —      |              |       |                             | —     |                                                      |       |                   | —     |      |       |   | (80,984 | ) |   | — |   | (80,984 | ) |
| Net unrealized losses from cash flow hedging  instruments                      |       |                                                      | —      |              |       |                             | —     |                                                      |       |                   | —     |      |       |   | (7,647 | ) |   | — |   | (7,647 | ) |
| Net change in foreign currency translation adjustment                               |       |                                                      | —      |              |       |                             | —     |                                                      |       |                   | —     |      |       |   | 1,114 |   |   | — |   | 1,114 |   |
| Total comprehensive income                                                          |       |                                                      |        |              |       |                             |       |                                                      |       |                   |       |      |       |   |   |   |   |   |   | 595,994 |   |
| Issuance of common stock pursuant to stock-based  compensation plans                |       |                                                      | 4,147,375   |              |       |                             | 212        |                                                      |       |                   | 87,441     |      |       |   | — |   |   | — |   | 87,653 |   |
| Excess tax benefit related to stock-based  compensation                             |       |                                                      | —      |              |       |                             | —     |                                                      |       |                   | 22,000     |      |       |   | — |   |   | — |   | 22,000 |   |
| Issuance of common stock, net of treasury stock                                     |       |                                                      | 193,884     |              |       |                             | 10         |                                                      |       |                   | 6,539      |      |       |   | — |   |   | — |   | 6,549 |   |
| Issuance of common stock in conversion of convertible  debt                         |       |                                                      | 414,868     |              |       |                             | 21         |                                                      |       |                   | 1,444      |      |       |   | — |   |   | — |   | 1,465 |   |
| Cash dividends paid—$0.15 per common share                                |       |                                                      | —      |              |       |                             | —     |                                                      |       |                   | —     |      |       |   | — |   |   | (90,333 | ) | (90,333 | ) |
| **Balance at March 31, 2006**                                                  |       |                                                      | 604,786,813 |              |       |                             | $          | 30,251                                                    |       |                   |       | $         | 3,071,443  |   |   |   | $ | (26,403 | ) |   | $ | 10,430,962 |   | $ | 13,506,253 |   |
| **Balance at December 31, 2006**                                               |       |                                                      | 585,182,298 |              |       |                             | $          | 29,273                                                    |       |                   |       | $         | 2,154,438  |   |   |   | $ | (17,556 | ) |   | $ | 12,151,691 |   | $ | 14,317,846 |   |
| Remeasurement of income taxes payable upon adoption  of FIN 48                      |       |                                                      | —      |              |       |                             | —     |                                                      |       |                   | —     |      |       |   | — |   |   | (12,719 | ) | (12,719 | ) |
| Balance as adjusted, January 1, 2007                                           |       |                                                      | 585,182,298 |              |       |                             | 29,273     |                                                      |       |                   | 2,154,438  |      |       |   | (17,556 | ) |   | 12,138,972 |   | 14,305,127 |   |
| Comprehensive income:                                                               |       |                                                      |        |              |       |                             |       |                                                      |       |                   |       |      |       |   |   |   |   |   |   |   |   |
| Net earnings for the period                                                         |       |                                                      | —      |              |       |                             | —     |                                                      |       |                   | —     |      |       |   | — |   |   | 433,981 |   | 433,981 |   |
| Other  comprehensive income (loss), net of tax:                                     |       |                                                      |        |              |       |                             |       |                                                      |       |                   |       |      |       |   |   |   |   |   |   |   |   |
| Net unrealized losses from  available-for-sale securities                      |       |                                                      | —      |              |       |                             | —     |                                                      |       |                   | —     |      |       |   | (5,160 | ) |   | — |   | (5,160 | ) |
| Net change in foreign currency translation adjustment                               |       |                                                      | —      |              |       |                             | —     |                                                      |       |                   | —     |      |       |   | 4,251 |   |   | — |   | 4,251 |   |
| Change in unfunded liability relating to defined  benefit plans                     |       |                                                      | —      |              |       |                             | —     |                                                      |       |                   | —     |      |       |   | 1,930 |   |   | — |   | 1,930 |   |
| Total comprehensive income                                                          |       |                                                      |        |              |       |                             |       |                                                      |       |                   |       |      |       |   |   |   |   |   |   | 435,002 |   |
| Issuance of common stock pursuant to stock-based  compensation plans                |       |                                                      | 5,717,442   |              |       |                             | 292        |                                                      |       |                   | 116,035    |      |       |   | — |   |   | — |   | 116,327 |   |
| Excess tax benefit related to stock-based  compensation                             |       |                                                      | —      |              |       |                             | —     |                                                      |       |                   | 38,513     |      |       |   | — |   |   | — |   | 38,513 |   |
| Issuance of common stock, net of treasury stock                                     |       |                                                      | 301,802     |              |       |                             | 15         |                                                      |       |                   | 11,774     |      |       |   | — |   |   | — |   | 11,789 |   |
| Cash dividends paid—$0.15 per common share                                |       |                                                      | —      |              |       |                             | —     |                                                      |       |                   | —     |      |       |   | — |   |   | (88,309 | ) | (88,309 | ) |
| **Balance  at March 31, 2007**                                                 |       |                                                      | 591,201,542 |              |       |                             | $          | 29,580                                                    |       |                   |       | $         | 2,320,760  |   |   |   | $ | (16,535 | ) |   | $ | 12,484,644 |   | $ | 14,818,449 |   |

 

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

3

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS**

| ** **                                                                                                                     | ** ** | **Quarters Ended   March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                     | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| ** **                                                                                                                     | ** ** | **(Unaudited)**                               | ** ** |
| ** **                                                                                                                     | ** ** | **(in thousands)**                       | ** ** |
| **Cash flows from operating activities:**                                                                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Net earnings                                                                                                                   |       | $                                             | 433,981    |   | $ | 683,511 |   |
| Adjustments to reconcile  net earnings to net cash (used) provided by operating activities:                                    |       |                                          |       |   |   |
| Gain on sale of  loans and securities                                                                                          |       | (1,234,104                                    | )          | (1,361,178 | ) |
| Accretion of  discount on securities                                                                                           |       | (138,089                                      | )          | (121,641 | ) |
| Interest  capitalized on loans                                                                                                 |       | (234,589                                      | )          | (109,433 | ) |
| Amortization of  deferred premiums, discounts, fees and costs, net                                                             |       | 106,761                                       |       | 69,465 |   |
| Accretion of fair  value adjustments and discount on notes payable                                                             |       | (8,087                                        | )          | (40,558 | ) |
| Change in fair  value of hedged notes payable and related interest-rate and foreign-currency  swaps                            |       | (7,959                                        | )          | (4,481 | ) |
| Amortization of  deferred fees on time deposits                                                                                |       | 5,981                                         |       | 4,319 |   |
| Provision for loan  losses                                                                                                     |       | 151,962                                       |       | 63,138 |   |
| Change in MSR  value due to realization of expected cash flows from mortgage  servicing rights                            |       | 924,706                                       |       | 738,567 |   |
| Change in fair  value of mortgage servicing rights                                                                             |       | (179,007                                      | )          | (978,281 | ) |
| Impairment of  retained interests                                                                                              |       | 418,109                                       |       | 123,982 |   |
| Servicing hedge  losses                                                                                                        |       | 113,738                                       |       | 885,870 |   |
| Stock-based  compensation expense                                                                                              |       | 15,898                                        |       | 22,153 |   |
| Depreciation and  other amortization                                                                                           |       | 74,503                                        |       | 62,189 |   |
| Provision for  deferred income taxes                                                                                           |       | 330,322                                       |       | 357,931 |   |
| Origination and  purchase of loans held for sale                                                                               |       | (114,407,534                                  | )          | (98,372,317 | ) |
| Proceeds from sale  and principal repayments of loans held for sale                                                            |       | 112,027,953                                   |       | 103,245,396 |   |
| Increase in  trading securities                                                                                                |       | (131,940                                      | )          | (1,090,372 | ) |
| Net increase in  retained interests and servicing hedge securities accounted for as trading  securities                        |       | (791,795                                      | )          | (244,006 | ) |
| Increase in other  assets                                                                                                      |       | (433,472                                      | )          | (634,651 | ) |
| Increase in  trading securities sold, not yet purchased, at fair value                                                         |       | 55,603                                        |       | 1,107,957 |   |
| Increase  (decrease) in accounts payable and accrued liabilities                                                               |       | 466,092                                       |       | (694,651 | ) |
| (Decrease)  increase in income taxes payable                                                                                   |       | (109,278                                      | )          | 50,062 |   |
| Net cash (used)  provided by operating activities                                                                              |       | (2,550,245                                    | )          | 3,762,971 |   |
| **Cash flows from investing activities:**                                                                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| (Increase)  decrease in securities purchased under agreements to resell, federal funds  sold and securities borrowed |       | (1,581,172                                    | )          | 1,801,102 |   |
| Repayments  (additions) to loans held for investment, net                                                                      |       | 3,597,579                                     |       | (4,318,121 | ) |
| Sales of loans  held for investment, net                                                                                       |       | —                                        |       | 52,787 |   |
| Additions to  investments in other financial instruments accounted for as  available-for-sale                                  |       | (7,729,622                                    | )          | (1,034,764 | ) |
| Proceeds from sale  and repayment of investments in other financial instruments accounted for as  available-for-sale           |       | 1,488,814                                     |       | 651,515 |   |
| Purchases of  mortgage servicing rights                                                                                        |       | (116,592                                      | )          | (1,911 | ) |
| Purchases of  premises and equipment, net                                                                                      |       | (85,088                                       | )          | (106,405 | ) |
| Net cash used by  investing activities                                                                                         |       | (4,426,081                                    | )          | (2,955,797 | ) |
| **Cash flows from financing activities:**                                                                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Net increase in  deposit liabilities                                                                                           |       | 1,940,398                                     |       | 5,934,707 |   |
| Net increase  (decrease) in securities sold under agreements to repurchase and federal  funds purchased                   |       | 1,972,242                                     |       | (1,553,360 | ) |
| Net increase  (decrease) in short-term borrowings                                                                              |       | 5,852,162                                     |       | (4,865,836 | ) |
| Issuance of  long-term debt                                                                                                    |       | 5,268,740                                     |       | 3,634,793 |   |
| Repayment of  long-term debt                                                                                                   |       | (8,325,000                                    | )          | (2,347,681 | ) |
| Excess tax  benefits related to stock-based compensation                                                                       |       | 38,989                                        |       | 22,000 |   |
| Issuance of common  stock                                                                                                      |       | 112,218                                       |       | 72,049 |   |
| Payment of  dividends                                                                                                          |       | (88,309                                       | )          | (90,333 | ) |
| Net cash provided  by financing activities                                                                                     |       | 6,771,440                                     |       | 806,339 |   |
| Net (decrease)  increase in cash                                                                                               |       | (204,886                                      | )          | 1,613,513 |   |
| Cash at beginning  of period                                                                                                   |       | 1,407,000                                     |       | 1,031,108 |   |
| Cash at end of  period                                                                                                         |       | $                                             | 1,202,114  |   | $ | 2,644,621 |   |

 

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

4

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

**Note 1—Basis ofPresentation**

Countrywide FinancialCorporation (“Countrywide”) is a holding company which, through itssubsidiaries (collectively, the “Company”), is engaged in mortgage lending andother real estate finance-related businesses, including mortgage banking,banking and mortgage warehouse lending, dealing in securities and insuranceunderwriting.

The accompanyingconsolidated financial statements have been prepared in conformity withU.S. generally accepted accounting principles (“U.S. GAAP”) forinterim financial information and with the Securities and Exchange Commission’sinstructions to Form 10-Q and Rule 10-01 of RegulationS-X. Accordingly, they do not include all of the information and notes requiredby U.S. GAAP for complete financial statements.

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

In the opinion ofmanagement, all adjustments (consisting of normal recurring adjustments)considered necessary for a fair presentation have been included. Operatingresults for the quarter ended March 31, 2007 are not necessarilyindicative of the results that may be expected for the year ending December 31,2007. For further information, including a description of the Company’ssignificant accounting policies, refer to the consolidated financial statementsand notes thereto included in the Annual Report on Form 10-K for theyear ended December 31, 2006, for the Company (the “2006 Annual Report”).

Certain amountsreflected in the prior year consolidated financial statements have beenreclassified to conform to current year presentation.

**Note 2—Adoption ofNew Accounting Pronouncements**

Statementof Financial Accounting Standards No. 155, *Accountingfor Certain Hybrid Financial Instruments,* an amendment ofSFAS 133 and SFAS 140 (“SFAS 155”), was effective for all financialinstruments acquired or issued after December 31, 2006. This Statement:

·       Establishesa requirement to evaluate whether interests in securitized financial instrumentscontain an embedded derivative that requires bifurcation;

·       Permitsfair value accounting to be elected for any hybrid financial instrument thatcontains an embedded derivative that otherwise would require bifurcation;

·       Clarifieswhich interest-only stripped securities and principal-only stripped securities arenot subject to SFAS 133; and

·       Clarifiesthat concentration of credit risks in the form of subordination are notembedded derivatives.

The application of SFAS155 did not have a significant impact on the consolidated financial position orearnings of the Company.

5

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

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

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

·       Incometax benefits should be recognized when, based on the technical merits of a taxposition, the entity believes that if a dispute arose with the taxing authorityand were taken to a court of last resort, it is more likely than not (i.e., aprobability of greater than 50 percent) that the tax position would besustained as filed; and

·       Ifa position is determined to be more likely than not of being sustained, thereporting enterprise should recognize the largest amount of tax benefit that isgreater than 50 percent likely of being realized upon ultimate settlement withthe taxing authority.

FIN 48was applicable beginning January 1, 2007. The opening balances of incometaxes payable and retained earnings were adjusted for the cumulative effect ofapplying the provisions of FIN 48:

| ** **                                                          | ** ** | **Income Taxes  Payable** | ** ** | **Retained  Earnings** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------|------------|------------------------|------------|
| ** **                                                          | ** ** | **(in thousands)**        | ** ** |
| Balance at  December 31, 2006                                  |       |                           | $          | 4,935,763              |       |   | $ | 12,151,691 |   |
| Remeasurement of  income tax liability upon adoption of FIN 48 |       |                           | 12,719     |                   |       | (12,719 | ) |
| Balance at  January 1, 2007                                    |       |                           | $          | 4,948,482              |       |   | $ | 12,138,972 |   |

 

Thetotal 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 taxbenefits would impact the Company’s effective income tax rate. As of January 1,2007 the Company had no tax positions for which it was reasonably possible thatthe total amounts of unrecognized tax benefits would significantly increase ordecrease by December 31, 2007.

TheCompany recognizes interest and penalties related to income tax uncertaintiesin its provision for income taxes and income taxes payable. The after-taxequivalent of approximately $17.2 million for interest and penalties onuncertain tax positions was included in income taxes payable at January 1,2007.

As of January 1, 2007the Internal Revenue Service (“IRS”) had examined the Company’s tax returns fortax years through 2002 and was in the process of auditing tax years 2003 and2004. As of March 31, 2007 the IRS had substantially completed itsexamination for 2003 and 2004. As of January 1, 2007 the Company was underaudit for tax years 2003 and 2004 by the California Franchise Tax Board (“FTB”),and tax year 2002 is open to examination. The FTB examination for 2003 and 2004is not expected to be completed by December 31, 2007.

**Note 3—Earnings Per Share**

Basicearnings per share is determined using net earnings divided by the weighted-averagecommon shares outstanding during the period. Diluted earnings per share iscomputed by dividing net earnings 

6

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

available to commonshareholders by the weighted-average shares outstanding, assuming allpotentially dilutive common shares were issued.

Thefollowing table summarizes the basic and diluted earnings per sharecalculations for the periods indicated:

| ** **                                    | ** ** | **Quarters Ended March 31,**                        | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                                           | ** ** | **2006** | ** ** |
| ** **                                    | ** ** | **Net  Earnings**                                                  | ** ** | **Shares** | ** ** | **Per-Share  Amount** | ** ** | **Net  Earnings** | ** ** | **Shares** | ** ** | **Per-Share  Amount** | ** ** |
| ** **                                    | ** ** | **(in thousands, except per share data)** | ** ** |
| Net earnings and  basic earnings per share    |       | $                                                                  | 433,981    |   | 588,158 |   |   | $ | 0.74 |   |   | $ | 683,511 |   | 601,585 |   |   | $ | 1.14 |   |   |
| Effect of  dilutive securities:               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dilutive stock options                        |       | —                                                             |       | 14,079 |   |   |   |   |   | — |   | 18,528 |   |   |   |   |   |
| Accelerated share repurchase program          |       | —                                                             |       | 763 |   |   |   |   |   | — |   | — |   |   |   |   |   |
| Convertible debentures                        |       | —                                                             |       | — |   |   |   |   |   | 15 |   | 219 |   |   |   |   |   |
| Diluted earnings and  earnings per share |       | $                                                                  | 433,981    |   | 603,000 |   |   | $ | 0.72 |   |   | $ | 683,526 |   | 620,332 |   |   | $ | 1.10 |   |   |

 

During the quarters ended March 31,2007 and 2006, options to purchase 10,000 shares and 187,209 shares,respectively, were outstanding but not included in the computation of dilutedearnings per share because they were anti-dilutive.

**Note 4—Derivative Financial Instruments**

***DerivativeFinancial Instruments***

The primary market riskfacing the Company is interest rate risk, which includes the risk that changesin market interest rates will result in unfavorable changes in the value of ourassets or liabilities (“price risk”) and the risk that net interest income fromour mortgage loan and investment portfolios will change in response to changesin interest rates. The overall objective of the Company’s interest rate riskmanagement activities is to reduce the variability of earnings caused bychanges in interest rates.

TheCompany manages interest rate risk in its Mortgage Banking Segment through thenatural counterbalance of its loan production and servicing businesses. TheCompany also uses various financial instruments, including derivatives, tomanage the interest rate risk related specifically to the values of itscommitments to make loans, (also referred to as interest rate lock commitmentsor “IRLCs”), mortgage loans held by the Company pending sale (“Mortgage LoanInventory”), retained interests and trading securities, as well as a portion ofits debt.

The Company managesinterest rate risk in its Banking Segment by funding the segment’sinterest-earning assets with liabilities of similar duration or a combinationof derivative instruments and certain liabilities that create repricingcharacteristics that closely reflect the repricing behaviors of those assets.

7

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

***Risk Management Activities Related to Mortgage LoanInventory and Interest Rate Lock Commitments***

To manage the price riskassociated with the IRLCs, the Company generally uses a combination of netforward sales of Mortgage Backed-Securities (“MBS”) and put and call options onMBS, Treasury futures and Eurodollar futures. The Company generally makesforward sales of MBS in an amount equal to the portion of the IRLCs expected toclose, assuming no change in mortgage rates. The Company acquires put and calloptions to protect against the variability of loan closings caused by changesin mortgage rates. To manage the credit spread risk associated with its IRLCsthe Company may enter into credit default swaps.

The Company manages theprice risk related to the Mortgage Loan Inventory primarily by entering intoforward sales of MBS and Eurodollar futures. The values of these forward MBSsales and Eurodollar futures move in opposite direction to the value of theMortgage Loan Inventory. To manage the credit spread risk associated with itsMortgage Loan Inventory, the Company may enter into credit default swaps orsimilar instruments. The Company actively manages the risk profiles of itsIRLCs and Mortgage Loan Inventory on a daily basis.

The Company manages theprice risk, including credit spread risk related to its commercial mortgageloans using interest rate, total rate of return and credit default swaps.

During the quarterended March 31, 2007, the interest rate risk management activitiesassociated with 55% of the fixed-rate mortgage loan inventory and 48% of theadjustable-rate mortgage loan inventory were accounted for as fair valuehedges. For the quarters ended March 31, 2007 and 2006, the Companyrecognized net pre-tax losses of $6.2 million and $28.8 million,respectively, representing the ineffective portion of the hedges of its MortgageLoan Inventory that qualified as fair value hedges.

***Risk Management Activities Related to MortgageServicing Rights and Retained Interests***

To moderate negativeimpacts on earnings caused by a rate-driven decline in fair value of its mortgageservicing rights (“MSRs”) and retained interests from securitization, theCompany maintains a portfolio of financial instruments, including derivativesand securities, which generally increase in value when interest rates decline. Inaddition, the Company uses credit default swaps or similar instruments tomoderate the negative impact on earnings caused by a credit spread-drivendecline in fair value. This portfolio of financial instruments is collectivelyreferred to herein as the “Servicing Hedge.”

The following tablesummarizes the activity for derivative contracts included in the ServicingHedge expressed by notional amounts:

| ** **                                  | ** ** | **Balance,  December 31,  2006** | ** ** | **Additions** | ** ** | **Dispositions/  Expirations** | ** ** | **Balance,  March 31,  2007** | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|---------------|------------|--------------------------------|------------|------------------------------------|------------|
| ** **                                  | ** ** | **(in millions)**                | ** ** |
| Mortgage forward  rate agreements           |       |                                  | $          | 48,000        |       |                           |       | $                                  | 37,000     |   |   |   | $ | (32,000 | ) |   |   | $ | 53,000 |   |   |
| Interest rate  swaptions                    |       |                                  | 41,750     |          |       |                           | 18,375     |                               |       |   | (14,050 | ) |   |   | 46,075 |   |   |
| Interest rate  swaps                        |       |                                  | 29,025     |          |       |                           | 13,990     |                               |       |   | (5,010 | ) |   |   | 38,005 |   |   |
| Long treasury  futures                      |       |                                  | —     |          |       |                           | 25,750     |                               |       |   | (5,000 | ) |   |   | 20,750 |   |   |
| Long call options on  interest rate futures |       |                                  | 4,500      |          |       |                           | 18,250     |                               |       |   | (15,750 | ) |   |   | 7,000 |   |   |
| Credit default swaps                        |       |                                  | —     |          |       |                           | 424        |                               |       |   | (312 | ) |   |   | 112 |   |   |

 

8

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

***Risk Management Activities Related to Issuance ofLong-Term Debt***

The Company has enteredinto interest rate swap contracts in which the rate received is fixed and therate paid is adjustable and is indexed to LIBOR. These interest rate swapsenable the Company to convert a portion of its fixed-rate long-term debt toU.S. dollar LIBOR-based floating-rate debt (notional amount of $5.2 billionas of March 31, 2007) and a portion of its foreign currency-denominatedfixed and floating-rate long-term debt to U.S. dollar LIBOR-based floating-ratedebt (notional amount of $4.4 billion as of March 31, 2007). Thesetransactions are generally designated as fair value hedges under SFAS 133.For the quarters ended March 31, 2007 and 2006, the Company recognized netpre-tax gains of $8.0 million and $4.5 million, respectively, representing theineffective portion of its fair value hedges of debt.

***Risk Management Activities Related to DepositLiabilities***

The Company hasentered into interest rate swap contracts that have the effect of converting aportion of its fixed-rate deposit liabilities to LIBOR-based variable-ratedeposit liabilities. These transactions are designated as fair value hedges.For the quarters ended March 31, 2007 and 2006, the Company recognized a netpre-tax gain of $1.3 million and a net pre-tax loss of $1.0 million,respectively, representing the hedge ineffectiveness relating to these swaps.

***Risk Management Activities Related to theBroker-Dealer Securities Trading Portfolio***

In connection withits broker-dealer activities, the Company maintains a trading portfolio offixed-income securities, primarily MBS. The Company is exposed to pricechanges in its trading portfolio arising from interest rate changes during theperiod it holds the securities. To manage this risk, the Company utilizesderivative instruments including forward sales/purchases of To-Be-Announced (“TBA”)MBS, short/long futures contracts, interest rate swaps, credit default swaps,long put/call options on futures contracts, interest rate caps and receiverswaptions.

9

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

**Note 5—MortgageLoans Held for Sale**

Mortgageloans held for sale include the following:

| ** **                                         | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|----------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                         | ** ** | **(in thousands)**  | ** ** |
| Prime                                              |       | $                        | 22,471,526 |                        | $          | 22,597,825 |   |
| Nonprime                                           |       | 4,864,435                |       | 4,895,438                   |       |
| Prime home equity                                  |       | 2,596,880                |       | 1,825,483                   |       |
| Commercial real  estate                            |       | 2,370,175                |       | 1,930,100                   |       |
| Deferred  premiums, discounts, fees and costs, net |       | (20,437                  | )          | 23,784                      |       |
|                                               |       | $                        | 32,282,579 |                        | $          | 31,272,630 |   |

 

At March 31, 2007, the Company had pledged $10.2billion and $0.7 billion in mortgage loans held for sale to secure asset-backedcommercial paper and a secured revolving line of credit, respectively.

At December 31, 2006,the Company had pledged $7.9 billion and $0.6 billion in mortgage loans heldfor sale to secure asset-backed commercial paper and a secured revolving lineof credit, respectively.

**Note 6—TradingSecurities and Trading Securities Sold, Not Yet Purchased**

Tradingsecurities, which consist of trading securities owned and trading securitiespledged as collateral, include the following:

| ** **                                              | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                              | ** ** | **(in thousands)**  | ** ** |
| Mortgage pass-through  securities:                      |       |                     |       |                        |       |
| Fixed-rate                                              |       | $                        | 11,462,638 |                        | $          | 13,502,403 |   |
| Adjustable-rate                                         |       | 511,876                  |       | 1,381,675                   |       |
| Total mortgage pass-through securities                  |       | 11,974,514               |       | 14,884,078                  |       |
| Collateralized  mortgage obligations                    |       | 4,692,800                |       | 3,307,594                   |       |
| U.S. Treasury  securities                               |       | 3,405,917                |       | 1,801,221                   |       |
| Obligations of  U.S. Government-sponsored   enterprises |       | 842,462                  |       | 781,657                     |       |
| Interest-only  securities                               |       | 264,137                  |       | 287,206                     |       |
| Asset-backed  securities                                |       | 208,598                  |       | 203,979                     |       |
| Derivative  financial instruments                       |       | 118,556                  |       | 15,728                      |       |
| Mark-to-market on  TBA securities                       |       | 92,946                   |       | 144,674                     |       |
| Residual  securities                                    |       | 18,301                   |       | 52,097                      |       |
| Other                                                   |       | 15,894                   |       | 23,951                      |       |
|                                                    |       | $                        | 21,634,125 |                        | $          | 21,502,185 |   |

 

10

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

Tradingsecurities sold, not yet purchased, include the following:

| ** **                                            | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                            | ** ** | **(in thousands)**  | ** ** |
| U.S. Treasury  securities                             |       | $                        | 2,671,722  |                        |       | $ | 2,803,030 |   |   |
| Obligations of  U.S. Government-sponsored enterprises |       | 518,671                  |       |                        | 305,826    |   |   |
| Mark-to-market on  TBA securities                     |       | 115,537                  |       |                        | 181,119    |   |   |
| Mortgage  pass-through securities, fixed-rate         |       | 48,371                   |       |                        | 26,024     |   |   |
| Derivative  financial instruments                     |       | 20,660                   |       |                        | 9,235      |   |   |
| Other                                                 |       | 5,891                    |       |                        | 15         |   |   |
|                                                  |       | $                        | 3,380,852  |                        |       | $ | 3,325,249 |   |   |

 

As of March 31, 2007, $18.1 billion of theCompany’s trading securities had been pledged as collateral for financingpurposes, of which the counterparty had the contractual right to sell orre-pledge $4.8 billion.

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

**Note 7—SecuritiesPurchased Under Agreements to Resell, Securities Borrowed and Federal FundsSold**

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

| ** **                                       | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                       | ** ** | **(in thousands)**  | ** ** |
| Securities  purchased under agreements to resell |       | $                        | 24,873,486 |                        | $          | 22,559,194 |   |
| Securities  borrowed                             |       | 2,877,583                |       | 3,460,703                   |       |
| Federal funds  sold                              |       | 1,100,000                |       | 1,250,000                   |       |
|                                             |       | $                        | 28,851,069 |                        | $          | 27,269,897 |   |

 

As of March 31, 2007, the Company had acceptedcollateral related to securities purchased under agreements to resell andsecurities borrowed with a fair value of $55.6 billion that it had the contractualability to sell or re-pledge, including $27.8 billion related to amounts offsetby securities sold under agreements to repurchase under master nettingarrangements. As of March 31, 2007, the Company had re-pledged $52.4billion of such collateral for financing purposes.

As of December 31,2006, the Company had accepted collateral related to securities purchased underagreements to resell and securities borrowed with a fair value of $56.0 billionthat it had the contractual ability to sell or re-pledge, including $30.0billion related to amounts offset by securities sold under agreements torepurchase under master netting arrangements. As of December 31, 2006, theCompany had re-pledged $52.1 billion of such collateral for financing purposes.

11

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

**Note 8—Loans Heldfor Investment, Net**

Loansheld for investment include the following:

| ** **                                                                     | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                     | ** ** | **(in thousands)**  | ** ** |
| Mortgage loans:                                                                |       |                     |       |                        |       |
| Banking Operations:                                                            |       |                     |       |                        |       |
| Prime                                                                          |       | $                        | 48,584,259 |                        | $          | 51,634,926 |   |
| Prime home equity                                                              |       | 19,877,711               |       | 20,163,337                  |       |
| Nonprime                                                                       |       | 16,927                   |       | —                      |       |
|                                                                           |       | 68,478,897               |       | 71,798,263                  |       |
| Mortgage Banking:                                                              |       |                     |       |                        |       |
| Nonprime                                                                       |       | 1,127,257                |       | 115,054                     |       |
| Prime                                                                          |       | 388,212                  |       | 252,731                     |       |
| Prime home equity                                                              |       | 58,280                   |       | 57,518                      |       |
|                                                                           |       | 1,573,749                |       | 425,303                     |       |
| Commercial real estate                                                         |       | 74,091                   |       | 72,413                      |       |
| Total mortgage loans                                                           |       | 70,126,737               |       | 72,295,979                  |       |
| Warehouse lending  advances secured by mortgage   loans                        |       | 2,771,074                |       | 3,185,248                   |       |
| Defaulted  FHA-insured and VA-guaranteed loans repurchased from securities     |       | 1,770,410                |       | 1,761,170                   |       |
|                                                                           |       | 74,668,221               |       | 77,242,397                  |       |
| Premium and  discounts, and deferred loan origination fees and costs, net |       | 883,240                  |       | 1,104,414                   |       |
| Allowance for  loan losses                                                     |       | (374,367                 | )          | (261,054                    | )          |
| Loans held for  investment, net                                                |       | $                        | 75,177,094 |                        | $          | 78,085,757 |   |

 

During the quarter ended March 31, 2007, theCompany transferred nonprime mortgage loans with an unpaid principal balance of$906.9 million and a carrying value of $713.1 million from mortgageloans held for sale to loans held for investment.

Mortgage loans totaling $60.7 billion and $57.5billion were pledged to secure Federal Home Loan Bank (“FHLB”) advances and toenable additional borrowings from the FHLB at March 31, 2007 and December 31,2006, respectively.

Mortgage loans held for investment totaling $3.9billion and $2.9 billion were pledged to secure an unused borrowing facilitywith the Federal Reserve Bank (“FRB”) at March 31, 2007 and December 31,2006, respectively.

As of March 31, 2007 and December 31, 2006,the Company had accepted mortgage loan collateral of $2.9 billion and $3.5billion, respectively, that it had the contractual ability to re-pledge. Thecollateral secures warehouse lending advances. Of this collateral, $1.3 billionand $1.6 billion, respectively, has been re-pledged to secure borrowings undera secured revolving line of credit as of March 31, 2007 and December 31,2006.

12

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

Changesin the allowance for loan losses were as follows:

| ** **                                                        | ** ** | **Quarters Ended  March 31,** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                        | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| ** **                                                        | ** ** | **(in thousands)**                 | ** ** |
| Balance,  beginning of period                                     |       | $                                       | 261,054    |   | $ | 189,201 |   |
| Provision for  loan losses                                        |       | 151,962                                 |       | 63,138 |   |
| Net charge-offs                                                   |       | (38,649                                 | )          | (66,421 | ) |
| Reclassification  of allowance for unfunded commitments and other |       | —                                  |       | (13,647 | ) |
| Balance, end of period                                            |       | $                                       | 374,367    |   | $ | 172,271 |   |

 

The Company has recorded a liability for losses onunfunded loan commitments in accounts payable and accrued liabilities totaling$13.8 million and $8.1 million at March 31, 2007 and December 31,2006, respectively. The provision for these loans is recorded in other expenses.The following is a summary of changes in the liability:

| ** **                                                   | ** ** | **Quarters Ended  March 31,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                   | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| ** **                                                   | ** ** | **(in thousands)**                 | ** ** |
| Balance, beginning  of period                                |       | $                                       | 8,104      |   | $ | 9,391 |   |
| Provision for  losses on unfunded loan commitments           |       | 5,655                                   |       | — |   |
| Reclassification  of allowance for unfunded loan commitments |       | —                                  |       | 4,005 |   |
| Balance, end of period                                       |       | $                                       | 13,759     |   | $ | 13,396 |   |

 

13

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

**Note 9—Investmentsin Other Financial Instruments, at Fair Value**

Investmentsin other financial instruments include the following:

| ** **                                                                                 | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                 | ** ** | **(in thousands)**  | ** ** |
| Available-for-sale  securities:                                                            |       |                     |       |                        |       |   |   |
| Mortgage-backed  securities                                                                |       |                     | $          | 13,369,569                  |       |   | $ | 7,007,786 |   |
| Obligations of U.S.  Government-sponsored enterprises                                      |       |                     | 654,361    |                        |       | 776,717 |   |
| Municipal bonds                                                                            |       |                     | 414,049    |                        |       | 412,886 |   |
| U.S. Treasury securities                                                                   |       |                     | 141,424    |                        |       | 168,313 |   |
| Other                                                                                      |       |                     | 2,697      |                        |       | 2,858 |   |
| Subtotal                                                                                   |       |                     | 14,582,100 |                        |       | 8,368,560 |   |
| Interests retained in  securitization accounted for as available-for-sale securities:      |       |                     |       |                        |       |   |   |
| Prime interest-only and  principal-only securities                                         |       |                     | 264,266    |                        |       | 279,375 |   |
| Prime home equity line  of credit transferor’s interest                               |       |                     | 101,686    |                        |       | 144,346 |   |
| Nonprime residuals and  other related securities                                           |       |                     | 90,547     |                        |       | 152,745 |   |
| Prepayment penalty bonds                                                                   |       |                     | 38,516     |                        |       | 52,697 |   |
| Prime home equity  residual securities                                                     |       |                     | 25,842     |                        |       | 40,766 |   |
| Nonprime interest-only  securities                                                         |       |                     | 14,996     |                        |       | 3,757 |   |
| Prime home equity  interest-only securities                                                |       |                     | 6,255      |                        |       | 7,021 |   |
| Subordinated  mortgage-backed pass-through securities                                      |       |                     | 799        |                        |       | 1,382 |   |
| Prime residual  securities                                                                 |       |                     | 715        |                        |       | 1,435 |   |
| Total interests retained  in securitization accounted for as available-for-sale securities |       |                     | 543,622    |                        |       | 683,524 |   |
| Total available-for-sale  securities                                                       |       |                     | 15,125,722 |                        |       | 9,052,084 |   |
| Interests retained in  securitization accounted for as trading securities:                 |       |                     |       |                        |       |   |   |
| Prime home equity line  of credit transferor’s interest                               |       |                     | 679,389    |                        |       | 553,701 |   |
| Prime interest-only and  principal-only securities                                         |       |                     | 634,098    |                        |       | 549,635 |   |
| Prime home equity  residual securities                                                     |       |                     | 591,434    |                        |       | 737,808 |   |
| Nonprime residuals and  other related securities                                           |       |                     | 292,054    |                        |       | 388,963 |   |
| Prepayment penalty bonds                                                                   |       |                     | 116,249    |                        |       | 90,666 |   |
| Subordinated  mortgage-backed pass-through securities                                      |       |                     | 46,487     |                        |       | — |   |
| Prime home equity  interest-only securities                                                |       |                     | 22,141     |                        |       | 22,467 |   |
| Prime residual  securities                                                                 |       |                     | 6,999      |                        |       | 11,321 |   |
| Interest rate swaps                                                                        |       |                     | 964        |                        |       | 2,490 |   |
| Total interests retained  in securitization accounted for as trading securities            |       |                     | 2,389,815  |                        |       | 2,357,051 |   |
| Servicing hedge  principal-only securities accounted for as trading   securities           |       |                     | 466,245    |                        |       | — |   |
| Hedging and mortgage  pipeline derivatives:                                                |       |                     |       |                        |       |   |   |
| Mortgage servicing  related                                                                |       |                     | 761,984    |                        |       | 837,908 |   |
| Notes payable related                                                                      |       |                     | 486,031    |                        |       | 444,342 |   |
| Mortgage loans held for  sale and pipeline related                                         |       |                     | 215,900    |                        |       | 78,066 |   |
| Total investments in other financial instruments                                           |       |                     | $          | 19,445,697                  |       |   | $ | 12,769,451 |   |

 

14

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

At March 31, 2007, the Company had pledged $0.1billion of MBS to secure securities sold under agreements to repurchase, whichthe counterparty had the contractual right to re-pledge and $0.1 billion of MBSto secure an unused borrowing facility with the FRB.

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 billionof MBS to secure an unused borrowing facility with the FRB.

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

| ** **                                            | ** ** | **March 31, 2007** | ** ** |
|-------------------------------------------------------|------------|------------------------------|------------|
| ** **                                            | ** ** | **Amortized  Cost**          | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
| ** **                                            | ** ** | **(in thousands)**      | ** ** |
| Mortgage-backed  securities                           |       | $                            | 13,447,213 |   |   | $ | 16,999 |   |   | $ | (94,643 | ) | $ | 13,369,569 |   |
| Obligations of  U.S. Government-sponsored enterprises |       | 656,901                      |       |   | 1,565 |   |   | (4,105 | ) | 654,361 |   |
| Municipal bonds                                       |       | 415,517                      |       |   | 1,429 |   |   | (2,897 | ) | 414,049 |   |
| U.S. Treasury  securities                             |       | 140,291                      |       |   | 1,630 |   |   | (497 | ) | 141,424 |   |
| Interests retained  in securitization                 |       | 497,433                      |       |   | 64,555 |   |   | (18,366 | ) | 543,622 |   |
| Other                                                 |       | 2,698                        |       |   | 2 |   |   | (3 | ) | 2,697 |   |
|                                                  |       | $                            | 15,160,053 |   |   | $ | 86,180 |   |   | $ | (120,511 | ) | $ | 15,125,722 |   |

 

| ** **                                            | ** ** | **December 31, 2006** | ** ** |
|-------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | **Amortized  Cost**             | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
| ** **                                            | ** ** | **(in thousands)**         | ** ** |
| Mortgage-backed  securities                           |       | $                               | 7,111,045  |   |   | $ | 4,091 |   |   | $ | (107,350 | ) | $ | 7,007,786 |   |
| Obligations of  U.S. Government-sponsored enterprises |       | 781,329                         |       |   | 1,280 |   |   | (5,892 | ) | 776,717 |   |
| Municipal bonds                                       |       | 414,249                         |       |   | 1,649 |   |   | (3,012 | ) | 412,886 |   |
| U.S. Treasury  securities                             |       | 167,724                         |       |   | 1,414 |   |   | (825 | ) | 168,313 |   |
| Interests  retained in securitization                 |       | 589,501                         |       |   | 111,722 |   |   | (17,699 | ) | 683,524 |   |
| Other                                                 |       | 2,860                           |       |   | — |   |   | (2 | ) | 2,858 |   |
|                                                  |       | $                               | 9,066,708  |   |   | $ | 120,156 |   |   | $ | (134,780 | ) | $ | 9,052,084 |   |

 

15

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

TheCompany’s available-for-sale securities in an unrealized loss position are asfollows:

| ** **                                            | ** ** | **March 31, 2007**           | ** ** |
|-------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                            | ** ** | **Less Than 12 Months** | ** ** | **12 Months or More** | ** ** | **Total** | ** ** |
| ** **                                            | ** ** | **Fair Value**                    | ** ** | **Gross  Unrealized  Loss** | ** ** | **Fair Value** | ** ** | **Gross  Unrealized  Loss** | ** ** | **Fair Value** | ** ** | **Gross  Unrealized  Loss** | ** ** |
| ** **                                            | ** ** | **(in thousands)**                | ** ** |
| Mortgage-backed securities.                           |       | $                                      | 2,472,542  |   |   | $ | (8,615 | ) |   | $ | 4,806,948 |   | $ | (86,028 | ) | $ | 7,279,490 |   | $ | (94,643 | ) |
| Obligations of  U.S. Government-sponsored enterprises |       | 13,978                                 |       |   | (36 | ) |   | 474,196 |   | (4,069 | ) | 488,174 |   | (4,105 | ) |
| Municipal bonds                                       |       | 67,000                                 |       |   | (381 | ) |   | 210,303 |   | (2,516 | ) | 277,303 |   | (2,897 | ) |
| U.S. Treasury  securities                             |       | 2,003                                  |       |   | (3 | ) |   | 80,374 |   | (494 | ) | 82,377 |   | (497 | ) |
| Interests  retained in  securitization                |       | 1,285                                  |       |   | (7 | ) |   | 126,132 |   | (18,359 | ) | 127,417 |   | (18,366 | ) |
| Other                                                 |       | —                                 |       |   | — |   |   | 48 |   | (3 | ) | 48 |   | (3 | ) |
| Total impaired  securities                            |       | $                                      | 2,556,808  |   |   | $ | (9,042 | ) |   | $ | 5,698,001 |   | $ | (111,469 | ) | $ | 8,254,809 |   | $ | (120,511 | ) |

 

| ** **                                            | ** ** | **December 31, 2006**        | ** ** |
|-------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                            | ** ** | **Less Than 12 Months** | ** ** | **12 Months or More** | ** ** | **Total** | ** ** |
| ** **                                            | ** ** | **Fair 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 | ) |
| Obligations of  U.S. Government-sponsored enterprises |       |                                   | 87,472     |   |   |   | (163 | ) |   | 484,186 |   | (5,729 | ) | 571,658 |   | (5,892 | ) |
| Municipal bonds                                       |       |                                   | 58,106     |   |   |   | (317 | ) |   | 212,973 |   | (2,695 | ) | 271,079 |   | (3,012 | ) |
| 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-temporaryimpairment on a quarterly basis. This assessment evaluates whether the Companyintends and is able to recover the amortized cost of the securities when takinginto account the Company’s present investment objectives and liquidityrequirements and whether the creditworthiness of the issuer calls therealization of contractual cash flows into question. Based on the Company’sreview of these securities, ALCO has concluded that Countrywide has both theintent and ability to hold these securities until they recover their amortizedcost and the issuer’s creditworthiness does not call into question therealization of contractual cash flows. Accordingly, other-than-temporaryimpairment related to these securities has not been recognized as of March 31,2007 and December 31, 2006.

16

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

Grossgains and losses realized on the sales of available-for-sale securities are asfollows:

| ** **                                                | ** ** | **Quarters Ended  March 31,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| ** **                                                | ** ** | **(in thousands)**                 | ** ** |
| Obligations of U.S. Government-sponsored  enterprises:    |       |                                    |       |   |   |
| Gross realized gains                                      |       | $                                       | 11         |   | $ | — |   |
| Gross realized losses                                     |       | —                                  |       | (50 | ) |
| Net                                                       |       | 11                                      |       | (50 | ) |
| Municipal bonds:                                          |       |                                    |       |   |   |
| Gross realized gains                                      |       | 24                                      |       | 33 |   |
| Gross realized losses                                     |       | (53                                     | )          | (30 | ) |
| Net                                                       |       | (29                                     | )          | 3 |   |
| Interests retained in securitization:                     |       |                                    |       |   |   |
| Gross realized gains                                      |       | 1,021                                   |       | — |   |
| Gross realized losses                                     |       | —                                  |       | — |   |
| Net                                                       |       | 1,021                                   |       | — |   |
| Total gains and losses on available-for-sale  securities: |       |                                    |       |   |   |
| Gross realized gains                                      |       | 1,056                                   |       | 33 |   |
| Gross realized losses                                     |       | (53                                     | )          | (80 | ) |
| Net                                                       |       | $                                       | 1,003      |   | $ | (47 | ) |

 

**Note 10—MortgageServicing Rights, at Fair Value**

Theactivity in MSRs is as follows:

| ** **                                                               | ** ** | **Quarters Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                               | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| ** **                                                               | ** ** | **(in thousands)**                 | ** ** |
| Balance at beginning of  period                                          |       | $                                       | 16,172,064 |   | $ | 12,610,839 |   |
| Remeasurement to fair  value upon adoption of SFAS 156                   |       | —                                  |       | 109,916 |   |
| Fair value at beginning  of period                                       |       | 16,172,064                              |       | 12,720,755 |   |
| Additions:                                                               |       |                                    |       |   |   |
| Servicing resulting from  transfers of financial assets                  |       | 1,898,903                               |       | 1,209,424 |   |
| Purchases of servicing  assets                                           |       | 116,592                                 |       | 1,911 |   |
| Total additions                                                          |       | 2,015,495                               |       | 1,211,335 |   |
| Change in fair value:                                                    |       |                                    |       |   |   |
| Due to changes in  valuation inputs or assumptions in valuation model(1) |       | 179,007                                 |       | 978,281 |   |
| Other changes in fair  value(2)                                          |       | (924,706                                | )          | (738,567 | ) |
| Balance, end of period                                                   |       | $                                       | 17,441,860 |   | $ | 14,171,804 |   |

----

(1)          Principally reflectschanges in discount rates and prepayment speed assumptions, primarily due tochanges in interest rates.

(2)          Represents changes dueto realization of expected cash flows.

17

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

**Note 11—OtherAssets**

Otherassets include the following:

| ** **                                                                    | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                    | ** ** | **(in thousands)**  | ** ** |
| Reimbursable servicing  advances, net                                         |       | $                        | 2,266,756  |                        |       | $ | 2,121,486 |   |   |
| Securities broker-dealer  receivables                                         |       | 1,976,388                |       |                        | 1,605,502  |   |   |
| Investments in FRB and  FHLB stock                                            |       | 1,220,597                |       |                        | 1,433,070  |   |   |
| Interest receivable                                                           |       | 998,387                  |       |                        | 997,854    |   |   |
| Receivables from  custodial accounts                                          |       | 599,223                  |       |                        | 719,048    |   |   |
| Real estate acquired in  settlement of loans                                  |       | 386,219                  |       |                        | 251,163    |   |   |
| Capitalized software,  net                                                    |       | 377,291                  |       |                        | 367,055    |   |   |
| Prepaid expenses                                                              |       | 336,659                  |       |                        | 320,597    |   |   |
| Cash surrender value of  assets held in trust for deferred compensation plans |       | 324,054                  |       |                        | 319,864    |   |   |
| Restricted cash                                                               |       | 321,032                  |       |                        | 238,930    |   |   |
| Receivables from sale of  securities                                          |       | 153,700                  |       |                        | 284,177    |   |   |
| Derivative margin  accounts                                                   |       | 133,003                  |       |                        | 118,254    |   |   |
| Other                                                                         |       | 1,169,523                |       |                        | 1,064,790  |   |   |
|                                                                          |       | $                        | 10,262,832 |                        |       | $ | 9,841,790 |   |   |

 

The Company had pledged$1.8 billion and $1.2 billion of securities broker-dealer receivables to securesecurities sold under agreements to repurchase at March 31, 2007 and December 31,2006, respectively.

**Note 12—DepositLiabilities**

Thefollowing table summarizes deposit liabilities:

| ** **                                                | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                | ** ** | **(in thousands)**  | ** ** |
| Time deposits:                                            |       |                     |       |                        |       |
| Retail                                                    |       | $                        | 16,869,704 |                        | $          | 17,973,792 |   |
| Brokered                                                  |       | 10,060,110               |       | 11,612,674                  |       |
| Commercial                                                |       | 1,018,313                |       | 635,927                     |       |
|                                                      |       | 27,948,127               |       | 30,222,393                  |       |
| Company-controlled  custodial deposit accounts(1)         |       | 16,878,122               |       | 15,737,632                  |       |
| Retail savings and money  market accounts                 |       | 7,731,586                |       | 5,970,245                   |       |
| Commercial money market  accounts                         |       | 4,797,360                |       | 3,557,445                   |       |
| Non-interest-bearing  checking accounts                   |       | 182,877                  |       | 113,045                     |       |
|                                                      |       | 57,538,072               |       | 55,600,760                  |       |
| Basis adjustment through  application of hedge accounting |       | (13,011                  | )          | (22,078                     | )          |
|                                                      |       | $                        | 57,525,061 |                        | $          | 55,578,682 |   |

----

(1)          These accounts representthe portion of the investor custodial accounts controlled by Countrywide thathave been placed on deposit with Countrywide Bank (the “Bank”).

18

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

**Note 13—SecuritiesSold Under Agreements to Repurchase and Federal Funds Purchased**

Thefollowing table summarizes securities sold under agreements to repurchase andfederal funds purchased:

| ** **                                      | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | **(in thousands)**  | ** ** |
| Securities sold  under agreements to repurchase |       | $                        | 43,835,743 |                        | $          | 42,113,501 |   |
| Federal funds  purchased                        |       | 250,000                  |       | —                      |       |
|                                            |       | $                        | 44,085,743 |                        | $          | 42,113,501 |   |

 

The Company routinely enters short-term financingarrangements to sell securities under agreements to repurchase (“repurchaseagreements”). The repurchase agreements are collateralized by mortgage loansand securities. All securities underlying repurchase agreements are held insafekeeping by broker-dealers or banks. All agreements are to repurchase thesame or substantially identical securities.

At March 31, 2007, repurchase agreements weresecured by $18.1 billion of trading securities, $52.4 billion ofsecurities purchased under agreements to resell and securities borrowed, $0.1billion in investments in other financial instruments and $1.8 billion of otherassets. At March 31, 2007, $27.8 billion of the pledged securitiespurchased under agreements to resell and securities borrowed related to amountsoffset against securities sold under agreements to repurchase pursuant tomaster netting agreements.

At December 31, 2006, repurchase agreements weresecured by $19.5 billion of trading securities, $52.1 billion of securitiespurchased under agreements to resell and securities borrowed, $0.1 billion ininvestments in other financial instruments and $1.2 billion of other assets. AtDecember 31, 2006, $30.0 billion of the pledged securities purchasedunder agreements to resell and securities borrowed related to amounts offsetagainst securities sold under agreements to repurchase pursuant to masternetting agreements.

Federal funds purchasedgenerally represent overnight borrowings of reserves from other banks in theFederal Reserve Bank System. Interest is generally settled the next day at thefederal funds rate.

19

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

**Note 14—NotesPayable**

**Thefollowing table summarizes notes payable:**

| ** **                         | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                         | ** ** | **(in thousands)**  | ** ** |
| Federal Home Loan Bank  advances   |       | $                        | 26,525,000 |                        | $          | 28,150,000 |   |
| Medium-term notes:                 |       |                     |       |                        |       |
| Floating-rate                      |       | 13,860,183               |       | 13,155,231                  |       |
| Fixed-rate                         |       | 8,426,796                |       | 9,783,881                   |       |
|                               |       | 22,286,979               |       | 22,939,112                  |       |
| Asset-backed commercial  paper     |       | 9,754,889                |       | 7,721,278                   |       |
| Unsecured commercial  paper        |       | 8,667,239                |       | 6,717,794                   |       |
| Secured revolving lines  of credit |       | 1,968,509                |       | 2,174,171                   |       |
| Secured overnight bank  loans      |       | 229,072                  |       | 105,049                     |       |
| Asset-backed secured  financings   |       | 947,417                  |       | 241,211                     |       |
| Unsecured bank loans               |       | 637,000                  |       | 130,000                     |       |
| Junior subordinated  debentures    |       | 2,231,457                |       | 2,232,334                   |       |
| Subordinated debt                  |       | 1,027,556                |       | 1,027,797                   |       |
| Other                              |       | 47,784                   |       | 48,838                      |       |
|                               |       | $                        | 74,322,902 |                        | $          | 71,487,584 |   |

 

***Federal Home Loan Bank Advances***

During the quarter ended March 31, 2007, theCompany obtained $7.2 billion of fixed-rate advances from the FHLB. At March 31,2007, the Company had pledged $60.7 billion of mortgage loans to secure itsoutstanding FHLB advances and enable future advances.

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

***Medium-Term Notes***

Duringthe quarter ended March 31, 2007, the Company issued the followingmedium-term notes:

| ** **        | ** ** | **Outstanding Balance**                     | ** ** | **Interest Rate** | ** ** | **Maturity Date** | ** ** |
|-------------------|------------|--------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **        | ** ** | **Floating-Rate**                                | ** ** | **Fixed-Rate**         | ** ** | **Total**              | ** ** | **From** | ** ** | **To** | ** ** | **From** | ** ** | **To** | ** ** |
| ** **        | ** ** | **(dollar amounts in thousands)** | ** ** |
| CFC Series B |       |                                             | $          | 800,000                |       |                   |       | $ | 132,028 |   |   | $ | 932,028 |   |   | 5.00 | % |   | 5.44 | % | January, 2008 |   | March, 2010 |   |
|                   |            |                                                  |            |                        |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The fixed-rate medium-term notes issued by the Companyduring the quarter ended March 31, 2007 were effectively converted tofloating-rate debt using interest rate swaps.

During the quarter ended March 31, 2007, theCompany redeemed $1.6 billion of maturing medium-term notes.

As of March 31, 2007, $4.4 billion of foreigncurrency-denominated medium-term notes were outstanding. Such notes aredenominated in Euros, Pounds Sterling, Australian Dollars, Canadian Dollars andSwiss Francs. These notes have been effectively converted to U.S. Dollarsthrough currency swaps.

20

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

***Asset-Backed Commercial Paper***

***The Company has formed two special purpose entities tofinance certain of its mortgage loans held for sale using commercial paper.These entities issue commercial paper in the form of short-term securedliquidity notes (“SLNs”) with initial maturities of up to 180 days. The SLNsbear interest at prevailing money market rates approximating LIBOR. The SLNprograms’ capacities, based on aggregate commitments from underlying creditenhancers, totaled $30.7 billion at March 31, 2007.***

For the quarter ended March 31,2007, the average borrowings under these facilities totaled $16.8 billion andthe weighted-average interest rate of the SLNs was 5.35%. At March 31,2007, the weighted-average interest rate of the SLNs was 5.38% and the Companyhad pledged $10.2 billion in mortgage loans held for sale to secure the SLNs.

For the quarter ended March 31,2006, the average borrowings under these facilities totaled $14.5 billion andthe weighted-average interest rate of the SLNs was 4.60%. At March 31,2006, the weighted-average interest rate of the SLNs was 4.76% and the Companyhad pledged $10.6 billion in mortgage loan inventory to secure the SLNs.

***Unsecured Commercial Paper and Backup CreditFacilities***

As of March 31, 2007,the Company had unsecured credit agreements (revolving credit facilities) witha group of commercial banks permitting the Company to borrow a maximum totalamount of $11.5 billion. The primary purpose of these credit facilities is toprovide liquidity support for the Company’s commercial paper program.

For the quarter ended March 31,2007, the average commercial paper outstanding under these facilities totaled$7.9 billion and the weighted-average interest rate was 5.35%. At March 31,2007, the weighted-average interest rate was 5.41%.

For the quarter ended March 31,2006 the average commercial paper outstanding under these facilities totaled$6.7 billion and the weighted-average interest rate was 4.61%. At March 31,2006, the weighted-average interest rate was 4.85%.

***Secured Revolving Lines of Credit***

The Company has formed aspecial purpose entity to finance inventory with funding provided by a group ofbank-sponsored conduits that are financed through the issuance of asset-backedcommercial paper. The entity incurs interest based on prevailing money marketrates approximating the cost of asset-backed commercial paper. At March 31,2007, the entity had aggregate commitments from the bank-sponsored conduitstotaling $10.4 billion and had $0.7 billion outstanding borrowings, secured by$0.7 billion of mortgage loans held for sale. For the quarter ended March 31,2007, the average borrowings under this facility totaled $0.7 billion and theweighted-average interest rate was 5.33%. At March 31, 2007, theweighted-average interest rate was 5.34%.

For the quarter ended March 31,2006, the average borrowings under this facility totaled $2.2 billion and theweighted-average interest rate was 4.46%. At March 31, 2006 theweighted-average interest rate was 4.65%.

21

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

The Company entered into a$4.0 billion master trust facility in June 2006, to finance CountrywideWarehouse Lending (“CWL”) receivables backed by mortgage loans. A multi-assetconduit finance company funds the purchase of notes backed by CWL receivableswhich are financed by issuing extendable maturity asset-backed commercialpaper. The borrowings under this facility at March 31, 2007, totaled $1.2billion, and the Company had pledged $1.3 billion in loans held for investmentto secure this facility. For the quarter ended March 31, 2007, the averageborrowings under this facility totaled $1.2 billion and the weighted-averageinterest rate was 5.39%. At March 31, 2007, the weighted-average interestrate was 5.38%.

***Asset-Backed Secured Financings***

***The Company recorded certain securitization transactions assecured borrowings because they did not qualify for sales treatment. Theamounts accounted for as secured borrowings totaled $947.4 million and $241.2million at March 31, 2007 and December 31, 2006, respectively.***

***Junior Subordinated Debentures***

***As more fully discussed in “Note 15—Notes Payable” includedin the consolidated financial statements of the 2006 Annual Report, the Companyhas issued junior subordinated debentures to non-consolidated subsidiarytrusts. The trusts finance their holdings of the junior subordinated debenturesby issuing Company-guaranteed capital securities.***

The Company guarantees CHL’sindebtedness to one of the subsidiary trusts, Countrywide Capital III,which is excluded from the Company’s consolidated financial statements.Following is summarized information for that trust:

| ** **                                                                          | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                          | ** ** | **(in thousands)**  | ** ** |
| Balance Sheet:                                                                      |       |                     |       |                        |       |   |   |
| Junior subordinated  debentures receivable                                          |       | $                        | 205,323    |                        |       | $ | 205,312 |   |   |
| Other assets                                                                        |       | 4,842                    |       |                        | 1,191      |   |   |
| Total assets                                                                        |       | $                        | 210,165    |                        |       | $ | 206,503 |   |   |
| Notes payable                                                                       |       | $                        | 6,173      |                        |       | $ | 6,173 |   |   |
| Other liabilities                                                                   |       | 4,842                    |       |                        | 1,191      |   |   |
| Company-obligated  guaranteed redeemable capital trust pass-through securities |       | 199,150                  |       |                        | 199,139    |   |   |
| Shareholder’s equity                                                           |       | —                   |       |                        | —     |   |   |
| Total liabilities and shareholder’s equity                                     |       | $                        | 210,165    |                        |       | $ | 206,503 |   |   |

 

| ** **                  | ** ** | **Quarters Ended  March 31,** | ** ** |
|-----------------------------|------------|-----------------------------------------|------------|
| ** **                  | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| ** **                  | ** ** | **(in thousands)**                 | ** ** |
| Statement of Earnings:      |       |                                    |       |   |   |
| Revenues                    |       | $                                       | 4,161      |   | $ | 4,161 |   |
| Expenses                    |       | (4,161                                  | )          | (4,161 | ) |
| Provision for income  taxes |       | —                                  |       | — |   |
| Net earnings                |       | $                                       | —     |   | $ | — |   |

 

22

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

 

***Subordinated Debt***

***The Company has outstanding $1.0 billion of 6.25% fixed-rateunsecured subordinated notes maturing May 2016. The notes rank subordinateand junior to all of the Company’s senior indebtedness, and rank senior to theCompany’s junior subordinated debentures underlying the Company’s trustpreferred securities.***

**Note 15—Regulatoryand Agency Capital Requirements**

***On March 12, 2007, the Bankconverted its charter from a national bank to a federal savings bank. As aresult of this conversion, the Company became a savings and loan holdingcompany, and is no longer a bank holding company. As a savings and loan holdingcompany, Countrywide Financial Corporation is no longer subject to specificstatutory capital requirements. Countrywide Bank’s capital is calculated incompliance 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 ofHousing and Urban Development, Fannie Mae, Freddie Mac and Government NationalMortgage Association (“Ginnie Mae”) net worth requirements, which are lowerthan those of the OTS.***

***At March 31, 2007, the Bank’s regulatory capital ratiosand amounts and minimum required capital ratios for the Bank to maintain a “wellcapitalized” status were as follows:***

| ** **           | ** ** | **March 31, 2007**                     | ** ** |
|----------------------|------------|--------------------------------------------------|------------|
| ** **           | ** ** | **Minimum  Required(1)**                         | ** ** | **Ratio** | ** ** | **Amount** | ** ** |
| ** **           | ** ** | **(dollar amounts in thousands)** | ** ** |
| Tier 1 Capital       |       |                                             | 5.0        | % |   |   | 8.1 | % |   | $ | 7,634,072 |   |
| Risk-Based  Capital: |       |                                             |       |   |   |   |   |   |   |   |   |
| Tier 1               |       |                                             | 6.0        | % |   |   | 13.0 | % |   | $ | 7,634,072 |   |
| Total                |       |                                             | 10.0       | % |   |   | 13.5 | % |   | $ | 7,927,016 |   |

----

(1)          Minimum required toqualify as “well capitalized.”

***Had Countrywide Bank’s capital been calculated in compliancewith the OTS requirements at December 31, 2006, its regulatory capitalratios and amounts and minimum required capital ratios would have been asfollows:***

| ** **           | ** ** | **December 31, 2006**                  | ** ** |
|----------------------|------------|--------------------------------------------------|------------|
| ** **           | ** ** | **Minimum  Required(1)**                         | ** ** | **Ratio** | ** ** | **Amount** | ** ** |
| ** **           | ** ** | **(dollar amounts in thousands)** | ** ** |
| ** **           | ** ** | **(Proforma)**                                   | ** ** |
| Tier 1 Capital       |       |                                             | 5.0        | % |   |   | 7.6 | % |   | $ | 7,100,439 |   |
| Risk-Based  Capital: |       |                                             |       |   |   |   |   |   |   |   |   |
| Tier 1               |       |                                             | 6.0        | % |   |   | 12.4 | % |   | $ | 7,100,439 |   |
| Total                |       |                                             | 10.0       | % |   |   | 12.8 | % |   | $ | 7,337,235 |   |

----

(1)          Minimumrequired to qualify as “well capitalized.”

23

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

Countrywide Bank is alsorequired by the OTS regulations to maintain tangible capital of at least 1.5%of assets. The Bank’s tangible capital ratio was 8.1% and 7.6% atMarch 31, 2007 and December 31, 2006, respectively.

**Note 16—SupplementalCash Flow Information**

***The following table presents supplemental cash flowinformation:***

| ** **                                                                                                                                                                                                     | ** ** | **Quarters Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                                                                                                                     | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| ** **                                                                                                                                                                                                     | ** ** | **(in thousands)**                 | ** ** |
| Cash used to pay  interest                                                                                                                                                                                     |       | $                                       | 2,635,330  |   | $ | 1,861,937 |   |
| Cash used to pay  income taxes                                                                                                                                                                                 |       | 3,646                                   |       | 6,269 |   |
| Non-cash  investing activities:                                                                                                                                                                                |       |                                    |       |   |   |
| Transfer of loans from mortgage loans held for sale  to loans held for investment                                                                                                                         |       | 713,050                                 |       | — |   |
| Servicing resulting from transfer of financial  assets                                                                                                                                                         |       | 1,898,903                               |       | 1,209,424 |   |
| Retention of other financial instruments classified  as available-for-sale in securitization transactions                                                                                                      |       | 998                                     |       | 39,187 |   |
| Unrealized gain (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 |       | 1,021                                   |       | (87,517 | ) |
| Remeasurement of fair value of MSRs upon adoption of  SFAS 156, net of tax                                                                                                                           |       | —                                  |       | 67,065 |   |
| Remeasurement of income taxes payable upon adoption  of FIN 48                                                                                                                                                 |       | (12,719                                 | )          | — |   |
| Non-cash  financing activities:                                                                                                                                                                                |       |                                    |       |   |   |
| Issuance of  common stock for conversion of convertible debt                                                                                                                                                   |       | —                                  |       | 1,465 |   |
|                                                                                                                                                                                                                |            |                                         |            |  |  |  |  |

 

**Note 17—Segmentsand Related Information**

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

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

***The Loan Production Sector originatesprime and nonprime loans for sale or securitization through a variety ofchannels on a national scale. The Loan Production Sector is comprised of threelending channels of Countrywide Home Loans and also includes the mortgagebanking activities of Countrywide Bank. The three production channels are: theRetail Channel (Consumer Markets and Full Spectrum Lending), the WholesaleLending Channel and the Correspondent Lending Channel. The Consumer Markets andFull Spectrum Lending Divisions source mortgage loans directly from consumersthrough the Company’s retail branch network and call centers, as well asthrough real estate agents and homebuilders. The Wholesale***

24

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

***Lending Channel sources mortgage loans primarily frommortgage brokers. The Correspondent Lending Channel purchases mortgage loansfrom other mortgage lenders, including financial institutions, commercialbanks, savings and loan associations, home builders and credit unions.***

***The Loan Servicing Sector includesinvestments in MSRs and retained interests, as well as the Company’s loanservicing operations and subservicing for other domestic financialinstitutions. The Loan Closing Services Sector is comprised of the LandSafecompanies, which provide credit reports, appraisals, title reports and flooddeterminations to the Company’s Loan Production Sector, as well as to thirdparties.***

***The Banking Segment includes BankingOperations—primarily the investment and fee-based activities of CountrywideBank—together with the activities of Countrywide Warehouse Lending and certainloans produced for investment and owned by Countrywide Home Loans. BankingOperations invests in mortgage loans sourced from the Loan Production Sectorand mortgage loans and high-quality MBS purchased from non-affiliated entities.Countrywide Warehouse Lending provides third-party mortgage lenders withtemporary financing secured by mortgage loans.***

***The Capital Markets Segment includes theoperations of Countrywide Securities Corporation, a registered broker-dealerspecializing in the mortgage securities market. It also includes the operationsof Countrywide Asset Management Corporation, Countrywide Commercial Real EstateFinance Inc., Countrywide Servicing Exchange, CFC International CapitalMarkets, Limited, Countrywide Alternative Investments Inc., CSCFutures Inc., Countrywide Capital Markets Asia Ltd, Countrywide CapitalMarkets Asia (H.K.) Limited, CAA Management Inc., Countrywide SunfishManagement LLC and Countrywide Derivative Products, Inc.***

***The Insurance Segment includes BalboaLife and Casualty Group, a national provider of property, casualty, life,disability and credit insurance; Balboa Reinsurance Company, a primary mortgagereinsurance company; and Countrywide Insurance Services, Inc., a nationalinsurance agency offering a specialized menu of insurance products directly toconsumers.***

***The Global Operations Segment includesGlobal Home Loans Limited, a provider of loan origination processing and loansubservicing in the United Kingdom until July 31, 2006; UKValuationLimited, a provider of property valuation services in the UK until December 6,2006; Countrywide International Technology Holdings Limited, a licensor of loanorigination processing, servicing and residential real estate value assessmenttechnology; and CFC India Private Limited, a provider of call center, dataprocessing and information technology related services.***

***Segment selection was based upon internalorganizational structures, and the process by which these operations aremanaged and evaluated, including how resources are allocated to the operations.***

***Intercompany transactions are generallyrecorded on an arms-length basis. However, the fulfillment fees paid by BankingOperations to the Production Sector for origination costs incurred on mortgageloans funded by Banking Operations are generally determined on an incrementalcost basis, which may be less than the fees that Banking Operations would payto a third party.***

25

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**COUNTRYWIDEFINANCIAL CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)(Unaudited)**

***Included in the columns below labeled “Other” are theholding company activities and certain reclassifications to conform managementreporting to the consolidated financial statements:***

| ** **              | ** ** | **Quarter Ended March 31, 2007** | ** ** |
|-------------------------|------------|------------------------------------------------------|------------|
| ** **              | ** ** | **Mortgage Banking**                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **              | ** ** | **Loan  Production**                                 | ** ** | **Loan  Servicing** | ** ** | **Closing  Services** | ** ** | **Total** | ** ** | **Banking** | ** ** | **Capital  Markets** | ** ** | **Insurance** | ** ** | **Global  Operations** | ** ** | **Other** | ** ** | **Total  Consolidated** | ** ** |
| ** **              | ** ** | **(in thousands)**                              | ** ** |
| Revenues:               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| External                |       | $                                                    | 1,070,711  |   | $ | (97,330 | ) | $ | 85,476 |   | $ | 1,058,857 |   | $ | 619,448 |   | $ | 227,791 |   | $ | 371,166 |   |   | $ | 3,878 |   |   | $ | 124,636 |   |   | $ | 2,405,776 |   |   |
| Intersegment            |       | 110,615                                              |       | 247,499 |   | — |   | 358,114 |   | (190,187 | ) | 32,865 |   | (1,450 | ) |   | 16,572 |   |   | (215,914 | ) |   | —— |   |   |
| Total Revenues          |       | $                                                    | 1,181,326  |   | $ | 150,169 |   | $ | 85,476 |   | $ | 1,416,971 |   | $ | 429,261 |   | $ | 260,656 |   | $ | 369,716 |   |   | $ | 20,450 |   |   | $ | (91,278 | ) |   | $ | 2,405,776 |   |   |
| Pre-tax Earnings (Loss) |       | $                                                    | 139,441    |   | $ | (69,093 | ) | $ | 29,956 |   | $ | 100,304 |   | $ | 288,094 |   | $ | 132,208 |   | $ | 179,658 |   |   | $ | 4,006 |   |   | $ | (3,475 | ) |   | $ | 700,795 |   |   |
| Total Assets            |       | $                                                    | 35,125,799 |   | $ | 29,537,903 |   | $ | 114,441 |   | $ | 64,778,143 |   | $ | 88,462,739 |   | $ | 57,068,471 |   | $ | 3,091,622 |   |   | $ | 219,200 |   |   | $ | (5,669,572 | ) |   | $ | 207,950,603 |   |   |

 

| ** **              | ** ** | **Quarter Ended March 31, 2006** | ** ** |
|-------------------------|------------|------------------------------------------------------|------------|
| ** **              | ** ** | **Mortgage Banking**                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **              | ** ** | **Loan  Production**                                 | ** ** | **Loan  Servicing** | ** ** | **Closing  Services** | ** ** | **Total** | ** ** | **Banking** | ** ** | **Capital  Markets** | ** ** | **Insurance** | ** ** | **Global  Operations** | ** ** | **Other** | ** ** | **Total  Consolidated** | ** ** |
| ** **              | ** ** | **(in thousands)**                              | ** ** |
| Revenues:               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| External                |       | $                                                    | 1,348,452  |   | $ | 299,497 |   |   | $ | 71,628 |   |   | $ | 1,719,577 |   | $ | 585,607 |   | $ | 204,056 |   | $ | 303,626 |   |   | $ | 26,139 |   |   | $ | (3,057 | ) |   | $ | 2,835,948 |   |   |
| Intersegment            |       | (6,853                                               | )          | 170,339 |   |   | — |   |   | 163,486 |   | (133,975 | ) | 59,067 |   | (479 | ) |   | 8,939 |   |   | (97,038 | ) |   | — |   |   |
| Total Revenues          |       | $                                                    | 1,341,599  |   | $ | 469,836 |   |   | $ | 71,628 |   |   | $ | 1,883,063 |   | $ | 451,632 |   | $ | 263,123 |   | $ | 303,147 |   |   | $ | 35,078 |   |   | $ | (100,095 | ) |   | $ | 2,835,948 |   |   |
| Pre-tax Earnings (Loss) |       | $                                                    | 284,149    |   | $ | 248,718 |   |   | $ | 22,207 |   |   | $ | 555,074 |   | $ | 341,086 |   | $ | 155,573 |   | $ | 64,943 |   |   | $ | 10,168 |   |   | $ | (7,481 | ) |   | $ | 1,119,363 |   |   |
| Total Assets            |       | $                                                    | 30,995,635 |   | $ | 22,676,131 |   |   | $ | 78,042 |   |   | $ | 53,749,808 |   | $ | 79,879,555 |   | $ | 41,628,089 |   | $ | 2,304,310 |   |   | $ | 148,927 |   |   | $ | (118,633 | ) |   | $ | 177,592,056 |   |   |

 

26

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

**Note 18—SummarizedFinancial Information**

Summarizedfinancial information for Countrywide Financial Corporation (parent only) andsubsidiaries is as follows:

| ** **                                                                                    | ** ** | **March 31, 2007**                                | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                                                    | ** ** | **Countrywide  Financial  Corporation  (Parent Only)** | ** ** | **Countrywide  Home  Loans, Inc.  (Consolidated)** | ** ** | **Other  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                                                                    | ** ** | **(in thousands)**                                     | ** ** |
| **Balance Sheets:**                                                                           |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage loans  held for sale                                                                 |       |                                                        | $          | — |   |   |   | $ | 24,165,000 |   |   | $ | 8,117,922 |   | $ | (343 | ) | $ | 32,282,579 |   |
| Trading securities                                                                            |       |                                                        | —     |   |   |   | 264,137 |   |   | 21,411,636 |   | (41,648 | ) | 21,634,125 |   |
| Securities  purchased under agreements to resell, securities borrowed and federal funds  sold |       |                                                        | —     |   |   |   | 420,000 |   |   | 29,733,269 |   | (1,302,200 | ) | 28,851,069 |   |
| Loans held for  investment, net                                                          |       |                                                        | —     |   |   |   | 5,231,599 |   |   | 69,960,370 |   | (14,875 | ) | 75,177,094 |   |
| Investments in  other financial instruments, at fair value                               |       |                                                        | 214,109    |   |   |   | 2,212,263 |   |   | 17,020,319 |   | (994 | ) | 19,445,697 |   |
| Mortgage servicing  rights, at fair value                                           |       |                                                        | —     |   |   |   | 17,422,504 |   |   | 19,356 |   | — |   | 17,441,860 |   |
| Investment in  subsidiaries                                                                   |       |                                                        | 16,138,459 |   |   |   | — |   |   | 4,484 |   | (16,142,943 | ) | — |   |
| Other assets                                                                                  |       |                                                        | 32,942,110 |   |   |   | 15,497,582 |   |   | 16,350,252 |   | (51,671,765 | ) | 13,118,179 |   |
| Total assets                                                                                  |       |                                                        | $          | 49,294,678 |   |   |   | $ | 65,213,085 |   |   | $ | 162,617,608 |   | $ | (69,174,768 | ) | $ | 207,950,603 |   |
| Deposit  liabilities                                                                          |       |                                                        | $          | — |   |   |   | $ | — |   |   | $ | 57,783,359 |   | $ | (258,298 | ) | $ | 57,525,061 |   |
| Securities sold  under agreements to repurchase and federal funds purchased              |       |                                                        | —     |   |   |   | 121,995 |   |   | 45,264,237 |   | (1,300,489 | ) | 44,085,743 |   |
| Notes payable                                                                                 |       |                                                        | 24,405,147 |   |   |   | 24,304,964 |   |   | 34,307,199 |   | (8,694,408 | ) | 74,322,902 |   |
| Other liabilities                                                                             |       |                                                        | 10,071,082 |   |   |   | 36,780,006 |   |   | 13,110,737 |   | (42,763,377 | ) | 17,198,448 |   |
| Equity                                                                                        |       |                                                        | 14,818,449 |   |   |   | 4,006,120 |   |   | 12,152,076 |   | (16,158,196 | ) | 14,818,449 |   |
| Total liabilities  and equity                                                                 |       |                                                        | $          | 49,294,678 |   |   |   | $ | 65,213,085 |   |   | $ | 162,617,608 |   | $ | (69,174,768 | ) | $ | 207,950,603 |   |

 

| ** **                              | ** ** | **Quarter Ended March 31, 2007**        | ** ** |
|-----------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                              | ** ** | **Countrywide  Financial  Corporation  (Parent Only)** | ** ** | **Countrywide  Home  Loans, Inc.  (Consolidated)** | ** ** | **Other  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                              | ** ** | **(in thousands)**                                     | ** ** |
| **Statements of Earnings:**             |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                                |       |                                                        | $          | (24,149 | ) |   |   | $ | 1,306,184 |   |   |   | $ | 1,383,318 |   |   |   | $ | (259,577 | ) |   |   | $ | 2,405,776 |   |   |
| Expenses                                |       |                                                        | 1,700      |   |   |   | 1,245,369 |   |   |   | 715,445 |   |   |   | (257,533 | ) |   |   | 1,704,981 |   |   |
| (Benefit)  provision for income taxes   |       |                                                        | (10,047    | ) |   |   | 28,733 |   |   |   | 248,982 |   |   |   | (854 | ) |   |   | 266,814 |   |   |
| Equity in net  earnings of subsidiaries |       |                                                        | 449,783    |   |   |   | — |   |   |   | — |   |   |   | (449,783 | ) |   |   | — |   |   |
| Net earnings                            |       |                                                        | $          | 433,981 |   |   |   | $ | 32,082 |   |   |   | $ | 418,891 |   |   |   | $ | (450,973 | ) |   |   | $ | 433,981 |   |   |

 

27

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

 

| ** **                                                                                        | ** ** | **December 31, 2006**                             | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                                                        | ** ** | **Countrywide  Financial  Corporation  (Parent Only)** | ** ** | **Countrywide  Home  Loans, Inc.  (Consolidated)** | ** ** | **Other  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                                                                        | ** ** | **(in thousands)**                                     | ** ** |
| **Balance Sheets:**                                                                               |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage loans held for sale                                                                      |       |                                                        | $          | — |   |   |   | $ | 22,659,510 |   |   | $ | 8,610,993 |   | $ | 2,127 |   | $ | 31,272,630 |   |
| Trading securities                                                                                |       |                                                        | —     |   |   |   | 287,206 |   |   | 21,381,541 |   | (166,562 | ) | 21,502,185 |   |
| Securities purchased under agreements to resell,  securities borrowed and federal funds sold |       |                                                        | —     |   |   |   | — |   |   | 27,738,192 |   | (468,295 | ) | 27,269,897 |   |
| Loans held for investment, net                                                                    |       |                                                        | —     |   |   |   | 4,563,919 |   |   | 73,534,762 |   | (12,924 | ) | 78,085,757 |   |
| Investments in other financial instruments, at fair  value                                        |       |                                                        | 191,138    |   |   |   | 1,725,235 |   |   | 10,853,078 |   | — |   | 12,769,451 |   |
| Mortgage servicing rights, at fair value                                                          |       |                                                        | —     |   |   |   | 16,151,435 |   |   | 20,629 |   | — |   | 16,172,064 |   |
| Investments in subsidiaries                                                                       |       |                                                        | 15,631,660 |   |   |   | — |   |   | 4,373 |   | (15,636,033 | ) | — |   |
| Other assets                                                                                      |       |                                                        | 29,405,609 |   |   |   | 15,322,522 |   |   | 13,424,629 |   | (45,278,514 | ) | 12,874,246 |   |
| Total assets                                                                                      |       |                                                        | $          | 45,228,407 |   |   |   | $ | 60,709,827 |   |   | $ | 155,568,197 |   | $ | (61,560,201 | ) | $ | 199,946,230 |   |
| Deposit liabilities                                                                               |       |                                                        | $          | — |   |   |   | $ | — |   |   | $ | 55,987,128 |   | $ | (408,446 | ) | $ | 55,578,682 |   |
| Securities sold under agreements to repurchase  and federal funds purchased             |       |                                                        | —     |   |   |   | 162,420 |   |   | 42,419,162 |   | (468,081 | ) | 42,113,501 |   |
| Notes payable                                                                                     |       |                                                        | 21,629,761 |   |   |   | 23,062,613 |   |   | 33,869,709 |   | (7,074,499 | ) | 71,487,584 |   |
| Other liabilities                                                                                 |       |                                                        | 9,280,800  |   |   |   | 33,307,493 |   |   | 11,819,403 |   | (37,959,079 | ) | 16,448,617 |   |
| Equity                                                                                            |       |                                                        | 14,317,846 |   |   |   | 4,177,301 |   |   | 11,472,795 |   | (15,650,096 | ) | 14,317,846 |   |
| Total liabilities  and equity                                                                     |       |                                                        | $          | 45,228,407 |   |   |   | $ | 60,709,827 |   |   | $ | 155,568,197 |   | $ | (61,560,201 | ) | $ | 199,946,230 |   |

 

| ** **                             | ** ** | **Quarter Ended March 31, 2006**        | ** ** |
|----------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                             | ** ** | **Countrywide  Financial  Corporation  (Parent Only)** | ** ** | **Countrywide  Home  Loans, Inc.  (Consolidated)** | ** ** | **Other  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                             | ** ** | **(in thousands)**                                     | ** ** |
| **Statements of Earnings:**            |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                               |       |                                                        | $          | (10,060 | ) |   |   | $ | 1,703,605 |   |   |   | $ | 1,340,357 |   |   |   | $ | (197,954 | ) |   |   | $ | 2,835,948 |   |   |
| Expenses                               |       |                                                        | 4,103      |   |   |   | 1,234,457 |   |   |   | 611,887 |   |   |   | (133,862 | ) |   |   | 1,716,585 |   |   |
| (Benefit) provision for income taxes   |       |                                                        | (5,573     | ) |   |   | 176,662 |   |   |   | 290,034 |   |   |   | (25,271 | ) |   |   | 435,852 |   |   |
| Equity in net earnings of subsidiaries |       |                                                        | 692,101    |   |   |   | — |   |   |   | — |   |   |   | (692,101 | ) |   |   | — |   |   |
| Net earnings                           |       |                                                        | $          | 683,511 |   |   |   | $ | 292,486 |   |   |   | $ | 438,436 |   |   |   | $ | (730,922 | ) |   |   | $ | 683,511 |   |   |

 

**Note 19—Borrowerand Investor Custodial Accounts**

As of March 31, 2007and December 31, 2006, the Company managed $25.0 billion and $23.3 billion,respectively, of borrower and investor custodial cash accounts. These custodialaccounts relate to the Company’s mortgage servicing activities. Of theseamounts, $16.9 billion and $15.7 billion, respectively, 

28

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

weredeposited at the Bank, of which $15.1 billion and $14.6 billion, respectively,were interest bearing and included in the Company’s deposit liabilities ascustodial deposit accounts. The remaining balances were deposited with otherdepository institutions and are not recorded on the Company’s balance sheets.

**Note 20—Legal Proceedings**

Countrywide and certainsubsidiaries are defendants in various legal proceedings involving mattersgenerally incidental to their businesses. Although it is difficult to predictthe resulting outcome of these proceedings, management believes, based ondiscussions with counsel, that any resulting liability beyond those alreadyrecorded will not materially affect the consolidated financial position of theCompany.

**Note 21—Loan Commitments**

As of March 31, 2007and December 31, 2006, the Company had undisbursed home equity lines ofcredit commitments of $8.6 billion and $9.5 billion, respectively, as well asundisbursed construction loan commitments of $1.5 billion at March 31,2007 and December 31, 2006. 

As of March 31, 2007,outstanding commitments to fund mortgage loans totaled $42.4 billion.

**Note 22—Subsequent Events**

On April 26, 2007,the Company announced that its Board of Directors declared a dividend of$0.15 per common share payable May 31, 2007, to shareholders ofrecord on May 14, 2007.

**Note 23—Recently Issued Accounting Pronouncements**

In September 2006,the FASB issued Statement of Financial Accounting Standards No. 157, *Fair Value Measurements,* (“SFAS 157”). SFAS 157 provides aframework for measuring fair value when such measurements are used foraccounting purposes. The framework focuses on an exit price in the principal(or, alternatively, the most advantageous) market accessible in an orderlytransaction between willing market participants. SFAS 157 establishes athree-tiered fair value hierarchy with Level 1 representing quoted prices foridentical assets or liabilities in an active market and Level 3 representingestimated values based on unobservable inputs. Under SFAS 157, relateddisclosures are segregated for assets and liabilities measured at fair valuebased 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 ofJanuary 1, 2008 and the financial impact, if any, upon adoption has notyet been determined.

In February 2007, the FASB issued Statement of FinancialAccounting Standards No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities, including an amendment of FASBStatement No. 115,*(“SFAS 159”). SFAS 159 permits fair valueaccounting to be irrevocably elected for certain financial assets andliabilities on an individual contract basis at the time of acquisition or at aremeasurement event date. Upon adoption of SFAS 159, fair value accounting mayalso be elected for existing financial assets and liabilities. For thoseinstruments for which fair value accounting is elected, changes in fair valuewill be recognized in earnings and fees and costs associated with originationor acquisition will be recognized as incurred rather than deferred. SFAS 159 iseffective January 1, 2008, with early adoption permitted as of January 1,2007. The Company has determined that it will adopt SFAS 159 concurrent withthe adoption of SFAS 157 on January 1, 2008, but has not yet determinedthe financial impact, if any, upon adoption.

29

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**Item 2.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

As used in this Report,references to “we,” “our,” “the Company” or “Countrywide” refer to CountrywideFinancial Corporation and its consolidated subsidiaries unless otherwiseindicated. This discussion includes forward-looking statements concerningfuture events and performance of the Company, which are subject to certainrisks and uncertainties as discussed under *Management’s Discussionand Analysis of Financial Condition and Results of Operations—Factors That May AffectOur Future Results*.

**Overview**

This section gives anoverview of critical items that are discussed in more detail throughoutManagement’s Discussion and Analysis of Financial Condition and Results ofOperations.

***Who We Are***

We are engaged in mortgage lending and other realestate finance-related businesses, including mortgage banking, banking andmortgage warehouse lending, dealing in securities and insurance underwriting.

We manage our businessthrough five business segments—Mortgage Banking, Banking, Capital Markets,Insurance and Global Operations.

***Results ofOperations***

Following is a summary of our key performance measuresfor the quarters ended March 31, 2007 and 2006:

| ** **                                       | ** ** | **March 31,**                                                 | ** **    | ** ** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------------------------|---------------|------------|------------|
| ** **                                       | ** ** | **2007**                                                           | ** **    | **2006**   | ** ** | **% Change** | ** ** |
| ** **                                       | ** ** | **(in thousands, except per share data)** | ** **    | ** ** | ** ** |
| **Consolidated  Company**                        |       |                                                               |          |       |       |   |   |   |   |
| Revenues                                         |       | $                                                                  | 2,405,776     |       | $          | 2,835,948 |   |   | (15 | )% |   |
| Net earnings                                     |       | $                                                                  | 433,981       |       | $          | 683,511 |   |   | (37 | )% |   |
| Diluted earnings  per share                      |       | $                                                                  | 0.72          |       | $          | 1.10 |   |   | (35 | )% |   |
| Total assets at  period end                      |       | $                                                                  | 207,950,603   |       | $          | 177,592,056 |   |   | 17 | % |   |
| **Key  Segment Pre-tax Earnings**                |       |                                                               |          |       |       |   |   |   |   |
| Mortgage Banking                                 |       | $                                                                  | 100,304       |       | $          | 555,074 |   |   | (82 | )% |   |
| Banking                                          |       | $                                                                  | 288,094       |       | $          | 341,086 |   |   | (16 | )% |   |
| Capital Markets                                  |       | $                                                                  | 132,208       |       | $          | 155,573 |   |   | (15 | )% |   |
| Insurance                                        |       | $                                                                  | 179,658       |       | $          | 64,943 |   |   | 177 | % |   |
| **Key  Operating Statistics**                    |       |                                                               |          |       |       |   |   |   |   |
| Total loan  fundings                             |       | $                                                                  | 116,975,000   |       | $          | 106,498,000 |   |   | 10 | % |   |
| Mortgage Banking  loan sales                     |       | $                                                                  | 108,599,136   |       | $          | 90,684,325 |   |   | 20 | % |   |
| Loan servicing  portfolio at period end          |       | $                                                                  | 1,351,598,000 |       | $          | 1,152,651,000 |   |   | 17 | % |   |
| Assets of Banking  Operations at period end |       | $                                                                  | 84,260,689    |       | $          | 77,777,915 |   |   | 8 | % |   |

 

30

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Consolidated netearnings for the first quarter of 2007 were $434.0 million, a decrease of 37%from net earnings of $683.5 million for the first quarter of 2006. Theresults of the first quarter of 2007 were affected significantly by higherdelinquencies and softer housing markets, especially as they relate to nonprimelending, which resulted in the following impacts to earnings:

·       Certainnonprime loans held for sale were deemed impaired and written down by $217.8million to fair value. The majority of these loans were transferred to loansheld for investment. This reduced revenues in our Loan Production Sector.

·       Theestimated fair value of our retained interests declined by $429.6 million. Thisreduced revenues in our Loan Servicing Sector.

·       Derivativeinstruments (credit default swaps) used to moderate declines in value ofcertain assets attributable to widening credit spreads increased in value,resulting in a substantial gain. Specifically, gains of $92.3 million and $57.2million, offset the write-downs on the nonprime loans and residual interestsidentified in the preceding points, respectively.

·       Theallowance for loan losses was increased to reflect higher estimated lossesrelated to loans held for investment. To effect this increase, we increased ourprovision for loan losses in Banking Operations by $95.9 million compared tothe quarter ended March 31, 2006. This increase reduced pre-tax income in our BankingSegment.

Partially offsetting these adjustments, reservesrecorded for reinsurance claims relating to certain pools of loans originatedin 2003 were reversed as we concluded during the quarter that it is unlikely wewould incur losses on these pools. This increased pre-tax earnings in ourInsurance Segment by $74.0 million.

***Credit***

Our primary source of credit risk continues to stemfrom investments and/or obligations that we retain from sales andsecuritizations of loans in the form of credit-enhancing subordinatedinterests, representations and warranties and corporate guarantees. Estimatedcredit losses are considered in the valuation of our subordinated interests. Theentire carrying value of such interests is generally at risk because the cashflows attributable to these interests are available to absorb credit losses inthe loan pools underlying such subordinated interests. We held $1.8 billion ofsubordinated interests at March 31, 2007, a decrease of 10% from December 31,2006.

Our estimated liability for representations andwarranties and corporate guarantees was $420.3 million at March 31,2007 and $435.5 million December 31, 2006. The contractual limit of ourcorporate guarantees exceeded the liabilities recorded by $522.8 million and$490.5 million at March 31, 2007 and December 31, 2006, respectively.

Our allowance for creditlosses, which includes our allowance for loan losses and a liability for lossesrelating to unfunded commitments, was $388.1 million at March 31, 2007, anincrease of 44% from December 31, 2006. The increase reflects higherestimated losses stemming from higher delinquencies combined with higherestimates of default rates, deterioration in prevailing real estate market andeconomic conditions and the seasoning of Banking Operations’ investment loanportfolio. To help moderate our credit risk, during the quarter we acquiredadditional supplemental mortgage insurance. As of March 31, 2007, $19.8billion of the residential lending portfolio was covered by such insurance. Despitethe increase in the allowance for credit losses, we believe that our investmentcriteria have provided us with a high quality investment portfolio and that ourcredit losses should stay within acceptable levels.

31

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***Liquidity and Capital***

During the first quarter of 2007, we saw a significantwidening of credit spreads and decrease in the demand for nonprime loanproducts. As a result, nonprime loans and related securities became much lessliquid. However, such assets represent only a small portion of our total assets.The substantial majority of our assets continue to experience ample liquidity inthe marketplace. As such, we do not expect the reduction in liquidity fornonprime loans to have a significant adverse effect on our ability toeffectively meet our financing requirements.

At March 31, 2007,the Bank exceeded the OTS regulatory capital requirements to be classified as “wellcapitalized,” with a Tier 1 capital ratio of 8.1% and a total risk-based ratioof 13.5%. Our public ratings were classified “investment grade,” with long-termratings of A, A3 and A by Standard & Poor’s, Moody’s Investors Serviceand Fitch, respectively. At March 31, 2007, we had $94.4 billion inavailable sources of secured and unsecured short-term liquidity, of which $65.2billion is committed and therefore considered a source of contingent liquidity.We also had $17.6 billion of available borrowing capacity at the FHLB.

***Outlook***

We estimate the mortgage market for 2007 to be$2.6 trillion as compared to our estimate of $2.9 trillion for 2006.We believe that the profitability of our Loan Production Sector will beaffected by the near-term reduction in the size of the mortgage market alongwith existing excess loan production capacity in the mortgage marketplace, andthat increasing credit costs will impact the profitability of our LoanServicing Sector and Banking Operations in the near term. However, we believethat these factors, combined with the effects of the recent disruption in thesecondary market for nonprime loans, the demands investors are making onmortgage lenders to repurchase defaulted loans and legislative and regulatorychanges relating to nonprime lending will combine to create further industryconsolidation.

Considerable risks remain in the mortgage marketplace,including but not limited to potential further deterioration in the housingmarket, increased defaults and foreclosures and potential regulatory orlegislative actions that could impose constraints on our operations.

Although we observed botha reduced appetite by investors and an increase in their yield requirements fornonprime loans during the quarter ended March 31, 2007, which adverselyimpacted our gain on sale of such loans, we believe that we have taken adequatesteps to reduce our exposure and to improve the profitability of our nonprimeproduction and investment activities provided that no significant furtherdeterioration occurs in the housing market or in the level of defaults andforeclosures of our mortgage loans.

**Critical AccountingPolicies**

The accounting policies with the greatest impact onour financial condition and results of operations that require the mostjudgment, and which are most likely to result in materially different amountsbeing recorded under different conditions or using different assumptions,relate to our mortgage securitization activities; our investments in MSRs andretained interests; our measurement of valuation allowances and liabilitiesassociated with credit risk inherent in our operations and our use ofderivatives to manage interest rate risk.

A discussion of thecritical accounting policies related to these activities is included in our2006 Annual Report.

32

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***Results ofOperations Comparison—Quarters Ended March 31, 2007 and 2006***

***Consolidated Earnings Performance***

Our consolidated net earnings for the first quarter of2007 were $434.0 million, a decrease of 37% from 2006’s first quarter netearnings of $683.5 million. Our diluted earnings per share were $0.72, ascompared to $1.10  for the year-agoperiod. The decrease in our net earnings resulted primarily from adversenonprime market conditions as well as credit related charges resulting fromhigher delinquencies and softer housing markets. These factors contributed to adecrease in the profitability of the Mortgage Banking, Banking and CapitalMarkets Segments. These decreases were partially offset by an increase in theprofitability of our Insurance Segment.

The decrease in the profitability of our MortgageBanking Segment was due primarily to decreased profitability in both our LoanProduction and Loan Servicing Sectors. Our Loan Production Sector wasnegatively impacted by the recent turmoil in the nonprime markets which causeda decline in nonprime revenues. Our Loan Servicing Sector was also negativelyimpacted by the nonprime market which caused a decline in the value of ournonprime and related residual securities. In addition, increased delinquenciesand a softer housing market resulted in a reduction in value of our home equityresidual securities. As a result of these factors, we recorded impairment ofretained interests of $428.6 million in the Loan Servicing Sector in thecurrent quarter compared to $120.1 million in the year-ago quarter.

The Banking Segmentproduced pre-tax earnings of $288.1 million, a decrease of 16% from the year-agoperiod. The decrease in profitability of our Banking Segment was primarily due toa $95.9 million increase in the provision for loan losses, partiallyoffset by an 8% increase in average interest-earning assets in BankingOperations from the year-ago period. The Capital Markets Segment produced adecrease in pre-tax earnings of $23.4 million, or 15% from the year-ago period,due to widening credit spreads and an increase in expenses related to continuedgrowth in newer lines of business. These decreases were partially offset by anincrease in the profitability of the Insurance Segment, due to an increase inthe net earned premiums and a reversal of loss reserves related to the 2003book of business on which negligible remaining loss exposure was deemed toexist in the first quarter of 2007.

**Operating SegmentResults**

Pre-tax earnings (loss) by segment are summarizedbelow:

| ** **             | ** ** | **Quarters Ended  March 31,** | ** ** |
|------------------------|------------|-----------------------------------------|------------|
| ** **             | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| ** **             | ** ** | **(in thousands)**                 | ** ** |
| Mortgage Banking:      |       |                                    |       |   |   |
| Loan Production        |       | $                                       | 139,441    |   | $ | 284,149 |   |
| Loan Servicing         |       | (69,093                                 | )          | 248,718 |   |
| Loan Closing Services  |       | 29,956                                  |       | 22,207 |   |
| Total Mortgage Banking |       | 100,304                                 |       | 555,074 |   |
| Banking                |       | 288,094                                 |       | 341,086 |   |
| Capital Markets        |       | 132,208                                 |       | 155,573 |   |
| Insurance              |       | 179,658                                 |       | 64,943 |   |
| Global Operations      |       | 4,006                                   |       | 10,168 |   |
| Other                  |       | (3,475                                  | )          | (7,481 | ) |
| Total                  |       | $                                       | 700,795    |   | $ | 1,119,363 |   |

 

The pre-tax earnings (loss) of each segment includeintercompany transactions, which are eliminated in the “other” category.

33

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Mortgageloan production by segment and product, net of intersegment sales, issummarized below:

| ** **                                   | ** ** | **Quarters Ended  March 31,** | ** ** |
|----------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                   | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| ** **                                   | ** ** | **(in millions)**                  | ** ** |
| Segment:                                     |       |                                    |       |   |   |
| Mortgage Banking                             |       | $                                       | 110,567    |   | $ | 93,452 |   |
| Banking Operations                           |       | 2,568                                   |       | 8,073 |   |
| Capital Markets—conduit acquisitions(1) |       | 1,829                                   |       | 4,007 |   |
| Total Mortgage Loan Fundings                 |       | 114,964                                 |       | 105,532 |   |
| Commercial Real Estate                       |       | 2,011                                   |       | 966 |   |
|                                         |       | $                                       | 116,975    |   | $ | 106,498 |   |
| Product:                                     |       |                                    |       |   |   |
| Prime Mortgage                               |       | $                                       | 96,544     |   | $ | 85,264 |   |
| Prime Home Equity                            |       | 10,539                                  |       | 11,063 |   |
| Nonprime Mortgage                            |       | 7,881                                   |       | 9,205 |   |
| Commercial Real Estate                       |       | 2,011                                   |       | 966 |   |
|                                         |       | $                                       | 116,975    |   | $ | 106,498 |   |

----

(1)          Acquisitions from thirdparties.

Our total loan production was $117.0 billion for thequarter ended March 31, 2007, a 10% increase from the year-ago period. Theincrease was primarily due to a 16% increase in our market share to 18.2%(based on our internal market estimates) offset by an overall decrease in totalU.S. residential mortgage production.

Thefollowing table summarizes loan production by purpose and by interest ratetype:

| ** **               | ** ** | **Quarters Ended  March 31,** | ** ** |
|--------------------------|------------|-----------------------------------------|------------|
| ** **               | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| ** **               | ** ** | **(in millions)**                  | ** ** |
| **Purpose:**             | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Non-purchase             |       | $                                       | 72,601     |   | $ | 58,877 |   |
| Purchase                 |       | 44,374                                  |       | 47,621 |   |
|                     |       | $                                       | 116,975    |   | $ | 106,498 |   |
| **Interest  Rate Type:** | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Fixed                    |       | $                                       | 75,695     |   | $ | 52,590 |   |
| Adjustable               |       | 41,280                                  |       | 53,908 |   |
|                     |       | $                                       | 116,975    |   | $ | 106,498 |   |

 

**Mortgage Banking Segment**

The Mortgage BankingSegment includes the Loan Production, Loan Servicing and Loan Closing ServicesSectors. The Loan Production and Loan Closing Services Sectors generallyperform most profitably when mortgage interest rates are relatively low and thedemand for mortgage loans is high. Conversely, the Loan Servicing Sectorgenerally performs well when mortgage interest rates are relatively high andloan prepayments are low. We generally expect the natural counterbalance ofthese sectors, which we refer to as the macro hedge, to reduce the impact ofchanges in mortgage interest rates on our earnings over the long term.

34

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***Loan Production Sector***

The Loan Production Sector sources mortgage loansthrough the three production channels of CHL—the Retail Channel (ConsumerMarkets and Full Spectrum Lending), Wholesale Lending Channel and CorrespondentLending Channel. These loans are funded through any one of these channels orthrough Countrywide Bank.

Thefollowing table summarizes Mortgage Banking loan production by channel, bymortgage loan type, by purpose and by interest rate type:

| ** **                           | ** ** | **Quarters Ended  March 31,(1)** | ** ** |
|--------------------------------------|------------|--------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                   | ** ** | **2006** | ** ** |
| ** **                           | ** ** | **(in millions)**                     | ** ** |
| **Channel:**                         | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Originated:                          |       |                                       |       |   |   |
| Retail:                              |       |                                       |       |   |   |
| Consumer Markets                     |       | $                                          | 29,382     |   | $ | 26,461 |   |
| Full Spectrum Lending                |       | 9,602                                      |       | 7,313 |   |
|                                 |       | 38,984                                     |       | 33,774 |   |
| Wholesale Lending                    |       | 22,176                                     |       | 20,879 |   |
| Total originated                     |       | 61,160                                     |       | 54,653 |   |
| Purchased—Correspondent Lending |       | 49,407                                     |       | 38,799 |   |
|                                 |       | $                                          | 110,567    |   | $ | 93,452 |   |
| **Mortgage  Loan Type:**             | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Prime Mortgage                       |       | $                                          | 93,833     |   | $ | 75,825 |   |
| Prime Home Equity                    |       | 9,234                                      |       | 9,528 |   |
| Nonprime Mortgage                    |       | 7,500                                      |       | 8,099 |   |
|                                 |       | $                                          | 110,567    |   | $ | 93,452 |   |
| **Purpose:**                         | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Non-purchase                         |       | $                                          | 68,692     |   | $ | 51,520 |   |
| Purchase                             |       | 41,875                                     |       | 41,932 |   |
|                                 |       | $                                          | 110,567    |   | $ | 93,452 |   |
| **Interest  Rate Type:**             | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Fixed                                |       | $                                          | 72,516     |   | $ | 52,472 |   |
| Adjustable                           |       | 38,051                                     |       | 40,980 |   |
|                                 |       | $                                          | 110,567    |   | $ | 93,452 |   |

----

(1)          $41.2 billion and $6.6billion of these loans were funded by Countrywide Bank during the quartersended March 31, 2007 and 2006, respectively.

35

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Thepre-tax earnings of the Loan Production Sector are summarized below:

| ** **                              | ** ** | **Quarters Ended March 31,**      | ** **  |
|-----------------------------------------|------------|--------------------------------------------------|-------------|
| ** **                              | ** ** | **2007**                                         | ** **  | **2006** | ** ** |
| ** **                              | ** ** | **Amount**                                       | ** **  | **Percentage of  Loan  Production  Volume** | ** ** | **Amount** | ** ** | **Percentage of  Loan  Production  Volume** | ** ** |
| ** **                              | ** ** | **(dollar amounts in thousands)** | ** **  |
| Revenues:                               |       |                                             |        |   |   |   |   |   |   |   |   |   |   |
| Prime Mortgage                          |       | $                                                | 1,008,067   |   |   |   |   |   | $ | 1,003,369 |   |   |   |   |   |
| Prime Home Equity                       |       | 171,617                                          |        |   |   |   |   | 154,297 |   |   |   |   |   |
| Nonprime Mortgage                       |       | 1,642                                            |        |   |   |   |   | 183,933 |   |   |   |   |   |
| Total revenues                          |       | 1,181,326                                        |        |   | 1.07 | % |   | 1,341,599 |   |   | 1.44 | % |   |
| Expenses:                               |       |                                             |        |   |   |   |   |   |   |   |   |   |   |
| Compensation                            |       | 574,658                                          |        |   | 0.52 | % |   | 580,071 |   |   | 0.62 | % |   |
| Other operating                         |       | 329,440                                          |        |   | 0.30 | % |   | 334,830 |   |   | 0.36 | % |   |
| Allocated corporate                     |       | 137,787                                          |        |   | 0.12 | % |   | 142,549 |   |   | 0.16 | % |   |
| Total expenses                          |       | 1,041,885                                        |        |   | 0.94 | % |   | 1,057,450 |   |   | 1.14 | % |   |
| Pre-tax earnings                        |       | $                                                | 139,441     |   |   | 0.13 | % |   | $ | 284,149 |   |   | 0.30 | % |   |
| Total Mortgage Banking  loan production |       | $                                                | 110,567,000 |   |   |   |   |   | $ | 93,452,000 |   |   |   |   |   |

 

Revenues (in dollars and expressed as a percentage ofmortgage loans produced) decreased from the year-ago period driven primarily bydeclining Nonprime Mortgage Loan revenues partially offset by a $17.9 billionincrease in the volume of loans sold. In the quarter ended March 31, 2007,$108.6 billion of mortgage loans, or 98% of Mortgage Banking loan production,was sold compared to $90.7 billion of mortgage loans, or 97% of MortgageBanking loan production, in the quarter ended March 31, 2006. Nonprimerevenues for the quarter ended March 31, 2007 included a $217.8 millionwrite-down of nonprime mortgage loans held for sale, predominately related toloans which were transferred to loans held for investment. This charge waspartially offset by gains from credit default swaps amounting to$92.3 million, which are used to manage credit spread risk or the riskthat investors will require higher yields as a result of their assessment ofthe credit risk inherent in the loans.

Expenses (in dollars and as a percentage of loansproduced) decreased from the year-ago period, primarily due to cost cuttinginitiatives and a change in the product mix. These reductions notwithstanding,we continue to invest in expanding the loan sales force and distributed branchnetwork in support of our long-term strategy of market share growth. While wecontinue to expand our loan production capacity, we are also adjusting staffingand occupancy levels in markets where declines in production require suchadjustments.

Followingis a summary of our loan origination channels’ sales organizations:

| ** **            | ** ** | **March 31,** | ** ** |
|-----------------------|------------|--------------------|------------|
| ** **            | ** ** | **2007**           | ** ** | **2006** | ** ** |
| ** **            | ** ** | **Sales  Force**   | ** ** | **Branches** | ** ** | **Call  Centers** | ** ** | **Sales   Force** | ** ** | **Branches** | ** ** | **Call  Centers** | ** ** |
| **Channel:**          | ** ** | ** **         | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Retail:               |       |               |       |   |   | ** ** |   |   |   | ** ** |   |   |   |   |   | ** ** |   |   |   | ** ** |   |
| Consumer Markets      |       | 9,095              |       |   | 769 | ** ** |   |   | 5 | ** ** |   | 8,470 |   |   | 691 | ** ** |   |   | 4 | ** ** |   |
| Full Spectrum Lending |       | 6,233              |       |   | 224 | ** ** |   |   | 10 | ** ** |   | 5,403 |   |   | 204 | ** ** |   |   | 8 | ** ** |   |
| Wholesale Lending     |       | 1,410              |       |   | 52 | ** ** |   |   | — | ** ** |   | 1,412 |   |   | 52 | ** ** |   |   | — | ** ** |   |
| Correspondent Lending |       | 182                |       |   | — | ** ** |   |   | — | ** ** |   | 187 |   |   | — | ** ** |   |   | — | ** ** |   |

 

36

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Thefollowing table summarizes the number of people included in the Loan ProductionSector workforce:

| ** **                             | ** ** | **March 31,** | ** ** |
|----------------------------------------|------------|--------------------|------------|
| ** **                             | ** ** | **2007**           | ** ** | **2006** | ** ** |
| Sales                                  |       | 16,920             |       | 15,472 |   |
| Operations:                            |       |               |       |   |   |
| Regular employees                      |       | 10,097             |       | 10,824 |   |
| Temporary staff                        |       | 1,407              |       | 1,643 |   |
|                                   |       | 11,504             |       | 12,467 |   |
| Administration and  support            |       | 3,359              |       | 3,272 |   |
| Total Loan Production Sector workforce |       | 31,783             |       | 31,211 |   |

 

***Loan Servicing Sector***

The Loan Servicing Sector’s results include fees andother income earned and expenses incurred for servicing loans for others; thefinancial performance of our investments in MSRs and retained interests and therisk management activities related to these assets; and profits from our subservicingactivities. The long-term performance of this sector is affected primarily bythe level of interest rates, the corresponding effect on the level of projectedand actual prepayments in our servicing portfolio, projected and actual creditlosses, our operational effectiveness and our ability to manage interest rateand credit spread risk.

Our servicing portfolio grew to $1.4 trillion at March 31,2007, a 17% increase from March 31, 2006. At the same time, the overallweighted-average note rate of loans in our servicing portfolio increased to6.5% from 6.2% at March 31, 2006.

Thefollowing table summarizes the results for the Loan Servicing Sector:

| ** **                                                         | ** ** | **Quarters Ended March 31,**      | ** **    |
|--------------------------------------------------------------------|------------|--------------------------------------------------|---------------|
| ** **                                                         | ** ** | **2007**                                         | ** **    | **2006** | ** ** |
| ** **                                                         | ** ** | **Amount**                                       | ** **    | **Percentage of  Average  Servicing  Portfolio(1)** | ** ** | **Amount** | ** ** | **Percentage of  Average  Servicing  Portfolio(1)** | ** ** |
| ** **                                                         | ** ** | **(dollar amounts in thousands)** | ** **    |
| Servicing fees, net of  guarantee fees                             |       | $                                                | 1,079,980     |   |   | 0.328 | % |   | $ | 913,462 |   |   | 0.326 | % |   |
| Miscellaneous fees                                                 |       | 208,839                                          |          |   | 0.063 | % |   | 144,383 |   |   | 0.052 | % |   |
| Escrow balance income                                              |       | 203,820                                          |          |   | 0.062 | % |   | 160,027 |   |   | 0.057 | % |   |
| Income from retained  interests                                    |       | 147,544                                          |          |   | 0.045 | % |   | 133,973 |   |   | 0.048 | % |   |
| Realization of expected  cash flows from mortgage servicing rights |       | (924,706                                         | )             |   | (0.281 | )% |   | (738,178 | ) |   | (0.264 | )% |   |
| Operating revenues                                                 |       | 715,477                                          |          |   | 0.217 | % |   | 613,667 |   |   | 0.219 | % |   |
| Direct expenses                                                    |       | 178,694                                          |          |   | 0.054 | % |   | 185,479 |   |   | 0.066 | % |   |
| Allocated corporate  expenses                                      |       | 22,066                                           |          |   | 0.007 | % |   | 23,178 |   |   | 0.008 | % |   |
| Total expenses                                                     |       | 200,760                                          |          |   | 0.061 | % |   | 208,657 |   |   | 0.074 | % |   |
| Operating earnings                                                 |       | 514,717                                          |          |   | 0.156 | % |   | 405,010 |   |   | 0.145 | % |   |
| Interest expense                                                   |       | (220,504                                         | )             |   | (0.067 | )% |   | (128,369 | ) |   | (0.046 | )% |   |
| Change in fair value of  mortgage servicing rights                 |       | 179,007                                          |          |   | 0.054 | % |   | 978,061 |   |   | 0.349 | % |   |
| Impairment of retained  interests                                  |       | (428,575                                         | )             |   | (0.130 | )% |   | (120,114 | ) |   | (0.043 | )% |   |
| Servicing hedge losses                                             |       | (113,738                                         | )             |   | (0.034 | )% |   | (885,870 | ) |   | (0.316 | )% |   |
| Valuation changes, net  of Servicing Hedge                         |       | (363,306                                         | )             |   | (0.110 | )% |   | (27,923 | ) |   | (0.010 | )% |   |
| Pre-tax (loss) earnings                                            |       | $                                                | (69,093       | ) |   | (0.021 | )% |   | $ | 248,718 |   |   | 0.089 | % |   |
| Average servicing portfolio                                        |       | $                                                | 1,316,260,000 |   |   |   |   |   | $ | 1,120,409,000 |   |   |   |   |   |

----

(1)          Annualized

37

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Pre-tax loss in the Loan Servicing Sectorwas $69.1 million during the quarter ended March 31, 2007, a decrease inresults of operations of $317.8 million from the year-ago period. The declinein pre-tax earnings was due to valuation changes, net of the Servicing Hedge,which were a loss of $363.3 million in the current quarter. During the year-agoperiod, valuation changes, net of the Servicing Hedge, were a loss of $27.9 million. During the quarterended March 31, 2007, impairment of retained interests of $428.6 millionwas recorded driven primarily by increased loss estimates on the loansunderlying our prime home equity and nonprime and related residual securitiesas well as increased market yield requirements on such securities. In addition,market yield requirements increased on certain retained interests where we donot retain credit risk. Also contributing to the decline in pre-tax earningswas an increase in interest expense related to the cost of carrying a larger averageinvestment in Loan ServicingSector assets and increased cost of debt. These reductions were partiallyoffset by higher operating revenues from a larger servicing portfolio.

***Loan Closing Services Sector***

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

The LandSafe companiesproduced $30.0 million in pre-tax earnings in the quarter ended March 31,2007, representing an increase of 35% from the year-ago period. The increase inLandSafe’s pre-tax earnings was primarily due to the increase in its creditreport and appraisal businesses due to the increase in CHL’s applicationactivity.

**Banking Segment**

The Banking Segment includes Banking Operations(primarily the investment and fee-based activities of Countrywide Bank), alongwith the activities of Countrywide Warehouse Lending (“CWL”). Banking Operationsinvests in mortgage loans sourced from the Loan Production Sector and mortgageloans and high-quality MBS purchased from non-affiliated entities. Banking investmentin loans is supplemented with a portfolio of mortgage-backed securities. CWLprovides third-party mortgage lenders with temporary financing secured bymortgage loans.

Countrywide Bank also produces loans for sale throughour Mortgage Banking Segment. This activity is a mortgage banking activity andthe mortgage loan production, the related balance sheet and the income relatingto the holding and sale of these loans are included in the Mortgage BankingSegment.

TheBanking Segment achieved pre-tax earnings of $288.1 million during the quarterended March 31, 2007, compared to $341.1 million for the year-ago period. Followingis the composition of pre-tax earnings:

| ** **                              | ** ** | **Quarters Ended  March 31,** | ** ** |
|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                              | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| ** **                              | ** ** | **(in thousands)**                 | ** ** |
| Banking  Operations                     |       | $                                       | 294,073    |   | $ | 330,731 |   |
| CWL                                     |       | 9,844                                   |       | 18,126 |   |
| Allocated  corporate expenses(1)        |       | (15,823                                 | )          | (7,771 | ) |
| Total Banking  Segment pre-tax earnings |       | $                                       | 288,094    |   | $ | 341,086 |   |

----

(1)          Not included in thecalculation of Banking Operations’ efficiency ratio.

38

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BankingOperations sources the loan production for its investment portfolio from theMortgage Banking Segments production channels and through purchases fromnonaffiliated entities. Following is a summary of Banking Operations’ loanproduction and purchase volume by channel:

| ** **             | ** ** | **Quarters Ended  March 31,** | ** ** |
|------------------------|------------|-----------------------------------------|------------|
| ** **             | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| ** **             | ** ** | **(in millions)**                  | ** ** |
| Purchases              |       | $                                       | 2,163      |   | $ | 2,114 |   |
| Correspondent  Lending |       | 366                                     |       | 2,337 |   |
| Consumer Markets       |       | 26                                      |       | 852 |   |
| Wholesale Lending      |       | 13                                      |       | 2,770 |   |
|                   |       | $                                       | 2,568      |   | $ | 8,073 |   |

 

The decline in Banking Operations’ loan production andpurchase volume contributed to slower asset growth in our Banking Operations.Our strategic plan calls for continued long-term growth in Banking Operationsassets; however, many factors may impact the asset growth in any period. These factorsinclude general mortgage market conditions, the availability of assets whichmeet the asset quality and yield requirements of our Banking Operations and ourconsolidated capital and earnings considerations.

Therevenues and expenses of Banking Operations are summarized in the followingtable:

| ** **                                          | ** ** | **Quarters Ended  March 31,**          | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                          | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                                          | ** ** | **(dollar amounts in thousands)** | ** ** |
| Interest income                                     |       |                                             | $          | 1,388,263 |   |   |   | $ | 1,122,464 |   |   |
| Interest expense                                    |       |                                             | (891,523   | ) |   |   | (704,164 | ) |   |
| Net interest income                                 |       |                                             | 496,740    |   |   |   | 418,300 |   |   |
| Provision for  loan losses                          |       |                                             | (123,562   | ) |   |   | (27,626 | ) |   |
| Net interest income after provision for loan losses |       |                                             | 373,178    |   |   |   | 390,674 |   |   |
| Non-interest  income                                |       |                                             | 40,734     |   |   |   | 35,813 |   |   |
| Non-interest  expense                               |       |                                             | (119,839   | ) |   |   | (95,756 | ) |   |
| Pre-tax earnings                                    |       |                                             | $          | 294,073 |   |   |   | $ | 330,731 |   |   |
| Efficiency  ratio(1)                                |       |                                             | 22         | % |   |   | 21 | % |   |
| After-tax return on  average assets                 |       |                                             | 0.88       | % |   |   | 1.08 | % |   |

----

(1)          Non-interest expensedivided by the sum of net interest income plus non-interest income. The BankingOperations’ efficiency ratio reflects the expense structure resulting from its relationship with CHL. If the Banking Operations of Countrywide Bankwere a stand-alone entity, the nature and amount of its expenses would differfrom those reported. For example, the fulfillment fees paid byCountrywide Bank to the Loan Production Sector for origination costs incurredon investment mortgage loans funded by Countrywide Bank are generally determined on an incrementalcost basis which is less than would beincurred in an arms-length transaction.

39

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The components of net interest income of BankingOperations are summarized below:

| ** **                                         | ** ** | **Quarters Ended March 31,**      | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                         | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                                         | ** ** | **Average  Balance**                             | ** ** | **Interest  Income/  Expense** | ** ** | **Annualized  Yield/  Rate** | ** ** | **Average  Balance** | ** ** | **Interest  Income/  Expense** | ** ** | **Annualized  Yield/  Rate** | ** ** |
| ** **                                         | ** ** | **(dollar amounts in thousands)** | ** ** |
| Interest-earning  assets:                          |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage loans(1)                                  |       | $                                                | 70,874,082 |   | $ | 1,265,364 |   |   | 7.16 | % |   | $ | 66,050,178 |   | $ | 1,021,000 |   |   | 6.20 | % |   |
| Securities available for  sale(2)                  |       | 7,574,841                                        |       | 101,450 |   |   | 5.36 | % |   | 6,249,461 |   | 80,469 |   |   | 5.15 | % |   |
| Short-term investments                             |       | 53,410                                           |       | 913 |   |   | 6.93 | % |   | 388,318 |   | 4,324 |   |   | 4.52 | % |   |
| FHLB securities and FRB  stock                     |       | 1,409,383                                        |       | 20,536 |   |   | 5.90 | % |   | 1,353,981 |   | 16,671 |   |   | 4.99 | % |   |
| Total earning assets                               |       | 79,911,716                                       |       | 1,388,263 |   |   | 6.97 | % |   | 74,041,938 |   | 1,122,464 |   |   | 6.08 | % |   |
| Allowance for loan losses                          |       | (245,454                                         | )          |   |   |   |   |   |   | (107,162 | ) |   |   |   |   |   |   |
| Other assets                                       |       | 3,207,537                                        |       |   |   |   |   |   |   | 930,857 |   |   |   |   |   |   |   |
| Total assets                                       |       | $                                                | 82,873,799 |   |   |   |   |   |   |   | $ | 74,865,633 |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                     |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Money market deposits and  savings accounts        |       | $                                                | 10,676,624 |   | 136,174 |   |   | 5.17 | % |   | $ | 4,831,270 |   | 51,411 |   |   | 4.32 | % |   |
| Company-controlled  custodial deposits(3)          |       | 15,588,390                                       |       | 198,412 |   |   | 5.16 | % |   | 13,468,530 |   | 145,852 |   |   | 4.39 | % |   |
| Time deposits                                      |       | 29,328,133                                       |       | 369,146 |   |   | 5.10 | % |   | 22,769,200 |   | 236,566 |   |   | 4.21 | % |   |
| Total interest-bearing  deposits                   |       | 55,593,147                                       |       | 703,732 |   |   | 5.13 | % |   | 41,069,000 |   | 433,829 |   |   | 4.28 | % |   |
| FHLB advances                                      |       | 17,166,718                                       |       | 180,971 |   |   | 4.28 | % |   | 24,663,071 |   | 245,221 |   |   | 4.03 | % |   |
| Other borrowed funds                               |       | 515,266                                          |       | 6,820 |   |   | 5.37 | % |   | 2,216,502 |   | 25,114 |   |   | 4.60 | % |   |
| Total borrowed funds                               |       | 17,681,984                                       |       | 187,791 |   |   | 4.31 | % |   | 26,879,573 |   | 270,335 |   |   | 4.08 | % |   |
| Total interest-bearing  liabilities                |       | 73,275,131                                       |       | 891,523 |   |   | 4.93 | % |   | 67,948,573 |   | 704,164 |   |   | 4.20 | % |   |
| Non interest-bearing liabilities and equity:       |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non interest-bearing  checking accounts            |       | 1,769,720                                        |       |   |   |   |   |   |   | 959,407 |   |   |   |   |   |   |   |
| Other liabilities                                  |       | 2,856,520                                        |       |   |   |   |   |   |   | 709,481 |   |   |   |   |   |   |   |
| Shareholder’s equity                          |       | 4,972,428                                        |       |   |   |   |   |   |   | 5,248,172 |   |   |   |   |   |   |   |
| Total non interest-bearing  liabilities and equity |       | 9,598,668                                        |       |   |   |   |   |   |   | 6,917,060 |   |   |   |   |   |   |   |
| Total liabilities and  shareholder’s equity   |       | $                                                | 82,873,799 |   |   |   |   |   |   |   | $ | 74,865,633 |   |   |   |   |   |   |   |
| Net interest income                                |       |                                             |       | $ | 496,740 |   |   |   |   |   |   |   | $ | 418,300 |   |   |   |   |   |
| Net interest spread(4)                             |       |                                             |       |   |   |   | 2.04 | % |   |   |   |   |   |   | 1.88 | % |   |
| Net interest margin(5)                             |       |                                             |       |   |   |   | 2.45 | % |   |   |   |   |   |   | 2.23 | % |   |

----

(1)           Average balancesinclude nonaccrual loans.

(2)           Average balancesand yields for securities available for sale are based on average amortizedcost computed on the settlement date basis.

(3)           Represents anintercompany rate paid to the Loan Servicing Sector.

(4)           Calculated asyield on total average interest-earning assets less rate on total averageinterest-bearing liabilities.

(5)           Calculated asnet interest income divided by total average interest-earning assets.

Thedollar amounts of interest income and interest expense change depending uponchanges in interest rates and in the relative volumes of our interest-earningassets and interest-bearing liabilities. Changes attributable to (i) changesin volume (changes in average outstanding balances multiplied by the priorperiod’s rate), (ii) changes in rate (changes in average interest ratemultiplied by the prior period’s volume), and (iii) changes in rate/volume(changes in rate multiplied by the change in volume)—which 

40

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were allocated proportionately to the changes involume and the changes in rate and included in the relevant column below—are asfollows:

| ** **                                 | ** ** | **Quarter Ended  March 31, 2007 vs. March 31, 2006** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **Increase (Decrease) Due to**                                           | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **Volume**                                                                              | ** ** | **Rate** | ** ** | **Total Changes** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                                                                 | ** ** |
| Interest-earning assets:                   |       |                                                                                    |       |   |   |   |   |   |   |
| Mortgage loans                             |       | $                                                                                       | 80,054     |   | $ | 164,310 |   |   | $ | 244,364 |   |   |
| Securities available for sale              |       | 17,641                                                                                  |       | 3,340 |   |   | 20,981 |   |   |
| Short-term investments                     |       | (4,960                                                                                  | )          | 1,549 |   |   | (3,411 | ) |   |
| FHLB securities and FRB stock              |       | 923                                                                                     |       | 2,942 |   |   | 3,865 |   |   |
| Total interest income                      |       | $                                                                                       | 93,658     |   | $ | 172,141 |   |   | $ | 265,799 |   |   |
| Interest-bearing  liabilities:             |       |                                                                                    |       |   |   |   |   |   |   |
| Money market deposits and savings accounts |       | $                                                                                       | 72,813     |   | $ | 11,950 |   |   | $ | 84,763 |   |   |
| Company-controlled custodial deposits      |       | 24,860                                                                                  |       | 27,700 |   |   | 52,560 |   |   |
| Time deposits                              |       | 76,456                                                                                  |       | 56,124 |   |   | 132,580 |   |   |
| Total deposits                             |       | 174,129                                                                                 |       | 95,774 |   |   | 269,903 |   |   |
| FHLB advances                              |       | (78,283                                                                                 | )          | 14,033 |   |   | (64,250 | ) |   |
| Other borrowed funds                       |       | (21,935                                                                                 | )          | 3,641 |   |   | (18,294 | ) |   |
| Total borrowings                           |       | (100,218                                                                                | )          | 17,674 |   |   | (82,544 | ) |   |
| Total interest expense                     |       | 73,911                                                                                  |       | 113,448 |   |   | 187,359 |   |   |
| Net interest  income                       |       | $                                                                                       | 19,747     |   | $ | 58,693 |   |   | $ | 78,440 |   |   |

 

The increase in net interest income was primarily dueto a 22 basis point increase in net interest margin combined with a $5.9billion, or 8%, increase in average interest-earning assets. The increase in thenet interest margin from the year-ago quarter was a result of the effect of asmaller interest rate repricing lag and the reduced impact of teaser ratesearned on recently funded pay-option loans as fewer such loans were originatedin the first quarter of 2007 compared to the year-ago quarter.

The Banking Operations’ provision for loan lossesincreased by $95.9 million during the quarter ended March 31, 2007compared to the quarter ended March 31, 2006. The provision rose year overyear as a result of increased delinquencies combined with higher estimates ofdefault rates as well as portfolio seasoning. The provision for loan losses andthe related allowance for loan losses is affected by many factors, includingeconomic conditions (for example, housing prices, interest rates andunemployment rates), borrower credit profiles, delinquency, and loan seasoningand prepayments.

Banking Operations holds a substantial investment inpay-option ARM loans. These loans have interest rates that adjust monthly andminimum required payments that adjust annually, resulting in the potential fornegative amortization. Minimum monthly payments may increase by no more than 71¤2%per year unless the unpaid balance increases to a specified limit, which is nomore than 115% of the original loan amount, at which time a new monthly paymentamount adequate to repay the loan over its remaining contractual life isestablished. To ensure that contractual loan payments are adequate to repay aloan, the fully amortizing loan payment amount is re-established after eitherfive or ten years and again every five years thereafter.

Assuming today’s interest rates remain unchanged, mostborrowers who consistently make the minimum required payment will have thecontractual right to make less than the full interest payment for three to fouryears from the date of funding, at which time the negative amortization limitwill be reached and a new monthly payment amount will be required. Theresulting payment adjustment could be substantial.

41

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We manage the credit risk relating to pay-option ARMloans through a variety of methods, including active borrower communicationsboth before and after funding, through our underwriting standards and throughthe purchase of mortgage insurance. Our underwriting standards conform to thoserequired to make the pay-option ARM loans salable into the secondary market atthe date of funding, including a requirement that the borrower meet secondarymarket debt-service ratio tests based on the borrower making the fullyamortizing 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 themargin applicable to the loan.)

Followingis a summary of pay-option ARM loans held for investment by Banking Operations:

| ** **                                                                              | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                              | ** ** | **(in thousands)**  | ** ** |
| Total pay-option  ARM loan portfolio                                                    |       | $                        | 30,780,617 |                        | $          | 32,732,581 |   |
| Total principal balance of pay-option ARM loans with  accumulated negative amortization |       | $                        | 27,448,774 |                        | $          | 28,958,718 |   |
| Accumulated negative amortization (from original  loan balance)                         |       | $                        | 815,826    |                        | $          | 653,974 |   |
| Average original  loan-to-value ratio(1)                                                |       | 75                       | %          | 75                          | %          |
| Average original  combined loan-to-value ratio(2)                                       |       | 79                       | %          | 78                          | %          |
| Average original  FICO score(3)                                                         |       | 717                      |       | 718                         |       |
| Loans delinquent 90 days  or more(4)                                                    |       | 1.02                     | %          | 0.63                        | %          |

----

(1)          The ratio of the lowerof the amount of the loan that is secured by the property to the originalappraised value or purchase price of the property.

(2)          The ratio of the lowerof the amount of all loans secured by the property to the original appraisedvalue or purchase price of the property.

(3)          A FICO score is ameasure of borrower creditworthiness determined using a statistical model. FICOscores range from approximately 300 to 850, with a higher score indicating anindividual with a more favorable credit profile.

(4)   Based upon unpaidprincipal balance.

42

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TheBanking Operations balance sheets are as follows: 

| ** **                                                                              | ** ** | **March 31, 2007**                     | ** ** | **December 31, 2006** | ** ** |
|-----------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                              | ** ** | **Amount**                                       | ** ** | **Rate**                        | ** ** | **Amount** | ** ** | **Rate** | ** ** |
| ** **                                                                              | ** ** | **(dollar amounts in thousands)** | ** ** |
| **Assets**                                                                              |       |                                             |       |                            |       |   |   |   |   |
| Short-term investments                                                                  |       | $                                                | 49,027     |                            | 5.30       | % | $ | 50,974 |   | 5.14 | % |
| Mortgage loans, net of  allowance for loan losses of $318,083 and $228,692 respectively |       | 69,360,391                                       |       | 7.47                            | %          | 73,481,762 |   | 7.39 | % |
| Securities available for  sale                                                          |       | 12,504,868                                       |       | 5.30                            | %          | 6,208,477 |   | 4.63 | % |
| FHLB securities and  FRB stock                                                     |       | 1,218,931                                        |       | 5.90                            | %          | 1,431,403 |   | 5.91 | % |
| Total interest-earning  assets                                                          |       | 83,133,217                                       |       | 7.12                            | %          | 81,172,616 |   | 7.16 | % |
| Other assets                                                                            |       | 1,127,472                                        |       |                            |       | 1,601,952 |   |   |   |
| Total assets                                                                            |       | $                                                | 84,260,689 |                            |       |   | $ | 82,774,568 |   |   |   |
| **Liabilities and Equity**                                                              |       |                                             |       |                            |       |   |   |   |   |
| Deposits:(1)                                                                            |       |                                             |       |                            |       |   |   |   |   |
| Customer                                                                                |       | $                                                | 40,634,183 |                            | 5.10       | % | $ | 39,904,633 |   | 5.08 | % |
| Company-controlled escrow  deposit accounts                                             |       | 15,071,445                                       |       | 5.42                            | %          | 14,609,269 |   | 5.28 | % |
| FHLB advances                                                                           |       | 18,792,170                                       |       | 4.47                            | %          | 18,900,053 |   | 4.35 | % |
| Other borrowings                                                                        |       | 347,914                                          |       | 5.31                            | %          | 97,914 |   | 5.35 | % |
| Total interest-bearing  liabilities                                                     |       | 74,845,712                                       |       | 5.01                            | %          | 73,511,869 |   | 4.93 | % |
| Non-interest bearing  deposits:                                                         |       |                                             |       |                            |       |   |   |   |   |
| Company-controlled escrow  deposit  accounts                                            |       | 1,839,291                                        |       |                            |       | 1,158,707 |   |   |   |
| Other                                                                                   |       | 238,529                                          |       |                            |       | 314,607 |   |   |   |
| Other liabilities                                                                       |       | 2,307,375                                        |       |                            |       | 1,451,003 |   |   |   |
| Shareholder’s equity                                                               |       | 5,029,782                                        |       |                            |       | 6,338,382 |   |   |   |
| Total liabilities and  equity                                                           |       | $                                                | 84,260,689 |                            |       |   | $ | 82,774,568 |   |   |   |
| Primary spread(2)                                                                       |       |                                             |       | 2.11                            | %          |   |   | 2.23 | % |
| Nonaccrual loans                                                                        |       | $                                                | 693,850    |                            |       |   | $ | 519,083 |   |   |   |

----

(1)          Includes inter-companydeposits.

(2)          Calculated as the yieldon total interest-earning assets less the rate on total interest-bearingliabilities.

The reduction in the balance of the mortgage loanportfolio from December 31, 2006 is due to an increasing percentage ofCountrywide’s originations being sold in the secondary markets, reduced availabilityof loans for purchase by Banking Operations that meet its investment criteriaand portfolio runoff. Despite the reduction in the mortgage loan portfolio,assets increased due to the acquisition of high quality mortgage-backedsecurities.

The Banking Segment alsoincludes the operations of CWL. CWL’s pre-tax earnings decreased by $8.3million during the quarter ended March 31, 2007 in comparison to theyear-ago period, primarily due to a 8% decrease in average mortgage warehouseadvances, which resulted primarily from a decrease in overall market fundingactivity and pricing pressure from competitors. At March 31, 2007,warehouse lending advances were $2.8 billion and had an average yield of 6.4%during the quarter ended March 31, 2007.

**Capital MarketsSegment**

Our Capital Markets Segment achieved pre-tax earningsof $132.2 million for the quarter ended March 31, 2007, a decrease of$23.4 million, or 15%, from the year-ago period caused by a decline in conduitrevenue and a $20.9 million, or 19% increase in expenses in newer lines ofbusiness, partially offset by growth in revenue from our commercial real estatelending activities.

43

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Thefollowing table shows revenues, expenses and pre-tax earnings of the CapitalMarkets Segment:

| ** **                    | ** ** | **Quarters Ended  March 31,** | ** ** |
|-------------------------------|------------|-----------------------------------------|------------|
| ** **                    | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| ** **                    | ** ** | **(in thousands)**                 | ** ** |
| Revenues:                     |       |                                    |       |   |   |
| Conduit                       |       | $                                       | 68,818     |   | $ | 122,601 |   |
| Underwriting                  |       | 67,388                                  |       | 71,212 |   |
| Commercial real estate        |       | 48,232                                  |       | 16,263 |   |
| Securities trading            |       | 34,764                                  |       | 34,664 |   |
| Brokering                     |       | 12,377                                  |       | 6,657 |   |
| Other                         |       | 29,077                                  |       | 11,726 |   |
| Total revenues                |       | 260,656                                 |       | 263,123 |   |
| Expenses:                     |       |                                    |       |   |   |
| Operating expenses            |       | 121,985                                 |       | 103,471 |   |
| Allocated corporate  expenses |       | 6,463                                   |       | 4,079 |   |
| Total expenses                |       | 128,448                                 |       | 107,550 |   |
| Pre-tax earnings              |       | $                                       | 132,208    |   | $ | 155,573 |   |

 

During the quarter ended March 31, 2007, the CapitalMarkets Segment generated revenues totaling $68.8 million from its conduitactivities, primarily managing the acquisition and sale or securitization ofloans on behalf of the Mortgage Banking Segment. The gain on sale of loans,primarily nonprime loans, was adversely impacted by deteriorating marketconditions, specifically higher investor yield requirements as well asincreased loss assumptions.  This declinein revenues was offset by $82.6 million of gains on credit default swaps, whichwere acquired as financial hedges against the spread-widening component of the pricerisk inherent in Capital Markets' conduit activities.  Because the credit default swaps were notdesignated as fair value hedges for accounting purposes, the portion of thegain on the swaps relating to unsold nonprime loan inventory was not matched byrecognition of an offsetting reduction in value of the inventory ofapproximately $24.8 million. Therefore, the loss in value of the unsold nonprime loan inventory willbe recorded as the loans are sold in the future.  The remainder of the gain on the creditdefault swaps offset the reduction in gain on sale of nonprime loans soldduring the current quarter.

During the current reporting period, the commercialreal estate finance activities of the Capital Markets Segment generatedrevenues totaling $48.2 million primarily from sales of commercial real estateloans compared to $16.3 million in the year-ago period. The increase in revenuewas due to an increase in the volume of loans sold, and to a lesser extent anincrease in margins, due to better execution and hedge gains.

Thefollowing table shows the composition of Countrywide Securities Corporation (“CSC”)securities trading volume, which includes intersegment trades with the MortgageBanking Segment, by instrument:

| ** **                      | ** ** | **Quarters Ended  March 31,** | ** ** |
|---------------------------------|------------|-----------------------------------------|------------|
| ** **                      | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| ** **                      | ** ** | **(in millions)**                  | ** ** |
| Mortgage-backed  securities     |       | $                                       | 560,269    |   | $ | 528,350 |   |
| Asset-backed securities         |       | 33,641                                  |       | 32,676 |   |
| Other                           |       | 38,703                                  |       | 60,217 |   |
| Subtotal(1)                     |       | 632,613                                 |       | 621,243 |   |
| U.S. Treasury securities        |       | 365,329                                 |       | 357,112 |   |
| Total securities trading volume |       | $                                       | 997,942    |   | $ | 978,355 |   |

----

(1)          Approximately 14% and13% of the segment’s non-U.S. Treasury securities trading volume was with CHLduring the quarters ended March 31, 2007 and 2006, respectively.

44

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**Insurance Segment**

TheInsurance Segment’s pre-tax earnings increased by $114.7 million over theyear-ago period, to $179.7 million during the quarter ended March 31,2007. The following table shows pre-tax earnings by component:

| ** **                                | ** ** | **Quarters Ended  March 31,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| ** **                                | ** ** | **(in thousands)**                 | ** ** |
| Balboa  Reinsurance Company               |       | $                                       | 131,123    |   | $ | 46,497 |   |
| Balboa  Life & Casualty(1)       |       | 56,612                                  |       | 22,779 |   |
| Allocated  corporate expenses             |       | (8,077                                  | )          | (4,333 | ) |
| Total Insurance  Segment pre-tax earnings |       | $                                       | 179,658    |   | $ | 64,943 |   |

----

(1)          Includes the Balboa Lifeand Casualty Group and the Countrywide Insurance Services Group.

Thefollowing table shows net insurance premiums earned:

| ** **                           | ** ** | **Quarters Ended  March 31,** | ** ** |
|--------------------------------------|------------|-----------------------------------------|------------|
| ** **                           | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| ** **                           | ** ** | **(in thousands)**                 | ** ** |
| Balboa  Reinsurance Company          |       | $                                       | 63,260     |   | $ | 51,795 |   |
| Balboa  Life & Casualty     |       | 270,917                                 |       | 227,998 |   |
| Total net  insurance premiums earned |       | $                                       | 334,177    |   | $ | 279,793 |   |

 

Thefollowing table shows insurance claim expenses:

| ** **                       | ** ** | **Quarters Ended March 31,**      | ** ** |
|----------------------------------|------------|--------------------------------------------------|------------|
| ** **                       | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                       | ** ** | **Amount**                                       | ** ** | **As Percentage  of Net  Earned  Premiums** | ** ** | **Amount** | ** ** | **As Percentage  of Net  Earned  Premiums** | ** ** |
| ** **                       | ** ** | **(dollar amounts in thousands)** | ** ** |
| Balboa  Reinsurance Company      |       | $                                                | (59,835    | ) |   | N/M |   |   | $ | 11,075 |   |   | 21 | % |   |
| Balboa  Life & Casualty |       | 117,140                                          |       |   | 43 | % |   | 112,967 |   |   | 50 | % |   |
| Total insurance  claim expenses  |       | $                                                | 57,305     |   |   |   |   |   | $ | 124,042 |   |   |   |   |   |

 

Our mortgage reinsurance business produced $131.1million in pre-tax earnings, an increase of 182% over the year-ago period,driven primarily by a $74.0 million reversal of loss reserves related to the2003 books of business, on which negligible remaining loss exposure was deemedto exist in the first quarter of 2007. In addition, growth of 16% in themortgage loans included in our loan servicing portfolio that are covered byreinsurance contracts contributed to the increase in pre-tax earnings.

Our Life and Casualty insurance business producedpre-tax earnings of $56.6 million, an increase of $33.8 million, or 149%, fromthe year-ago period. The increase in earnings was driven by a $42.9 million, or19%, increase in net earned premiums during the quarter ended March 31,2007 in comparison to the year-ago period, along with a $4.6 million decreasein catastrophe claims expense over the year-ago period. The increase in netearned premiums was primarily attributable to growth in lender-placed insuranceand voluntary auto insurance. Insurance claim expenses decreased from 50% to43% due to a reduction in loss reserves on hurricane-related claims incomparison to the year-ago period as well as improved non-catastrophe lossexperience.

45

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Our Life and Casualtyoperations manage insurance risk by reinsuring significant portions of suchrisk. They seek to earn profits by capitalizing on Countrywide’s customer baseand institutional relationships, as well as through operating efficiencies andsound underwriting.

**Global OperationsSegment**

Global Operations pre-taxearnings totaled $4.0 million during the quarter ended March 31, 2007, adecrease of $6.2 million from the year-ago period. The decrease in earnings wasprimarily due to the termination of the joint venture with Barclays Bank, PLCin 2006.

**Detailed Line ItemDiscussion of Consolidated Revenue and Expense Items**

***Gain on Sale of Loans and Securities***

Gainon sale of loans and securities is summarized below:

| ** **                   | ** ** | **Quarters Ended March 31,**      | ** **  |
|------------------------------|------------|--------------------------------------------------|-------------|
| ** **                   | ** ** | **2007**                                         | ** **  | **2006** | ** ** |
| ** **                   | ** ** | ** **                                       | ** **  | **Gain on Sale** | ** ** | ** ** | ** ** | **Gain on Sale** | ** ** |
| ** **                   | ** ** | **Loans Sold**                              | ** **  | **Amount** | ** ** | **Margin(2)** | ** ** | **Loans Sold** | ** ** | **Amount** | ** ** | **Margin(2)** | ** ** |
| ** **                   | ** ** | **(dollar amounts in thousands)** | ** **  |
| Mortgage Banking:            |       |                                             |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Prime Mortgage Loans         |       | $                                                | 92,879,139  |   | $ | 901,286 |   |   | 0.97 | % |   | $ | 76,176,576 |   | $ | 897,734 |   |   | 1.18 | % |   |
| Nonprime Mortgage Loans      |       | 7,890,022                                        |        | (33,429 | ) |   | (0.42 | )% |   | 9,090,272 |   | 149,437 |   |   | 1.64 | % |   |
| Prime  Home Equity Loans:    |       |                                             |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Initial sales                |       | 6,786,835                                        |        | 137,890 |   |   | 2.03 | % |   | 4,442,526 |   | 77,919 |   |   | 1.75 | % |   |
| Subsequent draws             |       | 1,043,140                                        |        | 27,462 |   |   | 2.63 | % |   | 974,951 |   | 35,687 |   |   | 3.66 | % |   |
|                         |       | 7,829,975                                        |        | 165,352 |   |   | 2.11 | % |   | 5,417,477 |   | 113,606 |   |   | 2.10 | % |   |
| Total Production Sector      |       | 108,599,136                                      |        | 1,033,209 |   |   | 0.95 | % |   | 90,684,325 |   | 1,160,777 |   |   | 1.28 | % |   |
| Reperforming loans           |       | —                                           |        | (49 | ) |   | 0 | % |   | 143,647 |   | 1,979 |   |   | 1.38 | % |   |
|                         |       | $                                                | 108,599,136 |   | 1,033,160 |   |   | 0.95 | % |   | $ | 90,827,972 |   | 1,162,756 |   |   | 1.28 | % |   |
| Capital Markets:             |       |                                             |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Underwriting                 |       | N/A                                              |        | 64,166 |   |   | N/A |   |   | N/A |   | 63,101 |   |   | N/A |   |   |
| Conduit activities(1)        |       | $                                                | 7,418,796   |   | 57,283 |   |   | 0.77 | % |   | $ | 17,943,454 |   | 112,894 |   |   | 0.63 | % |   |
| Commercial real estate       |       | $                                                | 1,532,173   |   | 37,565 |   |   | 2.45 | % |   | $ | 942,185 |   | 7,563 |   |   | 0.80 | % |   |
| Securities trading and other |       | N/A                                              |        | 30,782 |   |   | N/A |   |   | N/A |   | 3,742 |   |   | N/A |   |   |
|                         |       |                                             |        | 189,796 |   |   |   |   |   |   |   | 187,300 |   |   |   |   |   |
| Other                        |       | N/A                                              |        | 11,148 |   |   | N/A |   |   | N/A |   | 11,122 |   |   | N/A |   |   |
|                         |       |                                             |        | $ | 1,234,104 |   |   |   |   |   |   |   | $ | 1,361,178 |   |   |   |   |   |

----

(1)          Includes loans sourcedfrom the Mortgage Banking Segment.

(2)          Gain on sale as apercentage of loans sold.

The decrease in Capital Markets’ gain on sale relatedto its conduit activities was due primarily to a decrease in sales volumeresulting from lower U.S. residential mortgage production, increasedcompetition and credit spread widening. The increase in Capital Markets’ gainon sale related to its commercial real estate activities was due to an increasein the volume of loans sold and an increase in margins resulting from a changein mix of loans toward higher margin products. Capital Markets’ revenues fromits securities trading activities consist of gain on sale and interest income.In a flat to inverted yield curve environment, the mix of revenues will beweighted toward gain on sale of securities. As the yield curve shifts toward apositive slope, net interest income will comprise a larger percentage of totalsecurities trading revenue. During the quarter ended March 31, 2007, theyield curve was flat-to inverted, which resulted in a shift in trading revenuesfrom interest income to gain on sale.

46

----

Forthe Mortgage Banking Segment, the effects of changes in the volume of loan salesand the margin on sale on the amount of gain on sale is summarized in thefollowing table:

| ** **               | ** ** | **Quarter Ended  March 31, 2007 vs. March 31, 2006** | ** ** |
|--------------------------|------------|-----------------------------------------------------------------------------------------|------------|
| ** **               | ** ** | **Increase (Decrease) Due to**                                           | ** ** | ** ** | ** ** |
| ** **               | ** ** | **Loans Sold**                                                                     | ** ** | **Margin** | ** ** | **Total** | ** ** |
| ** **               | ** ** | **(in thousands)**                                                                 | ** ** |
| Mortgage Banking:        |       |                                                                                    |       |   |   |   |   |   |   |
| Prime Mortgage Loans     |       |                                                                                    | $          | 177,584 |   |   | $ | (174,032 | ) | $ | 3,552 |   |
| Nonprime Mortgage Loans  |       |                                                                                    | (17,373    | ) |   | (165,493 | ) | (182,866 | ) |
| Prime Home Equity Loans: |       |                                                                                    |       |   |   |   |   |   |   |
| Initial sales            |       |                                                                                    | 46,127     |   |   | 13,844 |   | 59,971 |   |
| Subsequent draws         |       |                                                                                    | 2,356      |   |   | (10,581 | ) | (8,225 | ) |
|                     |       |                                                                                    | 48,483     |   |   | 3,263 |   | 51,746 |   |
| Total Production Sector  |       |                                                                                    | 208,694    |   |   | (336,262 | ) | (127,568 | ) |
| Reperforming  loans      |       |                                                                                    | (2,028     | ) |   | — |   | (2,028 | ) |
| Total Mortgage  Banking  |       |                                                                                    | $          | 206,666 |   |   | $ | (336,262 | ) | $ | (129,596 | ) |

 

Gain on sale of Prime Mortgage Loans increased in thequarter ended March 31, 2007 as compared to the quarter ended March 31,2006, due primarily to higher sales, partially offset by decreased margins onsuch loans. The decline in margins was due to reduced sales of higher-marginpay-option products.

Gain on sale of Nonprime Mortgage Loans decreased inthe quarter ended March 31, 2007 as compared to the year-ago period dueprimarily to the write-down of $217.8 million related largely to the transferof $906.9 million Nonprime Mortgage Loans held for sale to loans held forinvestment. These loans had declined in value as a result of deterioratingmarket conditions, specifically higher investor yield requirements as well asincreased loss assumptions. The negative effect of this write-down waspartially offset by a $92.3 million gain in credit default swaps, whichare used to mitigate credit spread risk. Also contributing to the decline ingain on sale of Nonprime Mortgage Loans was a reduction in the volume of loanssold in the quarter ended March 31, 2007 compared to the quarter ended March 31,2006.

Gain on sale of Prime HomeEquity Loans increased in the quarter ended March 31, 2007 as compared tothe year-ago period due primarily to an increase in sales, and to a lesserextent an increase in the margins of such loans.

47

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***Net Interest Income and Provision for Loan Losses***

Netinterest income is summarized below:

| ** **                                           | ** ** | **Quarters Ended  March 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                           | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| ** **                                           | ** ** | **(in thousands)**                 | ** ** |
| Net interest  income (expense):                      |       |                                    |       |   |   |
| Banking Segment loans and securities                 |       | $                                       | 510,753    |   | $ | 437,908 |   |
| Mortgage Banking Segment:                            |       |                                    |       |   |   |
| Loans and securities                                 |       | 110,383                                 |       | 148,838 |   |
| Loan Servicing Sector:                               |       |                                    |       |   |   |
| Net interest income on custodial balances            |       | 203,820                                 |       | 160,027 |   |
| Interest expense                                     |       | (228,524                                | )          | (145,882 | ) |
| Capital Markets Segment securities inventory         |       | 24,480                                  |       | 32,363 |   |
| Other                                                |       | 110,025                                 |       | 61,181 |   |
| Net interest income                                  |       | 730,937                                 |       | 694,435 |   |
| Provision for loan losses                            |       | (151,962                                | )          | (63,138 | ) |
| Net interest  income after provision for loan losses |       | $                                       | 578,975    |   | $ | 631,297 |   |

 

The increase in net interest income from the BankingSegment was attributable to both an increase in the net interest margin andgrowth in the average investment in mortgage loans and investment securities.Average interest-earning assets in the Banking Segment increased to $83.6billion during the quarter ended March 31, 2007, an increase of $5.0 billion,or 6% over the year-ago period. Net interest margin increased to 2.44%during the quarter ended March 31, 2007, from 2.23% during the year-agoperiod primarily as a result of a smaller interest rate repricing lag comparedto the prior period as well as a smaller proportion of pay-option ARM loanswith reduced introductory interest rates.

The decrease in net interest income from MortgageBanking Segment loans and securities reflects a decrease in the averageinventory from the year-ago period and a decrease in net interest margin fromthe year-ago period. The Mortgage Banking Segment loan and securities inventoryis primarily financed with borrowings tied to short-term indices. Short-terminterest rates rose more than long-term mortgage interest rates between theyear-ago period and the quarter ended March 31, 2007, reducing the netinterest margin.

Net interest income from custodial balances increasedin the current period due to an increase in the earnings rate from 4.73% duringthe quarter ended March 31, 2006 to 5.11% during the quarter ended March 31,2007, and by an increase of $3.4 billion in average custodial balances from theyear-ago period. Interest income on custodial balances is reduced by theinterest we are required to pass through to security holders on paid-off loans,which was $88.2 million and $70.0 million in the quarters ended March 31,2007 and 2006, respectively.

Interest expense allocated to the Loan ServicingSector increased primarily due to the effect of rising interest rates, combinedwith an increase in total Servicing Sector assets.

The decrease in net interest income from the CapitalMarkets securities portfolio is attributable to a decrease in the net interestmargin from 0.27% in the quarter ended March 31, 2006 to 0.14% in thequarter ended March 31, 2007, partially offset by a 46% increase in theaverage inventory of securities held. The decrease in the net interest marginearned on the securities portfolio is primarily due to a larger increase inshort-term financing rates compared to the increase in rates on the longer-termsecurities held by the Capital Markets Segment. The decline in net interestincome was more than offset by an increase in gain on sale.

48

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The increase in theprovision for loan losses was due to rising delinquencies combined with higherestimates of defaults and seasoning of the Banking Segment’s loan portfolio,and to a lesser extent to deteriorating credit performance of loans held forinvestment in our Mortgage Banking Segment.

***Loan Servicing Fees and Other Income from MSRs andRetained Interests***

Loanservicing fees and other income from MSRs and retained interests are summarizedbelow:

| ** **                                                             | ** ** | **Quarters Ended  March 31,** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                             | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| ** **                                                             | ** ** | **(in thousands)**                 | ** ** |
| Servicing fees,  net of guarantee fees(1)                              |       | $                                       | 1,038,643  |   | $ | 913,462 |   |
| Income from  retained interests                                        |       | 148,322                                 |       | 133,973 |   |
| Late charges                                                           |       | 90,273                                  |       | 67,341 |   |
| Prepayment  penalties                                                  |       | 78,796                                  |       | 53,786 |   |
| Global Operations  Segment subservicing fees                           |       | —                                  |       | 11,322 |   |
| Ancillary fees                                                         |       | 31,255                                  |       | 20,003 |   |
| Total loan  servicing fees and income from MSRs and retained interests |       | $                                       | 1,387,289  |   | $ | 1,199,887 |   |

----

(1)          Includes contractuallyspecified servicing fees.

The increase in servicing fees, net of guarantee fees,was principally due to a 17% increase in the average servicing portfolio,partially offset by a decrease in the overall annualized net service fee earnedfrom 0.326% of the average portfolio balance during the quarter ended March 31,2006 to 0.316% during the quarter ended March  31, 2007.

The increase in incomefrom retained interests was due primarily to a 17% increase in the averageinvestment in these assets from the quarter ended March  31, 2006 tothe quarter ended March  31, 2007 partially offset by a reduction inthe yield on such instruments from 18% in the year ago quarter to 17% in thecurrent quarter. Income from retained interests excludes any impairment chargesor recoveries, which are included in impairment of retained interests in theconsolidated statement of earnings. These investments include interest-only,principal-only and residual securities that arise from the securitization ofmortgage loans, primarily Nonprime Mortgage and Prime Home Equity Loans.

***Realization of Expected Cash Flows from MortgageServicing Rights***

The change in fair valueof MSRs that is included in earnings for the quarters ended March 31, 2007and 2006 consists of two primary components—a reduction in fair value due tothe realization of expected cash flows from the MSRs and a change in fair valueresulting from changes in interest rates and other market factors. Therealization of expected cash flows from MSRs resulted in a value reduction of$924.7 million and $738.6 million during the quarters ended March 31, 2007and 2006, respectively.

***Change in Fair Value of Mortgage Servicing Rights***

We recorded an increase inthe fair value of the MSRs in the quarter ended March 31, 2007 of$179.0 million, primarily as a result of the effect of a steepening yieldcurve during the quarter which lowered expected future prepayment speeds. Werecorded an increase in the fair value of the MSRs in the quarter ended March 31,2006 of $978.3 million due to increasing mortgage rates during that period.

***Impairment of Retained Interests***

In the quarter ended March 31, 2007, werecognized impairment of retained interests of $429.6 million. Impairmentcharges of $231.0 million were related to nonprime and related residualinterests and 

49

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$135.3 million wererelated to subordinated interests on prime home equity lines of creditsecuritizations. These impairment charges were driven by increased estimatesfor future losses on the loans underlying these securities as well as increasedmarket yield requirements for the nonprime securities. In addition, werecognized impairment of $63.3 million on other retained interests where we didnot retain credit risk as a result of increased market yield requirements.

In the quarter ended March 31,2006, we recognized impairment of retained interests of $120.7 million. Thecollateral underlying certain of these residuals is fixed-rate while thepass-through rate is floating. An increase in projected short-term interestrates during the period caused compression of the spread on such residuals,which resulted in a decline in their value.

***Servicing Hedge Losses***

The Servicing Hedge is designed to supplement themacro hedge and to offset a portion of the change in value of MSRs and retainedinterests recorded in current period earnings. The values of the derivatives andsecurities that are the primary components of the Servicing Hedge are tied tolong-term mortgage, swap and Treasury rates. These rates decreased slightlyduring the quarter ended March 31, 2007. In addition, the Company usescredit default swaps to moderate a negative impact on earnings caused by creditspread-driven declines in fair value. During the current quarter, creditspreads widened, resulting in a gain related to the credit default swaps. As aresult, the Servicing Hedge realized a loss of $113.7 million, including $125.0million of time value decay of the options included in the Servicing Hedge (our“hedge cost”) and a $57.2 million gain related to the credit default swaps.

In the quarter ended March 31, 2006, long-termmortgage, swap and Treasury rates increased. As a result, the Servicing Hedgeincurred a loss of $885.9 million, including $133.0 million of hedge cost.

In a stable interest rateenvironment, we expect to incur no significant declines in value of MSRs otherthan recovery of our investment through the realization of cash flows. However,we expect to incur hedge costs. The level of Servicing Hedge gains or losses inany period depends on various factors such as the size and composition of thehedge, the shape of the yield curve and the level of implied interest ratevolatility.

***Net Insurance Premiums Earned***

An increase in premiumsearned on the lender-placed and voluntary auto insurance lines of businessalong with an increase in reinsurance premiums earned contributed to the$54.4 million increase in net insurance premiums earned.

***Other Revenue***

Otherrevenue consisted of the following:

| ** **                                          | ** ** | **Quarters Ended  March 31,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                          | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| ** **                                          | ** ** | **(in thousands)**                 | ** ** |
| Appraisal fees,  net                                |       | $                                       | 40,135     |   | $ | 31,262 |   |
| Credit report  fees, net                            |       | 18,138                                  |       | 19,346 |   |
| Title services                                      |       | 14,353                                  |       | 9,934 |   |
| Insurance agency  commissions                       |       | 8,661                                   |       | 7,340 |   |
| Increase in cash  surrender value of life insurance |       | 4,790                                   |       | 6,589 |   |
| Global Operations  Segment processing fees          |       | 1,669                                   |       | 10,247 |   |
| Other                                               |       | 72,523                                  |       | 45,885 |   |
| Total other  revenue                                |       | $                                       | 160,269    |   | $ | 130,603 |   |

 

50

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Global Operations Segmentprocessing fees decreased during the quarter ended March 31, 2007 ascompared to the year-ago period due to the termination of our joint venturewith Barclays Bank, PLC.

***Compensation Expenses***

Compensationexpenses were virtually unchanged in the quarter ended March 31, 2007 ascompared to the year-ago period. Details are presented below:

| ** **                          | ** ** | **Quarters Ended  March 31,** | ** ** |
|-------------------------------------|------------|-----------------------------------------|------------|
| ** **                          | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| ** **                          | ** ** | **(in thousands)**                 | ** ** |
| Base salaries                       |       | $                                       | 573,752    |   | $ | 553,828 |   |
| Incentive bonus  and commissions    |       | 446,943                                 |       | 456,299 |   |
| Payroll taxes and  other benefits   |       | 223,975                                 |       | 222,860 |   |
| Deferral of loan  origination costs |       | (169,262                                | )          | (158,169 | ) |
| Total  compensation expenses        |       | $                                       | 1,075,408  |   | $ | 1,074,818 |   |

 

Averageworkforce by segment is summarized below:

| ** **                                    | ** ** | **Quarters Ended  March 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| Mortgage Banking                              |       | 40,541                                  |       | 40,213 |   |
| Banking                                       |       | 2,011                                   |       | 2,220 |   |
| Capital Markets                               |       | 928                                     |       | 712 |   |
| Insurance                                     |       | 2,049                                   |       | 2,144 |   |
| Global Operations                             |       | 2,872                                   |       | 2,411 |   |
| Corporate  Administration                     |       | 6,818                                   |       | 6,893 |   |
| Average  workforce, including temporary staff |       | 55,219                                  |       | 54,593 |   |

 

In the Loan Production Sector, compensation expensesdecreased $12.1 million, or 2%, before the deferral of loan origination costs,because of a change in product and channel mix partially offset by a 2%increase in average staff to support our capacity growth efforts.

 

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The decrease in compensation expense in the LoanProduction Sector was partially offset by a $10.9 million increase incompensation expense in the Capital Markets Segment due to an increase in theaverage headcount, relating to new lines of business.

Incremental direct costsassociated with the origination of loans are deferred when incurred. Subsequenttreatment of these costs is based on whether the loans are held for sale orheld for investment. If the loan is sold, the costs deferred are included as acomponent of gain on sale in the period sold; if the loan is held forinvestment, the deferred costs are amortized to interest income over the lifeof the loan. Deferral of loan origination costs increased due to an increase inthe volume of loans produced.

***Occupancy and Other Office Expenses***

Occupancyand other office expenses are summarized below:

| ** **                                 | ** ** | **Quarters Ended  March 31,** | ** ** |
|--------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                 | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                 | ** ** |
| Office and  equipment rentals              |       | $                                       | 66,398     |   | $ | 52,951 |   |
| Depreciation  expense                      |       | 57,311                                  |       | 47,771 |   |
| Utilities                                  |       | 40,613                                  |       | 40,189 |   |
| Postage and  courier service               |       | 25,151                                  |       | 25,217 |   |
| Office supplies                            |       | 19,949                                  |       | 22,425 |   |
| Repairs and  maintenance                   |       | 16,304                                  |       | 16,431 |   |
| Dues and  subscriptions                    |       | 15,100                                  |       | 15,695 |   |
| Other                                      |       | 23,387                                  |       | 24,652 |   |
| Total occupancy  and other office expenses |       | $                                       | 264,213    |   | $ | 245,331 |   |

 

Occupancy and other officeexpenses for the quarter ended March 31, 2007 increased by 8%, or $18.9million, reflecting growth in facilities acquired to accommodate plannedgrowth.

***Insurance Claim Expenses***

Insurance claim expenseswere $57.3 million for the quarter ended March 31, 2007 as compared to$124.0 million for the year-ago period. The decrease in insurance claimexpenses was driven by a $74.0 million reversal of loss reserves related to thereinsurance 2003 books of business, on which negligible remaining loss exposurewas deemed to exist in the first quarter of 2007. This compares to a reversalof $5.0 million of loss reserves related to the reinsurance 2002 books ofbusiness in the year-ago quarter.

***Advertising and Promotion Expenses***

Advertising and promotionexpenses increased 16% from the quarter ended March 31, 2006, as a result ofthe increasing competition for lending business as the mortgage market volume declines.

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***Other Operating Expenses***

Otheroperating expenses are summarized below:

| ** **                                           | ** ** | **Quarters Ended  March 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                           | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| ** **                                           | ** ** | **(in thousands)**                 | ** ** |
| Insurance  commission expense                        |       | $                                       | 49,872     |   | $ | 45,382 |   |
| Legal,  consulting, accounting and auditing expenses |       | 38,525                                  |       | 50,362 |   |
| Insurance                                            |       | 36,310                                  |       | 14,732 |   |
| Travel and  entertainment                            |       | 21,086                                  |       | 36,357 |   |
| Taxes and  licenses                                  |       | 17,362                                  |       | 15,365 |   |
| Software  amortization and impairment                |       | 17,239                                  |       | 14,418 |   |
| Losses on  servicing-related advances                |       | 9,753                                   |       | 12,324 |   |
| Other                                                |       | 74,216                                  |       | 48,892 |   |
| Deferral of loan  origination costs                  |       | (26,325                                 | )          | (25,668 | ) |
| Total other  operating expenses                      |       | $                                       | 238,038    |   | $ | 212,164 |   |

 

The increase in operatingexpenses reflects an increase in purchased mortgage insurance expense relatingto the Banking Operations portfolio of loans held for investment of $11.1million and overall growth in the Company during the quarter ended March 31,2007.

**Quantitative andQualitative Disclosures About Market Risk**

The primary market risk facing the Company is interestrate risk, which includes the risk that changes in interest rates will resultin changes in the value of our assets or liabilities (“price risk”) and therisk that net interest income from our mortgage loan and investment portfolioswill change in response to changes in interest rates. The overall objective ofour interest rate risk management activities is to reduce the variability ofearnings caused by changes in interest rates. Our Corporate Asset/LiabilityManagement Committee, which is comprised of several of the Company’s seniorfinancial executives, is responsible for management of this risk.

We manage price risk through the naturalcounterbalance of our loan production and servicing businesses. We also usevarious financial instruments, including derivatives, to manage price riskrelated specifically to the values of our IRLC, mortgage loans and MBS heldpending sale (“Mortgage Loan Inventory”), MSRs and retained interests andtrading securities, as well as a portion of our debt.

We manage interest raterisk in our Banking Segment by funding the segment’s interest-earning assetswith liabilities of similar duration or a combination of derivative instrumentsand certain liabilities that create repricing characteristics that more closelyreflect the repricing behaviors of those assets than of the liabilities alone.

***Impact of Changes in Interest Rates on the Net Valueof the Company’s Interest Rate-Sensitive Financial Instruments***

We perform various sensitivity analyses that quantifythe net financial impact of changes in interest rates on our interestrate-sensitive assets, liabilities and commitments. These analyses incorporateassumed changes in the interest rate environment, including selectedhypothetical, instantaneous parallel shifts in the yield curve.

We employ various commonly used modeling techniques tovalue our financial instruments in connection with these sensitivity analyses.For mortgage loans, MBS, MBS forward contracts, collateralized mortgageobligations, interest-only securities and MSRs, we use option-adjusted spread 

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models. The primaryassumptions used in these models for the purpose of these sensitivity analysesare the prepayment speeds and implied market volatility of interest rates. Foroptions and interest rate floors, we use an option-pricing model. The primaryassumption used in this model is implied market volatility of interest rates.For retained interests, with the exception of interest-only securities we use azero volatility discounted cash flow model. The primary assumptions used inthese models are prepayment rates, discount rates and credit losses.

Thefollowing table summarizes the estimated change in fair value of our interest-rate-sensitiveassets, liabilities and commitments as of March 31, 2007, given severalhypothetical, (instantaneous) parallel shifts in the yield curve:

| ** **                                                            | ** ** | **Change in Fair Value** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------|------------|
| **Change in Interest Rate (basis points)**   | ** ** | ** **                              | ** ** | **-100** | ** ** | **-50** | ** ** | **+50** | ** ** | **+100** | ** ** |
| ** **                                                            | ** ** | **(in millions)**                  | ** ** |
| MSRs and financial  instruments:                                      |       |                                    |       |   |   |   |   |   |   |
| MSRs and retained interests                                           |       | $                                       | (3,651     | ) | $ | (1,671 | ) | $ | 1,308 |   | $ | 2,232 |   |
| Impact of  Servicing Hedge:                                           |       |                                    |       |   |   |   |   |   |   |
| Mortgage-based                                                        |       | 523                                     |       | 260 |   | (257 | ) | (510 | ) |
| Swap-based                                                            |       | 3,043                                   |       | 1,306 |   | (846 | ) | (1,357 | ) |
| Treasury-based                                                        |       | 400                                     |       | 154 |   | (45 | ) | (69 | ) |
| MSRs and retained interests, net                                      |       | 315                                     |       | 49 |   | 160 |   | 296 |   |
| Interest rate lock commitments                                        |       | 330                                     |       | 236 |   | (398 | ) | (888 | ) |
| Mortgage Loan Inventory                                               |       | 1,019                                   |       | 676 |   | (952 | ) | (2,082 | ) |
| Impact of  associated derivative instruments:                         |       |                                    |       |   |   |   |   |   |   |
| Mortgage-based                                                        |       | (1,415                                  | )          | (925 | ) | 1,278 |   | 2,778 |   |
| U.S. Treasury-based                                                   |       | 121                                     |       | 43 |   | 14 |   | 44 |   |
| Eurodollar-based                                                      |       | (76                                     | )          | (42 | ) | 60 |   | 130 |   |
| Interest rate lock commitments and Mortgage Loan  Inventory, net      |       | (21                                     | )          | (12 | ) | 2 |   | (18 | ) |
| Banking  Operations:                                                  |       |                                    |       |   |   |   |   |   |   |
| Securities portfolio                                                  |       | 200                                     |       | 131 |   | (187 | ) | (418 | ) |
| Mortgage loans held for investment                                    |       | 643                                     |       | 347 |   | (390 | ) | (819 | ) |
| Deposit liabilities                                                   |       | (355                                    | )          | (184 | ) | 194 |   | 394 |   |
| Federal Home Loan Bank advances                                       |       | (372                                    | )          | (176 | ) | 158 |   | 305 |   |
| Countrywide Bank, net                                                 |       | 116                                     |       | 118 |   | (225 | ) | (538 | ) |
| Notes payable and capital securities                                  |       | (643                                    | )          | (324 | ) | 314 |   | 603 |   |
| Impact of  associated derivative instruments:                         |       |                                    |       |   |   |   |   |   |   |
| Swap-based                                                            |       | 210                                     |       | 108 |   | (111 | ) | (227 | ) |
| Notes payable and capital securities, net                             |       | (433                                    | )          | (216 | ) | 203 |   | 376 |   |
| Insurance company investment portfolios                               |       | 54                                      |       | 28 |   | (30 | ) | (61 | ) |
| Net change in  fair value related to MSRs and financial instruments   |       | $                                       | 31         |   | $ | (33 | ) | $ | 110 |   | $ | 55 |   |
| Net change in fair value  related to broker-dealer trading securities |       | $                                       | 35         |   | $ | 18 |   | $ | (18 | ) | $ | (39 | ) |
|                                                                       |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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Thefollowing table summarizes the estimated change in fair value of the Company’sinterest-rate-sensitive assets, liabilities and commitments as of December 31,2006, given selected hypothetical (instantaneous) parallel shifts in the yieldcurve:

| ** **                                                               | ** ** | **Change in Fair Value** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| **Change in Interest Rate (basis points)**      | ** ** | ** **                              | ** ** | **-100** | ** ** | **-50** | ** ** | **+50** | ** ** | **+100** | ** ** |
| ** **                                                               | ** ** | **(in millions)**                  | ** ** |
| Net change in  fair value related to MSRs and financial instruments |       | $                                       | 205        |   | $ | (32 | ) | $ | 94 |   | $ | (21 | ) |
| Net change in fair value  related to broker-dealer trading securities    |       | $                                       | 26         |   | $ | 16 |   | $ | (17 | ) | $ | (40 | ) |
|                                                                          |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

These sensitivity analysesare limited in that they were performed at a particular point in time; arebased on the hedge position in place at that particular point in time; onlycontemplate certain movements in interest rates; do not incorporate changes ininterest rate volatility or changes in the relationship of one interest rateindex to another; are subject to the accuracy of various assumptions used,including prepayment forecasts and discount rates; and do not incorporate otherfactors that would impact the Company’s overall financial performance in suchscenarios, most significantly the impact of changes in loan production earningsthat result from changes in interest rates. Not all of the changes in fairvalue would affect current period earnings. For example, changes in fair valueof securities accounted for as available-for-sale securities are recognized asa component of shareholders’ equity, net of income taxes, and our debt iscarried at its unpaid balances net of issuance discount or premium. Absenthedge accounting, changes in the market value of our debt are not recorded incurrent-period earnings. For these reasons, the preceding estimates should notbe viewed as an earnings forecast.

***Market Risk—Foreign Currency Risk***

To diversify our fundingsources on a global basis, we issue medium-term notes denominated in foreigncurrency in addition to U.S. dollars. We manage the associated foreign currencyrisk through cross-currency swap transactions. The terms of the cross-currencyswaps have the effect of converting all foreign currency-denominatedmedium-term notes into U.S. dollar obligations, thereby eliminating theassociated foreign currency risk. As a result, potential changes in theexchange rates of foreign currencies denominating such medium-term notes wouldnot have a net financial impact on future earnings, fair values or cash flows.

**Credit RiskManagement**

Credit risk is thepotential for financial loss resulting from the failure of a borrower or aninstitution to honor its contractual obligations to us. Credit risk arises inmany of our business activities including lending activities, securitiestrading activities and interest rate risk management activities. We activelymanage credit risk to maintain credit losses within levels that achieve ourprofitability and return on capital objectives while meeting our expectationsfor consistent financial performance.

***Sale of Loans—Representations and Warranties***

Nearly all of the mortgageloans that we originate or purchase in our Mortgage Banking and Capital MarketsSegments are sold into the secondary mortgage market primarily in the form ofsecurities, and to a lesser extent as whole loans. In connection with suchsales, we have liability under the representations and warranties we make topurchasers and insurers of the loans. In the event of a breach of suchrepresentations and warranties, we may be required to either repurchase themortgage loans with the identified defects or indemnify the investor orinsurer. In such cases, we bear any subsequent credit loss on the mortgageloans. Our representations and warranties are generally not subject to statedlimits. However, our contractual liability arises only when the representationsand warranties are breached. We attempt to limit our risk of incurring theselosses by structuring our operations to ensure consistent 

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productionof quality mortgages and servicing those mortgages at levels that meet orexceed secondary mortgage market standards. We make significant investments inpersonnel and technology to ensure the quality of our mortgage loan production.The liability for this recourse resulting from a breach of our representationsand warranties totaled $365.3 million and $390.2 million at March 31,2007 and December 31, 2006, respectively. The decrease in this liabilityis due to charge-offs partially offset by a provision of $17.0 million relatedto loan sales in the current period.

***Securitization Credit Recourse***

When we securitize our mortgage loans, we may retaincredit risk. As described in more detail in our 2006 Annual Report, the degreeto which credit risk on the underlying loans is transferred through thesecuritization process depends on the structure of the securitization. OurPrime Mortgage Loans generally are securitized on a non-recourse basis, whilePrime Home Equity and Nonprime Mortgage Loans generally are securitized withlimited recourse for credit losses.

Ourexposure to credit losses related to our recourse securitization activities islimited to the carrying value of our subordinated interests and to thecontractual limit of reimbursable losses under our corporate guarantees lessthe recorded liability for such guarantees. These amounts are as follows:

| ** **                                                   | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                   | ** ** | **(in thousands)**  | ** ** |
| Subordinated  Interests:                                     |       |                     |       |                        |       |   |   |
| Prime home equity line of credit transferor’s  interest |       | $                        | 781,075    |                        |       | $ | 698,047 |   |   |
| Prime home equity residual securities                        |       | 617,276                  |       |                        | 778,574    |   |   |
| Nonprime residuals and other related securities              |       | 382,601                  |       |                        | 541,708    |   |   |
| Subordinated mortgage-backed pass-through securities         |       | 47,286                   |       |                        | 1,382      |   |   |
| Prime residual securities                                    |       | 7,714                    |       |                        | 12,756     |   |   |
|                                                         |       | $                        | 1,835,952  |                        |       | $ | 2,032,467 |   |   |
| Corporate guarantees in  excess of recorded liability        |       | $                        | 522,752    |                        |       | $ | 490,542 |   |   |

 

Expected future credit losses are considered in thedetermination of the fair value of the subordinated interests.

Thetotal credit losses realized for the quarters ended March 31, 2007 and2006 related to all of our mortgage loan sales activities are summarized asfollows:

| ** **                                                          | ** ** | **Quarters Ended  March 31,** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                          | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| ** **                                                          | ** ** | **(in thousands)**                 | ** ** |
| Nonprime and  prime securitizations with retained residual interest |       | $                                       | 84,992     |   | $ | 24,005 |   |
| Repurchased or  indemnified loans                                   |       | 41,939                                  |       | 12,616 |   |
| Prime home equity  securitizations with retained residual interest  |       | 36,326                                  |       | 11,915 |   |
| Nonprime  securitizations with corporate guarantee                  |       | 1,431                                   |       | 2,429 |   |
| Prime home equity  securitizations with corporate guarantee         |       | —                                  |       | 2,542 |   |
| VA losses in  excess of VA guarantee                                |       | 348                                     |       | 488 |   |
|                                                                |       | $                                       | 165,036    |   | $ | 53,995 |   |

 

***Portfolio Lending Activities***

In our Banking Segment,our portfolio of loans held for investment includes mortgage loans originatedor purchased for investment purposes and mortgage loan warehouse lendingadvances. In our 

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MortgageBanking Segment, loans held for investment include mortgage loans repurchaseddue to violations of representations and warranties; government-guaranteed orinsured loans repurchased from Ginnie Mae securitizations in lieu of continuingto advance delinquent principal and interest installments to security holders;and loans transferred from loans held for sale at the lower of cost or fair value.

*Mortgage LoansOriginated or Purchased for Investment*

Our portfolio of mortgage loans originated orpurchased for investment is held in our Banking Operations and consistsprimarily of Prime Mortgage and Prime Home Equity Loans, with unpaid principalbalances that amounted to $68.5 billion at March 31, 2007.

We assess a loan’s quality by considering the borrower’scredit profile and the quality of collateral securing the loan. Where aproposed loan’s combined loan-to-value ratio is higher than a specified level,which is usually 80% for conventional loans, we generally require the borrowerto supplement the collateral with primary mortgage insurance. In addition, wehave taken steps in recent years to credit enhance our investment loan portfolioby acquiring supplemental mortgage insurance coverage. As of March 31,2007, $19.8 billion of Banking Operations’ residential loan portfolio wascovered by supplemental mortgage insurance purchased by the Bank on specifiedpools of loans. The maximum coverage available under these policies on acombined basis is $851.3 million. While these policies generally providefor first loss coverage, some Bank-purchased policies require premiumadjustments if claims exceed specified levels. Furthermore, coverage limitsvary by policy, with some policies having limits at the pool level, and othersat the loan level.

Followingis a summary of our Banking Operations’ residential mortgage loans, togetherwith applicable mortgage insurance, by original combined loan-to-value ratio atMarch 31, 2007:

| ** **                                     | ** ** | **March 31, 2007** | ** ** |
|------------------------------------------------|------------|------------------------------|------------|
| **Original Combined Loan-to-Value:** | ** ** | ** **                   | ** ** | **Unpaid   Principal   Balance (“UPB”)** | ** ** | **UPB with   Lender   Purchased   Mortgage   Insurance(1)** | ** ** | **UPB with  Borrower  Purchased  Mortgage  Insurance** | ** ** |
| ** **                                     | ** ** | **(in thousands)**      | ** ** |
| < 50%                                       |       | $                            | 3,365,433  |   | $ | 505,584 |   | $ | — |   |
| 50.01 - 60.00%                                 |       | 3,003,570                    |       | 684,109 |   | — |   |
| 60.01 - 70.00%                                 |       | 7,778,325                    |       | 2,173,899 |   | — |   |
| 70.01 - 80.00%                                 |       | 23,162,959                   |       | 7,261,925 |   | — |   |
| 80.01 - 90.00%                                 |       | 19,890,928                   |       | 6,408,708 |   | 2,099,881 |   |
| 90.01 - 100.00%                                |       | 11,211,357                   |       | 2,724,271 |   | 1,209,598 |   |
| >100.00%                                    |       | 66,325                       |       | 8,080 |   | 9,744 |   |
|                                           |       | $                            | 68,478,897 |   | $ | 19,766,576 |   | $ | 3,319,223 |   |
|                                                |            |                              |            |  |  |  |  |  |  |  |  |  |

----

(1)          These amounts mayinclude loans with borrower paid mortgage insurance.

57

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Nonperformingassets (comprised of non-accrual loans and foreclosed assets) and the allowancefor loan losses related to mortgage loans originated or purchased forinvestment at period end are summarized as follows:

| ** **                  | ** ** | **March 31, 2007**                     | ** ** | **December 31, 2006**                      | ** ** |
|-----------------------------|------------|--------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                  | ** ** | **Amount**                                       | ** ** | **% of Banking  Operations   Assets** | ** ** | **Amount** | ** ** | **% of Banking  Operations   Assets** | ** ** |
| ** **                  | ** ** | **(dollar amounts in thousands)** | ** ** |
| Nonaccrual loans:           |       |                                             |       |                                                 |       |   |   |   |   |   |   |   |   |
| Residential                 |       | $                                                | 693,850    |                                                 |       | 0.82 | % |   | $ | 519,083 |   |   | 0.63 | % |   |
| Foreclosed real  estate:    |       |                                             |       |                                                 |       |   |   |   |   |   |   |   |   |
| Residential                 |       | 110,059                                          |       |                                                 | 0.13       | % |   | 27,416 |   |   | 0.03 | % |   |
| Total  nonperforming assets |       | $                                                | 803,909    |                                                 |       | 0.95 | % |   | $ | 546,499 |   |   | 0.66 | % |   |

 

| ** **                              | ** ** | **Amount** | ** ** | **% of   Nonaccrual   Loans** | ** ** | **Amount** | ** ** | **% of   Nonaccrual   Loans** | ** ** |
|-----------------------------------------|------------|------------|------------|----------------------------------------------|------------|------------|------------|----------------------------------------------|------------|
| Allowances for credit  losses:          |       |       |       |                                         |       |       |       |                                         |       |   |   |   |   |
| Allowance for  loan losses:             |       |       |       |                                         |       |       |       |                                         |       |   |   |   |   |
| Residential                             |       | $          | 318,083    |                                         |       | 45.84      | %          |                                         | $          | 228,692 |   |   | 44.06 | % |   |
| Liability for unfunded loan commitments |       | 13,759     |       |                                         |       |       |       | 8,104                                        |       |   |   |   |   |
| Total allowances for  credit losses     |       | $          | 331,842    |                                         |       | 47.83      | %          |                                         | $          | 236,796 |   |   | 45.62 | % |   |

 

| ** **          | ** ** | **Quarter Ended  March 31, 2007** | ** ** | **Quarter Ended  March 31, 2006**                    | ** ** |
|---------------------|------------|--------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **          | ** ** | **Amount**                                       | ** ** | **Net Charge-offs  as % Average  Investment  Loans** | ** ** | **Amount** | ** ** | **Net Charge-offs  as % Average  Investment  Loans** | ** ** |
| Net charge-offs:    |       |                                             |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Banking  Operations |       | $                                                | 33,057     |                                                                |       | 0.19 | % |   |   | $ | 6,665 |   |   |   | 0.04 | % |   |
|                     |            |                                                  |            |                                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The increase in our nonperforming assets and theincrease in the allowance for loan losses from the year-ago period reflectprevailing real estate market and economic conditions and the growth andseasoning of our investment loan portfolio. We expect the level ofnonperforming assets and credit losses to increase, both in absolute terms andas a percentage of our loan portfolio as our loan portfolio continues to seasonand as current market conditions develop. However, we believe that ourinvestment criteria have provided us with a high quality investment portfolioand that our credit losses should remain within acceptable levels.

The provision for loan lossesand the related allowance for loan losses are affected by many factors,including economic conditions (for example, housing prices, interest rates andunemployment rates), the borrower’s credit profile, the loan’s paymentrequirements, loan seasoning and prepayments and the level of purchased creditenhancement.

***Mortgage Warehouse Lending Advances***

We hold a portfolio of commercial loans made to othermortgage lenders to finance their inventories pending sale to Countrywide andother lenders. Our portfolio of mortgage loan warehouse advances totaled$2.8 billion and the average loan balance was $19.8 million at March 31,2007. These loans are underwritten by assessing the creditworthiness of theborrowers. This includes reviewing both borrower-provided financial informationand publicly available credit rating information and press coverage, as well asunderstanding the borrowers’ operational controls and product risk andassessments of collateral. We 

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monitorthe length of time that advances are outstanding against specific loans and mayrequire the borrower to pay off aged advances. We also monitor the fair valueof our collateral to ensure that the level of collateral posted is adequate torepay our advance in the event of default by our borrower and we may requireour warehouse lending borrowers to post specified levels of cash collateral tosupplement the mortgage loan collateral. We also regularly review updatedfinancial information of borrowers, including pipeline and hedging positions.We incurred no credit losses related to this activity during the quarter ended March 31,2007.

***Other Mortgage Loans Held for Investment***

Other loans held forinvestment are in our Mortgage Banking Segment and include loans we haverepurchased—either to remedy a violation of a representation or warranty madein a loan sale, to minimize the cost of servicing a severely delinquent loaninsured or partially guaranteed by the FHA or VA or in connection with aclean-up call. We make provisions for losses that may arise from breaches ofrepresentations and warranties when we record the sale of these loans and weadjust our estimates for losses on these loans quarterly. We record such loansat fair value when they are repurchased and any resulting loss is chargedagainst the liability we established when the loans were sold. We may determinethat a small percentage of the loans that we originate or purchase for salewill not be sold because of a defect, which may include a document deficiency,changes in secondary market conditions or deterioration of the credit status ofthe loan while it was held for sale. Such loans are transferred to the held forinvestment category at the lower of cost or fair value and any loss is recordedas a component of gain on sale of loans or securities in current periodearnings. Subsequent losses that may result from deteriorations in the creditquality of the loans are included in our provision for loan losses.

***Mortgage Loans Held for Sale***

At March 31, 2007, mortgage loans held for saleamounted to $32.3 billion. While the loans are in inventory of the MortgageBanking and Capital Markets Segments, we bear credit risk after taking intoconsideration primary mortgage insurance (which is generally required forconventional loans with a loan-to-value ratio greater than 80%), FHA insuranceor VA guarantees. These loans are carried at the lower of cost or market value,which incorporates a reduction in value for impaired loans.

A small portion of loans held for sale have beenplaced on nonaccrual status. This includes distressed loans that are generallypurchased at a discount as part of the conduit activities of the CapitalMarkets Segment and loans whose credit quality has deteriorated during the timethat they have been held for sale.

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Nonperformingassets, which includes loans held for investment (other than those originatedor purchased for investment), loans held for sale that have been placed onnonaccrual and foreclosed assets, and the allowance for loan losses aresummarized as follows:

| ** **                                                             | ** ** | **March 31, 2007**                     | ** ** | **December 31, 2006** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                             | ** ** | **Amount**                                       | ** ** | ** **                      | ** ** | **Amount** | ** ** | ** ** | ** ** |
| ** **                                                             | ** ** | **(dollar amounts in thousands)** | ** ** |
| Non-accrual loans(1)(2):                                               |       |                                             |       |                            |       |   |   |   |   |   |   |   |   |
| Residential                                                            |       |                                             |       |                            |       |   |   |   |   |   |   |   |   |
| Loans held for investment—credit risk retained by  Countrywide(3) |       | $                                                | 139,388    |                            |       |   |   |   | $ | 158,802 |   |   |   |   |   |
| Commercial                                                             |       | —                                           |       |                            |       |   |   | — |   |   |   |   |   |
| Total non-accrual loans                                                |       | 139,388                                          |       |                            |       |   |   | 158,802 |   |   |   |   |   |
| Foreclosed real estate:                                                |       |                                             |       |                            |       |   |   |   |   |   |   |   |   |
| Other                                                                  |       |                                             |       |                            |       |   |   |   |   |   |   |   |   |
| Residential                                                            |       | 276,160                                          |       |                            |       |   |   | 223,747 |   |   |   |   |   |
| Commercial                                                             |       | —                                           |       |                            |       |   |   | — |   |   |   |   |   |
| Total foreclosed real estate                                           |       | 276,160                                          |       |                            |       |   |   | 223,747 |   |   |   |   |   |
| Total nonperforming  assets                                            |       | $                                                | 415,548    |                            |       |   |   |   | $ | 382,549 |   |   |   |   |   |

 

| ** **                      | ** ** | **Amount** | ** ** | **% of   Nonaccrual   Loans** | ** ** | **Amount** | ** ** | **% of   Nonaccrual   Loans** | ** ** |
|---------------------------------|------------|------------|------------|----------------------------------------------|------------|------------|------------|----------------------------------------------|------------|
| Allowances for  loan losses(4): |       |       |       |                                         |       |       |       |                                         |       |   |   |   |   |
| Residential                     |       | $          | 41,788     |                                         |       | 29.98      | %          |                                         | $          | 19,524 |   |   | 12.29 | % |   |
| Commercial                      |       | 14,496     |       |                                         | N/M        |       |       | 12,838                                       |       |   | N/M |   |   |
|                            |       | $          | 56,284     |                                         |       | 40.38      | %          |                                         | $          | 32,362 |   |   | 20.38 | % |   |

 

| ** **                         | ** ** | **Quarter Ended  March 31, 2007** | ** ** | **Quarter Ended  March 31, 2006**                                | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **Amount**                                       | ** ** | **Net Charge-offs  as % Average   Investment   Loans** | ** ** | **Amount** | ** ** | **Net Charge-offs  as % Average   Investment   Loans** | ** ** |
| Net charge-offs:                   |       |                                             |       |                                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Mortgage  Banking & Other |       |                                             | $          | 5,592                                                                           |       |   |   | 0.44 | % |   | $ | 59,756 |   |   | 4.64 | % |   |
|                                    |            |                                                  |            |                                                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Excludes $1,233.0 millionand $1,254.9 million, at March 31, 2007 and at December 31,2006, respectively, of loans that we have the option but not the obligation torepurchase that are required to be included in our balance sheet but which wehave not exercised the option to repurchase.

(2)          Excludesnonaccrual loans that are carried on the consolidated balance sheet at thelower of cost or fair value and government-guaranteed loans held forinvestment, as shown below:

| ** **                                        | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                        | ** ** | **(in thousands)**  | ** ** |
| Loans held for  sale                              |       | $                        | 479,527    |                        |       | $ | 566,610 |   |   |
| Government  guaranteed loans, held for investment |       | 307,895                  |       |                        | 334,465    |   |   |
|                                              |       | $                        | 787,422    |                        |       | $ | 901,075 |   |   |

 

(3)          Generally these loanshave been repurchased and recorded at fair value or transferred to held forinvestment at lower of cost or fair value. Fair values incorporate the impairedstatus at the date of 

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repurchase of the loans.Losses related to subsequent deterioration in the credit quality of the loansare recorded in the allowance for loan losses.

(4)          The allowance for loanlosses excludes any reduction to the cost basis of loans recorded to reflectfair value at repurchase or transfer to held for investment.

The increase in theallowance for loan losses from December 31, 2006 is due mainly to anincrease in the allowance requirements for loans held for investment in theMortgage Banking Segment.

***Mortgage Reinsurance***

We provide mortgagereinsurance on certain mortgage loans included in our servicing portfoliothrough contracts with several primary mortgage insurance companies. Underthese contracts, we provide aggregate excess loss coverage in a mezzanine layerin exchange for a portion of the pool’s mortgage insurance premium. As of March 31,2007, approximately $94.1 billion of mortgage loans in our servicing portfolioare covered by such mortgage reinsurance contracts. The reinsurance contractsplace limits on our maximum exposure to losses. At March 31, 2007, themaximum aggregate losses under the reinsurance contracts were limited to $931.8million. We are required to pledge securities to cover this potentialliability. For the quarter ended March 31, 2007, we did not experience anylosses under our reinsurance contracts.

***Counterparty Credit Risk***

We have exposure to credit loss in the event ofcontractual non-performance by our trading counterparties and counterparties toour various over-the-counter derivative financial instruments. We manage thiscredit risk by selecting only counterparties we believe to be financiallystrong, spreading the credit risk among many such counterparties, by placingcontractual limits on the amount of unsecured credit extended to any singlecounterparty and by entering into netting agreements with the counterparties,as appropriate.

Theaggregate amount of counterparty credit exposure after consideration ofrelevant netting agreements at March 31, 2007, before and after collateralheld by us, was as follows:

| ** **                                        | ** ** | **March 31,**     | ** ** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|------------|
| ** **                                        | ** ** | **2007**               | ** ** | **2006**   | ** ** | ** ** |
| ** **                                        | ** ** | **(in millions)** | ** ** | ** ** |
| Aggregate credit  exposure before collateral held |       | $                      | 1,439      |       | $ | 701 |   |   |
| Less: collateral  held                            |       | (914                   | )          | (362       | ) |   |
| Net aggregate unsecured  credit exposure          |       | $                      | 525        |       | $ | 339 |   |   |

 

For the quarters ended March 31, 2007 and 2006,we incurred no credit losses due to non-performance of any of ourcounterparties.

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**Loan Servicing**

Thefollowing table sets forth certain information regarding our servicingportfolio of single-family mortgage loans, including loans held for sale, loansheld for investment and loans serviced under subservicing agreements, for theperiods indicated.

| ** **                           | ** ** | **Quarters Ended  March 31,** | ** ** |
|--------------------------------------|------------|-----------------------------------------|------------|
| ** **                           | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| ** **                           | ** ** | **(in millions)**                  | ** ** |
| Beginning owned  servicing portfolio |       | $                                       | 1,280,119  |   | $ | 1,081,189 |   |
| Add: Residential loan  production(1) |       | 113,338                                 |       | 104,971 |   |
| Purchased  MSRs (bulk acquisitions)  |       | 12,437                                  |       | 101 |   |
| Less: Principal  repayments          |       | (70,554                                 | )          | (59,782 | ) |
| Ending owned servicing  portfolio    |       | 1,335,340                               |       | 1,126,479 |   |
| Subservicing portfolio               |       | 16,258                                  |       | 26,172 |   |
| Total servicing  portfolio           |       | $                                       | 1,351,598  |   | $ | 1,152,651 |   |
| MSR portfolio                        |       | $                                       | 1,242,111  |   | $ | 1,024,220 |   |
| Mortgage loans owned                 |       | 93,229                                  |       | 102,259 |   |
| Subservicing portfolio               |       | 16,258                                  |       | 26,172 |   |
| Total servicing portfolio            |       | $                                       | 1,351,598  |   | $ | 1,152,651 |   |

----

(1)          Excludespurchases from third parties in which servicing rights were not acquired.

| ** **                                               | ** ** | **March 31,**                              | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                               | ** ** | **2007**                                        | ** ** | **2006** | ** ** |
| ** **                                               | ** ** | **(dollar amounts in millions)** | ** ** |
| Composition of owned servicing portfolio at period  end: |       |                                            |       |   |   |
| Conventional mortgage                                    |       | $                                               | 1,112,107  |   | $ | 910,349 |   |
| Nonprime Mortgage                                        |       | 122,679                                         |       | 114,378 |   |
| Prime Home Equity                                        |       | 45,861                                          |       | 51,486 |   |
| FHA-insured mortgage                                     |       | 40,171                                          |       | 37,112 |   |
| VA-guaranteed mortgage                                   |       | 14,522                                          |       | 13,154 |   |
| Total owned portfolio                                    |       | $                                               | 1,335,340  |   | $ | 1,126,479 |   |
| Delinquent mortgage loans(1):                            |       |                                            |       |   |   |
| 30 days                                                  |       | 2.40                                            | %          | 2.02 | % |
| 60 days                                                  |       | 0.81                                            | %          | 0.64 | % |
| 90 days or more                                          |       | 1.08                                            | %          | 1.02 | % |
| Total delinquent  mortgage loans                         |       | 4.29                                            | %          | 3.68 | % |
| Loans pending  foreclosure(1)                            |       | 0.69                                            | %          | 0.47 | % |
| Delinquent mortgage loans(1):                            |       |                                            |       |   |   |
| Conventional                                             |       | 2.31                                            | %          | 2.06 | % |
| Nonprime Mortgage                                        |       | 16.67                                           | %          | 12.51 | % |
| Prime Home Equity                                        |       | 2.96                                            | %          | 1.43 | % |
| Government                                               |       | 11.06                                           | %          | 11.61 | % |
| Total delinquent  mortgage loans                         |       | 4.29                                            | %          | 3.68 | % |
| Loans pending foreclosure(1):                            |       |                                            |       |   |   |
| Conventional                                             |       | 0.36                                            | %          | 0.21 | % |
| Nonprime Mortgage                                        |       | 3.61                                            | %          | 2.35 | % |
| Prime Home Equity                                        |       | 0.11                                            | %          | 0.06 | % |
| Government                                               |       | 1.21                                            | %          | 1.08 | % |
| Total loans pending foreclosure                          |       | 0.69                                            | %          | 0.47 | % |

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(1)          Expressedas a percentage of the total number of loans serviced, excluding subservicedloans and loans purchased at a discount due to their collection status.

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We attribute the overallincrease in delinquencies in our servicing portfolio primarily to portfolioseasoning and changing economic and housing market conditions. In addition,changing borrower profiles and higher combined loan-to-value ratios contributedto the increased nonprime delinquency. We believe the delinquency rates in ourservicing portfolio are consistent with rates for similar mortgage loanportfolios in the industry.

**Liquidity and Capital Resources**

We regularly forecast ourpotential funding needs over three-month and longer horizons, taking intoaccount debt maturities and potential peak balance sheet levels. We establishreliable sources of liquidity sized to meet a range of potential future fundingrequirements. We currently have $94.4 billion in available sources ofshort-term liquidity, which represents a decrease of $2.0 billion from December 31,2006. We believe we have adequate financing capacity to meet our currentlyforeseeable needs.

As part of our ongoingcapital optimization plan, the Board of Directors has authorized a sharerepurchase program of up to $2.5 billion. In connection with this program,we repurchased $1.5 billion of our common stock in the fourth quarter of 2006financed through the issuance of enhanced trust preferred securities.

On March 12,2007, the Bank converted its charter from a national bank to a federal savingsbank. As a result of this conversion, the Company became a savings and loanholding company, and is no longer a bank holding company. As a savings and loanholding company, Countrywide Financial Corporation is no longer subject tospecific capital requirements. Countrywide Bank’s capital is calculated incompliance 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 March 31, 2007, the Bank’s regulatorycapital ratios and amounts and minimum required capital ratios for the Bank tomaintain a “well capitalized” status were as follows:

| ** **          | ** ** | **Minimum**                                      | ** ** | **Countrywide Bank** | ** ** |
|---------------------|------------|--------------------------------------------------|------------|---------------------------|------------|
| ** **          | ** ** | **Required(1)**                                  | ** ** | **Ratio**                 | ** ** | **Amount** | ** ** |
| ** **          | ** ** | **(dollar amounts in thousands)** | ** ** |
| Tier 1 Capital      |       |                                             | 5.0        | %                         |       |   | 8.1 | % |   | $ | 7,634,072 |   |
| Risk-Based Capital: |       |                                             |       |                      |       |   |   |   |   |   |   |
| Tier 1              |       |                                             | 6.0        | %                         |       |   | 13.0 | % |   | $ | 7,634,072 |   |
| Total               |       |                                             | 10.0       | %                         |       |   | 13.5 | % |   | $ | 7,927,016 |   |

----

(1)          Minimumrequired to qualify as “well capitalized.”

HadCountrywide Bank’s capital been calculated in compliance with the OTSrequirements at December 31, 2006, its regulatory capital ratios andamounts and minimum required capital ratios would have been as follows:

| ** **          | ** ** | **Minimum**                                                  | ** ** | **Countrywide Bank** | ** ** |
|---------------------|------------|--------------------------------------------------------------|------------|---------------------------|------------|
| ** **          | ** ** | **Required(1)**                                              | ** ** | **Ratio**                 | ** ** | **Amount** | ** ** |
| ** **          | ** ** | **(dollar amounts in thousands)  (Proforma)** | ** ** |
| Tier 1 Capital      |       |                                                         | 5.0        | %                         |       |   | 7.6 | % |   | $ | 7,100,439 |   |
| Risk-Based Capital: |       |                                                         |       |                      |       |   |   |   |   |   |   |
| Tier 1              |       |                                                         | 6.0        | %                         |       |   | 12.4 | % |   | $ | 7,100,439 |   |
| Total               |       |                                                         | 10.0       | %                         |       |   | 12.8 | % |   | $ | 7,337,235 |   |

----

(1)          Minimumrequired to qualify as “well capitalized.”

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Countrywide Bank is alsorequired by the OTS regulations to maintain tangible capital of at least 1.5%of assets. The Bank’s tangible capital ratio was 8.1% and 7.6% atMarch 31, 2007 and December 31, 2006, respectively.

**Cash Flows**

Cash used by operatingactivities was $2.6 billion for the quarter ended March 31, 2007, comparedto cash provided by operating activities of $3.8 billion for the quarter ended March 31,2006. Cash used by operating activities includes the cash used for theorigination and purchase of mortgage loans held for sale and the proceeds fromthe sales and principal repayments of such mortgages. We generally retainservicing rights and may retain other interests when these loans are sold. Thetransfer of the amounts retained is a non-cash investing activity. See Note 16—*Supplemental Cash Flow Information* in the financialstatement section of this report. In the quarter ended March 31, 2007funds used to originate and purchase mortgage loans exceeded proceeds from thesales of mortgage loans by $2.4 billion, which resulted in cash used byoperating activities. In the quarter ended March 31, 2006 proceeds fromthe sales and principal repayments of mortgage loans exceeded funds used tooriginate and purchase mortgage loans by $4.9 billion, which resulted incash provided by operating activities.

Net cash used by investingactivities was $4.4 billion for the quarter ended March 31, 2007, comparedto $3.0 billion for the quarter ended March 31, 2006. The increase in netcash used by investing activities was attributable to a $5.9 billion increasein net additions to investments in other financial instruments, combined with a$3.4 billion increase in securities purchased under agreements to resell,securities borrowed and federal funds sold, partially offset by a $7.9 billiondecrease in repayment (additions) to loans held for investment.

Net cash provided byfinancing activities for the quarter ended March 31, 2007 totaled$6.8 billion, compared to $0.8 billion for the quarter ended March 31,2006. In the current quarter short-term borrowings, including securities soldunder agreements to repurchase, increased $7.8 billion compared to the year-agoquarter when such borrowings declined by $6.4 billion. Partially offsetting theincrease in cash provided by short-term borrowings was a $4.0 billion reductionin cash provided by deposit liabilities and a reduction in long-term debt. Inthe quarter ended March 31, 2007, long-term debt decreased $3.1 billioncompared to an increase in long-term debt of $1.3 billion in the quarterended March 31, 2006.

**Off-Balance Sheet Arrangements and AggregateContractual Obligations**

***Off-Balance Sheet Arrangements and Guarantees***

In the ordinary course ofour business we engage in financial transactions that are not reflected on ourbalance sheet. (See Note 2—*Summary of SignificantAccounting Policies* in our 2006 Annual Report for a description ofour consolidation policy.) Such transactions are structured to manage ourinterest rate, credit or liquidity risks, to diversify funding sources or tooptimize our capital.

Most of our off-balancesheet arrangements relate to the securitization of mortgage loans. Our mortgageloan securitizations are normally structured as sales as specified by Statementof Financial Accounting Standards No. 140, *Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities* (“SFAS 140”), and as such involve the transfer of themortgage loans to qualifying special-purpose entities that are not subject toconsolidation. In a securitization, an entity transferring the assets is ableto convert those assets into cash. Special-purpose entities used in suchsecuritizations obtain cash by issuing securities representing beneficialinterests in the transferred assets to investors. In a securitization, wecustomarily provide representations and warranties with respect to, and wegenerally retain the right to service, the transferred mortgage loans.

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We also generally have theright to repurchase mortgage loans from the special-purpose entity if theremaining outstanding balance of the mortgage loans falls to a level where thecost of servicing the loans becomes burdensome in relation to the benefits ofservicing.

Our Prime Mortgage Loansgenerally are securitized on a non-recourse basis, while Prime Home Equity andNonprime Loans generally are securitized with limited recourse for creditlosses. During the quarter ended March 31, 2007, we securitized $14.6billion in Nonprime Mortgage and Prime Home Equity Loans with limited recoursefor credit losses. Our exposure to credit losses related to our limitedrecourse securitization activities is limited to the carrying value of oursubordinated interests and to the contractual limit of reimbursable lossesunder our corporate guarantees less the recorded liability for such guarantees.For a further discussion of our exposure to credit risk, see the section inthis Report entitled *Management’s Discussionand Analysis of Financial Condition and Results of Operations—Credit RiskManagement*.

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

Our material contractualobligations were summarized and included in our 2006 Annual Report. There havebeen no material changes outside the ordinary course of our business in thecontractual obligations as summarized in our 2006 Annual Report during thethree months ended March 31, 2007.

**Prospective Trends**

***United States Mortgage Market***

Over the last decade,total mortgage indebtedness in the United States has grown at an average annualrate of 11%. Over the long term, we believe that continued population growth,ongoing developments in the mortgage market and the prospect of relatively lowinterest rates support growth in the market for the foreseeable future. Some ofthe ongoing developments in the mortgage market that we believe will contributeto its growth include government-sponsored programs targeted to increasehomeownership in low-income and minority communities, the growth of prime homeequity lending as a major form of consumer finance and the increasingefficiency of the secondary mortgage market that lowers the overall cost ofhomeownership. In the short-term however, the U.S. housing market is undergoinga significant contraction and lenders and investors are tightening their creditstandards. Therefore both mortgage origination volumes and growth in totalmortgage indebtedness is likely to slow in the short-term.

Overtime, the level of complexity in the mortgage lending business has increasedsignificantly due to several factors:

·                    The continuingevolution of the secondary mortgage market and demand by borrowers has resultedin a proliferation of mortgage products

·                    Greaterregulation imposed on the industry has resulted in increased costs and the needfor higher levels of specialization

·                    Interest ratevolatility has risen over the last decade. At the same time, homeowners’propensity to refinance their mortgages has increased as the refinance processhas become more efficient and cost effective. The combined result has beenlarge swings in the volume of mortgage loans originated from year to year.These volume swings have placed significant operational and financial pressureson mortgage lenders.

To compete effectively inthis environment, mortgage lenders must have a very high level of operational,technological and managerial expertise. In addition, the residential mortgagebusiness has 

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becomemore capital-intensive and therefore access to capital at a competitive cost iscritical. Primarily because of these factors, the industry continues itsconsolidation trend.

Today, large andsophisticated financial institutions dominate the residential mortgageindustry. These industry leaders are primarily commercial banks operatingthrough their mortgage banking subsidiaries. According to the trade publication*Inside Mortgage Finance*, the topfive originators produced 51% of all loans originated during the first threemonths of the calendar year 2007, as compared to 48% during the three monthsended December 31, 2006. (Reprinted with the permission of IMF Copyrighted.All rights reserved by IMF.)

Theloan volume for the top five originators, according to *Inside Mortgage Finance*, is as follows:  (Reprinted with the permission of IMFCopyrighted. All rights reserved by IMF.):

| **Institution**           | ** ** | ** **             | ** ** | **Three Months Ended  March 31, 2007** | ** ** | **Three Months Ended  December 31, 2006** | ** ** |
|---------------------------|------------|------------------------|------------|------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                | ** ** | **(in billions)** | ** ** |
| *Countrywide*             |       |                   | $          | 115                                                        |       |                                                          |       | $ | 122 |   |   |
| Wells Fargo Home Mortgage |       |                   | 88         |                                                       |       |                                                          | 87         |   |   |
| CitiMortgage              |       |                   | 55         |                                                       |       |                                                          | 51         |   |   |
| Chase Home  Finance       |       |                   | 47         |                                                       |       |                                                          | 44         |   |   |
| Bank of America  Mortgage |       |                   | 43         |                                                       |       |                                                          | 44         |   |   |
| Total for Top  Five       |       |                   | $          | 348                                                        |       |                                                          |       | $ | 348 |   |   |

 

We believe theconsolidation trend will continue, as the aforementioned market forces willcontinue to drive out weak competitors. We believe Countrywide will benefitfrom consolidation through increased market share and enhanced ability torecruit talented personnel.

Recently, well-capitalizedWall Street investment banking firms have increased their participation in themortgage banking business. We expect the entrance of these firms to the marketplaceto increase competition in the near-term, especially in the nonconforming andnonprime loan products.

Compared to Countrywide,the other industry leaders are less reliant on the secondary mortgage market asan outlet for mortgages, due to their greater portfolio lending capacity. Thiscould place us at a competitive disadvantage in the future if either thesecondary mortgage market does not continue to provide a competitive outlet forour loans, or we are unable to sustain an adequate portfolio lending capacity.

***Housing Appreciation***

Increasing housing valuesaffect us in several ways. Rising housing values point to healthy demand forpurchase-money mortgage financing and increased average loan balances and areduction in the risk of loss on sale of foreclosed real estate in the event aloan defaults. However, as housing values appreciate, prepayments of existingmortgages tend to increase as borrowers look to monetize the additional equityin their homes. Over the last several years, the housing price index hassignificantly outpaced the consumer price index and growth in personal income.Recently, we have seen a moderation in housing price appreciation and we expecthousing values to increase at a slower rate in the coming years than in the pastseveral years. Although it is likely that certain markets will experiencehousing price depreciation, we believe that price depreciation will not persistnationwide for an extended period of time. Over the long term, we expect thathousing appreciation will be positively correlated with both consumer priceinflation and growth in personal income.

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***Secondary Mortgage Market Investor Demand***

Changes in investor demandfor mortgage loans can have a significant impact on our ability to access thesecondary mortgage market as a competitive outlet. In 2007, we have seen anincrease in investor required yields for nonprime loans together with alessening in the liquidity of such loans. During the quarter ended March 31,2007, we recorded a $217.8 million write-down of our inventory of nonprimeloans and $231.0 million impairment of our nonprime and related residuals interestsreflecting reduced appetite for these loans in the marketplace. This trend hasnegatively affected our ability and willingness to sell such loans into thesecondary mortgage market, the revenues we realize on those loans that we dosell and the availability and pricing of such loans to consumers. If this trendcontinues we may be required to record additional impairment of our credit-subordinatedsecurities backed by nonprime loans.

***Impact of Declines in Credit Performance***

With the currentcontraction in the U.S. housing market and the resulting slowdown in priceappreciation (or price depreciation in some markets), along with worseningeconomic conditions, the credit losses we experience may increase in thefuture. In 2007, we have observed a marked decline in credit performance (asadjusted for age) for recent vintages, especially those loans with higher riskcharacteristics, including limited documentation, higher loan-to-value ratiosor weak credit scores. Deterioration in the credit performance of these loanscould result in increased losses, future impairment of our relatedcredit-subordinated securities and higher claims under our representations andwarranties.

**Regulatory Trends**

The regulatoryenvironments in which we operate have an impact on the activities in which wemay engage, how the activities may be carried out and the profitability ofthose activities. Therefore, changes to laws, regulations or regulatorypolicies can affect whether and to what extent we are able to operateprofitably.

For example, proposedlocal, state and federal legislation targeted at predatory lending could havethe unintended consequence of raising the cost or otherwise reducing theavailability of mortgage credit for those potential borrowers with less thanprime-quality credit histories. This could result in a reduction of otherwiselegitimate nonprime lending opportunities. In addition, there may be futurelocal, state and federal legislation that restricts our ability to communicatewith and solicit business from current and prospective customers in such a waythat we are not able to originate new loans or sell other products at currentprofit 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 aframework for measuring fair value when such measurements are used foraccounting purposes. The framework focuses on an exit price in the principal(or, alternatively, the most advantageous) market accessible in an orderlytransaction between willing market participants. SFAS 157 establishes athree-tiered fair value hierarchy with Level 1 representing quoted prices foridentical assets or liabilities in an active market and Level 3 representingestimated values based on unobservable inputs. Under SFAS 157, relateddisclosures are segregated for assets and liabilities measured at fair valuebased 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 ofJanuary 1, 2008 and the financial impact, if any, upon adoption has notyet been determined.

In February 2007, theFASB 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 certainfinancial assets and liabilities on an individual contract basis at the time ofacquisition or at a 

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remeasurementevent date. Upon adoption of SFAS 159, fair value accounting may also beelected for existing financial assets and liabilities. For those instrumentsfor which fair value accounting is elected, changes in fair value will berecognized in earnings and fees and costs associated with origination oracquisition will be recognized as incurred rather than deferred. SFAS 159 iseffective January 1, 2008, with early adoption permitted as of January 1,2007. The Company has determined that it will adopt SFAS 159 concurrent withthe adoption of SFAS 157 on January 1, 2008, but has not yet determinedthe financial impact, if any, upon adoption.

**Factors That May Affect Our Future Results**

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

·       Projectionsof our revenues, income, earnings per share, capital structure or otherfinancial items

·       Descriptionsof our plans or objectives for future operations, products or services

·       Forecastsof our future economic performance, interest rates, profit margins and ourshare of future markets

·       Descriptionsof assumptions underlying or relating to any of the foregoing.

Forward-looking statementsgive management’s expectation about the future and are not guarantees. Wordslike “believe,” “expect,” “anticipate,” “promise,” “plan” and other expressionsor words of similar meanings, as well as future or conditional verbs such as “will,”“would,” “should,” “could” or “may” are generally intended to identifyforward-looking statements. There are a number of factors, many of which arebeyond our control, that could cause actual results to differ significantlyfrom management’s expectations. Some of these factors are discussed below.

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

Factorsthat could cause actual results to differ materially from historical results orthose anticipated include, but are not limited to the following:

·       Changesin general business, economic, market and political conditions from thoseexpected

·       Thelevel and volatility of interest rates as well as the shape of the yield curve

·       Ageneral decline in U.S. housing prices or in activity in the U.S. housingmarket

·       Increaseddelinquency rates of borrowers

·       Areduction in the availability of secondary markets for our mortgage loanproducts

·       Thefact that our accounting policies and methods are fundamental to how we reportour financial condition and results of operations, and they may requiremanagement to make estimates about matters that are inherently uncertain

·       Thelevel of competition in each of our business segments

·       Negativepublic opinion that could damage our reputation

·       Changesin U.S. GAAP or in the legal, regulatory and legislative environments inthe markets in which the Company operates

·       Incompleteor inaccurate information provided by customers and counterparties, or adversechanges in the financial condition of our customers and counterparties

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·       Operationalrisk

·       Failureto attract and retain a highly skilled workforce

·       Newlines of business or new products and services may subject us to additionalrisks

·       Increasedcost of debt or loss of access to corporate debt markets, which may be causedby, for example, a loss of investment-grade credit ratings

·       Unforeseencash or capital requirements

·       Areduction in government support of homeownership

·       Achange in our relationship with the housing-related government agencies andgovernment sponsored enterprises (“GSEs”)

·       Changesin regulations or the occurrence of other events that impact the business,operation or prospects of GSEs

·       Theability of management to effectively implement the Company’s strategies andbusiness plans

·       Theoccurrence of natural disasters or other events or circumstances that couldimpact our operations or could impact the level of claims in the InsuranceSegment.

Other risk factors aredescribed elsewhere herein as well as in other reports and documents that wefile with or furnish to the SEC including the Company’s Annual Report on Form 10-K.Other factors that could also cause results to differ from our expectations maynot be described in any such report or document. Each of these factors could byitself, or together with one or more other factors, adversely affect ourbusiness, 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 53 to 55 of this Form 10-Qis incorporated herein by reference.

**Item 4.****                        *Controls and Procedures***

**Disclosure Controls and Procedures**

We have conducted anevaluation, with the participation of our Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of our disclosure controls andprocedures (as such term is defined in Rules 13a-15 (e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”)), as of the end of the period covered by this quarterly report asrequired by paragraph (b) of Rules 13a-15 and 15d-15under the Exchange Act. Based on their evaluation, the Chief Executive Officerand Chief Financial Officer have concluded that our disclosure controls andprocedures were effective in ensuring that information required to be disclosedby the Company, including our consolidated subsidiaries in the reports that wefile or submit under the Exchange Act is accumulated and communicated to ourmanagement, including the Chief Executive Officer and Chief Financial Officer,by others within those entities during the period in which this quarterly reporton Form 10-Q was being prepared.

**Internal Control over Financial Reporting**

***Changesto Internal Control over Financial Reporting***

There has been no change in our internal control overfinancial reporting during the quarter ended March 31, 2007 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

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**PART II. OTHERINFORMATION**

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

The following table shows repurchases by the Company ofits common stock for each calendar month during the quarter ended March 31,2007.

| **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)** | ** ** |
|-------------------------|------------|------------|------------|-----------------------------------------------------------|------------|----------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|
| January                 |       |       | 74,406     |                                                      |       |                                         | $          | 42.69                                                                                                                             |       |                                                                                                             |       | n/a |   |   |   | n/a |   |   |
| February                |       |       | 3,080      |                                                      |       |                                         | $          | 40.18                                                                                                                             |       |                                                                                                             |       | n/a |   |   |   | n/a |   |   |
| March                   |       |       | 33,205     |                                                      |       |                                         | $          | 34.44                                                                                                                             |       |                                                                                                             |       | n/a |   |   |   | n/a |   |   |
| Total                   |       |       | 110,691    |                                                      |       |                                         | $          | 40.15                                                                                                                             |       |                                                                                                             |       | n/a |   |   |   | $ | 1.0 billion |   |   |
|                         |            |            |            |                                                           |            |                                              |            |                                                                                                                                   |            |                                                                                                                  |            |  |  |  |  |  |  |  |  |  |  |

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(1)          Theshares indicated in this table represent shares of common stock repurchased andthe withholding of a portion of restricted shares and stock appreciation rightsto cover taxes on vested restricted shares and exercised stock appreciationrights.

(2)          In November 2006, theBoard of Directors authorized a share repurchase program of up to $2.5 billion.In connection with this program, the Company repurchased 38,639,876 shares ofits common stock in November 2006 for $1.5 billion, financed throughthe issuance of junior subordinated debentures.

**Item 6.**                        *Exhibits*

(a)         Exhibits

See Index of Exhibits on page 72.

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**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the Registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.
|                         |     |     | COUNTRYWIDE FINANCIAL  CORPORATION |
|-------------------------|----------|----------|------------------------------------|
|                    |     |     | (Registrant)                       |
| Dated: May 9, 2007 |     |     | By:                                | /s/  DAVID SAMBOL |
|                    |     |     |                               | David Sambol |
| * *                | * * | * * | * *                           | *President  and Chief Operating Officer* |
| Dated: May 9, 2007 |     |     | By:                                | /s/  ERIC P. SIERACKI |
|                    |     |     |                               | Eric P. Sieracki |
| * *                | * * | * * | * *                           | *Executive  Managing Director and Chief Financial Officer* |

 

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**COUNTRYWIDEFINANCIAL CORPORATION**

**FORM 10-QMarch 31, 2007**

**INDEX OF EXHIBITS**

| Exhibit No.             | ** ** | **Description**                                                                                                                                                                                                                                    | ** ** |
|------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| +10.137                      | *          | Employment  Agreement dated January 1, 2007 by and between the Company and David  Sambol (incorporated by reference to Exhibit 10.1 to the Company’s  Current Report on Form 8-K, filed with the SEC on March 29,  2007). |       |
| +10.138                      |       | Fourth Amendment,  dated September 10, 2004, to the Company’s Deferred Compensation Plan  Amended and Restated Effective March 2000.                                                                                                |       |
| +10.139                      |       | Fifth Amendment,  dated September 23, 2005, to the Company’s Deferred Compensation Plan  Amended and Restated Effective March 2000.                                                                                                 |       |
| +10.140                      |       | Sixth Amendment,  effective January 1, 2005, to the Company’s Executive Deferred  Compensation Plan Amended and Restated Effective March 2000.                                                                                      |       |
| +10.141                      |       | Amendment One to  the Company’s Selected Employee Deferred Compensation Plan, dated  July 23, 2004.                                                                                                                                      |       |
| +10.142                      |       | Fifth Amendment  to the Amended and Restated 2000 Equity Incentive Plan of the Company, dated  November 30, 2006.                                                                                                                             |       |
| +10.143                      |       | First Amendment  to the 2006 Equity Incentive Plan of the Company, dated November 30,  2006.                                                                                                                                                  |       |
| +10.144                      |       | Sixth Amendment  to the Global Stock Plan of the Company, dated November 30, 2006.                                                                                                                                                            |       |
| 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.                                                                                                                                                                 |       |

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*                    Incorporatedby reference

†                    Constitutes amanagement contract or compensatory plan or arrangement.

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