**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

**Form 10-Q**

**(Mark One)**

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

**Forthe quarterly period ended June 30, 2007**

**Or**

**o        TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 193**4

**Forthe transition period from             to             **

**Commissionfile number: 1-8422**

**Countrywide Financial Corporation**

(Exact name of registrantas 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’s telephonenumber, including area code)

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports) and (2) hasbeen subject to such filing requirements for the past 90 days. Yes x  Noo

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer. See definitionof “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act (check one):

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

 

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

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

 

Indicate the number of shares outstanding of each of the registrant’sclasses of common stock, as of the latest practicable date.
| Class                         | ** ** | **Outstanding at August 6, 2007** |
|-------------------------------|------------|----------------------------------------|
| Common Stock,  $.05 par value |       | 576,016,774                            |

 

 

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**COUNTRYWIDE FINANCIALCORPORATION**

**FORM 10-Q**

**June 30,2007**

**TABLE OF CONTENTS**
|                                   | ** ** | ** **                                                                                                   | ** ** | ** ** | **Page** | ** ** | ** ** |
|-----------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|------------|----------|------------|------------|
| **PART I. FINANCIAL INFORMATION** |       |                                                                                                         | 1          |       |     |
| Item 1.                           |       | Financial Statements:                                                                                        |       |       |     |       |       |
|                              |       | Consolidated Balance  Sheets—June 30, 2007 and December 31, 2006                                        |       |       | 1        |       |       |
|                              |       | Consolidated Statements of  Earnings—Three and Six Months Ended  June 30, 2007 and 2006                 |       |       | 2        |       |       |
|                              |       | Consolidated Statement of  Changes in Shareholders’ Equity—Six Months Ended June 30, 2007 and 2006 |       |       | 3        |       |       |
|                              |       | Consolidated Statements of  Cash Flows—Six Months Ended  June 30, 2007 and 2006                         |       |       | 4        |       |       |
|                              |       | Notes to Consolidated  Financial Statements                                                                  |       |       | 5        |       |       |
| Item 2.                           |       | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                  |       |       | 39       |       |       |
|                              |       | Overview                                                                                                     |       |       | 39       |       |       |
|                              |       | Results of Operations  Comparison—Quarters Ended June 30, 2007 and 2006                                 |       |       | 41       |       |       |
|                              |       | Results of Operations  Comparison—Six Months Ended June 30, 2007 and 2006                               |       |       | 61       |       |       |
|                              |       | Quantitative and Qualitative  Disclosures About Market Risk                                                  |       |       | 80       |       |       |
|                              |       | Credit Risk Management                                                                                       |       |       | 82       |       |       |
|                              |       | Loan Servicing                                                                                               |       |       | 92       |       |       |
|                              |       | Liquidity and Capital Resources                                                                              |       |       | 93       |       |       |
|                              |       | Off-Balance Sheet  Arrangements and Aggregate Contractual Obligations                                        |       |       | 94       |       |       |
|                              |       | Prospective  Trends                                                                                          |       |       | 95       |       |       |
|                              |       | Regulatory Trends                                                                                            |       |       | 99       |       |       |
|                              |       | New Accounting Standards                                                                                     |       |       | 99       |       |       |
|                              |       | Factors That May Affect Our  Future Results                                                                  |       |       | 100      |       |       |
| Item 3.                           |       | Quantitative and Qualitative  Disclosures About Market Risk                                                  |       |       | 101      |       |       |
| Item 4.                           |       | Controls and Procedures                                                                                      |       |       | 101      |       |       |
| **PART II. OTHER INFORMATION**    |       |                                                                                                         | 102        |       |     |
| Item 1A.                          |       | Risk Factors                                                                                                 |       |       | 102      |       |       |
| Item 2.                           |       | Unregistered Sales of Equity  Securities and Use of Proceeds                                                 |       |       | 103      |       |       |
| Item 4.                           |       | Submission of Matters to a  Vote of Security Holders                                                         |       |       | 103      |       |       |
| Item 6.                           |       | Exhibits                                                                                                     |       |       | 104      |       |       |
|                                   |            |                                                                                                              |            |            |          |            |            |  |  |  |  |

 

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**PART I.FINANCIAL INFORMATION**

**Item1.**                        *Financial Statements*

**COUNTRYWIDEFINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS**

| ** **                                                                                                                                                                                                                                                                                                              | ** ** | **June 30,  2007**                                   | ** **  | **December 31,  2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|-------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                              | ** ** | **(Unaudited)**                                           | ** **  | **(Audited)**               | ** ** |
| ** **                                                                                                                                                                                                                                                                                                              | ** ** | **(in thousands, except share data)** | ** **  |
| **ASSETS**                                                                                                                                                                                                                                                                                                              | ** ** | ** **                                                | ** **  | ** **                  | ** ** |
| Cash                                                                                                                                                                                                                                                                                                                    |       | $                                                         | 1,154,032   |                        | $          | 1,407,000 |   |
| Mortgage loans  held for sale                                                                                                                                                                                                                                                                                           |       | 34,090,154                                                |        | 31,272,630                  |       |
| Trading  securities owned, at fair value                                                                                                                                                                                                                                                                                |       | 19,271,559                                                |        | 20,036,668                  |       |
| Trading  securities pledged as collateral, at fair value                                                                                                                                                                                                                                                                |       | 3,521,522                                                 |        | 1,465,517                   |       |
| Securities  purchased under agreements to resell, securities borrowed and federal  funds sold                                                                                                                                                                                                                      |       | 26,385,089                                                |        | 27,269,897                  |       |
| Loans held for  investment, net of allowance for loan losses of $512,904 and $261,054,  respectively                                                                                                                                                                                                                    |       | 74,056,539                                                |        | 78,085,757                  |       |
| Investments in  other financial instruments, at fair value                                                                                                                                                                                                                                                              |       | 26,601,298                                                |        | 12,769,451                  |       |
| Mortgage  servicing rights, at fair value                                                                                                                                                                                                                                                                               |       | 20,087,368                                                |        | 16,172,064                  |       |
| Premises and  equipment, net                                                                                                                                                                                                                                                                                            |       | 1,644,141                                                 |        | 1,625,456                   |       |
| Other assets                                                                                                                                                                                                                                                                                                            |       | 10,010,058                                                |        | 9,841,790                   |       |
| Total assets                                                                                                                                                                                                                                                                                                            |       | $                                                         | 216,821,760 |                        | $          | 199,946,230 |   |
| **LIABILITIES**                                                                                                                                                                                                                                                                                                         | ** ** | ** **                                                | ** **  | ** **                  | ** ** |
| Deposit  liabilities                                                                                                                                                                                                                                                                                                    |       | $                                                         | 60,292,841  |                        | $          | 55,578,682 |   |
| Securities sold  under agreements to repurchase and federal funds purchased                                                                                                                                                                                                                                             |       | 46,186,848                                                |        | 42,113,501                  |       |
| Trading  securities sold, not yet purchased, at fair value                                                                                                                                                                                                                                                              |       | 4,145,425                                                 |        | 3,325,249                   |       |
| Notes payable                                                                                                                                                                                                                                                                                                           |       | 77,669,067                                                |        | 71,487,584                  |       |
| Accounts payable  and accrued liabilities                                                                                                                                                                                                                                                                               |       | 8,914,175                                                 |        | 8,187,605                   |       |
| Income taxes  payable                                                                                                                                                                                                                                                                                                   |       | 5,227,509                                                 |        | 4,935,763                   |       |
| Total liabilities                                                                                                                                                                                                                                                                                                       |       | 202,435,865                                               |        | 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,  574,655,984 shares and 585,466,719 shares at June 30, 2007 and December 31,  2006, respectively; outstanding, 574,218,312 shares and 585,182,298 shares at  June 30, 2007 and December 31, 2006, respectively |       | 28,733                                                    |        | 29,273                      |       |
| Additional  paid-in capital                                                                                                                                                                                                                                                                                             |       | 1,612,901                                                 |        | 2,154,438                   |       |
| Accumulated other  comprehensive loss                                                                                                                                                                                                                                                                                   |       | (136,228                                                  | )           | (17,556                     | )          |
| Retained earnings                                                                                                                                                                                                                                                                                                       |       | 12,880,489                                                |        | 12,151,691                  |       |
| Total shareholders’ equity                                                                                                                                                                                                                                                                                         |       | 14,385,895                                                |        | 14,317,846                  |       |
| Total liabilities  and shareholders’ equity                                                                                                                                                                                                                                                                        |       | $                                                         | 216,821,760 |                        | $          | 199,946,230 |   |

 

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

1

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF EARNINGS**

| ** **                                                                                      | ** ** | **Three Months Ended June 30,**                             | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                      | ** ** | **2007**                                                                        | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                                      | ** ** | **(Unaudited)  (in thousands, except per share data)** | ** ** |
| **Revenues**                                                                                    | ** ** | ** **                                                                      | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gain on sale of loans and securities                                                            |       | $                                                                               | 1,493,458  |                                              | $          | 1,527,450 |   | $ | 2,727,562 |   | $ | 2,888,628 |   |
| Interest income                                                                                 |       | 3,499,644                                                                       |       | 2,845,580                                         |       | 6,851,626 |   | 5,439,338 |   |
| Interest expense                                                                                |       | (2,771,648                                                                      | )          | (2,155,106                                        | )          | (5,392,693 | ) | (4,054,429 | ) |
| Net interest income                                                                             |       | 727,996                                                                         |       | 690,474                                           |       | 1,458,933 |   | 1,384,909 |   |
| Provision for loan losses                                                                       |       | (292,924                                                                        | )          | (61,898                                           | )          | (444,886 | ) | (125,036 | ) |
| Net interest income after provision for loan losses                                             |       | 435,072                                                                         |       | 628,576                                           |       | 1,014,047 |   | 1,259,873 |   |
| Loan servicing fees and other income from mortgage  servicing rights and retained interests     |       | 1,421,255                                                                       |       | 1,207,159                                         |       | 2,808,544 |   | 2,407,046 |   |
| Realization of expected cash flows from mortgage  servicing rights                              |       | (1,007,241                                                                      | )          | (768,132                                          | )          | (1,931,947 | ) | (1,506,699 | ) |
| Change in fair value of mortgage servicing rights                                               |       | 1,327,446                                                                       |       | 569,002                                           |       | 1,506,453 |   | 1,547,283 |   |
| (Impairment) recovery of retained interests                                                     |       | (268,117                                                                        | )          | 51,498                                            |       | (697,718 | ) | (69,156 | ) |
| Servicing Hedge losses                                                                          |       | (1,373,089                                                                      | )          | (621,074                                          | )          | (1,486,827 | ) | (1,506,944 | ) |
| Net loan servicing fees and other income from  mortgage servicing rights and retained interests |       | 100,254                                                                         |       | 438,453                                           |       | 198,505 |   | 871,530 |   |
| Net insurance premiums earned                                                                   |       | 352,384                                                                         |       | 284,226                                           |       | 686,561 |   | 564,019 |   |
| Other                                                                                           |       | 167,229                                                                         |       | 121,511                                           |       | 327,498 |   | 252,114 |   |
| Total revenues                                                                                  |       | 2,548,397                                                                       |       | 3,000,216                                         |       | 4,954,173 |   | 5,836,164 |   |
| **Expenses**                                                                                    | ** ** | ** **                                                                      | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Compensation                                                                                    |       | 1,109,016                                                                       |       | 1,143,707                                         |       | 2,184,424 |   | 2,218,525 |   |
| Occupancy and other office                                                                      |       | 269,017                                                                         |       | 261,080                                           |       | 533,230 |   | 506,411 |   |
| Insurance claims                                                                                |       | 154,769                                                                         |       | 102,809                                           |       | 212,074 |   | 226,851 |   |
| Advertising and promotion                                                                       |       | 79,540                                                                          |       | 65,686                                            |       | 149,557 |   | 125,916 |   |
| Other                                                                                           |       | 271,357                                                                         |       | 232,911                                           |       | 509,395 |   | 445,075 |   |
| Total expenses                                                                                  |       | 1,883,699                                                                       |       | 1,806,193                                         |       | 3,588,680 |   | 3,522,778 |   |
| Earnings before  income taxes                                                                   |       | 664,698                                                                         |       | 1,194,023                                         |       | 1,365,493 |   | 2,313,386 |   |
| Provision for income taxes                                                                      |       | 179,630                                                                         |       | 471,833                                           |       | 446,444 |   | 907,685 |   |
| **NET EARNINGS**                                                                                |       | $                                                                               | 485,068    |                                              | $          | 722,190 |   | $ | 919,049 |   | $ | 1,405,701 |   |
| **Earnings per share**                                                                          | ** ** | ** **                                                                      | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                                                           |       | $                                                                               | 0.83       |                                              | $          | 1.19 |   | $ | 1.57 |   | $ | 2.32 |   |
| Diluted                                                                                         |       | $                                                                               | 0.81       |                                              | $          | 1.15 |   | $ | 1.53 |   | $ | 2.25 |   |

 

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                                                             |       |                                                      | —      |              |       |                             | —     |                                                      |       |                   | —     |      |       |   | — |   |   | 1,405,701 |   | 1,405,701 |   |
| Other comprehensive  income (loss), net of tax:                                          |       |                                                      |        |              |       |                             |       |                                                      |       |                   |       |      |       |   |   |   |   |   |   |   |   |
| Net unrealized  losses from available-for-sale securities                           |       |                                                      | —      |              |       |                             | —     |                                                      |       |                   | —     |      |       |   | (127,156 | ) |   | — |   | (127,156 | ) |
| Net unrealized  losses from cash flow hedging instruments                           |       |                                                      | —      |              |       |                             | —     |                                                      |       |                   | —     |      |       |   | (9,918 | ) |   | — |   | (9,918 | ) |
| Net change in  foreign currency translation adjustment                                   |       |                                                      | —      |              |       |                             | —     |                                                      |       |                   | —     |      |       |   | 12,120 |   |   | — |   | 12,120 |   |
| Total  comprehensive income                                                              |       |                                                      |        |              |       |                             |       |                                                      |       |                   |       |      |       |   |   |   |   |   |   | 1,280,747 |   |
| Issuance of common  stock pursuant to stock-based compensation plans                     |       |                                                      | 9,811,695   |              |       |                             | 498        |                                                      |       |                   | 232,775    |      |       |   | — |   |   | — |   | 233,273 |   |
| Excess tax benefit  related to stock-based compensation                                  |       |                                                      | —      |              |       |                             | —     |                                                      |       |                   | 62,343     |      |       |   | — |   |   | — |   | 62,343 |   |
| Issuance of common  stock, net of treasury stock                                         |       |                                                      | 487,731     |              |       |                             | 24         |                                                      |       |                   | 17,839     |      |       |   | — |   |   | — |   | 17,863 |   |
| Issuance of common  stock in conversion of convertible debt                              |       |                                                      | 414,868     |              |       |                             | 21         |                                                      |       |                   | 1,444      |      |       |   | — |   |   | — |   | 1,465 |   |
| Cash dividends  paid—$0.30 per common share                                    |       |                                                      | —      |              |       |                             | —     |                                                      |       |                   | —     |      |       |   | — |   |   | (181,659 | ) | (181,659 | ) |
| **Balance  at June 30, 2006**                                                       |       |                                                      | 610,744,980 |              |       |                             | $          | 30,551                                                    |       |                   |       | $         | 3,268,420  |   |   |   | $ | (63,840 | ) |   | $ | 11,061,826 |   | $ | 14,296,957 |   |
| **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                                                             |       |                                                      | —      |              |       |                             | —     |                                                      |       |                   | —     |      |       |   | — |   |   | 919,049 |   | 919,049 |   |
| Other comprehensive  income (loss), net of tax:                                          |       |                                                      |        |              |       |                             |       |                                                      |       |                   |       |      |       |   |   |   |   |   |   |   |   |
| Net unrealized  losses from available-for-sale securities                           |       |                                                      | —      |              |       |                             | —     |                                                      |       |                   | —     |      |       |   | (130,123 | ) |   | — |   | (130,123 | ) |
| Net change in  foreign currency translation adjustment                                   |       |                                                      | —      |              |       |                             | —     |                                                      |       |                   | —     |      |       |   | 9,237 |   |   | — |   | 9,237 |   |
| Change in unfunded  liability relating to defined benefit plans                     |       |                                                      | —      |              |       |                             | —     |                                                      |       |                   | —     |      |       |   | 2,214 |   |   | — |   | 2,214 |   |
| Total  comprehensive income                                                              |       |                                                      |        |              |       |                             |       |                                                      |       |                   |       |      |       |   |   |   |   |   |   | 800,377 |   |
| Issuance of common  stock pursuant to stock-based compensation plans                     |       |                                                      | 9,887,079   |              |       |                             | 502        |                                                      |       |                   | 226,734    |      |       |   | — |   |   | — |   | 227,236 |   |
| Excess tax benefit  related to stock-based compensation                                  |       |                                                      | —      |              |       |                             | —     |                                                      |       |                   | 68,348     |      |       |   | — |   |   | — |   | 68,348 |   |
| Issuance of common  stock, net of treasury stock                                         |       |                                                      | 652,447     |              |       |                             | 33         |                                                      |       |                   | 25,862     |      |       |   | — |   |   | — |   | 25,895 |   |
| Repurchase and  cancellation of common stock                                             |       |                                                      | (21,503,512 | )                 |       |                             | (1,075     | )                                                         |       |                   | (862,481   | )         |       |   | — |   |   | — |   | (863,556 | ) |
| Cash dividends  paid—$0.30 per common share                                    |       |                                                      | —      |              |       |                             | —     |                                                      |       |                   | —     |      |       |   | — |   |   | (177,532 | ) | (177,532 | ) |
| **Balance  at June 30, 2007**                                                       |       |                                                      | 574,218,312 |              |       |                             | $          | 28,733                                                    |       |                   |       | $         | 1,612,901  |   |   |   | $ | (136,228 | ) |   | $ | 12,880,489 |   | $ | 14,385,895 |   |

 

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**

| ** **                                                                                                                          | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                          | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| ** **                                                                                                                          | ** ** | **(Unaudited)**                               | ** ** |
| ** **                                                                                                                          | ** ** | **(in thousands)**                       | ** ** |
| **Cash flows from operating activities:**                                                                                           | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Net earnings                                                                                                                        |       | $                                             | 919,049    |   | $ | 1,405,701 |   |
| Adjustments to reconcile  net earnings to net cash used by operating activities:                                                    |       |                                          |       |   |   |
| Gain on sale of  loans and securities                                                                                               |       | (2,727,562                                    | )          | (2,888,628 | ) |
| Accretion of  discount on securities                                                                                                |       | (260,618                                      | )          | (233,832 | ) |
| Interest  capitalized on loans                                                                                                      |       | (456,973                                      | )          | (273,469 | ) |
| Amortization of  deferred premiums, discounts, fees and costs, net                                                                  |       | 209,442                                       |       | 160,938 |   |
| Accretion of fair  value adjustments and discount on notes payable                                                                  |       | (29,348                                       | )          | (57,913 | ) |
| Change in fair  value of hedged notes payable and related interest-rate and foreign-currency  swaps                                 |       | (9,787                                        | )          | 8,408 |   |
| Amortization of  deferred fees on time deposits                                                                                     |       | 11,113                                        |       | 9,594 |   |
| Provision for loan  losses                                                                                                          |       | 444,886                                       |       | 125,036 |   |
| Change in MSR  value due to realization of expected cash flows from mortgage servicing rights                                  |       | 1,931,947                                     |       | 1,506,699 |   |
| Change in fair  value of mortgage servicing rights                                                                                  |       | (1,506,453                                    | )          | (1,547,283 | ) |
| Impairment of  retained interests                                                                                                   |       | 759,529                                       |       | 84,054 |   |
| Servicing hedge  losses                                                                                                             |       | 1,486,827                                     |       | 1,506,944 |   |
| Stock-based  compensation expense                                                                                                   |       | 48,353                                        |       | 82,182 |   |
| Depreciation and  other amortization                                                                                                |       | 151,188                                       |       | 124,641 |   |
| Provision for  deferred income taxes                                                                                                |       | 836,807                                       |       | 676,286 |   |
| Origination and  purchase of loans held for sale                                                                                    |       | (242,781,618                                  | )          | (209,604,399 | ) |
| Proceeds from sale  and principal repayments of loans held for sale                                                                 |       | 236,995,850                                   |       | 212,007,060 |   |
| Increase in  trading securities                                                                                                     |       | (1,290,896                                    | )          | (4,373,143 | ) |
| Net increase in  retained interests and servicing hedge securities accounted for as trading securities                         |       | (2,097,311                                    | )          | (466,779 | ) |
| Increase in other  assets                                                                                                           |       | (267,276                                      | )          | (475,592 | ) |
| Increase in  trading securities sold, not yet purchased, at fair value                                                              |       | 820,176                                       |       | 792,156 |   |
| Increase in  accounts payable and accrued liabilities                                                                               |       | 446,674                                       |       | 798,841 |   |
| (Decrease)  increase in income taxes payable                                                                                        |       | (473,482                                      | )          | 152,584 |   |
| Net cash used by  operating activities                                                                                              |       | (6,839,483                                    | )          | (479,914 | ) |
| **Cash flows from investing activities:**                                                                                           | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Decrease  (increase) in securities purchased under agreements to resell, federal funds  sold and securities borrowed |       | 884,808                                       |       | (1,967,830 | ) |
| Repayments  (additions) to loans held for investment, net                                                                           |       | 5,467,977                                     |       | (10,692,342 | ) |
| Sales of loans  held for investment, net                                                                                            |       | —                                        |       | 64,876 |   |
| Additions to  investments in other financial instruments accounted for as available for  sale                                       |       | (15,809,059                                   | )          | (2,071,758 | ) |
| Proceeds from sale  and repayment of investments in other financial instruments accounted for as  available for sale                |       | 2,182,069                                     |       | 1,395,127 |   |
| Purchases of  mortgage servicing rights                                                                                             |       | (184,511                                      | )          | (8,067 | ) |
| Purchases of premises  and equipment, net                                                                                           |       | (135,173                                      | )          | (287,142 | ) |
| Net cash used by  investing activities                                                                                              |       | (7,593,889                                    | )          | (13,567,136 | ) |
| **Cash flows from financing activities:**                                                                                           | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Net increase in  deposit liabilities                                                                                                |       | 4,703,046                                     |       | 11,103,539 |   |
| Net increase in  securities sold under agreements to repurchase and federal  funds purchased                                   |       | 4,073,347                                     |       | 4,008,020 |   |
| Net increase  (decrease) in short-term borrowings                                                                                   |       | 3,510,080                                     |       | (4,162,083 | ) |
| Issuance of  long-term debt                                                                                                         |       | 24,026,503                                    |       | 8,639,127 |   |
| Repayment of  long-term debt                                                                                                        |       | (21,364,797                                   | )          | (4,250,919 | ) |
| Excess tax benefit  related to stock-based compensation                                                                             |       | 68,535                                        |       | 60,309 |   |
| Repurchase and  cancellation of common stock                                                                                        |       | (863,556                                      | )          | — |   |
| Issuance of common  stock                                                                                                           |       | 204,778                                       |       | 168,954 |   |
| Payment of  dividends                                                                                                               |       | (177,532                                      | )          | (181,659 | ) |
| Net cash provided  by financing activities                                                                                          |       | 14,180,404                                    |       | 15,385,288 |   |
| Net (decrease)  increase in cash                                                                                                    |       | (252,968                                      | )          | 1,338,238 |   |
| Cash at beginning  of period                                                                                                        |       | 1,407,000                                     |       | 1,031,108 |   |
| Cash at end of  period                                                                                                              |       | $                                             | 1,154,032  |   | $ | 2,369,346 |   |

 

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 Financial Corporation (“Countrywide”) is aholding company which, through its subsidiaries (collectively, the “Company”),is engaged in mortgage lending and other real estate finance-relatedbusinesses, including mortgage banking, banking and mortgage warehouse lending,dealing in securities and insurance underwriting.

The accompanying consolidated financial statementshave been prepared in compliance with U.S. generally accepted accountingprinciples (“U.S. GAAP”) for interim financial information and with theSecurities and Exchange Commission’s instructions to Form 10-Q and Rule 10-01of Regulation S-X. Accordingly, they do not include all of the information andnotes required by U.S. GAAP for complete financial statements.

In preparing financial statements in compliance withU.S. GAAP, management is required to make estimates and assumptions thatmaterially affect the reported amounts of assets and liabilities and thedisclosure of contingent liabilities at the date of the financial statementsand revenues and expenses during the reporting period. Actual results coulddiffer from those estimates.

In the opinion of management, all adjustments(consisting of normal recurring adjustments) considered necessary for a fairpresentation have been included. Operating results for the six months ended June 30,2007 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2007. For further information, including adescription of the Company’s significant accounting policies, refer to theconsolidated financial statements and notes thereto included in the AnnualReport on Form 10-K for the year ended December 31, 2006, forthe Company (the “2006 Annual Report”).

Certain amounts reflectedin the prior year consolidated financial statements have been reclassified toconform to current year presentation.

**Note 2—Adoption ofNew Accounting Pronouncements**

Statement ofFinancial 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 securitiesare not subject to SFAS 133; and

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

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

5

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

FASB Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes,* (“FIN 48”) was issued to clarifythe requirements of Statement of Financial Accounting Standards No. 109, *Accounting for Income Taxes*, relating to the recognition ofincome tax benefits.

FIN 48 provides atwo-step approach 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 as follows:

| ** **                                                           | ** ** | **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 |   |

 

The total amount of unrecognized tax benefits onuncertain tax positions as of January 1, 2007 was $180.6 million. If recognized,$126.8 million of unrecognized tax benefits would impact the Company’seffective income tax rate. As of June 30, 2007, there have been nomaterial changes to the unrecognized tax benefits, including those that wouldimpact the Company’s effective income tax rate.

As of January 1, 2007 and June 30, 2007, theCompany is not aware of any tax positions for which it was reasonably possiblethat a change in the amount of unrecognized tax benefits during the next twelvemonths would significantly impact the Company’s effective income tax rate.

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

As of June 30, 2007,the IRS exam team had completed its fieldwork for tax years for 2003 and 2004,and forwarded the results for administrative review.  The California Franchise Tax Board examinationfor 2003 and 2004 is not expected to be completed by December 31, 2007 andthe 2002 tax year is still open to examination.

6

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

**During the quarter ended June 30,2007, the Company recognized a non-recurring reduction of its deferred incometax liabilities resulting from moving certain of our operations to other states.  This adjustment resulted in a reduced incometax rate of 27.0 percent.**

**Note 3—Earnings PerShare**

Basic earnings per share is determined using netearnings divided by the weighted-average common shares outstanding during theperiod. Diluted earnings per share is computed by dividing net earningsavailable to common shareholders by the weighted-average shares outstanding,assuming all potentially dilutive common shares were issued.

Thefollowing table summarizes the basic and diluted earnings per share calculationsfor the periods indicated:

| ** **                                    | ** ** | **Three Months Ended June 30,**                | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **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    |       | $                                                                  | 485,068    |   | 583,669 |   |   | $ | 0.83 |   |   | $ | 722,190 |   | 607,831 |   |   | $ | 1.19 |   |   |
| Effect of  dilutive securities:               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dilutive stock-based compensation instruments |       | —                                                             |       | 11,871 |   |   |   |   |   | — |   | 18,779 |   |   |   |   |   |
| Diluted earnings and  earnings per share |       | $                                                                  | 485,068    |   | 595,540 |   |   | $ | 0.81 |   |   | $ | 722,190 |   | 626,610 |   |   | $ | 1.15 |   |   |

 

| ** **                                    | ** ** | **Six Months Ended June 30,**                  | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **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    |       | $                                                                  | 919,049    |   | 585,901 |   |   | $ | 1.57 |   |   | $ | 1,405,701 |   | 604,725 |   |   | $ | 2.32 |   |   |
| Effect of  dilutive securities:               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dilutive stock-based compensation instruments |       | —                                                             |       | 12,963 |   |   |   |   |   | — |   | 18,639 |   |   |   |   |   |
| Convertible  debentures                       |       | —                                                             |       | — |   |   |   |   |   | 15 |   | 109 |   |   |   |   |   |
| Diluted earnings and earnings  per share |       | $                                                                  | 919,049    |   | 598,864 |   |   | $ | 1.53 |   |   | $ | 1,405,716 |   | 623,473 |   |   | $ | 2.25 |   |   |

 

7

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

During the quarters ended June 30,2007 and 2006, options to purchase 172,011 shares and 72,890 shares,respectively, were outstanding but not included in the computation of dilutedearnings per share because they were anti-dilutive. During the six months endedJune 30, 2007 and 2006, options to purchase 26,390 shares and 123,940shares, respectively, were outstanding but not included in the computation ofdiluted earnings per share because they were anti-dilutive.

**Note 4—Loan Sales**

As more fully discussed in “Note 3—Loan Sales”included in the consolidated financial statements in the 2006 Annual Report,the Company retains financial interests in its loan sales activities in theform of interest-only, principal-only and subordinated interests. The Companyalso obtains mortgage servicing rights (“MSRs”) through its loan salesactivities.

MSRs and retained interests are carried at fair value.The Company estimates fair value through the use of discounted cash flowmodels. The key assumptions used in the valuation of MSRs include mortgageprepayment speeds and discount rates. The key assumptions used in the valuationof retained interests include mortgage prepayment speeds, discount rates, andfor those subordinated interests containing credit risk, net credit losses overthe expected lifetime of the security. The discounted cash flow modelsincorporate cash flow and prepayment projections based on data drawn from thehistorical performance of the loans underlying the Company’s MSRs and retainedinterests, which management believes are consistent with assumptions othermajor market participants would use in determining the assets’ fair value.

Keyassumptions used in measuring the fair value of the Company’s MSRs at June 30,2007 and December 31, 2006, and the effect on their fair value fromadverse changes in those assumptions, are as follows:

| ** **                                | ** ** | **June 30,  2007**                          | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------|------------|-----------------------------|------------|
| ** **                                | ** ** | **(dollar amounts in thousands)** | ** ** |
| Fair value of  MSRs                       |       | $                                                | 20,087,368 |                        | $          | 16,172,064 |   |
| Weighted-average  life (in years)         |       | 6.5                                              |       | 5.8                         |       |
| Weighted-average  annual prepayment speed |       | 18.5                                             | %          | 21.0                        | %          |
| Impact of 5% adverse change               |       | $                                                | 335,463    |                        | $          | 293,639 |   |
| Impact of 10% adverse change              |       | $                                                | 654,783    |                        | $          | 571,577 |   |
| Impact of 20% adverse change              |       | $                                                | 1,249,706  |                        | $          | 1,085,394 |   |
| Weighted-average  OAS                     |       | 6.2                                              | %          | 6.2                         | %          |
| Impact of 5% adverse change               |       | $                                                | 167,829    |                        | $          | 129,460 |   |
| Impact of 10% adverse change              |       | $                                                | 332,825    |                        | $          | 256,746 |   |
| Impact of 20%  adverse change             |       | $                                                | 654,612    |                        | $          | 505,029 |   |

 

8

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

Key assumptions used inmeasuring the fair value of the Company’s retained interests at June 30,2007 and December 31, 2006, and the effect on their fair value fromadverse changes in those assumptions are as follows:

| ** **                                   | ** ** | **June 30,  2007**                          | ** ** | **December 31,  2006** | ** ** |
|----------------------------------------------|------------|--------------------------------------------------|------------|-----------------------------|------------|
| ** **                                   | ** ** | **(dollar amounts in thousands)** | ** ** |
| Fair value of  retained interests            |       | $                                                | 2,735,513  |                        |       | $ | 3,040,575 |   |   |
| Weighted-average  life (in years)            |       | 4.8                                              |       |                        | 3.1        |   |   |
| Weighted-average  annual prepayment speed    |       | 23.4                                             | %          |                        | 30.6       | % |   |
| Impact of 5% adverse change                  |       | $                                                | 85,793     |                        |       | $ | 97,971 |   |   |
| Impact of 10% adverse change                 |       | $                                                | 164,777    |                        |       | $ | 184,866 |   |   |
| Impact of 20% adverse change                 |       | $                                                | 297,468    |                        |       | $ | 335,668 |   |   |
| Weighted-average  annual discount rate       |       | 18.4                                             | %          |                        | 18.2       | % |   |
| Impact of 5% adverse change                  |       | $                                                | 38,765     |                        |       | $ | 33,809 |   |   |
| Impact of 10% adverse change                 |       | $                                                | 78,115     |                        |       | $ | 60,475 |   |   |
| Impact of 20% adverse change                 |       | $                                                | 152,084    |                        |       | $ | 127,056 |   |   |
| Weighted-average  net lifetime credit losses |       | 5.1                                              | %          |                        | 2.7        | % |   |
| Impact of 5% adverse change                  |       | $                                                | 74,644     |                        |       | $ | 48,550 |   |   |
| Impact of 10% adverse change                 |       | $                                                | 148,024    |                        |       | $ | 117,336 |   |   |
| Impact of 20%  adverse change                |       | $                                                | 277,800    |                        |       | $ | 224,616 |   |   |

 

These sensitivities arehypothetical and should be used with caution. As the figures indicate, changesin fair value based on a given percentage variation in individual assumptionsgenerally cannot be extrapolated. Also, in the preceding tables, the effect ofa variation in a particular assumption on the fair value of the MSRs orretained interests is calculated independently without changing any otherassumption. In reality, changes in one factor may result in changes in anotherwhich might compound or counteract the sensitivities.

**Note 5—DerivativeFinancial Instruments**

***Derivative Financial Instruments***

The primary market risk facing the Company is interestrate risk, which includes the risk that changes in market interest rates willresult in unfavorable changes in the value of our assets or liabilities (“pricerisk”) and the risk that net interest income from our mortgage loan andinvestment portfolios will change in response to changes in interest rates. Theoverall objective of the Company’s interest rate risk management activities isto reduce the variability of earnings caused by changes in interest rates.

The Company managesinterest rate risk with derivative financial instruments and by the structure ofits activities as follows:

·       TheCompany uses various financial instruments, including derivatives, to managethe interest rate risk related specifically to the values of its commitments tomake loans (also referred to as interest rate lock commitments or “IRLCs”),mortgage loans held by the Company pending sale (“Mortgage Loan Inventory”),retained interests and trading securities, as well as a portion of its debt.

9

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

·       Structurally, the Companymanages interest rate risk in its Mortgage Banking Segment through the naturalcounterbalance of its loan production and servicing businesses. In its BankingSegment, the Company manages interest rate risk 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.

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

To manage the price risk associated with the IRLCs,the Company generally uses a combination of net forward sales of MortgageBacked-Securities (“MBS”) and put and call options on MBS, Treasury futures andEurodollar futures. The Company generally makes forward sales of MBS in anamount equal to the portion of the IRLCs expected to close, assuming no changein mortgage rates. The Company acquires put and call options to protect againstthe variability of loan closings caused by changes in mortgage rates. To managethe credit spread risk associated with its IRLCs the Company may enter intocredit default swaps.

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

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

During the six monthsended June 30, 2007, the interest rate risk management activitiesassociated with 51% of the fixed-rate mortgage loan inventory and 44% of theadjustable-rate mortgage loan inventory were accounted for as fair valuehedges. For the six months ended June 30, 2007 and 2006, the Companyrecognized net pre-tax losses of $6.4 million and $41.8 million, respectively,representing the ineffective portion of the hedges of its Mortgage Loan Inventorythat qualified as fair value hedges.

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

To moderate negative impacts on earnings caused by arate-driven decline in fair value of its MSRs and retained interests from securitization,the Company maintains a portfolio of financial instruments, includingderivatives and securities, which generally increase in value when interestrates decline. In addition, the Company uses credit default swaps or similarinstruments to moderate the negative impact on earnings caused by a creditspread-driven decline in fair value. This portfolio of financial instruments iscollectively referred to herein as the “Servicing Hedge.”

10

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

Thefollowing table summarizes the activity for derivative contracts included inthe Servicing Hedge expressed by notional amounts:

| ** **                                  | ** ** | **Balance,  December 31,  2006** | ** ** | **Additions** | ** ** | **Dispositions/  Expirations** | ** ** | **Balance,  June 30,  2007** | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|---------------|------------|--------------------------------|------------|-----------------------------------|------------|
| ** **                                  | ** ** | **(in millions)**                | ** ** |
| Mortgage forward  rate agreements           |       |                                  | $          | 48,000        |       |                           |       | $                                 | 63,000     |   |   |   | $ | (84,000 | ) |   | $ | 27,000 |   |
| Interest rate  swaptions                    |       |                                  | 41,750     |          |       |                           | 51,825     |                              |       |   | (22,500 | ) |   | 71,075 |   |
| Interest rate  swaps                        |       |                                  | 29,025     |          |       |                           | 46,585     |                              |       |   | (16,425 | ) |   | 59,185 |   |
| Long treasury  futures                      |       |                                  | —     |          |       |                           | 26,750     |                              |       |   | (5,000 | ) |   | 21,750 |   |
| Long call options  on interest rate futures |       |                                  | 4,500      |          |       |                           | 91,770     |                              |       |   | (29,320 | ) |   | 66,950 |   |
| Credit default swaps                        |       |                                  | —     |          |       |                           | 424        |                              |       |   | (424 | ) |   | — |   |
|                                             |            |                                       |            |               |            |                                |            |                                   |            |  |  |  |  |  |  |  |  |  |  |

 

***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 $26.8 billion asof June 30, 2007) and a portion of its foreign currency-denominated fixedand floating-rate long-term debt to U.S. dollar LIBOR-based floating-rate debt(notional amount of $4.4 billion as of June 30, 2007). These transactionsare generally designated as fair value hedges under SFAS 133. For the sixmonths ended June 30, 2007 and 2006, the Company recognized net pre-taxgains of $9.8 million and $8.4 million, respectively, representing theineffective portion of its fair value hedges of debt.

***Risk Management Activities Related to Deposit Liabilities***

The Company has enteredinto interest rate swap contracts that have the effect of converting a portionof its fixed-rate deposit liabilities to LIBOR-based variable-rate depositliabilities. These transactions are designated as fair value hedges. For thesix months ended June 30, 2007 and 2006, the Company recognized a netpre-tax gain of $0.3 million and a net pre-tax loss of $2.2 million,respectively, representing the hedge ineffectiveness relating to these swaps.

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

In connection with itsbroker-dealer activities, the Company maintains a trading portfolio of fixed-incomesecurities, primarily MBS. The Company is exposed to price changes in itstrading portfolio arising from interest rate changes during the period it holdsthe securities. To manage this risk, the Company utilizes derivativeinstruments including forward sales/purchases of To-Be-Announced (“TBA”) MBS,short/long interest rate futures contracts, interest rate swaps, credit defaultswaps, long put/call options on interest rate futures contracts, interest ratecaps and receiver swaptions.

11

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

**Note 6—MortgageLoans Held for Sale**

Mortgageloans held for sale include the following:

| ** **                                         | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|----------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                         | ** ** | **(in thousands)** | ** ** |
| Prime                                              |       |                    | $          | 23,117,955                  |       |   | $ | 22,494,274 |   |
| Prime home equity                                  |       |                    | 5,050,134  |                        |       | 1,813,947 |   |
| Nonprime                                           |       |                    | 3,838,506  |                        |       | 4,917,895 |   |
| Commercial real  estate                            |       |                    | 2,277,855  |                        |       | 1,930,100 |   |
| Deferred  premiums, discounts, fees and costs, net |       |                    | (194,296   | )                           |       | 116,414 |   |
|                                               |       |                    | $          | 34,090,154                  |       |   | $ | 31,272,630 |   |

 

At June 30, 2007, the Company had pledged $8.3billion and $2.6 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 7—Trading Securitiesand Trading Securities Sold, Not Yet Purchased**

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

| ** **                                            | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                            | ** ** | **(in thousands)** | ** ** |
| Mortgage pass-through  securities:                    |       |                    |       |                        |       |
| Fixed-rate                                            |       | $                       | 13,481,757 |                        | $          | 13,502,403 |   |
| Adjustable-rate                                       |       | 518,346                 |       | 1,381,675                   |       |
| Total mortgage pass-through securities                |       | 14,000,103              |       | 14,884,078                  |       |
| Collateralized  mortgage obligations                  |       | 5,100,078               |       | 3,307,594                   |       |
| U.S. Treasury  securities                             |       | 1,486,515               |       | 1,801,221                   |       |
| Obligations of  U.S. Government-sponsored enterprises |       | 1,096,774               |       | 781,657                     |       |
| Derivative  financial instruments                     |       | 312,085                 |       | 15,728                      |       |
| Asset-backed  securities                              |       | 301,029                 |       | 203,979                     |       |
| Interest-only  securities                             |       | 292,308                 |       | 287,206                     |       |
| Mark-to-market on  TBA securities                     |       | 183,211                 |       | 144,674                     |       |
| Residual  securities                                  |       | 7,782                   |       | 52,097                      |       |
| Other                                                 |       | 13,196                  |       | 23,951                      |       |
|                                                  |       | $                       | 22,793,081 |                        | $          | 21,502,185 |   |

 

As of June 30, 2007, $19.4 billion of the Company’strading securities had been pledged as collateral for financing purposes, ofwhich the counterparty had the contractual right to sell or re-pledge $3.5billion.

12

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

As of December 31, 2006, $19.5 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 $1.5 billion.

Tradingsecurities sold, not yet purchased, include the following:

| ** **                                            | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                            | ** ** | **(in thousands)** | ** ** |
| U.S. Treasury  securities                             |       |                    | $          | 2,973,387                   |       |   |   | $ | 2,803,030 |   |   |
| Obligations of  U.S. Government-sponsored enterprises |       |                    | 712,934    |                        |       |   | 305,826 |   |   |
| Derivative  financial instruments                     |       |                    | 231,084    |                        |       |   | 9,235 |   |   |
| Mark-to-market on  TBA securities                     |       |                    | 221,071    |                        |       |   | 181,119 |   |   |
| Mortgage  pass-through securities, fixed-rate         |       |                    | 3,034      |                        |       |   | 26,024 |   |   |
| Other                                                 |       |                    | 3,915      |                        |       |   | 15 |   |   |
|                                                  |       |                    | $          | 4,145,425                   |       |   |   | $ | 3,325,249 |   |   |

 

**Note 8—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:

| ** **                                       | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                       | ** ** | **(in thousands)** | ** ** |
| Securities  purchased under agreements to resell |       |                    | $          | 20,533,604                  |       |   | $ | 22,559,194 |   |
| Securities  borrowed                             |       |                    | 4,401,485  |                        |       | 3,460,703 |   |
| Federal funds  sold                              |       |                    | 1,450,000  |                        |       | 1,250,000 |   |
|                                             |       |                    | $          | 26,385,089                  |       |   | $ | 27,269,897 |   |

 

As of June 30, 2007, the Company had acceptedcollateral related to securities purchased under agreements to resell andsecurities borrowed with a fair value of $46.2 billion that it had thecontractual ability to sell or re-pledge, including $21.1 billion related toamounts offset by securities sold under agreements to repurchase under masternetting arrangements. As of June 30, 2007, the Company had re-pledged$41.9 billion 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.

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

**Note 9—Loans Heldfor Investment, Net**

Loansheld for investment include the following:

| ** **                                                                     | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                     | ** ** | **(in thousands)** | ** ** |
| Mortgage loans:                                                                |       |                    |       |                        |       |   |   |
| Banking  Operations:                                                           |       |                    |       |                        |       |   |   |
| Prime                                                                          |       |                    | $          | 44,571,952                  |       |   | $ | 51,634,926 |   |
| Prime home equity                                                              |       |                    | 22,676,588 |                        |       | 20,163,337 |   |
| Nonprime                                                                       |       |                    | 13,188     |                        |       | — |   |
|                                                                           |       |                    | 67,261,728 |                        |       | 71,798,263 |   |
| Mortgage Banking:                                                              |       |                    |       |                        |       |   |   |
| Prime                                                                          |       |                    | 772,651    |                        |       | 252,731 |   |
| Prime home equity                                                              |       |                    | 168,116    |                        |       | 57,518 |   |
| Nonprime                                                                       |       |                    | 1,238,836  |                        |       | 115,054 |   |
|                                                                           |       |                    | 2,179,603  |                        |       | 425,303 |   |
| Commercial real estate                                                         |       |                    | 242,954    |                        |       | 72,413 |   |
| Total mortgage loans                                                           |       |                    | 69,684,285 |                        |       | 72,295,979 |   |
| Warehouse lending  advances secured by mortgage loans                          |       |                    | 2,457,571  |                        |       | 3,185,248 |   |
| Defaulted  FHA-insured and VA-guaranteed loans repurchased from securities     |       |                    | 1,670,714  |                        |       | 1,761,170 |   |
|                                                                           |       |                    | 73,812,570 |                        |       | 77,242,397 |   |
| Premium and  discounts, and deferred loan origination fees and costs, net |       |                    | 756,873    |                        |       | 1,104,414 |   |
| Allowance for  loan losses                                                     |       |                    | (512,904   | )                           |       | (261,054 | ) |
| Loans held for  investment, net                                                |       |                    | $          | 74,056,539                  |       |   | $ | 78,085,757 |   |

 

During the six months ended June 30, 2007, theCompany transferred prime, prime home equity and nonprime mortgage loans withan unpaid principal balance of $0.2 billion, $0.7 billion and $1.0 billion,respectively, and a carrying value after recognition of impairment upon transferof the loans of $0.2 billion, $0.6 billion and $0.8 billion, respectively, frommortgage loans held for sale to loans held for investment, as the Companydecided to hold those loans for the foreseeable future.

Mortgage loans totaling $56.6 billion and $57.5billion were pledged to secure Federal Home Loan Bank (“FHLB”) advances and toenable additional borrowings from the FHLB at June 30, 2007 and December 31,2006, respectively.

Mortgage loans held for investment totaling $4.6 billionand $2.9 billion were pledged to secure an unused borrowing facility with theFederal Reserve Bank (“FRB”) at June 30, 2007 and December 31, 2006,respectively.

As of June 30, 2007 and December 31, 2006,the Company had accepted mortgage loan collateral of $2.6 billion and $3.5billion, respectively, that it had the contractual ability to re-pledge. Thecollateral secures warehouse lending advances. Of this collateral, $1.1 billionand $1.6 billion, respectively, has been 

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

re-pledged to secureborrowings under a secured revolving line of credit as of June 30, 2007and December 31, 2006.

Changesin the allowance for loan losses are as follows:

| ** **                                                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                        | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                        | ** ** | **(in thousands)**                         | ** ** |
| Balance,  beginning of period                                     |       | $                                               | 374,367    |                                          | $          | 172,271 |   | $ | 261,054 |   | $ | 189,201 |   |
| Provision for  loan losses                                        |       | 292,924                                         |       | 61,898                                        |       | 444,886 |   | 125,036 |   |
| Net charge-offs                                                   |       | (154,387                                        | )          | (58,760                                       | )          | (193,036 | ) | (125,181 | ) |
| Reclassification  of allowance for unfunded commitments and other |       | —                                          |       | 8,172                                         |       | — |   | (5,475 | ) |
| Balance, end of period                                            |       | $                                               | 512,904    |                                          | $          | 183,581 |   | $ | 512,904 |   | $ | 183,581 |   |

 

TheCompany has recorded a liability for losses on unfunded loan commitments inaccounts payable and accrued liabilities totaling $18.2 million and $8.1 millionat June 30, 2007 and December 31, 2006, respectively. The provisionfor these losses is recorded in other expenses. The following is a summary ofchanges in the liability:

| ** **                                                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                   | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                   | ** ** | **(in thousands)**                         | ** ** |
| Balance,  beginning of period                                |       | $                                               | 13,759     |                                          | $          | 13,396 |   | $ | 8,104 |   | $ | 9,391 |   |
| Provision for  losses on unfunded loan commitments           |       | 4,463                                           |       | 1,100                                         |       | 10,118 |   | 1,100 |   |
| Reclassification  of allowance for unfunded loan commitments |       | —                                          |       | (8,172                                        | )          | — |   | (4,167 | ) |
| Balance, end of period                                       |       | $                                               | 18,222     |                                          | $          | 6,324 |   | $ | 18,222 |   | $ | 6,324 |   |

 

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

**Note 10—Investmentsin Other Financial Instruments, at Fair Value**

Investmentsin other financial instruments include the following:

| ** **                                                                                 | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                 | ** ** | **(in thousands)** | ** ** |
| Available-for-sale securities:                                                             |       |                    |       |                        |       |
| Mortgage-backed  securities                                                                |       | $                       | 19,495,594 |                        | $          | 7,007,786 |   |
| Obligations of U.S.  Government-sponsored enterprises                                      |       | 567,096                 |       | 776,717                     |       |
| Municipal bonds                                                                            |       | 409,170                 |       | 412,886                     |       |
| U.S. Treasury securities                                                                   |       | 199,019                 |       | 168,313                     |       |
| Other                                                                                      |       | 2,699                   |       | 2,858                       |       |
| Subtotal                                                                                   |       | 20,673,578              |       | 8,368,560                   |       |
| Interests retained in securitization accounted for  as available-for-sale securities:      |       |                    |       |                        |       |
| Prime interest-only and  principal-only securities                                         |       | 253,557                 |       | 279,375                     |       |
| Prime home equity line  of credit transferor’s interest                               |       | 70,774                  |       | 144,346                     |       |
| Prepayment penalty bonds                                                                   |       | 29,225                  |       | 52,697                      |       |
| Nonprime residuals and  other related securities                                           |       | 21,797                  |       | 152,745                     |       |
| Prime home equity  residual securities                                                     |       | 17,432                  |       | 40,766                      |       |
| Nonprime interest-only  securities                                                         |       | 13,491                  |       | 3,757                       |       |
| Prime home equity  interest-only securities                                                |       | 6,627                   |       | 7,021                       |       |
| Subordinated  mortgage-backed pass-through securities                                      |       | 529                     |       | 1,382                       |       |
| Prime residual  securities                                                                 |       | 154                     |       | 1,435                       |       |
| Total interests retained  in securitization accounted for as available-for-sale securities |       | 413,586                 |       | 683,524                     |       |
| Total available-for-sale  securities                                                       |       | 21,087,164              |       | 9,052,084                   |       |
| Interests retained in securitization accounted for  as trading securities:                 |       |                    |       |                        |       |
| Prime interest-only and  principal-only securities                                         |       | 781,310                 |       | 549,635                     |       |
| Prime home equity line  of credit transferor’s interest                               |       | 518,033                 |       | 553,701                     |       |
| Nonprime residuals and  other related securities                                           |       | 419,645                 |       | 388,963                     |       |
| Prime home equity  residual securities                                                     |       | 406,210                 |       | 737,808                     |       |
| Prepayment penalty bonds                                                                   |       | 117,454                 |       | 90,666                      |       |
| Subordinated  mortgage-backed pass-through securities                                      |       | 28,260                  |       | —                      |       |
| Prime home equity  interest-only securities                                                |       | 21,644                  |       | 22,467                      |       |
| Interest rate swaps                                                                        |       | 21,588                  |       | 2,490                       |       |
| Prime residual  securities                                                                 |       | 7,783                   |       | 11,321                      |       |
| Total interests retained  in securitization accounted for as trading securities            |       | 2,321,927               |       | 2,357,051                   |       |
| Servicing hedge  principal-only securities accounted for as trading  securities            |       | 1,488,435               |       | —                      |       |
| Hedging and mortgage pipeline derivatives:                                                 |       |                    |       |                        |       |
| Mortgage servicing  related                                                                |       | 661,113                 |       | 837,908                     |       |
| Notes payable related                                                                      |       | 543,258                 |       | 444,342                     |       |
| Mortgage loans held for  sale and pipeline related                                         |       | 499,401                 |       | 78,066                      |       |
| Total investments in other financial instruments                                           |       | $                       | 26,601,298 |                        | $          | 12,769,451 |   |

 

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

At June 30, 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, $0.1 billion of MBS tosecure margin calls on derivative instruments and $0.1 billion of MBS to securean 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:

| ** **                                            | ** ** | **June 30, 2007** | ** ** |
|-------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                            | ** ** | **Amortized  Cost**         | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
| ** **                                            | ** ** | **(in thousands)**     | ** ** |
| Mortgage-backed  securities                           |       | $                           | 19,770,030 |   |   | $ | 3,839 |   |   | $ | (278,275 | ) | $ | 19,495,594 |   |
| Obligations of  U.S. Government-sponsored enterprises |       | 566,758                     |       |   | 338 |   |   | — |   | 567,096 |   |
| Municipal bonds                                       |       | 415,165                     |       |   | 315 |   |   | (6,310 | ) | 409,170 |   |
| U.S. Treasury  securities                             |       | 199,045                     |       |   | 888 |   |   | (914 | ) | 199,019 |   |
| Interests  retained in securitization                 |       | 372,410                     |       |   | 68,672 |   |   | (27,496 | ) | 413,586 |   |
| Other                                                 |       | 2,699                       |       |   | — |   |   | — |   | 2,699 |   |
|                                                  |       | $                           | 21,326,107 |   |   | $ | 74,052 |   |   | $ | (312,995 | ) | $ | 21,087,164 |   |

 

| ** **                                            | ** ** | **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 |   |

 

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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:

| ** **                                            | ** ** | **June 30, 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                            |       | $                                      | 13,769,545 |   | $ | (142,271 | ) | $ | 4,603,107 |   | $ | (136,004 | ) | $ | 18,372,652 |   | $ | (278,275 | ) |
| Obligations of  U.S. Government-sponsored enterprises |       | —                                 |       | — |   | — |   | — |   | — |   | — |   |
| Municipal bonds                                       |       | 99,568                                 |       | (1,318 | ) | 259,953 |   | (4,992 | ) | 359,521 |   | (6,310 | ) |
| U.S. Treasury  securities                             |       | 69,275                                 |       | (535 | ) | 57,532 |   | (379 | ) | 126,807 |   | (914 | ) |
| Interests  retained in securitization                 |       | 1,117                                  |       | (67 | ) | 130,662 |   | (27,429 | ) | 131,779 |   | (27,496 | ) |
| Other                                                 |       | —                                 |       | — |   | — |   | — |   | — |   | — |   |
| Total impaired  securities                            |       | $                                      | 13,939,505 |   | $ | (144,191 | ) | $ | 5,051,254 |   | $ | (168,804 | ) | $ | 18,990,759 |   | $ | (312,995 | ) |

 

| ** **                                            | ** ** | **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.

During the six months ended June 30, 2007, ALCOdetermined that the Company no longer intends to hold certain obligations ofU.S. Government-sponsored enterprises until the impairment can be recovered. Suchsecurities had a carrying value of $469.8 million and unrealized losses recordedin accumulated other comprehensive income totaling $4.7 million at June 30,2007. Accordingly, the Company transferred the impairment losses relating tothese securities from accumulated other 

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

comprehensive income to earningsduring the six months ended June 30, 2007. No other-than-temporaryimpairment was recorded during the six months ended June 30, 2006.

Grossgains and losses realized on the sales of available-for-sale securities (excludingrecognition of other than temporary impairment) are as follows:

| ** **                                                | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| ** **                                                | ** ** | **(in thousands)**                       | ** ** |
| Mortgage-backed  securities:                              |       |                                          |       |   |   |
| Gross realized gains                                      |       | $                                             | 11         |   | $ | — |   |
| Gross realized losses                                     |       | —                                        |       | — |   |
| Net                                                       |       | 11                                            |       | — |   |
| Obligations of  U.S. Government-sponsored enterprises:    |       |                                          |       |   |   |
| Gross realized gains                                      |       | —                                        |       | — |   |
| Gross realized losses                                     |       | —                                        |       | (51 | ) |
| Net                                                       |       | —                                        |       | (51 | ) |
| Municipal bonds:                                          |       |                                          |       |   |   |
| Gross realized gains                                      |       | 75                                            |       | 33 |   |
| Gross realized losses                                     |       | (857                                          | )          | (159 | ) |
| Net                                                       |       | (782                                          | )          | (126 | ) |
| Interests  retained in securitization:                    |       |                                          |       |   |   |
| Gross realized gains                                      |       | 1,615                                         |       | 4,778 |   |
| Gross realized losses                                     |       | (12                                           | )          | — |   |
| Net                                                       |       | 1,603                                         |       | 4,778 |   |
| Total gains and  losses on available-for-sale securities: |       |                                          |       |   |   |
| Gross realized gains                                      |       | 1,701                                         |       | 4,811 |   |
| Gross realized losses                                     |       | (869                                          | )          | (210 | ) |
| Net                                                       |       | $                                             | 832        |   | $ | 4,601 |   |

 

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

**Note 11—MortgageServicing Rights, at Fair Value**

Theactivity in MSRs is as follows:

| ** **                                                                    | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                    | ** ** | **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                       |       | 4,156,287                                     |       | 2,551,169 |   |
| Purchases of servicing assets                                                 |       | 184,511                                       |       | 8,067 |   |
| Total additions                                                               |       | 4,340,798                                     |       | 2,559,236 |   |
| Change in fair  value:                                                        |       |                                          |       |   |   |
| Due to changes in valuation inputs or assumptions  used in valuation model(1) |       | 1,506,453                                     |       | 1,547,283 |   |
| Other changes in fair value(2)                                                |       | (1,931,947                                    | )          | (1,506,699 | ) |
| Balance at end of  period                                                     |       | $                                             | 20,087,368 |   | $ | 15,320,575 |   |

 

----

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

(2)          Representschanges due to realization of expected cash flows.

20

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

**Note 12—OtherAssets**

Other assets include thefollowing:

| ** **                                                                    | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                    | ** ** | **(in thousands)** | ** ** |
| Reimbursable servicing advances, net                                          |       |                    | $          | 2,330,732                   |       |   |   | $ | 2,121,486 |   |   |
| Investments in FRB and FHLB stock                                             |       |                    | 1,324,737  |                        |       |   | 1,433,070 |   |   |
| Interest receivable                                                           |       |                    | 1,050,405  |                        |       |   | 997,854 |   |   |
| Securities broker-dealer receivables                                          |       |                    | 937,854    |                        |       |   | 1,605,502 |   |   |
| Real estate acquired in settlement of loans                                   |       |                    | 546,585    |                        |       |   | 251,163 |   |   |
| Receivables from custodial accounts                                           |       |                    | 466,531    |                        |       |   | 719,048 |   |   |
| Derivative margin accounts                                                    |       |                    | 396,815    |                        |       |   | 118,254 |   |   |
| Cash surrender value of assets held in trust  for deferred compensation plans |       |                    | 393,018    |                        |       |   | 372,877 |   |   |
| Prepaid expenses                                                              |       |                    | 392,557    |                        |       |   | 320,597 |   |   |
| Capitalized software, net                                                     |       |                    | 369,933    |                        |       |   | 367,055 |   |   |
| Cash surrender value of Company owned life  insurance                         |       |                    | 205,951    |                        |       |   | 5,894 |   |   |
| Restricted cash                                                               |       |                    | 200,020    |                        |       |   | 238,930 |   |   |
| Mortgage guaranty insurance tax and loss bonds                                |       |                    | 169,067    |                        |       |   | 128,293 |   |   |
| Receivables from sale of securities                                           |       |                    | 140,905    |                        |       |   | 284,177 |   |   |
| Other                                                                         |       |                    | 1,084,948  |                        |       |   | 877,590 |   |   |
|                                                                          |       |                    | $          | 10,010,058                  |       |   |   | $ | 9,841,790 |   |   |

 

The Company had pledged $0.8billion and $1.2 billion of securities broker-dealer receivables to securesecurities sold under agreements to repurchase at June 30, 2007 and December 31,2006, respectively.

21

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

**Note 13—DepositLiabilities**

Thefollowing table summarizes deposit liabilities:

| ** **                                                | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                | ** ** | **(in thousands)** | ** ** |
| Non-interest-bearing checking accounts                    |       | $                       | 219,044    |                        | $          | 113,045 |   |
| Retail savings and money market accounts                  |       | 9,372,105               |       | 5,943,927                   |       |
| Commercial money market accounts                          |       | 7,192,268               |       | 3,583,763                   |       |
| Time deposits:                                            |       |                    |       |                        |       |
| Retail                                                    |       | 16,682,898              |       | 17,973,792                  |       |
| Brokered                                                  |       | 8,849,716               |       | 11,612,674                  |       |
| Commercial                                                |       | 815,242                 |       | 635,927                     |       |
|                                                      |       | 26,347,856              |       | 30,222,393                  |       |
| Company-controlled custodial deposit accounts(1)          |       | 17,206,714              |       | 15,737,632                  |       |
|                                                      |       | 60,337,987              |       | 55,600,760                  |       |
| Basis adjustment through  application of hedge accounting |       | (45,146                 | )          | (22,078                     | )          |
|                                                      |       | $                       | 60,292,841 |                        | $          | 55,578,682 |   |

 

----

(1)          Theseaccounts represent the portion of the investor custodial accounts controlled byCountrywide that have been placed on deposit with Countrywide Bank, FSB (“CountrywideBank” or the “Bank”).

**Note 14—SecuritiesSold Under Agreements to Repurchase and Federal Funds Purchased**

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

| ** **                                      | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | **(in thousands)** | ** ** |
| Securities sold  under agreements to repurchase |       | $                       | 45,351,848 |                        | $          | 42,113,501 |   |
| Federal funds  purchased                        |       | 835,000                 |       | —                      |       |
|                                            |       | $                       | 46,186,848 |                        | $          | 42,113,501 |   |

 

The Company routinely enters into 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 June 30, 2007, repurchase agreements weresecured by $19.4 billion of trading securities, $41.9 billion ofsecurities purchased under agreements to resell and securities borrowed, $0.1billion in investments in other financial instruments and $0.8 billion of otherassets. At June 30, 2007, $21.1 billion of 

22

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

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.

**Note 15—NotesPayable**

Thefollowing table summarizes notes payable: 

| ** **                        | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                        | ** ** | **(in thousands)** | ** ** |
| Asset-backed commercial paper     |       | $                       | 7,613,080  |                        | $          | 7,721,278 |   |
| Unsecured commercial paper        |       | 5,857,146               |       | 6,717,794                   |       |
| Secured revolving lines of credit |       | 3,577,960               |       | 2,174,171                   |       |
| Secured overnight bank loans      |       | —                  |       | 105,049                     |       |
| Asset-backed secured financings   |       | 2,133,510               |       | 241,211                     |       |
| Unsecured bank loans              |       | —                  |       | 130,000                     |       |
| Federal Home Loan Bank advances   |       | 28,825,000              |       | 28,150,000                  |       |
| Medium-term  notes:               |       |                    |       |                        |       |
| Floating-rate                     |       | 12,999,692              |       | 13,155,231                  |       |
| Fixed-rate                        |       | 9,412,381               |       | 9,783,881                   |       |
|                              |       | 22,412,073              |       | 22,939,112                  |       |
| Convertible debentures            |       | 4,000,000               |       | —                      |       |
| Junior subordinated debentures    |       | 2,215,278               |       | 2,232,334                   |       |
| Subordinated debt                 |       | 990,886                 |       | 1,027,797                   |       |
| Other                             |       | 44,134                  |       | 48,838                      |       |
|                              |       | $                       | 77,669,067 |                        | $          | 71,487,584 |   |

 

***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 June 30, 2007.

23

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

For the six months ended June 30, 2007, theaverage borrowings under these facilities totaled $17.0 billion and theweighted-average interest rate of the SLNs was 5.35%. At June 30, 2007,the weighted-average interest rate of the SLNs was 5.39% and the Company hadpledged $8.3 billion in mortgage loans held for sale to secure the SLNs.

For the six months ended June 30,2006, the average borrowings under these facilities totaled $20.3 billionand the weighted-average interest rate of the SLNs was 4.82%. At June 30,2006, the weighted-average interest rate of the SLNs was 5.21% and the Companyhad pledged $7.7 billion in mortgage loan inventory to secure the SLNs.

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

As of June 30, 2007, the Company had unsecuredcredit agreements (revolving credit facilities) with a group of commercialbanks permitting the Company to borrow a maximum total amount of $11.4 billion.The primary purpose of these credit facilities is to provide liquidity supportfor the Company’s commercial paper program.

For the six months ended June 30, 2007, theaverage commercial paper outstanding under these facilities totaled $8.1billion and the weighted-average interest rate was 5.35%. At June 30,2007, the weighted-average interest rate was 5.41%.

For the six months ended June 30,2006, the average commercial paper outstanding under these facilities totaled$7.0 billion and the weighted-average interest rate was 4.86%. At June 30,2006, the weighted-average interest rate was 5.32%.

***Secured Revolving Lines of Credit***

The Company has formed a special purpose entity tofinance inventory with funding provided by a group of bank-sponsored conduitsthat are financed through the issuance of asset-backed commercial paper. Theentity incurs interest based on prevailing money market rates approximating thecost of asset-backed commercial paper. At June 30, 2007, the entity hadaggregate commitments from the bank-sponsored conduits totaling $10.4 billionand had $0.5 billion of outstanding borrowings, secured by $0.5 billion ofmortgage loans held for sale. For the six months ended June 30, 2007, theaverage borrowings under this facility totaled $0.7 billion and theweighted-average interest rate was 5.34%. At June 30, 2007, theweighted-average interest rate was 5.35%.

For the six months ended June 30, 2006, theaverage borrowings under this facility totaled $1.6 billion and the weighted-averageinterest rate was 4.61%. At June 30, 2006, the weighted-average interestrate was 5.13%.

The Company entered into a $4.0 billion master trustfacility in June 2006, to finance Countrywide Warehouse Lending (“CWL”)receivables backed by mortgage loans. A multi-asset conduit finance companyfunds the purchase of notes backed by CWL receivables which are financed byissuing extendable maturity asset-backed commercial paper. The borrowings underthis facility at June 30, 2007, totaled $1.0 billion, and the Companyhad pledged $1.1 billion in loans held for investment to secure this facility.For the six months ended June 30, 2007, the average borrowings under thisfacility totaled $1.1 billion and the weighted-average interest rate was 5.38%.At June 30, 2007, the weighted-average interest rate was 5.39%.

24

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

For the six months ended June 30, 2006, therewere no outstanding borrowings under this facility.

In April 2007, theCompany entered into a secured master note purchase agreement to financecommercial real estate mortgage loan inventory. The borrowings under thisfacility at June 30, 2007 totaled $2.0 billion, and the Company hadpledged $2.1 billion in commercial real estate mortgage loans held for sale tosecure this facility. For the six months ended June 30, 2007, the averageborrowings under this facility totaled $0.8 billion and the weighted-averageinterest rate was 5.42%. At June 30, 2007, the weighted-average interestrate was 5.53%.

***Asset-Backed Secured Financings***

The Company recordedcertain securitization transactions as secured borrowings because they did notqualify for sales treatment. The amounts accounted for as secured borrowingstotaled $2.1 billion and $0.2 billion at June 30, 2007 and December 31,2006, respectively.

***Federal Home Loan Bank Advances***

During the six months ended June 30, 2007, theCompany obtained $25.8 billion of advances from the FHLB, of which $14.4billion are structured advances, with the remainder being fixed-rate advances. Ofthese structured advances, $0.9 billion were convertible where the rate isfixed and the FHLB has the option to convert to a floating rate in 2010. Theremaining structured advances have rates that will not exceed the startingrates but will decrease if the one-year Constant Maturities Treasury Index rateincreases above a specified level. At June 30, 2007, the Company hadpledged $56.6 billion of mortgage loans to secure its outstanding FHLB advancesand 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 six months ended June 30, 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 |       |                                             | $          | 1,717,000              |       |                   | $          | 2,206,585 |   | $ | 3,923,585 |   |   | 4.90 | % |   | 5.80 | % | January, 2008 |   | June, 2012 |   |
|                   |            |                                                  |            |                        |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

All of the fixed-rate medium-term notes issued by theCompany during the six months ended June 30, 2007 were effectivelyconverted to floating-rate debt using interest rate swaps.

During the six months ended June 30, 2007, theCompany redeemed $4.5 billion of maturing medium-term notes.

As of June 30, 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.

25

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

***Convertible Debentures***

Asdetailed in a Form 8-K filed with the Securities and ExchangeCommission on May 29, 2007, in May 2007, the Company issued $4.0billion series A and B floating-rate convertible debentures. The debenturesbear interest at rates indexed to LIBOR and are guaranteed by one of theCompany’s subsidiaries, Countrywide Home Loans. The following table summarizescertain terms of the convertible debentures: 

|                                                                               | ** ** | **Series A**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | ** ** | **Series B**                                                                                                   |
|-------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------|
| Securities offered                                                            |       | $2.0 billion aggregate principal amount                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       | $2.0 billion aggregate principal amount                                                                             |
| Maturity date                                                                 |       | April 15, 2037                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       | May 15, 2037                                                                                                   |
| Annual interest rate                                                          |       | 3-month LIBOR,  reset quarterly, minus 3.50%, payable quarterly. The interest rate at  June 30, 2007 was 1.86%                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       | 3-month LIBOR,  reset quarterly, minus 2.25%, payable quarterly. The interest rate at  June 30, 2007 was 3.11% |
| Conversion rights                                                             |       | Holders may convert their debentures, in whole or in  part, at any time before the close of business on the business day  immediately preceding the relevant maturity date from and after the date of  the following events:

·  upon satisfaction of the common stock sale  price condition;

·  if the trading price of the debentures falls  below a certain level;

·  if the Company has called those debentures  for redemption;

·  on or after January 15, 2037, in the  case of the Series A Debentures or February 15, 2037, in the case  of the Series B Debentures; or

·  upon occurrence of specified corporate  transactions affecting the Company |
| Conversion rate                                                               |       | 19.0734 shares of common  stock for each debenture subject to adjustment in specified circumstances                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       | 17.1003 shares of common  stock for each debenture subject to adjustment in specified circumstances                 |
| Redemption                                                                    |       | The Company may redeem  the Debentures, in whole or in part, at any time on or after:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                                                                          |       | October 15, 2008                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       | May 15, 2009                                                                                                   |
| Repurchase of debentures by  Countrywide at option of holder on certain dates |       | Holders have the right to require the Company to repurchase all or a portion  of their Debentures on:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                                                                               |       | October 15, 2008,  2009, 2010, 2012, 2017, 2022, 2027 and 2032                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       | May 15, 2009, 2010,  2012, 2017, 2022, 2027, and 2032                                                          |

*** ***

26

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

***Junior Subordinated Debentures***

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

TheCompany guarantees the indebtedness of Countrywide Home Loans to one of itssubsidiary trusts, Countrywide Capital III, which is excluded from the Company’sconsolidated financial statements. Following is summarized information for thattrust:

| ** **                                                                          | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                          | ** ** | **(in thousands)** | ** ** |
| Balance Sheet:                                                                      |       |                    |       |                        |       |   |   |
| Junior subordinated debentures receivable                                           |       | $                       | 205,334    |                        |       | $ | 205,312 |   |   |
| Other assets                                                                        |       | 692                     |       |                        | 1,191      |   |   |
| Total assets                                                                        |       | $                       | 206,026    |                        |       | $ | 206,503 |   |   |
| Notes payable                                                                       |       | $                       | 6,174      |                        |       | $ | 6,173 |   |   |
| Other liabilities                                                                   |       | 692                     |       |                        | 1,191      |   |   |
| Company-obligated guaranteed redeemable capital  trust pass-through securities |       | 199,160                 |       |                        | 199,139    |   |   |
| Shareholder’s equity                                                           |       | —                  |       |                        | —     |   |   |
| Total liabilities  and shareholder’s equity                                    |       | $                       | 206,026    |                        |       | $ | 206,503 |   |   |

 

| ** **                 | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------|------------|-----------------------------------------------|------------|
| ** **                 | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| ** **                 | ** ** | **(in thousands)**                       | ** ** |
| Statement of Earnings:     |       |                                          |       |   |   |
| Revenues                   |       | $                                             | 8,321      |   | $ | 8,321 |   |
| Expenses                   |       | (8,321                                        | )          | (8,321 | ) |
| Provision for income taxes |       | —                                        |       | — |   |
| Net earnings               |       | $                                             | —     |   | $ | — |   |

 

***Subordinated Debt***

The Company hasoutstanding $1.0 billion of 6.25% fixed-rate unsecured subordinated notesmaturing in May 2016. The notes rank subordinate and junior to all of theCompany’s senior indebtedness, and rank senior to the Company’s juniorsubordinated debentures underlying the Company’s trust preferred securities.

**Note 16—Regulatoryand Agency Capital Requirements**

On March 12, 2007, the Bank converted its charterfrom a national bank to a federal savings bank. As a result of this conversion,the Company became a savings and loan holding company, and is no longer a bankholding company. As a savings and loan holding company, Countrywide FinancialCorporation is no longer subject to specific statutory capital requirements.Countrywide Bank’s capital is calculated in 

27

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

compliance with therequirements of the Office of Thrift Supervision (“OTS”), which are similar tothose of the Office of the Comptroller of the Currency, the Bank’s formerregulator. The Company is also subject to U.S. Department of Housing and UrbanDevelopment, Fannie Mae, Freddie Mac and Government National MortgageAssociation (“Ginnie Mae”) net worth requirements, which are lower than thoseof the OTS. Management believes the Company is in compliance with thoserequirements.

At June 30,2007, the Bank’s regulatory capital ratios and amounts and minimum requiredcapital ratios to maintain a “well capitalized” status are as follows:

| ** **           | ** ** | **June 30, 2007**                      | ** ** |
|----------------------|------------|--------------------------------------------------|------------|
| ** **           | ** ** | **Minimum  Required** (1)                   | ** ** | **Ratio** | ** ** | **Amount** | ** ** |
| ** **           | ** ** | **(dollar amounts in thousands)** | ** ** |
| Tier 1 Capital       |       |                                             | 5.0        | % |   |   | 8.0 | % |   | $ | 7,990,469 |   |
| Risk-Based  Capital: |       |                                             |       |   |   |   |   |   |   |   |   |
| Tier 1               |       |                                             | 6.0        | % |   |   | 12.9 | % |   | $ | 7,990,469 |   |
| Total                |       |                                             | 10.0       | % |   |   | 13.7 | % |   | $ | 8,454,560 |   |

----

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

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

| ** **          | ** ** | **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)          Minimum required toqualify as “well capitalized.”

Countrywide Bank is required by OTS regulations tomaintain tangible capital of at least 1.5% of assets. However, the Bank is alsorequired to maintain a tangible equity ratio of at least 2% to avoid beingclassified as “critically undercapitalized.” Critically undercapitalizedinstitutions are subject to the prompt corrective action provisions of theFinancial Institution Reform Recovery and Enforcement Act of 1989. The Bank’stangible capital ratio was 8.0% and 7.6% at June 30, 2007 and December 31,2006, respectively.

28

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

**Note 17—SupplementalCash Flow Information**

Thefollowing table presents supplemental cash flow information:

| ** **                                                                                                                                                                                             | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                                                                                             | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| ** **                                                                                                                                                                                             | ** ** | **(in thousands)**                       | ** ** |
| Cash used to pay  interest                                                                                                                                                                             |       | $                                             | 5,356,090  |   | $ | 4,000,000 |   |
| Cash used to pay  income taxes                                                                                                                                                                         |       | 13,796                                        |       | 20,115 |   |
| Non-cash investing  activities:                                                                                                                                                                        |       |                                          |       |   |   |
| Transfer of loans from mortgage loans held for sale  to loans held for investment                                                                                                                 |       | 1,636,114                                     |       | — |   |
| Transfer of loans from held for investment to  mortgage loans held for sale                                                                                                                            |       | —                                        |       | 672,809 |   |
| Servicing resulting from transfers of financial  assets                                                                                                                                                |       | 4,156,287                                     |       | 2,551,169 |   |
| Retention of other financial instruments classified  as available-for-sale in securitization transactions                                                                                              |       | 1,829                                         |       | 42,392 |   |
| Unrealized 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 |       | (118,672                                      | )          | (124,954 | ) |
| 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 |   |
|                                                                                                                                                                                                        |            |                                               |            |  |  |  |  |

 

29

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

**Note 18—NetInterest Income**

Thefollowing table summarizes net interest income:

| ** **                                                                                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                        | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                                        | ** ** | **(in thousands)**                         | ** ** |
| Interest income:                                                                                  |       |                                            |       |                                          |       |   |   |   |   |
| Loans                                                                                             |       | $                                               | 2,150,060  |                                          | $          | 1,946,437 |   | $ | 4,270,105 |   | $ | 3,724,313 |   |
| Trading securities                                                                                |       | 341,932                                         |       | 155,730                                       |       | 660,884 |   | 354,024 |   |
| Securities purchased under agreements to resell,  securities borrowed and federal funds sold |       | 613,410                                         |       | 528,585                                       |       | 1,274,689 |   | 943,741 |   |
| Investments in other financial instruments                                                        |       | 233,261                                         |       | 93,818                                        |       | 360,752 |   | 193,549 |   |
| Other                                                                                             |       | 160,981                                         |       | 121,010                                       |       | 285,196 |   | 223,711 |   |
| Total interest income                                                                             |       | 3,499,644                                       |       | 2,845,580                                     |       | 6,851,626 |   | 5,439,338 |   |
| Interest expense:                                                                                 |       |                                            |       |                                          |       |   |   |   |   |
| Deposit liabilities                                                                               |       | 544,030                                         |       | 356,628                                       |       | 1,043,869 |   | 642,828 |   |
| Securities sold under agreements to repurchase and  federal funds purchased                  |       | 911,104                                         |       | 633,710                                       |       | 1,801,771 |   | 1,185,416 |   |
| Trading securities sold, not yet purchased                                                        |       | 60,375                                          |       | 45,813                                        |       | 122,504 |   | 101,961 |   |
| Notes payable                                                                                     |       | 1,116,212                                       |       | 1,031,333                                     |       | 2,173,445 |   | 1,983,536 |   |
| Other                                                                                             |       | 139,927                                         |       | 87,622                                        |       | 251,104 |   | 140,688 |   |
| Total interest expense                                                                            |       | 2,771,648                                       |       | 2,155,106                                     |       | 5,392,693 |   | 4,054,429 |   |
| Total net  interest income                                                                        |       | $                                               | 727,996    |                                          | $          | 690,474 |   | $ | 1,458,933 |   | $ | 1,384,909 |   |

 

**Note 19—PensionPlans**

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

Netperiodic benefit cost for the pension plan during the three and six monthsended June 30, 2007 and 2006, includes the following components:

| ** **                          | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                          | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                          | ** ** | **(in thousands)**                         | ** ** |
| Service cost                        |       | $                                               | 19,400     |                                          | $          | 22,440 |   | $ | 41,479 |   | $ | 42,200 |   |
| Interest cost                       |       | 6,355                                           |       | 5,524                                         |       | 12,337 |   | 10,388 |   |
| Expected return  on plan assets     |       | (5,483                                          | )          | (4,358                                        | )          | (10,974 | ) | (8,196 | ) |
| Amortization of  prior service cost |       | 87                                              |       | 91                                            |       | 174 |   | 171 |   |
| Recognized net  actuarial loss      |       | 217                                             |       | 1,855                                         |       | 217 |   | 3,489 |   |
| Net periodic  benefit cost          |       | $                                               | 20,576     |                                          | $          | 25,552 |   | $ | 43,233 |   | $ | 48,052 |   |

 

30

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

**Note 20—Segmentsand Related Information**

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

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

The Loan Production Sector originates prime andnonprime loans for sale or securitization through a variety of channels on anational scale. The Loan Production Sector is comprised of three lendingchannels of Countrywide Home Loans and also includes the mortgage bankingactivities of Countrywide Bank. The three production channels are: the RetailChannel (Consumer Markets and Full Spectrum Lending), the Wholesale LendingChannel and the Correspondent Lending Channel. The Retail Channel sources mortgageloans primarily from consumers through the Company’s retail branch network andcall centers, as well as through real estate agents and homebuilders. TheWholesale Lending Channel sources mortgage loans primarily from mortgagebrokers. The Correspondent Lending Channel purchases mortgage loans from othermortgage lenders, including financial institutions, commercial banks, savingsand loan associations, home builders and credit unions.

The Loan Servicing Sector includes investments in MSRsand retained interests, as well as the Company’s loan servicing operations andsubservicing for other domestic financial institutions. The Loan ClosingServices Sector is comprised of the LandSafe companies, which provide creditreports, appraisals, title reports and flood determinations to the Company’sLoan Production Sector, as well as to third parties.

The Banking Segment includes Banking Operations—primarilythe investment and fee-based activities of Countrywide Bank—together with theactivities of Countrywide Warehouse Lending and certain loans produced forinvestment and owned by Countrywide Home Loans. Banking Operations invests inmortgage loans sourced from the Loan Production Sector and mortgage loans andhigh-quality MBS purchased from non-affiliated entities. Countrywide WarehouseLending provides third-party mortgage lenders with temporary financing securedby mortgage loans.

The Capital Markets Segment includes the operations ofCountrywide Securities Corporation, a registered broker-dealer specializing inthe mortgage securities market. It also includes the operations of CountrywideAsset Management Corporation, Countrywide Commercial Real Estate Finance Inc.,Countrywide Servicing Exchange, CFC International Capital Markets, Limited,Countrywide Alternative Investments Inc., CSC Futures Inc., CountrywideCapital Markets Asia Ltd, Countrywide Capital Markets Asia (H.K.) Limited, CAAManagement Inc., Countrywide Sunfish Management LLC and Countrywide DerivativeProducts, Inc.

The Insurance Segment includes Balboa Life andCasualty Group, a national provider of property, casualty, life, disability andcredit insurance; Balboa Reinsurance Company, a primary mortgage reinsurancecompany; and Countrywide Insurance Services, Inc., a national insuranceagency offering a specialized menu of insurance products directly to consumers.

The Global Operations Segment includes Global HomeLoans Limited, a provider of loan origination processing and loan subservicingin the United Kingdom until July 31, 2006; UKValuation Limited, a providerof property valuation services in the UK until December 6, 2006;Countrywide International Technology Holdings Limited, a licensor of loanorigination processing, servicing and residential real 

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

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.

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

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

Financialhighlights by operating segments are as follows:

| ** **              | ** ** | **Quarter Ended June 30, 2007** | ** ** |
|-------------------------|------------|-----------------------------------------------------|------------|
| ** **              | ** ** | **Mortgage Banking**                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **              | ** ** | **Loan  Production**                                | ** ** | **Loan  Servicing** | ** ** | **Closing  Services** | ** ** | **Total** | ** ** | **Banking** | ** ** | **Capital  Markets** | ** ** | **Insurance** | ** ** | **Global  Operations** | ** ** | **Other** | ** ** | **Total  Consolidated** | ** ** |
| ** **              | ** ** | **(in thousands)**                             | ** ** |
| Revenues:               |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| External                |       | $                                                   | 1,499,693  |   | $ | (166,745 | ) | $ | 89,397 |   | $ | 1,422,345 |   | $ | 490,740 |   | $ | 223,744 |   | $ | 390,742 |   |   | $ | 7,165 |   |   | $ | 13,661 |   | $ | 2,548,397 |   |
| Intersegment            |       | 14,366                                              |       | 260,886 |   | (138 | ) | 275,114 |   | (202,969 | ) | 21,013 |   | (1,925 | ) |   | 21,733 |   |   | (112,966 | ) | — |   |
| Total Revenues          |       | $                                                   | 1,514,059  |   | $ | 94,141 |   | $ | 89,259 |   | $ | 1,697,459 |   | $ | 287,771 |   | $ | 244,757 |   | $ | 388,817 |   |   | $ | 28,898 |   |   | $ | (99,305 | ) | $ | 2,548,397 |   |
| Pre-tax Earnings (Loss) |       | $                                                   | 438,699    |   | $ | (147,358 | ) | $ | 28,261 |   | $ | 319,602 |   | $ | 128,910 |   | $ | 109,510 |   | $ | 98,721 |   |   | $ | 6,688 |   |   | $ | 1,267 |   | $ | 664,698 |   |
| Total Assets            |       | $                                                   | 34,166,571 |   | $ | 33,492,428 |   | $ | 105,799 |   | $ | 67,764,798 |   | $ | 93,464,293 |   | $ | 57,629,768 |   | $ | 3,342,309 |   |   | $ | 247,572 |   |   | $ | (5,626,980 | ) | $ | 216,821,760 |   |

 

| ** **              | ** ** | **Quarter Ended June 30, 2006** | ** ** |
|-------------------------|------------|-----------------------------------------------------|------------|
| ** **              | ** ** | **Mortgage Banking**                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **              | ** ** | **Loan  Production**                                | ** ** | **Loan  Servicing** | ** ** | **Closing  Services** | ** ** | **Total** | ** ** | **Banking** | ** ** | **Capital  Markets** | ** ** | **Insurance** | ** ** | **Global  Operations** | ** ** | **Other** | ** ** | **Total  Consolidated** | ** ** |
| ** **              | ** ** | **(in thousands)**                             | ** ** |
| Revenues:               |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| External                |       | $                                                   | 1,490,795  |   | $ | 276,117 |   | $ | 78,765 |   | $ | 1,845,677 |   | $ | 623,656 |   | $ | 192,674 |   | $ | 312,726 |   |   | $ | 4,348 |   |   | $ | 21,135 |   | $ | 3,000,216 |   |
| Intersegment            |       | (8,351                                              | )          | 225,279 |   | — |   | 216,928 |   | (179,946 | ) | 65,008 |   | (776 | ) |   | 10,854 |   |   | (112,068 | ) | — |   |
| Total Revenues          |       | $                                                   | 1,482,444  |   | $ | 501,396 |   | $ | 78,765 |   | $ | 2,062,605 |   | $ | 443,710 |   | $ | 257,682 |   | $ | 311,950 |   |   | $ | 15,202 |   |   | $ | (90,933 | ) | $ | 3,000,216 |   |
| Pre-tax Earnings (Loss) |       | $                                                   | 324,564    |   | $ | 279,283 |   | $ | 26,225 |   | $ | 630,072 |   | $ | 325,371 |   | $ | 157,590 |   | $ | 88,747 |   |   | $ | 2,820 |   |   | $ | (10,577 | ) | $ | 1,194,023 |   |
| Total Assets            |       | $                                                   | 35,317,511 |   | $ | 23,634,973 |   | $ | 89,407 |   | $ | 59,041,891 |   | $ | 85,962,550 |   | $ | 49,355,886 |   | $ | 2,393,146 |   |   | $ | 175,314 |   |   | $ | (1,944,324 | ) | $ | 194,984,463 |   |

 

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

33

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

| ** **              | ** ** | **Six Months Ended June 30, 2007** | ** ** |
|-------------------------|------------|-------------------------------------------------------------|------------|
| ** **              | ** ** | **Mortgage Banking**                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **              | ** ** | **Loan  Production**                                        | ** ** | **Loan  Servicing** | ** ** | **Closing  Services** | ** ** | **Total** | ** ** | **Banking** | ** ** | **Capital  Markets** | ** ** | **Insurance** | ** ** | **Global  Operations** | ** ** | **Other** | ** ** | **Total  Consolidated** | ** ** |
| ** **              | ** ** | **(in thousands)**                                     | ** ** |
| Revenues:               |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| External                |       | $                                                           | 2,678,488  |   | $ | (264,075 | ) | $ | 174,873 |   | $ | 2,589,286 |   | $ | 1,110,188 |   | $ | 451,535 |   | $ | 761,908 |   |   | $ | 11,043 |   |   | $ | 30,213 |   | $ | 4,954,173 |   |
| Intersegment            |       | 16,897                                                      |       | 508,385 |   | (138 | ) | 525,144 |   | (393,156 | ) | 53,878 |   | (3,375 | ) |   | 38,305 |   |   | (220,796 | ) | — |   |
| Total Revenues          |       | $                                                           | 2,695,385  |   | $ | 244,310 |   | $ | 174,735 |   | $ | 3,114,430 |   | $ | 717,032 |   | $ | 505,413 |   | $ | 758,533 |   |   | $ | 49,348 |   |   | $ | (190,583 | ) | $ | 4,954,173 |   |
| Pre-tax Earnings (Loss) |       | $                                                           | 578,140    |   | $ | (216,451 | ) | $ | 58,217 |   | $ | 419,906 |   | $ | 417,004 |   | $ | 241,718 |   | $ | 278,379 |   |   | $ | 10,694 |   |   | $ | (2,208 | ) | $ | 1,365,493 |   |
| Total Assets            |       | $                                                           | 34,166,571 |   | $ | 33,492,428 |   | $ | 105,799 |   | $ | 67,764,798 |   | $ | 93,464,293 |   | $ | 57,629,768 |   | $ | 3,342,309 |   |   | $ | 247,572 |   |   | $ | (5,626,980 | ) | $ | 216,821,760 |   |

 

| ** **              | ** ** | **Six Months Ended June 30, 2006** | ** ** |
|-------------------------|------------|-------------------------------------------------------------|------------|
| ** **              | ** ** | **Mortgage Banking**                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **              | ** ** | **Loan  Production**                                        | ** ** | **Loan  Servicing** | ** ** | **Closing  Services** | ** ** | **Total** | ** ** | **Banking** | ** ** | **Capital  Markets** | ** ** | **Insurance** | ** ** | **Global  Operations** | ** ** | **Other** | ** ** | **Total  Consolidated** | ** ** |
| ** **              | ** ** | **(in thousands)**                                     | ** ** |
| Revenues:               |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| External                |       | $                                                           | 2,839,247  |   | $ | 575,614 |   | $ | 150,393 |   | $ | 3,565,254 |   | $ | 1,209,263 |   | $ | 396,730 |   | $ | 616,352 |   |   | $ | 30,487 |   |   | $ | 18,078 |   | $ | 5,836,164 |   |
| Intersegment            |       | (15,204                                                     | )          | 395,618 |   | — |   | 380,414 |   | (313,921 | ) | 124,075 |   | (1,255 | ) |   | 19,793 |   |   | (209,106 | ) | — |   |
| Total Revenues          |       | $                                                           | 2,824,043  |   | $ | 971,232 |   | $ | 150,393 |   | $ | 3,945,668 |   | $ | 895,342 |   | $ | 520,805 |   | $ | 615,097 |   |   | $ | 50,280 |   |   | $ | (191,028 | ) | $ | 5,836,164 |   |
| Pre-tax Earnings (Loss) |       | $                                                           | 608,713    |   | $ | 528,001 |   | $ | 48,432 |   | $ | 1,185,146 |   | $ | 666,457 |   | $ | 313,163 |   | $ | 153,690 |   |   | $ | 12,988 |   |   | $ | (18,058 | ) | $ | 2,313,386 |   |
| Total Assets            |       | $                                                           | 35,317,511 |   | $ | 23,634,973 |   | $ | 89,407 |   | $ | 59,041,891 |   | $ | 85,962,550 |   | $ | 49,355,886 |   | $ | 2,393,146 |   |   | $ | 175,314 |   |   | $ | (1,944,324 | ) | $ | 194,984,463 |   |

 

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

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

**Note 21—SummarizedFinancial Information**

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

|                                                                                              | ** ** | **June 30, 2007**                                      | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **Countrywide  Financial  Corporation  (Parent Only)** | ** ** | **Countrywide  Home  Loans, Inc.  (Consolidated)** | ** ** | **Other  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                                                                   | ** ** | **(in thousands)**                                     | ** ** |
| **Balance Sheets:**                                                                          |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage loans held for sale                                                                 |       |                                                        | $          | — |   |   |   | $ | 24,082,666 |   |   | $ | 10,030,086 |   | $ | (22,598 | ) | $ | 34,090,154 |   |
| Trading securities                                                                           |       |                                                        | —     |   |   |   | 292,308 |   |   | 23,036,858 |   | (536,085 | ) | 22,793,081 |   |
| Securities purchased under agreements to resell,  securities borrowed and federal funds sold |       |                                                        | —     |   |   |   | — |   |   | 29,253,162 |   | (2,868,073 | ) | 26,385,089 |   |
| Loans held for investment, net                                                          |       |                                                        | —     |   |   |   | 5,554,703 |   |   | 68,516,514 |   | (14,678 | ) | 74,056,539 |   |
| Investments in other financial instruments, at fair value                                    |       |                                                        | 241,963    |   |   |   | 3,441,819 |   |   | 22,971,713 |   | (54,197 | ) | 26,601,298 |   |
| Mortgage servicing rights, at fair value                                                     |       |                                                        | —     |   |   |   | 20,067,327 |   |   | 20,041 |   | — |   | 20,087,368 |   |
| Investments in subsidiaries                                                                  |       |                                                        | 16,608,741 |   |   |   | — |   |   | 5,266 |   | (16,614,007 | ) | — |   |
| Other assets                                                                                 |       |                                                        | 34,884,124 |   |   |   | 16,488,511 |   |   | 15,621,932 |   | (54,186,336 | ) | 12,808,231 |   |
| Total assets                                                                                 |       |                                                        | $          | 51,734,828 |   |   |   | $ | 69,927,334 |   |   | $ | 169,455,572 |   | $ | (74,295,974 | ) | $ | 216,821,760 |   |
| Deposit liabilities                                                                          |       |                                                        | $          | — |   |   |   | $ | — |   |   | $ | 60,568,898 |   | $ | (276,057 | ) | $ | 60,292,841 |   |
| Securities sold under agreements to repurchase  and federal funds purchased             |       |                                                        | —     |   |   |   | 534,756 |   |   | 48,518,584 |   | (2,866,492 | ) | 46,186,848 |   |
| Notes payable                                                                                |       |                                                        | 26,665,508 |   |   |   | 22,941,200 |   |   | 37,271,983 |   | (9,209,624 | ) | 77,669,067 |   |
| Other liabilities                                                                            |       |                                                        | 10,683,425 |   |   |   | 42,229,765 |   |   | 10,671,562 |   | (45,297,643 | ) | 18,287,109 |   |
| Equity                                                                                       |       |                                                        | 14,385,895 |   |   |   | 4,221,613 |   |   | 12,424,545 |   | (16,646,158 | ) | 14,385,895 |   |
| Total liabilities and equity                                                                 |       |                                                        | $          | 51,734,828 |   |   |   | $ | 69,927,334 |   |   | $ | 169,455,572 |   | $ | (74,295,974 | ) | $ | 216,821,760 |   |
|                                                                                         |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |

 

| ** **                             | ** ** | **Six Months  Ended June 30, 2007**          | ** ** |
|----------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                             | ** ** | **Countrywide  Financial  Corporation  (Parent Only)** | ** ** | **Countrywide  Home  Loans, Inc.  (Consolidated)** | ** ** | **Other  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                             | ** ** | **(in thousands)**                                     | ** ** |
| **Statements of Earnings:**            |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                               |       |                                                        | $          | (51,127 | ) |   |   | $ | 3,068,101 |   |   |   | $ | 2,530,976 |   |   |   | $ | (593,777 | ) |   |   | $ | 4,954,173 |   |   |
| Expenses                               |       |                                                        | 6,795      |   |   |   | 2,541,297 |   |   |   | 1,608,111 |   |   |   | (567,523 | ) |   |   | 3,588,680 |   |   |
| (Benefit) provision for income taxes   |       |                                                        | (19,264    | ) |   |   | 160,514 |   |   |   | 313,397 |   |   |   | (8,203 | ) |   |   | 446,444 |   |   |
| Equity in net earnings of subsidiaries |       |                                                        | 957,707    |   |   |   | — |   |   |   | — |   |   |   | (957,707 | ) |   |   | — |   |   |
| Net earnings                           |       |                                                        | $          | 919,049 |   |   |   | $ | 366,290 |   |   |   | $ | 609,468 |   |   |   | $ | (975,758 | ) |   |   | $ | 919,049 |   |   |

 

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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 |   |

 

| ** **                              | ** ** | **Six Months Ended June 30, 2006**                | ** ** |
|-----------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                              | ** ** | **Countrywide  Financial  Corporation  (Parent Only)** | ** ** | **Countrywide  Home  Loans, Inc.  (Consolidated)** | ** ** | **Other  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                              | ** ** | **(in thousands)**                                     | ** ** |
| **Statements of Earnings:**             |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                                |       |                                                        | $          | (37,720 | ) |   |   | $ | 3,465,004 |   |   |   | $ | 2,729,582 |   |   |   | $ | (320,702 | ) |   |   | $ | 5,836,164 |   |   |
| Expenses                                |       |                                                        | 6,591      |   |   |   | 2,583,343 |   |   |   | 1,232,856 |   |   |   | (300,012 | ) |   |   | 3,522,778 |   |   |
| (Benefit) provision for income  taxes   |       |                                                        | (18,121    | ) |   |   | 344,756 |   |   |   | 589,346 |   |   |   | (8,296 | ) |   |   | 907,685 |   |   |
| Equity in net earnings of  subsidiaries |       |                                                        | 1,431,891  |   |   |   | — |   |   |   | — |   |   |   | (1,431,891 | ) |   |   | — |   |   |
| Net earnings                            |       |                                                        | $          | 1,405,701 |   |   |   | $ | 536,905 |   |   |   | $ | 907,380 |   |   |   | $ | (1,444,285 | ) |   |   | $ | 1,405,701 |   |   |

 

**Note 22—Borrowerand Investor Custodial Accounts**

As of June 30, 2007and December 31, 2006, the Company managed $23.2 billion and $23.3billion, respectively, of borrower and investor custodial cash accounts. Thesecustodial accounts relate to the Company’s mortgage servicing activities. Ofthese amounts, $17.2 billion and $15.7 billion, respectively, were deposited atthe Bank, and included in the Company’s deposit liabilities as custodialdeposit accounts. 

36

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

Theremaining balances were deposited with other depository institutions and arenot recorded on the Company’s balance sheets.

**Note 23—LegalProceedings**

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 24—LoanCommitments**

As of June 30, 2007 and December 31, 2006,the Company had undisbursed home equity lines of credit commitments of $8.6billion and $9.5 billion, respectively, as well as undisbursed constructionloan commitments of $1.8 billion and $1.5 billion at June 30, 2007 and December 31,2006, respectively. As of June 30, 2007 and December 31, 2006,outstanding commitments to fund mortgage loans totaled $42.6 billion and $35.5billion, respectively.

As of June 30, 2007 andDecember 31, 2006, outstanding net commitments to sell mortgage loans totaled$28.8 billion and $18.4 billion, respectively.

**Note 25—SubsequentEvents**

On July 24, 2007, theCompany announced that its Board of Directors declared a dividend of$0.15 per common share payable August 31, 2007, to shareholders ofrecord on August 15, 2007.

**Note 26—RecentlyIssued Accounting Pronouncements**

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 157, *Fair ValueMeasurements,* (“SFAS 157”). SFAS 157 provides a framework formeasuring fair value when such measurements are used for accounting purposes.The framework focuses on an exit price in the principal (or, alternatively, themost advantageous) market accessible in an orderly transaction between willingmarket participants. SFAS 157 establishes a three-tiered fair value hierarchywith Level 1 representing quoted prices for identical assets or liabilities inan active market and Level 3 representing estimated values based onunobservable inputs. Under SFAS 157, related disclosures are segregated forassets and liabilities measured at fair value based on the level used withinthe hierarchy to determine their fair values. The Company has determined thatit will adopt SFAS 157 on its effective date of January 1, 2008 and thefinancial impact, if any, upon adoption has not yet been determined.

In February 2007, the FASB issued Statement ofFinancial Accounting Standards No. 159, *The FairValue Option for Financial Assets and Financial Liabilities, including anamendment of FASB Statement No. 115,*(“SFAS 159”). SFAS 159permits fair value accounting to be irrevocably elected for certain financialassets and liabilities on an individual contract basis at the time ofacquisition or at a remeasurement event date. Upon adoption of SFAS 159, fairvalue accounting may also be elected for existing financial assets andliabilities. For those instruments for which fair value accounting is elected,changes in fair value will be recognized in earnings and fees and costsassociated with origination or acquisition will be recognized as incurredrather than deferred. SFAS 159 is effective January 1, 2008, with 

37

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

early adoption permittedas of January 1, 2007. The Company has determined that it will adopt SFAS159 concurrent with the adoption of SFAS 157 on January 1, 2008, but hasnot yet determined the financial impact, if any, upon adoption.

In April 2007, the FASB issued FASB StaffPosition No. FIN 39-1, *Amendment of FASBInterpretation No. 39*, (“FSP FIN 39-1”). FSP FIN 39-1amends certain paragraphs of FASB Interpretation Number 39, *Offsetting of Amounts Related to Certain Contracts*,—*an interpretation of APB Opinion No. 10 and FASB Statement No. 105*(“FIN 39”) to permit a reporting entity to offset fair value amounts recognizedfor the right to reclaim cash collateral or the obligation to return cashcollateral against fair value amounts recognized for derivative instrumentsexecuted with the same counterparty under the same master netting arrangement. FSPFIN 39-1 is effective for fiscal years beginning after November 15,2007, with early application permitted. Upon application, the Company shall bepermitted to change its accounting policy to offset or not offset fair valueamounts recognized for derivative instruments under master nettingarrangements. The Company has not yet determined whether it will apply thisguidance earlier than its effective date and has not determined the financial impact,if any, upon application.

38

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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.

***Results of Operations***

During the quarter ended June 30, 2007, theresidential mortgage market continued to be affected by increasing interestrates, a weakening housing market and increasing delinquencies and defaults. Regulatorsand legislators increased their focus on tightening underwriting standards fornew mortgage loans. Many nonprime mortgage lenders were impacted by reducedliquidity and as a result, were required to scale back or cease operations. Countrywideand most other market participants responded to changes in the marketplace withchanges in product offerings and tightening of underwriting guidelines. 

Countrywide’s quarterly results were negatively impactedby increased credit-related costs, primarily related to home equity loans. However,during the quarter Countrywide was able to increase loan production andestimated market share. Our pre-tax earnings from our Loan Production sectorimproved from the first quarter of 2007 as revenues increased, particularly fornonprime products underwritten with the revised guidelines.

Following is a summary of our key performance measuresfor the quarters ended June 30, 2007 and 2006:

| ** **                                       | ** ** | **June 30,**                                                                       | ** **    | ** ** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------------------------------------------------|---------------|------------|------------|
| ** **                                       | ** ** | **2007**                                                                                | ** **    | **2006**   | ** ** | **% Change** | ** ** |
| ** **                                       | ** ** | **(dollar amounts  in thousands, except per share data)** | ** **    | ** ** | ** ** |
| **Consolidated Company**                         | ** ** | ** **                                                                              | ** **    | ** ** | ** ** |   | ** ** | ** ** |   |
| Revenues                                         |       | $                                                                                       | 2,548,397     |       | $          | 3,000,216 |   |   | (15 | %) |   |
| Net earnings                                     |       | $                                                                                       | 485,068       |       | $          | 722,190 |   |   | (33 | %) |   |
| Diluted earnings  per share                      |       | $                                                                                       | 0.81          |       | $          | 1.15 |   |   | (30 | %) |   |
| Total assets at  period end                      |       | $                                                                                       | 216,821,760   |       | $          | 194,984,463 |   |   | 11 | % |   |
| **Key Segment Pre-tax Earnings**                 | ** ** | ** **                                                                              | ** **    | ** ** | ** ** |   | ** ** | ** ** |   |
| Mortgage Banking                                 |       | $                                                                                       | 319,602       |       | $          | 630,072 |   |   | (49 | %) |   |
| Banking                                          |       | $                                                                                       | 128,910       |       | $          | 325,371 |   |   | (60 | %) |   |
| Capital Markets                                  |       | $                                                                                       | 109,510       |       | $          | 157,590 |   |   | (31 | %) |   |
| Insurance                                        |       | $                                                                                       | 98,721        |       | $          | 88,747 |   |   | 11 | % |   |
| **Key Operating Statistics**                     | ** ** | ** **                                                                              | ** **    | ** ** | ** ** |   | ** ** | ** ** |   |
| Total loan  fundings                             |       | $                                                                                       | 133,064,000   |       | $          | 119,506,000 |   |   | 11 | % |   |
| Mortgage Banking  loan sales                     |       | $                                                                                       | 117,630,431   |       | $          | 94,971,802 |   |   | 24 | % |   |
| Estimated market  share(1)                       |       | 18.6                                                                                    | %             | 15.3       | %          |   |   |   |   |
| Loan servicing  portfolio at period end          |       | $                                                                                       | 1,415,472,000 |       | $          | 1,196,720,000 |   |   | 18 | % |   |
| Assets of Banking  Operations at period end |       | $                                                                                       | 89,910,226    |       | $          | 84,245,600 |   |   | 7 | % |   |

----

(1)          Based on internalestimates.

39

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Consolidated netearnings for the second quarter of 2007 were $485.1 million, a decrease of 33%from net earnings of $722.2 million for the second quarter of 2006,reflecting the effect of increased credit-related costs in the currentquarter, primarily related to investments in prime home equity loans. Theincreased credit costs were caused by higher delinquencies and defaultsresulting from softer housing markets. Following are certain key itemsaffecting the quarter’s earnings:

·       Werecognized impairment losses on credit-sensitive retained interests totaling$417.2 million, including $388.1 million on subordinated interestscollateralized by prime home equity loans.

·       Werecognized an increase in our provision for loan losses of $231.0 million,including an increase of $183.4 million relating to prime home equity loans.

·       We recognized a non-recurringreduction of our deferred income tax liabilities resulting from moving certainof our operations to other states. This adjustment reduced our effective incometax rate from 39.5 percent in the second quarter of 2006 to 27.0 percent forthe current quarter.

***Credit***

With respect to our mortgage banking activities, aprimary source of credit risk stems from investments and/or obligations that weretain from sales and securitizations of loans in the form of credit-enhancingsubordinated interests, representations and warranties and corporate guarantees.Estimated credit losses over the expected lifetime of the security areconsidered in the valuation of our subordinated interests. In general, theentire carrying value of such interest is at risk because the related cashflows are available to absorb credit losses in the loan pools underlying suchsubordinated interests. We held $1.5 billion of credit-sensitive subordinatedinterests at June 30, 2007, a decrease of 27% from December 31, 2006.

Our liability for representations and warranties andcorporate guarantees was $487.8 million at June 30, 2007 and $435.5 million atDecember 31, 2006. The contractual limit of our corporate guarantees exceededthe liabilities recorded by $506.3 million and $490.5 million at June 30, 2007and December 31, 2006, respectively.

We held $69.7 billion ofmortgage loans for investment, primarily in our Banking Operations, at June 30,2007, a decrease of 4% from December 31, 2006. Our allowance for credit losses,which includes our allowance for loan losses and a liability for lossesrelating to unfunded commitments, was $531.1 million at June 30, 2007, anincrease of 97% from December 31, 2006. The increase reflects higher estimatedlosses stemming from higher delinquencies combined with higher estimates ofdefault rates, and the seasoning of Banking Operations’ investment loanportfolio. To help moderate our credit risk, during the quarter we acquiredadditional supplemental mortgage insurance. As of June 30, 2007, $24.7 billionof the residential lending portfolio was covered by such insurance, an increaseof $15.6 billion from December 31, 2006.

***Liquidity and Capital***

We have contingency planning protocols that weredesigned to encompass a wide variety of conditions, including recent secondarymarket volatility. We place major emphasis on the adequacy, reliability anddiversity of our funding sources. At June 30, 2007, we had $190.3 billion inavailable sources of short-term liquidity, of which we consider $46.2 billionhighly reliable and available. Details of our liquidity sources as of June 30,2007 are included in a Form 8-K filed with the Securities and ExchangeCommission on August 6, 2007. 

Our credit ratings are classified “investment grade,”with long-term ratings of A, A3 and A by Standard & Poor’s, Moody’sInvestors Service and Fitch, respectively. On July 31, 2007, Standard &Poor’s 

40

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reaffirmed our short- andlong-term ratings with an outlook of “Stable.” On August 2, 2007, Moody’sInvestors Service also reaffirmed our short- and long-term ratings with anoutlook of “Stable.”

At June 30, 2007, the Bankexceeded the OTS regulatory capital requirements to be classified as “wellcapitalized,” with a Tier 1 capital ratio of 8.0% and a total risk-based ratioof 13.7%. 

***Outlook***

Near the end of the second quarter and shortlythereafter, market demand for the securities that we create in our loansecuritization activities was negatively affected by investor concern aboutcredit quality and demand for higher yields. As a result of these changes, weexpect in the short term to retain more loans in our portfolio of loans heldfor investment or to hold additional loan or security inventory until marketconditions improve.

Similarly, during the third quarter, funding liquidityto mortgage companies became constrained. We believe we have adequate fundingliquidity to accommodate these marketplace changes in the near term; however,the secondary market and funding liquidity situation is rapidly evolving andthe potential impact on the Company is unknown. Continuation of theseconditions or further deterioration could result in further reductions in theCompany’s funding volume. Our strategy of retaining a larger portion of loansor securities may impact our gain on sale margins in the short-term.

We believe the currentenvironment of rapidly changing and evolving credit markets may provideincreasing challenges for the financial services sector, including Countrywide.We also believe that the challenges facing the industry should ultimatelybenefit Countrywide as the mortgage lending industry continues to consolidate. Foradditional information regarding current conditions and our expectation offuture trends, please see the section in this Report entitled *Management’s Discussion and Analysis of Financial Condition and Resultsof Operations—Prospective Trends*. 

**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.

***Results ofOperations Comparison—Quarters Ended June 30, 2007 and 2006***

***Consolidated Earnings Performance***

Our consolidated net earnings for the second quarterof 2007 were $485.1 million, a decrease of 33% from 2006’s second quarternet earnings of $722.2 million. Our diluted earnings per share were $0.81,as compared to $1.15 for the year-ago period. The decrease in our net earningsresulted primarily from increased credit-related costs, largely pertaining toour investments in prime home equity loans and residual securities. Theincreased credit-related costs resulted from higher loss expectations caused byrising delinquencies and defaults, which in turn were primarily caused bysofter housing markets. The negative impact on net earnings from highercredit-related costs was partially offset by a non-recurring reduction in our corporatetax rate resulting from remeasurement of deferred income taxes precipitated bythe relocation of certain operating activities to other states. TheMortgage Banking Segment generated pre-tax earnings of $319.6 million, a 49%decline from the year-ago quarter. This decrease was due 

41

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primarily to a loss in ourLoan Servicing Sector attributable to a net impairment charge of $268.1 millionstemming from a reduction in the value of our credit-sensitive retainedinterests, primarily prime home equity subordinated interests. The decrease inpre-tax earnings in our Loan Servicing Sector was partially offset by anincrease in pre-tax earnings in our Loan Production Sector due to higher loansales volume.

The Banking Segment wasalso adversely impacted by increased credit-related costs, and produced pre-taxearnings of $128.9 million, a decrease of 60% from the year-ago period. Thedecrease was driven primarily by a $209.4 million increase in the provisionfor credit losses, partially offset by an improvement in net interest income of$42.2 million from the year-ago period.

**Operating SegmentResults**

Pre-taxearnings (loss) by segment are summarized below:

| ** **             | ** ** | **Quarters Ended  June 30,** | ** ** |
|------------------------|------------|----------------------------------------|------------|
| ** **             | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| ** **             | ** ** | **(in thousands)**                | ** ** |
| Mortgage Banking:      |       |                                   |       |   |   |   |   |
| Loan Production        |       |                                   | $          | 438,699 |   |   | $ | 324,564 |   |
| Loan Servicing         |       |                                   | (147,358   | ) |   | 279,283 |   |
| Loan Closing Services  |       |                                   | 28,261     |   |   | 26,225 |   |
| Total Mortgage Banking |       |                                   | 319,602    |   |   | 630,072 |   |
| Banking                |       |                                   | 128,910    |   |   | 325,371 |   |
| Capital Markets        |       |                                   | 109,510    |   |   | 157,590 |   |
| Insurance              |       |                                   | 98,721     |   |   | 88,747 |   |
| Global Operations      |       |                                   | 6,688      |   |   | 2,820 |   |
| Other                  |       |                                   | 1,267      |   |   | (10,577 | ) |
| Total                  |       |                                   | $          | 664,698 |   |   | $ | 1,194,023 |   |

 

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

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

| ** **                                    | ** ** | **Quarters Ended  June 30,** | ** ** |
|-----------------------------------------------|------------|----------------------------------------|------------|
| ** **                                    | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| ** **                                    | ** ** | **(in millions)**                 | ** ** |
| Segment:                                      |       |                                   |       |   |   |
| Mortgage Banking                              |       | $                                      | 123,068    |   | $ | 103,635 |   |
| Banking Operations                            |       | 4,461                                  |       | 8,261 |   |
| Capital Markets—conduit  acquisitions(1) |       | 2,634                                  |       | 6,613 |   |
| Total Mortgage Loan  Fundings                 |       | 130,163                                |       | 118,509 |   |
| Commercial Real Estate                        |       | 2,901                                  |       | 997 |   |
|                                          |       | $                                      | 133,064    |   | $ | 119,506 |   |
| Product:                                      |       |                                   |       |   |   |
| Prime Mortgage                                |       | $                                      | 113,846    |   | $ | 93,125 |   |
| Prime Home Equity                             |       | 10,596                                 |       | 14,178 |   |
| Nonprime Mortgage                             |       | 5,721                                  |       | 11,206 |   |
| Commercial Real Estate                        |       | 2,901                                  |       | 997 |   |
|                                          |       | $                                      | 133,064    |   | $ | 119,506 |   |

----

(1)          Acquisitions from thirdparties.

42

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Our total loan production was $133.1 billion for thequarter ended June 30, 2007, an 11% increase from the year-ago period. Theincrease was primarily due to an increase in our market share from 15.3% to18.6% in the overall mortgage market that declined approximately 9.9% from theyear-ago quarter. The increase in our market share was driven primarily byshare gains by our Correspondent Lending Channel (market size and share dataare based on our internal estimates.)

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

| ** **              | ** ** | **Quarters Ended  June 30,** | ** ** |
|-------------------------|------------|----------------------------------------|------------|
| ** **              | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| ** **              | ** ** | **(in millions)**                 | ** ** |
| **Purpose:**            | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Non-purchase            |       | $                                      | 76,536     |   | $ | 63,026 |   |
| Purchase                |       | 56,528                                 |       | 56,480 |   |
|                    |       | $                                      | 133,064    |   | $ | 119,506 |   |
| **Interest Rate Type:** | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Fixed                   |       | $                                      | 97,630     |   | $ | 61,158 |   |
| Adjustable              |       | 35,434                                 |       | 58,348 |   |
|                    |       | $                                      | 133,064    |   | $ | 119,506 |   |

 

**Mortgage BankingSegment**

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 to reduce the impact of changes in mortgage interest rates on ourearnings over the long term.

***Loan Production Sector***

The Loan Production Sector sources mortgage loansthrough the three production channels of our mortgage banking subsidiary,Countrywide Home Loans—the Retail Channel (Consumer Markets and Full SpectrumLending), Wholesale Lending Channel and Correspondent Lending Channel. Theseloans are funded through any one of these channels or through Countrywide Bank,FSB (“Countrywide Bank” or the “Bank”).

43

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

| ** **                           | ** ** | **Quarters Ended  June 30,(1)** | ** ** |
|--------------------------------------|------------|-------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                  | ** ** | **2006** | ** ** |
| ** **                           | ** ** | **(in millions)**                    | ** ** |
| **Channel:**                         | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Originated:                          |       |                                      |       |   |   |
| Retail:                              |       |                                      |       |   |   |
| Consumer Markets                     |       | $                                         | 30,939     |   | $ | 32,539 |   |
| Full Spectrum Lending                |       | 9,509                                     |       | 8,750 |   |
|                                 |       | 40,448                                    |       | 41,289 |   |
| Wholesale Lending                    |       | 22,877                                    |       | 23,879 |   |
| Total originated                     |       | 63,325                                    |       | 65,168 |   |
| Purchased—Correspondent Lending |       | 59,743                                    |       | 38,467 |   |
|                                 |       | $                                         | 123,068    |   | $ | 103,635 |   |
| **Mortgage Loan Type:**              | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Prime Mortgage                       |       | $                                         | 111,220    |   | $ | 82,229 |   |
| Prime Home Equity                    |       | 6,779                                     |       | 11,235 |   |
| Nonprime Mortgage                    |       | 5,069                                     |       | 10,171 |   |
|                                 |       | $                                         | 123,068    |   | $ | 103,635 |   |
| **Purpose:**                         | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Non-purchase                         |       | $                                         | 70,275     |   | $ | 54,080 |   |
| Purchase                             |       | 52,793                                    |       | 49,555 |   |
|                                 |       | $                                         | 123,068    |   | $ | 103,635 |   |
| **Interest Rate Type:**              | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Fixed                                |       | $                                         | 91,076     |   | $ | 55,383 |   |
| Adjustable                           |       | 31,992                                    |       | 48,252 |   |
|                                 |       | $                                         | 123,068    |   | $ | 103,635 |   |

----

(1)          $51.4 billion and $17.7billion of Mortgage Banking loan production were funded by Countrywide Bankduring the quarters ended June 30, 2007 and 2006, respectively.

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The pre-tax earnings ofthe Loan Production Sector are summarized below:

| ** **                              | ** ** | **Quarters Ended June 30,**       | ** **  |
|-----------------------------------------|------------|--------------------------------------------------|-------------|
| ** **                              | ** ** | **2007**                                         | ** **  | **2006** | ** ** |
| ** **                              | ** ** | **Amount**                                       | ** **  | **Percentage  of Loan  Production  Volume** | ** ** | **Amount** | ** ** | **Percentage  of Loan  Production  Volume** | ** ** |
| ** **                              | ** ** | **(dollar amounts in thousands)** | ** **  |
| Revenues:                               |       |                                             |        |   |   |   |   |   |   |   |   |   |   |
| Prime Mortgage                          |       | $                                                | 1,183,354   |   |   |   |   |   | $ | 1,061,492 |   |   |   |   |   |
| Nonprime Mortgage                       |       | 205,858                                          |        |   |   |   |   | 236,191 |   |   |   |   |   |
| Prime Home Equity                       |       | 124,847                                          |        |   |   |   |   | 184,761 |   |   |   |   |   |
| Total revenues                          |       | 1,514,059                                        |        |   | 1.23 | % |   | 1,482,444 |   |   | 1.43 | % |   |
| Expenses:                               |       |                                             |        |   |   |   |   |   |   |   |   |   |   |
| Compensation                            |       | 607,728                                          |        |   | 0.49 | % |   | 646,999 |   |   | 0.63 | % |   |
| Other operating                         |       | 368,710                                          |        |   | 0.30 | % |   | 374,335 |   |   | 0.36 | % |   |
| Allocated corporate                     |       | 98,922                                           |        |   | 0.08 | % |   | 136,546 |   |   | 0.13 | % |   |
| Total expenses                          |       | 1,075,360                                        |        |   | 0.87 | % |   | 1,157,880 |   |   | 1.12 | % |   |
| Pre-tax earnings                        |       | $                                                | 438,699     |   |   | 0.36 | % |   | $ | 324,564 |   |   | 0.31 | % |   |
| Total Mortgage Banking  loan production |       | $                                                | 123,068,000 |   |   |   |   |   | $ | 103,635,000 |   |   |   |   |   |

 

Revenues increased from the year-ago period, drivenprimarily by a $22.7 billion, or 24%, increase in the Mortgage Banking loansales volume. This increase was partially offset by a decrease in primemargins, primarily as a result of increased price competition, a higherpercentage of production originated in our Correspondent Lending Channel, whichhas lower margins, and a change in product mix. In the quarter ended June 30,2007, $117.6 billion of mortgage loans, or 96% of Mortgage Banking loanproduction, was sold compared to $95.0 billion of mortgage loans, or 92% in thequarter ended June 30, 2006. Revenues for the quarter ended June 30,2007 included an $80.2 million write-down of nonsalable delinquent loans thatwere transferred to loans held for investment. The write-down related primarilyto Prime Mortgage and Prime Home Equity Loans.

Expenses decreased from the year-ago period (both indollars and as a percentage of loans produced), primarily due to a change inthe production channel mix toward our Correspondent Lending Channel which has alower cost structure than our origination channels and cost cuttinginitiatives. These reductions notwithstanding, we continue to invest inexpanding the loan sales force and distributed branch network in support of ourlong-term strategy of increasing our share of the market. While we continue toexpand our loan production capacity, we also make adjustments in markets wheredeclines in production require such adjustments.

45

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

| ** **            | ** ** | **June 30,** | ** ** |
|-----------------------|------------|-------------------|------------|
| ** **            | ** ** | **2007**          | ** ** | **2006** | ** ** |
| ** **            | ** ** | ** **        | ** ** | **Facilities** | ** ** | ** ** | ** ** | **Facilities** | ** ** |
| ** **            | ** ** | **Sales  Force**  | ** ** | **Branches** | ** ** | **Call  Centers** | ** ** | **Sales   Force** | ** ** | **Branches** | ** ** | **Call  Centers** | ** ** |
| **Channel:**          | ** ** | ** **        | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Retail:               | ** ** | ** **        |       |   |   | ** ** |   |   |   | ** ** |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |
| Consumer Markets      |       | 9,753             |       |   | 758 | ** ** |   |   | 5 | ** ** |   | 9,009 |   |   | 745 | ** ** |   |   | 4 | ** ** |   |
| Full Spectrum Lending |       | 6,785             |       |   | 228 | ** ** |   |   | 10 | ** ** |   | 5,795 |   |   | 215 | ** ** |   |   | 8 | ** ** |   |
|                  |       | 16,538            |       |   | 986 | ** ** |   |   | 15 | ** ** |   | 14,804 |   |   | 960 | ** ** |   |   | 12 | ** ** |   |
| Wholesale Lending     |       | 1,375             |       |   | 52 | ** ** |   |   | — | ** ** |   | 1,483 |   |   | 52 | ** ** |   |   | — | ** ** |   |
| Correspondent Lending |       | 178               |       |   | — | ** ** |   |   | — | ** ** |   | 185 |   |   | — | ** ** |   |   | — | ** ** |   |
|                  |       | 18,091            |       |   | 1,038 | ** ** |   |   | 15 | ** ** |   | 16,472 |   |   | 1,012 | ** ** |   |   | 12 | ** ** |   |

 

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

| ** **                              | ** ** | **June 30,** | ** ** |
|-----------------------------------------|------------|-------------------|------------|
| ** **                              | ** ** | **2007**          | ** ** | **2006** | ** ** |
| Sales                                   |       | 18,091            |       | 16,472 |   |
| Operations:                             |       |              |       |   |   |
| Regular employees                       |       | 10,494            |       | 11,039 |   |
| Temporary staff                         |       | 1,461             |       | 1,453 |   |
|                                    |       | 11,955            |       | 12,492 |   |
| Administration  and support             |       | 3,750             |       | 3,551 |   |
| Total Loan  Production Sector workforce |       | 33,796            |       | 32,515 |   |

 

***Loan Servicing Sector***

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

Our servicing portfolio grew to $1.4 trillion at June 30,2007, an 18% increase from June 30, 2006. At the same time, the overallweighted-average note rate of loans in our servicing portfolio increased to6.6% from 6.3% at June 30, 2006.

46

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Thefollowing table summarizes the results for the Loan Servicing Sector:

| ** **                                                         | ** ** | **Quarters Ended June 30,**       | ** **    |
|--------------------------------------------------------------------|------------|--------------------------------------------------|---------------|
| ** **                                                         | ** ** | **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                             |       | $                                                | 1,145,212     |   |   | 0.333 | % |   | $ | 939,778 |   |   | 0.324 | % |   |
| Escrow balance  income                                             |       | 224,197                                          |          |   | 0.065 | % |   | 207,154 |   |   | 0.071 | % |   |
| Miscellaneous  fees                                                |       | 190,929                                          |          |   | 0.056 | % |   | 134,607 |   |   | 0.046 | % |   |
| Income from  retained interests                                    |       | 123,124                                          |          |   | 0.036 | % |   | 128,542 |   |   | 0.044 | % |   |
| Realization of  expected cash flows from mortgage servicing rights |       | (1,007,242                                       | )             |   | (0.293 | %) |   | (767,751 | ) |   | (0.264 | %) |   |
| Operating revenues                                                 |       | 676,220                                          |          |   | 0.197 | % |   | 642,330 |   |   | 0.221 | % |   |
| Direct expenses                                                    |       | 203,466                                          |          |   | 0.059 | % |   | 187,444 |   |   | 0.065 | % |   |
| Allocated  corporate expenses                                      |       | 14,824                                           |          |   | 0.005 | % |   | 21,405 |   |   | 0.007 | % |   |
| Total expenses                                                     |       | 218,290                                          |          |   | 0.064 | % |   | 208,849 |   |   | 0.072 | % |   |
| Operating  earnings                                                |       | 457,930                                          |          |   | 0.133 | % |   | 433,481 |   |   | 0.149 | % |   |
| Interest expense                                                   |       | (291,528                                         | )             |   | (0.085 | %) |   | (153,240 | ) |   | (0.053 | %) |   |
| Change in fair  value of mortgage servicing rights                 |       | 1,327,446                                        |          |   | 0.387 | % |   | 568,585 |   |   | 0.196 | % |   |
| (Impairment)  recovery of retained interests                       |       | (268,117                                         | )             |   | (0.078 | %) |   | 51,531 |   |   | 0.018 | % |   |
| Servicing hedge  losses                                            |       | (1,373,089                                       | )             |   | (0.400 | %) |   | (621,074 | ) |   | (0.214 | %) |   |
| Valuation changes, net of Servicing Hedge                          |       | (313,760                                         | )             |   | (0.091 | %) |   | (958 | ) |   | 0.000 | % |   |
| Pre-tax (loss)  earnings                                           |       | $                                                | (147,358      | ) |   | (0.043 | %) |   | $ | 279,283 |   |   | 0.096 | % |   |
| Average servicing  portfolio                                       |       | $                                                | 1,374,118,000 |   |   |   |   |   | $ | 1,161,569,000 |   |   |   |   |   |

----

(1)          Annualized

The pre-tax loss in the Loan Servicing Sector was $147.4 million for thequarter ended June 30, 2007, a decrease in results of operations of $426.6million from the year-ago period. The decline in pre-tax earnings was due inlarge part to impairment of retained interests of $268.1 million in the currentquarter compared to recovery of retained interests of $51.5 million in theyear-ago quarter. Also contributing to the decline in pre-tax earnings was anincrease 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.

During the quarterended June 30, 2007, we recorded net impairment of the retained interests heldin our Loan Servicing Sector of $268.1 million as summarized below:

| ** **                                   | ** ** | **Quarters Ended June 30,** | ** ** |
|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                   | ** ** | **2007**                                   | ** ** | **2006** | ** ** |
| ** **                                   | ** ** | **(Impairment)  Recovery**                 | ** ** | **Asset  Balance at  Period End** | ** ** | **(Impairment)  Recovery** | ** ** | **Asset  Balance at  Period End** | ** ** |
| ** **                                   | ** ** | **(in thousands)**                    | ** ** |
| Credit-sensitive  retained interests         |       |                                       | $          | (417,224 | ) |   | $ | 1,461,828 |   |   | $ | 10,133 |   |   | $ | 1,804,987 |   |
| Non  credit-sensitive retained interests     |       |                                       | 149,107    |   |   | 1,159,306 |   |   | 41,398 |   |   | 801,369 |   |
| (Impairment)  recovery of retained interests |       |                                       | $          | (268,117 | ) |   | $ | 2,621,134 |   |   | $ | 51,531 |   |   | $2,606,356 |   |
|                                              |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

47

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The impairment losses on credit-sensitiveretained interests recognized during the quarter ended June 30, 2007largely relate to subordinated interests backed by prime home equity loans. Thesecharges were caused primarily by increasing delinquencies and related increasedprojections of defaults caused by weakening housing market conditions. Theselosses were partially offset by $149.1 million in fair value increases primarilyrelating to interest-only and principal-only retained interests.

***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 $28.3 million in pre-tax earnings in the quarter ended June 30,2007, representing an increase of 8% 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 our loan applicationactivity.

**Banking Segment**

The Banking Segment includes Banking Operations—primarilythe investment and fee-based activities of Countrywide Bank—along with theactivities of Countrywide Warehouse Lending (“CWL”). Banking Operations investsin mortgage loans sourced from the Loan Production Sector and mortgage loansand high-quality MBS purchased from non-affiliated entities. CWL provides othermortgage lenders with temporary financing secured by mortgage loans.

BankingOperations sources the loan production for its investment portfolio from theMortgage Banking Segment’s production channels and through purchases from non-affiliatedentities. Following is a summary of Banking Operations’ loan production andpurchase volume by channel:

| ** **             | ** ** | **Quarters Ended  June 30,** | ** ** |
|------------------------|------------|----------------------------------------|------------|
| ** **             | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| ** **             | ** ** | **(in millions)**                 | ** ** |
| Consumer Markets       |       | $                                      | 1,550      |   | $ | 2 |   |
| Correspondent  Lending |       | 1,229                                  |       | 3,453 |   |
| Purchases              |       | 1,106                                  |       | 1,900 |   |
| Wholesale Lending      |       | 576                                    |       | 2,906 |   |
|                   |       | $                                      | 4,461      |   | $ | 8,261 |   |

 

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 Operations’assets. However, asset growth in any period is influenced by general mortgagemarket conditions, the availability of assets which meet our asset quality andyield requirements and our consolidated capital and earnings considerations.

48

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TheBanking Segment achieved pre-tax earnings of $128.9 million during the quarterended June 30, 2007, compared to $325.4 million for the year-ago period.Following is the composition of pre-tax earnings:

| ** **                              | ** ** | **Quarters Ended  June 30,** | ** ** |
|-----------------------------------------|------------|----------------------------------------|------------|
| ** **                              | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| ** **                              | ** ** | **(in thousands)**                | ** ** |
| Banking  Operations                     |       | $                                      | 136,310    |   | $ | 328,742 |   |
| CWL                                     |       | 9,712                                  |       | 13,406 |   |
| Allocated  corporate expenses           |       | (17,112                                | )          | (16,777 | ) |
| Total Banking  Segment pre-tax earnings |       | $                                      | 128,910    |   | $ | 325,371 |   |

 

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

| ** **                                             | ** ** | **Quarters Ended  June 30,**           | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                             | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                                             | ** ** | **(dollar amounts in thousands)** | ** ** |
| Interest income                                        |       | $                                                | 1,419,389  |   | $ | 1,240,805 |   |
| Interest expense                                       |       | (956,050                                         | )          | (819,707 | ) |
| Net interest income                                    |       | 463,339                                          |       | 421,098 |   |
| Provision for  credit losses(1)                        |       | (246,290                                         | )          | (36,907 | ) |
| Net interest income after provision for credit  losses |       | 217,049                                          |       | 384,191 |   |
| Non-interest  income                                   |       | 49,647                                           |       | 37,670 |   |
| Mortgage  insurance expense                            |       | (23,938                                          | )          | (7,718 | ) |
| Other non-interest  expense                            |       | (106,448                                         | )          | (85,401 | ) |
| Pre-tax earnings                                       |       | $                                                | 136,310    |   | $ | 328,742 |   |
| Efficiency  ratio(2)                                   |       | 26                                               | %          | 21 | % |
| After-tax return on  average assets                    |       | 0.50                                             | %          | 0.99 | % |

----

(1)          Includes provision forloan losses plus provision for losses on unfunded loan commitments.

(2)          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 CountrywideHome Loans but does not include allocated corporate expenses. If Banking Operations were a stand-aloneentity, the nature and amount of its expenses would differ from those reported.For example, the fulfillment fees paid by Countrywide Bank to the LoanProduction Sector for origination costs incurred on investment mortgage loansfunded by Countrywide Bank are generallydetermined on an incremental cost basis which is less than would be incurred in an arms-length transaction.

Banking Operations achieved pre-tax earnings of $136.3million for the quarter ended June 30, 2007, a decrease of $192.4 million,or 59%, from the year-ago period primarily driven by higher provision forcredit losses and an increase in mortgage insurance expense, partially offsetby an increase in net interest margin.

The Banking Operations’ provision for credit lossesincreased by $209.4 million during the quarter ended June 30, 2007compared to the quarter ended June 30, 2006. The increase in the provisionfor credit losses was primarily due to higher loss expectations driven by theimpact of the current housing market on delinquency and default trends as wellas portfolio seasoning. The impact was most significant on prime home equityloans. The provision for credit losses on prime home equity loans was $185.4million during the quarter ended June 30, 2007 compared to $27.2 millionin the year-ago quarter.

49

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The provision for credit losses and the relatedallowance for credit losses is affected by many factors, including economicconditions (for example, housing prices, interest rates and unemploymentrates), borrower credit profiles, delinquency, and loan seasoning andprepayments.

Mortgage insurance expense increased $16.2 millionfrom the year-ago quarter as the Bank has continued to acquire credit lossinsurance as part of its credit risk management activities.

Thecomponents of net interest income of Banking Operations are summarized below:

| ** **                                              | ** ** | **Quarters Ended June 30,**       | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                              | ** ** | **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:                                |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans(1)                                                |       | $                                                | 67,500,352 |   | $ | 1,190,093 |   |   | 7.06 | % |   | $ | 70,778,676 |   | $ | 1,136,342 |   |   | 6.43 | % |   |
| Securities available for  sale(2)                       |       | 14,588,289                                       |       | 205,633 |   |   | 5.64 | % |   | 5,960,904 |   | 73,652 |   |   | 4.94 | % |   |
| Short-term investments                                  |       | 344,147                                          |       | 4,585 |   |   | 5.34 | % |   | 740,425 |   | 9,117 |   |   | 4.94 | % |   |
| FHLB securities and FRB  stock                          |       | 1,275,083                                        |       | 19,078 |   |   | 6.00 | % |   | 1,413,274 |   | 21,694 |   |   | 5.63 | % |   |
| Total earning assets                                    |       | 83,707,871                                       |       | 1,419,389 |   |   | 6.79 | % |   | 78,893,279 |   | 1,240,805 |   |   | 6.29 | % |   |
| Allowance for loan losses                               |       | (301,019                                         | )          |   |   |   |   |   |   | (131,426 | ) |   |   |   |   |   |   |
| Other assets                                            |       | 3,391,616                                        |       |   |   |   |   |   |   | 1,190,491 |   |   |   |   |   |   |   |
| Total assets                                            |       | $                                                | 86,798,468 |   |   |   |   |   |   |   | $ | 79,952,344 |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                           |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Money market deposits and  savings accounts             |       | $                                                | 15,065,927 |   | 202,950 |   |   | 5.40 | % |   | $ | 5,199,192 |   | 61,015 |   |   | 4.71 | % |   |
| Company-controlled  custodial deposits(3)               |       | 16,706,566                                       |       | 216,967 |   |   | 5.21 | % |   | 15,817,734 |   | 191,521 |   |   | 4.86 | % |   |
| Time deposits                                           |       | 26,931,005                                       |       | 345,886 |   |   | 5.15 | % |   | 26,490,658 |   | 298,237 |   |   | 4.52 | % |   |
| Total interest-bearing  deposits                        |       | 58,703,498                                       |       | 765,803 |   |   | 5.23 | % |   | 47,507,584 |   | 550,773 |   |   | 4.65 | % |   |
| Borrowings                                              |       | 17,577,543                                       |       | 190,247 |   |   | 4.34 | % |   | 25,030,324 |   | 268,934 |   |   | 4.31 | % |   |
| Total interest-bearing  liabilities                     |       | 76,281,041                                       |       | 956,050 |   |   | 5.03 | % |   | 72,537,908 |   | 819,707 |   |   | 4.53 | % |   |
| Non interest-bearing  liabilities and equity:           |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non interest-bearing  checking accounts                 |       | 2,335,380                                        |       |   |   |   |   |   |   | 1,258,320 |   |   |   |   |   |   |   |
| Other liabilities                                       |       | 2,921,070                                        |       |   |   |   |   |   |   | 750,367 |   |   |   |   |   |   |   |
| Shareholder’s equity                               |       | 5,260,977                                        |       |   |   |   |   |   |   | 5,405,749 |   |   |   |   |   |   |   |
| Total non interest-bearing  liabilities and equity |       | 10,517,427                                       |       |   |   |   |   |   |   | 7,414,436 |   |   |   |   |   |   |   |
| Total liabilities and  shareholder’s equity        |       | $                                                | 86,798,468 |   |   |   |   |   |   |   | $ | 79,952,344 |   |   |   |   |   |   |   |
| Net interest income                                     |       |                                             |       | $ | 463,339 |   |   |   |   |   |   |   | $ | 421,098 |   |   |   |   |   |
| Net interest spread(4)                                  |       |                                             |       |   |   |   | 1.76 | % |   |   |   |   |   |   | 1.76 | % |   |
| Net interest margin(5)                                  |       |                                             |       |   |   |   | 2.21 | % |   |   |   |   |   |   | 2.12 | % |   |

----

(1)          Average balances includenonaccrual loans.

(2)          Average balances andyields for securities available for sale are based on average amortized costcomputed on the settlement date basis.

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

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

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

Thedollar amounts of interest income and interest expense vary depending uponchanges in interest rates and upon the relative volumes of our interest-earningassets and interest-bearing liabilities. Changes 

50

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attributable to (i) changes in volume (changes inaverage outstanding balances multiplied by the prior period’s rate), (ii) changesin rate (changes in average interest rate multiplied by the prior period’svolume), and (iii) changes in rate/volume (changes in rate multiplied bythe change in volume)—which were allocated proportionately to the changes involume and the changes in rate and included in the relevant column below—are asfollows:

| ** **                                 | ** ** | **Quarter Ended  June 30, 2007 vs. June 30, 2006** | ** ** |
|--------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **Increase (Decrease) Due to**                                         | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **      Volume      **    | ** ** | **      Rate      ** | ** ** | **Total Changes** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                                                               | ** ** |
| Interest-earning assets:                   |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Loans                                      |       |                                                                                  | $          | (46,792 | ) |   |   | $ | 100,543 |   |   |   | $ | 53,751 |   |   |
| Securities available for sale              |       |                                                                                  | 120,278    |   |   |   | 11,703 |   |   |   | 131,981 |   |   |
| Short-term investments                     |       |                                                                                  | (5,227     | ) |   |   | 695 |   |   |   | (4,532 | ) |   |
| FHLB securities and FRB stock              |       |                                                                                  | (3,907     | ) |   |   | 1,291 |   |   |   | (2,616 | ) |   |
| Total interest income                      |       |                                                                                  | $          | 64,352 |   |   |   | $ | 114,232 |   |   |   | $ | 178,584 |   |   |
| Interest-bearing  liabilities:             |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Money market deposits and savings accounts |       |                                                                                  | $          | 131,675 |   |   |   | $ | 10,260 |   |   |   | $ | 141,935 |   |   |
| Company-controlled custodial deposits      |       |                                                                                  | 11,103     |   |   |   | 14,343 |   |   |   | 25,446 |   |   |
| Time deposits                              |       |                                                                                  | 5,031      |   |   |   | 42,618 |   |   |   | 47,649 |   |   |
| Total deposits                             |       |                                                                                  | 147,809    |   |   |   | 67,221 |   |   |   | 215,030 |   |   |
| Borrowings                                 |       |                                                                                  | (80,650    | ) |   |   | 1,963 |   |   |   | (78,687 | ) |   |
| Total interest expense                     |       |                                                                                  | 67,159     |   |   |   | 69,184 |   |   |   | 136,343 |   |   |
| Net interest  income                       |       |                                                                                  | $          | (2,807 | ) |   |   | $ | 45,048 |   |   |   | $ | 42,241 |   |   |

 

The increase in net interest income was primarily dueto a $4.8 billion, or 6%, increase in average interest-earning assets combinedwith a 9 basis point increase in net interest margin. The increase in the netinterest margin was primarily a result of a smaller rate lag impact as thespread between the MTA index, which is the base for most of the Bank’sassets, and LIBOR, which is the index for most of the Bank’s liabilities,tightened and the reduced impact of teaser rates earned on recently fundedpay-option loans as fewer such loans were originated in the quarter ended June 30,2007 compared to the quarter ended June 30, 2006. These positive factorswere partially offset by a shift in asset mix to include a larger portion oflower-yielding high-credit quality mortgage-backed securities.

51

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TheBanking Operations balance sheets are as follows: 

| ** **                                                                      | ** ** | **June 30, 2007**                      | ** ** | **December 31, 2006** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                      | ** ** | **Amount**                                       | ** ** | **Rate**                        | ** ** | **Amount** | ** ** | **Rate** | ** ** |
| ** **                                                                      | ** ** | **(dollar amounts in thousands)** | ** ** |
| **Assets**                                                                      |       |                                             |       |                            |       |   |   |   |   |   |   |   |   |
| Short-term  investments                                                         |       | $                                                | 574,014    |                            |       | 5.53 | % |   | $ | 50,974 |   |   | 5.14 | % |   |
| Loans, net of  allowance for loan losses of $450,844 and $228,692, respectively |       | 68,130,524                                       |       |                            | 7.54       | % |   | 73,481,762 |   |   | 7.39 | % |   |
| Securities  available for sale                                                  |       | 18,328,079                                       |       |                            | 5.91       | % |   | 6,208,477 |   |   | 4.63 | % |   |
| FHLB  securities and FRB stock                                             |       | 1,322,434                                        |       |                            | 6.00       | % |   | 1,431,403 |   |   | 5.91 | % |   |
| Total interest-earning assets                                                   |       | 88,355,051                                       |       |                            | 7.16       | % |   | 81,172,616 |   |   | 7.16 | % |   |
| Other assets                                                                    |       | 1,555,175                                        |       |                            |       |   |   | 1,601,952 |   |   |   |   |   |
| Total assets                                                                    |       | $                                                | 89,910,226 |                            |       |   |   |   | $ | 82,774,568 |   |   |   |   |   |
| **Liabilities and Equity**                                                      |       |                                             |       |                            |       |   |   |   |   |   |   |   |   |
| Deposits:(1)                                                                    |       |                                             |       |                            |       |   |   |   |   |   |   |   |   |
| Customer                                                                        |       | $                                                | 43,029,617 |                            |       | 5.15 | % |   | $ | 39,904,633 |   |   | 5.08 | % |   |
| Company-controlled escrow deposit accounts                                      |       | 15,510,141                                       |       |                            | 5.44       | % |   | 14,609,269 |   |   | 5.28 | % |   |
| Borrowings                                                                      |       | 22,591,569                                       |       |                            | 4.73       | % |   | 18,997,967 |   |   | 4.35 | % |   |
| Total interest-bearing liabilities                                              |       | 81,131,327                                       |       |                            | 5.09       | % |   | 73,511,869 |   |   | 4.93 | % |   |
| Non-interest  bearing deposits:                                                 |       |                                             |       |                            |       |   |   |   |   |   |   |   |   |
| Company-controlled escrow deposit accounts                                      |       | 1,757,290                                        |       |                            |       |   |   | 1,158,707 |   |   |   |   |   |
| Other                                                                           |       | 271,939                                          |       |                            |       |   |   | 314,607 |   |   |   |   |   |
| Other liabilities                                                               |       | 1,210,149                                        |       |                            |       |   |   | 1,451,003 |   |   |   |   |   |
| Shareholder’s  equity                                                      |       | 5,539,521                                        |       |                            |       |   |   | 6,338,382 |   |   |   |   |   |
| Total liabilities and equity                                                    |       | $                                                | 89,910,226 |                            |       |   |   |   | $ | 82,774,568 |   |   |   |   |   |
| Primary spread(2)                                                               |       |                                             |       |                            | 2.07       | % |   |   |   |   | 2.23 | % |   |
| Nonaccrual loans                                                                |       | $                                                | 940,782    |                            |       |   |   |   | $ | 519,083 |   |   |   |   |   |

----

(1)          Includes inter-companydeposits.

(2)          Calculated as the yieldon total interest-earning assets less the cost of total interest-bearingliabilities.

Interest-earning assets growth came from theacquisition of high-credit quality mortgage-backed securities fromnon-affiliates. This growth was partially offset by a decline in the balance ofthe mortgage loan portfolio from December 31, 2006 due to an increasingpercentage of our originations being sold in the secondary markets, to loanrunoff and to reduced availability of loans for purchase by Banking Operationsthat meet our investment standards.

The Banking Segment alsoincludes the operations of CWL. CWL’s pre-tax earnings decreased by $3.7million during the quarter ended June 30, 2007 in comparison to theyear-ago period, primarily due to a 10% decrease in average mortgage warehouseadvances, which resulted primarily from a decrease in overall market fundingactivity and to competitive pricing pressure. Warehouse lending advances were$2.5 billion at June 30, 2007, and had an average yield of 6.4%during the quarter ended June 30, 2007.

**Capital MarketsSegment**

Our Capital Markets Segment achieved pre-tax earningsof $109.5 million for the quarter ended June 30, 2007, a decrease of $48.1million, or 31%, from the year-ago quarter. This decrease was caused by adecline in revenues as the business adjusted to weakening market conditions anda $35.2 million, or 35% increase in expenses to support newer lines of business.

52

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

| ** **                    | ** ** | **Quarters Ended  June 30,** | ** ** |
|-------------------------------|------------|----------------------------------------|------------|
| ** **                    | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| ** **                    | ** ** | **(in thousands)**                | ** ** |
| Revenues:                     |       |                                   |       |   |   |   |   |
| Conduit                       |       |                                   | $          | 92,650 |   |   | $ | 104,239 |   |
| Underwriting                  |       |                                   | 36,452     |   |   | 78,958 |   |
| Commercial real estate        |       |                                   | 39,731     |   |   | 27,850 |   |
| Securities trading            |       |                                   | 47,241     |   |   | 26,619 |   |
| Brokering                     |       |                                   | 14,953     |   |   | 9,485 |   |
| Other                         |       |                                   | 13,730     |   |   | 10,531 |   |
| Total revenues                |       |                                   | 244,757    |   |   | 257,682 |   |
| Expenses:                     |       |                                   |       |   |   |   |   |
| Operating expenses            |       |                                   | 127,982    |   |   | 92,942 |   |
| Allocated corporate  expenses |       |                                   | 7,265      |   |   | 7,150 |   |
| Total expenses                |       |                                   | 135,247    |   |   | 100,092 |   |
| Pre-tax earnings              |       |                                   | $          | 109,510 |   |   | $ | 157,590 |   |

 

During the quarter ended June 30, 2007, the CapitalMarkets Segment generated revenues totaling $92.7 million from its conduitactivities, primarily managing the acquisition and sale or securitization ofloans on behalf of CHL for the Capital Markets Segment. These revenues,primarily as they relate to nonprime loans, were adversely impacted by adecline in loans sold of $10.1 billion, or 56%. Underwriting revenues were alsonegatively impacted as a result of the reduced volume of conduitsecuritizations as well as a decline in nonprime and prime home equitysecuritization activity on behalf of the Mortgage Banking Segment.

During the current reporting period, the commercialreal estate finance activities of the Capital Markets Segment generatedrevenues totaling $39.7 million primarily from sales of commercial real estateloans compared to $27.9 million in the year-ago period. The increase in revenuewas due to an increase in the volume of loans sold, partially offset by adecrease in margins due to credit spread widening in the commercial mortgagemarkets.

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  June 30,** | ** ** |
|----------------------------------|------------|----------------------------------------|------------|
| ** **                       | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| ** **                       | ** ** | **(in millions)**                 | ** ** |
| Mortgage-backed  securities      |       | $                                      | 684,463    |   | $ | 570,878 |   |
| Asset-backed  securities         |       | 21,800                                 |       | 29,061 |   |
| Other                            |       | 38,094                                 |       | 26,582 |   |
| Subtotal(1)                      |       | 744,357                                |       | 626,521 |   |
| U.S. Treasury  securities        |       | 365,387                                |       | 307,815 |   |
| Total securities  trading volume |       | $                                      | 1,109,744  |   | $ | 934,336 |   |

----

(1)          Approximately12% and 15% of the segment’s non-U.S. Treasury securities trading volume waswith Countrywide Home Loans during the quarters ended June 30, 2007 and2006, respectively.

53

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**Insurance Segment**

TheInsurance Segment’s pre-tax earnings increased by $10.0 million over theyear-ago period, to $98.7 million during the quarter ended June 30, 2007.The following table shows pre-tax earnings by component:

| ** **                                | ** ** | **Quarters Ended  June 30,** | ** ** |
|-------------------------------------------|------------|----------------------------------------|------------|
| ** **                                | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| ** **                                | ** ** | **(in thousands)**                | ** ** |
| Balboa  Reinsurance Company               |       | $                                      | 56,292     |   | $ | 52,661 |   |
| Balboa  Life & Casualty(1)       |       | 51,374                                 |       | 44,569 |   |
| Allocated corporate  expenses             |       | (8,945                                 | )          | (8,483 | ) |
| Total Insurance  Segment pre-tax earnings |       | $                                      | 98,721     |   | $ | 88,747 |   |

----

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

Thefollowing table shows net insurance premiums earned:

| ** **                           | ** ** | **Quarters Ended  June 30,** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| ** **                           | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| ** **                           | ** ** | **(in thousands)**                | ** ** |
| Balboa  Reinsurance Company          |       | $                                      | 65,434     |   | $ | 55,156 |   |
| Balboa  Life & Casualty     |       | 286,950                                |       | 229,070 |   |
| Total net  insurance premiums earned |       | $                                      | 352,384    |   | $ | 284,226 |   |

 

Thefollowing table shows insurance claim expenses:

| ** **                       | ** ** | **Quarters Ended June 30,**       | ** ** |
|----------------------------------|------------|--------------------------------------------------|------------|
| ** **                       | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                       | ** ** | **Amount**                                       | ** ** | **As Percentage  of Net  Earned  Premiums** | ** ** | **Amount** | ** ** | **As Percentage  of Net  Earned  Premiums** | ** ** |
| ** **                       | ** ** | **(dollar amounts in thousands)** | ** ** |
| Balboa  Reinsurance Company      |       | $                                                | 15,963     |   |   | 24 | % |   | $ | 9,660 |   |   | 18 | % |   |
| Balboa Life &  Casualty |       | 138,806                                          |       |   | 48 | % |   | 93,149 |   |   | 41 | % |   |
| Total insurance  claim expenses  |       | $                                                | 154,769    |   |   |   |   |   | $ | 102,809 |   |   |   |   |   |

 

Our mortgage reinsurance business produced $56.3million in pre-tax earnings, an increase of 7% over the year-ago quarter,driven primarily by growth of 4% in the mortgage loans included in our loanservicing portfolio that are covered by reinsurance contracts.

Our Life and Casualty insurance business producedpre-tax earnings of $51.4 million, an increase of $6.8 million, or 15%, fromthe year-ago quarter. The increase in earnings was driven by a $57.9 million,or 25%, increase in net earned premiums during the quarter ended June 30,2007 in comparison to the year-ago quarter. The increase in net earned premiumswas primarily attributable to growth in lender-placed insurance. Insuranceclaim expenses as a percentage of net earned premiums increased from 41% to 48%primarily due to an increase in loss reserves related to wildfires andNortheast windstorms in the current quarter as compared to a reduction in lossreserves on hurricane related claims booked in the year-ago quarter.

Our Life and Casualtyoperations seek to earn profits by capitalizing on Countrywide’s customer baseand institutional relationships, as well as through operating efficiencies andsound underwriting. Insurance risk is managed through the use of reinsurance.

54

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**Global OperationsSegment**

Global Operation’s pre-taxearnings totaled $6.7 million during the quarter ended June 30, 2007, anincrease of $3.9 million from the year-ago period. The increase in earnings wasprimarily due to an increase in revenue recognized from the licensing ofsoftware.

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

***Gain on Sale ofLoans and Securities***

Gainon sale of loans and securities is summarized below:

| ** **                   | ** ** | **Quarters Ended June 30,**       | ** **  |
|------------------------------|------------|--------------------------------------------------|-------------|
| ** **                   | ** ** | **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         |       | $                                                | 109,425,578 |   | $ | 1,036,271 |   |   | 0.95 | % |   | $ | 79,175,113 |   | $ | 972,089 |   |   | 1.23 | % |   |
| Nonprime Mortgage Loans      |       | 5,164,101                                        |        | 182,685 |   |   | 3.54 | % |   | 9,895,562 |   | 200,003 |   |   | 2.02 | % |   |
| Prime Home Equity Loans:     |       |                                             |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Initial sales                |       | 1,998,399                                        |        | 50,723 |   |   | 2.54 | % |   | 4,702,418 |   | 91,809 |   |   | 1.95 | % |   |
| Subsequent draws             |       | 1,042,353                                        |        | 22,976 |   |   | 2.20 | % |   | 1,198,709 |   | 44,017 |   |   | 3.67 | % |   |
|                         |       | 3,040,752                                        |        | 73,699 |   |   | 2.42 | % |   | 5,901,127 |   | 135,826 |   |   | 2.30 | % |   |
| Total Production Sector      |       | 117,630,431                                      |        | 1,292,655 |   |   | 1.10 | % |   | 94,971,802 |   | 1,307,918 |   |   | 1.38 | % |   |
| Reperforming loans           |       | —                                           |        | 49 |   |   | 0.00 | % |   | 103,515 |   | 682 |   |   | 0.66 | % |   |
|                         |       | $                                                | 117,630,431 |   | 1,292,704 |   |   | 1.10 | % |   | $ | 95,075,317 |   | 1,308,600 |   |   | 1.38 | % |   |
| Capital Markets:             |       |                                             |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Conduit activities(1)        |       | $                                                | 7,848,462   |   | 82,712 |   |   | 1.05 | % |   | $ | 17,911,575 |   | 97,203 |   |   | 0.54 | % |   |
| Underwriting                 |       | N/A                                              |        | 32,862 |   |   | N/A |   |   | N/A |   | 73,506 |   |   | N/A |   |   |
| Commercial real estate       |       | $                                                | 2,737,967   |   | 28,650 |   |   | 1.05 | % |   | $ | 1,015,885 |   | 23,666 |   |   | 2.33 | % |   |
| Securities trading and other |       | N/A                                              |        | 36,418 |   |   | N/A |   |   | N/A |   | 13,478 |   |   | N/A |   |   |
|                         |       |                                             |        | 180,642 |   |   |   |   |   |   |   | 207,853 |   |   |   |   |   |
| Other                        |       | N/A                                              |        | 20,112 |   |   | N/A |   |   | N/A |   | 10,997 |   |   | N/A |   |   |
|                         |       |                                             |        | $ | 1,493,458 |   |   |   |   |   |   |   | $ | 1,527,450 |   |   |   |   |   |

----

(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, partially offset by a decrease in margins due tocredit spread widening in the commercial mortgage markets.

55

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Forthe Mortgage Banking Segment, the effects on the amount of gain on sale, ofchanges in the volume of loans sold and in the gain-on-sale margin issummarized in the following table:

| ** **               | ** ** | **Quarter Ended  June 30, 2007 vs. June 30, 2006** | ** ** |
|--------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **               | ** ** | **Increase (Decrease) Due to**                                         | ** ** | ** ** | ** ** |
| ** **               | ** ** | **Loans Sold**                                                                   | ** ** | **Margin** | ** ** | **Total** | ** ** |
| ** **               | ** ** | **(in thousands)**                                                               | ** ** |
| Mortgage Banking:        |       |                                                                                  |       |   |   |   |   |
| Prime Mortgage Loans     |       | $                                                                                     | 318,275    |   | $ | (254,093 | ) | $ | 64,182 |   |
| Nonprime Mortgage Loans  |       | (123,557                                                                              | )          | 106,239 |   | (17,318 | ) |
| Prime Home Equity Loans: |       |                                                                                  |       |   |   |   |   |
| Initial sales            |       | (63,202                                                                               | )          | 22,116 |   | (41,086 | ) |
| Subsequent draws         |       | (5,177                                                                                | )          | (15,864 | ) | (21,041 | ) |
|                     |       | (68,379                                                                               | )          | 6,252 |   | (62,127 | ) |
| Total Production Sector  |       | 126,339                                                                               |       | (141,602 | ) | (15,263 | ) |
| Reperforming  loans      |       | (633                                                                                  | )          | — |   | (633 | ) |
| Total Mortgage  Banking  |       | $                                                                                     | 125,706    |   | $ | (141,602 | ) | $ | (15,896 | ) |

 

Gain on sale of Prime Mortgage Loans increased in thequarter ended June 30, 2007 as compared to the quarter ended June 30,2006, due primarily to higher sales volume, partially offset by decreasedmargins on such sales. The decline in margins was due to increased pricecompetition, a shift in channel mix towards our Correspondent Lending Channel,which has lower margins than our origination channels, and reduced sales ofhigher-margin pay-option products.

Gain on sale of Nonprime Mortgage Loans decreased inthe quarter ended June 30, 2007 as compared to the year-ago quarter dueprimarily to a reduction in the volume of loans sold, partially offset by anincrease in margins. The increase in margins was the result of improvedsecondary marketing execution and reduced price competition, especially in theWholesale channel, along with a shift in the mix of loans sold towards ourretail channel, which traditionally has carried greater margins than our otherchannels.

Gain on sale of Prime HomeEquity Loans decreased in the quarter ended June 30, 2007 as compared tothe year-ago quarter due primarily to a decrease in sales of such loans.

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

Netinterest income is summarized below:

| ** **                                          | ** ** | **Quarters Ended  June 30,** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                          | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| ** **                                          | ** ** | **(in thousands)**                | ** ** |
| Net interest income (expense):                      |       |                                   |       |   |   |
| Banking Segment loans  and securities               |       | $                                      | 476,257    |   | $ | 436,547 |   |
| Mortgage Banking Segment:                           |       |                                   |       |   |   |
| Loans and securities                                |       | 147,647                                |       | 133,393 |   |
| Loan Servicing Sector:                              |       |                                   |       |   |   |
| Net interest income on custodial  balances          |       | 224,197                                |       | 207,154 |   |
| Interest expense                                    |       | (249,470                               | )          | (165,777 | ) |
| Capital Markets Segment  securities inventory       |       | 19,915                                 |       | 17,802 |   |
| Other                                               |       | 109,450                                |       | 61,355 |   |
| Net interest income                                 |       | 727,996                                |       | 690,474 |   |
| Provision for loan  losses                          |       | (292,924                               | )          | (61,898 | ) |
| Net interest income after provision for loan losses |       | $                                      | 435,072    |   | $ | 628,576 |   |

 

56

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The increase in net interest income from the BankingSegment was attributable to both an increase in the net interest margin andgrowth in the average interest-earning assets. Average interest-earning assetsin the Banking Segment increased to $86.7 billion during the quarter ended June 30,2007, an increase of $3.6 billion, or 4% over the year-ago quarter.Net interest margin increased to 2.19% during the quarter ended June 30,2007, from 2.10% during the year-ago quarter. Net interest margin waspositively impacted by a smaller interest rate repricing lag compared to the year-agoquarter as well as a smaller proportion of the portfolio comprising pay-optionARM loans with reduced introductory interest rates. These positive factors werepartially offset by a shift in asset mix to include a larger portion oflower-yielding high-credit quality mortgage-backed securities.

The increase in net interest income from Mortgage BankingSegment loans and securities reflects an increase in the average earning-assetsfrom the year-ago quarter, partially offset by a decrease in net interestmargin. The Mortgage Banking Segment loan and securities inventory is primarilyfinanced with borrowings tied to short-term indices. Long-term mortgage ratesdeclined over the comparable period as short-term interest rates increasedbetween the year-ago period and the quarter ended June 30, 2007, causingthe decrease in the net interest margin.

Net interest income from custodial balances increasedin the current period due to an increase in the earnings rate from 5.13% duringthe quarter ended June 30, 2006 to 5.35% during the quarter ended June 30,2007 combined with an increase of $2.9 billion in average custodial balancesfrom the year-ago quarter. Interest income on custodial balances is reduced bythe interest we are required to pass through to security holders on paid-offloans, which was $113.6 million and $79.4 million in the quarters ended June 30,2007 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 increase in net interest income from the CapitalMarkets securities inventory is attributable to a 39% increase in the averageinventory of securities held, partially offset by a decrease in the netinterest margin from 0.14% in the quarter ended June 30, 2006 to 0.11% inthe quarter ended June 30, 2007. The decrease in the net interest marginearned on the securities portfolio is primarily due to a increase in short-termfinancing rates compared to a decrease in rates on the longer-term securitiesheld by the Capital Markets Segment.

The increase in theprovision for loan losses was primarily due to higher loss expectations drivenby the impact of the current housing market on delinquency and default trendsas well as portfolio seasoning. The impact was most significant on prime homeequity loans.

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

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

| ** **                                                             | ** ** | **Quarters Ended  June 30,** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                             | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| ** **                                                             | ** ** | **(in thousands)**                | ** ** |
| Servicing fees,  net of guarantee fees(1)                              |       | $                                      | 1,102,707  |   | $ | 939,778 |   |
| Income from  retained interests                                        |       | 123,941                                |       | 128,542 |   |
| Late charges                                                           |       | 90,137                                 |       | 61,923 |   |
| Prepayment  penalties                                                  |       | 70,018                                 |       | 58,148 |   |
| Ancillary fees                                                         |       | 34,452                                 |       | 18,768 |   |
| Total loan  servicing fees and income from MSRs and retained interests |       | $                                      | 1,421,255  |   | $ | 1,207,159 |   |

----

(1)          Includes contractuallyspecified servicing fees.

57

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The increase in servicing fees, net of guarantee fees,was principally due to an 12% increase in the average servicing portfolio, combinedwith an increase in the overall annualized net service fee earned from 0.324%of the average portfolio balance during the quarter ended June 30, 2006 to0.340% during the quarter ended June 30, 2007.

The decrease in incomefrom retained interests was primarily due to a reduction in the average yieldon such instruments from 18% in the year-ago quarter to 16% in the currentquarter, partially offset by a 4% increase in the average investment in theseassets from the quarter ended June 30, 2006 to the quarter ended June 30,2007. Income from retained interests excludes any impairment charges orrecoveries, which are included in impairment of retained interests in theconsolidated statement of earnings. These investments include interest-only,principal-only and subordinated interests 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 June 30, 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$1,007.2 million and $768.1 million during the quarters ended June 30, 2007and 2006, respectively.

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

We recorded increases inthe fair value of the MSRs in the quarters ended June 30, 2007 and 2006 of$1,327.4 million and $569.0 million, respectively, primarily as a resultof increasing mortgage rates during both quarters which lowered expected futureprepayment speeds.

***(Impairment) Recovery of Retained Interests***

(Impairment)recovery of retained interests is summarized below:

| ** **                                    | ** ** | **Quarters Ended June 30,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                   | ** ** | **2006** | ** ** |
| ** **                                    | ** ** | **(Impairment)  Recovery**                 | ** ** | **Asset  Balance at  Period End** | ** ** | **(Impairment)  Recovery** | ** ** | **Asset  Balance at  Period End** | ** ** |
| ** **                                    | ** ** | **(in thousands)**                    | ** ** |
| Credit-sensitive  retained interests          |       |                                       | $          | (417,224 | ) |   | $ | 1,461,828 |   |   | $ | 10,133 |   |   | $ | 1,804,987 |   |
| Non  credit-sensitive retained interests      |       |                                       | 149,107    |   |   | 1,273,685 |   |   | 41,365 |   |   | 946,031 |   |
| (Impairment)  recovery of retained  interests |       |                                       | $          | (268,117 | ) |   | $ | 2,735,513 |   |   | $ | 51,498 |   |   | $ | 2,751,018 |   |

 

In the quarter ended June 30, 2007, we recognizedimpairment of credit-sensitive retained interests of $417.2 million, including$388.1 million related to subordinated interests on prime home equitysecuritizations. The impairment charges on these subordinated interests weredriven by weakening housing market conditions, which resulted in increasedestimates for future losses on the loans underlying these securities. The lossestimate, as measured by undiscounted losses embedded in the valuation ofsubordinated interests as a percentage of the unpaid principal balance of theloans underlying such interests, increased from 3.1% to 5.2% during the quarterended June 30, 2007.

In the quarters ended June 30,2007 and 2006, we recorded increases in value of non credit-sensitive retainedinterests amounting to $149.1 million and $41.4 million respectively. Theseincreases were related primarily to interest-only and principal-only retainedinterests.

58

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***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 derivativesand securities that are the primary components of the Servicing Hedge are tiedto long-term mortgage, swap and Treasury rates. These rates increased duringthe quarters ended June 30, 2007 and 2006. As a result, the ServicingHedge incurred a loss of $1,373.1 million, including $125 million of time valuedecay of the options included in the Servicing Hedge (our “hedge cost”) in thequarter ended June 30, 2007 and a loss of $621.1 million, including $112million of hedge cost, in the quarter ended June 30, 2006.

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 insurance lines of business, along with an increasein reinsurance premiums earned contributed to the $68.2 million increasein net insurance premiums earned.

***Other Revenue***

Otherrevenue consists of the following:

| ** **                                                     | ** ** | **Quarters Ended  June 30,** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                     | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| ** **                                                     | ** ** | **(in thousands)**                | ** ** |
| Appraisal fees,  net                                           |       | $                                      | 41,674     |   | $ | 34,823 |   |
| Credit report  fees, net                                       |       | 18,164                                 |       | 19,611 |   |
| Title services                                                 |       | 15,773                                 |       | 10,147 |   |
| Increase  (decrease) in cash surrender value of life insurance |       | 12,271                                 |       | (2,491 | ) |
| Insurance agency  commissions                                  |       | 5,392                                  |       | 7,756 |   |
| Other                                                          |       | 73,955                                 |       | 51,665 |   |
| Total other  revenue                                           |       | $                                      | 167,229    |   | $ | 121,511 |   |

 

***Compensation Expenses***

Compensationexpenses decreased 3%, or $34.7 million in the quarter ended June 30, 2007as compared to the year-ago period. Details are presented below:

| ** **                          | ** ** | **Quarters Ended  June 30,** | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|
| ** **                          | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| ** **                          | ** ** | **(in thousands)**                | ** ** |
| Base salaries                       |       | $                                      | 624,734    |   | $ | 587,431 |   |
| Incentive bonus  and commissions    |       | 475,941                                |       | 509,223 |   |
| Payroll taxes and  other benefits   |       | 195,214                                |       | 228,750 |   |
| Deferral of loan  origination costs |       | (186,873                               | )          | (181,697 | ) |
| Total  compensation expenses        |       | $                                      | 1,109,016  |   | $ | 1,143,707 |   |

 

59

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Averageworkforce by segment is summarized below:

| ** **                                    | ** ** | **Quarters Ended  June 30,** | ** ** |
|-----------------------------------------------|------------|----------------------------------------|------------|
| ** **                                    | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| Mortgage Banking                              |       | 42,279                                 |       | 41,472 |   |
| Banking                                       |       | 2,224                                  |       | 2,374 |   |
| Capital Markets                               |       | 1,048                                  |       | 775 |   |
| Insurance                                     |       | 2,170                                  |       | 2,102 |   |
| Global Operations                             |       | 3,486                                  |       | 2,041 |   |
| Corporate  Administration                     |       | 7,054                                  |       | 7,290 |   |
| Average  workforce, including temporary staff |       | 58,261                                 |       | 56,054 |   |

 

Compensationexpense reductions in the Mortgage Banking Segment and in CorporateAdministration were partially offset by increases in the Capital MarketsSegment.

·       Inthe Mortgage Banking Segment, compensation expenses decreased $39.4 million, or4% before deferral of loan origination costs. The decrease came from the LoanProduction Sector, where compensation expenses decreased $54.1 million, or 7%because of a change in channel mix, partially offset by a 2% increase inaverage staff to support our capacity growth efforts. This decrease waspartially offset by an increase of $9.1 million in the Loan Servicing Sectordue to continuing growth in the servicing portfolio and increasingdelinquencies and an increase of $5.6 million in the Loan Closing ServicesSector.

·       InCorporate Administration, compensation expense reductions of $49.7 millionprimarily related to reductions in stock-based compensation and pensionexpenses as well as to reduced staffing levels.

·       Inthe Capital Markets Segment, compensation expense increased by $27.9 milliondue to an increase in the average staffing levels relating to newer lines ofbusiness.

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.

***Occupancy and Other Office Expenses***

Occupancyand other office expenses are summarized below:

| ** **                                 | ** ** | **Quarters Ended  June 30,** | ** ** |
|--------------------------------------------|------------|----------------------------------------|------------|
| ** **                                 | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                | ** ** |
| Office and  equipment rentals              |       | $                                      | 65,221     |   | $ | 55,420 |   |
| Depreciation                               |       | 59,177                                 |       | 49,827 |   |
| Utilities                                  |       | 41,234                                 |       | 38,144 |   |
| Postage and  courier service               |       | 27,568                                 |       | 31,043 |   |
| Office supplies                            |       | 21,963                                 |       | 23,024 |   |
| Dues and  subscriptions                    |       | 15,088                                 |       | 17,939 |   |
| Repairs and  maintenance                   |       | 14,546                                 |       | 21,338 |   |
| Other                                      |       | 24,220                                 |       | 24,345 |   |
| Total occupancy  and other office expenses |       | $                                      | 269,017    |   | $ | 261,080 |   |

 

60

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Occupancy and other officeexpenses for the quarter ended June 30, 2007 increased by 3%, or $7.9 million,reflecting growth in facilities.

***Insurance Claim Expenses***

Insurance claim expenseswere $154.8 million for the quarter ended June 30, 2007 as compared to$102.8 million for the year-ago period. The increase in insurance claimsexpense was due to growth in our insurance book of business and to lossesarising from wildfires and Northeast windstorms during the current quarter.

***Advertising and Promotion Expenses***

Advertising and promotionexpenses increased 21% from the quarter ended June 30, 2006, as a resultof the increasing competition for lending business as the mortgage marketvolume declines.

***Other Operating Expenses***

Otheroperating expenses are summarized below:

| ** **                                           | ** ** | **Quarters Ended  June 30,** | ** ** |
|------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                           | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| ** **                                           | ** ** | **(in thousands)**                | ** ** |
| Legal,  consulting, accounting and auditing expenses |       | $                                      | 47,261     |   | $ | 63,141 |   |
| Insurance  commission expense                        |       | 43,705                                 |       | 45,508 |   |
| Travel and  entertainment                            |       | 27,771                                 |       | 38,205 |   |
| Mortgage  insurance                                  |       | 23,938                                 |       | 7,718 |   |
| Losses on  servicing-related advances                |       | 22,635                                 |       | 12,072 |   |
| Software  amortization and impairment                |       | 19,561                                 |       | 12,653 |   |
| Taxes and  licenses                                  |       | 18,146                                 |       | 13,608 |   |
| Insurance                                            |       | 17,686                                 |       | 6,187 |   |
| Other                                                |       | 79,790                                 |       | 63,835 |   |
| Deferral of loan  origination costs                  |       | (29,136                                | )          | (30,016 | ) |
| Total other  operating expenses                      |       | $                                      | 271,357    |   | $ | 232,911 |   |

 

The increase in operatingexpenses reflects an increase of $16.2 million in purchased mortgage insuranceexpense relating to the Banking Operations portfolio of loans held forinvestment, as well as overall growth in the Company from the quarter ended June 30,2006 to the quarter ended June 30, 2007.

***Results ofOperations Comparison—Six Months Ended June 30, 2007 and 2006***

***Consolidated Earnings Performance***

Net earnings for the six months ended June 30,2007 were $919.0 million, a 35% decrease from the year-ago period. Our dilutedearnings per share were $1.53, a 32% decrease from the year-ago period.

The decrease in our net earnings resulted primarilyfrom increased credit costs attributable to higher loss expectations caused byrising delinquencies and defaults stemming from softer housing markets. Inaddition, volatile market conditions, primarily in the nonprime and prime homeequity arenas, contributed to the year-over-year earnings decline, which arereflected in our Mortgage Banking, Banking and Capital Markets segments. Thesedecreases were partially offset by a non-recurring reduction in our corporatetax rate to 32.7% in the six months ended June 30, 2007, which compares to39.2% in the year-ago period and an increase in the profitability of ourInsurance Segment. The change in the tax rate is the result of 

61

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remeasurement of deferredincome taxes precipitated by the relocation of certain operating activitiesresulting in favorable state income tax consequences.

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 turmoil early in the period in the nonprime marketswhich caused a decline in nonprime revenues. Our Loan Servicing Sector wasnegatively impacted by impairment of prime home equity and nonprime and otherrelated residual securities. These credit-sensitive residuals declined in valuedue to increasing delinquency and default trends stemming from a softer housingmarket. As a result of these factors, we recorded impairment of retainedinterests of $696.7 million in the Loan Servicing Sector in the current sixmonth period compared to impairment of retained interests of $68.6 million inthe year-ago period.

The Banking Segmentproduced pre-tax earnings of $417.0 million, a decrease of 37% from the year-agoperiod. The decrease in profitability of our Banking Segment was primarily dueto a $311.0 million increase in the provision for credit losses, partiallyoffset by a 7% increase in average interest-earning assets in BankingOperations from the year-ago period. Pre-tax earnings of our Capital Markets Segmentdecreased $71.4 million, or 23%, from the year-ago period, due to weakeningmarket conditions and an increase in expenses related to continued growth innewer lines of business. These decreases were partially offset by an increasein the profitability of the Insurance Segment, due to an increase in the netearned premiums and a reversal of loss reserves related to the 2003 book of reinsurancebusiness on which negligible remaining loss exposure was deemed to exist in thefirst six months of 2007.

**Operating SegmentResults**

Pre-taxearnings (loss) by segment are summarized below:

| ** **             | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------|------------|-----------------------------------------------|------------|
| ** **             | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| ** **             | ** ** | **(in thousands)**                       | ** ** |
| Mortgage Banking:      |       |                                          |       |   |   |
| Loan Production        |       | $                                             | 578,140    |   | $ | 608,713 |   |
| Loan Servicing         |       | (216,451                                      | )          | 528,001 |   |
| Loan Closing Services  |       | 58,217                                        |       | 48,432 |   |
| Total Mortgage Banking |       | 419,906                                       |       | 1,185,146 |   |
| Banking                |       | 417,004                                       |       | 666,457 |   |
| Capital Markets        |       | 241,718                                       |       | 313,163 |   |
| Insurance              |       | 278,379                                       |       | 153,690 |   |
| Global Operations      |       | 10,694                                        |       | 12,988 |   |
| Other                  |       | (2,208                                        | )          | (18,058 | ) |
| Total                  |       | $                                             | 1,365,493  |   | $ | 2,313,386 |   |

 

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

62

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Totalloan production by segment and product, net of intercompany sales, issummarized below:

| ** **                                   | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                   | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| ** **                                   | ** ** | **(in millions)**                        | ** ** |
| Segment:                                     |       |                                          |       |   |   |
| Mortgage Banking                             |       | $                                             | 233,635    |   | $ | 197,087 |   |
| Banking Operations                           |       | 7,029                                         |       | 16,334 |   |
| Capital Markets—Conduit acquisitions(1) |       | 4,463                                         |       | 10,620 |   |
| Total Mortgage Loan Fundings                 |       | 245,127                                       |       | 224,041 |   |
| Commercial Real Estate                       |       | 4,912                                         |       | 1,963 |   |
|                                         |       | $                                             | 250,039    |   | $ | 226,004 |   |
| Product:                                     |       |                                          |       |   |   |
| Prime Mortgage                               |       | $                                             | 210,390    |   | $ | 178,389 |   |
| Prime Home Equity                            |       | 21,135                                        |       | 25,241 |   |
| Nonprime Mortgage                            |       | 13,602                                        |       | 20,411 |   |
| Commercial Real Estate                       |       | 4,912                                         |       | 1,963 |   |
|                                         |       | $                                             | 250,039    |   | $ | 226,004 |   |

----

(1)          Acquisitions from thirdparties.

Our total loan production was $250.0 billion for thesix months ended June 30, 2007, an 11% increase from the year-ago period.The increase was primarily due to an increase in our market share from 15.5% to18.2% (based on our internal market estimates) in a mortgage market thatdeclined approximately 7% from the year-ago period. The increase in our marketshare was primarily driven by increased market share in our CorrespondentLending Channel.

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

| ** **              | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------|------------|-----------------------------------------------|------------|
| ** **              | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| ** **              | ** ** | **(in millions)**                        | ** ** |
| **Purpose:**            |       |                                          |       |   |   |
| Non-purchase            |       | $                                             | 149,137    |   | $ | 121,903 |   |
| Purchase                |       | 100,902                                       |       | 104,101 |   |
|                    |       | $                                             | 250,039    |   | $ | 226,004 |   |
| **Interest Rate Type:** |       |                                          |       |   |   |
| Fixed                   |       | $                                             | 173,325    |   | $ | 113,748 |   |
| Adjustable              |       | 76,714                                        |       | 112,256 |   |
|                    |       | $                                             | 250,039    |   | $ | 226,004 |   |

 

**Mortgage BankingSegment**

The mortgage bankingsegment includes Loan Production, Loan Servicing and Loan Closing ServicesSectors.

63

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***Loan Production Sector***

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

| ** **                           | ** ** | **Six Months Ended  June 30,(1)** | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                           | ** ** | **(in millions)**                           | ** ** |
| **Channel:**                         |       |                                             |       |   |   |
| Originated:                          |       |                                             |       |   |   |
| Retail:                              |       |                                             |       |   |   |
| Consumer Markets                     |       | $                                                | 60,321     |   | $ | 59,000 |   |
| Full Spectrum Lending                |       | 19,111                                           |       | 16,063 |   |
|                                 |       | 79,432                                           |       | 75,063 |   |
| Wholesale Lending                    |       | 45,053                                           |       | 44,758 |   |
| Total originated                     |       | 124,485                                          |       | 119,821 |   |
| Purchased—Correspondent Lending |       | 109,150                                          |       | 77,266 |   |
|                                 |       | $                                                | 233,635    |   | $ | 197,087 |   |
| **Mortgage  Loan Type:**             |       |                                             |       |   |   |
| Prime Mortgage                       |       | $                                                | 205,053    |   | $ | 158,054 |   |
| Prime Home Equity                    |       | 16,013                                           |       | 20,763 |   |
| Nonprime Mortgage                    |       | 12,569                                           |       | 18,270 |   |
|                                 |       | $                                                | 233,635    |   | 197,087 |   |
| **Purpose:**                         |       |                                             |       |   |   |
| Non-purchase                         |       | $                                                | 138,967    |   | $ | 105,600 |   |
| Purchase                             |       | 94,668                                           |       | 91,487 |   |
|                                 |       | $                                                | 233,635    |   | $ | 197,087 |   |
| **Interest  Rate Type:**             |       |                                             |       |   |   |
| Fixed Rate                           |       | $                                                | 163,592    |   | $ | 107,855 |   |
| Adjustable Rate                      |       | 70,043                                           |       | 89,232 |   |
|                                 |       | $                                                | 233,635    |   | $ | 197,087 |   |

----

(1)          $92.5 billion and $24.3billion of Mortgage Banking loan production were funded by Countrywide Bankduring the six months ended June 30, 2007 and 2006, respectively.

64

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

| ** **                              | ** ** | **Six Months Ended June 30,** | ** **  |
|-----------------------------------------|------------|---------------------------------------------------|-------------|
| ** **                              | ** ** | **2007**                                          | ** **  | **2006** | ** ** |
| ** **                              | ** ** | **Amount**                                        | ** **  | **Percentage of  Loan  Production  Volume** | ** ** | **Amount** | ** ** | **Percentage of  Loan  Production  Volume** | ** ** |
| ** **                              | ** ** | **(dollar amounts in thousands)**  | ** **  |
| Revenues:                               |       |                                              |        |   |   |   |   |   |   |   |   |   |   |
| Prime Mortgage                          |       | $                                                 | 2,191,421   |   |   |   |   |   | $ | 2,064,861 |   |   |   |   |   |
| Prime Home Equity                       |       | 296,464                                           |        |   |   |   |   | 339,058 |   |   |   |   |   |
| Nonprime Mortgage                       |       | 207,500                                           |        |   |   |   |   | 420,124 |   |   |   |   |   |
| Total revenues                          |       | 2,695,385                                         |        |   | 1.16 | % |   | 2,824,043 |   |   | 1.43 | % |   |
| Expenses:                               |       |                                              |        |   |   |   |   |   |   |   |   |   |   |
| Compensation                            |       | 1,182,534                                         |        |   | 0.51 | % |   | 1,227,070 |   |   | 0.62 | % |   |
| Other operating                         |       | 698,002                                           |        |   | 0.30 | % |   | 709,165 |   |   | 0.36 | % |   |
| Allocated corporate                     |       | 236,709                                           |        |   | 0.10 | % |   | 279,095 |   |   | 0.14 | % |   |
| Total expenses                          |       | 2,117,245                                         |        |   | 0.91 | % |   | 2,215,330 |   |   | 1.12 | % |   |
| Pre-tax earnings                        |       | $                                                 | 578,140     |   |   | 0.25 | % |   | $ | 608,713 |   |   | 0.31 | % |   |
| Total Mortgage Banking  loan production |       | $                                                 | 233,635,000 |   |   |   |   |   | $ | 197,087,000 |   |   |   |   |   |

 

Revenues (in dollars and expressed as a percentage ofmortgage loans produced) decreased from the year-ago period driven primarily bydeclining Nonprime Mortgage Loan revenues and a decrease in Prime Mortgage margins,partially offset by a $40.6 billion increase in the volume of loans sold. Nonprimerevenues for the six months ended June 30, 2007 included a $217.8 millionwrite-down of nonprime mortgage loans held for sale, most of which weretransferred to loans held for investment. This charge was partially offset bygains of $97.0 million from credit default swaps. Credit default swaps areused to manage credit spread risk (the risk that investors will require higheryields as a result of changes in their assessment of credit risk as compared toa risk-free U.S. Treasury security). Revenues were also affected by an $80.2 millionwrite-down of primarily nonsalable prime and prime home equity mortgage loansheld for sale, most of which were transferred to loans held for investment. Inthe six months ended June 30, 2007, $226.2 billion of mortgage loans, or97% of Mortgage Banking loan production, was sold compared to $185.7 billion ofmortgage loans, or 94% of Mortgage Banking loan production, in the six monthsended June 30, 2006.

Expenses decreased from the year-ago period (both indollars and as a percentage of loans produced), primarily due to a change inthe production channel mix towards our Correspondent Lending Channel, which hasa lower cost structure than our origination channels and to cost cuttinginitiatives.

65

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***Loan Servicing Sector***

Thefollowing table summarizes the results for the Loan Servicing Sector:

| ** **                                                         | ** ** | **Six Months Ended June 30,** | ** **    |
|--------------------------------------------------------------------|------------|---------------------------------------------------|---------------|
| ** **                                                         | ** ** | **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                             |       | $                                                 | 2,225,192     |   |   | 0.331 | % |   | $ | 1,853,240 |   |   | 0.325 | % |   |
| Escrow balance  income                                             |       | 428,017                                           |          |   | 0.064 | % |   | 367,181 |   |   | 0.064 | % |   |
| Miscellaneous  fees                                                |       | 399,768                                           |          |   | 0.059 | % |   | 278,990 |   |   | 0.049 | % |   |
| Income from retained  interests                                    |       | 270,668                                           |          |   | 0.040 | % |   | 262,515 |   |   | 0.046 | % |   |
| Realization of  expected cash flows from mortgage servicing rights |       | (1,931,948                                        | )             |   | (0.287 | %) |   | (1,505,929 | ) |   | (0.264 | %) |   |
| Operating revenues                                                 |       | 1,391,697                                         |          |   | 0.207 | % |   | 1,255,997 |   |   | 0.220 | % |   |
| Direct expenses                                                    |       | 382,160                                           |          |   | 0.057 | % |   | 372,923 |   |   | 0.065 | % |   |
| Allocated  corporate expenses                                      |       | 36,890                                            |          |   | 0.005 | % |   | 44,583 |   |   | 0.008 | % |   |
| Total expenses                                                     |       | 419,050                                           |          |   | 0.062 | % |   | 417,506 |   |   | 0.073 | % |   |
| Operating  earnings                                                |       | 972,647                                           |          |   | 0.145 | % |   | 838,491 |   |   | 0.147 | % |   |
| Interest expense                                                   |       | (512,032                                          | )             |   | (0.076 | %) |   | (281,609 | ) |   | (0.049 | %) |   |
| Change in fair  value of mortgage servicing rights                 |       | 1,506,453                                         |          |   | 0.224 | % |   | 1,546,646 |   |   | 0.271 | % |   |
| Impairment of  retained interests                                  |       | (696,692                                          | )             |   | (0.104 | %) |   | (68,583 | ) |   | (0.012 | %) |   |
| Servicing hedge  losses                                            |       | (1,486,827                                        | )             |   | (0.221 | %) |   | (1,506,944 | ) |   | (0.264 | %) |   |
| Valuation changes, net of Servicing Hedge                          |       | (677,066                                          | )             |   | (0.101 | %) |   | (28,881 | ) |   | (0.005 | %) |   |
| Pre-tax (loss)  earnings                                           |       | $                                                 | (216,451      | ) |   | (0.032 | %) |   | $ | 528,001 |   |   | 0.093 | % |   |
| Average servicing  portfolio                                       |       | $                                                 | 1,345,189,000 |   |   |   |   |   | $ | 1,140,989,000 |   |   |   |   |   |

----

(1)          Annualized

The pre-tax loss in the Loan Servicing Sector was $216.5 million during thesix months ended June 30, 2007, a decrease in results of operations of$744.5 million from the year-ago period. The decline in pre-tax earnings wasdue to impairment of retained interests totaling $696.7 million in the sixmonths ended June 30, 2007, compared to a loss of $68.6 million in theyear-ago period. Also contributing to the decline in pre-tax earnings was anincrease 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.

During the sixmonths ended June 30, 2007, we recorded an impairment of retainedinterests of $696.7 million as summarized below:

| ** **                                   | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                   | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| ** **                                   | ** ** | **(Impairment)  Recovery**                        | ** ** | **Asset  Balance at  Period End** | ** ** | **(Impairment)  Recovery** | ** ** | **Asset  Balance at  Period End** | ** ** |
| ** **                                   | ** ** | **(in thousands)**                           | ** ** |
| Credit-sensitive  retained interests         |       |                                              | $          | (782,296 | ) |   | $ | 1,461,828 |   |   | $ | (91,496 | ) |   | $ | 1,804,987 |   |
| Non  credit-sensitive retained interests     |       |                                              | 85,604     |   |   | 1,159,306 |   |   | 22,913 |   |   | 801,369 |   |
| (Impairment)  recovery of retained interests |       |                                              | $          | (696,692 | ) |   | $ | 2,621,134 |   |   | $ | (68,583 | ) |   | $ | 2,606,356 |   |

 

66

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The impairment losses recognized duringthe six months ended June 30, 2007, on credit-sensitive retained interestsprimarily relate to subordinated interests backed by prime home equity andnonprime and related loans. The declines in value were caused primarily byweakening housing market conditions resulting in increased delinquency anddefault trends and related loss projections. Impairment charges relating tosubordinated interests backed by prime home equity loans and nonprime andrelated loans totaled $521.0 million and $255.9 million during the six monthsended June 30, 2007, respectively. These losses were partially offset by$85.6 million in fair value increases primarily relating to interest-only andprincipal-only retained interests.

***Loan Closing Services Sector***

The LandSafe companiesproduced $58.2 million in pre-tax earnings in the six months ended June 30,2007, representing an increase of 20% from the year-ago period. The increase inLandSafe’s pre-tax earnings was due to an increase in our loan applicationactivity.

**Banking Segment**

Followingis a summary of Banking Operations’ loan production and purchase volume bychannel:

| ** **             | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------|------------|-----------------------------------------------|------------|
| ** **             | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| ** **             | ** ** | **(in millions)**                        | ** ** |
| Purchases              |       | $                                             | 3,269      |   | $ | 4,014 |   |
| Correspondent  Lending |       | 1,595                                         |       | 5,790 |   |
| Consumer Markets       |       | 1,576                                         |       | 854 |   |
| Wholesale Lending      |       | 589                                           |       | 5,676 |   |
|                   |       | $                                             | 7,029      |   | $ | 16,334 |   |

 

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 Operations’assets. However, asset growth in any period is influenced by general mortgage marketconditions, the availability of assets which meet our asset quality and yieldrequirements and our consolidated capital and earnings considerations.

TheBanking Segment achieved pre-tax earnings of $417.0 million during the sixmonths ended June 30, 2007, compared to $666.5 million for the year-agoperiod. Following is the composition of pre-tax earnings:

| ** **                              | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------|------------|
| ** **                              | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| ** **                              | ** ** | **(in thousands)**                       | ** ** |
| Banking  Operations                     |       | $                                             | 430,383    |   | $ | 659,473 |   |
| CWL                                     |       | 19,556                                        |       | 31,532 |   |
| Allocated corporate  expenses           |       | (32,935                                       | )          | (24,548 | ) |
| Total Banking  Segment pre-tax earnings |       | $                                             | 417,004    |   | $ | 666,457 |   |

 

67

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

| ** **                                             | ** ** | **Six Months Ended  June 30,**    | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                             | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                                             | ** ** | **(dollar amounts in thousands)** | ** ** |
| Interest income                                        |       | $                                                | 2,807,652  |   | $ | 2,363,269 |   |
| Interest expense                                       |       | (1,847,573                                       | )          | (1,523,871 | ) |
| Net interest income                                    |       | 960,079                                          |       | 839,398 |   |
| Provision for  credit losses(1)                        |       | (375,507                                         | )          | (64,533 | ) |
| Net interest income after provision for credit  losses |       | 584,572                                          |       | 774,865 |   |
| Non-interest  income                                   |       | 90,381                                           |       | 73,483 |   |
| Mortgage  insurance expense                            |       | (43,332                                          | )          | (16,004 | ) |
| Other  non-interest expense                            |       | (201,238                                         | )          | (172,871 | ) |
| Pre-tax earnings                                       |       | $                                                | 430,383    |   | $ | 659,473 |   |
| Efficiency  ratio(2)                                   |       | 24                                               | %          | 21 | % |
| After-tax return on average  assets                    |       | 0.68                                             | %          | 1.03 | % |

----

(1)          Includes provision forloan losses plus provision for losses on unfunded commitments.

(2)          Non-interest expensedivided by the sum of net interest income plus non-interest income. The BankingOperations’ efficiency ratio reflects the expense structure resulting from itsrelationship with Countrywide Home Loans but does not include allocatedcorporate expenses. If Banking Operations were a stand-alone entity, the natureand amount of its expenses would differ from those reported. For example, thefulfillment fees paid by Countrywide Bank to the Loan Production Sector fororigination costs incurred on investment mortgage loans funded by CountrywideBank are generally determined on an incremental cost basis which is less thanwould be incurred in an arms-length transaction.

Banking Operations achieved pre-tax earnings of $430.4million for the six months ended June 30, 2007, a decrease of $229.1million, or 35%, from the year-ago period. This decrease resulted primarilyfrom a higher provision for credit losses and an increase in mortgage insuranceexpense, partially offset by an increase in net interest income.

The Banking Operations’ provision for credit lossesincreased by $311.0 million during the six months ended June 30, 2007compared to the six months ended June 30, 2006. The increase in theprovision for credit losses was primarily due to higher loss expectationsdriven by the impact of the current housing market on delinquency and defaulttrends as well as portfolio seasoning. The impact was most significant on primehome equity loans. The provision for credit loss on prime home equity loans was$286.8 million during the six months ended June 30, 2007 compared to $46.0million in the year-ago period.

Mortgage insurance expense increased $27.3 million asthe Bank has continued to acquire loss insurance as part of its credit riskmanagement activities.

68

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Thecomponents of net interest income of Banking Operations are summarized below:

| ** **                                         | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                         | ** ** | **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:                           |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans(1)                                           |       | $                                                 | 69,203,436 |   | $ | 2,455,457 |   |   | 7.11 | % |   | $ | 68,427,489 |   | $ | 2,157,342 |   |   | 6.32 | % |   |
| Securities available for sale(2)                   |       | 11,100,939                                        |       | 307,083 |   |   | 5.53 | % |   | 6,104,385 |   | 154,121 |   |   | 5.05 | % |   |
| Short-term investments                             |       | 199,582                                           |       | 5,498 |   |   | 5.56 | % |   | 565,344 |   | 13,441 |   |   | 4.79 | % |   |
| FHLB securities and FRB stock                      |       | 1,341,862                                         |       | 39,614 |   |   | 5.95 | % |   | 1,383,792 |   | 38,365 |   |   | 5.59 | % |   |
| Total earning assets                               |       | 81,845,819                                        |       | 2,807,652 |   |   | 6.87 | % |   | 76,481,010 |   | 2,363,269 |   |   | 6.19 | % |   |
| Allowance for loan losses                          |       | (279,464                                          | )          |   |   |   |   |   |   | (119,361 | ) |   |   |   |   |   |   |
| Other assets                                       |       | 3,308,692                                         |       |   |   |   |   |   |   | 1,061,392 |   |   |   |   |   |   |   |
| Total assets                                       |       | $                                                 | 84,875,047 |   |   |   |   |   |   |   | $ | 77,423,041 |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                     |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Money market deposits and savings accounts    |       | $                                                 | 12,883,401 |   | 339,124 |   |   | 5.31 | % |   | $ | 5,016,247 |   | 112,426 |   |   | 4.52 | % |   |
| Company-controlled custodial deposits(3)           |       | 16,150,567                                        |       | 415,379 |   |   | 5.19 | % |   | 14,649,621 |   | 337,373 |   |   | 4.64 | % |   |
| Time deposits                                      |       | 28,122,947                                        |       | 715,032 |   |   | 5.13 | % |   | 24,640,209 |   | 534,803 |   |   | 4.38 | % |   |
| Total interest-bearing  deposits                   |       | 57,156,915                                        |       | 1,469,535 |   |   | 5.18 | % |   | 44,306,077 |   | 984,602 |   |   | 4.48 | % |   |
| Borrowings                                         |       | 17,629,475                                        |       | 378,038 |   |   | 4.32 | % |   | 25,931,310 |   | 539,269 |   |   | 4.19 | % |   |
| Total interest-bearing  liabilities                |       | 74,786,390                                        |       | 1,847,573 |   |   | 4.98 | % |   | 70,237,387 |   | 1,523,871 |   |   | 4.38 | % |   |
| Non  interest-bearing liabilities and equity: |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non interest-bearing checking accounts             |       | 2,054,112                                         |       |   |   |   |   |   |   | 1,109,690 |   |   |   |   |   |   |   |
| Other liabilities                                  |       | 2,888,974                                         |       |   |   |   |   |   |   | 730,038 |   |   |   |   |   |   |   |
| Shareholder’s equity                          |       | 5,145,571                                         |       |   |   |   |   |   |   | 5,345,926 |   |   |   |   |   |   |   |
| Total non interest-bearing liabilities and equity  |       | 10,088,657                                        |       |   |   |   |   |   |   | 7,185,654 |   |   |   |   |   |   |   |
| Total liabilities and shareholder’s equity    |       | $                                                 | 84,875,047 |   |   |   |   |   |   |   | $ | 77,423,041 |   |   |   |   |   |   |   |
| Net interest income                                |       |                                              |       | $ | 960,079 |   |   |   |   |   |   |   | $ | 839,398 |   |   |   |   |   |
| Net interest spread(4)                             |       |                                              |       |   |   |   | 1.89 | % |   |   |   |   |   |   | 1.81 | % |   |
| Net interest  margin(5)                            |       |                                              |       |   |   |   | 2.32 | % |   |   |   |   |   |   | 2.17 | % |   |

----

(1)           Average balances include nonaccrual loans.

(2)           Average balances and yields for securities availablefor sale are based on average amortized cost computed on the settlement datebasis.

(3)           Represents an intercompany rate paid to the LoanServicing Sector.

(4)           Calculated as yield on total average interest-earningassets less rate on total average interest-bearing liabilities.

(5)           Calculated as net interest income divided by totalaverage interest-earning assets.

69

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Thedollar amounts of interest income and interest expense vary depending uponchanges in interest rates and upon 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 were allocatedproportionately to the changes in volume and the changes in rate and includedin the relevant column below—are as follows:

| ** **                              | ** ** | **Six Months Ended  June 30, 2007 vs. June 30, 2006** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **                              | ** ** | **Increase (Decrease) Due to**                                                 | ** ** | ** ** | ** ** |
| ** **                              | ** ** | **Volume**                                                                                    | ** ** | **Rate** | ** ** | **Total Changes** | ** ** |
| ** **                              | ** ** | **(in thousands)**                                                                       | ** ** |
| Interest-earning  assets:               |       |                                                                                          |       |   |   |   |   |   |   |   |   |
| Loans                                   |       | $                                                                                             | 36,346     |   |   | $ | 261,769 |   |   |   | $ | 298,115 |   |   |
| Securities available for  sale          |       | 136,956                                                                                       |       |   | 16,006 |   |   |   | 152,962 |   |   |
| Short-term investments                  |       | (9,804                                                                                        | )          |   | 1,861 |   |   |   | (7,943 | ) |   |
| FHLB securities and FRB  stock          |       | (1,306                                                                                        | )          |   | 2,555 |   |   |   | 1,249 |   |   |
| Total interest income                   |       | $                                                                                             | 162,192    |   |   | $ | 282,191 |   |   |   | $ | 444,383 |   |   |
| Interest-bearing  liabilities:          |       |                                                                                          |       |   |   |   |   |   |   |   |   |
| Money market deposits  savings accounts |       | $                                                                                             | 204,004    |   |   | $ | 22,694 |   |   |   | $ | 226,698 |   |   |
| Company-controlled  custodial deposits  |       | 36,453                                                                                        |       |   | 41,553 |   |   |   | 78,006 |   |   |
| Time deposits                           |       | 81,447                                                                                        |       |   | 98,782 |   |   |   | 180,229 |   |   |
| Total deposits                          |       | 321,904                                                                                       |       |   | 163,029 |   |   |   | 484,933 |   |   |
| Total borrowings                        |       | (177,546                                                                                      | )          |   | 16,315 |   |   |   | (161,231 | ) |   |
| Total interest expense                  |       | 144,358                                                                                       |       |   | 179,344 |   |   |   | 323,702 |   |   |
| Net interest income                     |       | $                                                                                             | 17,834     |   |   | $ | 102,847 |   |   |   | $ | 120,681 |   |   |

 

The increase in net interest income is primarily dueto a $5.4 billion, or 7%, increase in average interest-earning assets and a 15basis point increase in net interest margin. The increase in the net interestmargin from the year-ago period was a result of the effect of a smallerinterest rate repricing lag and the reduced impact of teaser rates earned onrecently funded pay-option loans as such loans comprised a smaller portion ofthe portfolio in the six months ended June 30, 2007 compared to theyear-ago period, partially offset by a change in asset mix to include a largerportion of lower-yielding high-credit quality mortgage-backed securities.

The Banking Segment alsoincludes the operations of CWL. CWL’s pre-tax earnings decreased by $12.0million during the six months ended June 30, 2007 in comparison to theyear-ago period, primarily due to a 10% decrease in average mortgage warehouseadvances, which resulted primarily from a decrease in overall market fundingactivity and to competitive pricing pressure. Warehouse lending advances were$2.5 billion at June 30, 2007 and had an average yield of 6.4% during thesix months ended June 30, 2007.

**Capital MarketsSegment**

Our Capital Markets Segment achieved pre-tax earningsof $241.7 million for the six months ended June 30, 2007, a decrease of$71.4 million, or 23%, from the year-ago period caused by an overall decline inrevenue and a $56.1 million, or 27% increase in expenses to support newer linesof business.

70

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

| ** **                   | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------|------------|-----------------------------------------------|------------|
| ** **                   | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| ** **                   | ** ** | **(in thousands)**                       | ** ** |
| Revenues:                    |       |                                          |       |   |   |
| Conduit                      |       | $                                             | 161,468    |   | $ | 226,840 |   |
| Underwriting                 |       | 103,840                                       |       | 150,170 |   |
| Commercial real estate       |       | 87,963                                        |       | 44,113 |   |
| Securities trading           |       | 82,005                                        |       | 61,283 |   |
| Brokering                    |       | 27,330                                        |       | 16,142 |   |
| Other                        |       | 42,807                                        |       | 22,257 |   |
| Total revenues               |       | 505,413                                       |       | 520,805 |   |
| Expenses:                    |       |                                          |       |   |   |
| Operating expenses           |       | 249,967                                       |       | 196,413 |   |
| Allocated corporate expenses |       | 13,728                                        |       | 11,229 |   |
| Total expenses               |       | 263,695                                       |       | 207,642 |   |
| Pre-tax earnings             |       | $                                             | 241,718    |   | $ | 313,163 |   |

 

During the six monthsended June 30, 2007, the Capital Markets Segment generated revenues totaling$161.5 million from its conduit activities, primarily managing the acquisitionand sale or securitization of loans on behalf of CHL. These revenues, primarilyas they relate to nonprime loans, were adversely impacted by deterioratingmarket conditions, specifically higher investor yield requirements. Also, thevolume of loans sold declined by $20.6 billion, or 57%, reflecting adversemarket conditions, reduced CHL loan production and fewer third party loanpurchases. Underwriting revenues were also negatively impacted because of thereduced volume of conduit securitizations as well as a decline in nonprime andprime home equity securitization activity on behalf of the Mortgage BankingSegment.

During the currentreporting period, the commercial real estate finance activities of the CapitalMarkets Segment generated revenues totaling $88.0 million compared to $44.1million in the year-ago period. The increase in revenue was due to an increasein the volume of loans sold, partially offset by a decrease in margins due tocredit spread widening resulting from turmoil in the mortgage market during thesix month ended June 30, 2007.

Thefollowing table shows the composition of CSC securities trading volume, whichincludes intersegment trades with the Mortgage Banking Segment, by instrument:

| ** **                      | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------|------------|-----------------------------------------------|------------|
| ** **                      | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| ** **                      | ** ** | **(in millions)**                        | ** ** |
| Mortgage-backed  securities     |       | $                                             | 1,244,732  |   | $ | 1,099,228 |   |
| Asset-backed  securities        |       | 55,441                                        |       | 61,737 |   |
| Other                           |       | 76,797                                        |       | 86,799 |   |
| Subtotal(1)                     |       | 1,376,970                                     |       | 1,247,764 |   |
| U.S. Treasury  securities       |       | 730,716                                       |       | 664,927 |   |
| Total securities trading volume |       | $                                             | 2,107,686  |   | $ | 1,912,691 |   |

 

----

(1)        Approximately 13% and 14% of the segment’snon-U.S. Treasury securities trading volume was with Countrywide Home Loansduring the six months ended June 30, 2007 and 2006, respectively.

71

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**Insurance Segment**

TheInsurance Segment’s pre-tax earnings increased by $124.7 million over theyear-ago period, to $278.4 million during the six months ended June 30,2007. The following table shows pre-tax earnings by component:

| ** **                                | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| ** **                                | ** ** | **(in thousands)**                       | ** ** |
| Balboa  Reinsurance Company               |       | $                                             | 187,415    |   | $ | 99,158 |   |
| Balboa Life and  Casualty(1)              |       | 107,986                                       |       | 67,348 |   |
| Allocated  corporate expenses             |       | (17,022                                       | )          | (12,816 | ) |
| Total Insurance  Segment pre-tax earnings |       | $                                             | 278,379    |   | $ | 153,690 |   |

 

----

(1)          Includesthe Balboa Life and Casualty Group and the Countrywide Insurance ServicesGroup.

Thefollowing table shows net insurance premiums earned:

| ** **                           | ** ** | **Six Months  Ended  June 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| ** **                           | ** ** | **(in thousands)**                             | ** ** |
| Balboa  Reinsurance Company          |       | $                                                   | 128,694    |   | $ | 106,951 |   |
| Balboa Life and  Casualty            |       | 557,867                                             |       | 457,068 |   |
| Total net  insurance premiums earned |       | $                                                   | 686,561    |   | $ | 564,019 |   |

 

Thefollowing table shows insurance claim expenses:

| ** **                      | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------|------------|---------------------------------------------------|------------|
| ** **                      | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| ** **                      | ** ** | **Amount**                                        | ** ** | **As Percentage  of Net  Earned  Premiums** | ** ** | **Amount** | ** ** | **As Percentage  of Net  Earned  Premiums** | ** ** |
| ** **                      | ** ** | **(dollar amounts in thousands)**  | ** ** |
| Balboa  Reinsurance Company     |       | $                                                 | (43,872    | ) |   | N/M |   |   | $ | 20,735 |   |   | 19 | % |   |
| Balboa Life and  Casualty       |       | 255,946                                           |       |   | 46 | % |   | 206,116 |   |   | 45 | % |   |
| Total insurance  claim expenses |       | $                                                 | 212,074    |   |   |   |   |   | $ | 226,851 |   |   |   |   |   |

 

Our mortgage reinsurance business produced an increasein pre-tax earnings of $88.3 million, or 89%, over the year-ago period,resulting primarily from a $74.0 million reversal of loss reserves related tothe 2003 book of business, on which negligible remaining loss exposure wasdeemed to exist in the first six months of 2007. Also contributing to theincrease in pre-tax earnings was growth of 4% in the mortgage loans included inour loan servicing portfolio that are covered by reinsurance contracts.

Our Life and Casualtyinsurance business produced pre-tax earnings of $108.0 million, an increase of$40.6 million, or 60%, from the year-ago period. The increase in earnings wasdriven by a $100.8 million, or 22%, increase in net earned premiums during thesix months ended June 30, 2007 in comparison to the year-ago period. Theincrease in net earned premiums was primarily attributable to growth inlender-placed insurance and voluntary auto insurance.

**Global OperationsSegment**

Global Operation’s pre-tax earnings totaled $10.7million during the six months ended June 30, 2007, a decrease of $2.3million from the year-ago period. The decrease in earnings was primarily due tothe termination of the joint venture with Barclays Bank, PLC in 2006, partiallyoffset by an increase in revenue recognized from the licensing of software.

72

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**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:

| ** **                   | ** ** | **Six Months Ended June 30,** | ** **  |
|------------------------------|------------|---------------------------------------------------|-------------|
| ** **                   | ** ** | **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        |       | $                                                 | 202,304,717 |   | $ | 1,937,557 |   |   | 0.96 | % |   | $ | 155,351,689 |   | $ | 1,869,823 |   |   | 1.20 | % |   |
| Nonprime Mortgage Loans      |       | 13,054,123                                        |        | 149,256 |   |   | 1.14 | % |   | 18,985,834 |   | 349,440 |   |   | 1.84 | % |   |
| Prime Home Equity  Loans:    |       |                                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Initial Sales                |       | 8,785,234                                         |        | 188,613 |   |   | 2.15 | % |   | 9,144,944 |   | 169,728 |   |   | 1.86 | % |   |
| Subsequent draws             |       | 2,085,493                                         |        | 50,438 |   |   | 2.42 | % |   | 2,173,660 |   | 79,704 |   |   | 3.67 | % |   |
|                         |       | 10,870,727                                        |        | 239,051 |   |   | 2.20 | % |   | 11,318,604 |   | 249,432 |   |   | 2.20 | % |   |
| Total Production  Sector     |       | 226,229,567                                       |        | 2,325,864 |   |   | 1.03 | % |   | 185,656,127 |   | 2,468,695 |   |   | 1.33 | % |   |
| Reperforming  loans          |       | —                                            |        | — |   |   | 0.00 | % |   | 247,162 |   | 2,661 |   |   | 1.08 | % |   |
|                         |       | $                                                 | 226,229,567 |   | 2,325,864 |   |   | 1.03 | % |   | $ | 185,903,289 |   | 2,471,356 |   |   | 1.33 | % |   |
| Capital Markets:             |       |                                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Conduit activities(1)        |       | $                                                 | 15,282,847  |   | 139,995 |   |   | 0.92 | % |   | $ | 35,855,029 |   | 210,097 |   |   | 0.59 | % |   |
| Underwriting                 |       | N/A                                               |        | 97,028 |   |   | N/A |   |   | N/A |   | 136,607 |   |   | N/A |   |   |
| Commercial real  estate      |       | $                                                 | 4,270,140   |   | 66,215 |   |   | 1.55 | % |   | $ | 1,958,070 |   | 31,229 |   |   | 1.59 | % |   |
| Securities trading and other |       | N/A                                               |        | 67,200 |   |   | N/A |   |   | N/A |   | 17,220 |   |   | N/A |   |   |
|                         |       |                                              |        | 370,438 |   |   |   |   |   |   |   | 395,153 |   |   |   |   |   |
| Other                        |       | N/A                                               |        | 31,260 |   |   | N/A |   |   | N/A |   | 22,119 |   |   | N/A |   |   |
|                         |       |                                              |        | $ | 2,727,562 |   |   |   |   |   |   |   | $ | 2,888,628 |   |   |   |   |   |

----

(1)          Includes loans purchasedfrom 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, partially offset by a decrease in marginsresulting from credit spread widening.

73

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

| ** **               | ** ** | **Six Months Ended  June 30, 2007 vs. June 30, 2006** | ** ** |
|--------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **               | ** ** | **Increase (Decrease) Due to**                                                 | ** ** | ** ** | ** ** |
| ** **               | ** ** | **Loans Sold**                                                                           | ** ** | **Margin** | ** ** | **Total** | ** ** |
| ** **               | ** ** | **(in thousands)**                                                                       | ** ** |
| Mortgage Banking:        |       |                                                                                          |       |   |   |   |   |   |   |
| Prime Mortgage Loans     |       |                                                                                          | $          | 496,244 |   |   | $ | (428,510 | ) | $ | 67,734 |   |
| Nonprime Mortgage Loans  |       |                                                                                          | (90,483    | ) |   | (109,701 | ) | (200,184 | ) |
| Prime Home Equity Loans: |       |                                                                                          |       |   |   |   |   |   |   |
| Initial Sales            |       |                                                                                          | (6,886     | ) |   | 25,771 |   | 18,885 |   |
| Subsequent draws         |       |                                                                                          | (3,116     | ) |   | (26,150 | ) | (29,266 | ) |
|                     |       |                                                                                          | (10,002    | ) |   | (379 | ) | (10,381 | ) |
| Total Production Sector  |       |                                                                                          | 395,759    |   |   | (538,590 | ) | (142,831 | ) |
| Reperforming  loans      |       |                                                                                          | (2,661     | ) |   | — |   | (2,661 | ) |
| Total Mortgage  Banking  |       |                                                                                          | $          | 393,098 |   |   | $ | (538,590 | ) | $ | (145,492 | ) |

 

Gain on sale of Prime Mortgage Loans increased in thesix months ended June 30, 2007 as compared to the six months ended June 30,2006, due primarily to higher sales, substantially offset by decreased marginson such loans. The decline in margins was due to increased price competition,change in product mix to lower-margin products and a shift in channel mixtowards our Correspondent Lending channel, which has lower margins than our originationchannels.

Gain on sale of Nonprime Mortgage Loans decreased inthe six months ended June 30, 2007 as compared to the year-ago period dueprimarily to a write-down of $217.8 million that related largely to thetransfer of $906.9 million Nonprime Mortgage Loans held for sale to loans heldfor investment in the first quarter of 2007. This negative impact was partiallyoffset by improved secondary market execution for nonprime loans in the secondquarter of 2007. The loans transferred to loans held for investment haddeclined in value as a result of deteriorating market conditions-specificallyhigher investor yield requirements as well as increased loss assumptions-duringthe first quarter of 2007. The negative effect of this write-down was partiallyoffset by a $97.0 million gain in credit default swaps, used to mitigatecredit spread risk. Also contributing to the decline in gain on sale ofNonprime Mortgage Loans was a reduction in the volume of loans sold in the sixmonths ended June 30, 2007 compared to the six months ended June 30,2006.

Gain on sale of Prime HomeEquity Loans decreased in the six months ended June 30, 2007 as comparedto the year-ago period due primarily to a decrease in the value of subsequentdraws resulting from higher loss expectations.

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

Netinterest income is summarized below:

| ** **                                           | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                           | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| ** **                                           | ** ** | **(in thousands)**                       | ** ** |
| Net interest  income (expense):                      |       |                                          |       |   |   |
| Banking Segment loans and securities                 |       | $                                             | 987,010    |   | $ | 874,455 |   |
| Mortgage Banking Segment:                            |       |                                          |       |   |   |
| Loans and securities                                 |       | 258,030                                       |       | 282,231 |   |
| Loan Servicing Sector:                               |       |                                          |       |   |   |
| Net interest income on custodial balances            |       | 428,017                                       |       | 367,181 |   |
| Interest expense                                     |       | (477,994                                      | )          | (311,659 | ) |
| Capital Markets Segment securities inventory         |       | 44,395                                        |       | 50,165 |   |
| Other                                                |       | 219,475                                       |       | 122,536 |   |
| Net interest income                                  |       | 1,458,933                                     |       | 1,384,909 |   |
| Provision for loan losses                            |       | (444,886                                      | )          | (125,036 | ) |
| Net interest  income after provision for loan losses |       | $                                             | 1,014,047  |   | $ | 1,259,873 |   |

 

The increase in net interest income from the BankingSegment was attributable to both an increase in the net interest margin andgrowth in the average interest-earning assets. Average interest-earning assetsin the Banking Segment increased to $84.9 billion during the six months ended June 30,2007, an increase of $4.0 billion, or 5% over the year-ago period.Net interest margin increased to 2.32% during the six months ended June 30,2007, from 2.16% during the year-ago period primarily as a result of a smallerinterest rate repricing lag compared to the prior period as well as the segment’sportfolio containing a smaller proportion of pay-option ARM loans with reducedintroductory interest rates. These positive factors were partially offset by ashift in asset mix to include a larger portion of lower-yielding high-creditquality mortgage-backed securities.

The decrease in net interest income from the MortgageBanking Segment loans and securities reflects a decrease in net interest marginfrom the year-ago period, partially offset by a higher balance of averageearning-assets. The Mortgage Banking Segment loan and securities inventory isprimarily financed with borrowings tied to short-term indices. Short-terminterest rates rose as average long-term mortgage interest rates experienced adecline between the year-ago period and the six months ended June 30,2007, causing the decrease in net interest margin.

Net interest income from custodial balances increasedin the current period due to an increase in the earnings rate from 4.94% duringthe six months ended June 30, 2006 to 5.24% during the six months ended June 30,2007, and by an increase of $3.2 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 $202.9 million and $149.4 million in the six months ended June 30,2007 and 2006, respectively.

Interest expense allocated to the Loan ServicingSector increased primarily due to an increase in total Loan Servicing Sectorassets.

The decrease in net interest income from the CapitalMarkets securities inventory is attributable to a decrease in the net interestmargin from 0.20% in the six months ended June 30, 2006 to 0.12% in thesix months ended June 30, 2007, partially offset by a 43% increase in theaverage inventory of securities held. The decrease in the net interest marginearned on the securities portfolio is primarily due to an increase in 

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short-term financing ratescompared to a decrease in the rates we earn on the longer-term securities heldby the Capital Markets Segment.

The increase in theprovision for loan losses was primarily due to higher loss expectations drivenby the impact of the current housing market on delinquency and default trendsas well as portfolio seasoning. The impact was most significant on prime homeequity loans.

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

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

| ** **                                                             | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                             | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| ** **                                                             | ** ** | **(in thousands)**                       | ** ** |
| Servicing fees,  net of guarantee fees(1)                              |       | $                                             | 2,141,350  |   | $ | 1,853,240 |   |
| Income from  retained interests                                        |       | 272,263                                       |       | 262,515 |   |
| Late charges                                                           |       | 180,410                                       |       | 129,264 |   |
| Prepayment  penalties                                                  |       | 148,814                                       |       | 111,934 |   |
| Global Operations  Segment subservicing fees                           |       | —                                        |       | 11,824 |   |
| Ancillary fees                                                         |       | 65,707                                        |       | 38,269 |   |
| Total loan  servicing fees and income from MSRs and retained interests |       | $                                             | 2,808,544  |   | $ | 2,407,046 |   |

----

(1)          Includes contractuallyspecified servicing fees.

The increase in servicing fees, net of guarantee fees,was principally due to an 11% increase in the average servicing portfolio, combinedwith an increase in the overall annualized net service fee earned from 0.325%of the average portfolio balance during the six months ended June 30, 2006to 0.338% during the six months ended June 30, 2007.

The increase in income from retained interests was dueprimarily to a 7% increase in the average investment in these assets from thesix months ended June 30, 2006 to the six months ended June 30, 2007partially offset by a reduction in the yield on such instruments from 18% inthe year-ago period to 17% in the current period. Income from retainedinterests excludes any impairment charges or recoveries, which are included inimpairment of retained interests in the consolidated statement of earnings.These investments include interest-only, principal-only and residual securitiesthat arise from the securitization of mortgage loans, primarily NonprimeMortgage 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 six months ended June 30,2007 and 2006 consists of two primary components—a reduction in fair value dueto the realization of expected cash flows from the MSRs and a change in fairvalue resulting from changes in interest rates and other market factors. Therealization of expected cash flows from MSRs resulted in a value reduction of$1,931.9 million and $1,506.7 million during the six months ended June 30, 2007and 2006, respectively.

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

We recorded an increase inthe fair value of MSRs in the six months ended June 30, 2007 of$1,506.5 million, primarily due to increased mortgage rates during theperiod which lowered expected future prepayment speeds. Mortgage rates alsoincreased in the six months ended June 30, 2006 and as a result werecorded an increase in the fair value of the MSRs of $1,547.3 million.

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***Impairment of Retained Interests***

Impairmentof retained interests is summarized below:

| ** **                                   | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                   | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| ** **                                   | ** ** | **(Impairment)  Recovery**                        | ** ** | **Asset  Balance at  Period End** | ** ** | **(Impairment)  Recovery** | ** ** | **Asset  Balance at  Period End** | ** ** |
| ** **                                   | ** ** | **(in thousands)**                           | ** ** |
| Credit-sensitive  retained interests         |       |                                              | $          | (782,296 | ) |   | $ | 1,461,828 |   |   | $ | (91,496 | ) |   | $ | 1,804,987 |   |
| Non  credit-sensitive retained interests     |       |                                              | 84,578     |   |   | 1,273,685 |   |   | 22,340 |   |   | 946,031 |   |
| (Impairment)  recovery of retained interests |       |                                              | $          | (697,718 | ) |   | $ | 2,735,513 |   |   | $ | (69,156 | ) |   | $ | 2,751,018 |   |

 

In the six months ended June 30, 2007, werecognized impairment of credit-sensitive retained interests of $782.3 million,including $521.0 million related to subordinated interests on prime home equitysecuritizations and $255.9 million related to nonprime and related residualinterests. These impairment charges were the result of the effect of weakeninghousing market conditions on increased estimates for future losses on the loansunderlying these securities. In addition, increased market yield requirementsfor the nonprime securities contributed to the decline in the value of thenonprime residual interests.

In the six months ended June 30, 2006, werecognized impairment of credit-sensitive retained interests of $91.5 million.This impairment was primarily the result of a decline in the value of certainnonprime securities due to compression of the interest rate spread on theresiduals we hold because the interest on the collateral is fixed-rate whilethe pass-through rate is floating.

In the six months ended June 30,2007 and 2006, we recognized increases in values of the non credit-sensitiveretained interests, consisting primarily of interest-only and principal-onlyretained interests.

***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 derivativesand securities that are the primary components of the Servicing Hedge are tiedto long-term mortgage, swap and Treasury rates. These rates increased duringthe six months ended June 30, 2007. In addition, we used credit defaultswaps to moderate a negative impact on earnings caused by credit spread-drivendeclines in fair value during the first quarter of 2007. During the firstquarter of 2007, credit spreads widened, resulting in a gain related to thecredit default swaps. The Servicing Hedge incurred a loss of $1,486.8 million,including $239 million of time value decay of the options included in theServicing Hedge (our “hedge cost”) and a $57.2 million gain related to thecredit default swaps.

In the six months ended June 30,2006, long-term mortgage, swap and Treasury rates increased. As a result, theServicing Hedge incurred a loss of $1,506.9 million, including $245 million ofhedge cost.

***Net Insurance Premiums Earned***

An increase in premiumsearned on the lender-placed and voluntary auto insurance lines of business,along with an increase in reinsurance premiums earned, contributed to the$122.5 million increase in net insurance premiums earned.

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***Other Revenue***

Otherrevenue consists of the following:

| ** **                                          | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                          | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| ** **                                          | ** ** | **(in thousands)**                       | ** ** |
| Appraisal fees,  net                                |       | $                                             | 81,809     |   | $ | 66,085 |   |
| Credit report  fees, net                            |       | 36,302                                        |       | 38,957 |   |
| Title services                                      |       | 30,126                                        |       | 20,081 |   |
| Increase in cash surrender  value of life insurance |       | 17,061                                        |       | 4,098 |   |
| Insurance agency  commissions                       |       | 14,053                                        |       | 15,096 |   |
| Other                                               |       | 148,147                                       |       | 107,797 |   |
| Total other  revenue                                |       | $                                             | 327,498    |   | $ | 252,114 |   |

 

***Compensation Expenses***

Compensationexpenses decreased $34.1 million, or 2%, during the six months ended June 30,2007 as compared to the year-ago period as summarized below:

| ** **                          | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------|------------|-----------------------------------------------|------------|
| ** **                          | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| ** **                          | ** ** | **(in thousands)**                       | ** ** |
| Base salaries                       |       | $                                             | 1,198,486  |   | $ | 1,141,259 |   |
| Incentive bonus  and commissions    |       | 922,884                                       |       | 965,522 |   |
| Payroll taxes and  benefits         |       | 419,189                                       |       | 451,610 |   |
| Deferral of loan  origination costs |       | (356,135                                      | )          | (339,866 | ) |
| Total  compensation expenses        |       | $                                             | 2,184,424  |   | $ | 2,218,525 |   |

 

Averageworkforce by segment is summarized below:

| ** **                                    | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| Mortgage Banking                              |       | 41,506                                        |       | 40,843 |   |
| Banking                                       |       | 2,115                                         |       | 2,297 |   |
| Capital Markets                               |       | 987                                           |       | 744 |   |
| Insurance                                     |       | 2,110                                         |       | 2,123 |   |
| Global Operations                             |       | 3,197                                         |       | 2,226 |   |
| Corporate  Administration                     |       | 6,941                                         |       | 7,091 |   |
| Average  workforce, including temporary staff |       | 56,856                                        |       | 55,324 |   |

 

Compensationexpense reductions in the Mortgage Banking Segment and in CorporateAdministration were partially offset by increases in the Capital MarketsSegment.

·       Inthe Mortgage Banking Segment, compensation expenses decreased $42.9 million, or2%, before deferral of loan origination costs. The decrease came from the LoanProduction Sector, where compensation expenses decreased $65.0 million, or 4%,because of a change in channel mix, partially offset by a 2% increase inaverage staff to support our capacity growth efforts. This decrease waspartially offset by an increase of $9.7 million in the Loan Servicing Sectordue to continuing growth in the servicing portfolio and rising delinquenciesand an increase of $12.4 million in the Loan Closing Services Sector.

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·       InCorporate Administration, compensation expense reductions primarily related toreductions in stock-based compensation and pension expenses as well as toreduced staffing levels.

·       Inthe Capital Markets Segment, compensation expense increased by $38.9 milliondue to an increase in the average 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:

| ** **                                 | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                 | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                       | ** ** |
| Office and  equipment rentals              |       | $                                             | 131,619    |   | $ | 108,371 |   |
| Depreciation                               |       | 116,488                                       |       | 97,598 |   |
| Utilities                                  |       | 81,847                                        |       | 78,333 |   |
| Postage and  courier service               |       | 52,719                                        |       | 56,260 |   |
| Office supplies                            |       | 41,912                                        |       | 45,449 |   |
| Repairs and  maintenance                   |       | 30,850                                        |       | 37,769 |   |
| Dues and  subscriptions                    |       | 30,188                                        |       | 33,634 |   |
| Other                                      |       | 47,607                                        |       | 48,997 |   |
| Total occupancy  and other office expenses |       | $                                             | 533,230    |   | $ | 506,411 |   |

 

Occupancy and other officeexpenses for the six months ended June 30, 2007, increased by 5%, or $26.8million, reflecting growth in facilities.

***Insurance Claim Expenses***

Insurance claim expenseswere $212.1 million for the six months ended June 30, 2007 as compared to$226.9 million for the year-ago period. The decrease in insurance claimexpenses was driven by a $74.0 million reversal of loss reserves related to the2003 reinsurance book of business, on which negligible remaining loss exposurewas deemed to exist in the current period, partially offset by growth in earnedpremiums. This compares to a reversal of $6.3 million of loss reserves relatedto the 2002 reinsurance books of business in the year-ago period.

***Advertising and Promotion Expenses***

Advertising and promotionexpenses increased 19% from the six months ended June 30, 2006, as aresult of the increasing competition for lending business as mortgage marketvolumes decline.

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***Other Operating Expenses***

Otheroperating expenses are summarized below:

| ** **                                           | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                           | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| ** **                                           | ** ** | **(in thousands)**                       | ** ** |
| Insurance  commission expense                        |       | $                                             | 93,577     |   | $ | 90,890 |   |
| Legal,  consulting, accounting and auditing expenses |       | 85,786                                        |       | 113,503 |   |
| Travel and  entertainment                            |       | 48,857                                        |       | 74,562 |   |
| Mortgage  insurance                                  |       | 43,332                                        |       | 16,004 |   |
| Software  amortization and impairment                |       | 36,800                                        |       | 27,071 |   |
| Taxes and  licenses                                  |       | 35,508                                        |       | 28,973 |   |
| Insurance                                            |       | 34,602                                        |       | 12,633 |   |
| Losses on  servicing-related advances                |       | 32,388                                        |       | 24,396 |   |
| Other                                                |       | 154,006                                       |       | 112,727 |   |
| Deferral of loan  origination costs                  |       | (55,461                                       | )          | (55,684 | ) |
| Total other  operating expenses                      |       | $                                             | 509,395    |   | $ | 445,075 |   |

 

The increase in operatingexpenses reflects an increase in purchased mortgage insurance expense relatedto the Banking Operations portfolio of loans held for investment of $27.3million and overall growth in the Company during the six months ended June 30,2007.

**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 natural counterbalanceof our loan production and servicing businesses. We also use various financialinstruments, including derivatives, to manage price risk related specificallyto the values of our IRLC, mortgage loans and MBS held pending sale (“MortgageLoan Inventory”), MSRs and retained interests and trading securities, as wellas 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, 

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collateralized mortgageobligations, interest-only securities and MSRs, we use option-adjusted spreadmodels. The primary assumptions used in these models for the purpose of thesesensitivity analyses are the prepayment speeds and implied market volatility ofinterest rates. For options and interest rate floors, we use an option-pricingmodel. The primary assumption used in this model is implied market volatilityof interest rates. For retained interests, with the exception of interest-onlysecurities, we use a zero volatility discounted cash flow model. The primaryassumptions used in these models are prepayment rates, discount rates andcredit losses.

Thefollowing table summarizes the estimated change in fair value of ourinterest-rate-sensitive assets, liabilities and commitments as of June 30,2007, given several hypothetical, (instantaneous) parallel shifts in the yieldcurve:

| ** **                                                                 | ** ** | **Change in Fair Value** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| **Change in Interest Rate (basis points)**        | ** ** | ** **                              | ** ** | **-100** | ** ** | **-50** | ** ** | **+50** | ** ** | **+100** | ** ** |
| ** **                                                                 | ** ** | **(in millions)**                  | ** ** |
| MSRs and financial  instruments:                                           |       |                                    |       |   |   |   |   |   |   |
| MSRs                                                                       |       | $                                       | (3,084     | ) | $ | (1,362 | ) | $ | 1,001 |   | $ | 1,698 |   |
| Retained interests                                                         |       | (147                                    | )          | (51 | ) | 7 |   | (34 | ) |
| Impact of  Servicing Hedge:                                                |       |                                    |       |   |   |   |   |   |   |
| Mortgage-based                                                             |       | 432                                     |       | 211 |   | (200 | ) | (389 | ) |
| Swap-based                                                                 |       | 3,066                                   |       | 1,208 |   | (666 | ) | (1,020 | ) |
| Treasury-based                                                             |       | 330                                     |       | 118 |   | (3 | ) | 110 |   |
| MSRs and retained interests, net                                           |       | 597                                     |       | 124 |   | 139 |   | 365 |   |
| Interest rate lock commitments                                             |       | 409                                     |       | 271 |   | (429 | ) | (931 | ) |
| Mortgage Loan Inventory                                                    |       | 1,904                                   |       | 1,111 |   | (1,360 | ) | (2,862 | ) |
| Impact of  associated derivative instruments:                              |       |                                    |       |   |   |   |   |   |   |
| Mortgage-based                                                             |       | (2,357                                  | )          | (1,399 | ) | 1,784 |   | 3,777 |   |
| U.S. Treasury-based                                                        |       | 45                                      |       | 15 |   | 29 |   | 108 |   |
| Eurodollar-based                                                           |       | (33                                     | )          | (20 | ) | 36 |   | 79 |   |
| Interest rate lock commitments and Mortgage Loan  Inventory, net           |       | (32                                     | )          | (22 | ) | 60 |   | 171 |   |
| Banking  Operations:                                                       |       |                                    |       |   |   |   |   |   |   |
| Securities portfolio                                                       |       | 433                                     |       | 266 |   | (353 | ) | (767 | ) |
| Mortgage loans held for investment                                         |       | 864                                     |       | 449 |   | (476 | ) | (978 | ) |
| Deposit liabilities                                                        |       | (388                                    | )          | (199 | ) | 205 |   | 415 |   |
| Federal Home Loan Bank advances                                            |       | (408                                    | )          | (195 | ) | 182 |   | 360 |   |
| Countrywide Bank, net                                                      |       | 501                                     |       | 321 |   | (442 | ) | (970 | ) |
| Notes payable and capital securities                                       |       | (799                                    | )          | (393 | ) | 371 |   | 716 |   |
| Impact of  associated derivative instruments:                              |       |                                    |       |   |   |   |   |   |   |
| Swap-based                                                                 |       | 211                                     |       | 108 |   | (109 | ) | (218 | ) |
| Notes payable and capital securities, net                                  |       | (588                                    | )          | (285 | ) | 262 |   | 498 |   |
| Insurance company investment portfolios                                    |       | 60                                      |       | 31 |   | (34 | ) | (69 | ) |
| Net change in  fair value related to MSRs and financial instruments        |       | $                                       | 538        |   | $ | 169 |   | $ | (15 | ) | $ | (5 | ) |
| Net change in fair value  related to broker-dealer trading securities |       | $                                       | 31         |   | $ | 20 |   | $ | (29 | ) | $ | (66 | ) |
|                                                                            |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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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 analyses are limited in that theywere performed at a particular point in time; are based on the hedge positionin place at that particular point in time; only contemplate certain movementsin interest rates; do not incorporate changes in interest rate volatility orchanges in the relationship of one interest rate index to another; are subjectto the accuracy of various assumptions used, including prepayment forecasts anddiscount rates; and do not incorporate other factors that would impact theCompany’s overall financial performance in such scenarios, most significantlythe impact of changes in loan production earnings that result from changes ininterest rates. Not all of the changes in fair value would affect currentperiod earnings. For example, changes in fair value of securities accounted foras available-for-sale securities are recognized as a component of shareholders’equity, net of income taxes, and our debt is carried at its unpaid balances netof issuance discount or premium. Absent hedge accounting, changes in the marketvalue of our debt are not recorded in current-period earnings. For thesereasons, the preceding estimates should not be viewed as an earnings forecast.

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

To diversify our fundingsources on a global basis, we issue a portion of our medium-term notesdenominated in foreign currencies. 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 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, mortgage banking,securities trading activities and interest rate risk management activities. Weactively manage credit risk to maintain expected credit losses within levelsthat achieve our profitability and return on capital objectives.

***Lending Activities—Sale of Loans***

Nearly all of the mortgage loans that we originate orpurchase in our Mortgage Banking and Capital Markets Segments are sold into thesecondary mortgage markets. When we sell our mortgage loans, we retain varyingdegrees of credit risk. As described in more detail in our 2006 Annual Report,the degree to which credit risk on the underlying loans is transferred in aloan sale depends on the terms of the sales transaction—including the structureof any securities created and retained.

We generally retaintwo types of credit risk: credit risk embedded in subordinated interests thatwe retain and that are structured to absorb losses before the senior securitieswe create and sell to investors; and recourse arising from representations andwarranties we provide in loan sale agreements or from corporate guarantees weissue.

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

***Subordinated Interests***

Ourexposure to credit losses related to subordinated interests is limited to theassets’ carrying values. We carry subordinated interests at their estimatedfair values. The carrying values of our subordinated interests are as follows:

| ** **                                                   | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                   | ** ** | **(in thousands)** | ** ** |
| Prime home equity  line of credit transferor’s interest |       | $                       | 588,807    |                        |       | $ | 698,047 |   |   |
| Nonprime residuals  and other related securities             |       | 441,442                 |       |                        | 541,708    |   |   |
| Prime home equity  residual securities                       |       | 423,642                 |       |                        | 778,574    |   |   |
| Subordinated  mortgage-backed pass-through securities        |       | 28,789                  |       |                        | 1,382      |   |   |
| Prime residual  securities                                   |       | 7,937                   |       |                        | 12,756     |   |   |
|                                                         |       | $                       | 1,490,617  |                        |       | $ | 2,032,467 |   |   |

 

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

Thelosses absorbed by our subordinated interests during the period are summarizedas follows:

| ** **                                       | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                       | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| ** **                                       | ** ** | **(in thousands)**                       | ** ** |
| Prime home equity  residual securities           |       | $                                             | 195,761    |   | $ | 25,251 |   |
| Nonprime  residuals and other related securities |       | 151,278                                       |       | 38,330 |   |
| Prime residual  securities                       |       | 3,158                                         |       | 1 |   |
|                                             |       | $                                             | 350,197    |   | $ | 63,582 |   |

 

***Representations and Warranties***

When we sell loans, we make representations andwarranties relating to the loans. In the event of a breach of theserepresentations and warranties, we may be required to either repurchase themortgage loans with the identified defects or indemnify the investor or insurer.In such cases, we bear any subsequent credit loss on the mortgage loans.

Our representations and warranties are generally notsubject to stated limits. However, our contractual liability arises only whenthe representations and warranties are breached. We attempt to limit our riskof incurring these losses by structuring our operations to ensure consistentproduction of quality mortgages and servicing those mortgages at levels thatmeet secondary mortgage market standards. We make significant investments inpersonnel and technology to ensure the quality of our mortgage loan production.

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Weestimate our liability for representations and warranties when we sell loansand update our estimate quarterly. Our provision for estimated losses arisingfrom loan sales is recorded as an adjustment to gain on sale of loans. Ourprovision for estimated losses arising from the sale of credit-subordinatedinterests is recorded as an adjustment to (impairment) recovery of retainedinterests. Following is a summary of our liability for representations andwarranties for the periods presented:

| ** **                    | ** ** | **Six Months Ended   June 30,** | ** ** |
|-------------------------------|------------|-----------------------------------------------------|------------|
| ** **                    | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| ** **                    | ** ** | **(in thousands)**                             | ** ** |
| Balance,  beginning of period |       | $                                                   | 390,111    |   | $ | 169,773 |   |
| Provision for  losses         |       | 90,435                                              |       | 184,878 |   |
| Chargeoffs                    |       | (48,723                                             | )          | (47,003 | ) |
| Balance, end of period        |       | $                                                   | 431,823    |   | $ | 307,648 |   |

 

***CorporateGuarantees***

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

| ** **                                                           | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                           | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| ** **                                                           | ** ** | **(in thousands)**                       | ** ** |
| Balance,  beginning of period                                        |       | $                                             | 45,425     |   | $ | 27,614 |   |
| Provision for  losses                                                |       | 13,318                                        |       | 12,131 |   |
| Chargeoffs                                                           |       | (2,727                                        | )          | (4,589 | ) |
| Balance, end of  period                                              |       | $                                             | 56,016     |   | $ | 35,156 |   |
| Corporate  guarantees in excess of recorded liability, end of period |       | $                                             | 506,286    |   | $ | 438,996 |   |

 

***Portfolio LendingActivities***

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 Mortgage Banking Segment, loans held for investment includemortgage loans repurchased due to violations of representations and warranties;government-guaranteed or insured loans repurchased from Ginnie Maesecuritizations in place of continuing to advance delinquent principal andinterest installments to security holders; and loans transferred from loansheld for sale at the lower of cost or estimated fair value.

*Mortgage Loans Originated 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 $67.3 billion at June 30, 2007.

Our primary credit risk management tool for ourportfolio loans is the origination and purchase of loans with high creditquality and collateral support. We assess a loan’s quality by considering theborrower’s credit profile and the value of collateral securing the loan. Wherea proposed first mortgage loan’s loan-to-value ratio is higher than a specifiedlevel, which is usually 80% for conventional loans, we generally require theborrower to supplement the collateral with primary mortgage insurance. When weoriginate such loans without mortgage insurance, we generally increase theinterest rate as compared to a loan with mortgage insurance to compensate forthe increased credit risk.

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We have taken stepsin recent years to reduce the credit risk in our investment loan portfolio byacquiring supplemental mortgage insurance coverage. As of June 30, 2007,$24.7 billion of Banking Operations’ residential loan portfolio was covered bysupplemental mortgage insurance purchased by the Bank on specified pools ofloans, of which $16.8 billion represents first loss coverage. The maximum losscoverage available under these policies on a combined basis is$1.5 billion. While these policies generally provide for first losscoverage, some Bank-purchased policies require premium adjustments if claimsexceed specified levels. Furthermore, coverage limits vary by policy, with somepolicies having limits at the pool level, and others at the loan level.

Following is a summary ofour Banking Operations’ residential mortgage loans, together with applicablemortgage insurance, by original combined loan-to-value ratio at June 30,2007:

| ** **                                     | ** ** | **June 30, 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%                                       |       |                        | $          | 3,276,569 |   |   | $ | 555,732 |   | $ | — |   |
| 50.01 - 60.00%                                 |       |                        | 2,789,473  |   |   | 797,194 |   | — |   |
| 60.01 - 70.00%                                 |       |                        | 7,154,074  |   |   | 2,657,471 |   | — |   |
| 70.01 - 80.00%                                 |       |                        | 21,021,295 |   |   | 9,359,280 |   | — |   |
| 80.01 - 90.00%                                 |       |                        | 20,040,729 |   |   | 7,638,753 |   | 1,867,104 |   |
| 90.01 - 100.00%                                |       |                        | 12,911,060 |   |   | 3,731,238 |   | 1,116,306 |   |
| >100.00%                                    |       |                        | 68,528     |   |   | 6,791 |   | 11,616 |   |
|                                           |       |                        | $          | 67,261,728 |   |   | $ | 24,746,459 |   | $ | 2,995,026 |   |
|                                                |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Theseamounts may include loans with borrower paid mortgage insurance.

Banking Operations holds a substantial investment inpay-option ARM loans. These loans have interest rates that adjust monthly andminimum required payments that adjust annually. The difference between thefrequency of changes in the loans’ interest rates and payments along with alimitation on changes in the minimum monthly payments to 71⁄2% per year canresult in payments that are not sufficient to pay all of the monthly interestcharges. Unpaid interest charges are added to the loan balance until the loan’sbalance increases to a specified limit, which is no more than 115% of theoriginal loan amount, at which time a new monthly payment amount adequate torepay the loan over its remaining contractual life is established. To ensurethat contractual loan payments are adequate to repay a loan, the fullyamortizing loan payment amount is re-established after either five or ten yearsand again every five years thereafter. These payment adjustments are notsubject to the 71⁄2% payment limit and may be substantial due to changes ininterest rates and the addition of unpaid interest to the loans’ balances.

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 loan balance limit will bereached and a new monthly payment amount will be required.

We supplement our credit risk management practicesrelating to pay-option ARM loans through a variety of methods, including activeborrower communications both before and after funding, through our underwritingstandards and through the purchase of mortgage insurance. Our underwritingstandards conform to those required to make the pay-option ARM loans salableinto the secondary market at the date of funding, including a requirement thatthe borrower meet secondary market debt-service ratio tests based on theborrower making the fully amortizing loan payment and assuming the loan’sinterest rate is fully indexed. (A fully indexed note rate equals the sum ofthe current index rate plus the margin applicable to the loan.) However, thesestandards also allow for stated or limited income documentation.

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

| ** **                                                                                      | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                      | ** ** | **(in thousands)** | ** ** |
| Total pay-option  ARM loan portfolio                                                            |       | $                       | 27,778,863 |                        | $          | 32,732,581 |   |
| Total principal balance of pay-option ARM loans with  accumulated negative amortization         |       | $                       | 25,219,735 |                        | $          | 28,958,718 |   |
| Accumulated negative amortization (from original  loan balance)                                 |       | $                       | 941,980    |                        | $          | 653,974 |   |
| Unpaid principal  balance of pay-option ARM loans with supplemental mortgage insurance coverage |       | $                       | 20,616,807 |                        | $          | 5,729,532 |   |
| Average original  loan-to-value ratio(1)                                                        |       | 76                      | %          | 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)                                                            |       | 1.84                    | %          | 0.63                        | %          |

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(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.

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BankingOperations’ nonperforming assets (comprised of non-accrual loans and foreclosedassets) and the allowance for loan losses related to mortgage loans originatedor purchased for investment at period end are summarized as follows:

| ** **                              | ** ** | **June 30, 2007**                      | ** ** | **December 31, 2006**                      | ** ** |
|-----------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                              | ** ** | **Amount**                                       | ** ** | **% of Banking  Operations   Assets** | ** ** | **Amount** | ** ** | **% of Banking  Operations   Assets** | ** ** |
| ** **                              | ** ** | **(dollar amounts in thousands)** | ** ** |
| Nonaccrual loans:                       |       |                                             |       |                                                 |       |   |   |   |   |   |   |   |   |
| Residential:                            |       |                                             |       |                                                 |       |   |   |   |   |   |   |   |   |
| With third party credit enhancements(1) |       | $                                                | 278,934    |                                                 |       | 0.31 | % |   | $ | 109,218 |   |   | 0.13 | % |   |
| Without third party credit enhancements |       | 661,848                                          |       |                                                 | 0.74       | % |   | 409,865 |   |   | 0.50 | % |   |
| Total residential                       |       | 940,782                                          |       |                                                 | 1.05       | % |   | 519,083 |   |   | 0.63 | % |   |
| Foreclosed real  estate:                |       |                                             |       |                                                 |       |   |   |   |   |   |   |   |   |
| Residential                             |       | 188,483                                          |       |                                                 | 0.21       | % |   | 27,416 |   |   | 0.03 | % |   |
| Total nonperforming assets              |       | $                                                | 1,129,265  |                                                 |       | 1.26 | % |   | $ | 546,499 |   |   | 0.66 | % |   |

 

| ** **                              | ** ** | **Amount** | ** ** | **% of   Nonaccrual   Loans** | ** ** | **Amount** | ** ** | **% of   Nonaccrual   Loans** | ** ** |
|-----------------------------------------|------------|------------|------------|----------------------------------------------|------------|------------|------------|----------------------------------------------|------------|
| Allowances for credit  losses:          |       |       |       |                                         |       |       |       |                                         |       |   |   |   |   |
| Allowance for  loan losses:             |       |       |       |                                         |       |       |       |                                         |       |   |   |   |   |
| Residential                             |       | $          | 450,844    |                                         |       | 47.92      | %          |                                         | $          | 228,692 |   |   | 44.06 | % |   |
| Liability for unfunded loan commitments |       | 18,222     |       |                                         |       |       |       | 8,104                                        |       |   |   |   |   |
| Total allowances for  credit losses     |       | $          | 469,066    |                                         |       | 49.86      | %          |                                         | $          | 236,796 |   |   | 45.62 | % |   |

 

| ** **          | ** ** | **Six Months Ended  June 30, 2007** | ** ** | **Six Months Ended  June 30, 2006**                         | ** ** |
|---------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **          | ** ** | **Amount**                                              | ** ** | **Annualized  Net Charge-offs  as % Average  Investment  Loans** | ** ** | **Amount** | ** ** | **Annualized  Net Charge-offs  as % Average  Investment  Loans** | ** ** |
| Net charge-offs:    |       |                                                    |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Banking  Operations |       | $                                                       | 142,124    |                                                                            |       | 0.42 | % |   | $ | 14,348 |   |   | 0.04 | % |   |
|                     |            |                                                         |            |                                                                                 |            |  |  |  |  |  |  |  |  |  |  |

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(1)          Third party credit enhancementsinclude borrower-paid mortgage insurance and pool insurance acquired by BankingOperations.

Thefollowing table shows Banking Operations chargeoffs by product:

| ** **        | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------|------------|-----------------------------------------------|------------|
| ** **        | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| ** **        | ** ** | **(in thousands)**                       | ** ** |
| Prime Home Equity |       | $                                             | 103,059    |   | $ | 11,894 |   |
| Prime Mortgage    |       | 39,065                                        |       | 2,454 |   |
| Total chargeoffs  |       | $                                             | 142,124    |   | $ | 14,348 |   |

 

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The increase in our nonperforming assets, theallowance for loan losses and chargeoffs from the year-ago period reflectprevailing real estate market and economic conditions and the growth andseasoning of our investment loan portfolio. The increase in chargeoffs washeightened by acceleration in the timing of chargeoff recognition inacknowledgement of recent trends in delinquencies and foreclosures. We expectthe level of nonperforming assets and credit losses to increase, both inabsolute terms and as a percentage of our loan portfolio as current weakness inthe housing market develops and as our loan portfolio continues to season.

***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$2.5 billion and the average loan balance was $19.9 million at June 30,2007. These loans are underwritten by assessing the creditworthiness of thewarehouse lending borrowers. This includes reviewing both borrower-providedfinancial information and publicly available credit rating information andpress coverage, as well as understanding the borrowers’ operational controlsand product risk and assessments of collateral.

We monitor the length oftime that advances are outstanding against specific residential 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 require ourwarehouse 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. Weincurred no credit losses related to this activity during the six months ended June 30,2007 and 2006.

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

Other loans held for investment are in our MortgageBanking Segment and include loans we have repurchased—either to remedy aviolation of a representation or warranty made in a loan sale, to minimize thecost of servicing a severely delinquent loan insured or partially guaranteed bythe FHA or VA or in connection with a clean-up call (a clean-up call representsthe repurchase of mortgage loans when the remaining outstanding balance of themortgage loans falls to a level where the cost of servicing the loans becomesburdensome in relation to the benefits of servicing.)  As discussed in the preceding section—*Lending Activities—Sale of Loans—Representations and Warranties*—wemake provisions for losses that may arise from breaches of representations andwarranties when we record the sale of these loans and we adjust our estimatesfor losses on these loans quarterly. We record repurchased loans at fair valuewhen they are repurchased and any resulting loss is charged against theliability.

We may determine that asmall percentage of the loans that we originate or purchase for sale will notbe sold because of a defect, which may include a document deficiency, changesin secondary market conditions or deterioration of the credit status of theloan while it was held for sale. Such loans are transferred to the held forinvestment category at the lower of cost or estimated fair value on anindividual loan basis and any loss is recorded as a component of gain on saleof loans or securities in current period earnings. Subsequent losses that mayresult from deterioration in the credit quality of the loans are included inour provision for loan losses.

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***Allowance for Loan Losses***

Followingis a summary of our consolidated allowance for loan losses by activity for theperiods presented:

| ** **                    | ** ** | **Six Months Ended  June 30, 2007** | ** ** |
|-------------------------------|------------|---------------------------------------------------------|------------|
| ** **                    | ** ** | **Banking   Operations**                           | ** ** | **Warehouse   Lending** | ** ** | **Other** | ** ** | **Total** | ** ** |
| ** **                    | ** ** | **(in thousands)**                                 | ** ** |
| Balance, beginning  of period |       | $                                                       | 228,692    |   |   | $ | 12,838 |   |   | $ | 19,524 |   | $ | 261,054 |   |
| Provision for  loan losses    |       | 365,389                                                 |       |   | 145 |   |   | 79,352 |   | 444,886 |   |
| Net charge-offs               |       | (142,124                                                | )          |   | — |   |   | (50,912 | ) | (193,036 | ) |
| Other  reclassifications      |       | (1,113                                                  | )          |   | 1,113 |   |   | — |   | — |   |
| Balance, end of period        |       | $                                                       | 450,844    |   |   | $ | 14,096 |   |   | $ | 47,964 |   | $ | 512,904 |   |

 

| ** **                                                        | ** ** | **Six Months Ended  June 30, 2006** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                        | ** ** | **Banking   Operations**                           | ** ** | **Warehouse   Lending** | ** ** | **Other** | ** ** | **Total** | ** ** |
| ** **                                                        | ** ** | **(in thousands)**                                 | ** ** |
| Balance,  beginning of period                                     |       |                                                    | $          | 102,680 |   |   |   | $ | 12,838 |   |   | $ | 73,683 |   | $ | 189,201 |   |
| Provision for  loan losses                                        |       |                                                    | 63,433     |   |   |   | — |   |   | 61,603 |   | 125,036 |   |
| Net charge-offs                                                   |       |                                                    | (14,271    | ) |   |   | — |   |   | (110,910 | ) | (125,181 | ) |
| Reclassification  of allowance for unfunded commitments and other |       |                                                    | 5,322      |   |   |   | — |   |   | (10,797 | ) | (5,475 | ) |
| Balance, end of period                                            |       |                                                    | $          | 157,164 |   |   |   | $ | 12,838 |   |   | $ | 13,579 |   | $ | 183,581 |   |

 

Chargeoffs increased inBanking Operations due to increasing rates of default and loss severity, alongwith acceleration in the timing of chargeoff recognition as a result of recenttrends in delinquencies and foreclosures. Chargeoffs decreased in otheroperations largely due to chargeoffs in the year-ago period being elevated as aresult of a decision to transfer and sell nonperforming loans from the MortgageBanking Segment’s portfolio of loans held for investment. The decision to sellthose nonperforming loans resulted in writedowns of the loans to theirestimated fair values through a chargeoff against the allowance for loanlosses.

***Mortgage Loans Held for Sale***

At June 30, 2007, mortgage loans held for saleamounted to $34.1 billion. While the loans are in inventory, we bear creditrisk after taking into consideration primary mortgage insurance (which isgenerally required for conventional first mortgage loans with a loan-to-valueratio greater than 80%), FHA insurance or VA guarantees. These loans arecarried at the lower of cost or market value, which incorporates a reduction invalue for impaired loans.

Loans held for sale that have been placed onnonaccrual status includes distressed loans that are generally purchased at adiscount as part of the conduit activities of the Capital Markets Segment andloans whose credit quality has deteriorated during the time that they have beenheld 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 related allowance for loan losses aresummarized as follows:

| ** **                                                             | ** ** | **June 30, 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) |       | $                                                | 325,839    |                            |       |   | $ | 158,802 |   |   |   |
| Commercial                                                             |       | 112                                              |       |                            |       | — |   |   |   |
| Total non-accrual loans                                                |       | 325,951                                          |       |                            |       | 158,802 |   |   |   |
| Foreclosed real estate:                                                |       |                                             |       |                            |       |   |   |   |   |
| Other                                                                  |       |                                             |       |                            |       |   |   |   |   |
| Residential                                                            |       | 358,102                                          |       |                            |       | 223,747 |   |   |   |
| Commercial                                                             |       | —                                           |       |                            |       | — |   |   |   |
| Total foreclosed real estate                                           |       | 358,102                                          |       |                            |       | 223,747 |   |   |   |
| Total nonperforming  assets                                            |       | $                                                | 684,053    |                            |       |   | $ | 382,549 |   |   |   |

 

| ** **                      | ** ** | **Amount** | ** ** | **% of  Nonaccrual  Loans** | ** ** | **Amount** | ** ** | **% of  Nonaccrual  Loans** | ** ** |
|---------------------------------|------------|------------|------------|----------------------------------|------------|------------|------------|----------------------------------|------------|
| Allowances for loan  losses(4): |       |       |       |                             |       |       |       |                             |       |   |   |   |   |
| Residential                     |       | $          | 47,964     |                             |       | 14.72      | %          |                             | $          | 19,524 |   |   | 12.29 | % |   |
| Commercial                      |       | 14,096     |       |                             | N/M        |       |       | 12,838                           |       |   | N/M |   |   |
|                            |       | $          | 62,060     |                             |       | 19.04      | %          |                             | $          | 32,362 |   |   | 20.38 | % |   |

 

| ** **                         | ** ** | **Six Months Ended  June 30, 2007** | ** ** | **Six Months Ended  June 30, 2006**                         | ** ** |
|------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **Amount**                                              | ** ** | **Annualized  Net Charge-offs  as % Average  Investment  Loans** | ** ** | **Amount** | ** ** | **Annualized  Net Charge-offs  as % Average  Investment  Loans** | ** ** |
| Net charge-offs:                   |       |                                                    |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Mortgage  Banking & Other |       | $                                                       | 50,912     |                                                                            |       | 1.82 | % |   | $ | 110,833 |   |   | 4.58 | % |   |
|                                    |            |                                                         |            |                                                                                 |            |  |  |  |  |  |  |  |  |  |  |

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(1)          Excludes$1,361.4 million and $1,254.9 million, at June 30, 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 estimated fair value and government-guaranteed loans held forinvestment, as shown below:

| ** **                                        | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                        | ** ** | **(in thousands)** | ** ** |
| Loans held for  sale                              |       |                    | $          | 279,824                     |       |   |   | $ | 566,610 |   |   |
| Government  guaranteed loans, held for investment |       |                    | 350,452    |                        |       |   | 334,465 |   |   |
|                                              |       |                    | $          | 630,276                     |       |   |   | $ | 901,075 |   |   |

 

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(3)          Generallythese loans have been repurchased and recorded at fair value or transferred toheld for investment at lower of cost or estimated fair value. Fair valuesincorporate the impaired status at the date of repurchase of the loans. Lossesrelated to subsequent deterioration in the credit quality of the loans arerecorded in the allowance for loan losses.

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

The increase in theallowance for loan losses from December 31, 2006 is due to growth in loansheld for investment in the Mortgage Banking Segment along with worsening creditperformance in that portfolio.

***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 June 30,2007, approximately $98.3 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 June 30, 2007, themaximum aggregate losses under the reinsurance contracts were limited to $998.5million. We are required to pledge securities to cover this potentialliability. The accumulated liability recorded for estimated reinsurance totaled$112.4 million and $156.2 million at June 30, 2007 andDecember 31, 2006, respectively. For the six months ended June 30,2007, we did not experience any losses under our reinsurance contracts.

***Securities Trading and Derivatives Counterparty CreditRisk***

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

Theaggregate amount of counterparty credit exposure after consideration ofrelevant netting agreements at June 30, 2007, before and after collateralheld by us, is as follows:

| ** **                                        | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                        | ** ** | **(in millions)**  | ** ** |
| Aggregate credit  exposure before collateral held |       |                    | $          | 1,782                       |       |   |   | $ | 1,777 |   |   |
| Less: collateral  held                            |       |                    | (974       | )                           |       |   | (1,223 | ) |   |
| Net aggregate unsecured  credit exposure          |       |                    | $          | 808                         |       |   |   | $ | 554 |   |   |

 

For the six months ended June 30, 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.

| ** **                           | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| ** **                           | ** ** | **(in millions)**                        | ** ** |
| Beginning owned  servicing portfolio |       | $                                             | 1,280,119  |   | $ | 1,081,189 |   |
| Add: Residential loan  production(1) |       | 243,094                                       |       | 222,280 |   |
| Purchased MSRs (bulk  acquisitions)  |       | 20,450                                        |       | 172 |   |
| Less: Principal  repayments          |       | (144,454                                      | )          | (128,896 | ) |
| Ending owned servicing  portfolio    |       | 1,399,209                                     |       | 1,174,745 |   |
| Subservicing portfolio               |       | 16,263                                        |       | 21,975 |   |
| Total servicing  portfolio           |       | $                                             | 1,415,472  |   | $ | 1,196,720 |   |
| MSR portfolio                        |       | $                                             | 1,304,250  |   | $ | 1,063,405 |   |
| Mortgage loans owned                 |       | 94,959                                        |       | 111,340 |   |
| Subservicing portfolio               |       | 16,263                                        |       | 21,975 |   |
| Total servicing portfolio            |       | $                                             | 1,415,472  |   | $ | 1,196,720 |   |

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

| ** **                                               | ** ** | **June 30,**                               | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                               | ** ** | **2007**                                        | ** ** | **2006** | ** ** |
| ** **                                               | ** ** | **(dollar amounts in millions)** | ** ** |
| Composition of owned servicing portfolio at period  end: |       |                                            |       |   |   |
| Conventional mortgage                                    |       | $                                               | 1,173,002  |   | $ | 959,997 |   |
| Nonprime Mortgage                                        |       | 123,438                                         |       | 112,378 |   |
| Prime Home Equity                                        |       | 44,707                                          |       | 51,329 |   |
| FHA-insured mortgage                                     |       | 42,781                                          |       | 37,618 |   |
| VA-guaranteed mortgage                                   |       | 15,281                                          |       | 13,423 |   |
| Total owned portfolio                                    |       | $                                               | 1,399,209  |   | $ | 1,174,745 |   |
| Delinquent mortgage loans(1):                            |       |                                            |       |   |   |
| 30 days                                                  |       | 2.73                                            | %          | 2.24 | % |
| 60 days                                                  |       | 1.01                                            | %          | 0.72 | % |
| 90 days or more                                          |       | 1.24                                            | %          | 0.96 | % |
| Total delinquent  mortgage loans                         |       | 4.98                                            | %          | 3.92 | % |
| Loans pending  foreclosure(1)                            |       | 0.74                                            | %          | 0.47 | % |
| Delinquent mortgage loans(1):                            |       |                                            |       |   |   |
| Conventional                                             |       | 2.64                                            | %          | 2.11 | % |
| Nonprime Mortgage                                        |       | 20.15                                           | %          | 14.41 | % |
| Prime Home Equity                                        |       | 3.70                                            | %          | 1.51 | % |
| Government                                               |       | 12.37                                           | %          | 12.83 | % |
| Total delinquent  mortgage loans                         |       | 4.98                                            | %          | 3.92 | % |
| Loans pending foreclosure(1):                            |       |                                            |       |   |   |
| Conventional                                             |       | 0.39                                            | %          | 0.21 | % |
| Nonprime Mortgage                                        |       | 3.96                                            | %          | 2.51 | % |
| Prime Home Equity                                        |       | 0.12                                            | %          | 0.08 | % |
| Government                                               |       | 1.14                                            | %          | 0.99 | % |
| Total loans pending foreclosure                          |       | 0.74                                            | %          | 0.47 | % |

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(1)          Expressed as apercentage of the total number of loans serviced, excluding subserviced loansand loans purchased at a discount due to their collection status.

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We attribute the overallincrease in delinquencies in our servicing portfolio from June 30, 2006 toJune 30, 2007 primarily to housing market conditions as well as tochanging economic conditions and to portfolio seasoning. Changing borrowerprofiles and trends toward higher initial combined loan-to-value ratios havealso contributed to the increased nonprime delinquency. We believe thedelinquency rates in our servicing portfolio are consistent with rates forsimilar mortgage loan portfolios 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. As of June 30, 2007, we have $190.3 billion in availablesources of short-term liquidity, of which we consider $46.2 billion highlyreliable and available. We believe we have adequate financing capacity to meetour currently foreseeable needs. For additional information regarding currentconditions and our expectation of future trends, please see the section in thisReport entitled *Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Prospective Trends*.

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 and $0.9billion of our common stock in the second quarter of 2007 financed through theissuance of convertible debentures.

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 June 30, 2007, the Bank’s regulatorycapital ratios and amounts and minimum required capital ratios for the Bank tomaintain a “well capitalized” status are as follows:

| ** **          | ** ** | **Minimum**                                      | ** ** | **Countrywide Bank** | ** ** |
|---------------------|------------|--------------------------------------------------|------------|---------------------------|------------|
| ** **          | ** ** | **Required** (1)                            | ** ** | **Ratio**                 | ** ** | **Amount** | ** ** |
| ** **          | ** ** | **(dollar amounts in thousands)** | ** ** |
| Tier 1 Capital      |       |                                             | 5.0        | %                         |       |   | 8.0 | % |   | $ | 7,990,469 |   |
| Risk-Based Capital: |       |                                             |       |                      |       |   |   |   |   |   |   |
| Tier 1              |       |                                             | 6.0        | %                         |       |   | 12.9 | % |   | $ | 7,990,469 |   |
| Total               |       |                                             | 10.0       | %                         |       |   | 13.7 | % |   | $ | 8,454,560 |   |

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

HadCountrywide Bank’s capital been calculated in compliance with the OTS requirementsat December 31, 2006, its regulatory capital ratios and amounts andminimum 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 |   |

 

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

Countrywide Bank is requiredby OTS regulations to maintain tangible capital of at least 1.5% of assets. However,the Bank is also required to maintain a tangible equity ratio of at least 2% toavoid being classified as “critically undercapitalized.” Criticallyundercapitalized institutions are subject to the prompt corrective actionprovisions of the Financial Institution Reform Recovery and Enforcement Act of1989. The Bank’s tangible capital ratio was 8.0% and 7.6% at June 30, 2007and December 31, 2006, respectively.

**Cash Flows**

Cash used by operating activities was $6.8 billion forthe six months ended June 30, 2007, compared to $0.5 billion for the sixmonths ended June 30, 2006. Cash used by operating activities includes thecash used for the origination and purchase of mortgage loans held for sale andthe proceeds from the sales and principal repayments of such mortgages. Wegenerally retain servicing rights and may retain other interests when theseloans are sold. The recognition of the amounts retained is a non-cash investingactivity. See Note 17—*Supplemental Cash FlowInformation* in the financial statement section of this report. Inthe six months ended June 30, 2007, funds used to originate and purchasemortgage loans exceeded proceeds from the sales of mortgage loans by$5.8 billion, which resulted in cash used by operating activities. In thesix months ended June 30, 2006, proceeds from the sales and principalrepayments of mortgage loans exceeded funds used to originate and purchasemortgage loans by $2.4 billion.

Net cash used by investing activities was $7.6 billionfor the six months ended June 30, 2007, compared to $13.6 billion for thesix months ended June 30, 2006. The decrease in net cash used by investingactivities was attributable to a $16.2 billion decrease in repayment (additions)to loans held for investment, combined with a $2.9 billion decrease insecurities purchased under agreements to resell, securities borrowed andfederal funds sold, partially offset by a $13.0 billion increase in netadditions to investments in other financial instruments.

Net cash provided byfinancing activities for the six months ended June 30, 2007 totaled$14.2 billion, compared to $15.4 billion for the six months ended June 30,2006. In the six months ended June 30, 2007, deposit liabilities increased$4.7 billion, compared to an increase of $11.1 billion in the year-ago period.In the six months ended June 30, 2007, long-term debt increased $2.7billion compared to an increase in long-term debt of $4.4 billion in thesix months ended June 30, 2006. Partially offsetting these decreases was a$7.7 billion increase in cash provided by short-term borrowings, includingsecurities sold under agreements to repurchase.

**Off-Balance SheetArrangements and Aggregate Contractual Obligations**

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

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

Most of our off-balance sheet arrangements relate tothe securitization of mortgage loans. Our mortgage loan securitizations arenormally structured as sales as specified by Statement of Financial AccountingStandards No. 140, *Accounting for Transfersand Servicing of Financial Assets and Extinguishments of Liabilities*(“SFAS 140”), and as such involve the transfer of the mortgage loans toqualifying special-purpose entities that are not subject to consolidation. In asecuritization, an entity transferring the assets is able to convert thoseassets into cash. Special-purpose entities used in such 

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securitizations obtaincash by issuing securities representing beneficial interests in the transferredassets to investors. In a securitization, we customarily providerepresentations and warranties with respect to, and we generally retain theright to service, the transferred mortgage loans.

We also generally have the right to repurchasemortgage loans from the special-purpose entity pursuant to a clean-up call.

Our Prime Mortgage Loans generally are securitized ona non-recourse basis, while Prime Home Equity and Nonprime Loans generally aresecuritized with limited recourse for credit losses. During the six monthsended June 30, 2007, we securitized $20.9 billion in Nonprime Mortgage andPrime Home Equity Loans with limited recourse for credit losses. Our exposureto credit losses related to our limited 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. For a further discussion of ourexposure to credit risk, see the section in this Report entitled *Management’s Discussion and Analysis of Financial Condition and Resultsof Operations—Credit Risk Management*.

We do not believe that any of our off-balance sheetarrangements have had, or are reasonably likely to have, a current or futurematerial effect on our financial condition, results of 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 the sixmonths ended June 30, 2007.

**Prospective Trends**

***Outlook***

We believe thecurrent environment of rapidly changing and evolving markets will provideincreasing challenges for the financial services sector, including Countrywide.Specifically, in the near term, we may experience:

·  Continued pressure on housing values andmortgage origination volumes

·  Increasing delinquencies and foreclosures

·  Continued disruptions in the secondarymortgage and debt capital markets and

·  More restrictive legislative and regulatoryenvironments.

As a result ofthese conditions, Countrywide and other lenders may be experiencing, amongother things, the following:

·  Lower loan production volumes

·  Lower margins on loans produced

·  Higher credit losses on delinquent loans andsubordinated interests

·  Reduced access to secondary mortgage and debtcapital markets and 

·  Increased cost of debt.

In response to the current environment, Countrywide ismaking changes to tighten the underwriting guidelines for loan products offeredand adjusting loan pricing to reflect market conditions. Further reductions inthe Company’s funding volume could result. Additionally, we expect to retainmore loans in our portfolio of loans held for investment or to hold additionalloan or security inventory until market conditions improve. In an effort toensure the adequacy of our funding liquidity, we continue to transition 

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to more reliable fundingsources, which may be more costly. We are also optimizing our organizationalstructure through, among other things, the planned integration of CountrywideBank and Countrywide Home Loans.

While we expect theseconditions may impact our earnings in the near term, we believe that thechallenges facing the industry should ultimately benefit Countrywide as themortgage lending industry continues to consolidate.

***United States Mortgage Market***

In the short term, the U.S. housing market is rapidlychanging and evolving. The housing market is undergoing a significantcontraction and lenders and investors are tightening their credit standards.Therefore, mortgage origination volumes are likely to decrease and growth intotal mortgage indebtedness is likely to slow in the short term. 

Over the long term, we believe that continuedpopulation growth, ongoing developments in the mortgage market and the prospectof relatively low interest rates will support growth in the market. Some of thedevelopments in the mortgage market that we believe will contribute to itslong-term 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. 

Over time, thelevel of complexity in the mortgage lending business has increasedsignificantly due to several factors:

·  The continuing evolution of the secondarymortgage market and demand by borrowers has resulted in a proliferation ofmortgage products

·  Greater regulation imposed on the industry hasresulted in increased costs and the need for higher levels of specialization

·  Interest rate volatility has increased inrecent years. At the same time, homeowners’ propensity to refinance theirmortgages has increased as the refinance process has become more efficient andcost effective. The combined result has been large swings in the volume ofmortgage loans originated from year to year. These volume swings have placedsignificant operational and financial pressures on mortgage lenders.

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

Today, large and sophisticated financial institutionsdominate the residential mortgage industry. These industry leaders areprimarily commercial banks operating through their mortgage bankingsubsidiaries. According to the trade publication *InsideMortgage Finance*, the top five originators produced 51% of all loansoriginated during the first six months of the calendar year 2007, as comparedto 48% during the six months ended December 31, 2006. (Reprinted with thepermission of IMF Copyrighted. All rights reserved by IMF.)

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Theloan volume for the top five originators, according to *InsideMortgage Finance*, is as follows: (Reprinted with the permission of IMF Copyrighted. All rights reservedby IMF.)

| **Institution**            | ** ** | ** **             | ** ** | **Six Months Ended  June 30, 2007** | ** ** | **Six Months Ended  December 31, 2006** | ** ** |
|----------------------------|------------|------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                 | ** ** | **(in billions)** | ** ** |
| Countrywide                |       |                   | $          | 245                                                     |       |                                                        |       | $ | 240 |   |   |
| Wells Fargo Home  Mortgage |       |                   | 148        |                                                    |       |                                                        | 191        |   |   |
| CitiMortgage               |       |                   | 116        |                                                    |       |                                                        | 99         |   |   |
| Chase Home  Finance(1)     |       |                   | 110        |                                                    |       |                                                        | —     |   |   |
| Washington  Mutual(1)      |       |                   | —     |                                                    |       |                                                        | 91         |   |   |
| Bank of America  Mortgage  |       |                   | 95         |                                                    |       |                                                        | 87         |   |   |
| Total for Top  Five        |       |                   | $          | 714                                                     |       |                                                        |       | $ | 708 |   |   |

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(1)   Comparativedata not included for quarter in which the institution was not in the top fiveoriginators.

We believe the consolidation trend in the mortgageindustry will continue, as the aforementioned market forces will continue todrive out weak competitors. We believe Countrywide will benefit from consolidationover the long term through increased market share and enhanced ability torecruit talented personnel.

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 Values***

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

Recently, we have seenhousing price declines, including recent declines in housing values in many metropolitanstatistical areas in the United States. We expect housing values to remainstagnant or decrease during the near term which will affect our credit lossexperience and may affect our willingness to offer certain mortgage loanproducts, both of which could impact our earnings, particularly in the shortterm. Over the long term, we expect that housing appreciation will bepositively correlated with both consumer price inflation and growth in personalincome.

***Secondary Mortgage Market Investor Demand***

Changes in investor demand for mortgage loans can havea significant impact on our ability to access the secondary mortgage market asa competitive outlet. In 2007, we have seen an increase in investor requiredyields, first for nonprime loans or securities followed by prime home equityloans and then nonconforming loans, together with a lessening in the liquidityof such loans and securities caused by reduced investor demand. In addition,certain credit rating agencies have announced that changes are pending to theirsecuritization ratings protocol. These factors have reduced our ability and 

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willingness to sell suchloans or securities into the secondary mortgage market and the availability andpricing of such loans to consumers. Our gain on sale margin may be impacted inthe short term. 

***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 many markets), along with worseningeconomic conditions, we may experience increased credit losses in the nearterm. In 2007, we have observed a marked decline in credit performance (as adjustedfor age) for recent vintages, especially those loans with higher riskcharacteristics, including reduced documentation, higher loan-to-value ratiosor weak credit scores. Deterioration in the credit performance of these loanshas resulted in increased credit losses and impairment of our relatedcredit-subordinated interests and higher claims under our representations andwarranties. Credit markets are rapidly changing and evolving and we expectthese changes to impact the housing market, demand for our mortgage-backedsecurities, our future credit losses and the availability of creditenhancements for the loans and securities we sell and invest in, which may impactfuture earnings.

***Funding Liquidity***

We have contingency planning protocols for fundingliquidity that were designed to encompass a wide variety of market conditions. Weplace major emphasis on the adequacy, reliability and diversity of our fundingsources. Details of Countrywide’s liquidity sources as of June 30, 2007 areincluded in a Form 8-K filed with the Securities and Exchange Commission onAugust 6, 2007. 

In the third quarter through the filing date of thisForm 10-Q, funding liquidity in the financial services sector was constrainedprimarily due to changes in secondary mortgage market investor demand. Variousmortgage lenders have experienced operating difficulties and have extendedasset-backed commercial paper facilities or filed for bankruptcy protection. Theseevents have further constrained funding liquidity in the sector.

We have maintained access to our traditional, highlyreliable short-term liquidity sources. In view of current unprecedented marketconditions, we are accessing other pre-existing funding liquidity sources,procuring new sources and accelerating the integration of our mortgage companywith the Bank. As a result of this accelerated integration, a significantlyhigher percentage of our mortgage banking fundings will occur in the Banksooner than originally planned. The Bank has significant liquidity sourcesavailable to fund our mortgage banking operations. While we believe we haveadequate funding liquidity, the situation is rapidly evolving and the impact onthe Company is unknown.

Two independentcredit rating agencies recently reaffirmed their ratings and outlooks onCountrywide. On July 31, 2007, Standard & Poor’s reaffirmed our short- andlong-term ratings with an outlook of “Stable.” On August 2, 2007, Moody’s alsoreaffirmed our short- and long-term ratings with an outlook of “Stable.”

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**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 operate profitably.

On June 29,2007, the federal financial regulatory agencies issued a Statement on SubprimeMortgage Lending (the “Statement”) to address issues relating to certainsubprime mortgage products and lending practices, especially as they relate tocertain adjustable-rate mortgage products. This statement requires mortgagelenders to:

·       Qualifyborrowers based on fully-indexed interest rates with fully-amortizing payments

·       Obtainadequate documentation of borrower income and assets

·       Limitprepayment penalties to the initial payment reset period

·       Provideadequate information for the borrower to understand the loan’s terms andfeatures.

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

Furthermore, 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 not yetbeen 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 remeasurement event date. Upon adoption of SFAS 159, fairvalue accounting may also be elected for existing financial assets andliabilities. For those instruments for which fair value accounting is elected,changes in fair value will be recognized in earnings and fees and costsassociated with origination or acquisition will be recognized as incurredrather than deferred. SFAS 159 is effective January 1, 2008, with earlyadoption permitted as of January 1, 2007. The Company has determined thatit will adopt SFAS 159 

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concurrentwith the adoption of SFAS 157 on January 1, 2008, but has not yetdetermined the financial impact, if any, upon adoption.

In April 2007, theFASB issued FASB Staff Position No. FIN 39-1, *Amendment ofFASB Interpretation No. 39*, (“FSP FIN 39-1”). FSP FIN 39-1amends certain paragraphs of FASB Interpretation Number 39, *Offsetting of Amounts Related to Certain Contracts*,—aninterpretation of APB Opinion No. 10 and FASB Statement No. 105 (“FIN39”), to permit a reporting entity to offset fair value amounts recognized forthe right to reclaim cash collateral or the obligation to return cashcollateral against fair value amounts recognized for derivative instrumentsexecuted with the same counterparty under the same master netting arrangement. FSPFIN 39-1 is effective for fiscal years beginning after November 15,2007, with early application permitted. Upon application, the Company shall bepermitted to change its accounting policy to offset or not offset fair valueamounts recognized for derivative instruments under master nettingarrangements. The Company has not yet determined whether it will apply thisguidance earlier than its effective date and has not determined the financialimpact, if any, upon application.

**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 are beyondour control, that could cause actual results to differ significantly frommanagement’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

·       Increasedcredit exposure resulting from our decision to retain more loans in ourportfolio of loans held for investment than we have historically

·       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

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·       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

·       Operationalrisks

·       Failureto attract and retain a highly skilled workforce

·       Newlines of business or new products and services that may subject us toadditional risks

·       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, such as Part II, Item 1A—*Risk Factors* as well as in other reports and documents thatwe file with or furnish to the SEC including the 2006 Annual Report. Otherfactors that could also cause results to differ from our expectations may notbe 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 80 to 82 of this Form 10-Qis incorporated herein by reference.

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

**Disclosure Controls and Procedures**

Our management hasconducted an evaluation, with the participation of our Chief Executive Officerand Chief Financial Officer, of the effectiveness of our disclosure controlsand procedures (as such term is defined in Rules 13a-15 (e) and15d-15 (e) under the Securities Exchange Act of 1934, as amended(the “Exchange Act”)), as of the end of the period covered by this Report asrequired by paragraph (b) of Rules 13a-15 and 15d-15under the Exchange Act. Based on this evaluation, the Chief Executive Officerand Chief Financial Officer have concluded that our disclosure controls andprocedures were effective as of the end of the period covered by this Report.

**Internal Control over Financial Reporting**

***Changes to InternalControl over Financial Reporting***

There has been no change in our internal control overfinancial reporting during the quarter ended June 30, 2007 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

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**PART II. OTHERINFORMATION**

**Item 1A.**                *Risk Factors*

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

***Debt and secondary mortgage market conditions couldhave a material adverse impact on our earnings and financial condition***

We have significant financing needs that we meetthrough the capital markets, including the debt and secondary mortgage markets.These markets are currently experiencing unprecedented disruptions, which couldhave an adverse impact on the Company’s earnings and financial condition,particularly in the short term.

Current conditions in the debt markets include reducedliquidity and increased credit risk premiums for certain market participants.These conditions, which increase the cost and reduce the availability of debt,may continue or worsen in the future. The Company attempts to mitigate theimpact of debt market disruptions by obtaining adequate committed anduncommitted facilities from a variety of reliable sources. There can be noassurance, however, that the Company will be successful in these efforts, thatsuch facilities will be adequate or that the cost of debt will allow us tooperate at profitable levels. The Company’s cost of debt is also dependent onits maintaining investment-grade credit ratings. Since the Company is highlydependent on the availability of credit to finance its operations, disruptionsin the debt markets or a reduction in our credit ratings, could have an adverseimpact on our earnings and financial condition, particularly in the short term.

The secondary mortgagemarkets are also currently experiencing unprecedented disruptions resultingfrom reduced investor demand for mortgage loans and mortgage-backed securitiesand increased investor yield requirements for those loans and securities. Theseconditions may continue or worsen in the future. In light of currentconditions, we expect to retain a larger portion of mortgage loans and mortgage-backedsecurities than we would in other environments. While our capital and liquiditypositions are currently strong and we believe we have sufficient capacity tohold additional mortgage loans and mortgage backed securities until investordemand improves and yield requirements moderate, our capacity to retainmortgage loans and mortgage backed securities is not unlimited. As a result, aprolonged period of secondary market illiquidity may reduce our loan productionvolumes and could have an adverse impact on our future earnings and financialcondition.

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

The following table showsrepurchases by the Company of its common stock for each calendar month duringthe quarter ended June 30, 2007.

| **Calendar Month** | ** ** | ** ** | ** ** | **Total Number   of Shares  Purchased(1)** | ** ** | **Average  Price Paid  per Share** | ** ** | **Total Number of  Shares Purchased  as Part of Publicly  Announced Plan  or Program(2)** | ** ** | **Maximum Amount  That May  Yet be Purchased  Under the Plan or  Program(2)** | ** ** |
|-------------------------|------------|------------|------------|-----------------------------------------------------------|------------|----------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|
| April                   |       |       | 36,761     |                                                      |       |                                         | $          | 34.13                                                                                                                             |       |                                                                                                             |       | n/a |   |   |   | n/a |   |   |
| May                     |       |       | 21,507,817 |                                                      |       |                                         | $          | 40.39                                                                                                                             |       |                                                                                                             |       | 21,503,512 |   |   |   | n/a |   |   |
| June                    |       |       | 1,494      |                                                      |       |                                         | $          | 38.71                                                                                                                             |       |                                                                                                             |       | n/a |   |   |   | n/a |   |   |
| Total                   |       |       | 21,546,072 |                                                      |       |                                         | $          | 40.37                                                                                                                             |       |                                                                                                             |       | 21,503,512 |   |   |   | $ | 0.1 billion |   |   |
|                         |            |            |            |                                                           |            |                                              |            |                                                                                                                                   |            |                                                                                                                  |            |  |  |  |  |  |  |  |  |  |  |

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(1)          In addition to sharesrepurchased pursuant to the Company’s publicly announced repurchase program,this column includes the withholding of a portion of restricted shares andstock appreciation rights to cover taxes on vested restricted shares andexercised stock appreciation rights.

(2)          InNovember 2006, the Board of Directors authorized a share repurchaseprogram of up to $2.5 billion. In connection with this program, the Companyrepurchased 60,143,388 shares of its common stock for $2.4 billion.

**Item 4.**                        *Submission of Matters to a Vote of Security Holders*

The Annual Meetingof Stockholders of the Company was held on June 13, 2007. The agenda itemsfor such meeting are shown below together with the vote of the Company’s CommonStock with respect to such agenda items.

1.     The election of three Class IIDirectors to serve until the 2010 Annual Meeting of Stockholders.

| **Class II Nominees** | ** ** | ** **  | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|---------------------------------|------------|-------------|------------|--------------------|------------|-------------------------|------------|
| Henry G. Cisneros               |       | 479,126,908 |       |               | 38,844,853 |                    |       |
| Robert J. Donato                |       | 452,154,502 |       |               | 65,817,259 |                    |       |
| Harley W. Snyder                |       | 436,853,940 |       |               | 81,117,821 |                    |       |

 

The terms of AngeloR. Mozilo, Jeffrey M. Cunningham, Martin R. Melone, Robert T. Parry, Oscar P.Robertson and Keith P. Russell as directors continued after such meeting.

2.     Ratification of the appointment of KPMG LLPas the Company’s independent registered public accounting firm.

| Votes For     |   | 511,115,341 |   |
|---------------|--------|-------------|--------|
| Votes Against |   | 3,307,172   |   |
| Abstentions   |   | 3,549,248   |   |

 

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3.     Consideration of a stockholder proposalurging the Company’s Board of Directors to adopt a policy that the Company’sstockholders be given an opportunity to annually ratify the compensation of thenamed executive officers set forth in the Company’s proxy statement.

| Votes For        |   | 147,505,284 |   |
|------------------|--------|-------------|--------|
| Votes Against    |   | 277,323,995 |   |
| Abstentions      |   | 40,264,323  |   |
| Broker Non-Votes |   | 52,878,159  |   |

 

**Item 6.**                        *Exhibits*

(a)         Exhibits

See Index of Exhibits on page 106.

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

|                             | COUNTRYWIDE FINANCIAL  CORPORATION |
|-----------------------------|------------------------------------|
|                        | (Registrant)                       |
| Dated: August 9,  2007 | By:                                | /s/  DAVID SAMBOL |
|                        |                               | David Sambol |
|                        |                               | *President  and Chief Operating Officer* |
| Dated: August 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-QJune 30, 2007**

**INDEXOF EXHIBITS**

| Exhibit No. | ** ** | ** **                                                                                                                                                                                                                                                                                                                                   | ** ** | **Description** |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 3.3              |       | Bylaws of the Company,  as amended.                                                                                                                                                                                                                                                                                                          |
| 4.55*            |       | Indenture, dated  May 22, 2007, among the Company, Countrywide Home Loans and The Bank of  New York, as Trustee (including form of series A debenture and form of series  B debenture) (incorporated by reference to Exhibit 4.1 to the Company’s  Current Report on Form 8-K, filed with the SEC on May 29, 2007). |
| 4.56*            |       | Registration  Rights Agreement, dated May 22, 2007, among the Company, Countrywide  Home Loans and the initial purchasers named therein (incorporated by  reference to Exhibit 4.2 to the Company’s Current Report on  Form 8-K, filed with the SEC on May 29, 2007).                                          |
| 10.145*          |       | Purchase Agreement,  dated May 16, 2007, among the Company, Countrywide Home Loans and the  Initial Purchasers identified therein (incorporated by reference to  Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed  with the SEC on May 22, 2007).                                                    |
| + 10.148         |       | First Amendment  to the Company’s Director Emeritus Program, dated June 13, 2007.                                                                                                                                                                                                                                                  |
| + 10.149         |       | The Company’s  Director’s Charitable Award Program, dated January 1, 2002, as amended.                                                                                                                                                                                                                                        |
| + 10.150         |       | The Company’s  Supplemental Savings and Investment Deferred Compensation Plan, dated as of  December 30, 2005, effective as of February 1, 2006, as amended.                                                                                                                                                                  |
| 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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