**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**Form 10-K**

**(Mark One)**

**x**                               ANNUAL REPORTPURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

**For the fiscal year ended December 31, 2005**

**or**

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

**Commission file number: 1-8422**

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**Countrywide Financial Corporation**

(Exact name of registrant asspecified in its charter)

| **Delaware**                                                    |   | **13-2641992**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or Other Jurisdiction of  Incorporation or Organization) |   | (I.R.S. Employer  Identification No.) |
| **4500 Park Granada, Calabasas,  CA**                           |   | **91302**                             |
| (Address of principal executive offices)                        |   | (Zip Code)                            |

 

Registrant’s telephonenumber, including area code: **(818) 225-3000**

Securities registeredpursuant to Section 12(b) of the Act:

| Title of Each Class             | ** ** | **Name of Each  Exchange on Which Registered**  |
|---------------------------------|------------|-------------------------------------------------|
| Common Stock, $0.05 Par  Value  |       | New York Stock Exchange  Pacific Stock Exchange |
| Preferred Stock Purchase Rights |       | New York Stock Exchange  Pacific Stock Exchange |

 

Securities registered pursuant to Section 12(g) ofthe Act:

**None**

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.  Yes  x    No  o

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act.  Yes  o    No  x

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject tosuch filing requirements for the past 90 days.  Yes  x   No  o

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.   o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act(check one):

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

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes  o    No  x

Asof June 30, 2005, the last business day of the registrant’s most recentlycompleted second fiscal quarter, the aggregate market value of the Registrant’sCommon Stock held by non-affiliates was $22,735,828,809 based on the closingprice as reported on the New York Stock Exchange.

Asof February 24, 2006, there were 602,995,163 shares of CountrywideFinancial Corporation Common Stock, $0.05 par value, outstanding.

**Documents Incorporated By Reference**

| Document                                                                               | ** ** | **Parts Into Which Incorporated** |
|----------------------------------------------------------------------------------------|------------|-----------------------------------|
| Proxy Statement for the  Annual Meeting of Stockholders  to be held June 14, 2006 |       | Part III                     |

 

 

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**Countrywide Financial Corporation**

**2005 Annual Reportof Form 10-K**

**Tableof Contents**
|              | ** ** | **Page**                                                                                                             |
|--------------|------------|----------------------------------------------------------------------------------------------------------------------|
| PART I  | ** ** | ** **                                                                                                           |
|         | Item 1.    | Business                                                                                                             |   | 1 |   |
|         |       | Overview                                                                                                             |   | 1 |   |
|         |       | Available  Information                                                                                               |   | 1 |   |
|         |       | Loan Production                                                                                                      |   | 2 |   |
|         |       | Mortgage  Banking Segment                                                                                            |   | 3 |   |
|         |       | Banking Segment                                                                                                      |   | 9 |   |
|         |       | Capital  Markets Segment                                                                                             |   | 11 |   |
|         |       | Insurance Segment                                                                                                    |   | 12 |   |
|         |       | Global  Operations Segment                                                                                           |   | 14 |   |
|         |       | Financing of  Operations                                                                                             |   | 14 |   |
|         |       | Regulations                                                                                                          |   | 16 |   |
|         |       | Workforce                                                                                                            |   | 23 |   |
|         |       | Additional  Information                                                                                              |   | 24 |   |
|         |       | Loan  Production Tables                                                                                              |   | 24 |   |
|         | Item 1A.   | Risk Factors                                                                                                         |   | 32 |   |
|         | Item  1B.  | Unresolved  Staff Comments                                                                                           |   | 36 |   |
|         | Item 2.    | Properties                                                                                                           |   | 36 |   |
|         | Item 3.    | Legal  Proceedings                                                                                                   |   | 36 |   |
|         | Item  4.   | Submission  of Matters to a Vote of Security Holders                                                                 |   | 36 |   |
| PART II |       |                                                                                                                 |   |   |
|         | Item  5.   | Market  for the Company’s Common Stock, Related Stockholder Matters and Issuer  Purchase of Equity Securities   |   | 37 |   |
|         | Item  6.   | Selected  Consolidated Financial Data                                                                                |   | 39 |   |
|         | Item  7.   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                          |   | 41 |   |
|         |       | Overview                                                                                                             |   | 41 |   |
|         |       | Critical  Accounting Policies                                                                                        |   | 43 |   |
|         |       | Results  of Operations Comparison—Year Ended December 31, 2005 and Year Ended  December 31, 2004 |   | 47 |   |
|         |       | Results  of Operations Comparison—Year Ended December 31, 2004 and Year Ended  December 31, 2003 |   | 68 |   |
|         |       | Quantitative  and Qualitative Disclosures About Market Risk                                                          |   | 86 |   |
|         |       | Credit Risk Management                                                                                               |   | 92 |   |
|         |       | Loan Servicing                                                                                                       |   | 98 |   |
|         |       | Inflation                                                                                                            |   | 99 |   |
|         |       | Seasonality                                                                                                          |   | 99 |   |
|         |       | Liquidity  and Capital Resources                                                                                     |   | 99 |   |
|         |       | Off-Balance  Sheet arrangements and Aggregate Contractual Obligations                                                |   | 103 |   |
|         |       | Prospective  Trends                                                                                                  |   | 104 |   |
|         | Item  7A.  | Quantitative  and Qualitative Disclosures About Market Risk                                                          |   | 108 |   |
|         | Item  8.   | Financial  Statements and Supplementary Data                                                                         |   | 108 |   |
|         | Item  9.   | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure                                |   | 108 |   |
|         | Item  9A.  | Controls  and Procedures                                                                                             |   | 108 |   |
|         | Item 9B.   | Other Information                                                                                                    |   | 112 |   |
|              |            |                                                                                                                      |  |  |  |  |

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| PART III |      |                                                                                                  |   |   |
|---------------|-----------|-------------------------------------------------------------------------------------------------------|--------|--------|
|          | Item  10. | Directors  and Executive Officers of the Registrant                                                   |   | 113    |   |
|          | Item  11. | Executive  Compensation                                                                               |   | 113    |   |
|          | Item  12. | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters |   | 113    |   |
|          | Item  13. | Certain  Relationships and Related Transactions                                                       |   | 113    |   |
|          | Item  14. | Principal  Accountant Fees and Services                                                               |   | 113    |   |
| PART IV  |      |                                                                                                  |   |   |
|          | Item  15. | Exhibits,  Financial Statement Schedules                                                              |   | 114    |   |

 

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**PART I**

**Item 1.**                        *Business*

**Overview**

Countrywide FinancialCorporation (“Countrywide”) is a holding company which, through itssubsidiaries (collectively, the “Company”), is engaged in mortgage lending andother finance-related businesses, including mortgage banking, retail bankingand mortgage warehouse lending, securities dealing, insurance underwriting andinternational mortgage loan processing and subservicing.

Wemanage our business through five business segments—Mortgage Banking, Banking,Capital Markets, Insurance and Global Operations. We primarily conduct thefollowing operations in these segments:

·       *Mortgage Banking*—We originate, purchase,securitize and service mortgage loans nationwide.

·       *Banking*—We operate a federally-charteredbank that primarily invests in mortgage loans and home equity lines of creditprimarily sourced through our mortgage banking operation. We also provideshort-term secured financing to mortgage lenders through a non-depositorylending company.

·       *Capital Markets*—We operate aninstitutional broker-dealer that primarily specializes in trading andunderwriting mortgage-backed securities. During 2004, this segment beganoriginating for sale loans secured by commercial real estate. We also managewithin this segment the acquisition and disposition of mortgage loans on behalfof Countrywide Home Loans (“CHL”), our primary mortgage banking subsidiary.

·       *Insurance*—We offer property, casualty,life and credit insurance as an underwriter and as an independent agent. Wealso provide reinsurance coverage to primary mortgage insurers.

·       *Global Operations*—We provided mortgageloan application processing and mortgage loan servicing on behalf of afinancial institution in the United Kingdom through a joint venture with thatinstitution. This joint venture was terminated on December 23, 2005. We willcontinue to offer these services in addition to licensing the proprietarytechnology supporting these services. Certain of the Company’s administrativefunctions are performed through an Indian subsidiary.

Mortgage banking continuesto be our core business, generating 59% of our pre-tax earnings in 2005. Ourother segments generated the following percentages of our pre-tax earnings in2005: Banking—25%; Capital Markets—11%; Insurance—4%; and Global Operations—1%.We have leveraged our mortgage lending operations in recent years to capitalizeon meaningful related opportunities to provide sources of earnings that areless cyclical than the mortgage banking business. For financial informationabout our segments, see the “Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Operating Segment Results” section and “Note26—Segments and Related Information” in the financial statement section of thisReport.

**AvailableInformation**

We have a Web site locatedat www.countrywide.com and make our Annual Reports on Form 10-K,Quarterly Reports on Form 10-Q, Current Reports on Form 8-Kand all exhibits and amendments to these reports available, free of charge, onthat Web site, as soon as reasonably practicable after such material iselectronically filed with, or furnished to, the Securities and ExchangeCommission. Our Corporate Governance Guidelines, our Code of Business Ethics,and the charters of the committees of our Board of Directors are also availableon our Web site and printed copies are available upon request.

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**Loan Production**

We produce residential andcommercial mortgage loans within the Mortgage Banking, Banking and CapitalMarkets Segments. Most of the mortgage loans we produce in the Mortgage Bankingand Capital Markets Segments are sold into the secondary mortgage market,primarily in the form of mortgage-backed securities. We generally perform theongoing servicing functions related to the mortgage loans that we produce. Loansproduced in our Banking Segment are generally held for investment.

***Types of Loans***

Weoriginate and purchase mortgage loans that generally fall into one of the followingfour categories:

·       *Prime Mortgage Loans*—These are primecredit quality first-lien mortgage loans secured by single-family residences. Referencesto loans secured by single-family residences in this document include loanssecured by one-to-four dwelling unit residential real estate.

·       *Prime Home Equity Loans*—These are primecredit quality second-lien mortgage loans, including home equity lines ofcredit, secured by single-family residences.

·       *Non**prime Mortgage Loans—*These arefirst- and second-lien mortgage loans secured by single-family residences, madeto individuals with credit profiles that do not qualify them for a prime loan.

·       *Commercial Real Estate**Loans—*These are prime credit qualityfirst-lien mortgage loans secured by commercial properties, such as apartmentbuildings, retail properties, offices, industrial sites, hotels and othercommercial properties.

The majority of our loanproduction consists of Prime Mortgage Loans. Prime Mortgage Loans includeconventional mortgage loans, loans insured by the Federal HousingAdministration (“FHA”) and loans guaranteed by the Veterans Administration (“VA”).A significant portion of the conventional loans qualify for inclusion inguaranteed mortgage securities backed by Fannie Mae or Freddie Mac (“conformingloans”). Some of the conventional loans we produce either have an original loanamount in excess of the Fannie Mae and Freddie Mac loan limit for single-familyloans ($417,000 for 2006) or otherwise do not meet Fannie Mae or Freddie Macguidelines. Loans that do not meet Fannie Mae or Freddie Mac guidelines arereferred to as “nonconforming loans.” In certain tables and elsewhere in thisReport, FHA and VA loans may be referred to as Government Loans.

The following tablesummarizes our mortgage loan production by business segment and by loan type:

| ** **              | ** ** | **Mortgage Loan Production**      | ** ** |
|-------------------------|------------|---------------------------------------------|------------|
| ** **              | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Ten Months** | ** ** |
| ** **              | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Ended** | ** ** |
| ** **              | ** ** | **Years Ended December 31,** | ** ** | **December 31,** | ** ** |
| ** **              | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **              | ** ** | **(in millions)**                      | ** ** |
| By Segment:             |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Mortgage Banking        |       | $                                           | 427,916    |   | $ | 317,811 |   | $ | 398,310 |   | $ | 242,437 |   |   | $ | 121,002 |   |   |
| Banking                 |       | 42,003                                      |       | 27,116 |   | 14,354 |   | 805 |   |   | — |   |   |
| Capital  Markets:       |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Conduit acquisitions(1) |       | 21,028                                      |       | 18,079 |   | 22,200 |   | 8,659 |   |   | 2,967 |   |   |
| Commercial Real Estate  |       | 3,925                                       |       | 358 |   | — |   | — |   |   | — |   |   |
| Total Mortgage Loans    |       | $                                           | 494,872    |   | $ | 363,364 |   | $ | 434,864 |   | $ | 251,901 |   |   | $ | 123,969 |   |   |
| By Loan Type:           |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Prime Mortgage Loans    |       | $                                           | 403,604    |   | $ | 292,672 |   | $ | 396,934 |   | $ | 230,830 |   |   | $ | 112,750 |   |   |
| Nonprime Mortgage Loans |       | 44,637                                      |       | 39,441 |   | 19,827 |   | 9,421 |   |   | 5,580 |   |   |
| Prime Home Equity Loans |       | 42,706                                      |       | 30,893 |   | 18,103 |   | 11,650 |   |   | 5,639 |   |   |
| Commercial Real Estate  |       | 3,925                                       |       | 358 |   | — |   | — |   |   | — |   |   |
| Total Mortgage Loans    |       | $                                           | 494,872    |   | $ | 363,364 |   | $ | 434,864 |   | $ | 251,901 |   |   | $ | 123,969 |   |   |

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(1)   Acquisitionsfrom third parties

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For additional loanproduction statistics, see the section in this Report entitled “Business—LoanProduction Tables.”

**Mortgage Banking Segment**

Our Mortgage BankingSegment produces mortgage loans through a variety of channels on a nationalscale. Most of the mortgage loans we produce in this segment are sold into thesecondary mortgage market, primarily in the form of mortgage-backed securities.We generally perform the ongoing servicing functions related to the mortgageloans that we produce. We also provide various loan closing services such astitle, escrow and appraisal. We group the activities of our Mortgage BankingSegment into three business sectors—Loan Production, Loan Servicing and LoanClosing Services. See the section in this Report entitled “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—Seasonality”for a discussion of the effect of seasonality on our business.

***Loan Production***

We produce mortgage loans through four productiondivisions of Countrywide Home Loans (“CHL”)—Consumer Markets, WholesaleLending, Correspondent Lending and Full Spectrum Lending and, beginning in thethird quarter of 2005, through Countrywide Bank. Countrywide Bank funds loansfor both investment purposes and for sale. Bank production in the MortgageBanking Segment includes loans originated for sale at the Bank together withbulk sales of loans from the Bank to the Mortgage Banking Segment.

Thefollowing table summarizes our Mortgage Banking loan production by division:

| ** **             | ** ** | **Mortgage Loan Production(1)**   | ** ** |
|------------------------|------------|---------------------------------------------|------------|
| ** **             | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Ten Months** | ** ** |
| ** **             | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Ended** | ** ** |
| ** **             | ** ** | **Years Ended December 31,** | ** ** | **December 31,** | ** ** |
| ** **             | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **             | ** ** | **(in millions)**                      | ** ** |
| Correspondent  Lending |       | $                                           | 197,104    |   | $ | 133,588 |   | $ | 194,948 |   | $ | 109,474 |   |   | $ | 42,502 |   |   |
| Consumer Markets       |       | 116,399                                     |       | 95,619 |   | 104,216 |   | 62,189 |   |   | 37,357 |   |   |
| Wholesale Lending      |       | 80,660                                      |       | 72,848 |   | 91,211 |   | 67,188 |   |   | 39,312 |   |   |
| Full Spectrum  Lending |       | 25,670                                      |       | 15,756 |   | 7,935 |   | 3,586 |   |   | 1,831 |   |   |
| Countrywide Bank       |       | 8,083                                       |       | — |   | — |   | — |   |   | — |   |   |
| Total Loans            |       | $                                           | 427,916    |   | $ | 317,811 |   | $ | 398,310 |   | $ | 242,437 |   |   | $ | 121,002 |   |   |

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(1)          Foradditional production statistics, see the section in this Report entitled “Business—LoanProduction Tables.”

*CorrespondentLending Division*

Our Correspondent Lending Division purchases mortgageloans from other lenders, which include mortgage bankers, commercial banks,savings and loan associations, home builders and credit unions. As of December 31,2005, this Division served approximately 2,100 lenders, who are subject toinitial and ongoing credit evaluation and monitoring, operating in all 50states and the District of Columbia.

For 2005, Countrywide wasranked by *Inside Mortgage Finance*asthe largest correspondent lender, in terms of volume, among residentialcorrespondent mortgage lenders nationwide.

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*Consumer MarketsDivision*

Our Consumer Markets Division (“CMD”) originatesmortgage loans through three business channels: the Distributed Retail channel,the Business-to-Consumer channel and the Strategic Business Alliances channel.

The Distributed Retail channel is the branch networkwhich originates loans through relationships with consumers, builders, realtorsand through joint ventures. As of December 31, 2005, this channelconsisted of 662 branch offices in 48 states and the District of Columbia,including 70 dedicated joint venture branches. This channel has a sales forceof 6,373 primary originators, which includes those dedicated to joint venturerelationships. The sales staff for the Distributed Retail channel is primarilyfocused on consumer lending through relationships established with previouscustomers, realtors, builders and joint venture partners. The DistributedRetail channel (including the joint venture relationships) originated 83% ofConsumer Markets Division total volume for the year ended December 31,2005.

The Business-to-Consumer channel primarily originatesmortgage loans directly from portfolio customers through the Internet andthrough our call centers. The Business-to-Consumer channel focuses on customerretention and marketing by providing our existing customers with an efficientand convenient means to obtain financing for a new home, refinance theirexisting mortgage or to obtain a Home Equity loan. As of December 31,2005, the Business-to-Consumer channel consisted of four call centers with asales staff of 749. This channel accounted for 15% of CMD’s total volume forthe year ended December 31, 2005.

The Strategic Business Alliance channel facilitatesand manages the development of new sources of loans by developing and deployingrelationships with organizations that influence the placement of mortgageservices and by supporting acquisition-related activities. This channel focusesprimarily on developing revenue-sharing arrangements such as joint ventures,third party outsourcing, relocation lending, marketing service agreements andbrokered-in agreements. This channel accounted for 2% (excluding DistributedRetail volume from joint venture relationships) of CMD’s total volume for theyear ended December 31, 2005.

For 2005, Countrywide wasranked by *Inside Mortgage Finance*asthe second largest retail lender, in terms of volume, among residential retailmortgage lenders nationwide.

*Wholesale LendingDivision*

Our Wholesale Lending Division underwrites and funds mortgageloans sourced by mortgage loan brokers and other financial intermediaries. TheDivision offers a wide variety of Prime and Nonprime Mortgage Loan and PrimeHome Equity Loan products. Business is solicited through a sales force, theInternet (www.CWBC.com), advertising and participation of branch management andsales personnel in trade associations.

As of December 31, 2005, our Wholesale LendingDivision operated 52 branch offices and seven fulfillment centers in variousparts of the United States. Through this Division we source loans throughapproximately 30,000 mortgage loan brokers nationwide.

For 2005, Countrywide wasranked by *Inside Mortgage Finance*asthe largest wholesale originator, in terms of volume, among residentialwholesale mortgage lenders nationwide.

*Full SpectrumLending Division*

The Full Spectrum LendingDivision originates Nonprime and Prime Mortgage Loans with the primary focus onrefinance and home equity products. This Division operates through a network of

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195 retailbranch offices located in 38 states, as well as 7 call centers. Thebranches and call centers of this Division are supported by 3 fulfillmentcenters for underwriting and funding of these mortgage loans.

The Division’s mortgageproduction is generated primarily through customer retention efforts directedto Countrywide’s nonprime servicing portfolio, but also through direct mail,internet, mass media and joint venture relationships. Of the 195 Full Spectrum retailbranch offices, 45 operate with a large network of sales associates who arededicated to the fulfillment of referrals of Nonprime Mortgage Loan customersfrom Countrywide’s Consumer Markets Division.

*Countrywide BankMortgage Banking Activities*

Countrywide Bank producesloans for sale by our Mortgage Banking Segment. As this activity is a MortgageBanking activity, the mortgage loan production and the income relating to thesale of these loans is included in the Mortgage Banking Segment. The productionof loans by Countrywide Bank for our Mortgage Banking operations is anefficient means to manage growth of the Bank’s portfolio of loans held forinvestment while complying with regulatory requirements.

*Affordable andMulticultural Home Loan Programs*

For more than a decade, we have pursued a variety ofaffordable home loan initiatives designed to increase homeownershipopportunities for low-to moderate-income borrowers and those with diversebackgrounds. Our long-time initiative, known as *We*House America®, supports affordable housing programsundertaken by Fannie Mae and promoted by various government agencies, includingthe U.S. Department of Housing and Urban Development.

We have specifically designed *We*House America loan programs to meet theneeds of low-to moderate-income borrowers and others with financial, employmentor personal situations which might prevent them from qualifying for traditionalmortgages. These loan programs enable such borrowers to qualify for a home loanby allowing, for example, lower down payments, lower cash reserves, alternativeincome sources and more flexible underwriting criteria than on a typical loan.The mortgage loans we produce through *We*HouseAmerica are sold and serviced on a non-recourse basis, generally throughguarantee programs sponsored by Fannie Mae.

Through *We*HouseAmerica, we provide telephone-based counseling services and web channelresources to educate prospective first-time minority and low- tomoderate-income homebuyers about the home loan process. *We*HouseAmerica also provides bilingual counselors and instructors, and educationalmaterials printed in other languages.

We have made othersignificant commitments to affordable lending and multicultural marketsinitiatives designed to increase homeownership opportunities among minority andimmigrant communities. For example, we are approved to participate in more than950 mortgage loan programs that assist with down payments and closing costs,which are offered by state, county and city agencies, municipalities andnot-for-profit organizations. In early 2005, we extended our five-year *We*House America Campaign, with a goal oforiginating $1.0 trillion in loans to targeted homebuyers by the end of 2010.As of December 31, 2005, we made loans to 3.4 million borrowers and funded$512 billion (including Prime and Nonprime Mortgage Loans) toward this goal.

***Loan Servicing***

When we sell mortgage loans, we generally retain therights to service these loans. The value we assign to these rights are referredto as mortgage servicing rights (“MSRs”). We may also retain other financialinterests when we securitize mortgage loans. We include the value of theseretained interests on our 

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balance sheet. The resultsof the Loan Servicing Sector include the performance of these interests, aswell as the operational and other financial activities related to servicingmortgage loans.

In servicing mortgageloans, we collect and remit loan payments, respond to customer inquiries,account for principal and interest, hold custodial (impound) funds for paymentof property taxes and insurance premiums, counsel delinquent mortgagors,supervise foreclosures and property dispositions. We receive servicing fees andother remuneration in return for performing these functions.

***Mortgage Servicing Rights, Other Retained Interestsand the Servicing Hedge***

Our MSRs arise from contractual agreements between usand investors (or their agents) in mortgage-backed securities and mortgage loans.Although MSRs generally arise from the securitization of mortgage loans that weoriginate, we also occasionally purchase MSRs from other servicers. For a morecomplete description of MSRs, see “Note 3—Loan Sales” in the financialstatement section of this Report.

MSRs and other retainedinterests are generally subject to a loss in value when mortgage rates decline.To moderate the effect on earnings of declines in value of MSRs and otherretained interests, we maintain a portfolio of financial instruments, primarilyderivative contracts, which generally increases in value when interest ratesdecline. This portfolio of financial instruments is referred to as the “ServicingHedge.” See “Note 4—Derivative Financial Instruments—Risk Management ActivitiesRelated to Mortgage Servicing Rights (MSRs) and Other Retained Interests” inthe financial statement section of this Report for a further discussion of ourServicing Hedge.

**Loan Servicing Operations**

The various functionswithin our loan servicing operations are briefly described in the followingparagraphs. These operations are performed in six primary locations: two inCalifornia, three in Texas and one in Mumbai, India.

***Customer Service***

Our Customer Service CallCenters managed more than 51 million contacts with customers in 2005. Thesecontacts were primarily handled through our Customer Service Representatives,Automated Phone System and Web site (www.customers.countrywide.com). Thisdivision also prints monthly statements and oversees outbound customer correspondence.Approximately 23% of our customers have chosen to receive electronicstatements, which reduces the cost and improves the timeliness of providingloan information to them.

***Remittance Processing***

Our Remittance Processingdivision processes all payments, loan payoffs and payoff demand statements.Approximately 39% of our customers make their monthly payments electronicallyusing various automated payment methods.

***Collections and Loss Mitigation***

Our Collections and LossMitigation units work with delinquent borrowers to bring their mortgages backto current status and to avoid foreclosure if possible. Workout efforts aretailored to the specific borrower circumstances and comply with therequirements of the mortgage investor.

***Foreclosure and Bankruptcy***

Foreclosure and bankruptcyare complex processes that are subject to federal and state laws andregulations, as well as various guidelines imposed by mortgage investors andinsurers. Our workflow-based 

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systemsfacilitate consistent processing of defaulted mortgage loans, as well as anefficient flow of data between internal and external business partners. Tominimize related costs and to increase efficiency, we utilize our own companiesin support of our foreclosure and bankruptcy activities.

***Investor Accounting***

Our Investor Accountingdepartment reconciles custodial accounts, processes investor remittances andmaintains accounting records on behalf of our mortgage investors, includingFannie Mae, the Government National Mortgage Association (“Ginnie Mae”) andFreddie Mac, as well as more than 2,000 private investors.

***Related Services***

We perform several loan servicing functions internallythat other loan servicers commonly outsource to third parties. We believe theintegration of these functions gives us a competitive advantage by loweringoverall servicing costs and enabling us to provide a high level of service toour mortgage customers and mortgage investors. In addition to providingforeclosure and bankruptcy activities, our integrated services include propertytax payment processing, performing property inspections, and insurance trackingand premium payment processing.

Thefollowing table sets forth certain information regarding the Company’s loanservicing portfolio, including mortgage loans and securities held for sale andresidential mortgage loans subserviced for others, for the periods indicated:

| ** **                           | ** ** | ** **                                  | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | **Ten Months** | ** ** |
|--------------------------------------|------------|---------------------------------------------|------------|-----------------------|------------|------------|------------|------------|------------|---------------------|------------|
| ** **                           | ** ** | ** **                                  | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | **Ended**           | ** ** |
| ** **                           | ** ** | **Years Ended December 31,** | ** ** | **December 31,** | ** ** |
| ** **                           | ** ** | **2005**                                    | ** ** | **2004**              | ** ** | **2003**   | ** ** | **2002**   | ** ** | **2001**            | ** ** |
| ** **                           | ** ** | **(in millions)**                      | ** ** |
| Beginning owned  servicing portfolio |       | $                                           | 821,475    |                  | $          | 630,451    |       | $          | 441,267    |                | $          | 327,541 |   |   | $ | 284,961 |   |   |
| Activity during  the period:         |       |                                        |       |                  |       |       |       |       |       |                |       |   |   |
| Residential loan production          |       | 490,947                                     |       | 363,006               |       | 434,864    |       | 251,901    |       |                | 123,969    |   |   |
| Purchased MSRs (bulk acquisitions)   |       | 51,377                                      |       | 40,723                |       | 6,944      |       | 4,228      |       |                | 3,770      |   |   |
| Runoff(1)                            |       | (281,491                                    | )          | (212,705              | )          | (252,624   | )          | (140,445   | )          |                | (85,159    | ) |   |
| Servicing sold                       |       | (1,119                                      | )          | —                |       | —     |       | (1,958     | )          |                | —     |   |   |
| Ending owned  servicing portfolio    |       | 1,081,189                                   |       | 821,475               |       | 630,451    |       | 441,267    |       |                | 327,541    |   |   |
| Subservicing  portfolio              |       | 29,901                                      |       | 16,847                |       | 14,404     |       | 11,138     |       |                | 9,086      |   |   |
| Total servicing portfolio            |       | $                                           | 1,111,090  |                  | $          | 838,322    |       | $          | 644,855    |                | $          | 452,405 |   |   | $ | 336,627 |   |   |
| MSR portfolio                        |       | $                                           | 978,988    |                  | $          | 758,975    |       | $          | 581,964    |                | $          | 422,328 |   |   | $ | 315,131 |   |   |
| Mortgage loans  owned                |       | 102,201                                     |       | 62,500                |       | 48,487     |       | 18,939     |       |                | 12,410     |   |   |
| Subservicing  portfolio              |       | 29,901                                      |       | 16,847                |       | 14,404     |       | 11,138     |       |                | 9,086      |   |   |
| Total servicing  portfolio           |       | $                                           | 1,111,090  |                  | $          | 838,322    |       | $          | 644,855    |                | $          | 452,405 |   |   | $ | 336,627 |   |   |

 

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| ** **                                               | ** ** | **As of December 31,**           | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                               | ** ** | **2005**                                        | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                               | ** ** | **(dollar amounts in millions)** | ** ** |
| Composition of owned servicing portfolio at period  end: |       |                                            |       |   |   |   |   |   |   |   |   |
| Conventional mortgage                                    |       | $                                               | 863,688    |   | $ | 639,148 |   | $ | 512,889 |   | $ | 343,420 |   | $ | 235,804 |   |
| Nonprime Mortgage                                        |       | 116,101                                         |       | 84,608 |   | 36,332 |   | 21,976 |   | 18,495 |   |
| Prime Home Equity                                        |       | 51,491                                          |       | 45,053 |   | 24,174 |   | 15,667 |   | 11,198 |   |
| FHA-insured mortgage                                     |       | 36,949                                          |       | 39,618 |   | 43,281 |   | 45,252 |   | 46,190 |   |
| VA-guaranteed mortgage                                   |       | 12,960                                          |       | 13,048 |   | 13,775 |   | 14,952 |   | 15,854 |   |
| Total owned servicing  portfolio                         |       | $                                               | 1,081,189  |   | $ | 821,475 |   | $ | 630,451 |   | $ | 441,267 |   | $ | 327,541 |   |
| Delinquent mortgage loans(2):                            |       |                                            |       |   |   |   |   |   |   |   |   |
| 30 days                                                  |       | 2.59                                            | %          | 2.35 | % | 2.35 | % | 2.73 | % | 3.11 | % |
| 60 days                                                  |       | 0.87                                            | %          | 0.70 | % | 0.72 | % | 0.87 | % | 0.98 | % |
| 90 days or more                                          |       | 1.15                                            | %          | 0.78 | % | 0.84 | % | 1.02 | % | 1.17 | % |
| Total delinquent  mortgage loans                         |       | 4.61                                            | %          | 3.83 | % | 3.91 | % | 4.62 | % | 5.26 | % |
| Loans pending  foreclosure(2)                            |       | 0.44                                            | %          | 0.42 | % | 0.43 | % | 0.55 | % | 0.69 | % |
| Delinquent mortgage loans(2):                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Conventional                                             |       | 2.60                                            | %          | 2.24 | % | 2.21 | % | 2.43 | % | 2.45 | % |
| Nonprime Mortgage                                        |       | 15.20                                           | %          | 11.29 | % | 12.46 | % | 14.41 | % | 14.42 | % |
| Prime Home Equity                                        |       | 1.57                                            | %          | 0.79 | % | 0.73 | % | 0.80 | % | 1.48 | % |
| Government                                               |       | 14.61                                           | %          | 13.14 | % | 13.29 | % | 12.61 | % | 12.14 | % |
| Total delinquent  mortgage loans                         |       | 4.61                                            | %          | 3.83 | % | 3.91 | % | 4.62 | % | 5.26 | % |
| Loans pending foreclosure(2):                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Conventional                                             |       | 0.20                                            | %          | 0.21 | % | 0.21 | % | 0.23 | % | 0.30 | % |
| Nonprime Mortgage                                        |       | 2.03                                            | %          | 1.74 | % | 2.30 | % | 2.93 | % | 3.39 | % |
| Prime Home Equity                                        |       | 0.06                                            | %          | 0.03 | % | 0.02 | % | 0.05 | % | 0.02 | % |
| Government                                               |       | 1.09                                            | %          | 1.21 | % | 1.20 | % | 1.32 | % | 1.23 | % |
| Total loans pending  foreclosure                         |       | 0.44                                            | %          | 0.42 | % | 0.43 | % | 0.55 | % | 0.69 | % |

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(1)          Runoff refers toprincipal repayments on loans.

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

Propertiessecuring the mortgage loans in the Company’s servicing portfolio aregeographically dispersed. The following is a summary of the geographicaldistribution of loans included in the Company’s servicing portfolio for the topthree states (as measured by unpaid principal balance) at December 31, 2005:

| **State**        | ** ** | ** **             | ** ** | **Unpaid Principal  Balance** | ** ** | **% Total  Balance** | ** ** |
|------------------|------------|------------------------|------------|------------------------------------|------------|---------------------------|------------|
| ** **       | ** ** | **(in millions)** | ** ** |
| California       |       |                   | $          | 329,008                            |       |                      |       | 30 | % |   |
| Florida          |       |                   | 73,389     |                               |       |                      | 7          | % |   |
| Texas            |       |                   | 49,166     |                               |       |                      | 4          | % |   |
| All other states |       |                   | 659,527    |                               |       |                      | 59         | % |   |
| Total            |       |                   | $          | 1,111,090                          |       |                      |       | 100 | % |   |

 

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***Loan Closing Services Sector***

We provide loan closingproducts and services such as credit reports, appraisals, title reports,property valuation services and flood determinations through our LandSafe, Inc.group of companies. We provide these services primarily to customers referredby our loan production divisions but to third parties as well.

***Competition***

The mortgagelending business is inherently complex due to several factors:

·       Thecontinuing evolution of the secondary mortgage market

·       Theproliferation of mortgage products

·       Greaterregulation imposed on the industry by more levels of government has resulted inincreased costs and the need for higher levels of specialization.

·       Increasinginterest rate volatility, compounded by homeowners’ increasing tendency torefinance their mortgages as the refinance process has become more efficientand cost effective, has resulted in significant fluctuations in the volume ofmortgage loans originated from year to year. These swings in mortgageorigination volume have placed significant operational and financial pressureson 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. Primarily as a result of these factors, the industry has consolidatedsignificantly.

Today, large, sophisticated financial institutions dominatethe residential mortgage industry. These industry leaders are primarilycommercial banks operating through their mortgage banking subsidiaries. Today,the top 30 mortgage lenders have a combined 88% share of the mortgageorigination market, up from 63% five years ago.

This consolidation trend also is reflected in loanservicing. Today, the top 30 mortgage servicers combined have a 71% share ofthe total mortgages outstanding, up from 64% five years ago.

Generally, we compete as amortgage banker by consistently offering a wide selection of mortgage loansthrough all marketing channels on a national scale, by providing high-qualityservice, and by pricing our mortgage loans at competitive rates.

**Banking Segment**

Our Banking Segmentconsists of the following operations:

·       Theinvestment and fee-based activities of *CountrywideBank, N.A.*, an FDIC-insured, federally-chartered bank (“BankingOperations”)

·       *Countrywide Warehouse Lending*, a non-depository lendingcompany that provides short-term secured financing to mortgage lenders.

***Countrywide Bank***

**Mortgage Banking Activities**

Countrywide Bank produces loans for sale that are partof our Mortgage Banking Segment. As this activity is a Mortgage Bankingactivity, the mortgage loan production and the income relating to the sale ofthese loans is included in the Mortgage Banking Segment. The production ofloans by Countrywide Bank 

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for our Mortgage Banking operationsis an efficient means to manage growth of the Bank’s portfolio of loans heldfor investment while minimizing the operational impact of complying withregulatory requirements.

**Banking Operations**

Our Banking Operation primarily originates andpurchases mortgage loans and home equity lines of credit for investmentpurposes. The majority of these loans are sourced through our mortgage bankingsubsidiary, Countrywide Home Loans. For liquidity and asset-liabilitymanagement purposes, we also invest in collateralized mortgage obligations andother securities that supplement the loan portfolio of our Banking Operations.

Our banking operations continue to leverage therelationship with the Mortgage Banking Segment by sourcing high-qualitymortgage assets through existing production distribution channels and thenfunding the loans for retention in the Bank’s investment portfolio. Assetgrowth is funded by the Bank’s overall low-cost liability base, where growth isdriven by the continued expansion of its core retail deposit franchise. TheBank obtains retail deposits, primarily certificates of deposit, through theInternet, call centers and 86 financial centers, 73 of which are located inCountrywide Home Loans’ retail branch offices as of December 31, 2005. TheBank activities provide the Company with an expanded product menu, lower costfunding sources and opportunities for a diversified revenue stream through netinterest income.

Through Countrywide Bank we offer deposit accounts. Wealso sell these deposit products online, from call centers and through depositbrokers (generally well-recognized financial intermediaries). Countrywide Bankalso offers commercial deposit accounts to title and mortgage insurancecompanies through a developing commercial business unit. A significant portionof Countrywide Bank’s deposit liabilities are comprised of custodial funds thatrelate to the loan servicing portfolio of Countrywide Home Loans. CountrywideBank also borrows funds on a secured basis from the Federal Home Loan Bank ofAtlanta, executes repurchase agreements and purchases federal funds tosupplement its deposit liabilities.

Countrywide Bank acts as a mortgage documentcustodian, primarily for our mortgage banking operations. As a documentcustodian, we verify, maintain and release collateral for issuers, servicers,sellers and purchasers of debt securitizations. We also provide other servicesincluding safekeeping, review/certification, release requests and customerreporting.

Propertiessecuring the mortgage loans in our portfolio of loans held for investment are concentratedin the State of California. The following is a summary of the geographicaldistribution of loans included in the Bank’s loan inventory portfolio for thetop three states (as measured by unpaid principal balance) at December 31,2005:

| **State**        | ** ** | ** **             | ** ** | **Unpaid Principal  Balance** | ** ** | **% Total  Balance** | ** ** |
|------------------|------------|------------------------|------------|------------------------------------|------------|---------------------------|------------|
| ** **       | ** ** | **(in millions)** | ** ** |
| California       |       |                   | $          | 29,818                             |       |                      |       | 47 | % |   |
| Virginia         |       |                   | 3,491      |                               |       |                      | 6          | % |   |
| Florida          |       |                   | 2,896      |                               |       |                      | 5          | % |   |
| All other states |       |                   | 28,177     |                               |       |                      | 42         | % |   |
| Total            |       |                   | $          | 64,382                             |       |                      |       | 100 | % |   |

 

***CountrywideWarehouse Lending***

We provide committed anduncommitted lines of credit to mortgage bankers to finance their mortgage loaninventories (“warehouse”). Most of these mortgage bankers sell loans to ourCorrespondent Lending Division. All of these advances are secured by mortgageloans that have a market value in excess of the balance of our advances.

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***Competition***

We operate in a highly competitive environment.Competition for retail deposits comes primarily from other insured depositoryinstitutions, which include approximately 7,500 commercial banks andapproximately 1,300 savings institutions. We attract and retain depositsthrough a combination of competitive rates, physical presence, and experiencedbanking professionals, as well as easy access to our products through callcenters and the Internet at www.countrywidebank.com. Because of our low-coststructure, we are able to offer deposit rates that are among the mostcompetitive in the industry.

Countrywide Bank invests primarily in short durationresidential mortgage loans. Competition in making real estate loans comeprincipally from other savings institutions, mortgage banking companies, andcommercial banks. The majority of loans that the Banking Segment invests in aresourced by the Mortgage Banking Operation. Countrywide Bank also competes withcommercial banks and investment banks in the purchase of loans from thirdparties.

Our Banking Segment’s competitive position is enhancedby its relationship with our Mortgage Banking Segment. For example, asignificant portion of Countrywide Bank’s deposit liabilities consists ofcustodial funds controlled by Countrywide Home Loans. As discussed above,Countrywide Bank obtains retail deposit products through financial centersplaced within certain of Countrywide Home Loans’ retail branch offices. Thiseconomical use of space reduces the Bank’s deposit acquisition costs. CountrywideBank also provides mortgage document custodial, reconveyance and foreclosuretrustee services for our Mortgage Banking Segment.

**Capital Markets Segment**

Our Capital Markets Segment primarily operates as aregistered securities broker dealer, a residential mortgage loan manager and acommercial mortgage loan originator. We also operate broker dealers in Japanand the United Kingdom, an introducing broker dealer of futures contracts, anasset manager and a broker of mortgage servicing rights. With the exception ofour commercial mortgage activities, we transact only with institutionalcustomers, such as banks, other depository institutions, insurance companies,asset managers, mutual funds, pension plans, other broker dealers andgovernmental agencies. Customers of our commercial real estate finance businessare the owners or sponsors of commercial properties, who can be individuals orinstitutions.

Our activities consist ofthe following:

***Conduit***

Conduit activities includethe purchase, warehousing and ultimate disposition of residential mortgageloans on behalf of Countrywide Home Loans. In our conduits, we manage bothNonprime Mortgage Loans and Prime Mortgage Loans which are either acquired fromthird parties or originated by Countrywide Home Loans. We dispose of the loansthrough sale to third parties or through securitization. We also manage theacquisition and disposition of delinquent or otherwise illiquid residentialmortgage loans, some of which have been originated under FHA and VA programs. Weattempt to cure the loans, using the servicing operations of Countrywide HomeLoans, with the intent to securitize those loans that become eligible forsecuritization. The remaining loans are serviced through foreclosure andliquidation, which includes the collection of government insurance andguarantee proceeds relating to defaulted FHA and VA program loans.

***Securities Trading***

Securities tradingactivities include the trading of debt securities in the secondary market afterthe original issuance of the security. We generally trade mortgage-relatedfixed-income securities, including Mortgage-Backed Securities (“MBS”),collateralized mortgage obligations and asset-backed securities 

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issuedby Fannie Mae, Freddie Mac, Ginnie Mae and other financial institutions,including Countrywide Home Loans. We also trade securities issued by the U.S.Department of Treasury and other governmental agencies.

***Underwriting***

Underwriting activitiesencompass the assumption of the risk of buying a new issue of securities fromthe issuer and reselling the securities to investors, either directly or throughdealers. Capital Markets primarily underwrites mortgage-related debt securities.In return for assuming this risk, Capital Markets earns an underwriting spreadthat is the difference between the amount paid to the issuer of securities andthe offering price to investors, net of expenses. The spread earned on eachtransaction may vary based upon the nature of the market and the terms of theunderwriting agreement. Capital Markets participates in both competitive bidand negotiated underwritings. We underwrite for CHL and for third parties.

***Brokering***

Brokering activitiesinclude brokerage of residential mortgage loan transactions, brokerage ofmortgage servicing rights, advisory services and brokering of exchange tradedfutures contracts and commodity options in an agent capacity. The brokerage ofresidential mortgage loans, mortgage servicing rights and futures contracts canbe between third parties or between CHL and third parties.

***Origination and Sale of Commercial Mortgage Loans***

Capital Markets originatesand sells commercial mortgage loans. Commercial mortgages are mortgages securedby commercial properties, such as apartment buildings, retail properties,offices, industrial sites, hotels and other. These loans are significantly largerthan residential mortgage loans. The average loan balance of the commercialloans originated in 2005 was $15.2 million.

***Asset Management***

Asset managementactivities derive from the management of assets for the benefit of investors.This may include managing a private equity fund, as well as collateralized debtand bond obligations. We receive fees, including performance fees, forproviding these services. We may also share in the results of the funds when wehold an investment interest in the fund.

***Competition***

The securities industry is both highly competitive andfragmented. In the mortgage securities market, we compete with globalinvestment banks as well as regional broker-dealers. We believe by leveragingthe strengths of Countrywide Home Loans and by specializing in the mortgagesecurities market, we can offer information, products and services tailored tothe unique needs of institutional customers, giving us an advantage in themarket. In contrast, many of our competitors offer a broader range of productsand services, which may place us at a competitive disadvantage. However, byoffering more non-residential mortgage related products and services to theglobal institutional investor markets we believe this helps us compete.

For 2005, according to *Inside MBS & ABS,* we rankedfourth among Non-Agency MBS Underwriters.

**Insurance Segment**

Our InsuranceSegment’s primary activities are:

·       Offeringproperty, casualty, life and credit insurance as an underwriter and as aninsurance agency

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·       Providingreinsurance coverage to primary mortgage insurers

We manage these activitiesthrough two business units—Balboa Life and Casualty Group and BalboaReinsurance Company.

***Life and Casualty Operations***

Life and Casualtyoperations include the operations of Balboa Life and Casualty Group, aninsurance underwriter/carrier, and Countrywide Insurance Services Group, aninsurance agency.

***BalboaLife and Casualty Group***

We underwrite property, casualty, life and creditinsurance in all 50 states and the District of Columbia through our Balboa Lifeand Casualty Group. However, during October 2005, we filed a notice withthe Florida Office of Insurance Regulation to discontinue underwriting voluntaryhomeowners and renters insurance in Florida.

Balboa Life andCasualty Group offers the following insurance product lines:

·       *Lender-Placed Property and Auto*—We offerlender-placed real-property hazard insurance and lender-placed auto insurance.Such insurance is provided on behalf of auto and mortgage lenders whenborrowers fail to have agreed-upon insurance coverage in place to protect thelender’s security interest. We also provide insurance tracking services, whichalert a lender when there is a lapse in a borrower’s insurance, for more than17.2 million loans, including nearly 7.4 million loans serviced within ourMortgage Banking Segment.

·       *Voluntary Homeowners and Auto*—Weunderwrite retail homeowners and auto insurance and home warranty plans forconsumers.

·       *Life and Credit*—We underwrite term life,credit life and credit disability insurance products.

Our retail insurance products are offered by selectgeneral insurance agents serving the consumer market, including our CountrywideInsurance Services Group.

The Balboa Life andCasualty Group has received an “Excellent” rating from A.M. Best Company,an insurance company rating and information service. The “Excellent” rating isdefined by the A.M. Best Company as having “an excellent ability to meetongoing obligations to policyholders.”

*CountrywideInsurance Services Group*

Our Countrywide InsuranceServices (“CIS”) Group operates an insurance agency that provides consumers, inparticular our mortgage customers, with homeowners insurance, life insurance,disability insurance, automobile insurance and various other insurance products.CIS also operates a full-service commercial insurance brokerage that offers acomprehensive menu of products and services to meet the insurance needs ofsmall, mid-size and large commercial businesses. The commercial insurancebrokerage distributes a wide array of competitively priced property &casualty and employee benefits programs in specialty niche markets, includinghome builders, mortgage brokers and bankers, real estate brokers and commercialproperty owners.

***Balboa Reinsurance Company***

We provide a mezzaninelayer of reinsurance coverage for losses between minimum and maximum specifiedamounts to the insurance companies that provide primary mortgage insurance (“PMI”)on loans in our servicing portfolio. We provide this coverage with respect tosubstantially all of the loans in our portfolio that are covered by PMI, whichgenerally includes all conventional loans with an original loan 

13

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amountin excess of 80% of the property’s appraised value. In return for providingthis coverage, we earn a portion of the PMI premiums.

***Competition***

The lender-placed insurance market is dominated by asmall number of providers, competing on policy terms and conditions, service,technological innovation, compliance capability, loan tracking ability andcommissions.

The homeowners, auto, term life, credit-life andcredit-disability marketplaces are dominated by large, well-known providers.Consumers select such insurance based on price, service, commissions and theefficiency and effectiveness of marketing and underwriting operations.

We compete generally byproviding high-quality service and pricing our products at competitive rates,as well as by leveraging our residential mortgage loan customer base.

**Global Operations Segment**

The primaryactivities we conduct in our Global Operations Segment include:

·       *Loan Processing and Subservicing—*Weprovide mortgage loan application processing and mortgage loan subservicing inthe UK. Before December 23, 2005, this business was a joint venture betweenBarclays, PLC (“Barclays”) and us. We held a majority interest in that venture.On December 23, 2005, we reached an agreement with Barclays to terminate thejoint venture. The termination agreement provides for the transfer of theBarclays mortgage business back to Barclays effective February 1, 2006, for usto acquire Barclays’ interest in the venture, and for a three-year softwarelicensing agreement, which allows Barclays to use our global originations,servicing and arrears management systems. We acquired Barclay’s interest in thejoint venture on December 23, 2005.

    In 2005, weprocessed more than 11.3 billion pounds sterling ($20.3 billion) inloans, all of which are subserviced for Barclays Bank, PLC, our joint venturepartner until December 2005. At December 31, 2005, Global’s subservicingportfolio was 59 billion pounds sterling ($102 billion).

·       *Offshore Services—*We perform businessprocess and technology services for various units of the Company both in theU.S. and UK through our Mumbai, India service center.

·       *Valuation Services—*We provide electronic residentialproperty valuation services to third parties in the UK through a majority-ownedjoint venture.

***Competition***

Our competitors in this segmentinclude direct lenders, business process outsourcers and technology companiesoperating in Europe and India. We compete by leveraging Countrywide’s mortgageexpertise and our proprietary technology.

**Financing ofOperations**

***Uses of Financing***

Wehave significant short-term and long-term financing needs. Our short-termfinancing needs arise primarily from the following:

·       Warehousingof mortgage loans pending sale

·       Tradingactivities of our broker-dealer

·       Providingmortgage warehouse credit to others

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Ourlong-term financing needs arise primarily from the following:

·       Investmentsin mortgage loans

·       Investments in MSRs andother interests that we retain when we securitize mortgage loans.

***Sources of Financing***

Wemeet our short- and long-term financing needs primarily through the followingmeans:

·       Unsecuredcommercial paper and medium-term notes

·       Short-termrepurchase agreements

·       Asset-backedfinancings

·       Deposit-gathering

·       FederalHome Loan Bank advances

·       Retainedearnings

·       Revolvinglines of credit.

We typically access theunsecured public corporate debt market by issuing commercial paper andmedium-term notes. At times, we may also issue subordinated debt, convertibledebt and securities that rating agencies credit with high equity-equivalency.

Ourongoing access to the public debt markets is dependent on a high credit rating.For the last 12 years, we have consistently maintained solidinvestment-grade ratings. To maintain investment-grade ratings we must, amongother considerations, maintain a high level of liquidity, including access toalternative sources of funding such as committed bank stand-by lines of credit.We also must maintain a conservative debt-to-equity ratio. Current creditratings are as follows:

| ** **                      | ** ** | **Countrywide  Home Loans** | ** ** | **Countrywide  Financial Corporation** | ** ** |
|---------------------------------|------------|----------------------------------|------------|---------------------------------------------|------------|
| **Rating Agency**          | ** ** | ** **                       | ** ** | **Short-Term**                              | ** ** | **Long-Term** | ** ** | **Short-Term** | ** ** | **Long-Term** | ** ** |
| Standard & Poors            |       |                             | A-1        |                                        |       |   | A |   |   |   | A-1 |   |   |   | A |   |   |
| Moody’s Investors  Service |       |                             | P-2        |                                        |       |   | A3 |   |   |   | P-2 |   |   |   | A3 |   |   |
| Fitch                           |       |                             | F1         |                                        |       |   | A |   |   |   | F1 |   |   |   | A |   |   |
|                                 |            |                                  |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

We use short-term secured financing such as repurchaseagreements and asset-backed commercial paper conduits to finance a substantialportion of our mortgage loan inventory and securities trading portfolio.Countrywide Bank finances its investments in mortgage loans primarily with acombination of deposit liabilities and secured Federal Home Loan Bank advances.

We rely substantially on the secondary mortgage marketas a source of long-term capital to support our mortgage banking operations.Most of the mortgage loans that we produce in our Mortgage Banking Segment aresold in the secondary mortgage market, primarily in the form of MBS andasset-backed securities.

We ensure our ongoing access to the secondary mortgagemarket by consistently producing quality mortgages and servicing thosemortgages at levels that meet or exceed secondary mortgage market standards. Asdescribed elsewhere in this document, we make significant investments inpersonnel and technology to ensure the quality of our mortgage loan production.

Our primary source of equity capital is retainedearnings. We supplement our equity capital with $1.0 billion intrust-preferred securities that receive varying degrees of “equity treatment”from rating agencies, bank lenders and regulators. From time to time, we mayissue common stock or other securities 

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that receive highequity-equivalent treatment as a means of supplementing our capital base andsupporting our growth.

For a further discussion of our liquidity and capitalmanagement see the section in this Report entitled “Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Liquidity and CapitalManagement.”

***InterestRate Risk***

We typically bear interestrate risk from the time a loan application is taken through the sale of theloan. Thereafter, we continue to bear interest rate risk related to theinterests we retain in the loans sold, which are typically in the form ofmortgage servicing rights and residual securities. We also bear interest-raterisk to the extent that our loan and securities investment portfolios’ yieldschange on a different basis or at different times than the rates we pay on ourborrowings. For a further discussion of our interest rate risk and how thisrisk is managed, see the section in this Report entitled “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—Quantitativeand Qualitative Disclosures About Market Risk.”

***Credit **Risk*****

When we securitize ourmortgage loans we retain varying levels of credit risk. This credit risk arisesthrough representations and warranties that we make as part of oursecuritization activities, as well as through retention of limited recourse forcredit losses in the case of certain securitizations. For a further discussionof our exposure to credit risk and how we manage this risk, see the section inthis Report entitled “Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Credit Risk Management.”

***Operational Risk***

Countrywide, like all large corporations, is exposedto many types of operational risk, including the risk of fraud by employees oroutsiders, unauthorized transactions by employees, or operational errors,including clerical or record-keeping errors or those resulting from faulty ordisabled computer or telecommunications systems.

For a further discussionof our operational risk and how we manage this risk see the section in thisReport entitled “Management’s Discussion and Analysis of Financial Conditionand Results of Operations—Operational Risk.”

**Regulations**

***RegulationsApplicable to Bank Holding Companies and Financial Holding Companies***

*General*

We are a registered bankholding company under the Bank Holding Company Act, as amended (the “BHC Act”).As such, we are subject to supervision and examination by the Board ofGovernors of the Federal Reserve System (the “FRB”). The FRB has authority toissue cease and desist orders against bank holding companies if it determinesthat their actions represent unsafe and unsound practices or violations of law.The FRB is empowered to impose civil money penalties for violations of bankingstatutes and regulations. Regulation by the FRB is primarily intended toprotect depositors of the Bank and the Bank Insurance Fund of the FederalDeposit Insurance Corporation, not our shareholders or creditors.

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*Limitation on Activities*

The activities of bankholding companies and their subsidiaries are generally limited to the businessof banking, managing or controlling banks or furnishing or performing servicesfor their subsidiaries, and other activities that the FRB has determined to beso closely related to banking or managing or controlling banks as to be aproper incident thereto. Under provisions of the BHC Act enacted as part of theGramm-Leach Bliley Act (the “GLB Act”), a bank holding company, all of whosecontrolled depository institutions are “well capitalized” and “well managed”(as defined in federal banking regulations) and which obtains “satisfactory”Community Reinvestment Act ratings, may elect to become a “financial holdingcompany” and engage in a broader range of activities. The Company is afinancial holding company.

A financial holding company that desires to engage inactivities that are financial in nature or incidental to a financial activitybut not previously authorized by the FRB must obtain approval from the FRBbefore engaging in such activities. The BHC Act requires a bank holding companyto obtain prior approval of the FRB before making certain acquisitions.

If any subsidiary bank of a financial holding companyceases to be “well capitalized” or “well managed,” the financial holdingcompany will not be in compliance with the requirements of the BHC Actregarding financial holding companies. If a financial holding company isnotified by the FRB of such a change in the ratings of any of its subsidiarybanks, it must take certain corrective actions within specified timeframes.

If any subsidiary bank ofa financial holding company receives a rating under the Community ReinvestmentAct of less than “satisfactory,” then the financial holding company isprohibited from engaging in new activities or acquiring companies other thanbank holding companies, banks or savings associations until the rating israised to “satisfactory” or better.

*Regulatory Capital Requirements*

The FRB has promulgated capital adequacy guidelinesfor use in its examination and supervision of bank holding companies. If a bankholding company’s capital falls below minimum required levels, then the bankholding company must implement a plan to increase its capital, and its abilityto pay dividends and make acquisitions of new bank subsidiaries may berestricted or prohibited.

To be classified as “adequately capitalized,” theFRB’s capital adequacy guidelines require that a bank holding company maintaina Tier 1 Leverage ratio equal to at least 4.0% of its average totalconsolidated assets, a Tier 1 Risk-Based Capital ratio equal to 4.0% of itsrisk-weighted assets and a Total Risk-Based Capital ratio equal to 8.0% of itsrisk-weighted assets. To be classified as “well capitalized,” a bank holdingcompany is required to maintain a Tier 1 Leverage ratio of 5.0% or greater, aTier 1 Risk-Based Capital ratio of 6.0% or greater, and a Total Risk-BasedCapital ratio of 10.0% or greater. On December 31, 2005, the Company wasin compliance with all of the FRB’s capital adequacy guidelines.

On December 31, 2005, the Company’s Leverageratio was 6.3%, the Tier 1 Risked-Based Capital ratio was 10.7% and Total Risk-BasedCapital ratio was 11.7%.

The federal bankingregulatory agencies are in the process of proposing revised capital standardsthat would apply to all financial institutions that are not subject to theBasel II Accord, with the expressed intention to align those standards moreclosely with those that would be applicable to Basel II institutions. Thesestandards would only apply to Countrywide if it is neither required to adopt,nor voluntarily elects to adopt, the Basel II Accord. For a discussion of theBasel II Accord, see the section of this Report entitled “Business-Regulation-BaselII Capital Standards.”

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*Interstate Bankingand Branching*

Under the Riegle-NealInterstate Banking and Branching Efficiency Act of 1994 (the “Riegle-NealAct”), a bank holding company is permitted to acquire the stock orsubstantially all of the assets of banks located in any state regardless ofwhether such transaction is prohibited under the laws of any state. The FRBwill not approve an interstate acquisition if, as a result of the acquisition,the bank holding company would control more than 10% of the total amount ofinsured deposits in the United States or would control more than 30% of theinsured deposits in the home state of the acquired bank. The 30% of insureddeposits state limit does not apply if the acquisition is the initial entryinto a state by a bank holding company or if the home state waives such limit.The Riegle-Neal Act also authorizes banks to merge across state lines, therebycreating interstate branches. Banks are also permitted to acquire and toestablish new branches in other states where authorized under the laws of thosestates.

Under the Riegle-Neal Act,individual states may restrict interstate acquisitions in two ways. A state mayprohibit an out-of-state bank holding company from acquiring a bank located inthe state unless the target bank has been in existence for a specified minimumperiod of time (not to exceed five years). A state may also establish limits onthe total amount of insured deposits within the state which are controlled by asingle bank holding company, provided that such deposit limit does notdiscriminate against out-of-state bank holding companies.

*Source of Strength*

FRB regulations require abank holding company to serve as a source of financial and managerial strengthto its subsidiary banks. Under this “source of strength doctrine,” a bankholding company is expected to stand ready to use its available resources toprovide adequate capital funds to its subsidiary banks during periods offinancial stress or adversity, and to maintain resources and the capacity toraise capital that it can commit to its subsidiary banks. Furthermore, the FRBhas the right to order a bank holding company to terminate any activity thatthe FRB believes is a serious risk to the financial safety, soundness orstability of any subsidiary bank.

***Regulations Applicableto Countrywide Bank***

*General*

Countrywide Bank, N.A.(the “Bank”), a federally chartered bank, is subject to regulation andexamination by the Office of the Comptroller of the Currency (the “OCC”). TheBank is also regulated by the Federal Deposit Insurance Corporation (the “FDIC”).The OCC is empowered to issue cease and desist orders against the Bank if itdetermines that activities of the Bank represent unsafe and unsound bankingpractices or violations of law. The OCC has the power to impose civil moneypenalties for violations of banking statutes and regulations. Regulation bythis agency is primarily intended to protect the depositors of the Bank and theBank Insurance Fund of the FDIC, not shareholders or other creditors of theCompany or the Bank.

*Bank Regulatory Capital Requirements*

The OCC has adoptedminimum capital requirements applicable to national banks, which are similar tothe capital adequacy guidelines established by the FRB for bank holdingcompanies. Federal banking laws classify an insured financial institution inone of the following five categories, depending upon the amount of itsregulatory capital: well capitalized, adequately capitalized, undercapitalized,significantly undercapitalized and critically undercapitalized. On December 31,2005, the Bank was in compliance with the OCC’s minimum capital requirementsand satisfied the requirements to be classified as well capitalized.

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The Bank must be wellcapitalized and well managed for the Company to remain a financial holding company.On December 31, 2005, the Bank’s Leverage ratio was 7.3%, the Tier 1Risked-Based Capital ratio was 12.2% and Total-Risk Based Capital ratio was12.5%.

*Deposit Insurance and Assessments*

As a result of the FederalDeposit Insurance Reform Act of 2005, the FDIC will use a risk-based assessmentsystem to determine assessment rates to be paid by member institutions such asthe Bank. Until new regulations are issued with respect to that system, FDICassessments will continue to range from zero cents to 27 cents per $100 ofinsured deposits based upon the level of an institution’s capital as well thedegree of supervisory concern over the institution.

*Limitations on Interest Rates and Loans to OneBorrower*

The rate of interest abank may charge on certain classes of loans is limited by state and federallaw. At certain times in the past, these limitations have resulted inreductions of net interest margins on certain classes of loans. Federal andstate laws impose additional restrictions on the lending activities of banks.The maximum amount that a national bank may loan to one borrower generally islimited to 15% of the bank’s capital, plus an additional 10% for loans fullysecured by readily marketable collateral, as such term is defined in applicableregulation.

*Payment of Dividends*

The Bank is subject tofederal and state laws limiting the payment of dividends. Under the FederalDeposit Insurance Act (“FDIA”), an FDIC-insured institution may not paydividends while it is undercapitalized or if payment would cause it to becomeundercapitalized. The OCC also generally prohibits the declaration of adividend out of the capital and surplus of a bank.

*Community Reinvestment Act*

The Bank is subject to theCommunity Reinvestment Act (“CRA”) and implementing regulations. CRAregulations establish the framework and criteria by which the bank regulatoryagencies assess an institution’s record of helping to meet the credit needs ofits community, including low- and moderate- income neighborhoods. CRA ratingsare taken into account by regulators in reviewing certain applications made bythe Company and its banking subsidiaries.

*Limitations on Transactions with Affiliates*

Countrywide FinancialCorporation and its non-bank subsidiaries are affiliates of the Bank within themeaning of Sections 23A and 23B of the Federal Reserve Act and regulationspromulgated thereunder. Transactions between a bank and an affiliate aregenerally subject to the requirement that they be on terms and conditions,including credit standards, substantially the same as, or at least as favorableto the bank as, those prevailing at the time for comparable transactions withnon-affiliates or, in the absence of comparable transactions, on terms andconditions that would be offered to nonaffiliates. In addition, certaintransactions between a bank and an affiliate, such as asset purchases by a bankfrom an affiliate, and bank extensions of credit to or for the benefit of anaffiliate, are defined as “covered transactions,” and are subject to quantitativelimitations and more stringent qualitative restrictions, including but notlimited to collateralization and safety and soundness requirements.

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*Other Banking Activities*

Theinvestments and activities of the Bank are also subject to regulation byfederal banking agencies, with respect to:

·       Investmentsin subsidiaries

·       Investmentsfor the Bank’s account (including limitations on investments)

·       Unsecuredcommercial paper and medium-term notes

·       Loansto officers, Directors and their affiliates

·       Securityrequirements

·       Anti-tyinglimitations, anti-money laundering

·       Financialprivacy and customer identity verification requirements

·       Truth-in-lending

·       Thetypes of interest-bearing deposit accounts which it can offer

·       Trustdepartment operations

·       Brokereddeposits

·       Auditrequirements

·       Issuanceof securities

·       Branching

·       Mergers and acquisitions.

***RegulationsApplicable to Non-Bank Subsidiaries***

*General*

As discussed below, thenon-bank subsidiaries of the Company are subject to supervision and examinationby the FRB and may be subject to the supervision of, and regulation andlicensure by, other state and federal regulatory agencies. There are also anumber of proposed and enacted federal, state and local laws aimed at protectinga consumer’s privacy. Generally, privacy laws cover a wide range of issuesincluding limiting a company’s ability to share information with third partiesor affiliates, providing stronger identity theft protection, victim’sassistance programs and security breach notification, providing the ability toavoid telemarketing solicitations through “do-not-call” lists, and limitinge-mail and fax advertising. These laws also impose penalties fornon-compliance.

***Mortgage BankingSegment***

Ourmortgage banking business is subject to the rules, regulations or guidelinesof, and/or examination or investigation by, the following entities with respectto the processing, originating, selling and servicing of mortgage loans:

·       TheFederal Reserve Board

·       TheDepartment of Housing and Urban Development (“HUD”)

·       TheFederal Housing Administration

·       TheDepartment of Veteran Affairs

·       FannieMae, Freddie Mac and Ginnie Mae

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·       Officeof the Comptroller of Currency

·       TheFederal Home Loan Bank (“FHLB”)

·       TheFederal Trade Commission

·       Stateregulatory authorities and Attorneys General.

The rules, regulations andrequirements of these entities, among other things, impose licensingobligations on the Company or its subsidiaries; establish standards foradvertising as well as processing; underwriting and servicing mortgage loansand appraisal practices; prohibit discrimination; restrict certain loanfeatures in some cases; and fix maximum interest rates and fees in some states.

As an FHA lender, we arerequired to submit to the FHA Commissioner, on an annual basis, auditedfinancial statements. Ginnie Mae, HUD, Fannie Mae and Freddie Mac require themaintenance of specified net worth levels (which vary among the entities). Ouraffairs are also subject to examination by the Federal Housing Commissioner toassure compliance with FHA regulations, policies and procedures.

Mortgage originationactivities are subject to the Fair Housing Act, Equal Credit Opportunity Act,Truth-in-Lending Act, Home Mortgage Disclosure Act, the Real Estate SettlementProcedures Act and the Home Ownership Equity Protection Act and the regulationspromulgated under those statutes, as well as other federal laws and otherregulations. These laws prohibit discrimination, require the disclosure ofcertain basic information to mortgagors concerning credit terms and settlementcosts, prohibit referral fees and require the maintenance and disclosure ofinformation regarding the disposition of mortgage applications based on race,gender, geographical distribution, income level and APR over certain thresholds.We expect the publication of such information to lead to heightened scrutiny ofall mortgage lenders’ loan pricing and underwriting practices.

Currently, there are anumber of proposed and recently enacted federal, state and local laws andregulations and guidance addressing responsible lending practices with respectto borrowers with blemished credit or nontraditional mortgage products. Ingeneral, these laws and regulations would or will impose new loan disclosurerequirements; restrict or prohibit certain loan terms, fees and charges such asprepayment penalties; may require borrower counseling; and increase penaltiesfor non-compliance. Due to our lending practices, we do not believe that theexistence of, or compliance with, these laws and regulations would have amaterial adverse impact on our business.

However, there can be noassurance that more restrictive laws, rules and regulations will not beadopted in the future or that the existing laws, rules and regulationswill not be applied in a manner that may adversely impact our business or makecompliance more difficult or expensive.

***Capital MarketsSegment***

Securities broker-dealeroperations are subject to federal and state securities laws, as well as the rules ofthe United States Securities and Exchange Commission, the National Associationof Securities Dealers, Inc., Financial Services Agency of Japan, FinancialServices Authority of the United Kingdom, the National Futures Association and theCommodities and Futures Trading Commission. State and federal securities lawsgovern many aspects of the broker-dealer’s business, including the maintenanceof required levels of net capital, the establishment of segregated cashaccounts for the benefit of customers, the monthly and annual reporting ofoperating and financial data to regulators, the approval and documentation oftrading activity, the retention of records and the governance of the manner inwhich business may be conducted with customers.

***Insurance Segment***

The Company, by virtue ofits ownership of insurance companies, is a member of an insurance holdingcompany group pursuant to the provisions of the insurance holding company acts(collectively the 

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“HoldingCompany Acts”). The insurance company entities are subject to the various stateinsurance departments’ broad regulatory, supervisory and administrative powers.These powers relate primarily to: the standards of capital and solvency whichmust be met and maintained; the licensing of insurers and their agents; thenature and limitation of insurers’ investments; the approval of rates, rules andform; the issuance of securities by insurers; periodic examinations of theaffairs of insurers; and the establishment of reserves required to be maintainedfor unearned premiums, losses and other purposes.

Pursuant to the HoldingCompany Acts, the Company must provide state insurance departments with certainfinancial information. In addition, certain transactions specified by theHolding Company Acts may not be effected without the prior notice and/orapproval of the applicable insurance department. Examples of transactions thatmay require prior approval include, but are not limited to, sales, purchases,exchanges, loans and extensions of credit, and dividends and investmentsbetween the insurance company entity and other entities within the holdingcompany group.

***Global Operations***

The mortgage loanapplication processing and servicing business of our Global Operations Segmentis regulated by the Financial Services Authority in the United Kingdom.

***Taxation***

Countrywide files aconsolidated federal income tax return and a combined income tax return inCalifornia and certain other states. Additional income tax returns are filed ona separate entity basis in various other states and localities.

Deferred taxes areprovided for the future tax effects of temporary differences between the bookand tax basis of assets and liabilities. The Company’s primary temporarydifference relates to its investment in mortgage servicing rights retained uponthe sale of mortgage loans. According to the Internal Revenue Code and relatedadministrative guidance, substantially all of the Company’s gain on sale ofloans is recognized in future periods as servicing fee income is earned.

Countrywide is generallysubject to California’s higher income tax rate for financial corporations inlieu of having to pay certain state and local personal property and other taxesthat are paid by non-financial corporations. The statutory financialcorporation tax rate was 10.84% for both 2005 and 2004. The Company apportionstaxable income to the various states in which it does business based on itslevel of business activity in those states, which is determined primarily byreference to payroll costs, revenues and property (including loansoutstanding). Among the many factors that the Company considers in determiningwhere to conduct its business activities are prevailing state income tax rates.

As a matter of course, theCompany is regularly audited by federal, state and other tax authorities. TheInternal Revenue Service has examined Countrywide’s tax returns for tax yearsthrough 2002, and is currently examining 2003 and 2004. The Company is notcurrently under examination by the California Franchise Tax Board, which hasaudited tax years through 2001. Management believes it has adequately providedfor probable tax liabilities that may be assessed for years in which thestatute of limitations remain open.

***Future Legislation***

Various legislation,including proposals to change substantially the financial institutionregulatory system, is from time to time introduced in Congress. Thislegislation may change banking statutes and the operating environment of theCompany in substantial and unpredictable ways. If enacted, this legislationcould increase or decrease the cost of doing business, limit or expandpermissible activities or affect the competitive balance among banks, savingsassociations, credit unions and other financial institutions. We cannot predictwhether any of this potential legislation will be enacted and, if enacted, theeffect that it, or 

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anyimplementing regulations, could have on the Company’s business, results ofoperations or financial condition.

*Basel II CapitalStandards*

We may be required tocomply with, or decide to adopt, certain new capital and other regulatoryrequirements proposed by the Basel Committee on Banking Supervision. Theseproposed requirements, which are often referred to as the Basel II Accord,would, among other things, modify the capital charge applicable to credit riskand incorporate a capital charge for operational risk. The Basel II Accord alsoplaces greater reliance on market discipline than current standards. We havenot yet determined whether to adopt to the Basel II Accord. The  Basel II standards will be mandatory withrespect to banking organizations with total banking assets of $250 billion ormore or total on-balance-sheet foreign exposure of $10 billion or more.

If we choose to opt in, CountrywideFinancial Corporation will be required to implement advanced measurementtechniques employing internal estimates of certain key risk drivers to derivecapital requirements. Prior to our implementation of the new capital regime, wewill be required to demonstrate to our primary federal regulators that ourmeasurement approaches meet relevant supervisory standards. Although optinginto Basel II may require us to meet more onerous computational requirements,we believe it may provide a more favorable capital treatment with respect tohome loans. U.S. regulators have proposed an effective date of January 1,2008 with a gradual phase-in schedule. If Countrywide Financial Corporationadopts Basel II, voluntarily or mandatorily, the Basel II Accord requirementswould replace existing risk-based capital requirements, but not the leveragecapital requirements imposed under U.S. law and regulation.

The references in theforegoing discussion to various aspects of statutes and regulations aresummaries which do not purport to be complete and which are qualified in theirentirety by reference to the actual statutes and regulations.

**Workforce**

At December 31, 2005,we had a workforce of 54,456, including regular employees and temporary staff,engaged in the following activities:

| ** **                          | ** ** | **Workforce** | ** ** |
|-------------------------------------|------------|---------------|------------|
| Mortgage Banking:                   |       |          |       |   |   |
| Loan Production:                    |       |          |       |   |   |
| Consumer Markets Division           |       |          | 16,488     |   |   |
| Wholesale Lending Division          |       |          | 4,268      |   |   |
| Correspondent Lending Division      |       |          | 2,331      |   |   |
| Full Spectrum Lending Division      |       |          | 7,532      |   |   |
| Production Technology               |       |          | 1,213      |   |   |
| Total Loan Production               |       |          | 31,832     |   |   |
| Loan Servicing                      |       |          | 7,923      |   |   |
| Loan Closing Services               |       |          | 1,648      |   |   |
| Banking                             |       |          | 2,078      |   |   |
| Capital Markets                     |       |          | 683        |   |   |
| Insurance                           |       |          | 2,100      |   |   |
| Global Operations                   |       |          | 3,251      |   |   |
| Corporate  Administration and Other |       |          | 4,941      |   |   |
| Total                               |       |          | 54,456     |   |   |

 

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Other than certain Global Home Loans employees who arerepresented by an independent trade union in the United Kingdom, none of ouremployees are represented by a collective bargaining agent.

**AdditionalInformation**

Countrywide FinancialCorporation was incorporated in New York on March 14, 1969, and on February 6,1987, was reincorporated in Delaware. The Company was originally named OLMCredit Industries, Inc., and has also been known as Countrywide CreditIndustries, Inc.

**Loan ProductionTables**

Thefollowing table presents our consolidated loan production by loan type for theperiods indicated:

| ** **                        | ** ** | **Consolidated Mortgage Loan Production**                            | ** ** |
|-----------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                        | ** ** | ** **                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Ten Months** | ** ** |
| ** **                        | ** ** | ** **                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Ended** | ** ** |
| ** **                        | ** ** | **Years Ended December 31,**                                         | ** ** | **December 31,** | ** ** |
| ** **                        | ** ** | **2005**                                                                            | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                        | ** ** | **(dollars in millions, except average loan amount)** | ** ** |
| Conventional Conforming Loans     |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                   |       | 809,630                                                                             |       | 846,395 |   | 1,517,743 |   | 999,448 |   |   | 504,975 |   |   |
| Volume of Loans                   |       | $                                                                                   | 167,675    |   | $ | 138,845 |   | $ | 235,868 |   | $ | 150,110 |   |   | $ | 76,432 |   |   |
| Percent  of Total Dollar Volume   |       | 33.9                                                                                | %          | 38.2 | % | 54.2 | % | 59.6 | % |   | 61.7 | % |   |
| Conventional Non-conforming Loans |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                   |       | 826,178                                                                             |       | 509,711 |   | 554,571 |   | 277,626 |   |   | 137,593 |   |   |
| Volume of Loans                   |       | $                                                                                   | 225,217    |   | $ | 140,580 |   | $ | 136,664 |   | $ | 61,627 |   |   | $ | 22,209 |   |   |
| Percent  of Total Dollar Volume   |       | 45.5                                                                                | %          | 38.7 | % | 31.4 | % | 24.5 | % |   | 17.9 | % |   |
| Nonprime Mortgage Loans           |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                   |       | 278,112                                                                             |       | 250,030 |   | 124,205 |   | 63,195 |   |   | 43,359 |   |   |
| Volume of Loans                   |       | $                                                                                   | 44,637     |   | $ | 39,441 |   | $ | 19,827 |   | $ | 9,421 |   |   | $ | 5,580 |   |   |
| Percent  of Total Dollar Volume   |       | 9.0                                                                                 | %          | 10.9 | % | 4.6 | % | 3.7 | % |   | 4.5 | % |   |
| Prime Home Equity Loans           |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                   |       | 683,887                                                                             |       | 587,046 |   | 453,817 |   | 316,049 |   |   | 164,503 |   |   |
| Volume of Loans                   |       | $                                                                                   | 42,706     |   | $ | 30,893 |   | $ | 18,103 |   | $ | 11,650 |   |   | $ | 5,639 |   |   |
| Percent  of Total Dollar Volume   |       | 8.6                                                                                 | %          | 8.5 | % | 4.2 | % | 4.6 | % |   | 4.5 | % |   |
| FHA/VA Loans                      |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                   |       | 80,528                                                                              |       | 105,562 |   | 196,063 |   | 157,626 |   |   | 118,734 |   |   |
| Volume of Loans                   |       | $                                                                                   | 10,712     |   | $ | 13,247 |   | $ | 24,402 |   | $ | 19,093 |   |   | $ | 14,109 |   |   |
| Percent  of Total Dollar Volume   |       | 2.2                                                                                 | %          | 3.6 | % | 5.6 | % | 7.6 | % |   | 11.4 | % |   |
| Commercial Real Estate Loans      |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                   |       | 258                                                                                 |       | 30 |   | — |   | — |   |   | — |   |   |
| Volume of Loans                   |       | $                                                                                   | 3,925      |   | $ | 358 |   | — |   | — |   |   | — |   |   |
| Percent  of Total Dollar Volume   |       | 0.8                                                                                 | %          | 0.1 | % | 0.0 | % | 0.0 | % |   | 0.0 | % |   |
| Total Loans                       |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                   |       | 2,678,593                                                                           |       | 2,298,774 |   | 2,846,399 |   | 1,813,944 |   |   | 969,164 |   |   |
| Volume of Loans                   |       | $                                                                                   | 494,872    |   | $ | 363,364 |   | $ | 434,864 |   | $ | 251,901 |   |   | $ | 123,969 |   |   |
| Average Loan Amount(1)            |       | $                                                                                   | 183,000    |   | $ | 158,000 |   | $ | 153,000 |   | $ | 139,000 |   |   | $ | 128,000 |   |   |
| Non-Purchase  Transactions(2)     |       | 53                                                                                  | %          | 51 | % | 72 | % | 66 | % |   | 63 | % |   |
| Adjustable-Rate Loans(2)          |       | 52                                                                                  | %          | 52 | % | 21 | % | 14 | % |   | 12 | % |   |

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(1)          Excludescommercial real estate loans.

(2)          Percentageof total loan production based on dollar volume.

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Thefollowing table presents our Mortgage Banking loan production by loan type:

| ** **                         | ** ** | **Mortgage Banking Loan Production**                                 | ** ** |
|------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | ** **                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Ten Months** | ** ** |
| ** **                         | ** ** | **Years Ended December 31,**                                         | ** ** | **Ended  December 31,** | ** ** |
| ** **                         | ** ** | **2005**                                                                            | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                         | ** ** | **(dollars in millions, except average loan amount)** | ** ** |
| Conventional Conforming  Loans     |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 766,613                                                                             |       | 821,932 |   | 1,509,721 |   | 993,243 |   |   | 504,435 |   |   |
| Volume of Loans                    |       | $                                                                                   | 157,271    |   | $ | 133,852 |   | $ | 234,455 |   | $ | 148,941 |   |   | $ | 76,356 |   |   |
| Percent of Total Dollar Volume     |       | 36.8                                                                                | %          | 42.1 | % | 58.9 | % | 61.5 | % |   | 63.1 | % |   |
| Conventional  Non-conforming Loans |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 712,270                                                                             |       | 430,362 |   | 492,512 |   | 265,972 |   |   | 136,898 |   |   |
| Volume of Loans                    |       | $                                                                                   | 186,526    |   | $ | 114,315 |   | $ | 111,661 |   | $ | 57,041 |   |   | $ | 21,935 |   |   |
| Percent of Total Dollar Volume     |       | 43.6                                                                                | %          | 36.0 | % | 28.0 | % | 23.5 | % |   | 18.1 | % |   |
| Nonprime Mortgage Loans            |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 254,172                                                                             |       | 218,821 |   | 95,062 |   | 43,938 |   |   | 26,347 |   |   |
| Volume of Loans                    |       | $                                                                                   | 40,089     |   | $ | 33,481 |   | $ | 15,525 |   | $ | 6,590 |   |   | $ | 3,418 |   |   |
| Percent of Total Dollar Volume     |       | 9.3                                                                                 | %          | 10.5 | % | 3.9 | % | 2.7 | % |   | 2.8 | % |   |
| Prime Home Equity Loans            |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 492,586                                                                             |       | 391,967 |   | 292,171 |   | 290,285 |   |   | 164,495 |   |   |
| Volume of Loans                    |       | $                                                                                   | 33,334     |   | $ | 23,351 |   | $ | 12,268 |   | $ | 10,848 |   |   | $ | 5,639 |   |   |
| Percent of Total Dollar Volume     |       | 7.8                                                                                 | %          | 7.4 | % | 3.1 | % | 4.5 | % |   | 4.7 | % |   |
| FHA/VA Loans                       |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 80,445                                                                              |       | 102,207 |   | 196,058 |   | 157,359 |   |   | 117,590 |   |   |
| Volume of Loans                    |       | $                                                                                   | 10,696     |   | $ | 12,812 |   | $ | 24,401 |   | $ | 19,017 |   |   | $ | 13,654 |   |   |
| Percent of Total Dollar Volume     |       | 2.5                                                                                 | %          | 4.0 | % | 6.1 | % | 7.8 | % |   | 11.3 | % |   |
| Total Loans                        |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 2,306,086                                                                           |       | 1,965,289 |   | 2,585,524 |   | 1,750,797 |   |   | 949,765 |   |   |
| Volume of Loans                    |       | $                                                                                   | 427,916    |   | $ | 317,811 |   | $ | 398,310 |   | $ | 242,437 |   |   | $ | 121,002 |   |   |
| Average Loan  Amount               |       | $                                                                                   | 186,000    |   | $ | 162,000 |   | $ | 154,000 |   | $ | 138,000 |   |   | $ | 127,000 |   |   |

 

25

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Thefollowing table presents our Correspondent Lending Division mortgage loanproduction by loan type:

| ** **                         | ** ** | **Correspondent Lending Division Loan Production**              | ** ** |
|------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | ** **                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Ten Months** | ** ** |
| ** **                         | ** ** | ** **                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Ended** | ** ** |
| ** **                         | ** ** | **Years Ended December 31,**                                         | ** ** | **December 31,** | ** ** |
| ** **                         | ** ** | **2005**                                                                            | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                         | ** ** | **(dollars in millions, except average loan amount)** | ** ** |
| Conventional  Conforming Loans     |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 462,572                                                                             |       | 422,505 |   | 847,914 |   | 484,795 |   |   | 159,752 |   |   |
| Volume of Loans                    |       | $                                                                                   | 95,105     |   | $ | 72,411 |   | $ | 139,569 |   | $ | 77,503 |   |   | $ | 28,344 |   |   |
| Percent of Total Dollar Volume     |       | 48.3                                                                                | %          | 54.2 | % | 71.6 | % | 70.8 | % |   | 66.7 | % |   |
| Conventional  Non-conforming Loans |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 306,570                                                                             |       | 153,036 |   | 151,248 |   | 74,051 |   |   | 48,453 |   |   |
| Volume of Loans                    |       | $                                                                                   | 80,695     |   | $ | 40,781 |   | $ | 34,525 |   | $ | 16,188 |   |   | $ | 5,390 |   |   |
| Percent of Total Dollar Volume     |       | 40.9                                                                                | %          | 30.5 | % | 17.7 | % | 14.8 | % |   | 12.7 | % |   |
| Nonprime Mortgage  Loans           |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 62,420                                                                              |       | 62,895 |   | 26,836 |   | 13,590 |   |   | 7,117 |   |   |
| Volume of Loans                    |       | $                                                                                   | 10,055     |   | $ | 9,446 |   | $ | 4,110 |   | $ | 1,869 |   |   | $ | 867 |   |   |
| Percent of Total Dollar Volume     |       | 5.1                                                                                 | %          | 7.1 | % | 2.1 | % | 1.7 | % |   | 2.0 | % |   |
| Prime Home Equity  Loans           |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 85,471                                                                              |       | 69,769 |   | 31,279 |   | 44,709 |   |   | 33,489 |   |   |
| Volume of Loans                    |       | $                                                                                   | 5,401      |   | $ | 3,916 |   | $ | 1,542 |   | $ | 1,873 |   |   | $ | 1,235 |   |   |
| Percent of Total Dollar Volume     |       | 2.7                                                                                 | %          | 2.9 | % | 0.8 | % | 1.7 | % |   | 2.9 | % |   |
| FHA/VA Loans                       |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 41,948                                                                              |       | 52,752 |   | 115,182 |   | 93,932 |   |   | 53,638 |   |   |
| Volume of Loans                    |       | $                                                                                   | 5,848      |   | $ | 7,034 |   | $ | 15,202 |   | $ | 12,041 |   |   | $ | 6,666 |   |   |
| Percent of Total Dollar Volume     |       | 3.0                                                                                 | %          | 5.3 | % | 7.8 | % | 11.0 | % |   | 15.7 | % |   |
| Total Loans                        |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 958,981                                                                             |       | 760,957 |   | 1,172,459 |   | 711,077 |   |   | 302,449 |   |   |
| Volume of Loans                    |       | $                                                                                   | 197,104    |   | $ | 133,588 |   | $ | 194,948 |   | $ | 109,474 |   |   | $ | 42,502 |   |   |
| Average Loan  Amount               |       | $                                                                                   | 206,000    |   | $ | 176,000 |   | $ | 166,000 |   | $ | 154,000 |   |   | $ | 141,000 |   |   |

 

26

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Thefollowing table presents our Consumer Markets Division mortgage loan productionby loan type:

| ** **                         | ** ** | **Consumer Markets Division’s Mortgage Loan Production** | ** ** |
|------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | ** **                                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Ten Months** | ** ** |
| ** **                         | ** ** | ** **                                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Ended** | ** ** |
| ** **                         | ** ** | **Years Ended December 31,**                                            | ** ** | **December 31,** | ** ** |
| ** **                         | ** ** | **2005**                                                                               | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                         | ** ** | **(dollars in millions, except average loan amount)**    | ** ** |
| Conventional Conforming  Loans     |       |                                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 155,739                                                                                |       | 230,994 |   | 355,790 |   | 259,738 |   |   | 172,797 |   |   |
| Volume of Loans                    |       | $                                                                                      | 33,721     |   | $ | 34,852 |   | $ | 48,864 |   | $ | 35,167 |   |   | $ | 23,761 |   |   |
| Percent of Total Dollar Volume     |       | 29.0                                                                                   | %          | 36.4 | % | 46.9 | % | 56.5 | % |   | 63.6 | % |   |
| Conventional  Non-conforming Loans |       |                                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 243,803                                                                                |       | 157,543 |   | 183,711 |   | 74,447 |   |   | 32,136 |   |   |
| Volume of Loans                    |       | $                                                                                      | 60,771     |   | $ | 40,859 |   | $ | 39,515 |   | $ | 15,451 |   |   | $ | 5,338 |   |   |
| Percent of Total Dollar Volume     |       | 52.2                                                                                   | %          | 42.7 | % | 37.9 | % | 24.9 | % |   | 14.3 | % |   |
| Nonprime Mortgage Loans            |       |                                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 1,608                                                                                  |       | 408 |   | 217 |   | 138 |   |   | 6 |   |   |
| Volume of Loans                    |       | $                                                                                      | 152        |   | $ | 16 |   | $ | 8 |   | $ | 5 |   |   | $ | 1 |   |   |
| Percent of Total Dollar Volume     |       | 0.1                                                                                    | %          | 0.0 | % | 0.0 | % | 0.0 | % |   | 0.0 | % |   |
| Prime Home Equity Loans            |       |                                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 233,804                                                                                |       | 258,985 |   | 213,732 |   | 159,792 |   |   | 92,134 |   |   |
| Volume of Loans                    |       | $                                                                                      | 17,661     |   | $ | 15,003 |   | $ | 8,167 |   | $ | 5,408 |   |   | $ | 2,841 |   |   |
| Percent of Total Dollar Volume     |       | 15.2                                                                                   | %          | 15.8 | % | 7.8 | % | 8.7 | % |   | 7.6 | % |   |
| FHA/VA Loans                       |       |                                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 32,473                                                                                 |       | 42,311 |   | 69,422 |   | 56,905 |   |   | 50,348 |   |   |
| Volume of Loans                    |       | $                                                                                      | 4,094      |   | $ | 4,889 |   | $ | 7,662 |   | $ | 6,158 |   |   | $ | 5,416 |   |   |
| Percent of Total Dollar Volume     |       | 3.5                                                                                    | %          | 5.1 | % | 7.4 | % | 9.9 | % |   | 14.5 | % |   |
| Total Loans                        |       |                                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 667,427                                                                                |       | 690,241 |   | 822,872 |   | 551,020 |   |   | 347,421 |   |   |
| Volume of Loans                    |       | $                                                                                      | 116,399    |   | $ | 95,619 |   | $ | 104,216 |   | $ | 62,189 |   |   | $ | 37,357 |   |   |
| Average Loan  Amount               |       | $                                                                                      | 174,000    |   | $ | 139,000 |   | $ | 127,000 |   | $ | 113,000 |   |   | $ | 108,000 |   |   |

 

27

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Thefollowing table presents Wholesale Lending Division mortgage loan production byloan type:

| ** **                         | ** ** | **Wholesale Lending Division Loan Production**                  | ** ** |
|------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | ** **                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Ten Months** | ** ** |
| ** **                         | ** ** | ** **                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Ended** | ** ** |
| ** **                         | ** ** | **Years Ended December 31,**                                         | ** ** | **December 31,** | ** ** |
| ** **                         | ** ** | **2005**                                                                            | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                         | ** ** | **(dollars in millions, except average loan amount)** | ** ** |
| Conventional Conforming  Loans     |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 123,954                                                                             |       | 156,658 |   | 301,260 |   | 248,089 |   |   | 171,658 |   |   |
| Volume of Loans                    |       | $                                                                                   | 24,098     |   | $ | 24,985 |   | $ | 45,415 |   | $ | 36,190 |   |   | $ | 24,224 |   |   |
| Percent of Total Dollar Volume     |       | 29.9                                                                                | %          | 34.3 | % | 49.8 | % | 53.9 | % |   | 61.6 | % |   |
| Conventional  Non-conforming Loans |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 126,805                                                                             |       | 112,755 |   | 153,781 |   | 116,146 |   |   | 56,161 |   |   |
| Volume of Loans                    |       | $                                                                                   | 37,115     |   | $ | 31,363 |   | $ | 37,041 |   | $ | 25,214 |   |   | $ | 11,185 |   |   |
| Percent of Total Dollar Volume     |       | 46.0                                                                                | %          | 43.1 | % | 40.6 | % | 37.5 | % |   | 28.5 | % |   |
| Nonprime Mortgage Loans            |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 94,646                                                                              |       | 77,985 |   | 29,094 |   | 9,627 |   |   | 6,971 |   |   |
| Volume of Loans                    |       | $                                                                                   | 15,203     |   | $ | 11,825 |   | $ | 5,004 |   | $ | 1,639 |   |   | $ | 841 |   |   |
| Percent of Total Dollar Volume     |       | 18.8                                                                                | %          | 16.2 | % | 5.5 | % | 2.4 | % |   | 2.1 | % |   |
| Prime Home Equity Loans            |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 37,193                                                                              |       | 52,781 |   | 41,874 |   | 82,465 |   |   | 37,370 |   |   |
| Volume of Loans                    |       | $                                                                                   | 3,490      |   | $ | 3,786 |   | $ | 2,214 |   | $ | 3,327 |   |   | $ | 1,490 |   |   |
| Percent of Total Dollar Volume     |       | 4.3                                                                                 | %          | 5.2 | % | 2.4 | % | 5.0 | % |   | 3.8 | % |   |
| FHA/VA Loans                       |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 6,024                                                                               |       | 7,144 |   | 11,454 |   | 6,522 |   |   | 13,604 |   |   |
| Volume of Loans                    |       | $                                                                                   | 754        |   | $ | 889 |   | $ | 1,537 |   | $ | 818 |   |   | $ | 1,572 |   |   |
| Percent of Total Dollar Volume     |       | 1.0                                                                                 | %          | 1.2 | % | 1.7 | % | 1.2 | % |   | 4.0 | % |   |
| Total Loans                        |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 388,622                                                                             |       | 407,323 |   | 537,463 |   | 462,849 |   |   | 285,764 |   |   |
| Volume of Loans                    |       | $                                                                                   | 80,660     |   | $ | 72,848 |   | $ | 91,211 |   | $ | 67,188 |   |   | $ | 39,312 |   |   |
| Average Loan  Amount               |       | $                                                                                   | 208,000    |   | $ | 179,000 |   | $ | 170,000 |   | $ | 145,000 |   |   | $ | 138,000 |   |   |

 

28

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Thefollowing table presents our Full Spectrum Lending Division mortgage loanproduction by loan type:

| ** **                         | ** ** | **Full Spectrum Lending Division Loan Production**         | ** ** |
|------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | ** **                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Ten Months** | ** ** |
| ** **                         | ** ** | ** **                                                                          | ** ** | **Ended** | ** ** |
| ** **                         | ** ** | **Years Ended December 31,**                                         | ** ** | **December 31,** | ** ** |
| ** **                         | ** ** | **2005**                                                                            | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                         | ** ** | **(dollars in millions, except average loan amount)** | ** ** |
| Conventional Conforming  Loans     |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 24,328                                                                              |       | 11,775 |   | 4,757 |   | 621 |   |   | 228 |   |   |
| Volume of Loans                    |       | $                                                                                   | 4,344      |   | $ | 1,604 |   | $ | 607 |   | $ | 81 |   |   | $ | 27 |   |   |
| Percent of Total Dollar Volume     |       | 16.9                                                                                | %          | 10.2 | % | 7.7 | % | 2.3 | % |   | 1.5 | % |   |
| Conventional  Non-conforming Loans |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 27,668                                                                              |       | 7,028 |   | 3,772 |   | 1,328 |   |   | 148 |   |   |
| Volume of Loans                    |       | $                                                                                   | 5,619      |   | $ | 1,312 |   | $ | 580 |   | $ | 188 |   |   | $ | 22 |   |   |
| Percent of Total Dollar Volume     |       | 21.9                                                                                | %          | 8.3 | % | 7.3 | % | 5.2 | % |   | 1.2 | % |   |
| Nonprime Mortgage Loans            |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 95,498                                                                              |       | 77,533 |   | 38,915 |   | 20,583 |   |   | 12,253 |   |   |
| Volume of Loans                    |       | $                                                                                   | 14,679     |   | $ | 12,194 |   | $ | 6,403 |   | $ | 3,077 |   |   | $ | 1,709 |   |   |
| Percent of Total Dollar Volume     |       | 57.2                                                                                | %          | 77.4 | % | 80.7 | % | 85.8 | % |   | 93.3 | % |   |
| Prime Home Equity Loans            |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 16,665                                                                              |       | 10,432 |   | 5,286 |   | 3,319 |   |   | 1,502 |   |   |
| Volume of Loans                    |       | $                                                                                   | 1,028      |   | $ | 646 |   | $ | 345 |   | $ | 240 |   |   | $ | 73 |   |   |
| Percent of Total Dollar Volume     |       | 4.0                                                                                 | %          | 4.1 | % | 4.3 | % | 6.7 | % |   | 4.0 | % |   |
| FHA/VA Loans                       |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | —                                                                              |       | — |   | — |   | — |   |   | — |   |   |
| Volume of Loans                    |       | —                                                                              |       | — |   | — |   | — |   |   | — |   |   |
| Percent of Total Dollar Volume     |       | 0.0                                                                                 | %          | 0.0 | % | 0.0 | % | 0.0 | % |   | 0.0 | % |   |
| Total Loans                        |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 164,159                                                                             |       | 106,768 |   | 52,730 |   | 25,851 |   |   | 14,131 |   |   |
| Volume of Loans                    |       | $                                                                                   | 25,670     |   | $ | 15,756 |   | $ | 7,935 |   | $ | 3,586 |   |   | $ | 1,831 |   |   |
| Average Loan  Amount               |       | $                                                                                   | 156,000    |   | $ | 148,000 |   | $ | 150,000 |   | $ | 139,000 |   |   | $ | 130,000 |   |   |

 

29

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Thefollowing table presents our Countrywide Bank production of loans for sale inour Mortgage Banking Segment by loan type:

| ** **                         | ** ** | **Countrywide Bank Mortgage Banking Loan Production**      | ** ** |
|------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | ** **                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Ten Months** | ** ** |
| ** **                         | ** ** | ** **                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Ended** | ** ** |
| ** **                         | ** ** | **Years Ended December 31,**                                         | ** ** | **December 31,** | ** ** |
| ** **                         | ** ** | **2005**                                                                            | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                         | ** ** | **(dollars in millions, except average loan amount)** | ** ** |
| Conventional Conforming  Loans     |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 20                                                                                  |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Volume of Loans                    |       | $                                                                                   | 3          |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Percent of Total Dollar Volume     |       | 0.0                                                                                 | %          |   | 0.0 | % |   |   | 0.0 | % |   |   | 0.0 | % |   |   | 0.0 | % |   |
| Conventional  Non-conforming Loans |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 7,424                                                                               |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Volume of Loans                    |       | $                                                                                   | 2,326      |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Percent of Total Dollar Volume     |       | 28.8                                                                                | %          |   | 0.0 | % |   |   | 0.0 | % |   |   | 0.0 | % |   |   | 0.0 | % |   |
| Nonprime Mortgage Loans            |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | —                                                                              |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Volume of Loans                    |       | —                                                                              |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Percent of Total Dollar Volume     |       | 0.0                                                                                 | %          |   | 0.0 | % |   |   | 0.0 | % |   |   | 0.0 | % |   |   | 0.0 | % |   |
| Prime Home Equity Loans            |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 119,453                                                                             |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Volume of Loans                    |       | $                                                                                   | 5,754      |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Percent of Total Dollar Volume     |       | 71.2                                                                                | %          |   | 0.0 | % |   |   | 0.0 | % |   |   | 0.0 | % |   |   | 0.0 | % |   |
| FHA/VA Loans                       |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | —                                                                              |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Volume of Loans                    |       | —                                                                              |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Percent of Total Dollar Volume     |       | 0.0                                                                                 | %          |   | 0.0 | % |   |   | 0.0 | % |   |   | 0.0 | % |   |   | 0.0 | % |   |
| Total Loans                        |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 126,897                                                                             |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Volume of Loans                    |       | $                                                                                   | 8,083      |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Average Loan  Amount               |       | $                                                                                   | 64,000     |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |

 

30

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The following tablepresents our Capital Markets mortgage loan production by loan type, whichconsists of mortgage loans managed on behalf of Countrywide Home Loans:

| ** **                         | ** ** | **Capital Markets Mortgage Loan Production**                    | ** ** |
|------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | ** **                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Ten Months** | ** ** |
| ** **                         | ** ** | ** **                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Ended** | ** ** |
| ** **                         | ** ** | **Years Ended December 31,**                                         | ** ** | **December 31,** | ** ** |
| ** **                         | ** ** | **2005**                                                                            | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                         | ** ** | **(dollars in millions, except average loan amount)** | ** ** |
| Conventional Conforming  Loans     |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 37,208                                                                              |       | 19,481 |   | 7,818 |   | 5,910 |   |   | 540 |   |   |
| Volume of Loans                    |       | $                                                                                   | 9,020      |   | $ | 4,083 |   | $ | 1,342 |   | $ | 1,038 |   |   | $ | 76 |   |   |
| Percent of Total Dollar Volume     |       | 36.1                                                                                | %          | 22.1 | % | 6.0 | % | 12.0 | % |   | 2.6 | % |   |
| Conventional Non-conforming  Loans |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 19,190                                                                              |       | 17,730 |   | 37,466 |   | 11,654 |   |   | 695 |   |   |
| Volume of Loans                    |       | $                                                                                   | 7,364      |   | $ | 7,327 |   | $ | 16,267 |   | $ | 4,586 |   |   | $ | 274 |   |   |
| Percent of Total Dollar Volume     |       | 29.5                                                                                | %          | 39.7 | % | 73.3 | % | 53.0 | % |   | 9.2 | % |   |
| Nonprime Mortgage Loans            |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 23,940                                                                              |       | 31,209 |   | 29,143 |   | 19,257 |   |   | 17,012 |   |   |
| Volume of Loans                    |       | $                                                                                   | 4,548      |   | $ | 5,960 |   | $ | 4,302 |   | $ | 2,831 |   |   | $ | 2,162 |   |   |
| Percent of Total Dollar Volume     |       | 18.2                                                                                | %          | 32.3 | % | 19.4 | % | 32.6 | % |   | 72.9 | % |   |
| Prime Home Equity Loans            |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 1,407                                                                               |       | 2,440 |   | 6,228 |   | 3,037 |   |   | 8 |   |   |
| Volume of Loans                    |       | $                                                                                   | 80         |   | $ | 274 |   | $ | 288 |   | $ | 128 |   |   | — |   |   |
| Percent of Total Dollar Volume     |       | 0.3                                                                                 | %          | 1.5 | % | 1.3 | % | 1.5 | % |   | 0.0 | % |   |
| FHA/VA Loans                       |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 83                                                                                  |       | 3,355 |   | 5 |   | 267 |   |   | 1,144 |   |   |
| Volume of Loans                    |       | $                                                                                   | 16         |   | $ | 435 |   | $ | 1 |   | $ | 76 |   |   | $ | 455 |   |   |
| Percent of Total Dollar Volume     |       | 0.2                                                                                 | %          | 2.4 | % | 0.0 | % | 0.9 | % |   | 15.3 | % |   |
| Commercial Real Estate  Loans      |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 258                                                                                 |       | 30 |   | — |   | — |   |   | — |   |   |
| Volume of Loans                    |       | $                                                                                   | 3,925      |   | $ | 358 |   | — |   | — |   |   | — |   |   |
| Percent of Total Dollar Volume     |       | 15.7                                                                                | %          | 2.0 | % | 0.0 | % | 0.0 | % |   | 0.0 | % |   |
| Total Loans                        |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 82,086                                                                              |       | 74,245 |   | 80,660 |   | 40,125 |   |   | 19,399 |   |   |
| Volume of Loans                    |       | $                                                                                   | 24,953     |   | $ | 18,437 |   | $ | 22,200 |   | $ | 8,659 |   |   | $ | 2,967 |   |   |
| Average Loan  Amount(1)            |       | $                                                                                   | 257,000    |   | $ | 244,000 |   | $ | 275,000 |   | $ | 216,000 |   |   | $ | 153,000 |   |   |

----

(1)          Excludes commercial realestate loans

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Thefollowing table presents our mortgage loan production for our BankingOperations by loan type:

| ** **                         | ** ** | **Banking Operations Mortgage Loan Production**                 | ** ** |
|------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | ** **                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Ten Months** | ** ** |
| ** **                         | ** ** | ** **                                                                          | ** ** | **Ended** | ** ** |
| ** **                         | ** ** | **Years Ended December 31,**                                         | ** ** | **December 31,** | ** ** |
| ** **                         | ** ** | **2005**                                                                            | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                         | ** ** | **(dollars in millions, except average loan amount)** | ** ** |
| Conventional Conforming  Loans     |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 5,809                                                                               |       | 4,982 |   | 204 |   | 295 |   |   | — |   |   |
| Volume of Loans                    |       | $                                                                                   | 1,384      |   | $ | 910 |   | $ | 71 |   | $ | 131 |   |   | — |   |   |
| Percent of Total Dollar Volume     |       | 3.3                                                                                 | %          | 3.4 | % | 0.5 | % | 16.3 | % |   | 0.0 | % |   |
| Conventional  Non-conforming Loans |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 94,718                                                                              |       | 61,619 |   | 24,593 |   | — |   |   | — |   |   |
| Volume of Loans                    |       | $                                                                                   | 31,327     |   | $ | 18,938 |   | $ | 8,736 |   | — |   |   | — |   |   |
| Percent of Total Dollar Volume     |       | 74.6                                                                                | %          | 69.8 | % | 60.9 | % | 0.0 | % |   | 0.0 | % |   |
| Nonprime Mortgage Loans            |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | —                                                                              |       | — |   | — |   | — |   |   | — |   |   |
| Volume of Loans                    |       | —                                                                              |       | — |   | — |   | — |   |   | — |   |   |
| Percent of Total Dollar Volume     |       | 0.0                                                                                 | %          | 0.0 | % | 0.0 | % | 0.0 | % |   | 0.0 | % |   |
| Prime Home Equity Loans            |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 189,894                                                                             |       | 192,639 |   | 155,418 |   | 22,727 |   |   | — |   |   |
| Volume of Loans                    |       | $                                                                                   | 9,292      |   | $ | 7,268 |   | $ | 5,547 |   | $ | 674 |   |   | — |   |   |
| Percent of Total Dollar Volume     |       | 22.1                                                                                | %          | 26.8 | % | 38.6 | % | 83.7 | % |   | 0.0 | % |   |
| FHA/VA Loans                       |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | —                                                                              |       | — |   | — |   | — |   |   | — |   |   |
| Volume of Loans                    |       | —                                                                              |       | — |   | — |   | — |   |   | — |   |   |
| Percent of Total Dollar Volume     |       | 0.0                                                                                 | %          | 0.0 | % | 0.0 | % | 0.0 | % |   | 0.0 | % |   |
| Total Loans                        |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 290,421                                                                             |       | 259,240 |   | 180,215 |   | 23,022 |   |   | — |   |   |
| Volume of Loans                    |       | $                                                                                   | 42,003     |   | $ | 27,116 |   | $ | 14,354 |   | $ | 805 |   |   | — |   |   |
| Average Loan Amount                |       | $                                                                                   | 145,000    |   | $ | 105,000 |   | $ | 80,000 |   | $ | 35,000 |   |   | 0.0 | % |   |

 

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

**Forward-LookingStatements**

***Factors That May AffectOur Future Results***

Wemake forward-looking statements in this Report and in other reports we filewith the SEC. In addition, we make forward-looking statements in press releasesand our management may make forward-looking statements orally to analysts,investors, the media and others. 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 

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arebeyond our control, that could cause actual results to differ significantlyfrom management’s expectations. Some of these factors are discussed below.

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

***General business,economic, market and political conditions may significantly affect our earnings***

Our business and earningsare sensitive to general business and economic conditions in the United States.These conditions include short-term and long-term interest rates, inflation,fluctuations in both debt and equity capital markets, and the strength of theU.S. economy, as well as the local economies in which we conduct business. Ifany of these conditions worsen, our business and earnings could be adverselyaffected. For example, a rising interest rate environment could decrease thedemand for loans; or, business and economic conditions that negatively impacthousehold incomes could decrease the demand for our home loans and increase thenumber of customers who become delinquent or default on their loans. The riskof borrower default becomes more important to our business as our portfolio ofloans held for investment continues to grow.

In addition, our businessand earnings are significantly affected by the fiscal and monetary policies ofthe federal government and its agencies. We are particularly affected by thepolicies of the Federal Reserve Board, which regulates the supply of money andcredit in the United States. The Federal Reserve Board’s policies influence thesize of the mortgage origination market, which significantly impacts theearnings of our Loan Production Sector and the value of our investment in MSRsand other retained interests. The Federal Reserve Board’s policies alsoinfluence the yield on our interest-earning assets and the cost of ourinterest-bearing liabilities. Changes in those policies are beyond our controland difficult to predict and can have a material effect on the Company’sbusiness, results of operations and financial condition.

Political conditions canalso impact our earnings. Acts or threats of war or terrorism, as well asactions taken by the U.S. or other governments in response to such acts orthreats, could impact business and economic conditions in the United States.

***The volatility of our mortgage banking business maysignificantly affect our earnings***

The level and volatilityof interest rates significantly affect the mortgage banking industry. Forexample, a decline in mortgage rates generally increases the demand for homeloans as borrowers refinance, but also generally leads to accelerated payoffsin our mortgage servicing portfolio, which negatively impacts the value of ourMSRs.

We attempt to manageinterest rate risk in our mortgage banking business primarily through thenatural counterbalance of our loan production and servicing operations. Inaddition, we also use derivatives extensively in order to manage the interestrate, or price risk, inherent in our assets, liabilities and loan commitments.Our main objective in managing interest rate risk is to moderate the impact ofchanges in interest rates on our earnings over time. Our interest rate riskmanagement strategies may result in significant earnings volatility in theshort term. The success of our interest rate risk management strategy islargely dependent on our ability to predict the earnings sensitivity of ourloan servicing and loan production operations in various interest rateenvironments. There are many market factors that impact the performance of ourinterest rate risk management activities including interest rate volatility,the shape of the yield curve and the spread between mortgage interest rates andTreasury or swap rates. The success of this strategy impacts our net income.This impact, which can be either positive or negative, can be material.

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***Our accounting policies and methods are fundamental tohow we report our financial condition and results of operations, and they mayrequire management to make estimates about matters that are inherentlyuncertain***

We have identified severalaccounting policies as being “critical” to the presentation of our financialcondition and results of operations because they require management to makeparticularly subjective or complex judgments about matters that are inherentlyuncertain and because of the likelihood that materially different amounts wouldbe recorded under different conditions or using different assumptions. Thesecritical accounting policies relate to our gain from sale of loans andsecurities, valuation of retained interests and interest rate managementactivities. Because of the inherent uncertainty of the estimates associatedwith these critical accounting policies, we cannot provide any assurance thatwe will not make significant subsequent adjustments to the related amountsrecorded. For more information, please refer to the “Management’s Discussionand Analysis of Financial Condition and Results of Operations—CriticalAccounting Policies” section in this Report.

***The financialservices industry is highly competitive***

We operate in a highlycompetitive industry that could become even more competitive as a result ofeconomic, legislative, regulatory and technological changes. Competition formortgage loans comes primarily from large commercial banks and savings institutions.Many of our competitors have fewer regulatory constraints. For example,national banks and federal savings and loan institutions are not subject tocertain state laws and regulations targeted at predatory lending practices andwe could be at a competitive disadvantage with respect to fulfilling legitimatenonprime credit opportunities. Another competitive consideration is that othercompanies have lower cost structures and others are less reliant on thesecondary mortgage market for funding due to their greater portfolio lendingcapacity.

We face competition insuch areas as mortgage product offerings, rates and fees, and customer service,both at the retail and institutional level. In addition, technological advancesand heightened e-commerce activities have increased consumers’accessibility to products and services generally. This has intensifiedcompetition among banking as well as nonbanking companies in offering financialproducts and services, with or without the need for a physical presence.

***Negative publicopinion could damage our reputation and adversely impact our earnings***

Reputation risk, or therisk to our business, earnings and capital from negative public opinion, isinherent in our business. Negative public opinion can result from our actual oralleged conduct in any number of activities, including lending practices,corporate governance and acquisitions, and from actions taken by governmentregulators and community organizations in response to those activities.Negative public opinion can adversely affect our ability to keep and attractcustomers and employees and can expose us to litigation and regulatory action.Because virtually all of our businesses operate under the “Countrywide” brand,actual or alleged conduct by one business can result in negative public opinionabout other Countrywide businesses. Although we take steps to minimizereputation risk in dealing with our customers and communities, as a largediversified financial services company with a relatively high industry profile,this risk will always be present in our organization.

***Changes inregulations could adversely affect our business***

We are heavily regulatedby banking, mortgage lending and insurance laws at the federal, state and locallevels, and proposals for further regulation of the financial services industryare continually being introduced. We are subject to many other federal, stateand local laws and regulations that affect our business, including thoseregarding taxation and privacy. Congress and state legislatures, as well asfederal and state regulatory agencies, review such laws, regulations andpolicies and periodically propose changes that could affect us in substantialand unpredictable ways. Such changes could, for example, limit the types offinancial services and products we offer, or limit our liability or increaseour cost to offer such services 

34

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andproducts. It is possible that one or more legislative proposals may be adoptedor regulatory changes may be implemented that would have an adverse effect onour business. Our failure to comply with such laws or regulations, whetheractual or alleged, could expose us to fines, penalties or potential litigationliabilities, including costs, settlements and judgments, any of which couldadversely affect our earnings.

***We depend on theaccuracy and completeness of information about customers and counterparties***

In deciding whether toextend credit or enter into other transactions with customers andcounterparties, we may rely on information furnished to us by or on behalf ofcustomers and counterparties, including financial statements and otherfinancial information. We also may rely on representations of customers andcounterparties as to the accuracy and completeness of that information and,with respect to financial statements, on reports of independent auditors. Forexample, in deciding whether to extend credit to institutional customers, wemay assume that a customer’s audited financial statements conform with GAAP andpresent fairly, in all material respects, the financial condition, results ofoperations and cash flows of the customer. Our financial condition and resultsof operations could be negatively impacted to the extent we rely on financialstatements that do not comply with GAAP or are materially misleading.

***We are exposed tooperational risks***

Countrywide, like alllarge corporations, is exposed to many types of operational risk, including therisk of fraud by employees or outsiders, unauthorized transactions by employeesor operational errors, including clerical or record-keeping errors or thoseresulting from faulty or disabled computer or telecommunications systems. Giventhe high volume of transactions at Countrywide, certain errors may be repeatedor compounded before they are discovered and successfully corrected. Ourdependence upon automated systems to record and process transaction volume mayfurther increase the risk that technical system flaws or employee tampering ormanipulation of those systems will result in losses that are difficult todetect. We may be subject to disruptions of our systems, arising from eventsthat are wholly or partially beyond our control (including, for example,computer viruses or electrical or telecommunications outages), which may giverise to losses in service to customers and to loss or liability. We are exposedto the risk that our external vendors may be unable to fulfill theircontractual obligation to us (or will be subject to the same risk of fraud oroperational errors by their respective employees as we are), and to the riskthat our (or our vendors’) business continuity and data security systems provenot to be adequate to allow us to resume operations in the event of adisruption to our (or our vendors’) operations. We also face the risk that thedesign of our controls and procedures prove inadequate or are circumvented,thereby causing delays in detection or errors in information. Although wemaintain a system of controls designed to keep operational risk at appropriatelevels, there can be no assurance that we will not suffer losses fromoperational risks in the future that may be material in amount.

***Other Factors***

Theabove description of risk factors is not exhaustive. Other factors that couldcause actual results to differ materially from historical results or thoseanticipated include, but are not limited to:

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

·       Aloss of investment-grade credit ratings, which may result in increased cost ofdebt or loss of access to corporate debt markets

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

·       Areduction in government support of homeownership

·       Achange in our relationship with the housing-related government agencies andGovernment Sponsored Enterprises (GSEs)

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

·       Ineffectivenessof our hedging activities

·       Thelevel and volatility of interest rates

·       Changesin interest rate paths

·       Changesin generally accepted accounting principles or in the legal, regulatory andlegislative environments in the markets in which the Company operates

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

·       Thelevel of competition in each of our business segments

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

Other risk factors aredescribed elsewhere herein as well as in other reports and documents that wefile with or furnish to the SEC. Other factors that could also cause results todiffer from our expectations may not be described in any such report ordocument. Each of these factors could by itself, or together with one or moreother factors, adversely affect our business, results of operations and/orfinancial condition.

**Item1B.**               *Unresolved Staff Comments*

None.

**Item 2.**                        *Properties*

We have 31 central officelocations that support our administrative, loan production and loan servicingactivities. These locations are office buildings or space in office buildingsand most are located in Southern California, Dallas-Fort Worth, Texas andChandler, Arizona. Of these locations, we own 19 properties and lease 12properties, which are generally on one- to ten-year terms. These locations areprimarily used in our Mortgage Banking and Banking segments, with approximatelynine being used by our Capital Markets and Insurance segments. In addition, wehave seven locations in the U.K. and two in India that are primarily used byour Global segment. We also have retail branch offices throughout the UnitedStates, which are generally leased on two- to five-year terms and which areused primarily by our Mortgage Banking Segment.

**Item 3.**                        *Legal Proceedings*

We are defendants in, orparties to, a number of pending and threatened legal actions and proceedingsinvolving matters that are generally incidental to our business. These mattersinclude actions and proceedings involving alleged breaches of contract,violations of consumer protection and other laws and regulations, and otherdisputes arising out of our operations. Certain of these matters involve claimsfor substantial monetary damages, and others purport to be class actions.

Based on our currentknowledge, we do not believe that liabilities, if any, arising from any singlepending action or proceeding will have a material adverse effect on theconsolidated financial position, results of operations or cash flows of theCompany and its subsidiaries. We are not, however, able to predict withcertainty the outcome or timing of the resolution of any of these actions orproceedings or the ultimate impact on us or our results of operations in aparticular future period.

**Item4.**                        *Submission of Matters to a Vote of Security Holders*

None.

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**PART II**

**Item 5.**                        *Market for the Company’s Common Stock, Related Stockholder Matters andIssuer Purchase of Equity Securities*

The Company’s common stockis listed on the New York Stock Exchange and the Pacific Stock Exchange(Symbol: CFC). The following table sets forth the high and low sales prices (asreported by the New York Stock Exchange) for the Company’s common stock and theamount of cash dividends declared during the last two periods:

**Forthe Year Ended December 31, 2004**

| ** **               | ** ** | **Stock Price** | ** ** | **Cash Dividends** | ** ** |
|--------------------------|------------|----------------------|------------|-------------------------|------------|
| **Period Ended**    | ** ** | ** **           | ** ** | **High**                | ** ** | **Low** | ** ** | **Declared** | ** ** |
| March 31,  2004     |       |                 | $          | 32.41                   |       |   | $ | 23.13 |   |   | $ | 0.07 |   |   |
| June 30,  2004      |       |                 | $          | 36.27                   |       |   | $ | 27.20 |   |   | $ | 0.08 |   |   |
| September 30,  2004 |       |                 | $          | 39.83                   |       |   | $ | 32.75 |   |   | $ | 0.10 |   |   |
| December 31, 2004   |       |                 | $          | 39.93                   |       |   | $ | 30.30 |   |   | $ | 0.12 |   |   |
|                          |            |                      |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |

 

**Forthe Year Ended December 31, 2005**

| ** **               | ** ** | **Stock Price** | ** ** | **Cash Dividends** | ** ** |
|--------------------------|------------|----------------------|------------|-------------------------|------------|
| **Period Ended**    | ** ** | ** **           | ** ** | **High**                | ** ** | **Low** | ** ** | **Declared** | ** ** |
| March 31,  2005     |       |                 | $          | 38.65                   |       |   | $ | 31.19 |   |   | $ | 0.14 |   |   |
| June 30,  2005      |       |                 | $          | 40.31                   |       |   | $ | 30.54 |   |   | $ | 0.15 |   |   |
| September 30,  2005 |       |                 | $          | 39.64                   |       |   | $ | 32.38 |   |   | $ | 0.15 |   |   |
| December 31, 2005   |       |                 | $          | 36.74                   |       |   | $ | 29.35 |   |   | $ | 0.15 |   |   |
|                          |            |                      |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |

 

The Company has declared and paid cash dividends onits common stock quarterly since 1982. The Board of Directors of the Companydeclares dividends based on its review of the most recent quarter’sprofitability along with the Company’s earnings prospects and capitalrequirements. During the years ended December 31, 2005 and 2004, theCompany declared quarterly cash dividends totaling $0.59 and $0.37 per share,respectively.

The ability of the Company to pay dividends in thefuture is limited by the earnings, cash position and capital needs of theCompany, general business conditions and other factors deemed relevant by theCompany’s Board of Directors. The Company is prohibited under certain of itsdebt agreements, including its guarantee of Countrywide Home Loans’ revolvingcredit facility, from paying dividends on any capital stock (other thandividends payable in capital stock or stock rights) if in default; otherwisethe Company may pay dividends in an aggregate amount not to exceed the greaterof: (i) the after-tax net income of the Company, determined in accordancewith generally accepted accounting principles, for the fiscal year to the endof the quarter to which the dividends relate, or (ii) the aggregate amountof dividends paid on common stock during the immediately preceding year. Theability of the Company to pay dividends may also be limited by the FederalReserve Board if it determines that the payment of dividends by the Companywould hinder its ability to serve as a source of strength for Countrywide Bankor would otherwise be detrimental to the continued viability of CountrywideBank or the Company.

The primary source of funds for payments tostockholders by the Company is dividends received from its subsidiaries.Accordingly, such payments by the Company in the future also depend on variousrestrictive covenants in the debt obligations of its subsidiaries, theearnings, the cash position and the capital needs of its subsidiaries, as wellas laws and regulations applicable to its subsidiaries. Unless the Company andCountrywide Home Loans each maintains specified minimum levels of net worth andcertain other financial ratios, dividends cannot be paid by the Company andCountrywide Home Loans to 

37

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remain in compliance withcertain of Countrywide Home Loans’ debt obligations (including its revolvingcredit facility). See “Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Liquidity and Capital Resources.”

As of February 24, 2006 there were 1,940shareholders of record of the Company’s common stock, with 602,995,163 commonshares outstanding.

Thefollowing table shows Company repurchases of its common stock for each calendarmonth during the quarter ended December 31, 2005.

| **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(1)** | ** ** | **Maximum Number of  Shares That May Yet Be  Purchased Under the  Plan or Program(1)** | ** ** |
|-------------------------|------------|------------|------------|-----------------------------------------------------|------------|--------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------|------------|
| October                 |       |       | 78         |                                                |       |                                             | $          | 31.05                                                                                                                             |       |                                                                                                                                     |       | n/a |   |   |   | n/a |   |   |
| November                |       |       | 8,261      |                                                |       |                                             | $          | 34.62                                                                                                                             |       |                                                                                                                                     |       | n/a |   |   |   | n/a |   |   |
| December                |       |       | 99         |                                                |       |                                             | $          | 34.07                                                                                                                             |       |                                                                                                                                     |       | n/a |   |   |   | n/a |   |   |
| Total                   |       |       | 8,438      |                                                |       |                                             | $          | 34.58                                                                                                                             |       |                                                                                                                                     |       | n/a |   |   |   | n/a |   |   |

----

(1)          TheCompany has no publicly announced plans or programs to repurchase its stock.The shares indicated in this table represent only the withholding of a portionof restricted shares to cover taxes on vested restricted shares.

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**Item6.**                        *Selected Consolidated Financial Data*

| ** **                                                               | ** ** | ** **                                                                                  | ** ** | **Ten Months**   | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                               | ** ** | ** **                                                                                  | ** ** | **Ended**             | ** ** |
| ** **                                                               | ** ** | **Years Ended December 31,**                                                 | ** ** | **December 31,** | ** ** |
| ** **                                                               | ** ** | **2005**                                                                                    | ** ** | **2004**              | ** ** | **2003** | ** ** | **2002** | ** ** | **   2001   ** | ** ** |
| ** **                                                               | ** ** | **(dollar amounts in thousands, except per share data)** | ** ** |
| **Statement of Earnings Data(1):**                                       |       |                                                                                        |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Revenues:                                                                |       |                                                                                        |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Gain on sale of loans and securities                                     |       | $                                                                                           | 4,861,780  |                  |       | $ | 4,842,082 |   |   | $ | 5,887,436 |   | $ | 3,471,209 |   |   | $ | 1,602,573 |   |   |
| Net interest income after provision for loan losses                      |       | 2,237,935                                                                                   |       |                  | 1,965,541  |   |   | 1,359,390 |   | 765,665 |   |   | 305,769 |   |   |
| Net loan servicing fees and other income (loss) from  retained interests |       | 1,493,167                                                                                   |       |                  | 465,650    |   |   | (463,050 | ) | (865,752 | ) |   | (2,146 | ) |   |
| Net insurance premiums earned                                            |       | 953,647                                                                                     |       |                  | 782,685    |   |   | 732,816 |   | 561,681 |   |   | 316,432 |   |   |
| Other revenue                                                            |       | 470,179                                                                                     |       |                  | 510,669    |   |   | 462,050 |   | 358,864 |   |   | 247,923 |   |   |
| Total revenues                                                           |       | 10,016,708                                                                                  |       |                  | 8,566,627  |   |   | 7,978,642 |   | 4,291,667 |   |   | 2,470,551 |   |   |
| Expenses:                                                                |       |                                                                                        |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Compensation expenses                                                    |       | 3,615,483                                                                                   |       |                  | 3,137,045  |   |   | 2,590,936 |   | 1,773,318 |   |   | 968,232 |   |   |
| Occupancy and other office expenses                                      |       | 879,680                                                                                     |       |                  | 643,378    |   |   | 525,192 |   | 403,976 |   |   | 280,403 |   |   |
| Insurance claims expenses                                                |       | 441,584                                                                                     |       |                  | 390,203    |   |   | 360,046 |   | 277,614 |   |   | 134,819 |   |   |
| Advertising and promotion expenses                                       |       | 229,183                                                                                     |       |                  | 171,585    |   |   | 103,902 |   | 86,278 |   |   | 54,068 |   |   |
| Other operating expenses                                                 |       | 703,012                                                                                     |       |                  | 628,543    |   |   | 552,794 |   | 407,458 |   |   | 244,410 |   |   |
| Total expenses                                                           |       | 5,868,942                                                                                   |       |                  | 4,970,754  |   |   | 4,132,870 |   | 2,948,644 |   |   | 1,681,932 |   |   |
| Earnings before income taxes                                             |       | 4,147,766                                                                                   |       |                  | 3,595,873  |   |   | 3,845,772 |   | 1,343,023 |   |   | 788,619 |   |   |
| Provision for income taxes                                               |       | 1,619,676                                                                                   |       |                  | 1,398,299  |   |   | 1,472,822 |   | 501,244 |   |   | 302,613 |   |   |
| Net earnings                                                             |       | $                                                                                           | 2,528,090  |                  |       | $ | 2,197,574 |   |   | $ | 2,372,950 |   | $ | 841,779 |   |   | $ | 486,006 |   |   |
| **Per  Share Data:**                                                     |       |                                                                                        |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Earnings                                                                 |       |                                                                                        |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                    |       | $                                                                                           | 4.28       |                  |       | $ | 3.90 |   |   | $ | 4.44 |   | $ | 1.69 |   |   | $ | 1.01 |   |   |
| Diluted                                                                  |       | $                                                                                           | 4.11       |                  |       | $ | 3.63 |   |   | $ | 4.18 |   | $ | 1.62 |   |   | $ | 0.97 |   |   |
| Cash dividends declared                                                  |       | $                                                                                           | 0.59       |                  |       | $ | 0.37 |   |   | $ | 0.15 |   | $ | 0.09 |   |   | $ | 0.10 |   |   |
| Stock price at end of period(2)                                          |       | $                                                                                           | 34.19      |                  |       | $ | 37.01 |   |   | $ | 25.28 |   | $ | 12.91 |   |   | $ | 10.24 |   |   |
| **Selected  Financial Ratios:**                                          |       |                                                                                        |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Return on average assets                                                 |       | 1.46                                                                                        | %          |                  | 1.80       | % |   | 2.65 | % | 1.77 | % |   | 1.61 | % |   |
| Return on average equity                                                 |       | 22.67                                                                                       | %          |                  | 23.53      | % |   | 34.25 | % | 18.20 | % |   | 12.71 | % |   |
| Dividend payout ratio                                                    |       | 13.81                                                                                       | %          |                  | 9.53       | % |   | 3.39 | % | 6.67 | % |   | 6.85 | % |   |
| **Selected  Operating Data (in millions):**                              |       |                                                                                        |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Loan servicing portfolio(3)                                              |       | $                                                                                           | 1,111,090  |                  |       | $ | 838,322 |   |   | $ | 644,855 |   | $ | 452,405 |   |   | $ | 336,627 |   |   |
| Volume of loans originated                                               |       | $                                                                                           | 494,872    |                  |       | $ | 363,364 |   |   | $ | 434,864 |   | $ | 251,901 |   |   | $ | 123,969 |   |   |
| Volume of loans  sold                                                    |       | $                                                                                           | 409,508    |                  |       | $ | 324,726 |   |   | $ | 374,245 |   | $ | 241,601 |   |   | $ | 118,953 |   |   |

 

39

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| ** **                                                                                       | ** ** | **December 31,**                                                                       | ** **  |
|--------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|-------------|
| ** **                                                                                       | ** ** | **2005**                                                                                    | ** **  | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                                                       | ** ** | **(dollar amounts in thousands, except per share data)** | ** **  |
| **Selected  Balance Sheet Data at End of Period(1):**                                            |       |                                                                                        |        |   |   |   |   |   |   |   |   |
| Loans:                                                                                           |       |                                                                                        |        |   |   |   |   |   |   |   |   |
| Held for sale                                                                                    |       | $                                                                                           | 36,818,688  |   | $ | 37,350,149 |   | $ | 24,103,625 |   | $ | 15,042,072 |   | $ | 10,622,771 |   |
| Held for investment                                                                              |       | 70,071,152                                                                                  |        | 39,661,191 |   | 26,375,958 |   | 6,081,598 |   | 3,455,404 |   |
|                                                                                             |       | 106,889,840                                                                                 |        | 77,011,340 |   | 50,479,583 |   | 21,123,670 |   | 14,078,175 |   |
| Securities purchased under agreements to repurchase,  federal funds sold and securities borrowed |       | 23,317,361                                                                                  |        | 13,456,448 |   | 10,448,102 |   | 5,997,368 |   | 4,491,878 |   |
| Investment in other financial  instruments                                                       |       | 11,455,745                                                                                  |        | 10,091,057 |   | 12,761,764 |   | 10,901,915 |   | 3,527,832 |   |
| Mortgage servicing rights                                                                        |       | 12,610,839                                                                                  |        | 8,729,929 |   | 6,863,625 |   | 5,384,933 |   | 6,116,082 |   |
| Other assets                                                                                     |       | 20,811,585                                                                                  |        | 19,206,931 |   | 17,424,599 |   | 14,650,645 |   | 9,030,452 |   |
| Total assets                                                                                     |       | $                                                                                           | 175,085,370 |   | $ | 128,495,705 |   | $ | 97,977,673 |   | $ | 58,058,531 |   | $ | 37,244,419 |   |
| Notes payable                                                                                    |       | $                                                                                           | 76,187,886  |   | $ | 66,613,671 |   | $ | 39,948,461 |   | $ | 19,821,536 |   | $ | 17,182,618 |   |
| Securities sold under agreements to repurchase and  federal funds  purchased                     |       | 34,153,205                                                                                  |        | 20,465,123 |   | 32,013,412 |   | 22,634,839 |   | 9,452,852 |   |
| Deposit liabilities                                                                              |       | 39,489,256                                                                                  |        | 20,013,208 |   | 9,327,671 |   | 3,114,271 |   | 675,480 |   |
| Other liabilities                                                                                |       | 12,439,163                                                                                  |        | 11,093,627 |   | 8,603,413 |   | 7,326,752 |   | 5,845,827 |   |
| Common shareholders’ equity                                                                 |       | 12,815,860                                                                                  |        | 10,310,076 |   | 8,084,716 |   | 5,161,133 |   | 4,087,642 |   |
| Total liabilities and shareholders’ equity                                                  |       | $                                                                                           | 175,085,370 |   | $ | 128,495,705 |   | $ | 97,977,673 |   | $ | 58,058,531 |   | $ | 37,244,419 |   |
| **Selected Financial Ratios:**                                                                   |       |                                                                                        |        |   |   |   |   |   |   |   |   |
| Equity to average assets                                                                         |       | 6.45                                                                                        | %           | 7.66 | % | 7.74 | % | 9.70 | % | 12.70 | % |
| MSR capitalization ratio at period end                                                           |       | 1.29                                                                                        | %           | 1.15 | % | 1.18 | % | 1.28 | % | 1.94 | % |
| Tier 1 risk-based capital ratio                                                                  |       | 10.7                                                                                        | %           | 11.1 | % | 12.8 | % | 12.2 | % | 11.2 | % |
| Total risk-based  capital ratio                                                                  |       | 11.7                                                                                        | %           | 11.7 | % | 13.7 | % | 13.6 | % | 12.8 | % |

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(1)           Certain amountsin the consolidated financial statements have been reclassified to conform tocurrent year presentation.

(2)           Adjusted toreflect the effect of subsequent stock splits.

(3)           Includeswarehoused loans and loans under subservicing agreements.

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**Item7.**                        *Management’s Discussion and Analysis of Financial Condition and Resultsof Operations*

As used in this Report,references to “we,” “our,” “the Company” or “Countrywide” refer to CountrywideFinancial Corporation and its consolidated subsidiaries unless otherwiseindicated.

**Overview**

Countrywide is adiversified financial services company engaged in mortgage-finance relatedbusinesses. We organize our operations into five business segments—MortgageBanking, Banking, Capital Markets, Insurance and Global Operations. Our goal isto continue as a leader in the mortgage banking business and to use thisleadership position to take advantage of meaningful opportunities that leveragethis business and provide sources of earnings that are sustainable in variousinterest rate environments.

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 ofOperations***

Our consolidated net earningsfor 2005 were $2,528.1 million, an increase of 15% from 2004’s net earnings of$2,197.6 million. This increase was primarily due to increased profitability ofour Banking Segment resulting from 115% growth in average interest-earningassets from 2004. 

***Mortgage Market***

The mortgage bankingbusiness continues to be the primary source of our revenues and earnings.Therefore, the dominant external influence on our operating results is theaggregate demand for mortgage loans in the U.S., which is affected by suchfactors as prevailing mortgage interest rates and the strength of the U.S.housing market.

For the year ended December 31,2005, total U.S. residential mortgage production was estimated at $2.79trillion compared to $2.77 trillion for the year ended December 31, 2004.We increased our market share to 17.6% for 2005 from 13.1% in the year-agoperiod. *(Mortgage Market Source: MortgageBankers Association).*We attribute the increase in market share tooperational effectiveness rather than aggressive pricing. Third partyforecasters predict total U.S. mortgage production for 2006 to be between $2.2trillion and $2.4 trillion, compared to $2.8 trillion in 2005. Due todifferences in products represented and model estimation logic, mortgage marketestimates vary. We estimate the mortgage market for 2006 to be $2.6 trillioncompared to our estimate of $3.3 trillion for 2005.

***Loan Production***

Our total loan productionvolume increased during 2005 largely because we increased our market share. Ouradjustable rate loan production has remained relatively constant from last yearat 52% of total loan production. Although adjustable rate production hasremained constant, the composition has changed due to the increase inpay-option loans—which provide borrowers with the option to makefully-amortizing, interest-only, or “negative-amortizing” payments.

Pay-option loans haveincreased from approximately 6% of our loan production during the year ended December 31,2004, to approximately 19% of our production during the year ended December 31,2005. These loans provide our Production Sector with greater pricing margins;our Servicing Sector with increased servicing complexity during their optionperiod; and, to the extent these loans are retained in the Bank’s portfolio,our Banking Segment with lower initial net interest income during the period ofthe loans’ reduced introductory interest rate. Approximately 82% of thepay-option loans produced in 2005 was originated for sale without recourse. Theremainder of these loans, which amount to $17.2 billion, were retained inthe Bank’s portfolio of loans held for investment.

Our pay-option loan portfolio has a relatively highinitial loan quality, with original average FICO scores (a measure of creditrating) of 720 and original loan-to-value and combined loan-to-values of 75% 

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and 78%,respectively. We only originate pay-option loans to borrowers who can qualifyat the loan’s fully-indexed interest rates. This high credit quality notwithstanding,lower initial payment requirements of pay-option loans may increase the creditrisk inherent in our loans held for investment. This is because when therequired monthly payments for pay-option loans eventually increase (in a periodnot to exceed 60 months), borrowers may be less able to pay the increasedamounts and, therefore, more likely to default on the loan, than a borrowerwith an amortizing loan. Our exposure to this higher credit risk is increasedby any negative amortization that has been added to the principal balance.

***Interest Rate Riskand Credit Risk***

The principal market riskwe face is interest rate risk—the risk that the value of our assets orliabilities or our net interest income will change due to changes in interestrates. Market risk is most directly reflected in the value of our interest ratelock commitments, inventory of loans held for sale, trading securities,investment in other financial instruments and mortgage servicing rights (“MSRs”).We manage market risk primarily through the natural counterbalance of our loanproduction operations and our investment in MSRs, as well as with variousfinancial instruments including derivatives. The primary objective of ourinterest rate risk management activities is to reduce the variability ofearnings caused by changes in interest rates.

We also face credit risk,primarily related to our residential mortgage production activities in both theMortgage Banking and Banking Segments. Credit risk is the potential forfinancial loss resulting from the failure of a borrower or an institution tohonor its contractual obligations to us. Credit risk most directly affects ourmortgage loans held for investment and our other financial instruments that arecredit subordinated to other securities. We manage mortgage credit riskprincipally by selling most of the mortgage loans that we produce and byretaining high credit quality mortgages in our loan portfolio. Our PrimeMortgage Loans are generally sold on a non-recourse basis. Our Prime HomeEquity and Nonprime Mortgage Loans are generally sold with recourse, withcredit risk limited to the carrying value of residual securities we hold.

***Losses fromHurricanes***

HurricaneKatrina and other hurricanes that occurred during the third quarter of 2005affected the financial results of several of our business segments. HurricaneKatrina is notable because unlike other hurricanes it caused losses as a resultof flooding that many borrowers had not, and would not generally be expected tobe, insured against. The estimated losses from these hurricanes, primarilyHurricane Katrina, consist of a charge to our insurance operations as well asuninsured losses associated with flood damage on properties that collateralizemortgage loans and loans underlying MSRs and residuals. The effect on pre-taxand after-tax earnings is summarized below:

| **Segment**      | ** ** | ** **              | ** ** | **Pre-Tax Effect** | ** ** | **After-Tax Effect** | ** ** | **Source** | ** ** |
|------------------|------------|-------------------------|------------|-------------------------|------------|---------------------------|------------|------------|------------|
| ** **       | ** ** | **(in thousands)** | ** ** | **(in thousands)** | ** ** | ** **                | ** ** |
| Mortgage Banking |       |                    | $          | (41,837                 | )          |                      |       | $          | (25,478    | ) |   | Estimated credit losses relating to loans held for sale  and to credit-subordinated retained interests; impairment of MSRs and  provision for servicing advances relating to government-insured loans |   |
| Banking          |       |                    | (7,237     | )                       |       |                      | (4,409     | )          |       | Estimated credit losses relating to loans held for investment |   |
| Capital Markets  |       |                    | (3,212     | )                       |       |                      | (1,885     | )          |       | Estimated losses relating to conduit activities |   |
| Insurance        |       |                    | (85,206    | )                       |       |                      | (55,384    | )          |       | Estimated insured losses |   |
|             |       |                    | $          | (137,492                | )          |                      |       | $          | (87,156    | ) |   |   |   |

 

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We continue to assess theimpact of the hurricanes on our businesses, assets and operations. While ourestimates are based on our best available information, they could ultimately beaffected by many factors, including, but not limited to, the short-term andlong-term impact on the economies of the affected communities; the conduct ofborrowers in the affected areas; the actions of various third parties,including government agencies and government-sponsored enterprises that supporthousing, insurance companies, lenders and mortgage insurance companies; theapportionment of liability among insurers; the availability of catastrophicreinsurance proceeds; factors impacting property values in the affected areas,including any environmental factors such as the presence of toxic chemicals;and subsequent storm activity. As new information becomes available we willcontinue to adjust our loss estimates on a prospective basis.

***Liquidity andCapital***

Our liquidity andfinancing requirements are significant. We meet these requirements in a varietyof ways, including use of the public corporate debt and equity markets,mortgage- and asset-backed securities markets, and through the financingactivities of our Bank. The objective of our liquidity management is to ensurethat adequate, diverse and reliable sources of cash are available to meet ourfunding needs on a cost-effective basis. Our ability to raise financing at thelevel and cost required to compete effectively is dependent on maintaining ourhigh credit standing.

How we grow our businessesand meet our financing needs is influenced by regulatory agency and public debtrating agency capital requirements. These requirements influence the nature ofthe financing we are able to obtain and the rate at which we are able to grow. AtDecember 31, 2005, we exceeded the regulatory capital requirements to beclassified as “well capitalized,” with Tier 1 capital ratio of 10.7% and totalrisk based ratio of 11.7%. Our public ratings were classified “investmentgrade,” with long-term ratings of A, A3 and A by Standard & Poors,Moody’s Investors Service and Fitch, respectively. We meet our financing needsin a variety of ways, through the public corporate debt and equity markets, aswell as the mortgage and asset-backed securities markets, and through thedeposit-gathering and other financing activities of our Bank.

***Competition***

The mortgage industry hasundergone rapid consolidation in recent years, and we expect this trend tocontinue in the future. Today the industry is dominated by large, sophisticatedfinancial institutions. To compete effectively in this business, we arerequired to maintain a high level of operational, technological and managerial expertise,as well as to attract capital at a competitive cost. We believe that we willbenefit from industry consolidation through increased market share.

**CriticalAccounting Policies**

The accounting policieswith the greatest impact on our financial condition and results of operations,and which require the most judgment, pertain to our mortgage securitizationactivities, our investments in MSRs and other retained interests, and our useof derivatives to manage interest rate risk. Our critical accounting policiesinvolve the following three areas: 1) accounting for gains on sales of loansand securities; 2) accounting for MSRs and other retained interests, includingvaluation of these retained interests; and 3) accounting for derivatives andour related interest rate risk management activities.

Our accounting policiesare described in “Note 2—Summary of Significant Accounting Policies” in thefinancial statement section of this report.

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

Most of the mortgage loanswe produce are sold in the secondary mortgage market, primarily in the form ofsecurities and to a lesser extent as whole loans. When we sell loans in thesecondary mortgage market we generally retain the MSRs. Depending on the typeof securitization, there may be other interests we retain includinginterest-only securities, principal-only securities and residual securities.

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We determine the gain onsale of a security or loans by allocating the carrying value of the underlyingmortgage loans between securities or loans sold and the interests retained,based on their relative estimated fair values. The gain on sale we report isthe difference between the cash proceeds from the sale and the cost allocatedto the securities or loans sold. The timing of such gain recognition isdependent on meeting very specific accounting criteria and, as a result, thegain on sale may be recorded in a different accounting period from when thesecuritization was completed. In addition, we may sell or securitize loans in adifferent accounting period from when the loans were originated.

Hereis an example of how this accounting works: 

| Carrying value of  mortgage loans underlying a security(1)                  |   | $       | 1,000,000 |   |
|-----------------------------------------------------------------------------|--------|---------|-----------|--------|
| Fair values:                                                                |   |    |      |
| Security                                                                    |   | $       | 998,000   |   |
| Retained interests                                                          |   | 12,000  |      |
| Total fair value                                                            |   | $       | 1,010,000 |   |
| Computation of gain on sale of security:                                    |   |    |      |
| Sales proceeds                                                              |   | $       | 998,000   |   |
| Less: Cost allocated to  security ($1,000,000 x ($998,000÷$1,010,000)) |   | 988,119 |      |
| Gain on sale                                                                |   | $       | 9,881     |   |
| Initial recorded value of retained interests  ($1,000,000 — $988,119)  |   | $       | 11,881    |   |

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(1)          Thecarrying value of mortgage loans includes the outstanding principal balance ofthe loans, net of deferred origination costs and fees, any premiums ordiscounts and any basis adjustment resulting from hedge accounting.

***Accounting for MSRsand Other Retained Interests***

MSRs are carried at thelower of their amortized cost or fair value. Therefore, once MSRs have beenrecorded, they must be periodically amortized and evaluated for impairment. Wecompute MSR amortization by applying the ratio of the net MSR cash flowsprojected for the current period to the estimated total remaining net MSR cashflows. The estimated total net MSR cash flows are determined at the beginningof each reporting period, using prepayment assumptions applicable at that time.

Impairment occurs when thecurrent fair value of the MSRs fall below the asset’s amortized cost basis. Westratify our MSRs by predominate risk characteristic when evaluating forimpairment. If MSRs are impaired, the impairment is recognized incurrent-period earnings and the carrying value of the MSRs is adjusted througha valuation allowance. If the value of the MSRs subsequently increases, therecovery in value is recognized in current-period earnings and the carryingvalue of the MSRs is adjusted through a reduction in the valuation allowance.(As of December 31, 2005, the MSR impairment valuation allowance was $0.4billion.) If impairment is deemed to be other than temporary, the valuationallowance is applied to reduce the cost basis of the MSRs.

Other retained interestsare designated as trading or available-for-sale securities at the time ofsecuritization. Once the other retained interests are recorded they must beperiodically evaluated for impairment. Other retained interests classified asavailable-for-sale securities are marked to market with changes in valuerecognized as a component of shareholders’ equity (net of tax). If the securityis impaired and the impairment is deemed to be other than temporary, it isrecognized in current-period earnings. Once we record this impairment, werecognize subsequent increases in the value of these other retained interestsin earnings over the estimated remaining life of the investment through ahigher effective yield. Other retained interests classified as tradingsecurities are marked to market with all changes in estimated fair valuerecognized in current-period earnings.

44

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***Valuation of MSRsand Other Retained Interests***

The precise market value of retainedinterests cannot be readily determined because these assets are not activelytraded in stand-alone markets. Considerable judgment is required to determinethe fair values of our retained interests, and the exercise of such judgmentcan significantly impact the Company’s earnings. Therefore, senior financialmanagement exercises extensive and active oversight of this process. TheCompany’s Asset and Liability Committee, which is comprised of several of oursenior financial executives, ultimately determines the valuation of MSRs andOther Retained Interests. 

Our MSR valuation process combines the useof a sophisticated discounted cash flow model and extensive analysis of currentmarket data to arrive at an estimate of fair value at each balance sheet date. Thecash flow assumptions and prepayment assumptions used in our discounted cashflow model are based on our empirical data drawn from the historicalperformance of our MSRs, which we believe are consistent with assumptions usedby market participants valuing similar MSRs, and from data obtained on theperformance of similar MSRs. The key assumptions used in the valuation of MSRsinclude mortgage prepayment speeds and the discount rate (projected LIBOR plusoption-adjusted spread). These variables can, and generally will, change fromquarter to quarter as market conditions and projected interest rates change.The current market data utilized in the MSR valuation process and in theassessment of the reasonableness of our valuation is obtained from MSR trades,MSR broker valuations, prices of interest-only securities, and peer group MSRvaluation surveys. 

For our other retainedinterests, we also estimate fair value through the use of discounted cash flowmodels. The key assumptions used in the valuation of our other retainedinterests include mortgage prepayment speeds, discount rates, and for residualinterests containing credit risk, the net lifetime credit losses. (See “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—CreditRisk Management” section in this Report for further discussion of credit risk.)We develop cash flow and prepayment assumptions based on our own data drawnfrom the historical performance of the loans underlying our other retainedinterests. We believe that such empirical data are consistent with assumptionsthat other major market participants would use in determining the assets’ fairvalue.

Thefollowing table shows the key assumptions we used to determine the fair valuesof our MSRs at December 31, 2005, and the value sensitivity of our MSRs tochanges in such assumptions.

| ** **                                      | ** ** | **MSRs**                                     | ** ** |
|-------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                      | ** ** | **(dollar amounts  in thousands)** | ** ** |
| Fair value of MSRs                              |       |                                         | $          | 12,720,755 |   |   |
| Carrying value of MSRs                          |       |                                         | $          | 12,610,839 |   |   |
| Carrying value as a percentage of MSR portfolio |       |                                         | 1.29       | % |   |
| Weighted-average service fee                    |       |                                         | 0.35       | % |   |
| Weighted-average life (in years)                |       |                                         | 5.6        |   |   |
| Multiple of net service fee                     |       |                                         | 3.7        |   |   |
| Weighted-average annual prepayment speed        |       |                                         | 22.8       | % |   |
| Impact of 5%  adverse change                    |       |                                         | $          | 238,131 |   |   |
| Impact of 10%  adverse change                   |       |                                         | $          | 463,010 |   |   |
| Impact of 20%  adverse change                   |       |                                         | $          | 877,291 |   |   |
| Weighted-average OAS(1)                         |       |                                         | 6.4        | % |   |
| Impact of 5%  adverse change                    |       |                                         | $          | 94,600 |   |   |
| Impact of 10%  adverse change                   |       |                                         | $          | 187,660 |   |   |
| Impact of 20% adverse  change                   |       |                                         | $          | 367,225 |   |   |

----

(1)          Option-adjustedspread over LIBOR.

45

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The yield implied in the market value of the MSRs was10.2% at December 31, 2005.

Thefollowing table shows the key assumptions we used to determine the fair valuesof our other retained interests at December 31, 2005, and the fair valuesensitivity of our other retained interests to changes in such assumptions.

| ** **                                   | ** ** | **Other Retained  Interests**           | ** ** |
|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                   | ** ** | **(dollar amounts  in thousands)** | ** ** |
| Fair value of  retained interests            |       |                                         | $          | 2,675,461 |   |   |
| Weighted-average  life (in years)            |       |                                         | 2.4        |   |   |
| Weighted-average  annual prepayment speed    |       |                                         | 38.3       | % |   |
| Impact of 5% adverse change                  |       |                                         | $          | 57,329 |   |   |
| Impact of 10% adverse change                 |       |                                         | $          | 110,297 |   |   |
| Impact of 20% adverse change                 |       |                                         | $          | 214,392 |   |   |
| Weighted-average  annual discount rate       |       |                                         | 17.9       | % |   |
| Impact of 5% adverse change                  |       |                                         | $          | 25,646 |   |   |
| Impact of 10% adverse change                 |       |                                         | $          | 54,844 |   |   |
| Impact of 20% adverse change                 |       |                                         | $          | 117,472 |   |   |
| Weighted-average  net lifetime credit losses |       |                                         | 1.7        | % |   |
| Impact of 5% adverse change                  |       |                                         | $          | 44,834 |   |   |
| Impact of 10% adverse change                 |       |                                         | $          | 90,552 |   |   |
| Impact of 20%  adverse change                |       |                                         | $          | 177,589 |   |   |

 

These sensitivities aresolely for illustrative purposes and should be used with caution. Thisinformation is furnished to provide the reader with a basis for assessing thesensitivity of the values presented to changes in key assumptions. As thefigures indicate, changes in fair value based on a given percentage variation inindividual assumptions generally cannot be extrapolated. In addition, in theabove tables, the effect of a variation in a particular assumption on the fairvalue of the retained interests is calculated without changing any otherassumption. In reality, changes in one factor may coincide with changes inanother, which could compound or counteract the sensitivities.

***Derivatives and Interest Rate Risk ManagementActivities***

We use derivatives extensively in connection with ourinterest rate risk management activities. We record all derivative instrumentsat fair value.

We may qualify some of our interest rate riskmanagement activities for hedge accounting. A primary requirement to qualifyfor hedge accounting is the documented demonstration initially and on anongoing basis that our interest rate risk management activity is highlyeffective. We use standard statistical measures to determine the effectivenessof our hedging activity. If we are unable to, or choose not to, qualify certaininterest rate risk management activities for hedge accounting, then a possibleearnings mismatch may be created because, unlike the derivative instruments,the change in fair value of the related asset or liability may not be reflectedin current-period earnings. This issue is potentially most significantregarding MSRs and inventory of loans held for sale, which are required to becarried at the lower of amortized cost or market.

In connection with our mortgage loan originationactivities, we issue interest rate lock commitments (“IRLCs”) to loanapplicants and financial intermediaries. The IRLCs guarantee a loan’s terms,subject to credit approval, for a period typically between seven and 60 days.The majority of our IRLCs are derivative instruments and, therefore, arerequired to be recorded at fair value, with changes in fair value reflected incurrent-period earnings. However, unlike most other derivative instruments,there is no active market for 

46

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IRLCs that can be used todetermine their fair value. Consequently, we have developed a method forestimating the fair value of our IRLCs.

We estimate the fair valueof an IRLC based on the change in estimated fair value of the underlying mortgageloan, adjusted for the probability that the loan will fund within the terms ofthe IRLC. The change in fair value of the underlying mortgage loan is based onquoted MBS prices and is measured from the date we issue the commitment.Therefore, at the time of issuance the estimated fair value of an IRLC is zero.Subsequent to issuance, the value of an IRLC can be either positive ornegative, depending on the change in value of the underlying mortgage loan. Theprimary factor influencing the probability that the loan will fund within theterms of the IRLC is the change, if any, in mortgage rates subsequent to thelock date. In general, the probability of funding increases if mortgage ratesrise and decreases if mortgage rates fall. This is due primarily to therelative attractiveness of current mortgage rates compared to the applicant’scommitted rate. The probability that a loan will fund within the terms of theIRLC also is influenced by the source of the application, age of theapplication, purpose for the loan (purchase or refinance) and the applicationapproval rate. We have developed closing ratio estimates using historicalempirical data that take into account all of these variables, as well asrenegotiations of rate and point commitments that tend to occur when mortgagerates fall. These closing ratio estimates are used to calculate the number ofloans that we expect to fund within the terms of the IRLCs.

***Results ofOperations Comparison—Year Ended December 31, 2005, (“2005”) and YearEnded December 31, 2004 (“2004”)***

***Consolidated Earnings Performance***

Our earnings were $2,528.1million for 2005, a 15% increase from 2004. Our diluted earnings per share for2005 were $4.11, a 13*%*increase from diluted earnings per sharefrom the year-ago period.

The increase in our earnings was primarily the resultof an increase in the profitability of our Banking Segment which producedpre-tax earnings of $1,074.5 million, up 84% from the year-ago period. Thisincrease was due mainly to a 115% increase in average interest-earning assetsat Countrywide Bank from the year-ago period.

The Mortgage Banking Segment produced pre-tax earningsof $2,434.5 million for 2005, an increase of 4%. In the Mortgage BankingSegment, improved financial performance of our MSRs was for the most partoffset by a decline in the profitability of our Loan Production Sector.

Production Sector pre-tax earnings were affected bymarket price pressure, which offset the positive impact of increased sales ofPrime Mortgage Loans and Nonprime Mortgage Loans. Loan Production Sectorpre-tax earnings were $1,659.5 million for 2005, a decrease of$1,024.8 million from the year-ago period.

The pre-tax earnings inthe Loan Servicing Sector, which incorporates the performance of our MSRs andother retained interests, was $669.6 million, an improvement of$1,103.1 million from the year-ago period. This increase in pre-taxearnings was primarily attributable to higher revenue resulting from a 32%increase in the size of the average loan servicing portfolio, higher earningson escrow balances and an improvement in the amount of impairment/recovery ofour retained interests, net of the Servicing Hedge.

47

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**Operating Segment Results**

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

| ** **             | ** ** | **Years Ended December 31,** | ** ** |
|------------------------|------------|---------------------------------------------|------------|
| ** **             | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| ** **             | ** ** | **(in thousands)**                     | ** ** |
| Mortgage Banking:      |       |                                        |       |   |   |
| Loan Production        |       | $                                           | 1,659,457  |   | $ | 2,684,258 |   |
| Loan Servicing         |       | 669,611                                     |       | (433,531 | ) |
| Loan Closing Services  |       | 105,457                                     |       | 84,986 |   |
| Total Mortgage Banking |       | 2,434,525                                   |       | 2,335,713 |   |
| Banking                |       | 1,074,480                                   |       | 582,483 |   |
| Capital Markets        |       | 451,629                                     |       | 479,115 |   |
| Insurance              |       | 183,716                                     |       | 160,093 |   |
| Global Operations      |       | 35,353                                      |       | 41,865 |   |
| Other                  |       | (31,937                                     | )          | (3,396 | ) |
| Total                  |       | $                                           | 4,147,766  |   | $ | 3,595,873 |   |

 

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

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

| ** **              | ** ** | **Years Ended  December 31,** | ** ** |
|-------------------------|------------|-----------------------------------------|------------|
| ** **              | ** ** | **2005**                                | ** ** | **2004** | ** ** |
| ** **              | ** ** | **(in millions)**                  | ** ** |
| Segment:                |       |                                    |       |   |   |
| Mortgage Banking        |       | $                                       | 427,916    |   | $ | 317,811 |   |
| Banking                 |       | 42,003                                  |       | 27,116 |   |
| Capital Markets:        |       |                                    |       |   |   |
| Conduit acquisitions(1) |       | 21,028                                  |       | 18,079 |   |
| Commercial Real Estate  |       | 3,925                                   |       | 358 |   |
|                    |       | $                                       | 494,872    |   | $ | 363,364 |   |
| Product:                |       |                                    |       |   |   |
| Prime Mortgage          |       | $                                       | 403,604    |   | $ | 292,672 |   |
| Nonprime Mortgage       |       | 44,637                                  |       | 39,441 |   |
| Prime Home Equity       |       | 42,706                                  |       | 30,893 |   |
| Commercial Real Estate  |       | 3,925                                   |       | 358 |   |
|                    |       | $                                       | 494,872    |   | $ | 363,364 |   |

----

(1)   Acquisitionsfrom third parties.

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

| ** **              | ** ** | **Years Ended  December 31,** | ** ** |
|-------------------------|------------|-----------------------------------------|------------|
| ** **              | ** ** | **2005**                                | ** ** | **2004** | ** ** |
| ** **              | ** ** | **(in millions)**                  | ** ** |
| **Purpose:**            |       |                                    |       |   |   |
| Non-purchase            |       | $                                       | 260,518    |   | $ | 186,781 |   |
| Purchase                |       | 234,354                                 |       | 176,583 |   |
|                    |       | $                                       | 494,872    |   | $ | 363,364 |   |
| **Interest Rate Type:** |       |                                    |       |   |   |
| Adjustable Rate         |       | $                                       | 257,332    |   | $ | 189,931 |   |
| Fixed Rate              |       | 237,540                                 |       | 173,433 |   |
|                    |       | $                                       | 494,872    |   | $ | 363,364 |   |

 

**Mortgage Banking Segment**

The Mortgage BankingSegment includes the Loan Production, Loan Servicing and Loan Closing ServicesSectors. The Loan Production and Loan Closing Services Sectors generallyperform most profitably when mortgage interest rates are relatively low andloan origination volume is high. Conversely, the Loan Servicing Sectorgenerally performs well when mortgage interest rates are relatively high andloan prepayments are low. We expect the natural counterbalance of these sectorsto continue to reduce the impact of changes in mortgage interest rates on ourearnings.

***Loan ProductionSector***

The Loan Production Sectorproduces mortgage loans through the four production divisions of CountrywideHome Loans (“CHL”)—Consumer Markets, Wholesale Lending, Correspondent Lendingand Full Spectrum Lending, and, beginning in the third quarter of 2005, throughCountrywide Bank.

Mortgage Banking loanproduction volume for 2005 increased 35% from the year-ago period. Our marketshare increased in 2005, which resulted in an increase in both purchase andnon-purchase loan production. Purchase loan production increased 30% from theyear-ago period. The increase in purchase loans is significant because thiscomponent of the mortgage market has historically offered relatively stablegrowth, averaging 11% per year over the last 10 years. The non-purchase, orrefinance, component of the mortgage market is highly volatile because it isdriven almost exclusively by prevailing mortgage interest rates.

Thefollowing table summarizes Mortgage Banking loan production by purpose and byinterest rate type:

| ** **              | ** ** | **Years Ended  December 31,** | ** ** |
|-------------------------|------------|-----------------------------------------|------------|
| ** **              | ** ** | **2005**                                | ** ** | **2004** | ** ** |
| ** **              | ** ** | **(in millions)**                  | ** ** |
| **Purpose:**            |       |                                    |       |   |   |
| Non-purchase            |       | $                                       | 226,400    |   | $ | 163,325 |   |
| Purchase                |       | 201,516                                 |       | 154,486 |   |
|                    |       | $                                       | 427,916    |   | $ | 317,811 |   |
| **Interest Rate Type:** |       |                                    |       |   |   |
| Fixed rate              |       | $                                       | 224,692    |   | $ | 163,588 |   |
| Adjustable rate         |       | 203,224                                 |       | 154,223 |   |
|                    |       | $                                       | 427,916    |   | $ | 317,811 |   |

 

In 2005, 47% of our loan production wasadjustable-rate in comparison to 49% in the year-ago period. The decrease inadjustable-rate production reflects the increase in short-term interest ratesduring the 

49

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current period and therelatively flat yield curve, increasing the relative attractiveness offixed-rate financing.

Whilevirtually unchanged as a percentage of total loans funded, the volume ofMortgage Banking Nonprime Mortgage and Prime Home Equity Loans produced (whichis included in our total volume of loans produced) increased 29% during 2005compared to the year-ago period. Details are shown in the following table:

| ** **                                        | ** ** | **Years Ended  December 31,**     | ** ** |
|---------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                        | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| ** **                                        | ** ** | **(dollar amounts  in millions)** | ** ** |
| Nonprime Mortgage Loans                           |       | $                                           | 40,089     |   | $ | 33,481 |   |
| Prime Home Equity Loans                           |       | 33,334                                      |       | 23,351 |   |
|                                              |       | $                                           | 73,423     |   | $ | 56,832 |   |
| Percent of total Mortgage Banking loan production |       | 17.2%                                       |       | 17.9 | % |

 

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

| ** **                             | ** ** | **Years Ended December 31,**      | ** **  |
|----------------------------------------|------------|--------------------------------------------------|-------------|
| ** **                             | ** ** | **2005**                                         | ** **  | **2004** | ** ** |
| ** **                             | ** ** | **Amount**                                       | ** **  | **Percentage of  Loan  Production  Volume** | ** ** | **Amount** | ** ** | **Percentage of  Loan  Production  Volume** | ** ** |
| ** **                             | ** ** | **(dollar amounts in thousands)** | ** **  |
| Revenues:                              |       |                                             |        |   |   |   |   |   |   |   |   |   |   |
| Prime Mortgage                         |       | $                                                | 3,223,177   |   |   |   |   |   | $ | 3,187,108 |   |   |   |   |   |
| Nonprime Mortgage                      |       | 1,096,145                                        |        |   |   |   |   | 1,364,912 |   |   |   |   |   |
| Prime Home Equity                      |       | 820,072                                          |        |   |   |   |   | 1,130,406 |   |   |   |   |   |
| Total revenues                         |       | 5,139,394                                        |        |   | 1.20 | % |   | 5,682,426 |   |   | 1.79 | % |   |
| Expenses:                              |       |                                             |        |   |   |   |   |   |   |   |   |   |   |
| Compensation                           |       | 2,089,777                                        |        |   | 0.48 | % |   | 1,894,187 |   |   | 0.60 | % |   |
| Other operating                        |       | 979,735                                          |        |   | 0.23 | % |   | 703,309 |   |   | 0.22 | % |   |
| Allocated corporate                    |       | 410,425                                          |        |   | 0.10 | % |   | 400,672 |   |   | 0.13 | % |   |
| Total expenses                         |       | 3,479,937                                        |        |   | 0.81 | % |   | 2,998,168 |   |   | 0.95 | % |   |
| Pre-tax earnings                       |       | $                                                | 1,659,457   |   |   | 0.39 | % |   | $ | 2,684,258 |   |   | 0.84 | % |   |
| Total Mortgage Banking loan production |       | $                                                | 427,916,000 |   |   |   |   |   | $ | 317,811,000 |   |   |   |   |   |

 

Despite an increase in loan production, revenues (indollars and expressed as a percentage of mortgage loans produced) decreasedover the year-ago period. Production Sector revenues were affected by marketprice pressure and by the effect of flattening of the yield curve on the netinterest income earned while we hold loans for sale. Normally, a decline in netinterest income caused by a flatter yield curve would be mitigated by anincrease in gain on sale, but in 2005 this was hindered by pricing pressure. In2005, $408.5 billion of mortgage loans, or 95% of loan production, was soldcompared to $324.7 billion of mortgage loans, or 102% of loan production, in2004. This decline in sales as a percentage of production contributed to thedecline in revenues as a percentage of mortgage loan production in the currentyear.

Expenses increased from the year-ago period, primarilydue to an increase in loan production. A shift in the mix of production towardsour correspondent channel, which traditionally has the lowest cost structure,helped reduce expenses expressed as a percentage of production compared to theprior year. We continued to expand our loan production operations in 2005 tosupport our long-term objective of market share growth.

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During 2005, the Loan Production Sector operated atapproximately 108% of planned operational capacity, compared to 111% during theyear-ago period. The primary capacity constraint in our loan originationactivities is the number of loan operations personnel we have on staff.Therefore, we measure planned capacity by multiplying the number of our loanoperations personnel by the number of loans we expect each loan operationsstaff person to process under normal conditions. Management adjusts staffinglevels to account for changes in the current and projected near-term mortgagemarket. We plan to continue building our sales staff as a primary means toincrease our market share, particularly for purchase loans.

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

| ** **                              | ** ** | **Workforce at  December 31,** | ** ** |
|-----------------------------------------|------------|------------------------------------------|------------|
| ** **                              | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| Sales                                   |       | 16,641                                   |       | 12,833 |   |
| Operations:                             |       |                                     |       |   |   |
| Regular employees                       |       | 9,246                                    |       | 7,992 |   |
| Temporary staff                         |       | 1,861                                    |       | 934 |   |
|                                    |       | 11,107                                   |       | 8,926 |   |
| Production  technology                  |       | 1,213                                    |       | 1,024 |   |
| Administration  and support             |       | 2,871                                    |       | 2,288 |   |
| Total Loan  Production Sector workforce |       | 31,832                                   |       | 25,071 |   |

 

The followingtable shows total Mortgage Banking loan production volume by division:

| ** **             | ** ** | **Years Ended  December 31,** | ** ** |
|------------------------|------------|-----------------------------------------|------------|
| ** **             | ** ** | **2005**                                | ** ** | **2004** | ** ** |
| ** **             | ** ** | **(in millions)**                  | ** ** |
| Correspondent  Lending |       | $                                       | 197,104    |   | $ | 133,588 |   |
| Consumer Markets       |       | 116,399                                 |       | 95,619 |   |
| Wholesale Lending      |       | 80,660                                  |       | 72,848 |   |
| Full Spectrum  Lending |       | 25,670                                  |       | 15,756 |   |
| Countrywide Bank       |       | 8,083                                   |       | — |   |
|                   |       | $                                       | 427,916    |   | $ | 317,811 |   |

 

The Correspondent Lending division increased itsoverall loan production volume due primarily to an increase in the mortgagemarket combined with increased market share resulting from a shift in consumerpreference towards agency conforming and pay-option loan products where we havea large market share.

The Consumer Markets Division continues to expand itscommissioned sales force, which emphasizes purchase loan production, to 5,974at December 31, 2005, an increase of 1,149, or 24%, over the year-agoperiod. This Division’s branch network has grown to 662 branch offices at December 31,2005, an increase of 85 offices from December 31, 2004.

TheConsumer Markets Division’s commissioned sales force contributed $48.5 billionin purchase originations during 2005, a 31% increase over the year-ago period.Such purchase production generated by the commissioned sales force represented77% of the Consumer Markets Division’s total purchase production for 2005.

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The Wholesale and Full Spectrum Lending Divisions alsocontinue to increase their sales forces as a means to increase market share. AtDecember 31, 2005, the sales force in the Wholesale Lending Divisionnumbered 1,311, an increase of 17% compared to December 31, 2004.

The Full Spectrum LendingDivision expanded its sales force to 4,871, an increase of 37% compared to December 31,2004 and has expanded its branch network to 195 branch offices at December 31,2005, an increase of 35 offices over the year-ago period.

***Loan Servicing Sector***

The Loan Servicing Sector includes approximately 7,900employees who service our 7.4 million mortgage loans. The Loan Servicing Sector’sresults include fees and other income earned and expenses incurred forservicing loans for others; the financial performance of our investments inMSRs and other retained interests and associated risk management activities;and profits from subservicing activities in the United States. The long-termperformance of this sector is affected primarily by the level of interestrates, the corresponding effect on the level of projected and actualprepayments in our servicing portfolio, our operational effectiveness and ourability to manage interest rate risk.

Thefollowing table summarizes the results for the Loan Servicing Sector:

| ** **                                   | ** ** | **Years Ended December 31,**      | ** **  |
|----------------------------------------------|------------|--------------------------------------------------|-------------|
| ** **                                   | ** ** | **2005**                                         | ** **  | **2004** | ** ** |
| ** **                                   | ** ** | **Amount**                                       | ** **  | **Percentage of  Average  Servicing  Portfolio** | ** ** | **Amount** | ** ** | **Percentage of  Average  Servicing  Portfolio** | ** ** |
| ** **                                   | ** ** | **(dollar amounts in thousands)** | ** **  |
| Servicing fees, net of  guarantee fees       |       | $                                                | 3,194,395   |   |   | 0.333 | % |   | $ | 2,382,685 |   |   | 0.327 | % |   |
| Miscellaneous fees                           |       | 508,576                                          |        |   | 0.053 | % |   | 525,807 |   |   | 0.072 | % |   |
| Income from other  retained interests        |       | 455,986                                          |        |   | 0.048 | % |   | 388,474 |   |   | 0.054 | % |   |
| Escrow balance income  (expense)             |       | 366,848                                          |        |   | 0.038 | % |   | (86,514 | ) |   | (0.012 | )% |   |
| Amortization of mortgage  servicing rights   |       | (2,288,354                                       | )           |   | (0.238 | )% |   | (1,940,457 | ) |   | (0.267 | )% |   |
| Recovery (impairment) of  retained interests |       | 21,950                                           |        |   | 0.002 | % |   | (643,864 | ) |   | (0.088 | )% |   |
| Servicing hedge losses                       |       | (523,078                                         | )           |   | (0.055 | )% |   | (215,343 | ) |   | (0.030 | )% |   |
| Total servicing revenues                     |       | 1,736,323                                        |        |   | 0.181 | % |   | 410,788 |   |   | 0.056 | % |   |
| Operating expenses                           |       | 647,898                                          |        |   | 0.067 | % |   | 460,552 |   |   | 0.063 | % |   |
| Allocated corporate  expenses                |       | 64,659                                           |        |   | 0.007 | % |   | 77,015 |   |   | 0.011 | % |   |
| Total servicing expenses                     |       | 712,557                                          |        |   | 0.074 | % |   | 537,567 |   |   | 0.074 | % |   |
| Interest expense                             |       | 354,155                                          |        |   | 0.037 | % |   | 306,752 |   |   | 0.042 | % |   |
| Pre-tax earnings (loss)                      |       | $                                                | 669,611     |   |   | 0.070 | % |   | $ | (433,531 | ) |   | (0.060 | )% |   |
| Average servicing portfolio                  |       | $                                                | 959,691,000 |   |   |   |   |   | $ | 727,821,000 |   |   |   |   |   |

 

Our servicing portfolio grew to $1,111.1 billion at December 31,2005, a 33% increase from December 31, 2004. At the same time, the overallweighted-average note rate of loans in our servicing portfolio increased to6.1% from 5.9% at December 31, 2004.

Pre-tax earnings in theLoan Servicing Sector were $669.6 million during 2005, an improvement of$1,103.1 million from the year-ago period. Such earnings improved due to a 32%increase in the average servicing portfolio, an increase in escrow balancebenefit due to higher short-term interest rates and improvement in the value ofour retained interests, net of the Servicing Hedge, which resulted from reducedactual and anticipated prepayment rates. The servicing sector was negativelyimpacted in the current year by hurricane losses of $29.2 million.

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***Loan Closing Services Sector***

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

The LandSafe companiesproduced $105.5 million in pre-tax earnings, an increase of 24% from theyear-ago period. The increase in LandSafe’s pre-tax earnings was primarily dueto the increase in our loan origination activity.

**Banking Segment**

The Banking Segment includes the investment andfee-based activities of Countrywide Bank, along with the activities ofCountrywide Warehouse Lending, a provider of mortgage inventory financing toindependent mortgage bankers. Part of our banking strategy is to holdloans in portfolio rather than immediately selling them into the secondarymortgage market. Management believes this strategy will provide a stream ofearnings over the life of such loans, create a greater base of future earningsand enhance the stability of earnings growth. In the short term, reportedconsolidated profits will be impacted by the reduction in gains that would havebeen recognizable had the loans been sold.

Countrywide Bank, N.A. (the “Bank”) also producesloans for sale through our Mortgage Banking Segment. As this activity is aMortgage Banking activity, the mortgage loan production and the income relatingto the sale of these loans is included in the Mortgage Banking Segment. Theproduction of loans by Countrywide Bank for our Mortgage Banking operations isa means to manage growth of the Bank’s portfolio of loans held for investmentwhile complying with regulatory requirements.

TheBanking Segment achieved pre-tax earnings of $1,074.5 million during 2005, ascompared to $582.5 million for the year-ago period. Following is thecomposition of pre-tax earnings by component:

| ** **                                                                            | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                            | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| ** **                                                                            | ** ** | **(in thousands)**                     | ** ** |
| Countywide Bank  investment and fee-based activities (“Banking Operations”) |       | $                                           | 1,017,313  |   | $ | 534,091 |   |
| Countrywide  Warehouse Lending (“CWL”)                                      |       | 90,033                                      |       | 71,414 |   |
| Allocated  corporate expenses                                                         |       | (32,866                                     | )          | (23,022 | ) |
| Total Banking  Segment pre-tax earnings                                               |       | $                                           | 1,074,480  |   | $ | 582,483 |   |

 

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

| ** **                                           | ** ** | **Years Ended December 31,**      | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                           | ** ** | **2005**                                         | ** ** | **2004** | ** ** |
| ** **                                           | ** ** | **(dollar amounts in thousands)** | ** ** |
| Interest income                                      |       | $                                                | 3,219,590  |   | $ | 1,301,351 |   |
| Interest expense                                     |       | (1,938,450                                       | )          | (631,188 | ) |
| Net interest income                                  |       | 1,281,140                                        |       | 670,163 |   |
| Provision for loan  losses                           |       | (81,644                                          | )          | (37,438 | ) |
| Net interest income  after provision for loan losses |       | 1,199,496                                        |       | 632,725 |   |
| Non-interest income                                  |       | 147,990                                          |       | 65,550 |   |
| Non-interest expense                                 |       | (330,173                                         | )          | (164,184 | ) |
| Pre-tax earnings                                     |       | $                                                | 1,017,313  |   | $ | 534,091 |   |
| Efficiency ratio(1)                                  |       | 21                                               | %          | 20 | % |
| After-tax return on  average assets                  |       | 1.01                                             | %          | 1.13 | % |

----

(1)          Non-interest expensereduced by mortgage insurance divided by the sum of net interest income plusnon-interest income. The Bank’s efficiency ratio reflects the benefitCountrywide Bank realizes from leveraging CHL’s operations in originatingmortgage loans and corporate support functions and the pricing of suchservices.

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Thechange in net interest income is summarized below:

| ** **                                                   | ** ** | **Years Ended December 31,**      | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                   | ** ** | **2005**                                         | ** ** | **2004** | ** ** |
| ** **                                                   | ** ** | **Average  Balance**                             | ** ** | **Interest  Income/  Expense** | ** ** | **Annualized  Yield/  Rate** | ** ** | **Average  Balance** | ** ** | **Interest  Income/  Expense** | ** ** | **Annualized  Yield/  Rate** | ** ** |
| ** **                                                   | ** ** | **(dollar amounts in thousands)** | ** ** |
| Interest-earning assets:                                     |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage loans(1)                                            |       | $                                                | 52,741,015 |   | $ | 2,861,280 |   |   | 5.43 | % |   | $ | 23,989,383 |   | $ | 1,147,979 |   |   | 4.79 | % |   |
| Securities available for  sale(2)                       |       | 6,091,499                                        |       | 284,867 |   |   | 4.68 | % |   | 3,013,265 |   | 124,086 |   |   | 4.12 | % |   |
| Short-term investments                                       |       | 723,341                                          |       | 25,049 |   |   | 3.46 | % |   | 592,919 |   | 7,719 |   |   | 1.30 | % |   |
| Other investments                                            |       | 1,131,121                                        |       | 48,394 |   |   | 4.28 | % |   | 567,682 |   | 21,567 |   |   | 3.80 | % |   |
| Total interest-earning  assets                               |       | 60,686,976                                       |       | 3,219,590 |   |   | 5.31 | % |   | 28,163,249 |   | 1,301,351 |   |   | 4.62 | % |   |
| Allowance for loan  losses                                   |       | (77,176                                          | )          |   |   |   |   |   |   | (29,008 | ) |   |   |   |   |   |   |
| Other assets                                                 |       | 714,084                                          |       |   |   |   |   |   |   | 471,333 |   |   |   |   |   |   |   |
| Total non  interest-earning assets                           |       | 636,908                                          |       |   |   |   |   |   |   | 442,325 |   |   |   |   |   |   |   |
| Total assets                                                 |       | $                                                | 61,323,884 |   |   |   |   |   |   |   | $ | 28,605,574 |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Money market deposits                                        |       | $                                                | 2,733,997  |   | 98,862 |   |   | 3.62 | % |   | $ | 795,025 |   | 18,286 |   |   | 2.30 | % |   |
| Savings                                                      |       | 1,110                                            |       | 16 |   |   | 1.45 | % |   | 1,798 |   | 31 |   |   | 1.73 | % |   |
| Escrow deposits                                              |       | 11,895,480                                       |       | 382,332 |   |   | 3.21 | % |   | 7,870,918 |   | 102,096 |   |   | 1.30 | % |   |
| Time deposits                                                |       | 16,210,538                                       |       | 585,139 |   |   | 3.61 | % |   | 6,432,036 |   | 197,389 |   |   | 3.07 | % |   |
| Total interest-bearing  deposits                        |       | 30,841,125                                       |       | 1,066,349 |   |   | 3.46 | % |   | 15,099,777 |   | 317,802 |   |   | 2.10 | % |   |
| FHLB advances                                                |       | 22,065,097                                       |       | 769,711 |   |   | 3.49 | % |   | 10,323,708 |   | 305,032 |   |   | 2.95 | % |   |
| Other borrowed funds                                         |       | 3,175,166                                        |       | 102,390 |   |   | 3.22 | % |   | 578,855 |   | 8,354 |   |   | 1.44 | % |   |
| Total borrowed funds                                         |       | 25,240,263                                       |       | 872,101 |   |   | 3.46 | % |   | 10,902,563 |   | 313,386 |   |   | 2.87 | % |   |
| Total interest-bearing  liabilities                          |       | 56,081,388                                       |       | 1,938,450 |   |   | 3.46 | % |   | 26,002,340 |   | 631,188 |   |   | 2.43 | % |   |
| Non interest-bearing liabilities and equity   |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non interest-bearing checking                                |       | 464,388                                          |       |   |   |   |   |   |   | 95,664 |   |   |   |   |   |   |   |
| Other liabilities                                            |       | 767,389                                          |       |   |   |   |   |   |   | 416,821 |   |   |   |   |   |   |   |
| Shareholder’s equity                                    |       | 4,010,719                                        |       |   |   |   |   |   |   | 2,090,749 |   |   |   |   |   |   |   |
| Total non  interest-bearing liabilities and equity           |       | 5,242,496                                        |       |   |   |   |   |   |   | 2,603,234 |   |   |   |   |   |   |   |
| Total liabilities and  shareholder’s equity             |       | $                                                | 61,323,884 |   |   |   |   |   |   |   | $ | 28,605,574 |   |   |   |   |   |   |   |
| Net interest income                                          |       |                                             |       | $ | 1,281,140 |   |   |   |   |   |   |   | $ | 670,163 |   |   |   |   |   |
| Net interest spread(3)                                       |       |                                             |       |   |   |   | 1.85 | % |   |   |   |   |   |   | 2.19 | % |   |
| Net interest margin(4)                                       |       |                                             |       |   |   |   | 2.11 | % |   |   |   |   |   |   | 2.38 | % |   |

----

(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.

55

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

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

Thedollar amounts of interest income and interest expense fluctuate depending uponchanges in interest rates and upon changes in the volume of ourinterest-earning assets and interest-bearing liabilities. Changes attributableto (i) changes in volume (changes in average outstanding balancesmultiplied by the prior period’s rate), (ii) changes in rate (changes inaverage interest rate multiplied by the prior period’s volume), and (iii) changesin rate/volume (changes in rate times the change in volume)—which wereallocated proportionately to the changes in volume and the changes in rate andincluded in the relevant column below—were as follows:

| ** **                         | ** ** | **2005 vs 2004**                    | ** ** |
|------------------------------------|------------|-----------------------------------------------|------------|
| ** **                         | ** ** | **Increase (Decrease) Due to** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **Volume**                                    | ** ** | **Rate** | ** ** | **Total Changes** | ** ** |
| ** **                         | ** ** | ** **                                    | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Interest-earning  assets:          |       |                                          |       |   |   |   |   |   |   |   |   |
| Mortgage loans(1)                  |       | $                                             | 1,500,308  |   |   | $ | 212,993 |   |   |   | $ | 1,713,301 |   |   |
| Securities available for sale(2)   |       | 141,938                                       |       |   | 18,843 |   |   |   | 160,781 |   |   |
| Short-term investments             |       | 2,028                                         |       |   | 15,302 |   |   |   | 17,330 |   |   |
| Other investments                  |       | 23,686                                        |       |   | 3,141 |   |   |   | 26,827 |   |   |
| Total interest income              |       | $                                             | 1,667,960  |   |   | $ | 250,279 |   |   |   | $ | 1,918,239 |   |   |
| Interest-bearing  liabilities:     |       |                                          |       |   |   |   |   |   |   |   |   |
| Money market deposits              |       | $                                             | (65,265    | ) |   | $ | (15,311 | ) |   |   | $ | (80,576 | ) |   |
| Savings                            |       | 11                                            |       |   | 4 |   |   |   | 15 |   |   |
| Escrow deposits                    |       | (72,036                                       | )          |   | (208,200 | ) |   |   | (280,236 | ) |   |
| Time deposits                      |       | (347,167                                      | )          |   | (40,583 | ) |   |   | (387,750 | ) |   |
| Total interest expense             |       | (484,457                                      | )          |   | (264,090 | ) |   |   | (748,547 | ) |   |
| FHLB advances                      |       | (400,995                                      | )          |   | (63,684 | ) |   |   | (464,679 | ) |   |
| Other borrowed funds               |       | (73,742                                       | )          |   | (20,294 | ) |   |   | (94,036 | ) |   |
| Total borrowed funds               |       | (474,737                                      | )          |   | (83,978 | ) |   |   | (558,715 | ) |   |
| Total interest-bearing liabilities |       | (959,194                                      | )          |   | (348,068 | ) |   |   | (1,307,262 | ) |   |
| Net interest  income               |       | $                                             | 708,766    |   |   | $ | (97,789 | ) |   |   | $ | 610,977 |   |   |

----

(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.

The increase in net interest income is primarily dueto a $32.5 billion or 115% increase in average interest-earning assets,partially offset by a 27 basis point reduction in net interest margin. Netinterest margin experienced compression during 2005 from the year-ago periodmainly as a result of a lag in the re-pricing of the Bank’s loanportfolio compared to the increase in the cost of its interest-bearingliabilities and to the large volume of loans held by the Bank that are earninginterest at their reduced introductory interest rates.

Countrywide Bank increased its investment inpay-option loans during 2005. These loans have interest rates that adjustmonthly and contain features that allow the borrower to defer making the fullinterest payment for at least the first year of the loan. Thereafter, minimummonthly payments increase by no more than 71⁄2% per year unless the unpaidbalance 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 

56

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repay a loan, the fullyamortizing loan payment amount is re-established every five years. Ourunderwriting standards conform to those required to make the pay-option loanssalable into the secondary market at the date of funding, including arequirement that the borrower meet secondary market debt-service ratio testsbased on the borrower making the fully amortizing loan payment assuming theloan’s interest rate is fully indexed. (A fully indexed loan rate equals thesum of the current index rate plus the margin applicable to the loan.)

Followingis a summary of pay-option loans held for investment by Countrywide Bank:

| ** **                                                      | ** ** | **December 31,**   | ** ** |
|-----------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                      | ** ** | **2005**                | ** ** | **2004** | ** ** |
| ** **                                                      | ** ** | **(in thousands)** | ** ** |
| Total pay-option  loan portfolio                                |       | $                       | 26,101,306 |   | $ | 4,698,665 |   |
| Pay-option loans  with accumulated negative amortization:       |       |                    |       |   |   |
| Principal                                                       |       | $                       | 13,963,721 |   | $ | 32,818 |   |
| Accumulated negative amortization (from original  loan balance) |       | $                       | 74,748     |   | $ | 29 |   |
| Original  loan-to-value ratio(1)                                |       | 75                      | %          | 73 | % |
| Original combined  loan-to-value ratio(2)                       |       | 78                      | %          | 75 | % |
| Average original  FICO score                                    |       | 720                     |       | 730 |   |
| Delinquencies(3)                                                |       | 0.22                    | %          | 0.08 | % |

----

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

(2)          The ratio of the lowerof the appraised value or purchase price of the property to the amount of allloans secured by the property.

(3)          Loans delinquent 60 daysand more, including non-accrual loans.

The provision for loan losses increased during 2005compared to 2004 due to the increase in mortgage loans held for investmentalong with the continued seasoning of the loans we have added during the pastyears and the estimated losses from Hurricane Katrina. We expect our provisionfor loan losses and the related allowance for loan losses to increase as apercentage of our portfolio of loans held for investment as our portfoliocontinues to season. The impact of the increase in the allowance for loanlosses will be partially mitigated by the addition of new loans to ourportfolio.

57

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Thecomposition of the Bank’s balance sheets was as follows:

| ** **                                  | ** ** | **December 31,**                           | ** ** |
|---------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                  | ** ** | **2005**                                        | ** ** | **2004** | ** ** |
| ** **                                  | ** ** | **Amount**                                      | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** |
| ** **                                  | ** ** | **(dollar amounts in millions)** | ** ** |
| **Assets**                                  |       |                                            |       |   |   |   |   |   |   |
| Short-term investments                      |       | $                                               | 245        |   | 4.08 | % | $ | 315 |   | 2.15 | % |
| Mortgage loans                              |       | 64,279                                          |       | 6.11 | % | 34,230 |   | 5.25 | % |
| Securities available for  sale              |       | 6,251                                           |       | 5.02 | % | 4,796 |   | 5.02 | % |
| FHLB  securities & FRB stock       |       | 1,333                                           |       | 4.73 | % | 795 |   | 3.96 | % |
| Total interest-earning  assets              |       | 72,108                                          |       | 5.98 | % | 40,136 |   | 5.17 | % |
| Cash                                        |       | 183                                             |       |   |   | 50 |   |   |   |
| Other assets                                |       | 736                                             |       |   |   | 778 |   |   |   |
| Total assets                                |       | $                                               | 73,027     |   |   |   | $ | 40,964 |   |   |   |
| **Liabilities  and Equity**                 |       |                                            |       |   |   |   |   |   |   |
| Deposits:(1)                                |       |                                            |       |   |   |   |   |   |   |
| Customer                                    |       | $                                               | 25,350     |   | 4.09 | % | $ | 12,045 |   | 3.27 | % |
| Company-controlled  escrow deposit accounts |       | 13,333                                          |       | 4.18 | % | 7,901 |   | 2.19 | % |
| FHLB advances                               |       | 26,267                                          |       | 3.88 | % | 15,475 |   | 2.97 | % |
| Other borrowings                            |       | 1,280                                           |       | 4.23 | % | 1,811 |   | 2.37 | % |
| Total interest-bearing  liabilities         |       | 66,230                                          |       | 4.03 | % | 37,232 |   | 2.87 | % |
| Other liabilities                           |       | 1,524                                           |       |   |   | 807 |   |   |   |
| Shareholder’s equity                   |       | 5,273                                           |       |   |   | 2,925 |   |   |   |
| Total liabilities and  equity               |       | $                                               | 73,027     |   |   |   | $ | 40,964 |   |   |   |
| Primary spread(2)                           |       |                                            |       | 1.95 | % |   |   | 2.30 | % |
| Nonaccrual loans                            |       | $                                               | 151.3      |   |   |   | $ | 21.8 |   |   |   |
| Capital ratios:                             |       |                                            |       |   |   |   |   |   |   |
| Tier 1 Leverage capital                     |       | 7.3                                             | %          |   |   | 7.8 | % |   |   |
| Tier 1 Risk-based  capital                  |       | 12.2                                            | %          |   |   | 11.8 | % |   |   |
| Total Risk-based capital                    |       | 12.5                                            | %          |   |   | 12.0 | % |   |   |

----

(1)          Includes inter-companydeposits.

(2)          Calculated as rate ontotal interest-earning assets less rate on total interest-bearing liabilities.

The Banking Segment alsoincludes the operation of CWL. CWL’s pre-tax earnings increased by $18.6million during 2005 in comparison to 2004, primarily due to a 62% increase inaverage mortgage warehouse advances. Such advances increased from $3.8 billionin 2004 to $6.1 billion in 2005, primarily due to an overall increase inactivity with Mortgage Banking Segment customers. At December 31, 2005,warehouse lending advances were $3.9 billion.

**Capital Markets Segment**

Our Capital Markets Segment achieved pre-tax earningsof $451.6 million for 2005, a decrease of $27.5 million, or 6%, from 2004.Total revenues were $798.3 million, an increase of $36.8 million, or 5%,compared to the year-ago period. During 2005, Capital Markets realized $67.3 millionin revenue from its commercial real estate finance activities. Partiallyoffsetting this increase in revenue, market conditions caused by risingshort-term interest rates and a flattening of the yield curve resulted in lowerrevenue from conduit and securities trading operations. The Capital MarketsSegment has expanded its capacity in its existing business lines and itsinvestment in new lines of business such as commercial real estate finance andbroker-dealer operations in Japan, which contributed to an increase in expensesof $64.3 million, or 23%, compared to the year-ago period.

58

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

| ** **                   | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------|------------|---------------------------------------------|------------|
| ** **                   | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| ** **                   | ** ** | **(in thousands)**                     | ** ** |
| Revenues:                    |       |                                        |       |   |   |
| Conduit                      |       | $                                           | 301,237    |   | $ | 319,089 |   |
| Underwriting                 |       | 271,729                                     |       | 289,125 |   |
| Securities trading           |       | 92,658                                      |       | 110,476 |   |
| Commercial real estate       |       | 67,298                                      |       | 3,485 |   |
| Brokering                    |       | 36,095                                      |       | 20,174 |   |
| Other                        |       | 29,234                                      |       | 19,089 |   |
| Total revenues               |       | 798,251                                     |       | 761,438 |   |
| Expenses:                    |       |                                        |       |   |   |
| Operating expenses           |       | 332,880                                     |       | 272,167 |   |
| Allocated corporate expenses |       | 13,742                                      |       | 10,156 |   |
| Total expenses               |       | 346,622                                     |       | 282,323 |   |
| Pre-tax earnings             |       | $                                           | 451,629    |   | $ | 479,115 |   |

 

During 2005, the Capital Markets Segment generatedrevenues totaling $301.2 million from its conduit activities, which includesmanaging the acquisition and sale or securitization of whole loans on behalf ofCHL. Conduit revenues for 2005 decreased 6% in comparison to the year-agoperiod, primarily because of a decrease in margins, driven by a flattening ofthe yield curve and increased competition.

Underwriting revenues decreased $17.4 million over theyear-ago period because of decreased underwriting of CHL securitizations byCapital Markets and a decrease in margins.

Trading volumes increased 2% from the year-ago periodexcluding U.S. Treasury securities. Including U.S. Treasury securities, thetotal securities volume traded increased 14% over the year-ago period. Despitethe increase in trading volumes, securities trading revenue declined 16% due toa decline in trading margins and a shift in product mix to lower margin product.

During 2005, the commercial real estate financeactivities of the Capital Markets Segment generated revenues totaling $67.3million from sales of commercial real estate loans. Our commercial real estatefinance activities were in their startup period during 2004.

Thefollowing table shows the composition of CSC securities trading volume, whichincludes intersegment trades with the mortgage banking operations, byinstrument:

| ** **                       | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------|------------|---------------------------------------------|------------|
| ** **                       | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| ** **                       | ** ** | **(in millions)**                      | ** ** |
| Mortgage-backed  securities      |       | $                                           | 1,841,783  |   | $ | 1,821,642 |   |
| Asset-backed  securities         |       | 163,975                                     |       | 186,296 |   |
| Other                            |       | 125,508                                     |       | 75,949 |   |
| Subtotal(1)                      |       | 2,131,266                                   |       | 2,083,887 |   |
| U.S. Treasury  securities        |       | 1,420,217                                   |       | 1,042,785 |   |
| Total securities  trading volume |       | $                                           | 3,551,483  |   | $ | 3,126,672 |   |

----

(1)          Approximately16% and 15% of the segment’s non-U.S. Treasury securities trading volume waswith CHL during 2005 and 2004, respectively.

59

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**Insurance Segment**

TheInsurance Segment’s pre-tax earnings increased 15% over the year-ago period, to$183.7 million. The following table shows pre-tax earnings by business line:

| ** **                                | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| ** **                                | ** ** | **(in thousands)**                     | ** ** |
| Balboa  Reinsurance Company               |       | $                                           | 178,647    |   | $ | 134,928 |   |
| Balboa Life and  Casualty Operations(1)   |       | 23,836                                      |       | 49,496 |   |
| Allocated corporate  expenses             |       | (18,767                                     | )          | (24,331 | ) |
| Total Insurance  Segment pre-tax earnings |       | $                                           | 183,716    |   | $ | 160,093 |   |

----

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

Thefollowing table shows net insurance premiums earned:

| ** **                           | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------|------------|---------------------------------------------|------------|
| ** **                           | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| ** **                           | ** ** | **(in thousands)**                     | ** ** |
| Balboa  Reinsurance Company          |       | $                                           | 180,716    |   | $ | 157,318 |   |
| Balboa Life and  Casualty Operations |       | 772,931                                     |       | 625,367 |   |
| Total net  insurance premiums earned |       | $                                           | 953,647    |   | $ | 782,685 |   |

 

Thefollowing table shows insurance claim expenses:

| ** **                           | ** ** | **Years Ended December 31,**      | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|
| ** **                           | ** ** | **2005**                                         | ** ** | **2004** | ** ** |
| ** **                           | ** ** | **Amount**                                       | ** ** | **As Percentage  of Net  Earned  Premiums** | ** ** | **Amount** | ** ** | **As Percentage  of Net  Earned  Premiums** | ** ** |
| ** **                           | ** ** | **(dollar amounts in thousands)** | ** ** |
| Balboa  Reinsurance Company          |       | $                                                | 30,756     |   |   | 17 | % |   | $ | 41,529 |   |   | 26 | % |   |
| Balboa Life and  Casualty Operations |       | 410,828                                          |       |   | 53 | % |   | 348,674 |   |   | 56 | % |   |
| Total insurance  claim expenses      |       | $                                                | 441,584    |   |   |   |   |   | $ | 390,203 |   |   |   |   |   |

 

Our mortgage reinsurance business produced $178.6million in pre-tax earnings, an increase of 32% over the year-ago period,driven primarily by growth of 9% in the mortgage loans included in our loanservicing portfolio that are covered by reinsurance contracts, along with areduced provision, as a percentage of premiums earned, for insured losses dueto faster-than expected prepayments of older pools of reinsured loans.

Our Life and Casualty insurance business producedpre-tax earnings of $23.8 million, a decrease of $25.7 million from theyear-ago period. The decrease in earnings was driven by $87.7 million incatastrophe losses, including $85.2 million relating to the hurricanes thatstruck the Gulf Coast states in 2005, in comparison to $67.9 million incurredin the year-ago period and an increase in expenses due to the growth in ourbusiness. The impact of these losses and increase in expenses was partiallyoffset by an increase in net earned premiums during 2005 in comparison to theyear-ago period. The increase in net earned premiums was primarily attributableto an increase in voluntary homeowners and auto insurance.

Our Life and Casualtyinsurance operations manage insurance risk by reinsuring portions of such risk.Balboa seeks to earn profits by capitalizing on Countrywide’s customer base andinstitutional relationships, as well as through operating efficiencies andsound underwriting.

60

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**Global Operations Segment**

Global Operations pre-taxearnings totaled $35.4 million, a decrease of $6.5 million from the year-agoperiod. The decrease in earnings was due to a 38% decline in the number of newmortgage loans processed.

**DetailedLine Item Discussion of Consolidated Revenue and Expense Items**

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

Gainon sale of loans and securities is summarized below:

| ** **                   | ** ** | **Years Ended December 31,**      | ** **  |
|------------------------------|------------|--------------------------------------------------|-------------|
| ** **                   | ** ** | **2005**                                         | ** **  | **2004** | ** ** |
| ** **                   | ** ** | ** **                                       | ** **  | **Gain on Sale** | ** ** | ** ** | ** ** | **Gain on Sale** | ** ** |
| ** **                   | ** ** | **Loans Sold**                              | ** **  | **Amount** | ** ** | **As Percentage  of Loans Sold** | ** ** | **Loans Sold** | ** ** | **Amount** | ** ** | **As Percentage  of Loans Sold** | ** ** |
| ** **                   | ** ** | **(dollar amounts in thousands)** | ** **  |
| Mortgage Banking:            |       |                                             |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Prime Mortgage Loans         |       | $                                                | 340,483,290 |   | $ | 2,787,108 |   |   | 0.82 | % |   | $ | 268,227,114 |   | $ | 2,492,464 |   |   | 0.93 | % |   |
| Nonprime Mortgage Loans |       | 43,774,272                                       |        | 881,843 |   |   | 2.01 | % |   | 30,649,607 |   | 1,115,450 |   |   | 3.64 | % |   |
| Prime Home Equity Loans:     |       |                                             |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Initial Sales                |       | 24,258,329                                       |        | 510,109 |   |   | 2.10 | % |   | 25,849,186 |   | 719,610 |   |   | 2.78 | % |   |
| Subsequent draws             |       | N/A                                              |        | 121,519 |   |   | N/A |   |   | N/A |   | 59,012 |   |   | N/A |   |   |
|                         |       | 24,258,329                                       |        | 631,628 |   |   | 2.60 | % |   | 25,849,186 |   | 778,622 |   |   | 3.01 | % |   |
| Production Sector            |       | 408,515,891                                      |        | 4,300,579 |   |   | 1.05 | % |   | 324,725,907 |   | 4,386,536 |   |   | 1.35 | % |   |
| Reperforming  loans          |       | 1,186,033                                        |        | 32,595 |   |   | 2.75 | % |   | 2,770,673 |   | 127,149 |   |   | 4.59 | % |   |
|                         |       | $                                                | 409,701,924 |   | 4,333,174 |   |   |   |   |   | $ | 327,496,580 |   | 4,513,685 |   |   |   |   |   |
| Capital Markets:             |       |                                             |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Conduit  activities(1)       |       | $                                                | 55,475,610  |   | 258,910 |   |   | 0.47 | % |   | $ | 44,157,661 |   | 273,424 |   |   | 0.62 | % |   |
| Underwriting                 |       | N/A                                              |        | 232,008 |   |   | N/A |   |   | N/A |   | 238,570 |   |   | N/A |   |   |
| Commercial real  estate      |       | $                                                | 3,155,389   |   | 62,242 |   |   | 1.97 | % |   | $ | 57,973 |   | 2,938 |   |   | 5.07 | % |   |
| Securities trading and other |       | N/A                                              |        | (54,021 | ) |   | N/A |   |   | N/A |   | (218,922 | ) |   | N/A |   |   |
|                         |       |                                             |        | 499,139 |   |   |   |   |   |   |   | 296,010 |   |   |   |   |   |
| Other                        |       | N/A                                              |        | 29,467 |   |   | N/A |   |   | N/A |   | 32,387 |   |   | N/A |   |   |
|                         |       |                                             |        | $ | 4,861,780 |   |   |   |   |   |   |   | $ | 4,842,082 |   |   |   |   |   |

----

(1)          Includes loans purchasedfrom the Mortgage Banking Segment.

61

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Theeffects of changes in the volume of loan sales and the rate of gain on sale (asa percentage of loans sold) on the amount of gain on sale is summarized in thefollowing table:

| ** **                | ** ** | **2005 vs. 2004**           | ** ** |
|---------------------------|------------|---------------------------------------|------------|
| ** **                | ** ** | **Increase (Decrease) Due** | ** ** | ** ** | ** ** |
| ** **                | ** ** | **Loans Sold**                   | ** ** | **Gain on Sale Rate** | ** ** | **Total** | ** ** |
| ** **                | ** ** | **(in thousands)**               | ** ** |
| Mortgage Banking:         |       |                                  |       |   |   |   |   |   |   |
| Prime Mortgage Loans      |       | $                                     | 615,983    |   |   | $ | (321,339 | ) |   | $ | 294,644 |   |
| Nonprime Mortgage Loans   |       | 373,251                               |       |   | (606,858 | ) |   | (233,607 | ) |
| Prime Home Equity  Loans: |       |                                  |       |   |   |   |   |   |   |
| Initial Sales             |       | (42,110                               | )          |   | (167,391 | ) |   | (209,501 | ) |
| Subsequent draws          |       | 62,507                                |       |   | — |   |   | 62,507 |   |
|                      |       | 20,397                                |       |   | (167,391 | ) |   | (146,994 | ) |
| Total Production Sector   |       | 1,009,631                             |       |   | (1,095,588 | ) |   | (85,957 | ) |
| Reperforming loans        |       | (55,577                               | )          |   | (38,977 | ) |   | (94,554 | ) |
| Total Mortgage  Banking   |       | $                                     | 954,054    |   |   | $ | (1,134,565 | ) |   | $ | (180,511 | ) |

 

Gain on sale of Prime Mortgage Loans increased in 2005as compared to 2004 due primarily to an increase in the volume of loans soldpartially offset by lower margins resulting from increased pricing competitionand weaker secondary market conditions.

Gain on sale of Nonprime Mortgage Loans decreased in2005 as compared to 2004 due primarily to lower margins resulting fromincreased pricing competition and weaker secondary market conditions, partiallyoffset by increased sales of Nonprime Mortgage Loans.

Gain on sale of Prime Home Equity Loans decreased in2005 as compared to 2004 due primarily to lower margins combined with adecrease in the volume of loans sold.

Gain on sale of Reperforming loans decreased in 2005as compared to 2004 due primarily to a decrease in the volume of loans soldcombined with lower margins. Reperforming loans are reinstated loans that hadpreviously defaulted and were repurchased from mortgage securitization trustswe sponsor. The note rate on these loans is typically higher than the currentlyoffered mortgage interest rates and therefore, the margin on these loans istypically higher than margins on Prime Mortgage Loans.

The decrease in Capital Markets’ gain on sale relatedto its conduit activities was due to a decline in margins partially offset byincreased sales of mortgage loans. The increase in Capital Markets’ gain onsale related to its commercial real estate activities was due to increasedsales of such loans. Capital Markets’ revenues from its securities tradingactivities consist of gain on sale and interest income. In a steep yield curveenvironment, net interest income will comprise a larger percentage of totalsecurities trading revenue. As the yield curve flattens, the mix of revenueswill naturally shift toward gain on sale of securities. During 2005 the yieldcurve was flatter than in 2004, which resulted in a shift in trading revenuesfrom interest income to gain on sale. The decrease in loss on sale of thetrading securities was more than offset by a decline in net interest income dueto the overall decline in trading margins.

In general, gain on saleof loans and securities is affected by numerous factors, including the volume,mix and timing of loans sold, production channel mix, the level of pricecompetition, the level of investor demand for mortgage securities, the slope ofthe yield curve and the effectiveness of our associated interest rate riskmanagement activities.

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

Netinterest income is summarized below:

| ** **                                                      | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                      | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| ** **                                                      | ** ** | **(in thousands)**                     | ** ** |
| Net interest income  (expense):                                 |       |                                        |       |   |   |
| Banking Segment loans and securities                            |       | $                                           | 1,381,672  |   | $ | 736,236 |   |
| Mortgage Banking Segment loans and securities                   |       | 607,041                                     |       | 1,202,571 |   |
| Loan Servicing Sector interest expense                          |       | (382,324                                    | )          | (353,454 | ) |
| Interest income (expense) on custodial balances                 |       | 366,848                                     |       | (86,514 | ) |
| Capital Markets Segment securities portfolio                    |       | 235,528                                     |       | 393,451 |   |
| Other                                                           |       | 144,855                                     |       | 145,026 |   |
| Net interest income                                             |       | 2,353,620                                   |       | 2,037,316 |   |
| Provision for loan losses related to loans held for  investment |       | (115,685                                    | )          | (71,775 | ) |
| Net interest  income after provision for loan losses            |       | $                                           | 2,237,935  |   | $ | 1,965,541 |   |

 

The increase in net interest income from the BankingSegment was primarily attributable to growth in the average investment inmortgage loans in the Bank and CWL. Average interest-earning assets in theBanking Segment increased to $66.8 billion during 2005, an increase of $34.9billion over the year-ago period. Offsetting this increase, the net interestmargin decreased to 2.05% during 2005 from 2.31% during the year-ago period.

The decrease in net interest income from MortgageBanking loans and securities reflects primarily a flattening of the yield curveduring 2005 as compared to 2004 partially offset by an increase in averagebalance. The Mortgage Banking Segment loan and securities inventory isprimarily financed with borrowings tied to short-term indices. Short-terminterest rates rose while long-term mortgage interest rates declined slightlybetween the year-ago period and 2005, reducing the net interest income relatingto outstanding balances. The decline in net interest margin was not offset byan increase in gain on sale due to price competition.

Interest expense allocated to the Loan ServicingSector increased primarily due to an increase in total Servicing Sector assetscombined with an increase in cost of funds.

Net interest income from custodial balances increasedin the current period due to an increase in the earnings rate on the custodialbalances from 1.24% during 2004 to 3.26% during 2005, resulting from anincrease in short-term interest rates combined with an increase in averagecustodial balances of $4.8 billion or 28% over the year-ago period. We arerequired to pass through monthly interest to security holders on paid-off loansat the underlying security rates, which were substantially higher than theshort-term rates earned by us on the payoff float. The amount of such interestpassed through to the security holders was $343.2 million and $296.7 million in2005 and 2004, respectively.

The decrease in net interest income from the CapitalMarkets securities portfolio is attributable to a decrease in the net interestmargin from 0.93% in 2004 to 0.47% 2005, which is partially offset by anincrease of 20% in the average inventory of securities held. The decrease innet interest margin on the securities portfolio is primarily due to a largerincrease in short-term financing rates versus the increase in rates in thelonger-term securities held by the Capital Markets Segment. The decline in netinterest income was partially offset by a decrease in loss on sale ofsecurities.

The increase in the provision for loan losses is dueto the continuing growth and seasoning of the Banking Segment’s loan portfolio,along with $78.5 million of estimated losses incurred as a result of HurricaneKatrina. During the period, nonaccrual loans increased 85% to $93.1 million.

63

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Nonaccrualloans and foreclosed assets at period end are summarized as follows:

| ** **                                                                                | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                | ** ** | **(in thousands)**     | ** ** |
| Nonaccrual  loans(1):                                                                     |       |                        |       |   |   |
| Mortgage loans:                                                                           |       |                        |       |   |   |
| Nonprime                                                                                  |       |                        | $          | 437,006 |   |   |
| Prime                                                                                     |       |                        | 444,094    |   |   |
| Prime home equity                                                                         |       |                        | 95,998     |   |   |
| Subtotal                                                                                  |       |                        | 977,098    |   |   |
| Warehouse lending advances                                                                |       |                        | —     |   |   |
| Defaulted FHA-insured and VA-guaranteed mortgage  loans repurchased from securities  |       |                        | 589,290    |   |   |
| Total nonaccrual loans                                                                    |       |                        | 1,566,388  |   |   |
| Foreclosed assets                                                                         |       |                        | 93,121     |   |   |
| Total nonaccrual loans and foreclosed assets                                              |       |                        | $          | 1,659,509 |   |   |
| Nonaccrual loans  as a percentage of loans held for investment:                           |       |                        |       |   |   |
| Total                                                                                     |       |                        | 2.2        | % |   |
| Excluding loans FHA-insured and VA-guaranteed loans                                       |       |                        | 1.4        | % |   |
| Allowance for  loan losses                                                                |       |                        | $          | 189,201 |   |   |
| Allowance for  loan losses as a percentage of nonaccrual loans:                           |       |                        |       |   |   |
| Total                                                                                     |       |                        | 12.1       | % |   |
| Excluding loans FHA-insured and VA-guaranteed loans                                       |       |                        | 19.4       | % |   |
| Allowance for loan  losses as a percentage of loans held for investment                   |       |                        | 0.3        | % |   |

----

(1)          This amount excludes$588.3 million of government-insured loans eligible for repurchase from GinnieMae securities issued by us. Our servicing agreement with Ginnie Mae allows usto repurchase loans that are delinquent more than 90 days instead of continuingto advance the delinquent interest to the security holders. This amount isincluded in loans held for investment as Countrywide has the option ofrepurchasing the loans from the securities and is required to include suchloans on its balance sheets. However, we do not include these loans in ournonaccrual balances because we have not exercised the option to repurchase theloans.

The allowance for loanlosses increased by 51% from $125.0 million at December 31, 2004, to$189.2 million at December 31, 2005, primarily due to growth in loans heldfor investment at Countrywide Bank. We expect our allowance for loan losses andthe related provision for loan losses to increase as a percentage of ourportfolio of loans held for investment as such portfolio continues to season.As our portfolio continues to grow, the impact of seasoning on the allowance asa percentage of loans held for investment will be partially offset by newloans.

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***Loan Servicing Fees and Other Income from RetainedInterests***

Loanservicing fees and other income from retained interests are summarized below:

| ** **                                                           | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                           | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| ** **                                                           | ** ** | **(in thousands)**                     | ** ** |
| Servicing fees,  net of guarantee fees                               |       | $                                           | 3,194,395  |   | $ | 2,382,685 |   |
| Income from other  retained interests                                |       | 455,986                                     |       | 388,474 |   |
| Late charges                                                         |       | 237,112                                     |       | 182,446 |   |
| Prepayment  penalties                                                |       | 211,668                                     |       | 153,467 |   |
| Global Operations  Segment subservicing fees                         |       | 108,378                                     |       | 106,356 |   |
| Ancillary fees                                                       |       | 73,715                                      |       | 56,159 |   |
| Total loan servicing fees and other income from  retained  interests |       | $                                           | 4,281,254  |   | $ | 3,269,587 |   |

 

The increase in servicing fees, net of guarantee fees,was principally due to a 32% increase in the average servicing portfolio, plusan increase in the overall annualized net service fee earned from 0.327% of theaverage portfolio balance during 2004 to 0.333% during 2005.

The increase in incomefrom other retained interests was due primarily to a 23% increase in theaverage investment in these assets. This income excludes any impairmentcharges, which are included in recovery (impairment) of retained interests inthe consolidated statement of earnings. Other retained interests includeinterest-only and principal-only securities as well as residual interests thatarise from the securitization of mortgage loans, particularly Nonprime Mortgageand Prime Home Equity Loans.

***Amortization of Mortgage Servicing Rights***

We recorded amortizationof MSRs of $2,288.4 million, or an annual rate of 20.8%, during 2005 ascompared to $1,940.5 million, or an annual rate of 22.0%, during 2004. Theamortization rate of MSRs is dependent on the forecasted prepayment speeds atthe beginning of each quarter during the period. On average, prevailingmortgage rates at the beginning of the quarterly periods during 2005 wereslightly higher than in 2004. In addition, the average of the portfolio noterates was lower over the same period. As a result, the average forecastedprepayment speeds were lower in the current period. This resulted in a loweramortization rate for 2005 than in the year-ago period. Dollar amortization washigher because the MSR asset balance was higher during 2005.

***Recovery (Impairment) of Retained Interests andServicing Hedge Losses***

Recovery (impairment) ofretained interests and Servicing Hedge losses are detailed below:

| ** **                                                            | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                            | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| ** **                                                            | ** ** | **(in thousands)**                     | ** ** |
| Recovery  (impairment) of retained interests:                         |       |                                        |       |   |   |
| MSRs:                                                                 |       |                                        |       |   |   |
| Recovery (impairment)                                                 |       | $                                           | 601,017    |   | $ | (279,842 | ) |
| Reduction  of MSR cost basis through application of hedge accounting: |       |                                        |       |   |   |
| Change in fair value attributable to hedged risk                      |       | (213,166                                    | )          | — |   |
| Total recovery (impairment) of MSRs                                   |       | 387,851                                     |       | (279,842 | ) |
| Other retained interests                                              |       | (364,506                                    | )          | (368,295 | ) |
|                                                                  |       | $                                           | 23,345     |   | $ | (648,137 | ) |
| Servicing Hedge losses recorded in earnings                           |       | $                                           | (523,078   | ) | $ | (215,343 | ) |

 

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Total recovery of MSRs during 2005 resulted from anincrease in the estimated fair value of MSRs resulting primarily from theincrease in mortgage interest rates during the period. MSR impairment in 2004resulted generally from a decrease in the MSRs’ estimated fair value driven bya slight decrease in mortgage rates during the period. In 2005 and 2004 werecognized impairment of other retained interests resulting from a decline inthe value of such securities. The collateral underlying certain of theseresiduals is fixed-rate while the pass-through rate is floating. An increase inprojected short-term interest rates during both periods caused compression ofthe spread on such residuals, which resulted in a decline in their value.

The Servicing Hedgegenerated losses of $523.1 million and $215.3 million during 2005 and 2004,respectively. During 2005 these losses resulted from increases in long-termTreasury and swap rates and mortgage rates as well as the decay in option timevalue. During 2004 the losses primarily resulted from the decay in option timevalue as long-term Treasury and swap rates remained substantially unchanged.

***Net Insurance Premiums Earned***

The increase in netinsurance premiums earned of $171.0 million was primarily due to an increase inpremiums earned on the voluntary homeowners and auto lines of business and inreinsurance premiums earned.

***Other Revenue***

Otherrevenue consisted of the following:

| ** **                                          | ** ** | **Years Ended  December 31,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                          | ** ** | **2005**                                | ** ** | **2004** | ** ** |
| ** **                                          | ** ** | **(in thousands)**                 | ** ** |
| Appraisal fees,  net                                |       | $                                       | 109,898    |   | $ | 75,991 |   |
| Credit report  fees, net                            |       | 77,830                                  |       | 70,558 |   |
| Global Operations  Segment processing fees          |       | 64,688                                  |       | 78,404 |   |
| Title services                                      |       | 44,293                                  |       | 46,480 |   |
| Insurance agency  commissions                       |       | 28,785                                  |       | 63,194 |   |
| Increase in cash  surrender value of life insurance |       | 8,324                                   |       | 22,041 |   |
| Other                                               |       | 136,361                                 |       | 154,001 |   |
| Total other  revenue                                |       | $                                       | 470,179    |   | $ | 510,669 |   |

 

***Compensation Expenses***

Averageworkforce by segment is summarized below:

| ** **                                    | ** ** | **Years Ended  December 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                    | ** ** | **2005**                                | ** ** | **2004** | ** ** |
| Mortgage Banking                              |       | 37,206                                  |       | 29,699 |   |
| Banking                                       |       | 1,804                                   |       | 1,015 |   |
| Capital Markets                               |       | 624                                     |       | 532 |   |
| Insurance                                     |       | 2,016                                   |       | 1,834 |   |
| Global Operations                             |       | 2,650                                   |       | 2,131 |   |
| Corporate  Administration                     |       | 4,414                                   |       | 3,720 |   |
| Average  workforce, including temporary staff |       | 48,714                                  |       | 38,931 |   |

 

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Compensationexpenses are summarized below:

| ** **                          | ** ** | **Years Ended  December 31,** | ** ** |
|-------------------------------------|------------|-----------------------------------------|------------|
| ** **                          | ** ** | **2005**                                | ** ** | **2004** | ** ** |
| ** **                          | ** ** | **(in thousands)**                 | ** ** |
| Base salaries                       |       | $                                       | 2,010,383  |   | $ | 1,650,321 |   |
| Incentive bonus  and commissions    |       | 1,940,426                               |       | 1,636,833 |   |
| Payroll taxes and  benefits         |       | 607,704                                 |       | 428,683 |   |
| Deferral of loan  origination costs |       | (943,030                                | )          | (578,792 | ) |
| Total  compensation expenses        |       | $                                       | 3,615,483  |   | $ | 3,137,045 |   |

 

Compensation expenses increased $478.4 million, or15%, during 2005 as compared to the year-ago period. In the Loan ProductionSector, compensation expenses increased $494.4 million, or 20%, prior to thedeferral of loan origination costs, because of a 26% increase in average staff.

In the Loan Servicing Sector, compensation expenserose $66.6 million, or 24%, to accommodate a 20% increase in the number ofloans serviced. Compensation expenses increased in most other business segmentsand corporate areas, reflecting growth in the Company.

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 related loan is sold, the costs deferred areincluded as a component of gain on sale; if the loan is held for investment,the costs are amortized to interest income over the life of the loan.

***Occupancy and Other Office Expenses***

Occupancyand other office expenses are summarized below:

| ** **                                 | ** ** | **Years Ended  December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                 | ** ** | **2005**                                | ** ** | **2004** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                 | ** ** |
| Office and  equipment rentals              |       | $                                       | 185,748    |   | $ | 160,687 |   |
| Depreciation  expense                      |       | 181,598                                 |       | 111,664 |   |
| Utilities                                  |       | 150,973                                 |       | 120,995 |   |
| Postage and  courier service               |       | 101,622                                 |       | 90,036 |   |
| Office supplies                            |       | 72,655                                  |       | 58,831 |   |
| Dues and  subscriptions                    |       | 53,154                                  |       | 44,859 |   |
| Repairs and  maintenance                   |       | 51,850                                  |       | 45,031 |   |
| Other                                      |       | 82,080                                  |       | 11,275 |   |
| Total occupancy  and other office expenses |       | $                                       | 879,680    |   | $ | 643,378 |   |

 

Occupancy and other officeexpenses for 2005 increased by $236.3 million primarily to accommodate a 25%increase in the average workforce.

***Insurance Claim Expenses***

Insurance claim expenseswere $441.6 million for 2005 as compared to $390.2 million for the year-agoperiod. The increase in insurance claim expenses was due mainly to growth inour insured risk and a $19.8 million increase in catastrophe losses over theyear-ago period.

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***Advertising and Promotion Expenses***

Advertising and promotionexpenses increased 34% from 2004, as a result of a shift in the mortgage loanproduction market towards purchase activity, which generally requires moreadvertising and promotion than refinance activity.

***Other Operating Expenses***

Otheroperating expenses are summarized below:

| ** **                                       | ** ** | **Years Ended  December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                       | ** ** | **2005**                                | ** ** | **2004** | ** ** |
| ** **                                       | ** ** | **(in thousands)**                 | ** ** |
| Insurance  commission expense                    |       | $                                       | 166,970    |   | $ | 123,225 |   |
| Legal,  consulting, accounting and auditing fees |       | 141,028                                 |       | 103,990 |   |
| Travel and entertainment                         |       | 115,473                                 |       | 85,319 |   |
| Losses on  servicing-related advances            |       | 71,181                                  |       | 56,785 |   |
| Software  amortization and impairment            |       | 64,962                                  |       | 53,235 |   |
| Insurance                                        |       | 55,071                                  |       | 55,608 |   |
| Taxes and  licenses                              |       | 49,488                                  |       | 37,582 |   |
| Other                                            |       | 194,172                                 |       | 188,203 |   |
| Deferral of loan  origination costs              |       | (155,333                                | )          | (75,404 | ) |
| Total other  operating expenses                  |       | $                                       | 703,012    |   | $ | 628,543 |   |

 

***Results ofOperations Comparison—Year Ended December 31, 2004, (“2004”) and YearEnded December 31, 2003, (“2003”)***

**Consolidated Earnings Performance**

Net earnings were $2,197.6 million during 2004, a 7%decrease from 2003. The decrease in our earnings was driven primarily by adecrease in the profitability of our Mortgage Banking Segment. The MortgageBanking Segment produced pre-tax earnings of $2,335.7 million for 2004, adecrease of 21% from 2003. In the Mortgage Banking Segment, improved financialperformance of our MSRs was more than offset by a decline in the profitabilityof our Loan Production Sector. Although net earnings decreased 7% from prioryear, earnings per share for 2004 decreased 13% to $3.63 as a result of anincrease in the average number of diluted shares outstanding during the period.

Loan Production Sector pre-tax earnings were $2,684.3million for 2004, a decrease of $1,403.6 million from the prior year. Thedecrease in the profitability of the Loan Production Sector resulted from lowerPrime Mortgage Loan production and sales combined with a compression inmargins, which was caused by generally higher mortgage interest rates;increased borrower demand for lower-margin adjustable-rate mortgages; greaterpricing competition; and, higher loan origination costs. Production Sectorprofitability in 2004 was bolstered by increased sales of higher-marginNonprime Mortgage and Prime Home Equity Loans.

The pre-tax loss in the Loan Servicing Sector, whichincorporates the performance of our MSRs and other retained interests, was$433.5 million, an improvement of $799.9 million from the year-ago period. Thereduced pre-tax loss was primarily attributable to a decrease in the combinedamount of amortization and impairment, net of Servicing Hedge (losses) gains,which totaled $2,799.7 million in 2004, compared to $3,267.4 million in theyear-ago period.

Our Banking Segmentincreased its pre-tax earnings by $295.3 million from the year-ago period,primarily as the result of increases in the balance of mortgage loans held byCountrywide Bank. In total, 

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non-mortgagebanking businesses contributed $1,260.2 million in pre-tax earnings for 2004,an increase of 41% from the year-ago period.

**Operating Segment Results**

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

| ** **             | ** ** | **Years Ended  December 31,** | ** ** |
|------------------------|------------|-----------------------------------------|------------|
| ** **             | ** ** | **2004**                                | ** ** | **2003** | ** ** |
| ** **             | ** ** | **(in thousands)**                 | ** ** |
| Mortgage Banking:      |       |                                    |       |   |   |
| Loan Production        |       | $                                       | 2,684,258  |   | $ | 4,087,866 |   |
| Loan Servicing         |       | (433,531                                | )          | (1,233,475 | ) |
| Loan Closing Services  |       | 84,986                                  |       | 97,825 |   |
| Total Mortgage Banking |       | 2,335,713                               |       | 2,952,216 |   |
| Banking                |       | 582,483                                 |       | 287,217 |   |
| Capital Markets        |       | 479,115                                 |       | 442,303 |   |
| Insurance              |       | 160,093                                 |       | 138,774 |   |
| Global Operations      |       | 41,865                                  |       | 25,607 |   |
| Other                  |       | (3,396                                  | )          | (345 | ) |
| Total                  |       | $                                       | 3,595,873  |   | $ | 3,845,772 |   |

 

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

Mortgageloan production by segment and product is summarized below:

| ** **              | ** ** | **Years Ended  December 31,** | ** ** |
|-------------------------|------------|-----------------------------------------|------------|
| ** **              | ** ** | **2004**                                | ** ** | **2003** | ** ** |
| ** **              | ** ** | **(in millions)**                  | ** ** |
| Segment:                |       |                                    |       |   |   |
| Mortgage Banking        |       | $                                       | 317,811    |   | $ | 398,310 |   |
| Banking                 |       | 27,116                                  |       | 14,354 |   |
| Capital Markets:        |       |                                    |       |   |   |
| Conduit acquisitions    |       | 18,079                                  |       | 22,200 |   |
| Commercial Real Restate |       | 358                                     |       | — |   |
|                    |       | $                                       | 363,364    |   | $ | 434,864 |   |
| Product:                |       |                                    |       |   |   |
| Prime Mortgage          |       | $                                       | 292,672    |   | $ | 396,934 |   |
| Nonprime Mortgage       |       | 39,441                                  |       | 19,827 |   |
| Prime Home Equity       |       | 30,893                                  |       | 18,103 |   |
| Commercial Real Estate  |       | 358                                     |       | — |   |
|                    |       | $                                       | 363,364    |   | $ | 434,864 |   |

 

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

| ** **               | ** ** | **Years Ended  December 31,** | ** ** |
|--------------------------|------------|-----------------------------------------|------------|
| ** **               | ** ** | **2004**                                | ** ** | **2003** | ** ** |
| ** **               | ** ** | **(in millions)**                  | ** ** |
| **Purpose:**             |       |                                    |       |   |   |
| Non-purchase             |       | $                                       | 186,781    |   | $ | 305,084 |   |
| Purchase                 |       | 176,583                                 |       | 129,780 |   |
|                     |       | $                                       | 363,364    |   | $ | 434,864 |   |
| **Interest  Rate Type:** |       |                                    |       |   |   |
| Adjustable Rate          |       | $                                       | 189,931    |   | $ | 91,824 |   |
| Fixed Rate               |       | 173,433                                 |       | 343,040 |   |
|                     |       | $                                       | 363,364    |   | $ | 434,864 |   |

 

**Mortgage Banking Segment**

The Mortgage BankingSegment includes the Loan Production, Loan Servicing and Loan Closing ServicesSectors. The Loan Production and Loan Closing Services Sectors generallyperform at their best when mortgage rates are relatively low and loanorigination volume is high. Conversely, the Loan Servicing Sector generallyperforms well when mortgage rates are relatively high and loan prepayments arelow. The natural counterbalance of these sectors reduces the impact of changesin mortgage rates on our earnings.

***Loan Production Sector***

The Loan Production Sector produces mortgage loansthrough the four production divisions of Countrywide Home Loans (“CHL”)—ConsumerMarkets, Wholesale Lending, Correspondent Lending and Full Spectrum Lending.Full Spectrum Lending, Inc. was a subsidiary of CFC until it merged withCHL in December 2004.

Mortgage Banking loan production volume for 2004decreased 20% in comparison to 2003. Non-purchase loan production declined by42%, while purchase production increased by 33%. The increase in purchase loansis significant because this component of the mortgage market offers relativelystable growth, averaging 11% per year over the last 10 years. The non-purchase,or refinance, component of the mortgage market is highly volatile because it isdriven almost exclusively by prevailing mortgage rates.

Thefollowing table summarizes Mortgage Banking loan production by purpose and byinterest rate type:

| ** **               | ** ** | **Years Ended  December 31,** | ** ** |
|--------------------------|------------|-----------------------------------------|------------|
| ** **               | ** ** | **2004**                                | ** ** | **2003** | ** ** |
| ** **               | ** ** | **(in millions)**                  | ** ** |
| **Purpose:**             |       |                                    |       |   |   |
| Non-purchase             |       | $                                       | 163,325    |   | $ | 282,560 |   |
| Purchase                 |       | 154,486                                 |       | 115,750 |   |
|                     |       | $                                       | 317,811    |   | $ | 398,310 |   |
| **Interest  Rate Type:** |       |                                    |       |   |   |
| Fixed rate               |       | $                                       | 163,588    |   | $ | 327,412 |   |
| Adjustable rate          |       | 154,223                                 |       | 70,898 |   |
|                     |       | $                                       | 317,811    |   | $ | 398,310 |   |

 

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In 2004, 49% of our loan production wasadjustable-rate in comparison to 18% in 2003. The shift in homeownerpreferences toward adjustable-rate mortgages in 2004 was driven by an increasein 30-year fixed mortgage rates, coupled with the availability ofattractive product alternatives such as hybrid adjustable-rate and short-termpay-option adjustable-rate mortgages that provide a relatively low fixed ratefor the first three to ten years of the mortgage.

Thevolume of Mortgage Banking Prime Home Equity and Nonprime Mortgage Loansproduced (which is included in our total volume of loans produced) increased104% during the current period from the prior period. Details are shown in thefollowing table.

| ** **                                         | ** ** | **Years Ended  December 31,**                              | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                         | ** ** | **     2004     ** | ** ** | **     2003     ** | ** ** |
| ** **                                         | ** ** | **(dollar amounts in millions)**                      | ** ** |
| Prime Home Equity  Loans                           |       |                                                                 | $          | 23,351 |   |   |   | $ | 12,268 |   |   |
| Nonprime Mortgage  Loans                           |       |                                                                 | 33,481     |   |   |   | 15,525 |   |   |
|                                               |       |                                                                 | $          | 56,832 |   |   |   | $ | 27,793 |   |   |
| Percent of total  Mortgage Banking loan production |       |                                                                 | 17.9       | % |   |   | 7.0 | % |   |

 

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

| ** **                              | ** ** | **Years Ended December 31,**      | ** **  |
|-----------------------------------------|------------|--------------------------------------------------|-------------|
| ** **                              | ** ** | **2004**                                         | ** **  | **2003** | ** ** |
| ****                                    | ** ** | **Amount**                                       | ** **  | **Percentage of  Loan Production  Volume** | ** ** | **Amount** | ** ** | **Percentage of  Loan Production  Volume** | ** ** |
| ** **                              | ** ** | **(dollar amounts in thousands)** | ** **  |
| Revenues:                               |       |                                             |        |   |   |   |   |   |   |   |   |   |   |
| Prime Mortgage                          |       | $                                                | 3,187,108   |   |   |   |   |   | $ | 5,713,008 |   |   |   |   |   |
| Nonprime Mortgage                       |       | 1,364,912                                        |        |   |   |   |   | 564,188 |   |   |   |   |   |
| Prime Home Equity                       |       | 1,130,406                                        |        |   |   |   |   | 210,264 |   |   |   |   |   |
| Total revenues                          |       | 5,682,426                                        |        |   | 1.79 | % |   | 6,487,460 |   |   | 1.63 | % |   |
| Expenses:                               |       |                                             |        |   |   |   |   |   |   |   |   |   |   |
| Compensation                            |       | 1,894,187                                        |        |   | 0.60 | % |   | 1,511,876 |   |   | 0.38 | % |   |
| Other operating                         |       | 703,309                                          |        |   | 0.22 | % |   | 489,708 |   |   | 0.12 | % |   |
| Allocated corporate                     |       | 400,672                                          |        |   | 0.13 | % |   | 398,010 |   |   | 0.10 | % |   |
| Total expenses                          |       | 2,998,168                                        |        |   | 0.95 | % |   | 2,399,594 |   |   | 0.60 | % |   |
| Pre-tax earnings                        |       | $                                                | 2,684,258   |   |   | 0.84 | % |   | $ | 4,087,866 |   |   | 1.03 | % |   |
| Total Mortgage Banking  loan production |       | $                                                | 317,811,000 |   |   |   |   |   | $ | 398,310,000 |   |   |   |   |   |

 

Decreased demand for residential mortgages from thehistoric levels experienced in 2003 resulted in lower production volume in 2004.The resulting decline in our production was moderated by an increase in ourmarket share from the year-ago period. Our mortgage loan production marketshare was 13.1% in 2004, up from 11.4% in 2003*.*

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Revenues declined over the prior year due primarily toa reduction in production and sales volumes and to decreased margins on PrimeMortgage Loans. Sales of Prime Mortgage Loans were $268.2 billion in thecurrent period compared to $363.2 billion in the prior year. We attribute thedecline in margins on Prime Mortgage Loans to increased price competitioncaused by the significant reduction in refinance activity, as well as to theshift in consumer preference towards adjustable rate mortgages, which generallycarry lower margins than 30-year fixed-rate mortgages. The decline inPrime Mortgage Loan revenues was partially offset by increased production andsales of higher margin Nonprime Mortgage and Prime Home Equity Loans. Combinedsales of Nonprime Mortgage and Prime Home Equity Loan products were $56.5 billionin 2004 compared to $11.1 billion in 2003. The increase in total revenues as apercentage of loan volume in 2004 is attributable to a shift in mix towardNonprime Mortgage and Prime Home Equity Loans, which generally have higherrevenues, as a percentage of the loan balance, than Prime Mortgage Loans.

Operating expenses increased, both in dollars and inproportion to loan production volume, compared to the prior year. Expensesincreased primarily due to an increase in sales and marketing costs and to ageneral reduction in productivity from the very high levels achieved during thepeak of refinance activity in 2003. The increase in sales and marketing costswere related to increased production in 2004 of purchase Prime Mortgage Loans,Nonprime Mortgage Loans and Prime Home Equity Loans, as well as to an increasein the percentage of total loans produced through our retail channels. Wecontinued to expand our loans production operations in 2004 despite a declinein the overall market to support our long-term objective of market sharegrowth.

During 2004, the Loan Production Sector operated atapproximately 111% of planned operational capacity, compared to 123% during theyear-ago period. The primary capacity constraint in our loan originationactivities is the number of loan operations personnel we have on staff.Therefore, we measure planned capacity with reference to the number of our loanoperations personnel multiplied by the number of loans we expect each loanoperations staff person to process under normal conditions. As loan productionvolume has declined, there has been a reduction in productivity to moresustainable levels that has resulted in higher overall unit costs. We plan tocontinue building our sales staff despite a potential further drop in loanorigination volume as a primary means to increase our market share,particularly for purchase loans.

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

| ** **                              | ** ** | **Workforce at  December 31,** | ** ** |
|-----------------------------------------|------------|------------------------------------------|------------|
| ** **                              | ** ** | **2004**                                 | ** ** | **2003** | ** ** |
| Sales                                   |       | 12,833                                   |       | 8,681 |   |
| Operations:                             |       |                                     |       |   |   |
| Regular employees                       |       | 7,992                                    |       | 7,116 |   |
| Temporary staff                         |       | 934                                      |       | 504 |   |
|                                    |       | 8,926                                    |       | 7,620 |   |
| Production  technology                  |       | 1,024                                    |       | 994 |   |
| Administration  and support             |       | 2,288                                    |       | 1,723 |   |
| Total Loan  Production Sector workforce |       | 25,071                                   |       | 19,018 |   |

 

72

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Thefollowing table shows total Mortgage Banking loan production volume bydivision:

| ** **             | ** ** | **Years Ended  December 31,** | ** ** |
|------------------------|------------|-----------------------------------------|------------|
| ** **             | ** ** | **2004**                                | ** ** | **2003** | ** ** |
| ** **             | ** ** | **(in millions)**                  | ** ** |
| Correspondent  Lending |       | $                                       | 133,588    |   | $ | 194,948 |   |
| Consumer Markets       |       | 95,619                                  |       | 104,216 |   |
| Wholesale Lending      |       | 72,848                                  |       | 91,211 |   |
| Full Spectrum  Lending |       | 15,756                                  |       | 7,935 |   |
|                   |       | $                                       | 317,811    |   | $ | 398,310 |   |

 

The commissioned sales force of the Consumer MarketsDivision numbered 4,825 at December 31, 2004, an increase of 1,341 or 38%compared to December 31, 2003. The commissioned sales force contributed$36.9 billion in purchase originations during 2004, a 43% increase over theyear-ago period. The purchase production generated by the commissioned salesforce represented 75% of the Consumer Markets Division’s purchase productionfor 2004. In addition, the Consumer Markets Division has expanded its branchnetwork to 577 branch offices at December 31, 2004, an increase of 111offices over the year-ago period.

The Wholesale Lending Divisionand Full Spectrum Lending Division also continued to grow their sales forces asa means to increase market share. At December 31, 2004, the sales force inthe Wholesale Lending Division numbered 1,123, an increase of 27% compared to December 31,2003. The Full Spectrum Lending Division expanded its sales force by 1,544, or77%, compared to December 31, 2003, and has expanded its branch network to160 branch offices at December 31, 2004, an increase of 63 offices overthe prior year.

***Loan Servicing Sector***

Thefollowing table summarizes the results for the Loan Servicing Sector:

| ** **                                 | ** ** | **Years Ended December 31,**      | ** **  |
|--------------------------------------------|------------|--------------------------------------------------|-------------|
| ** **                                 | ** ** | **2004**                                         | ** **  | **2003** | ** ** |
| ** **                                 | ** ** | **Amount**                                       | ** **  | **Percentage of  Average  Servicing  Portfolio** | ** ** | **Amount** | ** ** | **Percentage of  Average  Servicing  Portfolio** | ** ** |
| ** **                                 | ** ** | **(dollar amounts in thousands)** | ** **  |
| Servicing fees,  net of guarantee fees     |       | $                                                | 2,382,685   |   |   | 0.327 | % |   | $ | 1,917,014 |   |   | 0.350 | % |   |
| Miscellaneous  fees                        |       | 525,807                                          |        |   | 0.072 | % |   | 546,380 |   |   | 0.099 | % |   |
| Income from other  retained interests      |       | 388,474                                          |        |   | 0.054 | % |   | 410,346 |   |   | 0.075 | % |   |
| Escrow balance  expense                    |       | (86,514                                          | )           |   | (0.012 | )% |   | (212,562 | ) |   | (0.039 | )% |   |
| Amortization of  mortgage servicing rights |       | (1,940,457                                       | )           |   | (0.267 | )% |   | (2,069,246 | ) |   | (0.377 | )% |   |
| Impairment of  retained interests          |       | (643,864                                         | )           |   | (0.088 | )% |   | (1,432,965 | ) |   | (0.261 | )% |   |
| Servicing hedge  (losses) gains            |       | (215,343                                         | )           |   | (0.030 | )% |   | 234,823 |   |   | 0.043 | % |   |
| Total servicing revenues                   |       | 410,788                                          |        |   | 0.056 | % |   | (606,210 | ) |   | (0.110 | )% |   |
| Operating  expenses                        |       | 460,552                                          |        |   | 0.063 | % |   | 359,005 |   |   | 0.066 | % |   |
| Allocated  corporate expenses              |       | 77,015                                           |        |   | 0.011 | % |   | 84,126 |   |   | 0.015 | % |   |
| Total servicing expenses                   |       | 537,567                                          |        |   | 0.074 | % |   | 443,131 |   |   | 0.081 | % |   |
| Interest expense                           |       | 306,752                                          |        |   | 0.042 | % |   | 184,134 |   |   | 0.034 | % |   |
| Pre-tax loss                               |       | $                                                | (433,531    | ) |   | (0.060 | )% |   | $ | (1,233,475 | ) |   | (0.225 | )% |   |
| Average servicing  portfolio volume        |       | $                                                | 727,821,000 |   |   |   |   |   | $ | 548,724,000 |   |   |   |   |   |

 

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Our servicing portfolio grew to $838.3 billion at December 31,2004, a 30% increase from December 31, 2003. At the same time, the overallweighted-average note rate of loans in our servicing portfolio declined from6.1% to 5.9%.

The pre-tax loss in the Loan Servicing Sector was$433.5 million during 2004, an improvement of $799.9 million from the prioryear. During 2004, mortgage rates were generally higher than in 2003, whichresulted in lower actual and projected prepayments. Such lower prepaymentsresulted in lower amortization and impairment. The combined amounts ofamortization and impairment, were $2,584.3 million and $3,502.2 million during2004 and 2003, respectively.

Long-term Treasury andswap rates are the indices that underlie the derivatives that constitute theprimary components of the Servicing Hedge. There was little change in theserates from December 31, 2003 to December 31, 2004. The ServicingHedge loss of $215.3 million in 2004 resulted primarily from time value decayon the options included in the Servicing Hedge. During 2003, the ServicingHedge generated a gain of $234.8 million. This gain resulted from a decline inlong-term Treasury and swap rates during the first part of 2003. The ServicingHedge gains generated in the early part of 2003 were partly offset by ServicingHedge losses toward the end of the year as long-term Treasury and swap ratesrose. In a stable interest rate environment, we would expect to incur nosignificant impairment charges; however, we would expect to incur lossesrelated to the Servicing Hedge driven primarily by time decay on options usedin the hedge. The level of such Servicing Hedge losses depends on variousfactors such as the size and composition of the hedge, the shape of the yieldcurve and the level of implied interest rate volatility.

***Loan Closing Services Sector***

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

The LandSafe companiesproduced $85.0 million in pre-tax earnings, representing a decrease of 13% fromthe prior year. The decrease in LandSafe’s pre-tax earnings was primarily dueto the decrease in our loan origination activity.

**Banking Segment**

Our banking strategy includes holding loans inportfolio that historically would have been immediately securitized and soldinto the secondary mortgage market. Management believes this strategy willincrease earnings, as well as provide more stable earnings over the long term.In the short term, reported profits will be impacted by the reduction in gainsotherwise recognizable at time of sale.

TheBanking Segment achieved pre-tax earnings of $582.5 million during 2004, ascompared to $287.2 million for the year-ago period. Following is thecomposition of pre-tax earnings by company:

| ** **                                       | ** ** | **Years Ended  December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                       | ** ** | **2004**                                | ** ** | **2003** | ** ** |
| ** **                                       | ** ** | **(in thousands)**                 | ** ** |
| Banking  Operations                              |       | $                                       | 534,091    |   | $ | 228,657 |   |
| Countrywide  Warehouse Lending (“CWL”) |       | 71,414                                  |       | 78,105 |   |
| Allocated  corporate expenses                    |       | (23,022                                 | )          | (19,545 | ) |
| Pre-tax earnings                                 |       | $                                       | 582,483    |   | $ | 287,217 |   |

 

74

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TheBank’s revenues and expenses are summarized in the following table:

| ** **                                          | ** ** | **Years Ended December 31,**                                                  | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                          | ** ** | **       2004       ** | ** ** | **       2003       ** | ** ** |
| ** **                                          | ** ** | **(dollar amounts in thousands)**                                             | ** ** |
| Interest income                                     |       | $                                                                                            | 1,301,351  |   |   | $ | 504,023 |   |   |
| Interest expense                                    |       | (631,188                                                                                     | )          |   | (232,826 | ) |   |
| Net interest income                                 |       | 670,163                                                                                      |       |   | 271,197 |   |   |
| Provision for  loan losses                          |       | (37,438                                                                                      | )          |   | (9,782 | ) |   |
| Net interest income after provision for loan losses |       | 632,725                                                                                      |       |   | 261,415 |   |   |
| Non-interest  income                                |       | 65,550                                                                                       |       |   | 63,035 |   |   |
| Non-interest  expense                               |       | (164,184                                                                                     | )          |   | (95,793 | ) |   |
| Pre-tax earnings                                    |       | $                                                                                            | 534,091    |   |   | $ | 228,657 |   |   |
| Efficiency  ratio(1)                                |       | 20                                                                                           | %          |   | 27 | % |   |
| After-tax return on  average assets                 |       | 1.13                                                                                         | %          |   | 1.11 | % |   |

----

(1)          Non-interest expensereduced by mortgage insurance divided by the sum of net interest income plusnon-interest income.

75

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Theincrease in net interest income is primarily due to a $15.8 billion or 127%increase in average interest-earning assets, as summarized below:

| ** **                                        | ** ** | **Years Ended December 31,**      | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                        | ** ** | **2004**                                         | ** ** | **2003** | ** ** |
| ** **                                        | ** ** | **Average  Balance**                             | ** ** | **Interest  Income/  Expense** | ** ** | **Annualized  Yield/  Rate** | ** ** | **Average  Balance** | ** ** | **Interest  Income/  Expense** | ** ** | **Annualized  Yield/  Rate** | ** ** |
| ** **                                        | ** ** | **(dollar amounts in thousands)** | ** ** |
| Interest-earning  assets:                         |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage loans(1)                                 |       | $                                                | 23,989,383 |   | $ | 1,147,979 |   |   | 4.79 | % |   | $ | 7,729,436 |   | $ | 351,558 |   |   | 4.55 | % |   |
| Securities available for  sale(2)                 |       | 3,013,265                                        |       | 124,086 |   |   | 4.12 | % |   | 3,601,929 |   | 134,204 |   |   | 3.73 | % |   |
| Short-term investments                            |       | 592,919                                          |       | 7,719 |   |   | 1.30 | % |   | 849,036 |   | 9,896 |   |   | 1.17 | % |   |
| Other investments                                 |       | 567,682                                          |       | 21,567 |   |   | 3.80 | % |   | 209,988 |   | 8,365 |   |   | 3.98 | % |   |
| Total interest-earning assets                |       | 28,163,249                                       |       | 1,301,351 |   |   | 4.62 | % |   | 12,390,389 |   | 504,023 |   |   | 4.07 | % |   |
| Allowance for loan losses                         |       | (29,008                                          | )          |   |   |   |   |   |   | (6,651 | ) |   |   |   |   |   |   |
| Other assets                                      |       | 471,333                                          |       |   |   |   |   |   |   | 251,591 |   |   |   |   |   |   |   |
| Total non interest-earning assets                 |       | 442,325                                          |       |   |   |   |   |   |   | 244,940 |   |   |   |   |   |   |   |
| Total assets                                      |       | $                                                | 28,605,574 |   |   |   |   |   |   |   | $ | 12,635,329 |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                    |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Money market deposits                             |       | $                                                | 795,025    |   | 18,286 |   |   | 2.30 | % |   | $ | 32,329 |   | 577 |   |   | 1.78 | % |   |
| Savings                                           |       | 1,798                                            |       | 31 |   |   | 1.73 | % |   | 1,626 |   | 28 |   |   | 1.71 | % |   |
| Escrow deposits                                   |       | 7,870,918                                        |       | 102,096 |   |   | 1.30 | % |   | 5,788,084 |   | 57,801 |   |   | 1.00 | % |   |
| Time deposits                                     |       | 6,432,036                                        |       | 197,389 |   |   | 3.07 | % |   | 1,738,712 |   | 57,910 |   |   | 3.33 | % |   |
| Total interest-bearing deposits                   |       | 15,099,777                                       |       | 317,802 |   |   | 2.10 | % |   | 7,560,751 |   | 116,316 |   |   | 1.54 | % |   |
| FHLB advances                                     |       | 10,323,708                                       |       | 305,032 |   |   | 2.95 | % |   | 3,541,507 |   | 114,437 |   |   | 3.23 | % |   |
| Other borrowed funds                              |       | 578,855                                          |       | 8,354 |   |   | 1.44 | % |   | 178,086 |   | 2,073 |   |   | 1.16 | % |   |
| Total borrowed funds                              |       | 10,902,563                                       |       | 313,386 |   |   | 2.87 | % |   | 3,719,593 |   | 116,510 |   |   | 3.13 | % |   |
| Total interest-bearing liabilities                |       | 26,002,340                                       |       | 631,188 |   |   | 2.43 | % |   | 11,280,344 |   | 232,826 |   |   | 2.06 | % |   |
| Non interest-bearing liabilities and equity       |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non interest-bearing   checking                   |       | 95,664                                           |       |   |   |   |   |   |   | 11,241 |   |   |   |   |   |   |   |
| Other liabilities                                 |       | 416,821                                          |       |   |   |   |   |   |   | 127,324 |   |   |   |   |   |   |   |
| Shareholders’ equity                         |       | 2,090,749                                        |       |   |   |   |   |   |   | 1,216,420 |   |   |   |   |   |   |   |
| Total non interest-bearing liabilities and equity |       | 2,603,234                                        |       |   |   |   |   |   |   | 1,354,985 |   |   |   |   |   |   |   |
| Total liabilities and shareholders’ equity   |       | $                                                | 28,605,574 |   |   |   |   |   |   |   | $ | 12,635,329 |   |   |   |   |   |   |   |
| Net interest  income                              |       |                                             |       | $ | 670,163 |   |   |   |   |   |   |   | $ | 271,197 |   |   |   |   |   |
| Net interest  spread(3)                           |       |                                             |       |   |   |   | 2.19 | % |   |   |   |   |   |   | 2.01 | % |   |
| Net interest margin(4)                            |       |                                             |       |   |   |   | 2.38 | % |   |   |   |   |   |   | 2.19 | % |   |

----

(1)          Average balances includenonaccrual loans.

76

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

(3)          Calculated as yield on totalaverage interest-earning assets less rate on total average interest-bearingliabilities.

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

Thedollar amounts of interest income and interest expense fluctuate depending uponchanges in interest rates and upon changes in the volume of ourinterest-earning assets and interest-bearing liabilities. Changes attributableto (i) changes in volume (changes in average outstanding balancesmultiplied by the prior period’s rate), (ii) changes in rate (changes inaverage interest rate multiplied by the prior period’s volume), and (iii) changesin rate/volume (changes in rate times the change in volume)—which wereallocated proportionately to the changes in volume and the changes in rate andincluded in the relevant column below—were as follows:

| ** **                         | ** ** | **2004 vs 2003**                                             | ** ** |
|------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **Increase (Decrease) Due to**                          | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **     Volume     ** | ** ** | **      Rate      ** | ** ** | **Total Changes** | ** ** |
| ** **                         | ** ** | **(in thousands)**                                                | ** ** |
| Interest-earning  assets:          |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Mortgage loans(1)                  |       |                                                                   | $          | 774,279 |   |   |   | $ | 22,142 |   |   |   | $ | 796,421 |   |   |
| Securities available for sale(2)   |       |                                                                   | (28,414    | ) |   |   | 18,296 |   |   |   | (10,118 | ) |   |
| Short-term investments             |       |                                                                   | (3,556     | ) |   |   | 1,379 |   |   |   | (2,177 | ) |   |
| Other investments                  |       |                                                                   | 13,254     |   |   |   | (52 | ) |   |   | 13,202 |   |   |
| Total interest income              |       |                                                                   | 755,563    |   |   |   | 41,765 |   |   |   | 797,328 |   |   |
| Interest-bearing  liabilities:     |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Money market deposits              |       |                                                                   | $          | (17,495 | ) |   |   | $ | (214 | ) |   |   | $ | (17,709 | ) |   |
| Savings                            |       |                                                                   | (3         | ) |   |   | — |   |   |   | (3 | ) |   |
| Escrow deposits                    |       |                                                                   | (24,195    | ) |   |   | (20,100 | ) |   |   | (44,295 | ) |   |
| Time deposits                      |       |                                                                   | (143,681   | ) |   |   | 4,202 |   |   |   | (139,479 | ) |   |
| Total interest expense             |       |                                                                   | (185,374   | ) |   |   | (16,112 | ) |   |   | (201,486 | ) |   |
| FHLB advances                      |       |                                                                   | (199,514   | ) |   |   | 8,919 |   |   |   | (190,595 | ) |   |
| Other borrowed funds               |       |                                                                   | (5,676     | ) |   |   | (605 | ) |   |   | (6,281 | ) |   |
| Total borrowed funds               |       |                                                                   | (205,190   | ) |   |   | 8,314 |   |   |   | (196,876 | ) |   |
| Total interest-bearing liabilities |       |                                                                   | (390,564   | ) |   |   | (7,798 | ) |   |   | (398,362 | ) |   |
| Net interest  income               |       |                                                                   | $          | 364,999 |   |   |   | $ | 33,967 |   |   |   | $ | 398,966 |   |   |

----

(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.

The increase in net interest income is primarily dueto a $15.8 billion increase in average interest-earning assets, primarilymortgage loans, combined with an increase in net interest margin (net interestincome divided by average earning assets) of 19 basis points. The marginincrease was the result of a change in the mix of interest-earning assetstoward mortgage loans and the reduced amortization of loan origination costsand purchase premiums on securities resulting from lower prepayments onmortgage loans and securities.

77

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Thecomposition of the Bank’s balance sheets was as follows:

| ** **                                 | ** ** | **December 31,**                           | ** ** |
|--------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                 | ** ** | **2004**                                        | ** ** | **2003** | ** ** |
| ** **                                 | ** ** | **Amount**                                      | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** |
| ** **                                 | ** ** | **(dollar amounts in millions)** | ** ** |
| **Assets**                                 |       |                                            |       |   |   |   |   |   |   |
| Short-term  investments                    |       | $                                               | 315        |   | 2.15 | % | $ | 451 |   | 0.95 | % |
| Mortgage loans                             |       | 34,230                                          |       | 5.25 | % | 14,686 |   | 4.97 | % |
| Securities  available for sale             |       | 4,796                                           |       | 5.02 | % | 3,564 |   | 4.24 | % |
| FHLB  securities & FRB stock      |       | 795                                             |       | 3.96 | % | 394 |   | 3.75 | % |
| Total interest-earning assets              |       | 40,136                                          |       | 5.17 | % | 19,095 |   | 4.71 | % |
| Cash                                       |       | 50                                              |       |   |   | 43 |   |   |   |
| Other assets                               |       | 778                                             |       |   |   | 239 |   |   |   |
| Total assets                               |       | $                                               | 40,964     |   |   |   | $ | 19,377 |   |   |   |
| **Liabilities and Equity**                 |       |                                            |       |   |   |   |   |   |   |
| Deposits:(1)                               |       |                                            |       |   |   |   |   |   |   |
| Customer                                   |       | $                                               | 12,045     |   | 3.27 | % | $ | 3,335 |   | 3.24 | % |
| Company-controlled escrow deposit accounts |       | 7,901                                           |       | 2.19 | % | 5,901 |   | 0.96 | % |
| FHLB advances                              |       | 15,475                                          |       | 2.97 | % | 6,875 |   | 3.19 | % |
| Other borrowings                           |       | 1,811                                           |       | 2.37 | % | 1,508 |   | 1.15 | % |
| Total interest-bearing liabilities         |       | 37,232                                          |       | 2.87 | % | 17,619 |   | 2.28 | % |
| Other liabilities                          |       | 807                                             |       |   |   | 263 |   |   |   |
| Shareholder’s  equity                 |       | 2,925                                           |       |   |   | 1,495 |   |   |   |
| Total liabilities and equity               |       | $                                               | 40,964     |   |   |   | $ | 19,377 |   |   |   |
| Primary spread(2)                          |       |                                            |       | 2.30 | % |   |   | 2.43 | % |
| Nonaccrual loans                           |       | $                                               | 21.8       |   |   |   | $ | 4.4 |   |   |   |
| Capital ratios:                            |       |                                            |       |   |   |   |   |   |   |
| Tier 1 Leverage capital                    |       | 7.8                                             | %          |   |   | 8.6 | % |   |   |
| Tier 1 Risk-based capital                  |       | 11.8                                            | %          |   |   | 12.8 | % |   |   |
| Total Risk-based  capital                  |       | 12.0                                            | %          |   |   | 12.9 | % |   |   |

----

(1)          Includes inter-companydeposits.

(2)          Calculated as rate ontotal interest-earning assets less rate on total interest-bearing liabilities

The Banking Segment alsoincludes the operation of CWL. CWL’s pre-tax earnings decreased by $6.7 millionduring 2004 in comparison to the prior year, primarily due to a 6% decrease inaverage mortgage warehouse advances, which in turn resulted from an overalldecline in the mortgage originations market.

**Capital Markets Segment**

Our Capital Markets Segment achieved pre-tax earningsof $479.1 million for 2004, an increase of $36.8 million, or 8%, from theyear-ago period. Total revenues were $761.4 million, an increase of $85.4million, or 13%, compared to the year-ago period. Capital Markets benefited byunderwriting the Production Sector’s Prime Home Equity and Nonprime MortgageLoan securitizations, which increased significantly in the current year. Thisbenefit was offset by a less favorable mortgage-related fixed income securitiesmarket. These factors led to reduced mortgage-backed securities trading volumesand margins. This segment has expanded its staffing and infrastructure toinvest in the development of new lines of business such as U.S. Treasurysecurities trading, commercial real estate finance and broker-dealer operationsin Japan, which largely contributed to an increase in expenses of $48.6million, or 21%, compared to the year-ago period.

78

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Thefollowing table shows revenues, expenses and pre-tax earnings of the Capital MarketsSegment:

| ** **                   | ** ** | **Years Ended December 31,**                                      | ** ** |
|------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                   | ** ** | **      2004      ** | ** ** | **      2003      ** | ** ** |
| ** **                   | ** ** | **(in thousands)**                                                          | ** ** |
| Revenues:                    |       |                                                                             |       |   |   |   |   |   |   |
| Conduit                      |       |                                                                             | $          | 319,089 |   |   |   | $ | 269,592 |   |   |
| Underwriting                 |       |                                                                             | 289,125    |   |   |   | 171,958 |   |   |
| Securities trading           |       |                                                                             | 110,476    |   |   |   | 199,149 |   |   |
| Brokering                    |       |                                                                             | 20,174     |   |   |   | 29,944 |   |   |
| Commercial real estate       |       |                                                                             | 3,485      |   |   |   | — |   |   |
| Other                        |       |                                                                             | 19,089     |   |   |   | 5,360 |   |   |
| Total revenues               |       |                                                                             | 761,438    |   |   |   | 676,003 |   |   |
| Expenses:                    |       |                                                                             |       |   |   |   |   |   |   |
| Operating expenses           |       |                                                                             | 272,167    |   |   |   | 222,555 |   |   |
| Allocated corporate expenses |       |                                                                             | 10,156     |   |   |   | 11,145 |   |   |
| Total expenses               |       |                                                                             | 282,323    |   |   |   | 233,700 |   |   |
| Pre-tax earnings             |       |                                                                             | $          | 479,115 |   |   |   | $ | 442,303 |   |   |

 

During 2004, the Capital Markets Segment generatedrevenues totaling $319.1 million from its conduit activities, which includebrokering and managing the acquisition and sale or securitization of wholeloans on behalf of CHL. Conduit revenues for 2004 increased 18% in comparisonto the prior year, primarily as a result of an increase in margins on sales ofdistressed assets and increased sales of Nonprime Mortgage Loans.

Underwriting revenues increased $117.2 million overthe prior year as a result of increased sales of our nonprime and home equitysecurities.

Trading revenues declined 45% due to a decrease in thesize of the overall mortgage market, which resulted in a decline in mortgagesecurities trading volume and margins. Trading volumes declined 26% from theprior year before giving effect to the introduction by the Company of U.S.Treasury securities trading. Including U.S. Treasury securities, the totalsecurities volume traded increased 9% over the prior year. Effective January 15,2004, Countrywide Securities Corporation (“CSC”) became a “Primary Dealer” andas such is an authorized counterparty with the Federal Reserve Bank of New Yorkin its open market operations.

The following table showsthe composition of CSC securities trading volume, which includes intersegmenttrades with the mortgage banking operations, by instrument:

| ** **                       | ** ** | **Years Ended December 31,**                                      | ** ** |
|----------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                       | ** ** | **      2004      ** | ** ** | **      2003      ** | ** ** |
| ** **                       | ** ** | **(in millions)**                                                           | ** ** |
| Mortgage-backed  securities      |       | $                                                                                | 1,821,642  |   | $ | 2,647,099 |   |
| Asset-backed securities          |       | 186,296                                                                          |       | 50,944 |   |
| Other                            |       | 75,949                                                                           |       | 112,360 |   |
| Subtotal(1)                      |       | 2,083,887                                                                        |       | 2,810,403 |   |
| U.S. Treasury securities         |       | 1,042,785                                                                        |       | 48,310 |   |
| Total securities trading  volume |       | $                                                                                | 3,126,672  |   | $ | 2,858,713 |   |

----

(1)          Approximately15% and 12% of the segment’s non-U.S. Treasury securities trading volume waswith CHL during 2004 and 2003, respectively.

79

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**Insurance Segment**

TheInsurance Segment’s pre-tax earnings increased 15% over the prior year, to$160.1 million. The following table shows pre-tax earnings by business line:

| ** **                              | ** ** | **Years Ended December 31,**                                      | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                              | ** ** | **      2004      ** | ** ** | **      2003      ** | ** ** |
| ** **                              | ** ** | **(in thousands)**                                                          | ** ** |
| Balboa  Reinsurance Company             |       |                                                                             | $          | 134,928 |   |   |   | $ | 102,785 |   |   |
| Balboa Life and  Casualty Operations(1) |       |                                                                             | 49,496     |   |   |   | 56,043 |   |   |
| Allocated  corporate expenses           |       |                                                                             | (24,331    | ) |   |   | (20,054 | ) |   |
| Pre-tax earnings                        |       |                                                                             | $          | 160,093 |   |   |   | $ | 138,774 |   |   |

----

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

Thefollowing table shows net insurance premiums earned:

| ** **                           | ** ** | **Years Ended December 31,**                                      | ** ** |
|--------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                           | ** ** | **      2004      ** | ** ** | **      2003      ** | ** ** |
| ** **                           | ** ** | **(in thousands)**                                                          | ** ** |
| Balboa  Reinsurance Company          |       |                                                                             | $          | 157,318 |   |   |   | $ | 128,585 |   |   |
| Balboa Life and  Casualty Operations |       |                                                                             | 625,367    |   |   |   | 604,231 |   |   |
| Total net  insurance premiums earned |       |                                                                             | $          | 782,685 |   |   |   | $ | 732,816 |   |   |

 

Thefollowing table shows insurance claim expenses:

| ** **                           | ** ** | **Years Ended December 31,**      | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|
| ** **                           | ** ** | **2004**                                         | ** ** | **2003** | ** ** |
| ** **                           | ** ** | **Amount**                                       | ** ** | **As Percentage  of Net Earned  Premiums(1)** | ** ** | **Amount** | ** ** | **As Percentage  of Net Earned  Premiums(1)** | ** ** |
| ** **                           | ** ** | **(dollar amounts in thousands)** | ** ** |
| Balboa  Reinsurance Company          |       | $                                                | 41,529     |   |   | 26 | % |   | $ | 38,636 |   |   | 30 | % |   |
| Balboa Life and  Casualty Operations |       | 348,674                                          |       |   | 56 | % |   | 321,410 |   |   | 53 | % |   |
| Total insurance  claim expenses      |       | $                                                | 390,203    |   |   |   |   |   | $ | 360,046 |   |   |   |   |   |

 

Our mortgage reinsurance business produced $134.9million in pre-tax earnings, an increase of 31% over the year-ago period,driven primarily by growth of 7% in the mortgage loans included in our loanservicing portfolio that are covered by reinsurance contracts, combined with anoverall increase in the ceded premium percentage.

Our Life and Casualty insurance business producedpre-tax earnings of $49.5 million, a decrease of $6.5 million from the prioryear. The decline in earnings was driven by $67.9 million in estimated lossesrelating to hurricane damage sustained in Florida during 2004 in comparison to$10.1 million of catastrophic losses in the prior year, partially offset by a declinein non-catastrophic losses and a $21.1 million, or 3.5%, increase in net earnedpremiums during 2004 in comparison to the prior year. The growth in net earnedpremiums was primarily attributable to growth in the lender-placed auto andvoluntary homeowner insurance lines of business.

Our Life and Casualtyinsurance operations manage insurance risk by reinsuring portions of such risk.Balboa seeks to earn profits by capitalizing on Countrywide’s customer base andinstitutional relationships, as well as through operating efficiencies andsound underwriting.

80

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**Global Operations Segment**

Global Operations pre-taxearnings totaled $41.9 million, an increase of $16.3 million in comparison tothe prior year. The increase in earnings was due partly to growth in theportfolio of mortgage loans subserviced on behalf of Global Home Loans’minority joint venture partner, Barclays Bank PLC. In addition, a favorableshift in foreign exchange rates contributed $5.6 million to earnings along witha $6.5 million software impairment in 2003, which did not recur in thecurrent period.

**DetailedLine Item Discussion of Consolidated Revenue and Expense Items**

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

Gainon sale of loans and securities is summarized below:

| ** **                         | ** ** | **Years Ended December 31,**      | ** **  |
|------------------------------------|------------|--------------------------------------------------|-------------|
| ** **                         | ** ** | **2004**                                         | ** **  | **2003** | ** ** |
| ** **                         | ** ** | ** **                                       | ** **  | **Gain on Sale** | ** ** | ** ** | ** ** | **Gain on Sale** | ** ** |
| ** **                         | ** ** | **Loans Sold**                              | ** **  | **Amount** | ** ** | **As Percentage  of Loans Sold** | ** ** | **Loans Sold** | ** ** | **Amount** | ** ** | **As Percentage  of Loans Sold** | ** ** |
| ** **                         | ** ** | **(dollar amounts in thousands)** | ** **  |
| Mortgage Banking:                  |       |                                             |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Prime Mortgage  Loans              |       | $                                                | 268,227,114 |   | $ | 2,492,464 |   |   | 0.93 | % |   | $ | 363,193,537 |   | $ | 5,073,107 |   |   | 1.40 | % |   |
| Nonprime Mortgage  Loans           |       | 30,649,607                                       |        | 1,115,450 |   |   | 3.64 | % |   | 10,231,132 |   | 452,866 |   |   | 4.43 | % |   |
| Prime Home Equity  Loans           |       | 25,849,186                                       |        | 778,622 |   |   | 3.01 | % |   | 820,125 |   | 15,566 |   |   | 1.90 | % |   |
| Production Sector                  |       | 324,725,907                                      |        | 4,386,536 |   |   | 1.35 | % |   | 374,244,794 |   | 5,541,539 |   |   | 1.48 | % |   |
| Reperforming loans                 |       | 2,770,673                                        |        | 127,149 |   |   | 4.59 | % |   | 2,396,957 |   | 163,443 |   |   | 6.82 | % |   |
|                               |       | $                                                | 327,496,580 |   | 4,513,685 |   |   |   |   |   | $ | 376,641,751 |   | 5,704,982 |   |   |   |   |   |
| Capital Markets:                   |       |                                             |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Conduit  activities(1)             |       | $                                                | 44,157,661  |   | 273,424 |   |   | 0.62 | % |   | $ | 44,142,091 |   | 237,449 |   |   | 0.54 | % |   |
| Underwriting                       |       | N/A                                              |        | 238,570 |   |   | N/A |   |   | N/A |   | 126,751 |   |   | N/A |   |   |
| Commercial real  estate            |       | $                                                | 57,973      |   | 2,938 |   |   | 5.07 | % |   | N/A |   | — |   |   | N/A |   |   |
| Securities trading  and other |       | N/A                                              |        | (218,922 | ) |   | N/A |   |   | N/A |   | (207,789 | ) |   | N/A |   |   |
|                               |       |                                             |        | 296,010 |   |   |   |   |   |   |   | 156,411 |   |   |   |   |   |
| Other                              |       | N/A                                              |        | 32,387 |   |   | N/A |   |   | N/A |   | 26,043 |   |   | N/A |   |   |
|                               |       |                                             |        | $ | 4,842,082 |   |   |   |   |   |   |   | $ | 5,887,436 |   |   |   |   |   |

----

(1)          Includes intercompanysales.

Gain on sale of Prime Mortgage Loans decreased in 2004as compared to 2003, due primarily to lower Prime Mortgage Loan production andsales combined with lower margins. The decline in margins from the high levelsrealized in 2003 was due to increased price competition as a result of lowerhomeowner demand for refinance mortgage loans, combined with a shift inhomeowner preference toward adjustable-rate mortgages, which generally carrylower margins than 30-year fixed-rate mortgages. Gain on sale of PrimeHome Equity and Nonprime Mortgage Loans increased in 2004 compared to 2003, dueprimarily to increased sales of these loans, offset somewhat by lower marginson the sale of Nonprime Mortgage Loans. Inventory of these products had beenaccumulated during recent periods of high origination volume.

Reperforming loans are reinstated loans that hadpreviously defaulted and were repurchased from mortgage securities we issued.The note rate on these loans is typically higher than the current mortgagerate, and therefore, the margin on these loans is typically higher than marginson Prime Mortgage Loans. A change in Ginnie Mae rules related to therepurchase of defaulted loans from Ginnie Mae securities has reduced the amountof loans available for repurchase, which has contributed to a lower gain onsale related to these items.

The increase in Capital Markets’ underwriting revenueswas due to increased sales of our nonprime and home equity securities combinedwith an increase in third-party underwriting business. The increase in 

81

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Capital Markets’ gain onsale related to its conduit activities was due to increased margins on sales ofdistressed assets combined with increased sales of Nonprime Mortgage Loans.Capital Markets’ revenues from its trading activities consist of gain on saleand interest income. In a steep yield curve environment, which generallyexisted during 2004 and 2003, trading revenues derive largely or entirely fromnet interest income earned during the securities’ holding period. As the yieldcurve flattens, the mix of revenues will naturally shift toward gain on sale ofsecurities.

In general, gain on saleof loans and securities is affected by numerous factors, including the volumeand mix of loans sold, production channel mix, the level of price competition,the slope of the yield curve, and the effectiveness of our associated interestrate risk management activities.

***Net Interest Income***

Netinterest income is summarized below:

| ** **                                                      | ** ** | **Years Ended December 31,**                                                  | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **       2004       ** | ** ** | **       2003       ** | ** ** |
| ** **                                                      | ** ** | **(in thousands)**                                                                      | ** ** |
| Net interest  income (expense):                                 |       |                                                                                         |       |   |   |
| Mortgage Banking Segment loans and securities                   |       | $                                                                                            | 1,202,571  |   | $ | 887,436 |   |
| Interest expense on custodial balances                          |       | (86,514                                                                                      | )          | (212,561 | ) |
| Servicing Sector interest expense                               |       | (353,454                                                                                     | )          | (254,285 | ) |
| Banking Segment loans and securities                            |       | 736,236                                                                                      |       | 341,005 |   |
| Capital Markets Segment securities portfolio                    |       | 393,451                                                                                      |       | 448,099 |   |
| Other                                                           |       | 145,026                                                                                      |       | 197,900 |   |
| Net interest income                                             |       | 2,037,316                                                                                    |       | 1,407,594 |   |
| Provision for loan losses related to loans held for  investment |       | (71,775                                                                                      | )          | (48,204 | ) |
| Net interest  income after provision for loan losses            |       | $                                                                                            | 1,965,541  |   | $ | 1,359,390 |   |

 

The increase in net interest income from MortgageBanking loans and securities reflects an increase in the average inventory ofmortgage loans during 2004 as compared to 2003. Prime Home Equity Loans hadbeen accumulated in prior periods resulting in a higher average inventorybalance of such loans in the current year as compared to the year-ago period.Also contributing to the increase in net interest income from Mortgage Bankingis a decline in the overall borrowing rate as a result of the use of morecost-effective short-term financing.

Net interest expense from custodial balances decreasedin the current period due to the decrease in loan payoffs from the year-agoperiod. We are required to pass through monthly interest to security holders onpaid-off loans at the underlying security rates, which were substantiallyhigher than the short-term rates earned by us on the payoff float. The amountof such interest passed through to the security holders was $296.7 million and$406.8 million in 2004 and 2003, respectively.

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

The increase in net interest income from the BankingSegment was primarily attributable to growth in the average investment inmortgage loans in the Bank. Average assets in the Banking Segment increased to$32.0 billion during 2004, an increase of $15.5 billion over the year-agoperiod. The average net interest spread earned increased to 2.31% during 2004from 2.13% during 2003.

The decrease in netinterest income from the Capital Markets securities portfolio is attributableto a decrease in the average net spread earned from 1.44% in 2003 to 0.93% in2004, partially offset by an 

82

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increaseof 28% in the average inventory of securities held. The decrease in net spreadearned on the securities portfolio is primarily due to an increase inshort-term financing rates.

***Loan Servicing Fees and Other Income from RetainedInterests***

Loanservicing fees and other income from retained interests are summarized below:

| ** **                                                          | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                          | ** ** | **2004**                                    | ** ** | **2003** | ** ** |
| ** **                                                          | ** ** | **(in thousands)**                     | ** ** |
| Servicing fees,  net of guarantee fees                              |       | $                                           | 2,382,685  |   | $ | 1,917,014 |   |
| Income from other  retained interests                               |       | 388,474                                     |       | 410,346 |   |
| Late charges                                                        |       | 182,446                                     |       | 151,665 |   |
| Prepayment  penalties                                               |       | 153,467                                     |       | 172,171 |   |
| Global Operations  Segment subservicing fees                        |       | 106,356                                     |       | 92,418 |   |
| Ancillary fees                                                      |       | 56,159                                      |       | 60,724 |   |
| Total loan  servicing fees and other income from retained interests |       | $                                           | 3,269,587  |   | $ | 2,804,338 |   |

 

The increase in servicing fees, net of guarantee fees,was principally due to a 33% increase in the average servicing portfolio,partially offset by a reduction in the overall annualized net service feeearned from 0.350% of the average portfolio balance during 2003 to 0.327%during 2004. The reduction in the overall net service fee was largely due toagreements we reached with certain loan investors to reduce our contractualservicing fee rate. The resulting excess yield has been securitized and sold oris included on the balance sheet as trading securities.

The decrease in incomefrom other retained interests was due primarily to a slight decrease in theyield on these investments during 2004. These investments include interest-onlyand principal-only securities as well as residual interests that arise from thesecuritization of nonconforming mortgage loans, particularly Nonprime Mortgageand Prime Home Equity Loans.

***Amortization of Mortgage Servicing Rights***

We recorded amortization ofMSRs of $1,940.5 million, or an annual rate of 22.0%, during 2004 as comparedto $2,069.2 million, or an annual rate of 26.5%, during 2003. The reduction inthe amortization rate reflects the increase in the estimated life of theservicing portfolio, which is attributable to the effect of comparativelyhigher interest rates during the current period on estimated futureprepayments. Partially offsetting the lower amortization rate was a higher MSRasset balance attributable to net growth in the servicing portfolio during2004.

***Impairment of Retained Interests and Servicing Hedge(Losses) Gains***

Impairmentof retained interests and Servicing Hedge (losses) gains are detailed below:

| ** **                                           | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                           | ** ** | **2004**                                    | ** ** | **2003** | ** ** |
| ** **                                           | ** ** | **(in thousands)**                     | ** ** |
| Impairment of retained  interests:                   |       |                                        |       |   |   |
| MSRs                                                 |       | $                                           | (279,842   | ) | $ | (1,326,741 | ) |
| Other retained interests                             |       | (368,295                                    | )          | (106,224 | ) |
|                                                 |       | $                                           | (648,137   | ) | $ | (1,432,965 | ) |
| Servicing Hedge (losses)  gains recorded in earnings |       | $                                           | (215,343   | ) | $ | 234,823 |   |

 

83

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Impairment of MSRs in 2004 resulted generally from adecline in their estimated fair value, driven by a slight decrease in mortgagerates during the year. However, impairment of MSRs was lower in 2004 than in2003 because mortgage rates were generally higher during 2004 than in 2003.Impairment of MSRs during 2003 resulted from a reduction in the estimated fairvalue of MSRs, primarily driven by the decline in mortgage rates during much ofthe period. In 2004, we recognized impairment of other retained interests,primarily as a result of a decline in the value of nonprime securities. Thecollateral underlying certain of these residuals is fixed-rate while thepass-through rate is floating. An increase in projected short-term interestrates during the current period resulted in a compression of the spread on suchresiduals, which resulted in a decline in their value.

There was little change in long-term Treasury and swaprates from December 31, 2003 to December 31, 2004. The Servicing Hedgeloss of $215.3 million in 2004 resulted primarily from time value decay on theoptions included in the Servicing Hedge. During 2003, the Servicing Hedgegenerated a gain of $234.8 million. This gain resulted from a decline inlong-term Treasury and swap rates during the first part of 2003. The ServicingHedge gains generated in the early part of 2003 were partly offset by ServicingHedge losses toward the end of the year as long-term Treasury and swap ratesrose.

The Servicing Hedge isintended to moderate the effect on earnings caused by changes in the estimatedfair value of MSRs and other retained interests that generally result fromchanges in mortgage rates. Rising interest rates in the future will result inServicing Hedge losses.

***Net Insurance Premiums Earned***

The increase in netinsurance premiums earned is due to an increase in premiums earned onlender-placed and voluntary lines of business combined with an increase inreinsurance premiums.

***Other Revenue***

Otherrevenue consisted of the following:

| ** **                                          | ** ** | **Years Ended December 31,**                                                  | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                          | ** ** | **       2004       ** | ** ** | **       2003       ** | ** ** |
| ** **                                          | ** ** | **(in thousands)**                                                                      | ** ** |
| Global Operations  Segment processing fees          |       |                                                                                         | $          | 78,404 |   |   |   | $ | 78,043 |   |   |
| Appraisal fees,  net                                |       |                                                                                         | 75,991     |   |   |   | 68,922 |   |   |
| Credit report  fees, net                            |       |                                                                                         | 70,558     |   |   |   | 69,424 |   |   |
| Insurance agency  commissions                       |       |                                                                                         | 63,194     |   |   |   | 52,865 |   |   |
| Title services                                      |       |                                                                                         | 46,480     |   |   |   | 49,922 |   |   |
| Increase in cash  surrender value of life insurance |       |                                                                                         | 22,041     |   |   |   | — |   |   |
| Other                                               |       |                                                                                         | 154,001    |   |   |   | 142,874 |   |   |
| Total other  income                                 |       |                                                                                         | $          | 510,669 |   |   |   | $ | 462,050 |   |   |

 

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***Compensation Expenses***

Averageworkforce by segment is summarized below:

| ** **                                    | ** ** | **Years Ended December 31,**                                | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **     2004      ** | ** ** | **      2003      ** | ** ** |
| Mortgage Banking                              |       |                                                                       | 29,699     |   |   |   | 25,415 |   |   |
| Banking                                       |       |                                                                       | 1,015      |   |   |   | 781 |   |   |
| Capital Markets                               |       |                                                                       | 532        |   |   |   | 420 |   |   |
| Insurance                                     |       |                                                                       | 1,834      |   |   |   | 1,784 |   |   |
| Global Operations                             |       |                                                                       | 2,131      |   |   |   | 2,018 |   |   |
| Corporate  Administration                     |       |                                                                       | 3,720      |   |   |   | 3,142 |   |   |
| Average workforce,  including temporary staff |       |                                                                       | 38,931     |   |   |   | 33,560 |   |   |

 

Compensationexpenses are summarized below:

| ** **                          | ** ** | **Years Ended December 31,**                                                  | ** ** |
|-------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **       2004       ** | ** ** | **       2003       ** | ** ** |
| ** **                          | ** ** | **(dollar amount in thousands)**                                              | ** ** |
| Base salaries                       |       | $                                                                                            | 1,650,321  |   | $ | 1,371,821 |   |
| Incentive bonus  and commissions    |       | 1,636,833                                                                                    |       | 1,285,964 |   |
| Payroll taxes and  benefits         |       | 428,683                                                                                      |       | 359,220 |   |
| Deferral of loan  origination costs |       | (578,792                                                                                     | )          | (426,069 | ) |
| Total  compensation expenses        |       | $                                                                                            | 3,137,045  |   | $ | 2,590,936 |   |

 

Compensation expenses increased $546.1 million, or21%, during 2004 as compared to 2003. In the Loan Production Sector,compensation expenses increased $382.3 million, or 25%, as a result of a 22%increase in average staff combined with an increase in incentive compensation,which averaged 0.30% of the volume of loans originated in 2004, compared to0.21% in 2003.

In the Loan Servicing Sector, compensation expenserose $34.0 million, or 14%, to accommodate a 22% increase in the number ofloans serviced. Compensation expenses increased in all other business segmentsand corporate areas, reflecting growth in the Company.

Incremental direct costsassociated with the origination of loans are deferred when incurred. When therelated loan is sold, the costs deferred are included as a component of gain onsale.

***Occupancy and Other Office Expenses***

Occupancyand other office expenses are summarized below:

| ** **                                 | ** ** | **Years Ended December 31,**                                      | ** ** |
|--------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **      2004      ** | ** ** | **      2003      ** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                                                          | ** ** |
| Office and  equipment rentals              |       |                                                                             | $          | 160,687 |   |   |   | $ | 109,696 |   |   |
| Utilities                                  |       |                                                                             | 120,995    |   |   |   | 96,979 |   |   |
| Depreciation  expense                      |       |                                                                             | 111,664    |   |   |   | 82,051 |   |   |
| Postage and  courier service               |       |                                                                             | 90,036     |   |   |   | 80,797 |   |   |
| Office supplies                            |       |                                                                             | 58,831     |   |   |   | 56,360 |   |   |
| Repairs and  maintenance                   |       |                                                                             | 45,031     |   |   |   | 36,389 |   |   |
| Dues and  subscriptions                    |       |                                                                             | 44,859     |   |   |   | 26,379 |   |   |
| Other                                      |       |                                                                             | 11,275     |   |   |   | 36,541 |   |   |
| Total occupancy  and other office expenses |       |                                                                             | $          | 643,378 |   |   |   | $ | 525,192 |   |   |

 

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Occupancy and other officeexpenses for 2004 increased by $118.2 million, or 23%. Personnel growth in ourloan production operations accounted for 89% of this increase.

***Insurance Claim Expenses***

Insurance claim expenseswere $390.2 million for 2004 as compared to $360.0 million for 2003. Theincrease in insurance claim expenses was due mainly to $67.9 million ofestimated losses resulting from hurricane damage sustained in Florida during2004 in comparison to $10.1 million of catastrophic losses in the prior year.The increase in catastrophic claim expenses was partially offset by lowernon-catastrophic claims experience in both voluntary homeowners andlender-placed insurance lines during 2004.

***Advertising and Promotion Expenses***

Advertising and promotionexpenses increased 65% from 2003, reflecting the shift in our loan product andproduction channel mix.

***Other Operating Expenses***

Otheroperating expenses are summarized below:

| ** **                                  | ** ** | **Years Ended December 31,**                                      | ** ** |
|---------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **      2004      ** | ** ** | **      2003      ** | ** ** |
| ** **                                  | ** ** | **(in thousands)**                                                          | ** ** |
| Insurance  commission expense               |       |                                                                             | $          | 123,225 |   |   |   | $ | 138,853 |   |   |
| Legal,  consulting, accounting and auditing |       |                                                                             | 103,990    |   |   |   | 111,643 |   |   |
| Travel and  entertainment                   |       |                                                                             | 85,319     |   |   |   | 63,295 |   |   |
| Losses on  servicing-related advances       |       |                                                                             | 56,785     |   |   |   | 36,217 |   |   |
| Insurance                                   |       |                                                                             | 55,608     |   |   |   | 40,298 |   |   |
| Software  amortization and impairment       |       |                                                                             | 53,235     |   |   |   | 46,136 |   |   |
| Taxes and  licenses                         |       |                                                                             | 37,582     |   |   |   | 32,347 |   |   |
| Other                                       |       |                                                                             | 188,203    |   |   |   | 155,541 |   |   |
| Deferral of loan  origination costs         |       |                                                                             | (75,404    | ) |   |   | (71,536 | ) |   |
| Total other  operating expenses             |       |                                                                             | $          | 628,543 |   |   |   | $ | 552,794 |   |   |

 

Insuranceexpense increased due to an increase in mortgage insurance related to growth inthe Bank’s loan portfolio.

**Quantitativeand Qualitative Disclosures About Market Risk**

The primary market risk weface is interest rate risk. The predominant type of interest rate risk atCountrywide is price risk, which is the risk that the value of our assets andliabilities will change due to changes in interest rates. Interest rate riskalso includes the risk that the net interest income from our mortgage loan andinvestment portfolios will change in response to changes in interest rates.From an enterprise perspective, we manage interest rate risk through thenatural counterbalance of our loan production and servicing businesses. We alsouse various financial instruments, including derivatives, to manage theinterest rate risk related specifically to the values of our interest rate lockcommitments, Mortgage Loan Inventory and MBS held for sale, MSRs and otherretained interests and trading securities, as well as a portion of our debt.The overall objective of our interest rate risk management activities is toreduce the variability of earnings caused by changes in interest rates. OurCorporate Asset/Liability Management Committee, which is comprised of severalof the Company’s senior financial executives, is responsible for management ofthis risk.

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***Interest Rate Lock Commitments and Mortgage Inventory***

We are exposed to price risk from the time an interestrate lock commitment (“IRLC”) is made to a mortgage applicant or financialintermediary to the time the resulting mortgage loan is sold. IRLCs guaranteefor a specified period the rate and points to be charged to a borrower on amortgage. The period of the guarantee is generally from seven to 60 days.During this period, we are exposed to losses if mortgage rates rise, becausethe increase in interest rates generally causes the value of the IRLC ormortgage to decline. To manage this risk, we use derivatives, primarily forwardsales of MBS, options to buy and sell MBS, Eurodollar futures and Eurodollaroptions as well as options on Treasury futures contracts.

Managing the interest rate risk related to IRLCs iscomplicated by the fact that the ultimate percentage of applications that closewithin the terms of the IRLC is beyond our control and is driven primarily bychanges in mortgage rates in the marketplace. In general, the percentage ofapplications that ultimately close within the terms of the IRLC increases ifmortgage rates rise and decreases if mortgage rates fall. This is due primarilyto the relative attractiveness of current mortgage rates compared to theapplicants’ committed rates. The closing percentage is also influenced by thesource and age of the applications, purpose for the loans (purchase orrefinance) and the application approval rate. We have developed closing ratioestimates using empirical data. Our estimates take into account all of thesevariables, as well as renegotiations of rate and point commitments that tend tooccur when mortgage rates fall. Our closing ratio estimates are revisedperiodically using the most current empirical data.

To manage the price risk associated with IRLCs, we usea combination of net forward sales of MBS and put and call options on MBS,Treasury futures and Eurodollar futures. We generally enter into forward salescontracts of MBS in an amount equal to the portion of the IRLCs expected toclose, assuming no change in mortgage rates. We acquire put and call options toprotect against the variability of the rate of loan closings caused by changesin mortgage rates, using our current closing ratio estimates to determine theamount of optional coverage required.

We manage the price risk related to our Mortgage LoanInventory primarily by entering into forward sales of MBS and Eurodollarfutures contracts. The value of these forward MBS sales and Eurodollar futuresmoves in the opposite direction of the value of the Mortgage Loan Inventory.

We manage the price risk and credit risk related toour commercial mortgage loans using total rate of return and credit defaultswaps.

We actively manage our IRLCs and Mortgage Loan Inventoryrisk profiles on a daily basis.

A more detaileddescription of the derivative instruments we use in our risk managementactivities related to the IRLCs and Mortgage Loan Inventory is presented below:

·       ForwardSales of MBS: An obligation to sell an MBS at a specified price in the future.The value increases as mortgage rates rise.

·       ForwardPurchases of MBS: An obligation to buy an MBS at a specified price in thefuture. The value increases as mortgage rates fall.

·       LongCall Options on MBS: A right to buy an MBS at a specified price in the future.The value increases as mortgage rates fall.

·       LongPut Options on MBS: A right to sell an MBS at a specified price in the future.The value increases as mortgage rates rise.

·       LongCall Options on Treasury Futures: A right to acquire a Treasury futurescontract at a specified price in the future. The value increases as thebenchmark Treasury rate falls.

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·       LongPut Options on Treasury Futures: A right to sell a Treasury futures contract ata specified price in the future. The value increases as the benchmark Treasuryrate rises.

·       ShortEurodollar Futures Contracts: A standardized exchange-traded contract, thevalue of which is tied to spot Eurodollar rates at specified future dates. Thevalue increases when Eurodollar rates rise.

·       Total Rate of Return Swaps:An agreement to pay or receive the total return on a financial index orsecurity in exchange for the payment or receipt of a floating rate of interestover the term of the contract. For use in the risk management of the commercialmortgage portfolio, the Company pays the return on a published CMBS index andreceives the floating rate of interest. The value of these contracts increasesas the value of the index declines.

·       CreditDefault Swaps:**An agreement to purchase creditevent protection based on a financial index or security in exchange for payinga fixed rate of interest over the term of the contract. For use in the riskmanagement of the commercial mortgage portfolio, the Company receives creditprotection and pays a fixed rate of interest. The value of these contractsincreases when the probability of the occurrence of a credit event rises.

***Mortgage Servicing Rights (MSRs) and Other RetainedInterests***

Our MSRs and other retained interests are subject toloss in value when mortgage rates decline. Declining mortgage rates generallyprecipitate increased mortgage refinancing activity. Increased refinancingactivity reduces the life of the loans underlying the MSRs and other retainedinterests, thereby reducing their value. Reductions in the value of theseassets impact earnings primarily through impairment charges. To moderate theeffect on earnings of impairment, we maintain a portfolio of financialinstruments, including derivatives, which generally increase in aggregate valuewhen interest rates decline (the “Servicing Hedge”).

We currently use,or have used in the past, the following financial instruments in our ServicingHedge:

·       InterestRate Floors: A right to receive cash if a reference interest rate falls below acontractual strike rate. The value increases as reference interest rates fall.The reference interest rates used include mortgage rates, Treasury rates andU.S. dollar (“USD”) LIBOR.

·       LongTreasury Futures: An agreement to purchase a Treasury security at a specifiedprice in the future. The value increases as the benchmark Treasury rate falls.

·       LongCall Options on Treasury and Eurodollar futures: A right to acquire a Treasuryor Eurodollar futures contract at a specified price in the future. The valueincreases as the benchmark Treasury or Eurodollar rate falls.

·       LongPut Options on Treasury and Eurodollar futures: A right to sell a Treasury orEurodollar futures contract at a specified price in the future. The valueincreases as the benchmark Treasury or Eurodollar rate rises.

·       LongCall Options on MBS: A right to buy an MBS at a specified price in the future.The value increases as mortgage rates fall.

·       ForwardPurchases of MBS: An obligation to buy an MBS at a specified price in thefuture. The value increases as mortgage rates fall.

·       InterestRate Swaps: A mutual agreement to exchange interest rate payments; one partypaying a fixed rate and another paying a floating rate tied to a referenceinterest rate (e.g., USD LIBOR). 

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For use in the ServicingHedge, we generally receive the fixed rate and pay the floating rate. Suchcontracts increase in value as rates fall.

·       ReceiverSwaptions: A right to enter a predetermined Interest Rate Swap at a future datewhere we receive the fixed rate and pay the floating rate. These contractsincrease in value as rates fall.

·       PayorSwaptions: A right to enter a predetermined Interest Rate Swap at a futuredate, where we pay the fixed rate and receive the floating rate. Thesecontracts increase in value as rates rise.

·       Principal-OnlySecurities: Consist of mortgage trust principal-only securities and Treasuryprincipal-only securities. These securities have been purchased at discounts topar value. As interest rates decrease, the value of these securities generallyincreases.

·       MortgageForward Rate Agreement: A mutual agreement to exchange a single cash flow at aforward settlement date, based on the basis point difference between theforward fixed rate and floating rate set equal to the 30-day forwardcurrent coupon mortgage rate, known as the CMM index, on the settlement date.For use in the Servicing Hedge, we generally receive the fixed rate and pay thefloating rate. Such contracts increase in value as the spread between thecurrent coupon mortgage rate and the swap curve tightens, or when interestrates fall.

These instruments arecombined to manage the overall risk profile of the MSRs and other retainedinterests. We actively manage our retained interests risk profile on a dailybasis.

***Securities Trading Activities***

Within our CapitalMarkets operations, we maintain a trading portfolio of fixed-income securities,primarily MBS. We are exposed to price changes in our trading portfolio arisingfrom interest rate changes during the period we hold the securities. To managethis risk, we use the following derivative instruments:

·       ForwardSales of To-Be-Announced (“TBA”) MBS: An obligation to sell agency pass-throughMBS that have not yet been issued at a specified price and at a specified datein the future. The value increases as mortgage rates rise.

·       ForwardPurchases of TBA MBS: An obligation to purchase agency pass-through MBS thathave not yet been issued at a specified price at a specified date in thefuture. The value increases as mortgage rates fall.

·       ForwardSale of U.S. Treasury Securities: An agreement to sell a specified quantity ofU.S. Treasury securities for a specified price at a specified date in thefuture. The value increases when interest rates rise.

·       ShortFutures Contract: A standardized exchange-traded contract, the value of whichis tied to spot Fed Funds or Eurodollar rates at specified future dates. Thevalue of these contracts increases when Fed Funds or Eurodollar rates rise.

·       LongFutures Contract: A standardized exchange-traded contract, the value of whichis tied to the spot Fed Funds or Eurodollar rates at specified future dates.The value of these contracts increases when Fed Funds or Eurodollar rates fall.

·       InterestRate Swaps: A mutual agreement to exchange interest rate payments; one partypaying a fixed rate and another paying a floating rate tied to a referenceinterest rate (e.g. USD LIBOR). For use in its trading portfolio riskmanagement activities, the Company receives the floating rate and pays thefixed rate. Such contracts increase in value as rates rise.

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·       LongPut Options on Futures Contracts: A right to sell futures contracts, the valueof which is tied to spot Fed Funds or Eurodollar rates at specified futuredates. The value of these contracts increases when Fed Funds or Eurodollarrates rise.

·       Long Call Options onFutures Contracts: A right to purchase futures contracts, the value of which istied to spot Fed Funds or Eurodollar rates at specific future dates. The valueof these contracts increases when Fed Funds or Eurodollar rates fall.

***Countrywide Bank***

The primary component ofCountrywide Bank’s earnings is net interest income from our mortgage loan andinvestment portfolios. At Countrywide Bank, we invest primarily inadjustable-rate and short duration residential mortgages. Our securitiesportfolio is comprised mostly of short-duration sequential collateralizedmortgage obligations. We manage our interest rate risk primarily by investingin relatively short duration assets, and matching the duration and re-pricingcharacteristics of our interest-bearing liabilities with those of ourinterest-earning assets. Deposits are priced to encourage consumers to choosematurity terms consistent with our assets. Interest rate swaps are also used toefficiently and cost effectively manage the repricing characteristics of ourliabilities to facilitate the liabilities’ alignment with our interest-earningassets.

***Debt Securities***

We determine the mix offixed-rate and variable-rate debt as part of our overall interest rate riskmanagement activities. We use interest rate swaps to efficiently and costeffectively achieve our desired mix of fixed- and floating-rate debt.Typically, terms of the Interest Rate Swaps match the terms of the underlyingdebt, resulting in an effective conversion to the desired mix.

***Impact of Changesin Interest Rates on the Net Value of the Company’s Interest Rate-SensitiveFinancial Instruments***

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

We employ various commonly used modeling techniques tovalue our financial instruments in connection with these sensitivity analyses.For mortgage loans, MBS, MBS forward contracts, collateralized mortgageobligations and MSRs, option-adjusted spread (“OAS”) models are used. Theprimary assumptions used in these models for purpose of these sensitivityanalyses are the implied market volatility of interest rates and prepaymentspeeds. For options and interest rate floors, an option-pricing model is used.The primary assumption used in this model is implied market volatility ofinterest rates. Other retained interests are valued using a zero volatilitydiscounted cash flow model. The primary assumptions used in these models areprepayment rates, discount rates and credit losses. All relevant cash flowsassociated with the financial instruments are incorporated in the models.

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Thefollowing table summarizes the estimated change in fair value of ourinterest-rate-sensitive assets, liabilities and commitments as of December 31,2005, 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 other financial  instruments:                                    |       |                                    |       |   |   |   |   |   |   |
| MSR and other retained interests                                          |       | $                                       | (2,812     | ) | $ | (1,302 | ) | $ | 1,009 |   | $ | 1,714 |   |
| Impact of  Servicing Hedge:                                               |       |                                    |       |   |   |   |   |   |   |
| Mortgage-based                                                            |       | 261                                     |       | 130 |   | (130 | ) | (260 | ) |
| Swap-based                                                                |       | 2,626                                   |       | 991 |   | (429 | ) | (598 | ) |
| MSRs and other retained interests, net                                    |       | 75                                      |       | (181 | ) | 450 |   | 856 |   |
| Interest rate lock commitments                                            |       | 190                                     |       | 136 |   | (218 | ) | (489 | ) |
| Mortgage Loan Inventory                                                   |       | 1,135                                   |       | 691 |   | (862 | ) | (1,842 | ) |
| Impact of  associated derivative instruments:                             |       |                                    |       |   |   |   |   |   |   |
| Mortgage-based                                                            |       | (1,454                                  | )          | (890 | ) | 1,117 |   | 2,387 |   |
| Treasury-based                                                            |       | 187                                     |       | 74 |   | 6 |   | 74 |   |
| Eurodollar-based                                                          |       | (97                                     | )          | (53 | ) | 77 |   | 166 |   |
| Interest rate lock commitments and Mortgage Loan  Inventory, net          |       | (39                                     | )          | (42 | ) | 120 |   | 296 |   |
| Countrywide Bank:                                                         |       |                                    |       |   |   |   |   |   |   |
| Securities portfolio                                                      |       | 147                                     |       | 88 |   | (108 | ) | (227 | ) |
| Mortgage loans                                                            |       | 555                                     |       | 299 |   | (376 | ) | (739 | ) |
| Deposit liabilities                                                       |       | (255                                    | )          | (131 | ) | 136 |   | 275 |   |
| Federal Home Loan Bank advances                                           |       | (235                                    | )          | (115 | ) | 156 |   | 264 |   |
| Countrywide Bank, net                                                     |       | 212                                     |       | 141 |   | (192 | ) | (427 | ) |
| Notes payable and capital securities                                      |       | (824                                    | )          | (412 | ) | 393 |   | 759 |   |
| Impact of  associated derivative instruments:                             |       |                                    |       |   |   |   |   |   |   |
| Swap-based                                                                |       | 95                                      |       | 48 |   | (48 | ) | (95 | ) |
| Notes payable and capital securities, net                                 |       | (729                                    | )          | (364 | ) | 345 |   | 664 |   |
| Insurance company investment portfolios                                   |       | 52                                      |       | 27 |   | (28 | ) | (56 | ) |
| Net change in  fair value related to MSRs and other financial instruments |       | $                                       | (429       | ) | $ | (419 | ) | $ | 695 |   | $ | 1,333 |   |
| Net change in fair value  related to broker-dealer trading securities     |       | $                                       | (18        | ) | $ | (3 | ) | $ | (11 | ) | $ | (33 | ) |
|                                                                           |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Thefollowing table summarizes the estimated change in fair value of the Company’sinterest-rate-sensitive assets, liabilities and commitments as of December 31,2004, 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)**                  | ** ** |
| Net change in  fair value related to MSRs and other financial Instruments |       | $                                       | (285       | ) | $ | (492 | ) | $ | 787 |   | $ | 1,765 |   |
| Net change in fair value  related to broker-dealer trading securities          |       | $                                       | (11        | ) | $ | (3 | ) | $ | (8 | ) | $ | (24 | ) |
|                                                                                |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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These sensitivity analysesare limited in that they were performed at a particular point in time; onlycontemplate certain movements in interest rates; do not incorporate changes ininterest rate volatility or changes in the relationship of one interest rateindex to another; are subject to the accuracy of various assumptions used,including prepayment forecasts and discount rates; and do not incorporate otherfactors that would impact the Company’s overall financial performance in suchscenarios, most significantly the impact of changes in loan production earningsthat result from changes in interest rates. Not all of the changes in fairvalue would affect current period earnings. For example, MSRs are carried byimpairment stratum at the lower of amortized cost or market value. Absent hedgeaccounting, any increase in the value of a particular MSR stratum in excess ofthe related impairment reserve would not be reflected in current-periodearnings. The total impairment valuation allowance was $0.4 billion as of December 31,2005. On April 1, 2005, we implemented hedge accounting in accordance withSFAS 133 for a portion of our interest rate risk management activities relatedto MSRs. In addition, our debt is carried at its unpaid principal balance netof issuance discount or premium; therefore, absent hedge accounting, changes inthe market value of our debt are not recorded in current-period earnings. Forthese reasons, the preceding estimates should not be viewed as an earningsforecast.

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

To diversify our fundingsources on a global basis, we occasionally issue medium-term notes denominatedin a foreign currency. We manage the foreign currency risk associated withthese medium-term notes through cross-currency swap transactions. The terms ofthe cross-currency swaps have the effect of converting all foreigncurrency-denominated medium-term notes into U.S. dollar obligations, therebyeliminating the associated foreign currency risk. As a result, potentialchanges in the exchange rates of foreign currencies denominating suchmedium-term notes would not have a net financial impact on future earnings,fair values or cash flows.

**Credit Risk Management**

Credit risk is the potential for financial lossresulting from the failure of a borrower or an institution to honor itscontractual obligations to us. Credit risk arises in many of our businessactivities including lending activities, securities trading activities andinterest rate risk management activities. We actively manage credit risk tomaintain credit losses within levels that achieve our profitability and returnon capital objectives while meeting our expectations for consistent financialperformance.

Our Credit Committee hasprimary responsibility for setting strategies to achieve our credit risk goalsand objectives. Those goals and objectives are documented in our Credit Policy.The committee is comprised of our Chief Credit Officer and other seniorexecutives.

***Mortgage Credit Risk***

*Overview*

In our mortgage lendingactivities, we manage our credit risk through credit policy, underwriting,quality control and surveillance activities as well as through use of creditenhancements, especially nonrecourse and limited recourse securitizations. Wealso employ proactive collection and loss mitigation efforts.

*Loan Quality*

Our credit policy establishes standards for thedetermination of acceptable credit risks. Those standards encompass borrowerand collateral quality, underwriting guidelines and loan origination standardsand procedures.

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Borrower quality includes consideration of theborrower’s credit and capacity to pay. We assess credit and capacity to paythrough the use of credit scores, application of a mortgage scorecard, andmanual or automated underwriting.

Collateral quality includes consideration of propertyvalue, condition and marketability and is determined through physicalinspections and the use of manual and automated valuation models and processes.

Underwriting guidelines facilitate the uniformapplication of underwriting standards to all borrowers regardless of race,religion or ethnic background. Uniformity in underwriting also provides a meansfor measuring and managing credit risk. This allows us, as well as governmentsponsored enterprises (“GSEs”), private investors, and the secondary markets ingeneral, to assess risk, which provides us with more flexibility in the sale ofloans.

Our conventional conforming underwriting guidelines arebased on the guidelines established by Fannie Mae or Freddie Mac. Ourunderwriting guidelines for FHA-insured and VA-guaranteed mortgage loans complywith guidelines established by the U.S. Department of Housing and UrbanDevelopment or the Veterans Administration. Our underwriting guidelines fornon-conforming mortgage loans, Prime Home Equity Loans, and Nonprime MortgageLoans have been designed so that these loans are salable in the secondary mortgagemarket. We developed these guidelines to meet the requirements of privateinvestors, rating agencies and third-party credit enhancement providers.

These standards and procedures encompass underwriterqualifications and authority levels, appraisal review requirements, fraud controls,funds disbursement controls, training of our employees and ongoing review oftheir work. We help to ensure that our origination standards are met byemploying accomplished and seasoned management, underwriters and processors andthrough the extensive use of technology. We also employ proprietaryunderwriting systems in our loan origination process that improve theconsistency of underwriting standards, assess collateral adequacy and help toprevent fraud, while at the same time increasing productivity.

We supplement our loanorigination standards and procedures with a post-funding quality controlprocess. Our Quality Control Department, under the direction of the ChiefCredit Officer, is responsible for completing loan audits that may consist of are-verification of loan documentation, an underwriting and appraisal review,and if necessary, a fraud investigation. We also employ a pre-and post-fundingproprietary loan performance evaluation system. This system helps to identifyfraud and poor performance of individuals and business entities associated withthe origination of our loans. The combination of this system and our auditresults allows us to evaluate and measure adherence to prescribed underwritingguidelines and compliance with laws and regulations.

*Sale of Loans*

Nearly all of the mortgageloans that we originate in our Mortgage Banking Segment are sold into thesecondary mortgage market primarily in the form of securities, and to a lesserextent as whole loans. While we generally sell our Prime Mortgage Loans on anon-recourse basis, either in the form of securities or whole loans, we havepotential liability under the representations and warranties we make topurchasers and insurers of the loans. In the event of a breach of suchrepresentations and warranties, we may be required to either repurchase themortgage loans with the identified defects or indemnify the investor orinsurer. In such cases, we bear any subsequent credit loss on the mortgageloans. The liability for this recourse totaled $169.8 million at December31, 2005 and $139.9 million at December 31, 2004.

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***Securitization***

As described below, thedegree to which we retain credit risk on loans that we sell throughsecuritizations depends on the structure of the securitization. Our PrimeMortgage Loans generally are securitized on a non-recourse basis, while PrimeHome Equity and Nonprime Mortgage Loans generally are securitized with limitedrecourse for credit losses.

***Conforming Conventional Loans***

We generally poolconforming conventional loans into mortgage-backed securities guaranteed byFannie Mae or Freddie Mac. Subject to certain representations and warranties wemake, nearly all conventional loans securitized through Fannie Mae or FreddieMac are sold on a non-recourse basis. We pay guarantee fees to these agenciesto compensate them for their assumption of credit risk on the securitizedloans.

***FHA-Insured and VA-Guaranteed Loans***

FHA-insured andVA-guaranteed mortgage loans are generally pooled into mortgage-backedsecurities guaranteed by the Government National Mortgage Association (“GinnieMae”). We are insured against foreclosure loss by the FHA or partiallyguaranteed against foreclosure loss by the VA. Fees charged by the FHA and VAfor assuming such risks are paid directly by the borrower. We are exposed tocredit losses on defaulted VA loans to the extent that the partial guaranteeprovided by the VA is inadequate to cover the total credit losses incurred. Wepay guarantee fees to Ginnie Mae for Ginnie Mae’s guarantee on its securitiesof timely payment of principal and interest. Ginnie Mae does not assumemortgage credit risk associated with the loans securitized under its program.

***Non-conforming Conventional Prime Loans***

Non-conformingconventional prime mortgage loans are generally pooled into “private-label”(non-agency) mortgage-backed securities. Such securitizations involve some formof credit enhancement, such as senior/subordinated structures,overcollateralization or mortgage pool insurance. Securitizations that involvesenior/subordinated structures contain securities that assume varying levels ofcredit risk. Holders of subordinated securities are compensated for the creditrisk assumed through a higher yield. We generally sell the subordinatedsecurities created in connection with these securitizations and therebytransfer the related credit risk subject to representations and warranties wemake when the loans are securitized.

***Prime Home Equity Loans***

Prime Home Equity Loansare generally pooled into private-label asset-backed securities. These securitiesgenerally are credit-enhanced through over-collateralization, residualinterests that we generally retain and guarantees provided by a third-partysurety. In some cases, the securitizations also contain mortgage pool insuranceor a limited corporate guarantee as a form of credit enhancement. In Prime HomeEquity securitizations, Countrywide is generally in the first loss position;however, the recourse for credit losses is limited to the carrying value of aresidual interest.

***Nonprime Mortgage Loans***

Nonprime Mortgage Loans generally are pooled intoprivate-label asset-backed securities. We generally securitize these loans withlimited recourse for credit losses through retention of residual interests, thevalue of which usually range from 1.0% to 5.5% of the principal balance of theloans. The holder of the residual interest is in the first loss position;however, the recourse for credit losses is limited to the carrying value of theresidual interest. In some cases, such limited recourse securitizations have 

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contained lender paidmortgage insurance as a form of credit enhancement or a limited corporateguarantee from us. We also have pooled a portion of our Nonprime Mortgage Loansinto securities guaranteed by Fannie Mae. In such cases, we have paid FannieMae a guarantee fee in exchange for Fannie Mae assuming the credit risk of theunderlying loans.

In some cases the retained residual interest isdeposited into a net interest margin security, which enables us to monetizefuture residual cash flows and retain a smaller residual interest (“Back-endNIM Residual”). The value of the Back-end NIM Residuals usually range from0.25% to 1.50% of the principal balance of the loans underlying the residualsecurity. The holder of the Back-end NIM Residual is in the first lossposition; however, the recourse for credit losses is limited to the carryingvalue of the Back-end NIM residual.

Ourexposure to credit losses related to our limited recourse securitizationactivities is limited to the carrying value of our subordinated interests andto the contractual limit of reimbursable losses under our corporate guaranteesless the recorded liability for such guarantees. These amounts at December 31,2005 are as follows:

| ** **                                                    | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                    | ** ** | **(in thousands)**     | ** ** |
| Subordinated Interests:                                       |       |                        |       |   |   |
| Prime home equity residual securities                         |       |                        | $          | 925,762 |   |   |
| Nonprime residual securities                                  |       |                        | 547,139    |   |   |
| Prime home equity line of credit transferor’s  interests |       |                        | 538,048    |   |   |
| Nonconforming residual securities                             |       |                        | 21,004     |   |   |
| Subordinated mortgage-backed pass-through securities          |       |                        | 2,059      |   |   |
|                                                          |       |                        | $          | 2,034,012 |   |   |
| Corporate guarantees in  excess of recorded liability         |       |                        | $          | 349,864 |   |   |

 

Thecarrying value of the residual securities is net of expected future creditlosses. The total credit losses incurred for 2005 and 2004 related to all ofour mortgage securitization activities are summarized as follows:

| ** **                                                         | ** ** | **Years Ended  December 31,** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                         | ** ** | **2005**                                | ** ** | **2004** | ** ** |
| ** **                                                         | ** ** | **(in thousands)**                 | ** ** |
| Nonprime  securitizations with retained residual interest          |       | $                                       | 69,269     |   | $ | 43,021 |   |
| Prime home equity  securitizations with retained residual interest |       | 34,173                                  |       | 29,370 |   |
| Repurchased or  indemnified loans                                  |       | 28,213                                  |       | 42,063 |   |
| Prime home equity  securitizations with corporate guarantee        |       | 10,798                                  |       | 6,930 |   |
| Nonprime  securitizations with corporate guarantee                 |       | 9,724                                   |       | 20,039 |   |
| VA losses in  excess of VA guarantee                               |       | 1,894                                   |       | 1,658 |   |
|                                                               |       | $                                       | 154,071    |   | $ | 143,081 |   |

 

***Portfolio Lending Activities***

As discussed in the preceding section, “Detailed LineItem Discussion of Consolidated Revenue and Expense Items—*Net InterestIncome*,” we have a portfolio of mortgage loans held for investment,consisting primarily of Prime Mortgage and Prime Home Equity Loans, whichamounted to $64.8 billion at December 31, 2005. This portfolio is heldprimarily in our Bank. $3.9 billion of Prime Home Equity Loans held in the Bankwith combined loan-to-value ratios equal-to or above 90% are covered by a pool 

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insurance policy thatprovides partial protection against credit losses. Otherwise, we generallyretain full credit exposure on these loans.

We also provide short-termsecured mortgage-loan warehouse advances to various lending institutions, whichtotaled $3.9 billion at December 31, 2005. We incurred no credit lossesrelated to this activity during the year ended December 31, 2005.

***Mortgage Reinsurance***

We provide mortgagereinsurance on certain mortgage loans included in our servicing portfoliothrough contracts with several primary mortgage insurance companies. Underthese contracts, we absorb mortgage insurance losses in excess of a specifiedpercentage of the principal balance of a given pool of loans, subject to a cap,in exchange for a portion of the pools’ mortgage insurance premium. As of December 31,2005, approximately $78.2 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 December 31, 2005, themaximum aggregate losses under the reinsurance contracts was limited to $577.4million. We are required to pledge securities to cover this potentialliability. We recorded provisions for losses related to this activity of $30.8million, $41.5 million and $38.6 million, in 2005, 2004 and 2003, respectively.The accumulated liability recorded for estimated reinsurance totaled $120.5million at December 31, 2005.

***Mortgage Loans Held for Sale***

At December 31, 2005,mortgage loans held for sale amounted to $36.8 billion. While the loans are ininventory, we bear credit risk after taking into consideration primary mortgageinsurance (which is generally required for conventional loans with aloan-to-value ratio greater than 80%), FHA insurance or VA guarantees.Historically, credit losses related to loans held for sale have not beensignificant.

***Counterparty Credit Risk***

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

Theaggregate amount of counterparty credit exposure after consideration ofrelevant netting agreements at December 31, 2005, before and aftercollateral held by us, was as follows:

| ** **                                        | ** ** | **December 31, 2005** | ** ** |
|---------------------------------------------------|------------|---------------------------------|------------|
| ** **                                        | ** ** | **(in millions)**          | ** ** |
| Aggregate credit  exposure before collateral held |       |                            | $          | 936 |   |   |
| Less: collateral  held                            |       |                            | (519       | ) |   |
| Net aggregate unsecured  credit exposure          |       |                            | $          | 417 |   |   |

 

For the year ended December 31,2005, we incurred no credit losses due to non-performance of any of ourcounterparties.

***Operational Risk***

All businesses faceoperational risk. Operational risk is the risk of loss from inadequate orfailed internal processes, people, and systems or from external events. CFCcategorizes operational risk into the areas of human resources; vendor management;custody of assets; accounting and financial disclosure; 

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technology;physical security, natural hazard and environment; fraud and embezzlement(internal and external); political/governmental affairs; modeling;compliance/regulatory; governance; strategic; and reputation. CFC hasdocumented its operational risks and corresponding controls in its proprietaryrisk assessment system. This information is utilized by executive officers andappropriate groups within the Company for ongoing risk monitoring, testing andreview. Responsibility for operational risk identification and management isassigned to each of our business units with centralized corporate oversight andsupport. We further integrate operational risk management into our dailyactivities. Examples include:

·       Identificationof operational risk is performed at the activity level. Key controls thataddress the risks are identified and monitored by management. Operationalcontrols that affect financial reporting are also tested by business unitmanagement

·       Independenttesting of internal controls is conducted on a sample basis by our internalaudit function

·       Independentreview of corporate processes and operational risks (including the sufficiencyof governance structures to mitigate those risks) is conducted by anindependent enterprise risk assessment function

·       Staffis dedicated to areas of key operational risk, such as a disaster recoveryfunction

·       Oversightof operational risk on an enterprise-wide basis is conducted by Countrywide’sExecutive Risk Committee; an Operational Risk Committee comprised of senior CFCexecutives; a risk managers’ roundtable comprised of divisional operation riskmanagers; and business unit risk committees comprised of the business unit’sleaders and risk managers

·       Committeesof executive management oversee operational areas that present the greatestoperational risk. These areas include mortgage loan pricing, hedging ofmortgage servicing rights, credit policy development, and asset/liabilitymanagement

·       Theprocesses supporting our key business activities are evaluated and redesignedin a structured manner that minimizes errors and inefficiency

·       A corporate expectation ofethical behavior is set with a formalized code of ethics, mandatory annual compliancetraining, provision for anonymous reporting of suspected breaches of corporateethics, and independent monitoring and reporting of alleged breaches ofcorporate ethics to the Audit and Ethics Committee of the Board of Directors.

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**Loan Servicing**

Thefollowing table sets forth certain information regarding our servicingportfolio of single-family mortgage loans, including loans and securities heldfor sale, loans held for investment and loans serviced under subservicingagreements, for the periods indicated.

| ** **                               | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------|------------|---------------------------------------------|------------|
| ** **                               | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| ** **                               | ** ** | **(in millions)**                      | ** ** |
| Beginning owned  servicing portfolio     |       | $                                           | 821,475    |   | $ | 630,451 |   |
| Add: Loan production                     |       | 490,947                                     |       | 363,006 |   |
|  Purchased MSRs (bulk acquisitions) |       | 51,377                                      |       | 40,723 |   |
| Less: Servicing sold                     |       | (1,119                                      | )          | — |   |
| Less: Runoff(1)                          |       | (281,491                                    | )          | (212,705 | ) |
| Ending owned servicing  portfolio        |       | 1,081,189                                   |       | 821,475 |   |
| Subservicing portfolio                   |       | 29,901                                      |       | 16,847 |   |
| Total servicing  portfolio               |       | $                                           | 1,111,090  |   | $ | 838,322 |   |
| MSR portfolio                            |       | $                                           | 978,988    |   | $ | 758,975 |   |
| Mortgage loans owned                     |       | 102,201                                     |       | 62,500 |   |
| Subservicing portfolio                   |       | 29,901                                      |       | 16,847 |   |
| Total servicing portfolio                |       | $                                           | 1,111,090  |   | $ | 838,322 |   |

 

| ** **                                               | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------|------------|----------|------------|
| ** **                                               | ** ** | **(dollar amounts  in millions)** | ** ** |
| Composition of owned  servicing portfolio at period end: |       |                                        |       |     |       |
| Conventional mortgage                                    |       | $                                           | 863,688    |     | $          | 639,148 |   |
| Nonprime Mortgage                                        |       | 116,101                                     |       | 84,608   |       |
| Prime Home Equity                                        |       | 51,491                                      |       | 45,053   |       |
| FHA-insured mortgage                                     |       | 36,949                                      |       | 39,618   |       |
| VA-guaranteed mortgage                                   |       | 12,960                                      |       | 13,048   |       |
| Total owned portfolio                                    |       | $                                           | 1,081,189  |     | $          | 821,475 |   |
| Delinquent mortgage  loans(2):                           |       |                                        |       |     |       |
| 30 days                                                  |       | 2.59                                        | %          | 2.35     | %          |
| 60 days                                                  |       | 0.87                                        | %          | 0.70     | %          |
| 90 days or more                                          |       | 1.15                                        | %          | 0.78     | %          |
| Total delinquent  mortgage loans                         |       | 4.61                                        | %          | 3.83     | %          |
| Loans pending  foreclosure(2)                            |       | 0.44                                        | %          | 0.42     | %          |
| Delinquent mortgage  loans(2):                           |       |                                        |       |     |       |
| Conventional                                             |       | 2.60                                        | %          | 2.24     | %          |
| Nonprime Mortgage                                        |       | 15.20                                       | %          | 11.29    | %          |
| Prime Home Equity                                        |       | 1.57                                        | %          | 0.79     | %          |
| Government                                               |       | 14.61                                       | %          | 13.14    | %          |
| Total delinquent  mortgage loans                         |       | 4.61                                        | %          | 3.83     | %          |
| Loans pending  foreclosure(2):                           |       |                                        |       |     |       |
| Conventional                                             |       | 0.20                                        | %          | 0.20     | %          |
| Nonprime Mortgage                                        |       | 2.03                                        | %          | 1.74     | %          |
| Prime Home Equity                                        |       | 0.06                                        | %          | 0.03     | %          |
| Government                                               |       | 1.09                                        | %          | 1.21     | %          |
| Total loans pending foreclosure                          |       | 0.44                                        | %          | 0.42     | %          |

----

(1)          Runoff refers toprincipal repayments on loans.

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

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We attribute the overallincrease in delinquencies in our servicing portfolio primarily to the relativeincrease in the number of loans in the nonprime portfolio, as well as anincrease in average seasoning of these portfolios, which carry higher delinquencyrates than conventional and Prime Home Equity mortgage loans. Loans in thehurricane affected areas contributed 39 basis points to the overall delinquencyrate. We believe the delinquency rates in our servicing portfolio areconsistent with industry experience for similar mortgage loan portfolios.

**Inflation**

Our operations that wouldbe most significantly impacted by an increase in inflation are our mortgagebanking and capital markets operations. Interest rates normally increase duringperiods of rising inflation. Historically, as interest rates increase, mortgageloan production decreases, particularly from loan refinancing. An environmentof gradual interest rate increases may, however, signify an improving economyor increasing real estate values, which in turn may stimulate increased homebuying activity. Generally, in such periods of reduced mortgage loan productionthe associated profit margins also decline due to increased competition amongmortgage loan originators and to higher unit costs, thus further reducing ourloan production earnings. Conversely, in a rising interest rate environment,our loan servicing earnings generally increase because mortgage prepaymentrates tend to slow down, thereby extending the average life of our servicingportfolio and thus reducing the amortization and impairment of our MSRs. Withinour broker-dealer operations, rising interest rates generally lead to areduction in trading and underwriting activities in its primary niche, themortgage securities market.

**Seasonality**

The mortgage bankingindustry is generally subject to seasonal trends. These seasonal trends reflectthe pattern in the national housing market. Home sales typically rise duringthe spring and summer seasons and decline during the fall and winter seasons.Seasonality has less of an effect on mortgage refinancing activity, which isprimarily driven by prevailing mortgage rates. In addition, mortgagedelinquency rates typically rise temporarily in the winter months, driven bymortgagor payment patterns.

**Liquidity and Capital Resources**

We have significant short-term and long-term financingneeds. Our short-term financing needs arise primarily from the warehousing ofmortgage loans pending sale and the trading activities of our broker-dealer.Our long-term financing needs arise primarily from our investments in ourmortgage loan portfolio, MSRs and other retained interests, along with thefinancial instruments acquired to manage the interest rate risk associated withthose investments.

Our primary source of equity capital is retainedearnings. We also have $1.1 billion outstanding in junior subordinateddebentures that receive varying degrees of “equity treatment” from ratingagencies, bank lenders and regulators. We currently have a $4.2 billiondeferred tax liability related to our MSRs that would offset a portion of anypotential loss in the value of our MSRs and which, to that extent, can be offsetagainst our MSRs in determining our capital requirements. From time to time, wemay issue common stock or other high-equity content securities as a means ofincreasing our capital base and supporting our growth.

How we meet our financingneeds is influenced by regulatory agency and public debt rating agencyrequirements. These requirements influence the nature of what we are able toobtain and the rate at which we are able to grow. As discussed in the followingparagraphs, we meet our financing needs in a variety of ways, through thepublic corporate debt and equity markets, as well as the mortgage andasset-backed securities markets, and through the deposit-gathering and otherfinancing activities of our Bank.

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***Liquidity Management***

The objective of our liquidity management is to ensurethat adequate reliable sources of cash are available to meet our potentialnear-term funding needs, including periods of stress within the financialmarkets. We manage our liquidity by financing our assets in a manner consistentwith their liquidity profile. Assets that are considered illiquid are financedwith long-term capital (equity and debt with a final maturity greater than sixmonths). We manage our long-term debt maturities (which we define for thispurpose as debt maturing after six months), and credit facility expirations tominimize refinancing risk. We also manage the timing of our short-term debtmaturities to limit the amount maturing on any given day. We diversify ourfinancing programs, credit providers and debt investors and dealers to reducereliance upon any one source of liquidity. Finally, we assess all sources offinancing based upon their reliability, recognizing that certain financingprograms are sensitive to temporary market disruptions. We also pay commitmentfees to certain creditors to ensure the reliability of certain funds.

We regularly forecast ourpotential funding needs over three-month and longer horizons, taking intoaccount debt maturities and potential peak balance sheet levels. We establishavailable reliable sources of liquidity sized to meet potential future fundingrequirements. We currently have $89.7 billion in available sources ofshort-term liquidity, including secured and unsecured committed bank lines ofcredit and reusable mortgage purchase commitments totaling $59.7 billion. Ourlong-term debt typically consists of unsecured debt issued in the publiccorporate debt markets. At December 31, 2005, we had $23.0 billion inunsecured long-term debt outstanding. See “Note 13—Notes Payable” in thefinancial statement section of this Report for additional descriptions of ourcommitted financing programs.

***Public Corporate Debt Markets***

The public corporate debt markets are a key source offinancing for us, due to their efficiency and low cost. Typically, we accessthese markets by issuing unsecured commercial paper and medium-term notes. Wealso have issued unsecured subordinated debt, convertible debt andtrust-preferred securities. At December 31, 2005, we had a total of $27.6billion in public corporate debt outstanding.

Tomaintain our desired level of access to the public corporate debt markets, itis critical for us to maintain investment-grade credit ratings. We haveconsistently maintained solid investment-grade credit ratings over the past 12years. Given our current ratings, we generally have deep access to the publiccorporate debt markets. Current credit ratings are as follows:

| ** **                      | ** ** | **Countrywide  Home Loans** | ** ** | **Countrywide  Financial Corporation** | ** ** |
|---------------------------------|------------|----------------------------------|------------|---------------------------------------------|------------|
| **Rating Agency**          | ** ** | ** **                       | ** ** | **Short-Term**                              | ** ** | **Long-Term** | ** ** | **Short-Term** | ** ** | **Long-Term** | ** ** |
| Standard & Poors            |       |                             | A-1        |                                        |       |   | A |   |   |   | A-1 |   |   |   | A |   |   |
| Moody’s Investors  Service |       |                             | P-2        |                                        |       |   | A3 |   |   |   | P-2 |   |   |   | A3 |   |   |
| Fitch                           |       |                             | F1         |                                        |       |   | A |   |   |   | F1 |   |   |   | A |   |   |
|                                 |            |                                  |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Among other things, maintenance of our currentinvestment-grade ratings requires that we have high levels of liquidity,including access to alternative sources of funding such as committed bankstand-by lines of credit, as well as a conservative capital structure.

Issues of concern to one or more credit ratingagencies in the past have included our significant investment in MSRs and otherretained interests, our involvement in nonprime lending, as well as ourliquidity and capital structure. We maintain an active dialogue with all threerating agencies, meeting throughout the year to review operational andfinancial performance and to address specific areas of focus.

In the unlikely event ourcredit ratings were to drop below “investment grade,” our access to the publiccorporate debt markets could be severely limited. (The cutoff for investmentgrade is generally considered to be a long-term rating of “BBB—”, or threegradations below our lowest current rating.) In 

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theevent of a ratings downgrade below investment grade, we could be required torely upon alternative sources of financing, such as bank lines and private debtplacements (secured and unsecured). Furthermore, we would likely be unable toretain all of our existing bank credit commitments beyond the then-existingmaturity dates. As a consequence, our cost of financing would risesignificantly and we could have to curtail some of our capital-intensiveactivities, such as our ongoing investment in our portfolio of mortgage loansheld for investment and MSRs and other retained interests. On the other hand,given the highly liquid nature of our mortgage inventory and broker-dealertrading portfolio, we would likely be able to arrange secured financing forsuch assets. Over the long-term, however, it would be difficult for us tocompete effectively without investment-grade ratings. Management believes thelikelihood of a reduction in our credit ratings to below investment grade inthe foreseeable future is remote. We analyze contingent liquidity scenarios ofvarying duration and severity for our mortgage company, bank and broker-dealerto ensure that sufficient highly reliable sources of committed liquidity are inplace and available to finance the Company during a temporary marketdisruption.

***Asset-Backed Financing Market***

A growing source offunding for us is the asset-backed financing market. This form of financinggenerally involves the temporary transfer of legal ownership of assets to aseparate legal entity (conduit) in exchange for short-term financing. Suchfinancing programs generally have commercial bank sponsors that provide someform of credit enhancement to the program, for example, back-up lines of creditor market value swaps. Investors that purchase secured debt, typicallycommercial paper, issued by these conduits look primarily to the asset value toensure repayment, rather than to the credit standing of the company thatutilizes the conduit for financing. We have used this market primarily tofinance a significant portion of our mortgage loan inventory. Due to its liquidnature and short holding period, our mortgage loan inventory has been wellreceived by asset-backed commercial paper investors. We use such programs as acost-effective means to expand and diversify our sources of liquidity. At December 31,2005, we had borrowed a total of $15.2 billion through such asset-backedfinancing programs.

***Secondary Mortgage Market***

We rely substantially on the secondary mortgage marketas a source of long-term capital to support our mortgage banking operations.Most of the mortgage loans that we produce are sold in the secondary mortgagemarket, primarily in the form of Mortgage-Backed Securities (“MBS”) andAsset-Backed Securities (“ABS”). Significant portions of the MBS we sell areguaranteed by Fannie Mae, Freddie Mac or Ginnie Mae (collectively, “Agency MBS”).We also issue non-Agency or “private-label” MBS and ABS. Private-label MBS andABS are registered with the SEC and have separate credit ratings. Private-labelMBS and ABS generally require some form of credit enhancement, such asover-collateralization, senior-subordinated structures, primary mortgage insurance,Countrywide guarantees and/or private surety guarantees.

The Agency MBS market is extremely liquid. Theprivate-label MBS and ABS market, particularly the nonprime ABS market, issignificantly less liquid, although we have enjoyed essentially uninterruptedaccess to these markets, albeit at varying costs.

We ensure our ongoingaccess to the secondary mortgage market by consistently producing qualitymortgages and servicing those mortgages at levels that meet or exceed secondarymortgage market standards. As described elsewhere in this document, we have amajor focus on ensuring the quality of our mortgage loan production and we makesignificant investments in personnel and technology to support the quality ofour mortgage loan production.

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***Repurchase Agreements***

We also utilize short-termrepurchase agreements as a primary means of financing securities and mortgageloans pending sale. Although this method of financing is uncommitted andshort-term in nature, it has proven to be a reliable and cost-effectivefinancing alternative for us.

***Regulatory Capital Requirements***

We are subject to capital adequacy guidelines adoptedby the Board of Governors of the Federal Reserve and the Bank is subject tocapital adequacy guidelines adopted by the Office of Comptroller of theCurrency. The capital adequacy guidelines require us to maintain specificcapital levels based on our assets and off-balance sheet items. Our policy isto maintain our regulatory capital ratios at levels that are above the “wellcapitalized” standards defined by the Federal Reserve Board.

At December 31,2005 and 2004, the Company and the Bank’s regulatory capital ratios and amountsand minimum required capital ratios for the Company and the Bank to maintain a “wellcapitalized” status were as follows:

| ** **               | ** ** | **December 31, 2005**                  | ** ** |
|--------------------------|------------|--------------------------------------------------|------------|
| ** **               | ** ** | **Minimum**                                      | ** ** | **Countrywide Financial  Corporation** | ** ** | **Countrywide Bank** | ** ** |
| ** **               | ** ** | **Required(1)**                                  | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** |
| ** **               | ** ** | **(dollar amounts in thousands)** | ** ** |
| Tier 1 Leverage  Capital |       |                                             | 5.0        | % |   |   | 6.3 | % |   | $ | 12,564,162 |   |   | 7.3 | % |   | $ | 5,343,675 |   |
| Risk-Based Capital:      |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Tier 1                   |       |                                             | 6.0        | % |   |   | 10.7 | % |   | $ | 12,564,162 |   |   | 12.2 | % |   | $ | 5,343,675 |   |
| Total                    |       |                                             | 10.0       | % |   |   | 11.7 | % |   | $ | 13,760,176 |   |   | 12.5 | % |   | $ | 5,457,019 |   |

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

| ** **               | ** ** | **December 31, 2004**                  | ** ** |
|--------------------------|------------|--------------------------------------------------|------------|
| ** **               | ** ** | **Minimum**                                      | ** ** | **Countrywide Financial  Corporation** | ** ** | **Countrywide Bank** | ** ** |
| ** **               | ** ** | **Required(1)**                                  | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** |
| ** **               | ** ** | **(dollar amounts in thousands)** | ** ** |
| Tier 1 Leverage  Capital |       |                                             | 5.0        | % |   |   | 7.9 | % |   | $ | 10,332,383 |   |   | 7.8 | % |   | $ | 2,939,144 |   |
| Risk-Based Capital:      |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Tier 1                   |       |                                             | 6.0        | % |   |   | 11.1 | % |   | $ | 10,332,383 |   |   | 11.8 | % |   | $ | 2,939,144 |   |
| Total                    |       |                                             | 10.0       | % |   |   | 11.7 | % |   | $ | 10,928,223 |   |   | 12.0 | % |   | $ | 2,988,116 |   |

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

While the Bank has nothistorically been a source of cash to the parent company, the capitalregulations also limit the Bank’s ability to transfer funds to the parentcompany. As of December 31, 2005, $1.2 billion of the Bank’s retainedearnings were available for payment of dividends to the parent company withoutprior regulatory approval. At December 31, 2005, the Bank’s retainedearnings unavailable for dividends totaled $31.4 million.

***Cash Flow***

Cash flow used by operating activities was $11.7billion for 2005, compared to $5.5 billion for 2004. Cash flow used inoperating activities includes the cash used for the origination and purchase ofmortgage loans held for sale and the proceeds from the sales of such mortgages.We generally retain servicing rights and may retain other interests when theseloans are sold. The transfer of the amounts retained is a non-cash investingactivity. See “Note 22—Supplemental Cash Flow Information” in the financialstatement section of this report. The increase in net cash flow used byoperations for 2005 compared to 2004 was 

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primarily due to anincrease in the Mortgage Loan Inventory of $12.6 billion in 2005 compared to anincrease in Mortgage Loan Inventory of $7.0 billion in 2004 and a $2.1 billionnet increase in cash used to settle trading securities sold not yet purchased,at fair value.

Net cash used by investing activities was $41.8billion for 2005, compared to $9.2 billion for 2004. The increase in net cashused in investing activities was attributable to a $20.3 billion increase incash used to fund loans held for investment, combined with a $8.0 billionincrease in cash used to fund investments in other financial instruments and a$6.9 billion increase in securities purchased under agreements to resell, securitiesborrowed and federal funds sold.

Net cash provided byfinancing activities for 2005 totaled $53.7 billion, compared to $14.8 billionfor 2004. The increase in cash provided by financing activities was comprisedof a $23.6 billion net increase in short-term borrowings, including securitiessold under agreements to repurchase, an $8.8 billion net increase in bank depositliabilities and a $6.6 billion increase in long-term debt.

**Off-BalanceSheet Arrangements 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—“Summaryof Significant Accounting Policies” in the financial statement section of thisReport for a description of our consolidation policy.) Such transactions arestructured to manage our interest rate, credit or liquidity risks, to diversifyfunding sources or to optimize our capital.

Substantially all of our off-balance sheetarrangements relate to the securitization of mortgage loans. Our mortgage loansecuritizations are normally structured as sales as specified by Statement ofFinancial Accounting Standards No. 140, “Accounting for Transfers andServicing of Financial Assets and Extinguishments of Liabilities” (“SFAS 140”),and as such involve the transfer of the mortgage loans to qualifying special-purposeentities that are not subject to consolidation. In a securitization, an entitytransferring the assets is able to convert those assets into cash.Special-purpose entities used in such securitizations obtain cash to acquirethe assets by issuing securities to investors. In a securitization, wecustomarily provide representations and warranties with respect to the mortgageloans transferred. In addition, we generally retain the right to service thetransferred mortgage loans.

We also generally have the right to repurchasemortgage loans from the special-purpose entity if the remaining outstandingbalance of the mortgage loans falls to a level where the cost of servicing theloans becomes burdensome in relation to the benefits of servicing.

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 2005, wesecuritized $61.4 billion in Nonprime Mortgage and Prime Home Equity Loans withlimited recourse for credit losses. Our exposure to credit losses related toour limited recourse securitization activities is limited to the carrying valueof our subordinated interests and to the contractual limit of reimbursable lossesunder our corporate guarantees less the recorded liability for such guarantees.For a further discussion of our exposure to credit risk, see the section inthis Report entitled “Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Credit Risk.”

We do not believe that any of our off-balance sheetarrangements have or are reasonably likely to have a current or future materialeffect on our financial condition, results of operations, liquidity, capitalexpenditures or capital resources.

The sales proceeds andcash flows from our securitizations for 2005 and additional information withrespect to securitization activities are included in the financial statementssection of this Report (Note 3—“Loan Sales”).

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***Contractual Obligations***

Thefollowing table summarizes our significant contractual obligations at December 31,2005, with the exception of short-term borrowing arrangements and pension andpost-retirement benefit plans.

| ** **           | ** ** | **Note(1)**             | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 Years** | ** ** | **Total** | ** ** |
|----------------------|------------|-------------------------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|----------------------------------|------------|-----------|------------|
| ** **           | ** ** | **(in thousands)** | ** ** |
| **Obligations:**     |       |                    |       |                            |       |               |       |               |       |                             |       |      |       |   |   |
| Notes payable        |       |                    | 13         |                            |       | $                  | 17,018,887 |               | $          | 27,547,366                       |       | $         | 9,745,951  |   | $ | 3,259,678 |   | $ | 57,571,882 |   |
| Time deposits        |       |                    | 15         |                            |       | $                  | 13,199,871 |               | $          | 4,509,776                        |       | $         | 1,846,454  |   | $ | 1,338,691 |   | $ | 20,894,792 |   |
| Operating leases     |       |                    | 31         |                            |       | $                  | 157,543    |               | $          | 231,668                          |       | $         | 105,119    |   | $ | 29,146 |   | $ | 523,476 |   |
| Purchase obligations |       |                    | —     |                            |       | $                  | 167,669    |               | $          | 17,803                           |       | $         | 3,116      |   | $ | 760 |   | $ | 189,348 |   |

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(1)          See respective notes tothe financial statements included in this Report.

As of December 31, 2005, the Company hadundisbursed home equity lines of credit and construction loan commitments of$7.2 billion and $1.5 billion, respectively. As of December 31, 2005,outstanding commitments to fund mortgage loans totaled $35.8 billion,outstanding commitments to sell mortgage loans totaled $21.1 billion andoutstanding commitments to buy mortgage loans totaled $6.9 billion.

In connection with theCompany’s underwriting activities, the Company had commitments to purchase andsell new issues of securities aggregating $40.0 million at December 31,2005.

**Prospective Trends**

***United States Mortgage Market***

Over the last decade, total mortgage indebtedness inthe United States has grown at an average annual rate of 9%. We believe thatcontinued population growth, ongoing developments in the mortgage market andthe prospect of relatively low interest rates support growth in the market forthe foreseeable future. Some of the ongoing developments in the mortgage marketthat should fuel its growth include government-sponsored programs targeted toincrease homeownership in low-income and minority communities, the growth innonprime lending, the growth of prime home equity lending as a major form ofconsumer finance and the increasing efficiency of the secondary mortgage marketthat lowers the overall cost of homeownership.

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

·       Thecontinuing evolution of the secondary mortgage market and demand by borrowershas resulted in a proliferation of mortgage products;

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

·       Interestrate volatility has risen over the last decade. At the same time, homeowners’propensity to refinance their mortgages has increased as the refinance processhas become more efficient and cost effective. The combined result has beenlarge swings in the volume of mortgage loans originated from year to year. Thesevolume swings have placed significant operational and financial pressures onmortgage 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. Primarily because of these factors, the industry has undergoneconsolidation.

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Today, large, sophisticated financial institutionsdominate the residential mortgage industry. These industry leaders areprimarily commercial banks operating through their mortgage bankingsubsidiaries. Today, the top 30 mortgage lenders combined have a  88% share of the mortgage origination market,up from 63% five years ago.

Followingis a year-over-year comparison of loan volume for the top five originators,according to *Inside Mortgage Finance*:

| ** **                 | ** ** | **Years Ended  December 31,** | ** ** |
|----------------------------|------------|-----------------------------------------|------------|
| **Institution**            | ** ** | ** **                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                 | ** ** | **(in billions)**                  | ** ** |
| *Countrywide*              |       | $                                       | 491        |   | $ | 363 |   |
| Wells Fargo Home  Mortgage |       | 392                                     |       | 298 |   |
| Washington Mutual          |       | 249                                     |       | 255 |   |
| Chase Home  Finance        |       | 183                                     |       | 197 |   |
| Bank of America  Mortgage  |       | 159                                     |       | 147 |   |
| Total for Top  Five        |       | $                                       | 1,474      |   | $ | 1,260 |   |
|                            |            |                                         |            |  |  |  |  |  |  |

 

This consolidation trend has naturally carried over tothe loan servicing side of the mortgage business. Today, the top 30 mortgageservicers combined have a 71% share of the total mortgages outstanding, up from64% five years ago. Following is a year-over-year comparison of loan volume forthe top five servicers, according to *InsideMortgage Finance*:

| ** **                 | ** ** | **Years Ended  December 31,** | ** ** |
|----------------------------|------------|-----------------------------------------|------------|
| **Institution**            | ** ** | ** **                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                 | ** ** | **(in billions)**                  | ** ** |
| *Countrywide*              |       | $                                       | 1,111      |   | $ | 838 |   |
| Wells Fargo Home  Mortgage |       | 1,005                                   |       | 782 |   |
| Washington Mutual          |       | 747                                     |       | 728 |   |
| Chase Home  Finance        |       | 604                                     |       | 563 |   |
| CitiMortgage Corp          |       | 403                                     |       | 364 |   |
| Total for Top  Five        |       | $                                       | 3,870      |   | $ | 3,275 |   |
|                            |            |                                         |            |  |  |  |  |  |  |

 

We believe the consolidation trend will continue, asthe aforementioned market forces will continue to drive out weak competitors.We believe Countrywide will benefit from this trend through increased marketshare and ability to recruit talented personnel.

Compared to Countrywide,the other industry leaders are less reliant on the secondary mortgage market asan outlet for adjustable-rate mortgages, due to their greater portfolio lendingcapacity. This could place us at a competitive disadvantage in the future ifthe demand for adjustable-rate mortgages continues, the secondary mortgagemarket does not continue to provide a competitive outlet for these loans, or weare unable to sustain an adequate portfolio lending capacity.

***Housing Appreciation***

Housing values affect usin several positive ways: rising housing values point to healthy demand forpurchase-money mortgage financing; increased average loan balances; and areduction in the risk of loss on sale of foreclosed real estate in the event aloan defaults. However, as housing values appreciate, prepayments of existingmortgages tend to increase as mortgagors look to monetize the additional equityin their homes. Over the last several years, the housing price index hassignificantly outpaced the consumer price index and growth in personal income.Consequently, we expect housing values to increase at a slower 

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rate inthe coming years than in the past several years. Although there may be somemarkets that experience housing price depreciation, we believe that pricedepreciation will not occur nationwide. Over the long term, we expect thathousing appreciation will be positively correlated with both consumer priceinflation and growth in personal income.

***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 regulatory policiescan affect whether and to what extent we are able to operate profitably. Forexample, proposed  local, state andfederal legislation targeted at predatory lending could have the unintendedconsequence of raising the cost or otherwise reducing the availability ofmortgage credit for those potential borrowers with less than prime-qualitycredit histories. This could result in a reduction of otherwise legitimatenonprime lending opportunities. In addition, there may be future local, stateand federal legislation that restricts our ability to communicate with andsolicit business from current and prospective customers in such a way that weare not able to originate new loans or sell other products in as profitable amanner.

***Mortgage Originations***

Followingis the estimated total United States mortgage originations market for each ofthe last five years:

| **Calendar Year** | ** ** | ** **             | ** ** | **United States  Mortgage  Originations** | ** ** |
|------------------------|------------|------------------------|------------|------------------------------------------------|------------|
| ** **             | ** ** | **(in billions)** | ** ** |
| 2005                   |       |                   | $          | 2,787                                          |       |   |
| 2004                   |       |                   | $          | 2,772                                          |       |   |
| 2003                   |       |                   | $          | 3,810                                          |       |   |
| 2002                   |       |                   | $          | 2,852                                          |       |   |
| 2001                   |       |                   | $          | 2,243                                          |       |   |

 

Source:  *Mortgage Bankers Association*

Forecasters currently putthe market for 2006 at between $2.2 trillion and $2.4 trillion. The forecastedreduction is attributable to an expected decline in mortgage refinanceactivity. We believe that a market within the forecasted range would still befavorable for our loan production business, although we would expect increasedcompetitive pressures to have some impact on its profitability. This forecastwould imply declining pressure on our loan servicing business due to areduction in mortgage loan prepayment activity. In our Capital Markets Segmentbusiness, such a drop in mortgage originations would likely result in areduction in mortgage securities trading and underwriting volume, which wouldhave a negative impact on profitability.

***Implementation of New Accounting Standards***

In December 2004, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123R,“Share-Based Payment” (“SFAS 123R”), an amendment of FASB Statement No. 123,“Accounting for Stock-Based Compensation” (“SFAS 123”). SFAS 123R is focusedprimarily on accounting for share-based compensation. This Statement requirescompanies to measure the cost of employee services received in exchange for anaward of equity instruments based on the grant date fair value of the award.SFAS 123R requires measurement of fair value of employee stock options using anoption pricing model that takes into account the awarded options’ unique characteristics.

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SFAS 123R requirescharging the recognized cost to expense over the period the employee providesservices to earn the award, generally the vesting period for the award.

SFAS 123R’smeasurement requirements for employee stock options are similar to those of SFAS 123,which is the basis for the pro forma stock-based compensation disclosure in “Note2—Summary of Significant Accounting Policies” in the financial statementsection of this Report. However, SFAS 123R requires:

·       initialand ongoing estimates of the amount of shares that will vest—SFAS 123 providedentities the option of assuming that all shares would vest and then “truing-up”compensation cost and expense as shares were forfeited

·       adjustingthe cost of a modified award with reference to the difference in the fair valueof the modified award to the initial award at the date of modification of theaward.

SFAS 123R also provides for the use of alternativemodels to determine compensation cost related to stock option grants. The modelthe Company will use to value its employee stock options is a variant of theBlack-Scholes-Merton option pricing model. Adoption of SFAS 123R is expected tohave an effect of approximately $40 million net of tax related to the expensingof prior periods’ unamortized grants in 2006. The Company will adopt SFAS 123Ron January 1, 2006.

In May 2005, the FASB issued Statement ofFinancial Accounting Standards No. 154, “Accounting Changes and ErrorCorrections” (“SFAS 154”), which replaces APB No. 20, “Accounting Changes”,and FASB Statement No. 3, “Reporting Changes in Interim FinancialStatements.” The Statement changes the accounting for, and reporting of, achange in accounting principle. SFAS 154 requires retrospective application toprior period’s financial statements of voluntary changes in accountingprinciple and changes required by new accounting standards when the standarddoes not include specific transition provisions, unless it is impracticable todo so. SFAS 154 is effective for accounting changes and corrections of errorsin fiscal years beginning after December 15, 2005 and will only effect theCompany’s financial statements upon adoption of a change in accountingprinciple by the Company.

In November 2005, the FASB issued FASB StaffPosition 140-2, “Clarification and Application of Paragraphs 40(b) and40(c) of FASB Statement No. 140,” (“FSP 140-2”) which clarifiedthat purchases by a transferor, its affiliates or its agents of previouslyissued beneficial interests, with protection by a derivative financialinstrument, from outside parties that are held temporarily and are classifiedas trading securities would not preclude the special purpose entity fromretaining its qualifying status under SFAS 140. Prior to the issuance of FSP 140-2,mortgage loans held in the SPE and the related asset-backed secured financingswere included in the Company’s consolidated balance sheets for the period oftime such securities were held by our broker-dealer. The assets and liabilitieswere initially recorded at fair value.

In November 2005, theFASB issued FASB Staff Position Nos. FAS 115-1/FAS 124-1, “TheMeaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments.” This FSP supersedes EITF Topic No. D-44, “Recognitionof Other-Than-Temporary Impairment upon the Planned Sale of a Security WhoseCost Exceeds Fair Value” and nullifies the guidance in EITF Issue No. 03-1,“The Meaning of Other-Than-Temporary Impairment and its Application to CertainInvestments” for determining whether impairment of an investment isother-than-temporary. This FSP references existing guidance to determinewhether an impairment of an investment is other-than-temporary. This FSPapplies to investments in debt and equity securities within the scope ofStatements 115 and 124, all equity securities held by insurance companies andinvestments in other equity securities that are not accounted for by the equitymethod. The application of this FSP is required for the Company beginning January 1,2006. Adoption of this FSP is not expected to have a significant impact on theconsolidated financial position or earnings of the Company.

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In February 2006,the FASB issued Statement of Financial Accounting Standards No. 155, “Accountingfor Certain Hybrid Financial Instruments”, an amendment of FASB Statements No.133 and SFAS 140 (“SFAS 155”). This statement:

·  permits fair value remeasurement for anyhybrid financial instrument that contains an embedded derivative that otherwisewould require bifurcation

·  clarifies which interest-only strips andprincipal-only strips are not subject to FASB Statement No. 133,“Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) 

·  establishes a requirement to evaluateinterests in securitized financial assets to identify interests that arefreestanding derivatives or hybrid financial instruments that contain anembedded derivative requiring bifurcation

·  clarifies that concentration of credit risksin the form of subordination are not embedded derivatives

·  amends SFAS 140 to eliminate the prohibitionon a QSPE from holding a derivative financial instrument that pertains to abeneficial interest other than another derivative financial instrument.

SFAS 155 is effective forall financial instruments acquired or issued after the beginning of an entity’sfirst fiscal year that begins after September 15, 2006. Early adoption of thisstatement is allowed. The Company has not determined the financial impact ofthe adoption of SFAS 155 or whether it will adopt SFAS 155 in 2006.

**Item 7A.**                *Quantitative and Qualitative Disclosures About Market Risk*

In response to this Item,the information set forth on pages 86 to 92 and Note 4 of this Form 10-Kis incorporated herein by reference.

**Item 8.**                        *Financial Statements and Supplementary Data*

The information called forby this Item 8 is hereby incorporated by reference from Countrywide’s FinancialStatements and Auditors’ Report beginning at page F-1 of this Form 10-K.

**Item 9.**                        *Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure*

Not Applicable.

**Item 9A.**                *Controls and Procedures*

***(1)* Evaluationof Disclosure Controls and Procedures**

We have conducted anevaluation, with the participation of our Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of our disclosure controls andprocedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as ofthe end of the period covered by this annual report as required by paragraph (b) ofRules 13a-15 and 15d-15 under the Exchange Act. Based on theirevaluation, the Chief Executive Officer and Chief Financial Officer haveconcluded that our disclosure controls and procedures were effective inensuring that material information relating to the Company, including ourconsolidated subsidiaries, is made known to the Chief Executive Officer andChief Financial Officer by others within those entities during the period inwhich this annual report on Form 10-K was being prepared.

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***(2)* Management’sReport on Internal Control Over Financial Reporting**

Management is responsible for establishing andmaintaining adequate internal control over financial reporting for the Company.

The Company’s internal control over financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with accounting principles generallyaccepted in the United States of America. The Company’s internal control overfinancial reporting includes those policies and procedures that (i) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the Company; (ii) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with the accountingprinciples generally accepted in the United States of America, and thatreceipts and expenditures of the Company are being made only in accordance withauthorizations of management and directors of the Company; and (iii) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the Company’s assets that could have amaterial effect on the financial statements.

Because of its inherent limitations, internal control overfinancial reporting may not prevent or detect misstatements. Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies and procedures may deteriorate.

In making its assessment of internal control overfinancial reporting, management used the criteria established in “InternalControl—Integrated Framework” issued by the Committee of Sponsoring Organizationsof the Treadway Commission (COSO). Based on this assessment, managementconcluded that the Company’s internal control over financial reporting waseffective as of December 31, 2005.

KPMG LLP, the independent registered public accountingfirm that audited the Company’s financial statements included in this AnnualReport on Form 10-K for the period ended December 31, 2005, hasissued an audit report on management’s assessment of the Company’s internalcontrol over financial reporting, in accordance with the standards of thePublic Company Accounting Oversight Board. This report appears on page 110.

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***Report of Independent Registered Public AccountingFirm***

The Board of Directors and StockholdersCountrywide Financial Corporation:

We have audited management’s assessment, included inthe accompanying *Management’s Report onInternal Control Over Financial Reporting*, included in Item 9A(2),that Countrywide Financial Corporation (the Company) maintained effectiveinternal control over financial reporting as of December 31, 2005, basedon criteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO). TheCompany’s management is responsible for maintaining effective internal controlover financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting. Our responsibility is to express anopinion on management’s assessment and an opinion on the effectiveness of theCompany’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standardsof the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

In our opinion, management’s assessment that theCompany maintained effective internal control over financial reporting as of December 31,2005, is fairly stated, in all material respects, based on criteria establishedin Internal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Also, in our opinion, theCompany maintained, in all material respects, effective internal control overfinancial reporting as of December 31, 2005, based on criteria establishedin Internal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).

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Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofCountrywide Financial Corporation and subsidiaries as of December 31, 2005and 2004, and the related consolidated statements of earnings, stockholders’equity and comprehensive income and cash flows for the years then ended, andour report dated February 27, 2006, expressed an unqualified opinion onthose consolidated financial statements.

|                          | KPMG LLP     |
|--------------------------|--------------|
|                     | /s/ Kpmg LLP |   |
| Los Angeles,  California |         |
| February 27,  2006  |         |

 

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** **

**Item 9B.**               *Other Information*

None.

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** **

**PART III**

**Item 10.**                 *Directors and Executive Officers of the Registrant*

The information requiredby this Item 10 is hereby incorporated by reference from our definitive proxystatement, to be filed pursuant to Regulation 14A within 120 days after the endof the fiscal year.

**Item 11.**                 *Executive Compensation*

The information requiredby this Item 11 is hereby incorporated by reference from our definitive proxystatement, to be filed pursuant to Regulation 14A within 120 days after the endof the fiscal year.

**Item 12.**                 *Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters*

**EquityCompensation Plan Information**

Thefollowing table shows aggregate information, as of December 31, 2005, withrespect to compensation plans under which equity securities of Countrywide areauthorized for issuance.

| **Plan Category**                                      | ** ** | ** ** | ** ** | **Number of Securities to be  Issued Upon Exercise of  Outstanding Options,  Warrants and Rights** | ** ** | **Weighted-Average  Exercise Price of  Outstanding Options,  Warrants and Rights** | ** ** | **Number of Securities  Remaining Available for  Future Issuance Under  Equity Compensation Plans  (Excluding Securities  Reflected in  Column(a))(1)** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity Compensation  Plans Approved by Security Holders     |       |       | 58,424,402 |                                                                                                                                                 |       |                                                                                                        | $          | 20.06                                                                                                                                                                                                     |       |   |   | 23,113,125 |   |   |
| Equity  Compensation Plans Not Approved by Security Holders |       |       | N/A        |                                                                                                                                                 |       |                                                                                                        | N/A        |                                                                                                                                                                                                      |       |   | N/A |   |   |
| **Total**                                                   |       |       | 58,424,402 |                                                                                                                                                 |       |                                                                                                        | $          | 20.06                                                                                                                                                                                                     |       |   |   | 23,113,125 |   |   |

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(1)          Countrywide’s 2000Equity Incentive Plan also provides for awards of Restricted Stock. Of thesecurities available for issuance under this plan, 4,645,461 shares of ourCommon Stock are available for issuance in the form of Restricted Stock.

The other informationrequired by this Item 12 is hereby incorporated by reference from ourdefinitive proxy statement, to be filed pursuant to Regulation 14A within 120days after the end of the fiscal year.

**Item 13.**                 *Certain Relationships and Related Transactions*

The information requiredby this Item 13 is hereby incorporated by reference from our definitive proxystatement, to be filed pursuant to Regulation 14A within 120 days after the endof the fiscal year.

**Item 14.**                 *Principal Accountant Fees and Services*

The information required by this Item 14 is herebyincorporated by reference from our definitive proxy statement, to be filedpursuant to Regulation 14A within 120 days after the end of the fiscal year.

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**PART IV**

**Item 15.**                 *Exhibits, Financial Statement Schedules*

(a)(1) and (a)(2)—Financial Statement and FinancialStatement Schedules.

The informationcalled for by this section of Item 15 is set forth in the Financial Statementsand Auditors’ Report beginning at page F-2 of this Form 10-K.The index to Financial Statements and Schedules is set forth at page F-1of this Form 10-K.

(a)(3)—Exhibits

| Exhibit   No. | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                             | ****Description |
|---------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------|
| 3.1*          |       | Restated Certificate of Incorporation of the Company  (incorporated by reference to Exhibit 3.12 to the Company’s Quarterly  Report on Form 10-Q, for the quarter ended September 30,  2004).                                                                                                                                                                      |
| 3.2*          |       | Bylaws of the Company,  as amended and restated (incorporated by reference to Exhibit 3 to the  Company’s Current Report on Form 8-K, dated February 10,  1988).                                                                                                                                                                                                   |
| 3.3*          |       | Amendment to Bylaws of  the Company dated January 28, 1998 (incorporated by reference to  Exhibit 3.3.1 to the Company’s Annual Report on Form 10-K,  for the fiscal year ended February 28, 1998).                                                                                                                                                           |
| 3.4*          |       | Amendment to Bylaws of  the Company dated February 3, 1998 (incorporated by reference to  Exhibit 3.3.1 to the Company’s Annual Report on Form 10-K,  for the fiscal year ended February 28, 1998).                                                                                                                                                           |
| 3.5*          |       | Amendment to Bylaws of  the Company dated March 24, 2000 (incorporated by reference to  Exhibit 3.3.3 to the Company’s Annual Report on Form 10-K,  for the fiscal year ended February 29, 2000).                                                                                                                                                             |
| 3.6*          |       | Amendment to Bylaws of  the Company dated September 28, 2000 (incorporated by reference to  Exhibit 3.3.4 to the Company’s Quarterly Report on Form 10-Q,  for the quarter ended August 31, 2000).                                                                                                                                                            |
| 4.1*          |       | Amended and Restated  Rights Agreement, dated as of November 27, 2001, between the Company and  The Bank of New York, as Rights Agent which includes as Exhibit A  thereto, the form of Amended and Restated Certificate of Designation  (incorporated by reference to Exhibit 1 to the Company’s Form 8-A/A,  filed with the SEC on December 10, 2001). |
| 4.2           |       | Substitution of Rights  Agent and Amendment to Amended and Restated Rights Agreement dated December 8,  2005, between the Company and American Stock Transfer & Trust  Company which includes as Exhibit B thereto, the form of Rights  Certificate.                                                                                                                |
| 4.3*          |       | Specimen Certificate of  the Company’s Common Stock (incorporated by reference to Exhibit 4.2 to  the Current Company’s Report on Form 8-K, dated February 6,  1987).                                                                                                                                                                                         |
| 4.4*          |       | Specimen Debenture  Certificate (incorporated by reference to Exhibit 4.3 to the Company’s  Current Report on Form 8-K, dated February 6, 1987).                                                                                                                                                                                                                   |
| 4.5*          |       | Indenture dated as of  January 1, 1992 among CHL, the Company and The Bank of New York, as  trustee (incorporated by reference to Exhibit 4.1 to the registration  statement on Form S-3 of CHL and the Company (File Nos. 33-50661  and 33-50661-01), filed with the SEC on October 19, 1993).                                                                    |
|               |            |                                                                                                                                                                                                                                                                                                                                                                                        |                 |  |

114

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| 4.6*  |   | Form of Supplemental Indenture No. 1 dated  as of June 15, 1995, to the Indenture dated as of January 1, 1992,  among CHL, the Company, and The Bank of New York, as trustee (incorporated by  reference to Exhibit 4.9 to Amendment No. 2 to the registration  statement on Form S-3 of the Company and CHL (File Nos. 33-59559  and 33-59559-01), filed with the SEC on June 16, 1995). |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.7*  |   | Form of Medium-Term  Notes, Series B (fixed-rate) of CHL (incorporated by reference to  Exhibit 4.2 to the Company’s registration statement on Form S-3  (File No. 33-51816), filed with the SEC on September 9,  1992).                                                                                                                                                                       |
| 4.8*  |   | Form of Medium-Term  Notes, Series B (floating-rate) of CHL (incorporated by reference to  Exhibit 4.3 to the Company’s registration statement on Form S-3  (File No. 33-51816), filed with the SEC on September 9,  1992).                                                                                                                                                                    |
| 4.9*  |   | Form of Medium-Term  Notes, Series C (fixed-rate) of CHL (incorporated by reference to  Exhibit 4.2 to the registration statement on Form S-3 of CHL  and the Company (File Nos. 33-50661 and 33-50661-01),  filed with the SEC on October 19, 1993).                                                                                                                                               |
| 4.10* |   | Form of Medium-Term  Notes, Series C (floating-rate) of CHL (incorporated by reference to  Exhibit 4.3 to the registration statement on Form S-3 of CHL  and the Company (File Nos. 33-50661 and 33-50661-01),  filed with the SEC on October 19, 1993).                                                                                                                                            |
| 4.11* |   | Form of Medium-Term  Notes, Series D (fixed-rate) of CHL (incorporated by reference to  Exhibit 4.10 to Amendment No. 2 to the registration statement on  Form S-3 of the Company and CHL (File Nos. 33-59559 and 33-59559-01),  filed with the SEC on June 16, 1995).                                                                                                                              |
| 4.12* |   | Form of Medium-Term  Notes, Series D (floating-rate) of CHL (incorporated by reference to  Exhibit 4.11 to Amendment No. 2 to the registration statement on  Form S-3 of the Company and CHL (File Nos. 33-59559 and 33-59559-01),  filed with the SEC on June 16, 1995).                                                                                                                           |
| 4.13* |   | Form of Medium-Term  Notes, Series E (fixed-rate) of CHL (incorporated by reference to  Exhibit 4.3 to Post-Effective Amendment No. 1 to the registration  statement on Form S-3 of the Company and CHL (File Nos. 333-3835  and 333-3835-01), filed with the SEC on August 2, 1996).                                                                                                               |
| 4.14* |   | Form of Medium-Term  Notes, Series E (floating rate) of CHL (incorporated by reference to  Exhibit 4.4 to Post-Effective Amendment No. 1 to the registration  statement on Form S-3 of the Company and CHL (File Nos. 333-3835  and 333-3835-01), filed with the SEC on August 2, 1996).                                                                                                            |
| 4.15* |   | Form of Medium-Term  Notes, Series F (fixed-rate) of CHL (incorporated by reference to  Exhibit 4.3 to the registration statement on Form S-3 of the  Company and CHL (File Nos. 333-31529 and 333-31529-01),  filed with the SEC on July 29, 1997).                                                                                                                                                |
| 4.16* |   | Form of Medium-Term  Notes, Series F (floating-rate) of CHL (incorporated by reference to  Exhibit 4.4 to the registration statement on Form S-3 of the  Company and CHL (File Nos. 333-31529 and 333-31529-01),  filed with the SEC on July 29, 1997).                                                                                                                                             |
| 4.17* |   | Form of Medium-Term  Notes, Series G (fixed-rate) of CHL (incorporated by reference to  Exhibit 4.10 to the registration statement on Form S-3 of the  Company and CHL (File Nos. 333-58125 and 333-58125-01),  filed with the SEC on June 30, 1998).                                                                                                                                               |
| 4.18* |   | Form of Medium-Term  Notes, Series G (floating-rate) of CHL (incorporated by reference to  Exhibit 4.11 to the registration statement on Form S-3 of the  Company and CHL (File Nos. 333-58125 and 333-58125-01),  filed with the SEC on June 30, 1998).                                                                                                                                            |

115

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| 4.19* |   | Form of Medium-Term Notes, Series H  (fixed-rate) of CHL (incorporated by reference to Exhibit 4.3 to the  registration statement on Form S-3 of the Company and CHL (File  Nos. 333-66467 and 333-66467-01), filed with the SEC  on October 30, 1998).                                                                                           |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.20* |   | Form of Medium-Term  Notes, Series H (floating-rate) of CHL (incorporated by reference to  Exhibit 4.4 to the registration statement on Form S-3 of the  Company and CHL (File Nos. 333-66467 and 333-66467-01),  filed with the SEC on October 30, 1998).                                                                                        |
| 4.21* |   | Form of 6.85% Note  due 2004 of CHL (incorporated by reference to Exhibit 2 to the Company’s  Current Report on Form 8-K, dated June 21, 1999).                                                                                                                                                                                                        |
| 4.22* |   | Form of Medium-Term  Notes, Series I (fixed-rate) of CHL (incorporated by reference to  Exhibit 4.15 to the registration statement on Form S-3 of the  Company and CHL (File Nos. 333-82583 and 333-82583-01),  filed with the SEC on June 5, 2000).                                                                                              |
| 4.23* |   | Form of Medium-Term  Notes, Series I (floating-rate) of CHL (incorporated by reference to  Exhibit 4.16 to the registration statement on Form S-3 of the  Company and CHL (File Nos. 333-82583 and 333-82583-01),  filed with the SEC on June 5, 2000).                                                                                           |
| 4.24* |   | Form of Medium-Term  Notes, Series J (fixed-rate) of CHL (incorporated by reference to  Exhibit 4.14 to the registration statement on Form S-3 of the  Company and CHL (File Nos. 333-55536 and 333-55536-01),  filed with the SEC on February 14, 2001).                                                                                         |
| 4.25* |   | Form of Medium-Term  Notes, Series J (floating-rate) of CHL (incorporated by reference to  Exhibit 4.15 to the registration statement on Form S-3 of the  Company and CHL (File Nos. 333-55536 and 333-55536-01),  filed with the SEC on February 14, 2001).                                                                                      |
| 4.26* |   | Indenture, dated as of  December 1, 2001 among CHL, the Company and The Bank of New York, as  trustee (incorporated by reference to Exhibit 4.25 to the Company’s  Annual Report on Form 10-K, for the year ended December 31,  2003).                                                                                                                 |
| 4.27* |   | Form of Medium-Term  Notes, Series K (fixed-rate) of CHL (incorporated by reference to  Exhibit 4.12 to the registration statement on Form S-3 of the  Company, CHL, Countrywide Capital IV and Countrywide Capital V (File Nos. 333-74042,  333-74042-03, 333-74042-02 and 333-74042-01,  respectively), filed with the SEC on November 28, 2001).    |
| 4.28* |   | Form of Medium-Term  Notes, Series K (floating-rate) of CHL (incorporated by reference to  Exhibit 4.13 to the registration statement on Form S-3 of the  Company, CHL, Countrywide Capital IV and Countrywide Capital V (File Nos. 333-74042,  333-74042-03, 333-74042-02 and 333-74042-01,  respectively), filed with the SEC on November 28, 2001). |
| 4.29* |   | Form of Medium-Term  Notes, Series L (fixed-rate) of CHL (incorporated by reference to  Exhibit 4.11 to the registration statement on Form S-3 of the  Company and CHL (File Nos. 333-103623, 333-103623-01, 333-103623-02  and 333-103623-03), filed with the SEC on March 5, 2003).                                                                  |
| 4.30* |   | Form of Medium-Term  Notes, Series L (floating-rate) of CHL (incorporated by reference to Exhibit 4.12  to the registration statement on Form S-3 of the Company and CHL  (File Nos. 333-103623, 333-103623-01, 333-103623-02  and 333-103623-03), filed with the SEC on March 5, 2003).                                                               |
| 4.31* |   | Form of Medium-Term  Notes, Series M (fixed-rate) of CHL (incorporated by reference to  Exhibit 4.11 to the registration statement on Form S-3 of the  Company and CHL (File Nos. 333-114270, 333-114270-01, 333-114270-02  and 333-114270-03), filed with the SEC on April 7, 2004).                                                                  |

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| 4.32* |   | Form of Medium-Term Notes, Series M (floating-rate)  of CHL (incorporated by reference to Exhibit 4.12 to the registration  statement on Form S-3 of the Company and CHL (File  Nos. 333-114270, 333-114270-01, 333-114270-02  and 333-114270-03), filed with the SEC on April 7, 2004).                                                                                           |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.33* |   | Form of Medium-Term  Notes, Series A (fixed-rate) of CFC (incorporated by reference to  Exhibit 4.11 to the registration statement on Form S-3 of the  Company and CHL (File  Nos. 333-114270, 333-114270-01, 333-114270-02  and 333-114270-03), filed with the SEC on April 7, 2004).                                                                                             |
| 4.34* |   | Form of Medium-Term  Notes, Series A (floating-rate) of CFC (incorporated by reference to  Exhibit 4.12 to the registration statement on Form S-3 of the  Company and CHL (File  Nos. 333-114270, 333-114270-01, 333-114270-02  and 333-114270-03), filed with the SEC on April 7, 2004).                                                                                          |
| 4.35* |   | Liquid Yield Option  Notes Due February 8, 2031 (Zero Coupon Senior) (incorporated by  reference to Exhibit 4.8 of registration statement on Form S-3  of the Company and CHL (File Nos. 333-59614 and 333-59614-01),  filed with the SEC on April 26, 2000).                                                                                                                           |
| 4.36* |   | Trust Deed dated 1st  May, 1998 among CHL, the Company and Bankers Trustee Company Limited, as  Trustee for Euro Medium Notes of CHL (incorporated by reference to  Exhibit 4.15 to the Company’s Quarterly Report on Form 10-Q,  for the quarter ended May 31, 1998).                                                                                                                  |
| 4.37* |   | Second Supplemental  Trust Deed dated 23rd day of December, 1999, further modifying the provisions  of a Trust Deed dated 1st May, 1998 among CHL, the Company and Bankers  Trustee Company Limited, as Trustee for Euro Medium Notes of CHL  (incorporated by reference to Exhibit 4.16.3 to the Company’s Annual  Report on Form 10-K, for the fiscal year ended February 28,  2001). |
| 4.38* |   | Third Supplemental Trust  Deed dated 12th day of January, 2001, further modifying the provisions of a  Trust Deed dated 1st May, 1998 among CHL, the Company and Bankers Trustee  Company Limited, as Trustee for Euro Medium Notes of CHL (incorporated by  reference to Exhibit 4.16.4 to the Company’s Annual Report on  Form 10-K, for the fiscal year ended February 28, 2001).    |
| 4.39* |   | Fourth Supplemental  Trust Deed, dated January 29, 2002, further modifying the provisions of  a Trust Deed, dated May 1, 1998 among CHL, the Company and Bankers  Trustee Company Limited, as trustee for Euro medium term notes of CHL  (incorporated by reference to Exhibit 4.46 of the Company’s Quarterly  Report on Form 10-Q, for the quarter ended March 31, 2002).   |
| 4.40* |   | Trust Deed between the  Company, as Issuer, CHL, as Guarantor and Deutsche Trustee Company Limited, as  Trustee, dated August 15, 2005 (incorporated by reference to  Exhibit 10.108 of the Company’s Quarterly Report on Form 10-Q,  for the quarter ended September 30, 2005).                                                                                                   |
| 4.41* |   | Note Deed Poll, dated  October 11, 2001, by CHL in favor of each person who is from time to  time an Australian dollar denominated Noteholder (incorporated by reference  to Exhibit 4.29 to the Company’s Quarterly Report on Form 10-Q,  for the quarter ended November 30, 2001).                                                                                               |
| 4.42* |   | Supplemental Note Deed  Poll, dated April 23, 2004, modifying the terms of a Note Deed Poll,  dated October 11, 2001, by CHL in favor of each person who is from time  to time an Australian Dollar denominated Noteholder (incorporated by  reference to Exhibit 4.49 to the Company’s Quarterly Report on Form 10-Q,  for the quarter ended September 30, 2004).            |

117

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| 4.43* |   | Note Deed Poll, dated as of April 29, 2005, by  the Company, in favor of each person who is from time to time an Australian  dollar denominated Noteholder (incorporated by reference to  Exhibit 10.103 to the Company’s Quarterly Report on Form 10-Q,  for the quarter ended June 30, 2005).                                                                                                                                                                                                              |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.44* |   | Deed Poll Guaranty and  Indemnity, dated as of April 29, 2005, by the Company in favor of each  person who is from time to time an Australian dollar denominated Noteholder (incorporated  by reference to Exhibit 10.104 to the Company’s Quarterly Report on  Form 10-Q, for the quarter ended June 30, 2005).                                                                                                                                                                                             |
| 4.45* |   | Indenture, dated as of  December 16, 1996 among CHL, the Company and the Bank of New York, as  trustee (incorporated by reference to Exhibit 4.34 to the Company’s  Annual Report on Form 10-K, for the year ended December 31,  2003).                                                                                                                                                                                                                                                                      |
| 4.46* |   | Supplemental Indenture,  dated as of December 16, 1996 among CHL, the Company and the Bank of New  York, as trustee (incorporated by reference to Exhibit 4.35 to the  Company’s Annual Report on Form 10-K, for the year ended  December 31, 2003).                                                                                                                                                                                                                                                         |
| 4.47* |   | Amended and Restated  Declaration of Trust, dated as of December 16, 1996 for Countrywide  Capital I by and among Eric P. Sieracki, Sandor E. Samuels and Carlos M.  Garcia as Regular Trustees, The Bank of New York, as Institutional Trustee,  and the Company (incorporated by reference to Exhibit 4.36 to the  Company’s Annual Report on Form 10-K, for the year ended  December 31, 2003).                                                                                                           |
| 4.48* |   | Indenture, dated as of  June 4, 1997, among CHL, the Company, and The Bank of New York, as  trustee (incorporated by reference to Exhibit 4.4 to the registration  statement on Form S-4 of CHL and the Company (File Nos. 333-37047,  333-37047-01, and 333-37047-02), filed with the SEC  October 2, 1997).                                                                                                                                                                                                     |
| 4.49* |   | Amended and Restated  Declaration of Trust of Countrywide Capital III, dated as of June 4,  1997, by and among the Company, The Bank of New York (Delaware) as Delaware  Trustee, Eric P. Sieracki, Sandor E. Samuels, and Thomas Keith McLaughlin, as  Regular Trustees (incorporated by reference to Exhibit 4.3 to the  registration statement on Form S-4 of CHL and the Company (File  Nos. 333-37047, 333-37047-01, and 333-37047-02),  filed with the SEC October 2, 1997).                                |
| 4.50* |   | Indenture, dated as of  April 11, 2003, among the Company, CHL and The Bank of New York, as  trustee (incorporated by reference to Exhibit 4.26 to the Company’s  Current Report on Form 8-K, dated April 15, 2003).                                                                                                                                                                                                                                                                                         |
| 4.51* |   | First Supplemental  Indenture, dated as of April 11, 2003, among the Company, CHL, and The  Bank of New York, as trustee, providing for the 6.75% Junior Subordinated  Deferrable Interest Debentures Due April 1, 2033 of CFC and the related  guarantee by CHL (incorporated by reference to Exhibit 4.27 to the  Company’s Current Report on Form 8-K, dated April 15, 2003).                                                                                                                        |
| 4.52* |   | Amended and Restated  Declaration of Trust of Countrywide Capital IV, dated as of April 11,  2003, by and among Sandor E. Samuels, Thomas K. McLaughlin and Jennifer  Sandefur, as Regular Trustees, The Bank of New York (Delaware), as Delaware  Trustee, The Bank of New York, as Institutional Trustee, the Company, as  Sponsor and Debenture Issuer, and CHL., as Debenture Guarantor (incorporated  by reference to Exhibit 4.28 to the Company’s Current Report on  Form 8-K, dated April 15, 2003). |

118

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| 4.53* |   | Indenture, dated as of February 8, 2001, among  the Company, CHL and The Bank of  New York, as trustee (incorporated by reference to Exhibit 4.7 of  registration statement on Form S-3 of the Company and CHL (File  Nos. 333-59614 and 333-59614-01), filed with the SEC on  April 26, 2000).                                                                      |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.54* |   | Registration Rights  Agreement, dated as of February 8, 2001, among the Company, CHL and  Merrill Lynch, Pierce, Fenner & Smith Incorporated (incorporated by  reference to Exhibit 4.7 of registration statement on Form S-3  of the Company and CHL (File Nos. 333-59614 and 333-59614-01),  filed with the SEC on April 26, 2000).                       |
| 4.55* |   | First Supplemental Trust  Deed dated 16th December, 1998, modifying the provisions of a Trust Deed  dated 1st May, 1998 among CHL, the Company and Bankers Trustee Company  Limited, as Trustee for Euro Medium Notes of CHL (incorporated by reference  to Exhibit 4.16 to the Company’s Annual Report on Form 10-K,  for the fiscal year ended February 28, 1999). |
| 4.56* |   | Indenture, dated  September 30, 2005, between the Company and The Bank of New York, as  Trustee, relating to the Floating Rate Subordinated Notes due April 11,  2011 (incorporated by reference to Exhibit 4.27 to the Company’s Current  Report on Form 8-K filed with the SEC on September 30, 2005).                                                   |
| 4.57* |   | Form of Floating  Rate Subordinated Note due April 1, 2011 of the Company (incorporated by  reference to Exhibit 4.28 to the Company’s Current Report on Form 8-K  filed with the SEC on September 30, 2005)                                                                                                                                               |
| 10.1* |   | Employment Agreement by  and between the Company and Angelo R. Mozilo effective March 1, 2001  (incorporated by reference to Exhibit 10.35 to the Company’s Quarterly  Report on Form 10-Q, for the quarter ended May 31, 2001).                                                                                                                                |
| 10.2* |   | First Amendment to  Employment Agreement, dated March 1, 2002, by and between the Company  and Angelo Mozilo (incorporated by reference to Exhibit 10.63 of the  Company’s Quarterly Report on Form 10-Q, for the quarter ended  June 30, 2002).                                                                                                                |
| 10.3* |   | Employment Agreement,  dated September 2, 2004 by and between the Company and Angelo R. Mozilo  (incorporated by reference to Exhibit 10.1 to the Company’s Current  Report on Form 8-K, dated September 2, 2004).                                                                                                                                              |
| 10.4* |   | Second Restated  Employment Agreement, dated as of February 28, 2003, by and between the  Company and Stanford L. Kurland (incorporated by reference to  Exhibit 10.78 to the Company’s Quarterly Report on Form 10-Q,  for the period ended March 31, 2003).                                                                                                   |
| 10.5* |   | First Amendment to  Second Restated Employment Agreement, dated as of January 1, 2004, by  and between the Company and Stanford L. Kurland (incorporated by reference to  Exhibit 10.84 to the Company’s Quarterly Report on Form 10-Q,  for the period ended March 31, 2004).                                                                                  |
| 10.6* |   | Restated Employment  Agreement, dated as of March 1, 2003, by and between the Company and  Thomas H. Boone (incorporated by reference to Exhibit 10.80 to the  Company’s Quarterly Report on Form 10-Q, for the period ended  March 31, 2003).                                                                                                                  |
| 10.7* |   | Restated Employment  Agreement, dated as of March 1, 2003, by and between the Company and  Carlos M. Garcia (incorporated by reference to Exhibit 10.81 to the  Company’s Quarterly Report on Form 10-Q, for the period ended  March 31, 2003).                                                                                                                 |
| 10.8* |   | Second Restated  Employment Agreement, dated as of February 28, 2003, by and between the  Company and David Sambol (incorporated by reference to Exhibit 10.79 to  the Company’s Quarterly Report on Form 10-Q, for the period ended  March 31, 2003).                                                                                                          |

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| 10.9*  |   | First Amendment to Second Restated Employment  Agreement, dated as of January 1, 2004, by and between the Company and  David Sambol (incorporated by reference to Exhibit 10.9 to the Company’s  Annual Report on Form 10-K, for the year ended December 31,  2004).       |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.10* |   | Restated Employment  Agreement, dated as of March 1, 2003, by and between the Company and  Sandor E. Samuels (incorporated by reference to Exhibit 10.82 to the  Company’s Quarterly Report on Form 10-Q, for the period ended  March 31, 2003).                           |
| 10.11* |   | Director Emeritus  Agreement, dated November 10, 2004, by and between the Company and  Gwendolyn S. King (incorporated by reference to Exhibit 10.1 to the  Company’s Current Report on Form 8-K, dated November 10,  2004).                                               |
| 10.12* |   | Consulting Agreement, by  and between the Company and Thomas Keith McLaughlin, dated as of  April 1, 2005 (incorporated by reference to Exhibit 10.1 to the  Company’s Current Report on Form 8-K, filed on March 30,  2005).                                              |
| 10.13* |   | General Release  Agreement, between Thomas Keith McLaughlin and the Company, dated as of  March 24, 2005 (incorporated by reference to Exhibit 10.2 to the  Company’s Current Report on Form 8-K, filed on March 30,  2005).                                               |
| 10.14* |   | Personalized Relocation  Terms Document by and between the Company and Andrew Gissinger, III,  dated as of January 29, 2004 (incorporated by reference to  Exhibit 10.1 to the Company’s Current Report on Form 8-K,  filed with the SEC on October 3, 2005).         |
| 10.15* |   | Purchase Contract by and  between CHL and Andrew Gissinger, III, dated as of September 27,  2005 (incorporated by reference to Exhibit 10.2 to the Company’s Current  Report on Form 8-K filed with the SEC on October 3, 2005).                                      |
| 10.16* |   | The Company’s Deferred  Compensation Agreement for Non-Employee Directors (incorporated by reference  to Exhibit 5.2 to the Company’s Quarterly Report on Form 10-Q,  for the quarter ended August 31, 1987).                                                              |
| 10.17* |   | Supplemental  Form of the Company’s Deferred Compensation Agreement for Non-Employee  Directors (incorporated by reference to Exhibit 10.7.3 to the Company’s  Quarterly Report on Form 10-Q, for the quarter ended May 31,  1998).                                   |
| 10.18* |   | The Company’s Executive  Deferred Compensation Plan Amended and Restated effective March 1, 2000  (incorporated by reference to Exhibit 10.7.3 to the Company’s Quarterly  Report on Form 10-Q, for the quarter ended May 31, 2000).                                  |
| 10.19* |   | First Amendment, effective  January 1, 2002, to the Deferred Compensation Plan Amended and Restated  effective March 1, 2000 (incorporated by reference to  Exhibit 10.7.4 to the Company’s Quarterly Report on Form 10-Q,  for the quarter ended November 30, 2001). |
| 10.20* |   | Second Amendment to the  Company’s Deferred Compensation Plan (incorporated by reference to  Exhibit 10.68 to the Company’s Annual Report on Form 10-K,  for the year ended December 31, 2002).                                                                            |
| 10.21* |   | Third Amendment to  Company’s Deferred Compensation Plan (incorporated by reference to  Exhibit 10.86 to the Company’s Quarterly Report on Forms 10-Q and  10-Q/A, for the quarter ended June 30, 2003)                                                                         |
| 10.22* |   | 1987 Stock Option Plan,  as Amended and Restated on May 15, 1989 (incorporated by reference to  Exhibit 10.7 to the Company’s Annual Report on Form 10-K for  the fiscal year ended February 28, 1989).                                                                    |

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| 10.23* |   | First Amendment to the 1987 Stock Option Plan as  Amended and Restated (incorporated by reference to Exhibit 10.11.1 to  the Company’s Quarterly Report on Form 10-Q, for the quarter ended  November 30, 1997).                                               |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.24* |   | Second Amendment to the  1987 Stock Option Plan as Amended and Restated (incorporated by reference to  Exhibit 10.11.2 to the Company’s Quarterly Report on Form 10-Q,  for the quarter ended November 30, 1997).                                              |
| 10.25* |   | Third Amendment to the  1987 Stock Option Plan as Amended and Restated (incorporated by reference to  Exhibit 10.11.3 to the Company’s Quarterly Report on Form 10-Q,  for the quarter ended November 30, 1997).                                               |
| 10.26* |   | Fourth Amendment to the  1987 Stock Option Plan as Amended and Restated (incorporated by reference to  Exhibit 10.11.4 to the Company’s Quarterly Report on Form 10-Q,  for the quarter ended May 31, 1998).                                                   |
| 10.27* |   | Amendment Number Five to  the Company’s 1987 Stock Option Plan, as Amended and Restated (incorporated  by reference to Exhibit 10.85 to the Company’s Quarterly Report on  Form 10-Q, for the quarter ended March 31, 2004).                              |
| 10.28* |   | Amendment Number Six to  the Company’s 1987 Stock Option Plan, as Amended and Restated (incorporated  by reference to Exhibit 10.86 to the Company’s Quarterly Report on  Form 10-Q, for the quarter ended March 31, 2004).                               |
| 10.29* |   | Amended and Restated  Stock Option Financing Plan (incorporated by reference to Exhibit 10.12  to Post-Effective Amendment No. 2 to the Company’s registration  statement on Form S-8 (File No. 33-9231), filed with  the SEC on December 20, 1988). |
| 10.30* |   | Third Amendment to the  Company’s Stock Option Financing Plan (incorporated by reference to  Exhibit 10.72 to the Company’s Annual Report on Form 10-K,  for the year ended December 31, 2002).                                                           |
| 10.31* |   | Fourth Amendment to the  Company’s Stock Option Financing Plan, as amended and restated, dated  July 23, 2004 (incorporated by reference to Exhibit 10.27 to the  Company’s Annual Report on Form 10-K, for the year ended  December 31, 2004).      |
| 10.32* |   | 1991 Stock Option Plan  (incorporated by reference to Exhibit 10.19 to the Company’s Annual  Report on Form 10-K, for the fiscal year ended February 29,  1992).                                                                                               |
| 10.33* |   | First Amendment to the  1991 Stock Option Plan (incorporated by reference to Exhibit 10.19.1 to  the Company’s Annual Report on Form 10-K, for the fiscal year  ended February 28, 1993).                                                                      |
| 10.34* |   | Second Amendment to the  1991 Stock Option Plan (incorporated by reference to Exhibit 10.19.2 to  the Company’s Annual Report on Form 10-K, for the fiscal year  ended February 28, 1993).                                                                     |
| 10.35* |   | Third Amendment to the  1991 Stock Option Plan (incorporated by reference to Exhibit 10.19.3 to  the Company’s Annual Report on Form 10-K, for the fiscal year  ended February 28, 1993).                                                                      |
| 10.36* |   | Fourth Amendment to the  1991 Stock Option Plan (incorporated by reference to Exhibit 10.19.4 to  the Company’s Annual Report on Form 10-K, for the fiscal year  ended February 28, 1993).                                                                     |
| 10.37* |   | Fifth Amendment to the  1991 Stock Option Plan (incorporated by reference to Exhibit 10.19.5 to  the Company’s Annual Report on Form 10-K, for the fiscal year  ended February 28, 1995).                                                                      |
| 10.38* |   | Sixth Amendment to the  1991 Stock Option Plan (incorporated by reference to Exhibit 10.20.6 to  the Company’s Annual Report on Form 10-Q, for the quarter ended  November 30, 1997).                                                                          |

121

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| 10.39* |   | Seventh Amendment to the 1991 Stock Option Plan  (incorporated by reference to Exhibit 10.20.7 to the Company’s Annual  Report on Form 10-Q, for the quarter ended November 30, 1997).                          |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.40* |   | Eighth Amendment to the  1991 Stock Option Plan (incorporated by reference to Exhibit 10.20.8 to  the Company’s Quarterly Report on Form 10-Q, for the quarter ended  May 31, 1998).                            |
| 10.41* |   | Amendment Number Nine to  the Company’s 1991 Stock Option Plan (incorporated by reference to  Exhibit 10.70 to the Company’s Annual Report on Form 10-K,  for the year ended December 31, 2002).           |
| 10.42* |   | Amendment Number Ten to  the Company’s 1991 Stock Option Plan (incorporated by reference to  Exhibit 10.87 to the Company’s quarterly report on Form 10-Q,  for the quarter ended March 31, 2004).         |
| 10.43* |   | Amendment Number Eleven  to the Company’s 1991 Stock Option Plan (incorporated by reference to  Exhibit 10.88 to the Company’s quarterly report on Form 10-Q,  for the quarter ended March 31, 2004).      |
| 10.44* |   | 1992 Stock Option Plan  dated as of December 22, 1992 (incorporated by reference to  Exhibit 10.19.5 to the Company’s Annual Report on Form 10-K,  for the fiscal year ended February 28, 1993).           |
| 10.45* |   | First Amendment to the  1992 Stock Option Plan (incorporated by reference to Exhibit 10.21.1 to  the Company’s Quarterly Report on Form 10-Q, for the quarter ended  November 30, 1997).                        |
| 10.46* |   | Second Amendment to the  1992 Stock Option Plan (incorporated by reference to Exhibit 10.21.2 to  the Company’s Quarterly Report on Form 10-Q, for the quarter ended  November 30, 1997).                       |
| 10.47* |   | Third Amendment to the  1992 Stock Option Plan (incorporated by reference to Exhibit 10.21.3 to  the Company’s Quarterly Report on Form 10-Q, for the quarter ended  May 31, 1998).                             |
| 10.48* |   | Amendment Number Four to  the Company’s 1992 Stock Option Plan (incorporated by reference to  Exhibit 10.89 to the Company’s Quarterly Report on Form 10-Q,  for the quarter ended March 31, 2004).        |
| 10.49* |   | Amendment Number Five to  the Company’s 1992 Stock Option Plan (incorporated by reference to  Exhibit 10.90 to the Company’s Quarterly Report on Form 10-Q,  for the quarter ended March 31, 2004).        |
| 10.50* |   | Amended and Restated  1993 Stock Option Plan (incorporated by reference to Exhibit 10.5 to the  Company’s Quarterly Report on Form 10-Q, for the quarter ended  August 31, 1996).                               |
| 10.51* |   | First Amendment to the  Amended and Restated 1993 Stock Option Plan (incorporated by reference to  Exhibit 10.5.1 to the Company’s Quarterly Report on Form 10-Q,  for the quarter ended August 31, 1996).      |
| 10.52* |   | Second Amendment to the  Amended and Restated 1993 Stock Option Plan. (incorporated by reference to  Exhibit 10.22.2 to the Company’s Quarterly Report on Form 10-Q,  for the quarter ended November 30, 1997). |
| 10.53* |   | Third Amendment to the  Amended and Restated 1993 Stock Option Plan (incorporated by reference to  Exhibit 10.22.3 to the Company’s Annual Report on Form 10-K,  for the fiscal year ended February 28, 1998).  |

122

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| 10.54* |   | Fourth Amendment to the Amended and Restated 1993  Stock Option Plan (incorporated by reference to Exhibit 10.22.4 to the  Company’s Quarterly Report on Form 10-Q, for the quarter ended  May 31, 1998).                                         |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.55* |   | Fifth Amendment to the  Amended and Restated 1993 Stock Option Plan (incorporated by reference to  Exhibit 10.22.5 to the Company’s Quarterly Report on Form 10-Q,  for the quarter ended August 31, 1998).                                       |
| 10.56* |   | Sixth Amendment to the  Amended and Restated 1993 Stock Option Plan, dated as of June 19, 2001  (incorporated by reference to Exhibit 10.41 to the Company’s Annual  Report on Form 10-K, for the year ended December 31, 2003).             |
| 10.57* |   | Amendment Number Seven  to the Company’s 1993 Stock Option Plan (incorporated by reference to  Exhibit 10.69 to the Company’s Annual Report on Form 10-K,  for the year ended December 31, 2002).                                            |
| 10.58* |   | Amendment Number Eight  to the Company’s 1993 Stock Option Plan, as Amended and Restated  (incorporated by reference to Exhibit 10.91 to the Company’s Quarterly  Report on Form 10-Q, for the quarter ended March 31, 2004).                |
| 10.59* |   | Amendment Number Nine to  the Company’s 1993 Stock Option Plan, as Amended and Restated (incorporated  by reference to Exhibit 10.92 to the Company’s Quarterly Report on  Form 10-Q, for the quarter ended March 31, 2004).                 |
| 10.60* |   | Amendment Number Ten to  the Company’s 1993 Stock Option Plan, effective as of December 23, 2005  (incorporated by reference to Exhibit 10.2 to the Company’s Current  Report on Form 8-K, filed with the SEC on December 30, 2005).    |
| 10.61* |   | 2000 Equity Incentive  Plan of the Company, as Amended and Restated on November 12, 2003  (incorporated by reference to Exhibit 10.43 to the Company’s Annual  Report on Form 10-K, for the year ended December 31, 2003).                   |
| 10.62* |   | Appendix I to the 2000  Equity Incentive Plan of the Company (incorporated by reference to  Exhibit 10.44 to the Company’s Annual Report on Form 10-K,  for the year ended December 31, 2003).                                                    |
| 10.63* |   | First Amendment to the  Company’s 2000 Equity Incentive Plan, as amended on November 12, 2003  (incorporated by reference to Exhibit 10.97 to the Company’s Quarterly  Report on Form 10-Q, for the quarter ended June 30, 2004).       |
| 10.64* |   | Amendment Number Two to  the Company’s 2000 Equity Incentive Plan, as amended on November 12,  2003 (incorporated by reference to Exhibit 10.98 to the Company’s  Quarterly Report on Form 10-Q, for the quarter ended June 30,  2004). |
| 10.65* |   | 2000 Equity Incentive  Plan of the Company, as amended and restated on June 16, 2004  (incorporated by reference to Exhibit 10.99 to the Company’s Quarterly  Report on Form 10-Q, for the quarter ended June 30, 2004).                     |
| 10.66* |   | First Amendment to 2000  Equity Incentive Plan of the Company, as amended and restated on  June 16, 2004 (incorporated by reference to Exhibit 10.61 to the  Company’s Annual Report on Form 10-K, for the year ended  December 31, 2004).   |
| 10.67* |   | Second Amendment to 2000  Equity Incentive Plan of the Company, dated February 22, 2005  (incorporated by reference to Exhibit 10.1 to the Company’s Current  Report on Form 8-K, furnished on March 1, 2005).                               |

123

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| 10.68* |   | Third Amendment to 2000 Equity Incentive Plan of the  Company, dated September 28, 2005 (incorporated by reference to  Exhibit 10.3 to the Company’s Current Report on Form 8-K  filed with the SEC on October 3, 2005).                                                              |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.69* |   | Fourth Amendment to the  2000 Equity Incentive Plan of the Company, effective as of December 23,  2005 (incorporated by reference to Exhibit 10.1 to the Company’s Current  Report on Form 8-K, filed with the SEC on December 30, 2005).                                             |
| 10.70* |   | Amended and Restated  Supplemental Executive Retirement Plan (incorporated by reference to  Exhibit 10.23.1 to the Company’s Annual Report on Form 10-K,  for the fiscal year ended February 28, 1998).                                                                                    |
| 10.71* |   | First Amendment,  effective January 1, 1999, to the Company’s Supplemental Executive Retirement  Plan 1998 Amendment and Restatement (incorporated by reference to  Exhibit 10.23.2 to the Company’s Annual Report on Form 10-K,  for the fiscal year ended February 28, 1999).  |
| 10.72* |   | Second Amendment,  effective as of June 30, 1999, to the Company’s Supplemental Executive  Retirement Plan (incorporated by reference to Exhibit 10.23.3 to the  Company’s Quarterly Report on Form 10-Q, for the quarter ended  August 31, 1999).                               |
| 10.73* |   | Third Amendment,  effective January 1, 2002, to the Company’s Supplemental Executive  Retirement Plan (incorporated by reference to Exhibit 10.23.4 to the  Company’s Quarterly Report on Form 10-Q, for the quarter ended  November 30, 2001).                                  |
| 10.74* |   | Fourth Amendment to the  Company’s Supplemental Executive Retirement Plan (incorporated by reference  to Exhibit 10.65 to the Company’s Quarterly Report on Form 10-Q,  for the quarter ended September 30, 2002).                                                                    |
| 10.75* |   | Amended and Restated  Split-Dollar Life Insurance Agreement (incorporated by reference to  Exhibit 10.24.1 to the Company’s Quarterly Report on Form 10-Q,  for the quarter ended November 30, 1998).                                                                                      |
| 10.76* |   | Split-Dollar Collateral  Assignment (incorporated by reference to Exhibit 10.4 to the Company’s  Quarterly Report on Form 10-Q, for the quarter ended May 31,  1994).                                                                                                                      |
| 10.77* |   | Amendment Number 2002-1  to the Company’s Split-Dollar Life Insurance Agreement as Amended and  Restated and Split Dollar Collateral Assignments (incorporated by reference  to Exhibit 10.61 of the Company’s Quarterly Report on Form 10-Q,  for the quarter ended March 31, 2002). |
| 10.78* |   | Annual Incentive Plan  (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly  Report on Form 10-Q, for the quarter ended August 31, 1996).                                                                                                                                 |
| 10.79* |   | First Amendment to the  Company’s Annual Incentive Plan (incorporated by reference to  Exhibit 10.26.1 to the Company’s Quarterly Report on Form 10-Q,  for the quarter ended August 31, 2001).                                                                                       |
| 10.80* |   | Second Amendment to the  Company’s Annual Incentive Plan (incorporated by reference to  Exhibit 10.55 to the Company’s Annual Report on Form 10-K,  for the year ended December 31, 2003).                                                                                            |
| 10.81* |   | Third Amendment to the  Company’s Annual Incentive Plan (incorporated by reference to  Exhibit 10.76 to the Company’s Quarterly Report on Form 10-Q,  for the period ended March 31, 2003).                                                                                           |

124

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| 10.82* |   | The Company’s Change in Control Severance Plan as  Amended and Restated on September 11, 2000 (incorporated by reference to  Exhibit 10.27.2 to the Company’s Quarterly Report on Form 10-Q,  for the quarter ended August 31, 2000).                                                                    |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.83* |   | Amendment No. 1 to  the Company’s Change in Control Severance Plan, as Amended and Restated on  September 11, 2000, dated December 3, 2003 (incorporated by  reference to Exhibit 10.58 to the Company’s Annual Report on  Form 10-K , for the year ended December 31, 2003).                  |
| 10.84* |   | Amendment Two to the  Company’s Change in Control Severance Plan, dated February 23, 2005  (incorporated by reference to Exhibit 10.3 to the Company’s Current  Report on Form 8-K, furnished on March 1, 2005).                                                                                         |
| 10.85* |   | Form of Director  Emeritus Agreement (incorporated by reference to Exhibit 10.28.1 to the  Company’s Quarterly Report on Form 10-Q, for the quarter ended  May 31, 2001).                                                                                                                                     |
| 10.86* |   | Form of Amendment  Number One, dated September 20, 2001, to the Restricted Stock Award  Agreement with non-employee directors dated as of June 1, 1999  (incorporated by reference to Exhibit 10.29.1 to the Company’s Annual  Report on Form 10-K, for the fiscal year ended February 28,  2001).  |
| 10.87* |   | Form of Restricted  Stock Award Agreement with non-employee directors dated as of March 1,  2000 (incorporated by reference to Exhibit 10.30 to the Company’s Annual  Report on Form 10-K, for the fiscal year ended February 28,  2001).                                                                |
| 10.88* |   | Form of Amendment  Number One, dated September 20, 2001, to the Restricted Stock Award  Agreement with non-employee directors dated as of March 1, 2000  (incorporated by reference to Exhibit 10.30.1 to the Company’s Annual  Report on Form 10-K, for the fiscal year ended February 28,  2001). |
| 10.89* |   | Form of Restricted  Stock Award Agreement with non-employee directors dated as of March 1,  2001 (incorporated by reference to Exhibit 10.31 to the Company’s Annual  Report on Form 10-K, for the fiscal year ended February 28,  2001).                                                                |
| 10.90* |   | Form of the  Company’s Performance Based Restricted Stock Agreement (incorporated by  reference to Exhibit 10.105 to the Company’s Quarterly Report on  Form 10-Q, for the quarter ended September 30, 2004).                                                                                            |
| 10.91* |   | Form of the  Company’s Performance Vested Non-Qualified Stock Option Agreement  (incorporated by reference to Exhibit 10.106 to the Company’s Quarterly  Report on Form 10-Q, for the quarter ended September 30,  2004).                                                                                |
| 10.92* |   | Form of the  Company’s Performance Vested Incentive Stock Option Agreement (incorporated  by reference to Exhibit 10.107 to the Company’s Quarterly Report on  Form 10-Q, for the quarter ended September 30, 2004).                                                                                     |
| 10.93* |   | Form of Performance  Vested Stock Appreciation Right Agreement of the Company (incorporated by  reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K,  furnished on March 1, 2005).                                                                                                          |
| 10.94* |   | The Company’s Managing  Director Incentive Plan effective March 1, 2001 (incorporated by  reference to Exhibit 10.57 to the Company’s Annual Report on  Form 10-K, for the transition period from March 1, 2001 to  December 31, 2001).                                                             |
| 10.95* |   | Form of Senior  Management Incentive Plan of the Company (incorporated by reference to  Exhibit 10.4 to the Company’s Current Report on Form 8-K,  furnished on March 1, 2005).                                                                                                                               |

125

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| 10.96*  |   | Summary of financial counseling program of the  Company (incorporated by reference to Exhibit 10.58 to the Company’s  Annual Report on Form 10-K, for the transition period from  March 1, 2001 to December 31, 2001).                                    |
|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.97*  |   | Company’s 1999 Employee  Stock Purchase Plan effective as of October 1, 1999 (incorporated by  reference to Exhibit 10.67 to the Company’s Annual Report on  Form 10-K, for the year ended December 31, 2003).                                       |
| 10.98*  |   | Amendment One to the  Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.71  to the Company’s Annual Report on Form 10-K, for the year ended  December 31, 2002).                                                                           |
| 10.99*  |   | Second Amendment to the  Company’s Global Stock Plan (incorporated by reference to Exhibit 4.1.2  to the Company’s Registration Statement on Form S-8, dated  August 5, 2003).                                                                            |
| 10.100* |   | Appendix I to Company’s  Global Stock Plan: UK Sharesave Scheme. (incorporated by reference to  Exhibit 10.70 to the Company’s Annual Report on Form 10-K,  for the year ended December 31, 2003).                                                        |
| 10.101* |   | Amendment Number Three  to the Company’s Global Stock Plan (incorporated by reference to Exhibit 10.95  to the Company’s Quarterly Report on Form 10-Q, for the quarter  ended March 31, 2004).                                                           |
| 10.102* |   | Amendment Number Four to  the Company’s Global Stock Plan (incorporated by reference to  Exhibit 10.96 to the Company’s Quarterly Report on Form 10-Q,  for the quarter ended March 31, 2004).                                                            |
| 10.103* |   | Amendment Number Five to  the Company’s Global Stock Plan, dated September 28, 2005 (incorporated  by reference to Exhibit 10.5 to the Company’s Current Report on  Form 8-K filed with the SEC on October 3, 2005).                                 |
| 10.104* |   | The Company’s Selected  Employee Deferred Compensation Plan, Master Plan Document, dated  December 23, 2003 (incorporated by reference to Exhibit 10.71 to  the Company’s Annual Report on Form 10-K, for the year ended  December 31, 2003).        |
| 10.105* |   | The Company’s ERISA  Nonqualified Pension Plan, Master Plan Document, dated as of August 12,  2003 (incorporated by reference to Exhibit 10.72 to the Company’s Annual  Report on Form 10-K, for the year ended December 31, 2003).                  |
| 10.106* |   | Amended and Restated Company  ERISA Nonqualified Pension Plan, Master Plan Document, effective as of  December 31, 2004 (incorporated by reference to Exhibit 10.94 to  the Company’s Annual Report on Form 10-K, for the year ended  December 31, 2004). |
| 10.107* |   | The Company’s 2003 Non-Employee  Directors’ Fee Plan, as amended and restated on September 27, 2005  (incorporated by reference to Exhibit 10.4 to the Company’s Current  Report on Form 8-K filed with the SEC on October 3, 2005).            |
| 10.108* |   | Countrywide Bank, N.A.  Non-Employee Directors’ Fee Plan, adopted October 27, 2005 (incorporated  by reference to Exhibit 10.1 to the Company’s Current Report on  Form 8-K, filed with the SEC on November 2, 2005).                                |
| 10.109* |   | The Company’s 2004  Executive Equity Deferral Program, dated as of January 1, 2004  (incorporated by reference to Exhibit 10.74 to the Company’s Annual  Report on Form 10-K, for the year ended December 31, 2003).                                 |

126

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| 10.110* |   | Revolving Credit Agreement, dated as of  December 17, 2001, by and among CHL and Bank Of America, N.A., as  Managing Administrative Agent, Bank of America, N.A. and JP Morgan Chase  Bank, as the Administrative Agents, The Bank Of New York, as the  Documentation Agent, Bank One, N.A. and Deutsche Bank AG, as the  Co-Syndication Agents, the lenders party thereto and Banc of America  Securities LLC and JP Morgan Securities, Inc., as Co-Arrangers  (incorporated by reference to Exhibit 10.8.11 to the Company’s Quarterly  Report on Form 10-Q, for the quarter ended November 30,  2001). |
|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.111* |   | First Amendment to the  Revolving Credit Agreement, dated as of September 30, 2002, by and among  CHL, the Lenders thereto, Bank of America, N.A. as the Managing  Administrative Agent and as a co-administrative agent and JP Morgan Chase  Bank as a co-administrative agent (incorporated by reference to  Exhibit 10.74 to the Company’s Annual Report on Form 10-K,  for the year ended December 31, 2002).                                                                                                                                                                                              |
| 10.112* |   | Second Amendment to the  Revolving Credit Agreement, dated as of December 16, 2002, by and among  CHL, the Lenders thereto and Bank of America, N.A. as the Managing  Administrative Agent (incorporated by reference to Exhibit 10.75 to the  Company’s Annual Report on Form 10-K, for the year ended  December 31, 2002).                                                                                                                                                                                                                                                                                   |
| 10.113* |   | Third Amendment to the  Revolving Credit Agreement, dated as of June 13, 2003, by and among CHL,  the Lenders thereto, Bank of America, N.A. as the Managing Administrative  Agent and the co-administrative agent and JPMorgan Chase Bank as  co-administrative agent (incorporated by reference to Exhibit 10.86 to  the Company’s Quarterly Report on Form 10-Q, for the period ended  June 30, 2003).                                                                                                                                                                                                      |
| 10.114* |   | Fourth Amendment to the  Revolving Credit Agreement, dated as of December 15, 2003, by and among  CHL, the Lenders thereto, Bank of America, N.A. as the Managing  Administrative Agent and the co-administrative agent and JPMorgan Chase Bank  as co-administrative agent. (incorporated by reference to Exhibit 10.79  to the Company’s Annual Report on Form 10-K, for the year ended  December 31, 2003).                                                                                                                                                                                                 |
| 10.115* |   | Five-Year Credit  Agreement, dated as of May 12, 2004, among CHL, the Company, ABN AMRO  Bank N.V. and Deutsche Bank Securities Inc., as Documentation Agents,  Citicorp USA, Inc., as Syndication Agent, the Lenders party hereto, Bank  of America, N.A., as Administrative Agent, and JPMorgan Chase Bank, as Managing  Administrative Agent (incorporated by reference to Exhibit 10.103 to the  Company’s Quarterly Report on Form 10-Q, for the quarter ended  June 30, 2004).                                                                                                                      |
| 10.116* |   | First Amendment to the  Five-Year Credit Agreement, dated as of May 11, 2005 among CHL, the  Company, the lenders identified therein, ABN AMRO Bank N.V. and Deutsche Bank  Securities Inc., as Documentation Agents, Citicorp USA, Inc., as  Syndication Agent, Bank of America, N.A., as Administrative Agent, and  JPMorgan Chase Bank, N.A., as Managing Administrative Agent (incorporated by  reference to Exhibit 10.102 to the Company’s Quarterly Report on  Form 10-Q, for the quarter ended June 30, 2005).                                                                                    |
| 10.117* |   | 364-Day Credit  Agreement, dated as of May 12, 2004, among CHL, the Company ABN AMRO  Bank N.V. and Deutsche Bank Securities Inc., as Documentation Agents,  Citicorp USA, Inc., as Syndication Agent, the Lenders party hereto, Bank  of America, N.A., as Administrative Agent, and JPMorgan Chase Bank, as  Managing Administrative Agent (incorporated by reference to  Exhibit 10.101 to the Company’s Quarterly Report on Form 10-Q,  for the quarter ended June 30, 2004).                                                                                                                         |

127

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| 10.118* |   | First Amendment to the 364-Day Credit  Agreement, dated as of May 11, 2005, among CHL, the Company, the lenders  identified therein, JPMorgan Chase Bank, N.A., as Managing Administrative  Agent, and Bank of America, N.A., as Administrative Agent (incorporated by  reference to Exhibit 10.101 to the Company’s Quarterly Report on  Form 10-Q for the period ended June 30, 2005).                                                                                                    |
|---------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.119* |   | Amended and Restated  Credit Agreement as of the 27th day of February, 2002 by and among CHL, Royal  Bank of Canada, Lloyds TSB Bank PLC, Credit Lyonnais New York Branch,  Commerzbank AG New York Branch, and the Lenders Party thereto (incorporated  by reference to Exhibit 10.59 of the Company’s Annual Report on  Form 10-K, for the transition period from March 1, 2001 to  December 31, 2001).                                                                                   |
| 10.120* |   | First Amendment to the  Amended and Restated Credit Agreement, dated as of June 14, 2002, by and  among CHL, the Lenders party thereto, and the Royal Bank of Canada, as the  Lead Administrative Agent for the Lenders. (incorporated by reference to  Exhibit 10.64 of the Company’s Quarterly Report on Form 10-Q,  for the quarter ended June 30, 2002).                                                                                                                                |
| 10.121* |   | Second Amendment to the  Amended and Restated Credit Agreement, dated as of September 30, 2002,  by and among CHL, the Lenders thereto and Royal Bank of Canada as lead  administrative agent (incorporated by reference to Exhibit 10.73 to the  Company’s Annual Report on Form 10-K, for the year ended  December 31, 2002).                                                                                                                                                             |
| 10.122* |   | Third Amendment to the  Amended and Restated Credit Agreement, dated as of June 13, 2003, by and  among CHL, the Lenders thereto and Royal Bank of Canada, as lead  administrative agent (incorporated by reference to Exhibit 10.85 to the  Company’s Quarterly Report on Form 10-Q, for the quarter ended  June 30, 2003).                                                                                                                                                                |
| 10.123* |   | 364-Day Credit  Agreement, dated as of May 12, 2004, among CHL, the Company, Commerzbank  AG, New York and Grand Cayman Branches and Societe Generale, as Documentation  Agents, BNP Paribas, as Syndication Agent, the Lenders party hereto, Barclays  Bank PLC, as Administrative Agent, and Royal Bank of Canada, as Managing  Administrative Agent (incorporated by reference to Exhibit 10.102 to the  Company’s Quarterly Report on Form 10-Q, for the quarter ended  June 30, 2004). |
| 10.124* |   | Termination and  Replacement Agreement to the 364-Day Credit Agreement, dated as of  November 19, 2004, among the Company, CHL, the Lenders thereto and Royal  Bank of Canada, as managing administrative agent (incorporated by reference  to Exhibit 10.1 to the Company’s Current Report on Form 8-K,  dated November 19, 2004).                                                                                                                                                         |
| 10.125  |   | First Amendment to the  364-Day Credit Agreement, dated as of May 11, 2005, among CHL, the  Company, the lenders identified therein, Commerzbank AG, New York and Grand  Cayman Branches and Societe Generale, as Documentation Agents, BNP Paribas,  as Syndication Agent, Barclays Bank PLC, as Administrative Agent, and Royal  Bank of Canada, as Managing Administrative Agent.                                                                                                                            |
| 10.126  |   | Second Amendment to the  364-Day Credit Agreement, dated as of November 18, 2005, among  CHL, the Company, the lenders identified therein, Lloyds TSB Bank, PLC and  Societe Generale, as Documentation Agents, BNP Paribas, as Syndication Agent,  Barclays Bank PLC, as Administrative Agent, and Royal Bank of Canada, as  Managing Administrative Agent.                                                                                                                                                    |
| 12.1    |   | Computation of the Ratio  of Earnings to Fixed Charges.                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 21      |   | List of subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 23      |   | Consent of KPMG LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

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| 23.1 |   | Consent of Grant  Thornton LLP.                                                                            |
|------|--------|------------------------------------------------------------------------------------------------------------|
| 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.                         |

----

*                    Incorporatedby reference

†                     Constitutesa management contract or compensatory plan or arrangement.

129

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

|                           | COUNTRYWIDE  FINANCIAL CORPORATION |
|--------------------------------|------------------------------------|
|                           | By:                                | /s/  ANGELO R. MOZILO |
|                           |                               | Angelo R. Mozilo, |
| * *                       | * *                           | *Chairman  of the Board of Directors and Chief Executive Officer (Principal  Executive Officer)* |
| Dated: February 28,  2006 |                               |   |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed by the following persons on behalf of the Registrant in thecapacities and on the dates indicated.

|                            | **Signatures** | ** **                                           |        | ** **             | **Title** | ** ** | ** ** |  | **Date** | ** ** |
|----------------------------|----------------|------------------------------------------------------|--------|------------------------|-----------|------------|------------|--|----------|------------|
| /s/ ANGELO R. MOZILO       |           | Chairman of the Board of Directors and               |   | February 28, 2006 |
| Angelo R. Mozilo           |           | Chief Executive Officer(Principal Executive Officer) |   |                   |
| /s/  STANFORD L. KURLAND   |           | President, Chief  Operating Officer and Director     |   | February 28, 2006 |
| Stanford L.  Kurland       |           |                                                 |   |                   |
| /s/  ERIC P. SIERACKI      |           | Financial Officer  (Executive Managing Director,     |   | February 28, 2006 |
| Eric P. Sieracki           |           | Chief Financial Officer)                             |   |                   |
| /s/  KATHLEEN BROWN        |           | Director                                             |   | February 28, 2006 |
| Kathleen Brown             |           |                                                 |   |                   |
| /s/  HENRY G. CISNEROS     |           | Director                                             |   | February 28, 2006 |
| Henry G. Cisneros          |           |                                                 |   |                   |
| /s/  JEFFREY M. CUNNINGHAM |           | Director                                             |   | February 28, 2006 |
| Jeffrey M.  Cunningham     |           |                                                 |   |                   |
| /s/  ROBERT J. DONATO      |           | Director                                             |   | February 28, 2006 |
| Robert J. Donato           |           |                                                 |   |                   |
| /s/ MICHAEL E. DOUGHERTY   |           | Director                                             |   | February 28, 2006 |
| Michael E.  Dougherty      |           |                                                 |   |                   |

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| /s/ BEN M. ENIS         |   | Director |   | February 28, 2006  |
|-------------------------|--------|----------|--------|-------------------------|
| Ben M. Enis             |   |     |   |                    |
| /s/  EDWIN HELLER       |   | Director |   | February 28, 2006  |
| Edwin Heller            |   |     |   |                    |
| /s/  MARTIN R. MELONE   |   | Director |   | February 28, 2006  |
| Martin R. Melone        |   |     |   |                    |
| /s/  ROBERT T. PARRY    |   | Director |   | February 28, 2006  |
| Robert T. Parry         |   |     |   |                    |
| /s/ OSCAR  P. ROBERTSON |   | Director |   | February 28,  2006 |
| Oscar  P. Robertson     |   |     |   |                    |
| /s/ KEITH  P. RUSSELL   |   | Director |   | February 28,  2006 |
| Keith  P. Russell       |   |     |   |                    |
| /s/ HARLEY  W. SNYDER   |   | Director |   | February 28,  2006 |
| Harley W. Snyder        |   |     |   |                    |

 

131

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDFINANCIAL STATEMENTS AND REPORTS OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS**

**December 31,2005**

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ANDSCHEDULESDecember 31, 2005**
|                                                                                                                                                      | ** ** | **Page** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| Report  of Independent Registered Public Accounting Firm—KPMG LLP                                                                               |       |     | F-2 |   |
| Report  of Independent Registered Public Accounting Firm—Grant Thornton LLP                                                                     |       |     | F-3 |   |
| Financial Statements:                                                                                                                                |       |     |   |   |
| Consolidated  Balance Sheets at December 31, 2005 and 2004                                                                                      |       |     | F-4 |   |
| Consolidated  Statements of Earnings for the years ended December 31, 2005, 2004, and  2003                                                     |       |     | F-5 |   |
| Consolidated  Statement of Changes in Shareholders’ Equity and Comprehensive Income for  the years ended December 31, 2005, 2004, and 2003 |       |     | F-6 |   |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2005, 2004,   and 2003                                                  |       |     | F-8 |   |
| Notes  to Consolidated Financial Statements                                                                                                          |       |     | F-9 |   |
| Schedules:                                                                                                                                           |       |     |   |   |
| Schedule  I—Condensed Financial Information of Registrant                                                                                       |       |     | F-84 |   |
| Schedule  II—Valuation and Qualifying Accounts                                                                                                  |       |     | F-88 |   |

 

All other schedules have been omitted since therequired information is not present or not present in amounts sufficient torequire submission of the schedules, or because the information required isincluded in the consolidated financial statements or notes thereto.

F-1

----

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

**Boardof Directors and Shareholders**

**Countrywide Financial Corporation:**

We have audited the accompanying consolidated balancesheets of Countrywide Financial Corporation and subsidiaries as of December 31,2005 and 2004 and the related consolidated statements of earnings, changes inshareholders’ equity and comprehensive income and cash flows for the years thenended. In connection with our audits of the consolidated financial statements,we have also audited financial statement schedules I and II. These consolidatedfinancial statements and financial statement schedules are the responsibilityof the Company’s management. Our responsibility is to express an opinion onthese consolidated financial statements and financial statement schedules basedon our audit.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Countrywide Financial Corporation and subsidiaries as of December 31,2005 and 2004, and the results of their operations and their cash flows for theyears then ended, in conformity with U.S. generally accepted accountingprinciples. Also in our opinion, the related financial statement schedules,when considered in relation to the basic consolidated financial statementstaken as a whole, present fairly, in all material respects, the information setforth therein.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of the Company’s internal control over financialreporting as of December 31, 2005, based on criteria established inInternal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), and our report dated February 27,2006 expressed an unqualified opinion on management’s assessment of, and anunqualified opinion on the effective operation of, internal control overfinancial reporting.
|  | KPMG LLP      |
|--|---------------|
|  | /s/  KPMG LLP |

 

Los Angeles, California

February 27, 2006

F-2

----

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

**Board of Directors and ShareholdersCountrywide Financial Corporation**

We have audited the accompanying consolidated statementof earnings of Countrywide Financial Corporation and Subsidiaries for the yearended December 31, 2003 and the related consolidated statements of changesin shareholders’ equity and comprehensive income and cash flows for the yearthen ended. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes consideration of internal control overfinancial reporting as a basis for designing audit procedures that are appropriatein the circumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting.Accordingly, we express no such opinion. An audit also includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation. We believe that our audit provides a reasonable basis for ouropinion.

In our opinion, the financial statements referred toabove present fairly, in all material respects, the consolidated results ofoperations of Countrywide Financial Corporation and Subsidiaries for the yearended December 31, 2003, and their consolidated cash flows for the yearended December 31, 2003, in conformity with accounting principlesgenerally accepted in the United States of America.

Wehave also audited Schedule I and Schedule II for the year ended December 31,2003. In our opinion, such schedules, when considered in relation to the basicfinancial statements taken as a whole, present fairly, in all materialrespects, the information therein.
|        | GRANT THORNTON LLP      |
|--------|-------------------------|
|   | /s/  GRANT THORNTON LLP |

 

Los Angeles, CaliforniaFebruary 27, 2004, except for Schedule I, as to which the date isMarch 11, 2005.

F-3

----

**COUNTRYWIDEFINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS**
|                                                                                                                                                                                                                                                                                             | ** ** | **December 31,**                                     | ** **  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|-------------|
| ** **                                                                                                                                                                                                                                                                                  | ** ** | **2005**                                                  | ** **  | **2004** | ** ** |
| ** **                                                                                                                                                                                                                                                                                  | ** ** | **(in thousands, except share data)** | ** **  |
| **ASSETS**                                                                                                                                                                                                                                                                                  | ** ** | ** **                                                | ** **  | ** ** | ** ** |
| Cash                                                                                                                                                                                                                                                                                        |       | $                                                         | 1,031,108   |   | $ | 751,237 |   |
| Mortgage loans  and mortgage-backed securities held for sale                                                                                                                                                                                                                                |       | 36,818,688                                                |        | 37,350,149 |   |
| Trading  securities owned, at fair value                                                                                                                                                                                                                                                    |       | 10,314,384                                                |        | 10,558,387 |   |
| Trading  securities pledged as collateral, at fair value                                                                                                                                                                                                                                    |       | 668,189                                                   |        | 1,303,007 |   |
| Securities  purchased under agreements to resell, securities borrowed and federal funds  sold                                                                                                                                                                                               |       | 23,317,361                                                |        | 13,456,448 |   |
| Loans held for  investment, net of allowance for loan losses of $189,201 and $125,046,  respectively                                                                                                                                                                                        |       | 70,071,152                                                |        | 39,661,191 |   |
| Investments in  other financial instruments, at fair value                                                                                                                                                                                                                                  |       | 11,455,745                                                |        | 10,091,057 |   |
| Mortgage  servicing rights, net                                                                                                                                                                                                                                                             |       | 12,610,839                                                |        | 8,729,929 |   |
| Premises and  equipment, net                                                                                                                                                                                                                                                                |       | 1,279,659                                                 |        | 985,350 |   |
| Other assets                                                                                                                                                                                                                                                                                |       | 7,518,245                                                 |        | 5,608,950 |   |
| Total assets                                                                                                                                                                                                                                                                                |       | $                                                         | 175,085,370 |   | $ | 128,495,705 |   |
| **LIABILITIES**                                                                                                                                                                                                                                                                             | ** ** | ** **                                                | ** **  | ** ** | ** ** |
| Notes payable                                                                                                                                                                                                                                                                               |       | $                                                         | 76,187,886  |   | $ | 66,613,671 |   |
| Securities sold  under agreements to repurchase and federal funds purchased                                                                                                                                                                                                            |       | 34,153,205                                                |        | 20,465,123 |   |
| Deposit  liabilities                                                                                                                                                                                                                                                                        |       | 39,489,256                                                |        | 20,013,208 |   |
| Accounts payable  and accrued liabilities                                                                                                                                                                                                                                                   |       | 6,307,818                                                 |        | 5,594,764 |   |
| Trading  securities sold, not yet purchased, at fair value                                                                                                                                                                                                                                  |       | 2,285,171                                                 |        | 2,912,620 |   |
| Income taxes  payable                                                                                                                                                                                                                                                                       |       | 3,846,174                                                 |        | 2,586,243 |   |
| Total liabilities                                                                                                                                                                                                                                                                           |       | 162,269,510                                               |        | 118,185,629 |   |
| 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, 600,169,268  shares and 581,706,836 shares at December 31, 2005 and 2004, respectively;  outstanding, 600,030,686 shares and 581,648,881 shares at December 31,  2005 and 2004, respectively |       | 30,008                                                    |        | 29,085 |   |
| Additional  paid-in capital                                                                                                                                                                                                                                                                 |       | 2,954,019                                                 |        | 2,570,402 |   |
| Accumulated other  comprehensive income                                                                                                                                                                                                                                                     |       | 61,114                                                    |        | 118,943 |   |
| Retained earnings                                                                                                                                                                                                                                                                           |       | 9,770,719                                                 |        | 7,591,646 |   |
| Total shareholders’ equity                                                                                                                                                                                                                                                             |       | 12,815,860                                                |        | 10,310,076 |   |
| Total liabilities  and shareholders’ equity                                                                                                                                                                                                                                            |       | $                                                         | 175,085,370 |   | $ | 128,495,705 |   |

 

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

F-4

----

**COUNTRYWIDEFINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OFEARNINGS**

| ** **                                                               | ** ** | **Years Ended December 31,**                        | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                               | ** ** | **2005**                                                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                               | ** ** | **(in thousands, except per share data)** | ** ** |
| **Revenues**                                                             |       |                                                               |       |   |   |   |   |
| Gain on sale of loans and securities                                     |       | $                                                                  | 4,861,780  |   | $ | 4,842,082 |   | $ | 5,887,436 |   |
| Interest income                                                          |       | 7,970,045                                                          |       | 4,645,654 |   | 3,347,801 |   |
| Interest expense                                                         |       | (5,616,425                                                         | )          | (2,608,338 | ) | (1,940,207 | ) |
| Net interest income                                                      |       | 2,353,620                                                          |       | 2,037,316 |   | 1,407,594 |   |
| Provision for loan losses                                                |       | (115,685                                                           | )          | (71,775 | ) | (48,204 | ) |
| Net interest income after provision for loan losses                      |       | 2,237,935                                                          |       | 1,965,541 |   | 1,359,390 |   |
| Loan servicing fees and other income from retained  interests       |       | 4,281,254                                                          |       | 3,269,587 |   | 2,804,338 |   |
| Amortization of mortgage servicing rights                                |       | (2,288,354                                                         | )          | (1,940,457 | ) | (2,069,246 | ) |
| Recovery (impairment) of retained interests                              |       | 23,345                                                             |       | (648,137 | ) | (1,432,965 | ) |
| Servicing hedge (losses) gains                                           |       | (523,078                                                           | )          | (215,343 | ) | 234,823 |   |
| Net loan servicing fees and other income (loss) from  retained interests |       | 1,493,167                                                          |       | 465,650 |   | (463,050 | ) |
| Net insurance premiums earned                                            |       | 953,647                                                            |       | 782,685 |   | 732,816 |   |
| Other revenue                                                            |       | 470,179                                                            |       | 510,669 |   | 462,050 |   |
| Total revenues                                                           |       | 10,016,708                                                         |       | 8,566,627 |   | 7,978,642 |   |
| **Expenses**                                                             |       |                                                               |       |   |   |   |   |
| Compensation                                                             |       | 3,615,483                                                          |       | 3,137,045 |   | 2,590,936 |   |
| Occupancy and other office                                               |       | 879,680                                                            |       | 643,378 |   | 525,192 |   |
| Insurance claims                                                         |       | 441,584                                                            |       | 390,203 |   | 360,046 |   |
| Advertising and promotion                                                |       | 229,183                                                            |       | 171,585 |   | 103,902 |   |
| Other operating                                                          |       | 703,012                                                            |       | 628,543 |   | 552,794 |   |
| Total expenses                                                           |       | 5,868,942                                                          |       | 4,970,754 |   | 4,132,870 |   |
| Earnings before income taxes                                             |       | 4,147,766                                                          |       | 3,595,873 |   | 3,845,772 |   |
| Provision for income taxes                                               |       | 1,619,676                                                          |       | 1,398,299 |   | 1,472,822 |   |
| **NET EARNINGS**                                                         |       | $                                                                  | 2,528,090  |   | $ | 2,197,574 |   | $ | 2,372,950 |   |
| **Earnings per share**                                                   |       |                                                               |       |   |   |   |   |
| Basic                                                                    |       | $                                                                  | 4.28       |   | $ | 3.90 |   | $ | 4.44 |   |
| Diluted                                                                  |       | $                                                                  | 4.11       |   | $ | 3.63 |   | $ | 4.18 |   |

 

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

F-5

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME**

| ** **                                                                              | ** ** | **Number of  Shares of  Common Stock**     | ** **  | **Common  Stock** | ** ** | **Additional  Paid-in-  Capital** | ** ** | **Accumulated**  Other  Comprehensive  Income (Loss) | ** ** | **Retained  Earnings** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|-------------|-------------------|------------|-----------------------------------|------------|-----------------------------------------------------------|------------|------------------------|------------|-----------|------------|
| ** **                                                                              | ** ** | **(in thousands, except share data)** | ** **  |
| **Balance at December 31, 2002**                                                        |       |                                                      | 126,563,333 |              |       | $                                 | 6,330      |                                                      |       | $                      | 1,657,144  |      |       |   | $ | 186,799 |   |   | $ | 3,310,860 |   | $ | 5,161,133 |   |
| Comprehensive income:                                                                   |       |                                                      |        |              |       |                              |       |                                                      |       |                   |       |      |       |   |   |   |   |   |   |
| Net earnings for the year                                                               |       |                                                      | —      |              |       | —                            |       |                                                      | —     |                   |       |      | —     |   |   | 2,372,950 |   | 2,372,950 |   |
| Other  comprehensive income (loss), net of tax:                                    |       |                                                      |        |              |       |                              |       |                                                      |       |                   |       |      |       |   |   |   |   |   |   |
| Net unrealized losses from available-for-sale  securities                               |       |                                                      | —      |              |       | —                            |       |                                                      | —     |                   |       |      | (53,634    | ) |   | — |   | (53,634 | ) |
| Net unrealized gains from cash flow hedging  instruments                                |       |                                                      | —      |              |       | —                            |       |                                                      | —     |                   |       |      | 16,088     |   |   | — |   | 16,088 |   |
| Net change in foreign currency translation adjustment                              |       |                                                      | —      |              |       | —                            |       |                                                      | —     |                   |       |      | 15,273     |   |   | — |   | 15,273 |   |
| Total comprehensive income                                                              |       |                                                      |        |              |       |                              |       |                                                      |       |                   |       |      |       |   |   |   |   | 2,350,677 |   |
| 4 for 3 stock split, effected December 18,  2003                                        |       |                                                      | 46,066,835  |              |       | 2,303                             |       |                                                      | (2,303     | )                      |       |      | —     |   |   | — |   | — |   |
| Stock options exercised                                                                 |       |                                                      | 5,562,507   |              |       | 277                               |       |                                                      | 175,769    |                   |       |      | —     |   |   | — |   | 176,046 |   |
| Tax benefit of stock options exercised                                                  |       |                                                      | —      |              |       | —                            |       |                                                      | 88,031     |                   |       |      | —     |   |   | — |   | 88,031 |   |
| Issuance of common stock, net of treasury stock                                         |       |                                                      | 5,947,872   |              |       | 298                               |       |                                                      | 367,892    |                   |       |      | —     |   |   | — |   | 368,190 |   |
| Contribution of common stock to 401(k)  Plan                                            |       |                                                      | 338,795     |              |       | 17                                |       |                                                      | 20,998     |                   |       |      | —     |   |   | — |   | 21,015 |   |
| Cash dividends paid—$0.59 per common share (before  giving effect to stock splits) |       |                                                      | —      |              |       | —                            |       |                                                      | —     |                   |       |      | —     |   |   | (80,376 | ) | (80,376 | ) |
| **Balance at December 31, 2003**                                                        |       |                                                      | 184,479,342 |              |       | 9,225                             |       |                                                      | 2,307,531  |                   |       |      | 164,526    |   |   | 5,603,434 |   | 8,084,716 |   |
| Comprehensive income:                                                                   |       |                                                      |        |              |       |                              |       |                                                      |       |                   |       |      |       |   |   |   |   |   |   |
| Net earnings for the year                                                               |       |                                                      | —      |              |       | —                            |       |                                                      | —     |                   |       |      | —     |   |   | 2,197,574 |   | 2,197,574 |   |
| Other  comprehensive income (loss), net of tax:                                    |       |                                                      |        |              |       |                              |       |                                                      |       |                   |       |      |       |   |   |   |   |   |   |
| Net unrealized losses from available-for-sale  securities                               |       |                                                      | —      |              |       | —                            |       |                                                      | —     |                   |       |      | (88,277    | ) |   | — |   | (88,277 | ) |
| Net unrealized gains from cash flow hedging instruments                                 |       |                                                      | —      |              |       | —                            |       |                                                      | —     |                   |       |      | 29,101     |   |   | — |   | 29,101 |   |
| Net change in foreign currency translation adjustment                                   |       |                                                      | —      |              |       | —                            |       |                                                      | —     |                   |       |      | 13,593     |   |   | — |   | 13,593 |   |
| Total comprehensive income                                                              |       |                                                      |        |              |       |                              |       |                                                      |       |                   |       |      |       |   |   |   |   | 2,151,991 |   |
| 3 for 2 stock split, effected April 12, 2004                                            |       |                                                      | 92,915,124  |              |       | 4,646                             |       |                                                      | (4,646     | )                      |       |      | —     |   |   | — |   | — |   |
| 2 for 1 stock split, effected August 30, 2004                                           |       |                                                      | 282,010,434 |              |       | 14,101                            |       |                                                      | (14,101    | )                      |       |      | —     |   |   | — |   | — |   |
| Stock options exercised                                                                 |       |                                                      | 6,274,769   |              |       | 313                               |       |                                                      | 99,056     |                   |       |      | —     |   |   | — |   | 99,369 |   |
| Tax benefit of stock options exercised                                                  |       |                                                      | —      |              |       | —                            |       |                                                      | 93,057     |                   |       |      | —     |   |   | — |   | 93,057 |   |
| Issuance of common stock, net of treasury stock                                         |       |                                                      | 432,584     |              |       | 23                                |       |                                                      | 17,169     |                   |       |      | —     |   |   | — |   | 17,192 |   |
| Issuance of common stock for conversion of convertible  debt                       |       |                                                      | 15,063,788  |              |       | 753                               |       |                                                      | 7,182      |                   |       |      | —     |   |   | — |   | 7,935 |   |
| Tax benefit of interest on conversion of convertible  debt                              |       |                                                      | —      |              |       | —                            |       |                                                      | 37,787     |                   |       |      | —     |   |   | — |   | 37,787 |   |
| Contribution of common stock to 401(k)  Plan                                            |       |                                                      | 472,840     |              |       | 24                                |       |                                                      | 27,367     |                   |       |      | —     |   |   | — |   | 27,391 |   |
| Cash dividends paid—$0.37 per common share                                         |       |                                                      | —      |              |       | —                            |       |                                                      | —     |                   |       |      | —     |   |   | (209,362 | ) | (209,362 | ) |
| **Balance  at December 31, 2004**                                                       |       |                                                      | 581,648,881 |              |       | $                                 | 29,085     |                                                      |       | $                      | 2,570,402  |      |       |   | $ | 118,943 |   |   | $ | 7,591,646 |   | $ | 10,310,076 |   |

 

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

F-6

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

** CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME—(Continued)**

 

| ** **                                                   | ** ** | **Number of  Shares of  Common Stock**     | ** **  | **Common  Stock** | ** ** | **Additional  Paid-in-  Capital** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Retained  Earnings** | ** ** | **Total** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------------------------|-------------|-------------------|------------|-----------------------------------|------------|-----------------------------------------------------------|------------|------------------------|------------|-----------|------------|
| ** **                                                   | ** ** | **(in thousands, except share data)** | ** **  |
| Comprehensive income:                                        |       |                                                      |        |              |       |                              |       |                                                      |       |                   |       |      |       |   |   |   |   |   |   |   |   |
| Net earnings for the year                                    |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | —     |      |       |   | — |   |   | 2,528,090 |   | 2,528,090 |   |
| Other  comprehensive income (loss), net of tax:              |       |                                                      |        |              |       |                              |       |                                                      |       |                   |       |      |       |   |   |   |   |   |   |   |   |
| Net unrealized losses from available-for-sale securities     |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | —     |      |       |   | (19,875 | ) |   | — |   | (19,875 | ) |
| Net unrealized losses from cash flow hedging  instruments    |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | —     |      |       |   | (16,080 | ) |   | — |   | (16,080 | ) |
| Net change in foreign currency translation adjustment        |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | —     |      |       |   | (21,874 | ) |   | — |   | (21,874 | ) |
| Total comprehensive income                                   |       |                                                      |        |              |       |                              |       |                                                      |       |                   |       |      |       |   |   |   |   |   |   | 2,470,261 |   |
| Stock options exercised                                      |       |                                                      | 13,068,735  |              |       |                              | 658        |                                                      |       |                   | 151,424    |      |       |   | — |   |   | — |   | 152,082 |   |
| Tax benefit of stock options exercised                       |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | 115,117    |      |       |   | — |   |   | — |   | 115,117 |   |
| Issuance of common stock, net of treasury stock              |       |                                                      | 1,917,868   |              |       |                              | 96         |                                                      |       |                   | 66,818     |      |       |   | — |   |   | — |   | 66,914 |   |
| Issuance of common stock for conversion of  convertible debt |       |                                                      | 2,408,217   |              |       |                              | 120        |                                                      |       |                   | 10,559     |      |       |   | — |   |   | — |   | 10,679 |   |
| Tax benefit of interest on conversion of convertible  debt   |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | 5,532      |      |       |   | — |   |   | — |   | 5,532 |   |
| Contribution of common stock to 401(k) Plan                  |       |                                                      | 986,985     |              |       |                              | 49         |                                                      |       |                   | 34,167     |      |       |   | — |   |   | — |   | 34,216 |   |
| Cash dividends paid—$0.59 per common share              |       |                                                      | —      |              |       |                              | —     |                                                      |       |                   | —     |      |       |   | — |   |   | (349,017 | ) | (349,017 | ) |
| **Balance  at December 31, 2005**                            |       |                                                      | 600,030,686 |              |       |                              | $          | 30,008                                                    |       |                   |       | $         | 2,954,019  |   |   |   | $ | 61,114 |   |   | $ | 9,770,719 |   | $ | 12,815,860 |   |
|                                                              |            |                                                           |             |                   |            |                                   |            |                                                           |            |                        |            |           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

F-7

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**COUNTRYWIDEFINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASHFLOWS**

| ** **                                                                                                 | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                 | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                 | ** ** | **(in thousands)**                     | ** ** |
| **Cash flows from operating activities:**                                                                  |       |                                        |       |   |   |   |   |
| Net earnings                                                                                               |       | $                                           | 2,528,090  |   | $ | 2,197,574 |   | $ | 2,372,950 |   |
| Adjustments to reconcile net earnings to net cash  used by operating activities:                           |       |                                        |       |   |   |   |   |
| Gain on sale of loans and  securities                                                                      |       | (4,861,780                                  | )          | (4,842,082 | ) | (5,887,436 | ) |
| Accretion of discount on  securities                                                                       |       | (386,322                                    | )          | (422,683 | ) | (474,302 | ) |
| Accretion of discount and  fair value adjustments on notes payable                                    |       | (58,397                                     | )          | (32,783 | ) | (32,062 | ) |
| Net change in fair value  of hedged notes payable and related interest-rate and foreign-currency swaps     |       | (2,777)                                     |       | 370 |   | 330 |   |
| Amortization of deferred  fees on time deposits                                                            |       | 13,706                                      |       | 4,928 |   | — |   |
| Provision for loan losses                                                                                  |       | 115,685                                     |       | 71,775 |   | 48,204 |   |
| Amortization of mortgage  servicing rights                                                                 |       | 2,288,354                                   |       | 1,940,457 |   | 2,069,246 |   |
| (Recovery) impairment of  mortgage servicing rights                                                        |       | (601,017                                    | )          | 279,842 |   | 1,326,741 |   |
| Change in fair value of  mortgage servicing rights attributable to hedged risk                             |       | 213,166                                     |       | — |   | — |   |
| (Recovery) impairment of  other retained interests                                                         |       | (346,121                                    | )          | 404,226 |   | 208,387 |   |
| Interest capitalized on  loans held for investment                                                         |       | (123,457                                    | )          | (1,503 | ) | — |   |
| Depreciation and other  amortization                                                                       |       | 243,101                                     |       | 151,159 |   | 110,082 |   |
| Stock-based compensation  expense                                                                          |       | 39,909                                      |       | 32,776 |   | 23,176 |   |
| Provision for deferred  income taxes                                                                       |       | 1,469,093                                   |       | 492,188 |   | 344,189 |   |
| Tax benefit of stock  options exercised                                                                    |       | 115,117                                     |       | 93,057 |   | 88,031 |   |
| Origination and purchase  of loans and mortgage-backed   securities held for sale                          |       | (448,686,210                                | )          | (335,890,238 | ) | (406,775,069 | ) |
| Proceeds from sale and  principal repayments of loans and   mortgage-backed securities                     |       | 436,083,977                                 |       | 328,901,595 |   | 396,319,952 |   |
| Decrease (increase) in  trading securities                                                                 |       | 933,354                                     |       | (517,263 | ) | (2,595,373 | ) |
| Decrease in investments  in other financial instruments                                                    |       | 1,422,310                                   |       | 517,200 |   | 1,369,928 |   |
| Increase in other assets                                                                                   |       | (1,970,798                                  | )          | (893,398 | ) | (11,996 | ) |
| Increase (decrease) in  accounts payable and accrued liabilities                                           |       | 679,285                                     |       | 795,106 |   | (129,315 | ) |
| (Decrease) increase in  trading securities sold, not yet purchased,   at fair value                        |       | (627,449                                    | )          | 1,442,976 |   | 1,023,414 |   |
| (Decrease) increase in  income taxes payable                                                               |       | (181,598                                    | )          | (184,439 | ) | 49,224 |   |
| Net cash used by  operating activities                                                                     |       | (11,700,779                                 | )          | (5,459,160 | ) | (10,551,699 | ) |
| **Cash flows from investing activities:**                                                                  |       |                                        |       |   |   |   |   |
| Increase in securities  purchased under agreements to resell, federal   funds sold and securities borrowed |       | (9,860,913                                  | )          | (3,008,346 | ) | (4,450,734 | ) |
| Additions to loans held  for investment, net                                                               |       | (33,697,649                                 | )          | (13,355,505 | ) | (20,193,110 | ) |
| Sales of loans held for  investment                                                                        |       | 2,678,737                                   |       | — |   | — |   |
| Additions to investments  in other financial instruments                                                   |       | (6,071,163                                  | )          | (7,042,716 | ) | (11,506,640 | ) |
| Proceeds from sale and  repayment of investments in other financial instruments                            |       | 5,961,014                                   |       | 14,894,871 |   | 10,965,252 |   |
| Additions to mortgage  servicing rights                                                                    |       | (302,441                                    | )          | (385,459 | ) | (49,607 | ) |
| Purchase of premises and  equipment, net                                                                   |       | (475,907                                    | )          | (341,738 | ) | (260,639 | ) |
| Net cash used by  investing activities                                                                     |       | (41,768,322                                 | )          | (9,238,893 | ) | (25,495,478 | ) |
| **Cash flows from financing activities:**                                                                  |       |                                        |       |   |   |   |   |
| Net increase in  short-term borrowings                                                                     |       | 8,142,815                                   |       | 9,772,156 |   | 16,552,092 |   |
| Issuance of long-term  debt                                                                                |       | 21,873,808                                  |       | 16,535,096 |   | 8,202,650 |   |
| Repayment of long-term  debt                                                                               |       | (9,282,361                                  | )          | (10,518,279 | ) | (5,245,209 | ) |
| Issuance of  Company-obligated mandatorily redeemable capital pass-through securities                      |       | —                                      |       | — |   | 500,000 |   |
| Net increase (decrease)  in securities sold under agreements to   repurchase and federal funds purchased   |       | 13,688,082                                  |       | (11,548,289 | ) | 9,378,573 |   |
| Net increase in deposit  liabilities                                                                       |       | 19,462,342                                  |       | 10,680,609 |   | 6,213,400 |   |
| Issuance of common stock                                                                                   |       | 213,303                                     |       | 111,176 |   | 542,075 |   |
| Payment of dividends                                                                                       |       | (349,017                                    | )          | (209,362 | ) | (80,376 | ) |
| Net cash provided by  financing activities                                                                 |       | 53,748,972                                  |       | 14,823,107 |   | 36,063,205 |   |
| Net increase in  cash                                                                                      |       | 279,871                                     |       | 125,054 |   | 16,028 |   |
| Cash at beginning  of year                                                                                 |       | 751,237                                     |       | 626,183 |   | 610,155 |   |
| Cash at end of year                                                                                        |       | $                                           | 1,031,108  |   | $ | 751,237 |   | $ | 626,183 |   |

80

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

F-8

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**Note1—Organization**

Countrywide FinancialCorporation (“Countrywide”) is a holding company which, through its principalsubsidiary, Countrywide Home Loans, Inc. (“CHL”) and other subsidiaries(collectively, the “Company”), is engaged in mortgage lending and other finance-relatedbusinesses, including mortgage banking, retail banking and mortgage warehouselending, dealing in securities, insurance underwriting and operating aninsurance agency and international mortgage loan processing and subservicing.

**Note2—Summary of Significant Accounting Policies**

A summary of the Company’ssignificant accounting policies applied in the preparation of the accompanyingconsolidated financial statements follows.

***Use of Estimates***

In preparing financialstatements in conformity with U.S. generally accepted accounting principles (“GAAP”),management is required to make estimates and assumptions that materially affectthe reported amounts of assets and liabilities and the disclosure of contingentliabilities at the date of the financial statements, and revenues and expensesduring the reporting period. Actual results could differ from those estimates.

***Principles of Consolidation***

The Company comprises both operating and specialpurpose entities (“SPEs”). For operating entities, the consolidated financialstatements include the accounts of Countrywide Financial Corporation, allmajority-owned subsidiaries and all joint ventures for which it has operationalcontrol. The Company has whole or majority ownership of all of itssubsidiaries, and has control of its joint ventures. Therefore, Countrywide hasno significant equity method or cost-basis investees.

Special purpose entities are evaluated first forclassification as “qualifying special purpose entities” (“QSPEs”) as specifiedby Statement of Financial Accounting Standards No. 140, “Accounting forTransfers and Servicing of Financial Assets and Extinguishments of Liabilities”(“SFAS 140”). Special purpose entities that are classified as QSPEs areexcluded from the consolidated financial statements of the Company. Specialpurpose entities that are not classified as QSPEs are further evaluated forclassification as variable interest entities as specified by FASBInterpretation No. 46, “Consolidation of Variable Interest Entities.”Special purpose entities that meet the definition of variable interest entitieswhere the Company is identified as the primary beneficiary of the entity areincluded in Countrywide’s consolidated financial statements.

All material intercompanyaccounts and transactions have been eliminated. Minority interests in theCompany’s majority-owned subsidiaries are included in accounts payable andaccrued liabilities on the Company’s consolidated balance sheets and minorityinterests in the Company’s earnings are charged to other operating expenses,net of applicable income taxes, on the Company’s consolidated statements ofearnings.

***Financial Statement Reclassifications***

Certain amounts reflectedin the consolidated financial statements for the years ended December 31,2004 and 2003, have been reclassified to conform to the presentation for theyear ended December 31, 2005.

F-9

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

***Derivative Financial Instruments***

The Company uses derivative financial instrumentsextensively as part of its interest rate and foreign currency risk managementactivities. (See Note 4—“Derivative Financial Instruments,” for furtherdiscussion about the Company’s risk management activities.) All derivativefinancial instruments are recognized on the balance sheet at fair value.

The Company designates every derivative instrument aseither a hedge of the fair value of a recognized asset or liability, or of anunrecognized firm commitment (“fair value” hedge); a hedge of a forecastedtransaction or of the variability of cash flows to be received or paid relatedto a recognized asset or liability (“cash flow” hedge); or as a free-standingderivative instrument.

For a fair value hedge, changes in the fair value ofthe derivative instrument and changes in the fair value of the hedged asset orliability attributable to the hedged risk are recorded in current-periodearnings.

For a cash flow hedge, changes in the fair value ofthe derivative are recorded in accumulated other comprehensive income withinshareholders’ equity, to the extent that the derivative is an effective hedge,and are subsequently reclassified to earnings in the same period(s) thatthe hedged transaction impacts net earnings, and on the same income statementline item as the hedged item. The ineffective portion of a cash flow hedge isreported in current-period earnings on the same income statement line item asthe hedged item.

For free-standing derivative instruments, changes inthe fair values are reported in current-period earnings.

At the inception of a hedge, the Company formallydocuments the relationship between hedging instruments and hedged items, aswell as the risk management objective and strategy for undertaking varioushedge transactions. This process includes linking all derivative instrumentsthat are designated as fair value or cash flow hedges to specific assets andliabilities on the balance sheet or to specific firm commitments or forecastedtransactions. The Company also formally assesses, both at the inception of thehedge and on an ongoing basis, whether the derivative instruments used arehighly effective in offsetting changes in fair values or cash flows of hedgeditems. If it is determined that the derivative instrument is not highlyeffective as a hedge, hedge accounting is discontinued.

The Company also discontinues hedge accounting when (1) aderivative instrument expires or is sold, terminated or exercised; or (2) aderivative instrument is de-designated as a hedge instrument because it isunlikely a forecasted transaction will occur, or (3) we determine that thedesignation of a derivative instrument as a hedge is no longer appropriate.When hedge accounting is discontinued, the derivative instrument continues tobe carried on the balance sheet at its fair value with changes in fair valuerecognized in current-period earnings. However, the carrying value of thepreviously hedged asset or liability is no longer adjusted for changes in fairvalue.

When hedge accounting is discontinued because it isprobable that a forecasted transaction will not occur, the derivativeinstrument continues to be carried on the balance sheet at its fair value, andgains and losses that were accumulated in other accumulated comprehensiveincome are recognized in current-period earnings. When hedge accounting isdiscontinued because the hedging instrument is sold or terminated, the amountreported in accumulated other comprehensive income to the date of sale ortermination, if any, is reported in accumulated other comprehensive incomeuntil the forecasted transaction impacts earnings.

F-10

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

The Company occasionally purchases or originatesfinancial instruments that contain an embedded derivative instrument. Atinception, the Company assesses whether the economic characteristics of theembedded derivative instrument are clearly and closely related to the economiccharacteristics of the financial instrument (host contract), whether thefinancial instrument that embodies both the embedded derivative instrument andthe host contract is currently measured at fair value with changes in fairvalue reported in earnings, and whether a separate instrument with the sameterms as the embedded instrument would meet the definition of a derivativeinstrument.

If the embedded derivativeinstrument is determined not to be clearly and closely related to the hostcontract; the financial instrument that embodies both the embedded derivativeinstrument and the host contract is not currently measured at fair value withchanges in fair value reported in earnings; and, if a separate instrument withthe same terms as the embedded derivative would qualify as a derivativeinstrument; the embedded derivative instrument is recorded apart from the hostcontract and carried at fair value with changes recorded in current-periodearnings.

***Sales, Securitizations and Servicing of FinancialInstruments***

The Company sells most of the mortgage loans itproduces in the secondary mortgage market, primarily in the form of securities,and to a lesser extent as whole loans. By-products of those sales are certainretained interests, including mortgage servicing rights (“MSRs”), interest-onlysecurities, principal-only securities and residual securities, which theCompany generally holds as long-term investments. (See Note 3—“Loan Sales,” fora description of MSRs.)

When the Company sells mortgage loans, it allocatesthe cost of the mortgage loans between the security sold and the retainedinterests, based on their relative fair values. Note 3—“Loan Sales,” describeshow the Company estimates fair value. The reported gain is the difference ofthe cash proceeds from the sale of the security or loan, the cost allocated tothe security or portion of the loan sold, and the fair value of any recourseretained or guarantee issued by the Company.

MSRs are carried at the lower of amortized cost orestimated fair value. To the extent the MSR is part of a fair value hedgeaccounting relationship, the cost basis is adjusted for the change in valueattributable to the hedge risk. This adjustment is reflected in current periodearnings. The adjusted cost basis value of the MSR is then assessed forimpairment. If MSRs are impaired, the impairment is recognized incurrent-period earnings and the carrying value of the MSRs is adjusted througha valuation allowance. If the value of the MSRs subsequently increases, therecovery in value is recognized in current-period earnings and the carryingvalue of the MSRs is adjusted through a reduction in the valuation allowance.

For purposes of performing its MSR impairmentevaluation, the Company stratifies its servicing portfolio on the basis ofcertain risk characteristics including loan type (fixed-rate oradjustable-rate) and note rate. Fixed-rate loans are stratified into note-ratepools of 50 basis points for note rates between 5% and 8% and single pools fornote rates above 8% and less than or equal to 5%.

Management periodically reviews the various impairmentstrata to determine whether the value of the impaired MSRs in a given stratumis likely to recover. When management deems recovery of the value to beunlikely in the foreseeable future, a write-down of the MSRs in the stratum to theestimated recoverable value is charged to the valuation allowance.

Other retained interests are designated as trading oravailable-for-sale securities at the time of securitization and are carried atestimated fair value in the consolidated balance sheets. Changes in the 

F-11

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

value of other retainedinterests classified as trading securities are included in current-periodearnings as a component of impairment of retained interests.

Unrealized gains and losses of other retainedinterests classified as available-for-sale, net of deferred income taxes, areexcluded from earnings and reported as a component of accumulated othercomprehensive income, which is included in shareholders’ equity. Realized gainsand losses on sales of these assets are computed by the specific identificationmethod and are recorded in earnings at the time of disposition. Unrealizedlosses that are other than temporary are recognized in earnings in the periodthat the other than temporary impairment is identified. Once impairment ofother retained interests classified as available-for-sale is charged toearnings, subsequent increases in value are recognized in earnings over theestimated remaining life of the investment through a higher effective yield.

Recourse retained in loan sales and securitizationactivities is discussed in Note 30—“Credit Losses Related to Securitized Loans.”

Countrywide Securities Corporation (“CSC”), abroker-dealer subsidiary of Countrywide, may reacquire beneficial interestspreviously sold to outside third parties in the Company’s securitizationtransactions. In the event that such securities include protection by aderivative financial instrument held by an SPE, until November 2005 that SPE nolonger met the conditions as a QSPE under SFAS 140. As a result, mortgage loansheld in the SPE and the related asset-backed secured financings were included onthe Company’s consolidated balance sheets for the period of time suchsecurities were held by CSC. The assets and liabilities were initially recordedat fair value. See Note 13—“Notes Payable—Asset-Backed Secured Financing.”

In November 2005, theFASB issued FASB Staff Position 140-2, “Clarification and Application ofParagraphs 40(b) and 40(c) of FASB Statement No. 140” (“FSP 140-2”)**which**clarified thatpurchases by a transferor, its affiliates, or its agents of previously issuedbeneficial interests, with protection by a derivative financial instrument,from outside parties that are held temporarily and are classified as tradingsecuritieswouldnot preclude the SPE from retaining its qualifying status under SFAS 140. FSP140-2 became effective upon its issuance.

***Loans***

*Mortgage Loans andMortgage-Backed Securities (“MBS”) Held for Sale*

Mortgage loans held for sale includes mortgage loansoriginated or purchased for resale together with mortgage loans held in SPEsused in the Company’s securitization transactions, net of related retainedinterests which temporarily do not meet the conditions necessary for QSPEstatus under SFAS 140 (“Mortgage Loans held in SPEs”). Mortgage loansoriginated or purchased for resale are recorded at the principal amountoutstanding net of deferred origination costs and fees and any premiums ordiscounts. Loan origination fees, as well as discount points and incrementaldirect origination costs, are initially recorded as an adjustment of the costof the loan and are reflected in earnings when the loan is sold.

The cost basis of mortgage loans held for sale isadjusted to reflect changes in the loans’ fair value as applicable through fairvalue hedge accounting. Mortgage loans held for sale are carried at the lowerof adjusted cost or market, which is computed by the aggregate method(unrealized losses are offset by unrealized gains). The market value ofmortgage loans held for sale is generally based on quoted market prices for MBS.

Mortgage Loans Held inSPEs are initially recorded at fair value upon reconsolidation.

F-12

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

*Loans Held forInvestment*

Loans are classified as held-for-investment based onmanagement’s intent and ability to hold the loans for the foreseeable future orto maturity. Loans held for investment are carried at amortized cost reduced bya valuation allowance for credit losses inherent in the portfolio as of thebalance sheet date. A loan’s cost includes its unpaid principal balance alongwith unearned income, comprised of fees charged to borrowers offset byincremental direct origination costs for loans originated by the Company or anypremiums or discounts paid for loans purchased. Unearned income is amortizedover the loan’s contractual life. For revolving lines of credit, unearnedincome is amortized using the straight-line method. For other loans, unearnedincome is amortized using the interest method of accounting.

A loan is considered impaired when, based on currentinformation and events, it is probable that the Company will be unable tocollect the scheduled payments of principal or interest when due according tothe contractual terms of the loan agreement. The Company’s loan portfolio iscomprised primarily of large groups of homogeneous loans made to consumers thatare secured by residential real estate. The Company does not evaluateindividual homogenous loans for impairment. These loans are generallyidentified as impaired when they become 90 days delinquent, at which time theloans are placed on nonaccrual status. Loans in the Company’s warehouse lendingand commercial real estate lending portfolios are individually evaluated forimpairment on a regular basis.

The Company provides for losses on impaired loans withan allowance for loan losses. The allowance for loan losses is evaluated on aperiodic basis by management and is determined by applying expected lossfactors to outstanding loans, based on historical default rates and losspercentages for similar loans originated by the Company and estimates of collateralvalue for individually evaluated loans. This evaluation is inherentlysubjective as it requires estimates that are susceptible to significantrevision as factors change or as more information becomes available. Theallowance for loan losses is a valuation allowance established to provide forcredit losses inherent in the portfolio of loans held for investment as of thebalance sheet date.

Loan losses are chargedagainst the allowance when management believes the loss is confirmed.Subsequent recoveries, if any, are credited to the allowance.

*Interest IncomeRecognition*

Interest income is accruedas earned. Loans are placed on nonaccrual status when any portion of principalor interest is 90 days past due, or earlier when concern exists as to the ultimatecollection of principal or interest. When a loan is placed on nonaccrual statusthe accrued and unpaid interest is reversed and interest income is recordedwhen collected. Loans return to accrual status when principal and interestbecome current and are anticipated to be fully collectible.

***Trading Securities***

Trading securities consistof securities purchased by the Company’s broker-dealer subsidiary. Thesesecurities, along with associated derivative instruments used to manage pricerisk, are recorded at fair value on the trade date basis, and gains and losses,both realized and unrealized, are included in gain on sale of loans andsecurities in the consolidated statements of earnings.

F-13

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

***Investments in Other Financial Instruments***

Investments inother financial instruments include mortgage-backed securities, obligations ofU.S. Government-sponsored enterprises, municipal bonds, U.S. Treasurysecurities, derivative financial instruments and certain interests retained insecuritization. The Company carries all of these assets at their estimated fairvalues. How the changes in fair value of the instruments are recognized isdependent on the accounting classification of the respective assets:

·       Changesin the fair value of financial instruments accounted for as trading instrumentsare recognized in current-period earnings;

·       All other instruments havebeen accounted for as available-for-sale securities; therefore, unrealizedgains or losses, net of deferred income taxes, are excluded from earnings andreported as a component of accumulated other comprehensive income, which isincluded in shareholders’ equity. Realized gains and losses on sales of theseassets are computed by the specific identification method and are recorded inearnings at the time of disposition. Unrealized losses that are other thantemporary are recognized in earnings in the period that theother-than-temporary impairment is identified. Once impairment of otherretained interests classified as available-for-sale is charged to earnings,subsequent increases in value are recognized in earnings over the estimatedremaining life of the investment through a higher effective yield.

Interest income is accrued as earned. Unamortizedpremiums and unaccreted discounts are amortized and accrued to interest incomeas an adjustment of the related loan yield using the interest method. Yieldsare estimated using market prepayment expectations for similar securities.

***SecuritiesPurchased Under Agreements to Resell, Securities Borrowed and Securities SoldUnder Agreements to Repurchase***

Transactions involving purchases of securities underagreements to resell, borrowing of securities or sales of securities underagreements to repurchase are recorded at their contractual amounts plus accruedinterest and are accounted for as collateralized financings, except where theCompany does not have an agreement to sell (or purchase) the same orsubstantially the same securities before maturity at a fixed or determinableprice. Transactions that do not provide for the Company to sell (or purchase)substantially the same securities before maturity at a fixed or determinableprice are accounted for as purchases and sales of securities.

Certain of the Company’ssecurities lending arrangements include master netting agreements that entitleCountrywide and its counterparties to settle their positions “net.” Where sucharrangements are in place, and where the Company or its counterparty intends tosettle its positions “net,” the Company includes the net asset or liability inits balance sheet. At December 31, 2005 and 2004, $11.9 billion and $8.1billion of securities purchased under agreements to resell and securitiesborrowed were offset against securities sold under agreements to repurchase undermaster netting arrangements, respectively.

***Deferred Acquisition Costs***

The Company’s insurancecarrier subsidiary, Balboa Life and Casualty (“Balboa”), incurs insurancepolicy acquisition costs that vary with and are directly related to acquisitionof new insurance policies. These costs consist primarily of commissions,premium taxes and certain other underwriting costs. These costs are deferredand amortized as the related premiums are earned. Deferred acquisition costsare 

F-14

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

limitedto amounts estimated to be recoverable from the related premiums andanticipated investment income less anticipated losses, loss adjustment expensesand policy maintenance expenses. Deferred acquisition costs totaling $115.2million and $91.2 million were included in other assets at December 31,2005 and 2004, respectively. Amortization of policy acquisition costs totaling$167.0 million, $138.1 million and $184.2 million was included in otheroperating expenses for the years ended December 31, 2005, 2004 and 2003,respectively.

***Liability for Insurance Losses***

For Balboa’s property and casualty policies, theliability for losses and loss adjustment expenses consists of an accrual forthe unpaid portion of estimated ultimate losses and loss adjustment expenses onclaims reported through the end of the accounting period plus estimates, basedon past experience, for the estimated losses and loss adjustment expensesrelating to incidents incurred but not reported as of the balance sheet date.

For credit life and disability policies, the liabilityfor losses provides for future claims, estimated based upon statutorystandards, on all policies-in-force at the end of the period, as well as thepresent value of amounts not yet due on disability claims. The liability forpolicy and contract claims represents the estimated ultimate net cost of allreported and unreported claims incurred through the end of the period, exceptfor the present value of amounts not yet due on disability claims, which areincluded in accounts payable and accrued liabilities.

The liability for insurance losses is establishedusing statistical analyses and is subject to the effects of trends in claimseverity and frequency and other factors. The estimate is continually reviewedand as adjustments to the liability become necessary, such adjustments arereflected in current earnings.

For mortgage reinsurance,the liability for insured losses is accrued in proportion to the amount ofrevenue recognized based on management’s assessment of the ultimate liabilityto be paid over the current and expected renewal period of the contracts. Theremaining liability to be paid, along with reinsurance revenues to be earned,are estimated based on projected defaults, losses and prepayments.

***Collateral Pledged and Collateral Received***

The Company reports assets it has pledged ascollateral in secured borrowing and other arrangements when the secured partycannot sell or repledge the assets or the Company can substitute collateral orotherwise redeem it on short notice.

The Company generally doesnot report assets received as collateral in secured lending and otherarrangements since the debtor typically has the right to redeem the collateralon short notice.

***Premises and Equipment***

Premises and equipment arestated at cost, less accumulated depreciation and amortization. Depreciation isprovided in amounts sufficient to relate the cost of depreciable assets tooperations over their estimated service lives using the straight-line method.Leasehold improvements are amortized over the lesser of the life of the leaseor service lives of the improvements using the straight-line method.Renovations and improvements that add utility or significantly extend the usefullife of assets are capitalized. Repair and maintenance costs are expensed asincurred.

F-15

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

***Capitalized Software Costs***

Internal software development costs are capitalized tothe extent of external direct costs of materials and services consumed and ofsalary costs relating to employees’ time spent on the software project duringthe application development stage. Internally developed software is amortizedover six to ten years using the straight-line method.

Capitalized software costsare evaluated for impairment annually or when changing circumstances indicatethat amounts capitalized may be impaired. Impaired items are written down totheir estimated fair values at the date of evaluation.

***Loan Servicing Fees***

Loan servicing fees andother remuneration are received by the Company for servicing residentialmortgage loans. Loan servicing fees are recorded net of guarantee fees paid bythe Company in connection with its securitization activities. Loan servicingfees are recognized as earned over the life of the servicing portfolio.

***Income from Other Retained Interests***

Income from other retainedinterests represents the yield on interest-only securities, principal-onlysecurities, residual interests and other financial instruments retained insecuritization. Income on these investments is recognized using the interestmethod.

***Insurance Premiums***

Property and casualty andcredit life and disability premiums are recognized over the term of thepolicies on a pro-rata basis for all policies except for lender-placedinsurance and Guaranteed Auto Protection (“GAP”), which provides coverage forleased automobiles’ residual value to the lessor of the vehicle. Forlender-placed insurance, premiums are “slowed,” or recognized later in the lifeof the policy, due to high cancellation rates experienced early in the life ofthe policy. For GAP insurance, revenue recognition is correlated to theexposure and accelerated over the life of the contract. Mortgage reinsurancepremiums are recognized as earned over the life of the policy. Prepaid premiumsapplicable to the unexpired term of policies-in-force are recorded as unearnedpremiums in accounts payable and accrued liabilities.

***Stock-Based Compensation***

The Company has both restricted stock and stock optionaward programs for its employees. Details of these plans are included in Note 20—“EmployeeBenefits.”

The Company recognizes compensation expense relatingto its restricted stock grants based on the fair value of the shares awarded as of the grant date. Compensation expensefor restricted stock grants, including those awarded toretirement-eligible employees, is recognized over the shares’ nominal vestingperiod.

F-16

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

The Company generally grants stock options for a fixednumber of shares with an exercise price equal to the fair value of the sharesat the date of grant to eligible employees. Through December 31, 2005 theCompany recognized compensation expense related to its stock option plans onlyto the extent that the fair value of the shares at the grant date exceeds theexercise price.

In December 2004, the FASB issued Statement ofFinancial Accounting Standards No. 123R, “Share-Based Payment” (“SFAS 123R”),an amendment of FASB Statement No. 123 (“SFAS 123”), “Accounting forStock-Based Compensation.” The Company will adopt SFAS 123R beginning in 2006.As a result of adopting SFAS 123R, the Company will charge the value ofemployee stock options as well as restricted stock and any other stock-basedcompensation to expense. The Company will also be required, for awards madebeginning with the adoption of SFAS 123R, to immediately expense awards made toretirement-eligible employees where the options vest upon retirement and willbe required to amortize grants to other employees over the lesser of thenominal vesting period or the period until the grantee becomesretirement-eligible and options vest. The Company will adopt SFAS 123R, usingthe modified prospective application approach effective January 1, 2006.The Company will value its stock options using a variant of theBlack-Scholes-Merton option-pricing model that takes into account employeetenure and exercise experience. We expect the charge to earnings for 2006related to the expensing of prior period unamortized grants made before theeffective date will be approximately $40 million, net of income taxes. Theeffect of amortization of the value of any grants awarded after December 31,2005 will increase this earnings charge.

Had the estimatedfair value of the options granted been included in compensation expense for theyears indicated below, the Company’s net earnings and earnings per share wouldhave been as follows:

| ** **                                                            | ** ** | **Years Ended December 31,**                        | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2005**                                                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                            | ** ** | **(in thousands, except per share data)** | ** ** |
| Net Earnings:                                                         |       |                                                               |       |   |   |   |   |
| As reported                                                           |       | $                                                                  | 2,528,090  |   | $ | 2,197,574 |   | $ | 2,372,950 |   |
| Add: Stock-based compensation included in net  earnings, net of taxes |       | 3,441                                                              |       | 3,292 |   | 1,329 |   |
| Deduct: Stock-based employee compensation,  net of taxes              |       | (104,269                                                           | )          | (41,317 | ) | (29,515 | ) |
| Pro forma                                                             |       | $                                                                  | 2,427,262  |   | $ | 2,159,549 |   | $ | 2,344,764 |   |
| Basic Earnings Per  Share:                                            |       |                                                               |       |   |   |   |   |
| As reported                                                           |       | $                                                                  | 4.28       |   | $ | 3.90 |   | $ | 4.44 |   |
| Pro forma                                                             |       | $                                                                  | 4.11       |   | $ | 3.83 |   | $ | 4.39 |   |
| Diluted Earnings Per  Share:                                          |       |                                                               |       |   |   |   |   |
| As reported                                                           |       | $                                                                  | 4.11       |   | $ | 3.63 |   | $ | 4.18 |   |
| Pro forma                                                             |       | $                                                                  | 3.94       |   | $ | 3.57 |   | $ | 4.13 |   |

 

Beginning in the second quarter of 2005, the Companybegan using a variant of the Black-Scholes-Merton option-pricing model thattakes into account enhanced estimates of employee tenure and exerciseexperience to estimate the fair value of the options. For purposes of thispro-forma disclosure, the fair value of each option grant is amortized toperiodic compensation expense over the options’ vesting period.

On April 1, 2005 the Company granted eligibleemployees options to purchase 13.3 million shares of its common stock at theaverage market price on that date. These options fully vested when granted and 

F-17

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

became exercisable on May 1,2005. As a result of this vesting provision, the pro-forma expense associatedwith the entire stock option grant amounting to $55.7 million, net of incometaxes, is included in the above stock-based compensation pro-forma disclosurefor the year ended December 31, 2005.

Theweighted-average assumptions used to value the option grants and the resultingaverage estimated values were as follows:

| ** **                       | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------|------------|---------------------------------------------|------------|
| ** **                       | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Weighted Average Assumptions:    |       |                                        |       |   |   |   |   |
| Dividend yield                   |       | 1.70                                        | %          | 0.85 | % | 0.80 | % |
| Expected volatility              |       | 32.50                                       | %          | 36.02 | % | 33.00 | % |
| Risk-free interest rate          |       | 4.15                                        | %          | 2.90 | % | 2.28 | % |
| Expected life (in years)(1)      |       | 3.15                                        |       | 5.59 |   | 4.35 |   |
| Per-share fair value of  options |       | $                                           | 6.95       |   | $ | 11.09 |   | $ | 4.47 |   |
| Weighted-average exercise price  |       | $                                           | 32.63      |   | $ | 31.85 |   | $ | 15.71 |   |

----

(1)          Beginningin the second quarter of 2005, expected employee tenure and exercise experienceare determined by the option pricing model.

***Income Taxes***

Countrywide files a consolidated federal income taxreturn and a combined income tax return in California and certain other states.Additional income tax returns are filed on a separate entity basis in variousother states and localities.

The Company uses thebalance sheet method to account for income taxes. Under this method, the netdeferred tax asset or liability is based on the tax effects of the differencesbetween the book and tax basis of assets and liabilities, and recognizesenacted changes in tax rates and laws. A valuation allowance is recognized if,based on the weight of available evidence, it is more likely than not that someportion of a deferred tax asset will not be realized.

***Implementation of New Accounting Standards***

In December 2004, the FASB issued Statement ofFinancial Accounting Standards No. 123R, “Share-Based Payment” (“SFAS 123R”),an amendment of FASB Statement No. 123 (“SFAS 123”), “Accounting forStock-Based Compensation.” SFAS 123R is focused primarily on accounting forshare-based compensation. This statement requires companies to measure the costof employee services received in exchange for an award of equity instrumentsbased on the grant date fair value of the award. SFAS 123R requires measurementof fair value of employee stock options using an option pricing model thattakes into account the awarded options’ unique characteristics. SFAS 123Rrequires charging the recognized cost to expense over the period the employeeprovides services to earn the award, generally the vesting period for theaward.

F-18

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

SFAS 123R’smeasurement requirements for employee stock options are similar to those ofSFAS 123, which is the basis for the pro forma stock-based compensationdisclosure contained in the preceding caption *“StockBased Compensation”* of this note. However, SFAS 123R requires:

·       initialand ongoing estimates of the amount of shares that will vest—SFAS 123 providedentities the option of assuming that all shares would vest and then “truing-up”compensation cost and expense as shares were forfeited

·       adjustingthe cost of a modified award with reference to the difference in the fair valueof the modified award to the initial award at the date of modification of theaward.

SFAS 123R also provides for the use of alternativemodels to determine compensation cost related to stock option grants. The modelthe Company will use to value its employee stock options is a variant of theBlack-Scholes-Merton option pricing model. Adoption of SFAS 123R is expected tohave an affect of approximately $40 million, net of tax related to theexpensing of prior periods’ unamortized grants in 2006. The Company will adoptSFAS 123R on January 1, 2006.

In May 2005, the FASB issued Statement ofFinancial Accounting Standards No. 154, “Accounting Changes and ErrorCorrections” (“SFAS 154”), which replaces APB No. 20, “Accounting Changes,”and FASB Statement No. 3, “Reporting Changes in Interim FinancialStatements.” The Statement changes the accounting for, and reporting of, achange in accounting principle. SFAS 154 requires retrospective application toprior period’s financial statements when voluntary changes in accountingprinciple are adopted and when adopting changes required by new accountingstandards when the standard does not include specific transition provisions,unless it is impracticable to do so. SFAS 154 is effective for accountingchanges and corrections of errors in fiscal years beginning after December 15,2005.

In November 2005, the FASB issued FASB StaffPosition 140-2, “Clarification and Application of Paragraphs 40(b) and40(c) of FASB Statement No. 140,” (“FSP 140-2”) which clarifiedthat purchases by a transferor, its affiliates, or its agents of previouslyissued beneficial interests, with protection by a derivative financialinstrument, from outside parties that are held temporarily and are classifiedas trading securities would not preclude the special purpose entity fromretaining its qualifying status under SFAS 140. Prior to the issuance of FSP 140-2,mortgage loans held by the SPE and the related asset-backed secured financingswere included in the Company’s consolidated balance sheets for the period oftime such securities were held by our broker-dealer. The assets and liabilitieswere initially recorded at fair value.

In November 2005, theFASB issued FASB Staff Position No. FAS 115-1/124-1, “TheMeaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments’’ This FSP supersedes EITF Topic No. D-44, “Recognitionof Other-Than-Temporary Impairment upon the Planned Sale of a Security WhoseCost Exceeds Fair Value,” and nullifies the guidance in EITF Issue No. 03-1,“The Meaning of Other-Than-Temporary Impairment and its Application to CertainInvestments,” for determining whether impairment of an investment isother-than-temporary. This FSP references existing guidance to determinewhether an impairment of an investment is other-than-temporary. This FSPapplies to investments in debt and equity securities within the scope ofStatements 115 and 124, all equity securities held by insurance companies andinvestments in other equity securities that are not accounted for by the equitymethod. The application of this FSP is required for the Company beginning January 1,2006. Adoption of this FSP is not expected to have a significant impact on theconsolidated financial position or earnings of the Company.

F-19

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

In February 2006,the FASB issued Statement of Financial Accounting Standards No. 155, “Accountingfor Certain Hybrid Financial Instruments”, an amendment of FASB StatementsNo. 133 and SFAS 140 (“SFAS 155”). This Statement:

**· **permits fair value remeasurement for anyhybrid financial instrument that contains an embedded derivative that otherwisewould require bifurcation

**· **clarifies which interest-only strips andprincipal-only strips are not subject to FASB Statement No. 133,“Accounting for Derivative Instruments and Hedging Activities”(“SFAS 133”)

**· **establishes a requirement to evaluateinterests in securitized financial assets to identify interests that arefreestanding derivatives or hybrid financial instruments that contain anembedded derivative requiring bifurcation

**· **clarifies that concentration of creditrisks in the form of subordination are not embedded derivatives

·  amends SFAS 140 to eliminate theprohibition on a QSPE from holding a derivative financial instrument thatpertains to a beneficial interest other than another derivative financialinstrument.

SFAS 155 is effective for all financialinstruments acquired or issued after the beginning of an entity’s first fiscalyear that begins after September 15, 2006. Early adoption of thisstatement is allowed. The Company has not determined the financial impact ofthe adoption of SFAS 155 or whether it will adopt SFAS 155 in 2006.

**Note 3—Loan Sales**

The Company routinely originates, securitizes and sellsmortgage loans into the secondary mortgage market. Prime mortgage loansecuritizations are generally structured without recourse to the Company.However, the Company generally has limited recourse on the Prime Home Equityand Nonprime Mortgage Loans it securitizes, through retention of a subordinatedinterest or through its issuance of a corporate guarantee of losses up to anegotiated maximum amount. While the Company generally does not retain creditrisk on the Prime Mortgage Loans it securitizes, it has potential liabilityunder representations and warranties it makes to purchasers and insurers of theloans. The Company had a liability for losses relating to representations andwarranties included in other liabilities totaling $169.8 million and $139.9million at December 31, 2005 and 2004, respectively. The Companyrecognized gains of $4.0 billion, $4.3 billion, and $5.5 billion from sales ofmortgage loans in securitizations in the years ended December 31, 2005,2004 and 2003, respectively.

When the Company securitizes mortgage loans itgenerally retains the MSRs and, depending on the nature of the securitization,may also retain interest-only securities, principal-only securities,subordinated securities and residual interests.

MSRs arise from contractual agreements between theCompany and investors (or their agents) in mortgage securities and mortgageloans. Under these contracts, the Company performs loan servicing functions inexchange for fees and other remuneration. The servicing functions typicallyperformed include, among other responsibilities, collecting and remitting loanpayments; responding to borrower inquiries; accounting for principal andinterest, holding custodial (impound) funds for payment of property taxes andinsurance premiums; counseling delinquent mortgagors; supervising foreclosuresand property dispositions.

F-20

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

The value of MSRs is derived from the net positivecash flows associated with the servicing contracts. The Company receives aservicing fee ranging generally from 0.25% to 0.50% annually on the remainingoutstanding principal balances of the loans. The servicing fees are collectedfrom the monthly payments made by the mortgagors. The Company generallyreceives other remuneration consisting of float benefits derived from collectingand remitting mortgage payments, as well as rights to variousmortgagor-contracted fees such as late charges, reconveyance charges andprepayment penalties. The Company also generally has the right to solicit themortgagors for other products and services, such as second mortgages andinsurance, as well as for new mortgages for those considering refinancing orpurchasing a new home.

The precise market value of retained interests cannotbe readily determined because these assets are not actively traded instand-alone markets. Considerable judgment is required to determine the fairvalues of our retained interests, and the exercise of such judgment cansignificantly impact the Company’s earnings. Therefore, senior financialmanagement exercises extensive and active oversight of this process. TheCompany’s Asset and Liability Committee, which is comprised of several of oursenior financial executives, ultimately determines the valuation of MSRs andOther Retained Interests.

Our MSR valuation process combines the use of asophisticated discounted cash flow model and extensive analysis of currentmarket data to arrive at an estimate of fair value at each balance sheet date. Thecash flow assumptions and prepayment assumptions used in our discounted cashflow model are based on our empirical data drawn from the historicalperformance of our MSRs, which we believe are consistent with assumptions usedby market participants valuing similar MSRs, and from data obtained on theperformance of similar MSRs. The key assumptions used in the valuation of MSRsinclude mortgage prepayment speeds and the discount rate (projected LIBOR plusoption-adjusted spread). These variables can, and generally will, change fromquarter to quarter as market conditions and projected interest rates change.The current market data utilized in the MSR valuation process and in theassessment of the reasonableness of our valuation is obtained from MSR trades,MSR broker valuations, prices of interest-only securities, and peer group MSRvaluation surveys.

For the other retained interests, the Company alsoestimates fair value—both at initial recognition and on an ongoing basis—throughthe use of discounted cash flow models. The key assumptions used in thevaluation of its other retained interests include mortgage prepayment speeds,discount rates, and for residual interests containing credit risk, the netlifetime credit losses. The discounted cash flow models incorporate cash flowand prepayment assumptions based on the Company’s own empirical data drawn fromthe historical performance of the loans underlying its other retainedinterests, which management believes is consistent with assumptions other majormarket participants would use in determining the assets’ fair value.

Keyeconomic assumptions used in determining the fair value of MSRs at the time ofsecuritization are as follows:

| ** **                                | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Weighted-average  life (in years)         |       | 4.4                                         |       | 4.7 |   | 6.0 |   |
| Weighted-average  annual prepayment speed |       | 23.0                                        | %          | 21.2 | % | 16.9 | % |
| Weighted-average OAS(1)                   |       | 6.5                                         | %          | 5.9 | % | 4.6 | % |

----

(1)          Option-adjusted spreadover LIBOR.

F-21

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

Key economic assumptionsused in determining the fair value of other retained interests at the time ofsecuritization are as follows:

| ** **                                | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Weighted-average  life (in years)         |       | 3.5                                         |       | 3.5 |   | 2.4 |   |
| Weighted-average  annual prepayment speed |       | 30.2                                        | %          | 32.9 | % | 28.0 | % |
| Weighted-average  annual discount rate    |       | 20.1                                        | %          | 25.0 | % | 22.6 | % |
| Weighted-average  lifetime credit losses  |       | 2.0                                         | %          | 2.7 | % | 1.5 | % |

 

The following tablesummarizes cash flows between the Company and securitization special purposeentities:

| ** **                                                | ** ** | **Years Ended December 31,** | ** **  |
|-----------------------------------------------------------|------------|---------------------------------------------|-------------|
| ** **                                                | ** ** | **2005**                                    | ** **  | **2004** | ** ** | **2003** | ** ** |
| ** **                                                | ** ** | **(in thousands)**                     | ** **  |
| Proceeds from new  securitizations                        |       | $                                           | 364,669,509 |   | $ | 259,102,621 |   | $ | 346,180,875 |   |
| Proceeds from  collections reinvested in securitizations  |       | 3,329,840                                   |        | 1,836,796 |   | 1,844,332 |   |
| Service fees  received                                    |       | 1,877,780                                   |        | 1,586,166 |   | 1,461,747 |   |
| Purchases of  delinquent loans                            |       | (3,786,551                                  | )           | (3,387,739 | ) | (3,715,193 | ) |
| Servicing  advances                                       |       | (2,524,067                                  | )           | (3,334,357 | ) | (2,519,583 | ) |
| Repayment of  servicing advances                          |       | 2,352,253                                   |        | 3,576,598 |   | 2,124,564 |   |
| Other cash flows  received on retained interests(1)  |       | 1,309,437                                   |        | 704,813 |   | 1,237,183 |   |
|                                                           |            |                                             |             |  |  |  |  |  |  |  |

----

(1)          Represents cash flowsreceived on retained interests other than servicing fees.

Keyassumptions used in measuring the fair value of the Company’s MSRs at December 31,2005 and 2004 and the effect on the fair value of those MSRs from adversechanges in those assumptions, are as follows:

| ** **                                | ** ** | **December 31,**                            | ** ** |
|-------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                | ** ** | **2005**                                         | ** ** | **2004** | ** ** |
| ** **                                | ** ** | **(dollar amounts in thousands)** | ** ** |
| Fair value of  mortgage servicing rights  |       | $                                                | 12,720,755 |   | $ | 8,882,917 |   |
| Weighted-average  life (in years)         |       | 5.6                                              |       | 6.1 |   |
| Weighted-average  annual prepayment speed |       | 22.8                                             | %          | 22.0 | % |
| Impact of 5% adverse change               |       | $                                                | 238,131    |   | $ | 236,789 |   |
| Impact of 10% adverse change              |       | $                                                | 463,010    |   | $ | 452,705 |   |
| Impact of 20% adverse change              |       | $                                                | 877,291    |   | $ | 859,520 |   |
| Weighted-average  OAS                     |       | 6.4                                              | %          | 6.0 | % |
| Impact of 5% adverse change               |       | $                                                | 94,600     |   | $ | 106,519 |   |
| Impact of 10% adverse change              |       | $                                                | 187,660    |   | $ | 156,338 |   |
| Impact of 20%  adverse change             |       | $                                                | 367,225    |   | $ | 306,544 |   |

 

F-22

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

Keyassumptions used in subsequently measuring the fair value of the Company’sother retained interests at December 31, 2005 and 2004, and the effect onthe fair value of those other retained interests from adverse changes in thoseassumptions are as follows:

| ** **                                   | ** ** | **December 31,**                            | ** ** |
|----------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                   | ** ** | **2005**                                         | ** ** | **2004** | ** ** |
| ** **                                   | ** ** | **(dollar amounts in thousands)** | ** ** |
| Fair value of  other retained interests      |       | $                                                | 2,675,461  |   | $ | 1,908,504 |   |
| Weighted-average  life (in years)            |       | 2.4                                              |       | 2.5 |   |
| Weighted-average  annual prepayment speed    |       | 38.3                                             | %          | 34.8 | % |
| Impact of 5% adverse change                  |       | $                                                | 57,329     |   | $ | 112,851 |   |
| Impact of 10% adverse change                 |       | $                                                | 110,297    |   | $ | 211,947 |   |
| Impact of 20% adverse change                 |       | $                                                | 214,392    |   | $ | 394,330 |   |
| Weighted-average  annual discount rate       |       | 17.9                                             | %          | 18.1 | % |
| Impact of 5% adverse change                  |       | $                                                | 25,646     |   | $ | 24,022 |   |
| Impact of 10% adverse change                 |       | $                                                | 54,844     |   | $ | 46,376 |   |
| Impact of 20% adverse change                 |       | $                                                | 117,472    |   | $ | 88,818 |   |
| Weighted-average  net lifetime credit losses |       | 1.7                                              | %          | 2.0 | % |
| Impact of 5% adverse change                  |       | $                                                | 44,834     |   | $ | 41,437 |   |
| Impact of 10% adverse change                 |       | $                                                | 90,552     |   | $ | 80,833 |   |
| Impact of 20%  adverse change                |       | $                                                | 177,589    |   | $ | 158,730 |   |

 

These sensitivities are hypothetical and should beused with caution. As the figures indicate, changes in fair value based on agiven percentage variation in individual assumptions generally cannot beextrapolated. Also, in the preceding tables, the effect of a variation in aparticular assumption on the fair value of the retained interest is calculatedindependently without changing any other assumption. In reality, changes in onefactor may result in changes in another which might compound or counteract thesensitivities.

The following table presents information aboutdelinquencies and components of Prime Home Equity and Nonprime Mortgage Loans forwhich the Company has retained some level of credit risk:

| ** **                                          | ** ** | **December 31,**   | ** ** |
|-----------------------------------------------------|------------|-------------------------|------------|
| ** **                                          | ** ** | **2005**                | ** ** | **2004** | ** ** |
| ** **                                          | ** ** | **(in thousands)** | ** ** |
| Prime Home Equity and  Nonprime Mortgage Loans:     |       |                    |       |   |   |
| Total principal amount                              |       | $                       | 65,657,207 |   | $ | 71,860,875 |   |
| Principal amount 60 days or more past due           |       | $                       | 1,639,436  |   | $ | 2,836,516 |   |
| Comprised of:                                       |       |                    |       |   |   |
| Loans and securities sold                           |       | $                       | 65,657,207 |   | $ | 55,461,436 |   |
| Loans and securities held for or available-for-sale |       | —                  |       | 6,706,663 |   |
| Mortgages loans held in SPEs                        |       | —                  |       | 9,692,776 |   |
|                                                |       | $                       | 65,657,207 |   | $ | 71,860,875 |   |

 

The Company incurredcredit losses of $124.0 million, $99.4 million and $95.5 million related to themortgage loans above during the years ended December 31, 2005, 2004 and2003, respectively.

F-23

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

**Note4—Derivative Financial Instruments**

***DerivativeFinancial Instruments***

The primary market riskfacing the Company is interest rate risk, which includes the risks that changesin interest rates will result in changes inthe value of our assets or liabilities (“price risk”) and the net interestincome from our mortgage loan and investment portfolios. The overall objectiveof the Company’s interest rate risk management activities is to reduce thevariability of earnings caused by changes in interest rates.

From an enterpriseperspective, the Company manages interest rate risk through the naturalcounterbalance of its loan production and servicing businesses. We also usevarious financial instruments, including derivatives, to manage the interestrate risk related specifically to the values of its interest rate lockcommitments, Mortgage Loan Inventory and MBS held for sale, MSRs and otherretained interests and trading securities, as well as a portion of its debt.Interest rate risk relating to the Company’s portfolio of loans held forinvestment is managed by funding these assets with liabilities of similarduration or using derivative instruments to change the repricingcharacteristics of its liabilities to more closely reflect the repricingbehaviors of those assets.

***Risk ManagementActivities Related to Mortgage Loan Inventory and Interest Rate LockCommitments***

*Description of Risk Management Activities*

The Company is exposed toprice risk relative to its Mortgage Loan Inventory and its interest rate lockcommitments (“IRLC”). The Mortgage Loan Inventory is comprised of mortgageloans and MBS held by the Company pending sale, and is presently held for anaverage of approximately 30 days. IRLCs guarantee the rate and points on theunderlying mortgage or group of mortgages for a specified period, generallyfrom seven to 60 days. IRLCs are derivative instruments and are recorded atfair value with changes in fair value recognized in current period earnings (asa component of gain on sale of loans and securities).

With regard to loans heldfor sale the Company is exposed to price risk from the time an IRLC is made toa mortgage applicant or financial intermediary to the time the related mortgageloan is sold. For loans held for investment the Company is exposed to pricerisk from the time an IRLC is made to a financial intermediary to the time theloan is purchased. During this period, the Company is exposed to losses ifmortgage rates rise, because the value of the IRLC or mortgage loan held forsale declines. To manage this price risk the Company utilizes derivatives. (Seethe following section titled “Accounting for Risk Management Activities” forfurther discussion.)

The price risk managementof the IRLCs is complicated by the fact that the ultimate percentage ofapplications that close within the terms of the IRLC is variable. Theprobability that the loan will fund within the terms of the IRLC is affected bya number of factors, in particular the change, if any, in mortgage ratessubsequent to the lock date. This probability generally increases if mortgagerates rise, and decreases if mortgage rates fall, due primarily to the relativeattractiveness of current mortgage rates compared to the applicant’s committedrate. The probability that a loan will fund within the terms of the IRLC isalso influenced by the source and age of the application, purpose for the loan(purchase or refinance), and the application approval rate. The Company hasdeveloped closing ratio estimates using its historical data that take intoaccount all of these variables, as well as renegotiations of rate and pointcommitments that tend to occur when mortgage rates fall. The closing ratioestimates are used to calculate the quantity of loans that will fund within theterms of IRLCs.

F-24

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

To manage the price risk associated with the IRLCs,the Company uses a combination of net forward sales of MBS and put and calloptions on MBS, Treasury futures and Eurodollar futures. The Company generallyenters into forward sales of MBS in an amount equal to the portion of the IRLCsexpected to close, assuming no change in mortgage rates. The Company acquiresput and call options to protect against the variability of loan closings causedby changes in mortgage rates, by using the current closing ratio estimates todetermine the amount of optional coverage required.

The Company manages the price risk related to theMortgage Loan Inventory primarily by entering into forward sales of MBS andEurodollar futures. The value of these forward MBS sales and Eurodollar futuresmoves in opposite direction to the value of the Mortgage Loan Inventory. TheCompany actively manages its IRLCs and Mortgage Loan Inventory risk profiles ona daily basis.

The Company manages the price risk and credit riskrelated to its commercial Mortgage Loans using total rate of return and creditdefault swaps.

The Company usesthe following derivative instruments in its risk management activities relatedto the IRLCs and Mortgage Loan Inventory:

·       *Forward Sales of MBS:*   An obligationto sell an MBS at a specified price in the future. The value increases asmortgage rates rise.

·       *Forward Purchases of MBS:*   Anobligation to buy an MBS at a specified price in the future. The valueincreases as mortgage rates fall.

·       *Long Call Options on MBS:*   A right tobuy an MBS at a specified price in the future. The value increases as mortgagerates fall.

·       *Long Put Options on MBS:*   A right tosell an MBS at a specified price in the future. The value increases as mortgagerates rise.

·       *Long Call Options on Treasury Futures:*   Aright to acquire a Treasury futures contract at a specified price in thefuture. The value increases as the benchmark Treasury rate falls.

·       *Long Put Options on Treasury Futures:*   Aright to sell a Treasury futures contract at a specified price in the future.The value increases as the benchmark Treasury rate rises.

·       *Short Eurodollar Futures Contracts*:   Astandardized exchange-traded contract, the value of which is tied to spotEurodollar rates at specified future dates. The value increases when Eurodollarrates rise.

·       *Total Rate of Return Swaps:*   An agreement to pay orreceive the total return on a financial index or security in exchange for thepayment or receipt of a floating rate of interest over the term of thecontract. For use in the risk management of the commercial mortgage portfolio,the Company pays the return on a published CMBS index and receives the floatingrate of interest. The value of these contracts increases as the value of theindex declines.

·       *Credit Default Swaps:*   An agreement to purchase creditevent protection based on a financial index or security in exchange for payinga fixed rate of interest over the term of the contract. For use in the riskmanagement of the commercial mortgage portfolio, the Company receives creditprotection and pays a fixed rate of interest. The value of these contractsincreases when the probability of the occurrence of a credit event rises.

F-25

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

Thefollowing table summarizes the balance or notional amounts, as applicable, ofMortgage Loan Inventory, IRLCs and the related derivative instruments at December 31,2005:

| ** **                      | ** ** | **(in billions)** | ** ** |
|---------------------------------|------------|------------------------|------------|
| Mortgage Loan Inventory:        |       |                   |       |   |   |
| Fixed rate                      |       |                   | $          | 13.8 |   |   |
| Adjustable rate                 |       |                   | 23.0       |   |   |
| Total                           |       |                   | $          | 36.8 |   |   |
| Interest Rate Lock  Commitments |       |                   |       |   |   |
| Fixed rate                      |       |                   | $          | 16.3 |   |   |
| Adjustable rate                 |       |                   | 14.7       |   |   |
| Total                           |       |                   | $          | 31.0 |   |   |
| Mandatory Forward Trades        |       |                   |       |   |   |
| Sales                           |       |                   | $          | (32.2 | ) |   |
| Buys                            |       |                   | 15.1       |   |   |
| Net mandatory positions         |       |                   | $          | (17.1 | ) |   |
| Long MBS Options                |       |                   |       |   |   |
| Calls                           |       |                   | $          | 1.0 |   |   |
| Puts                            |       |                   | —     |   |   |
| Net long MBS options            |       |                   | $          | 1.0 |   |   |
| Long Treasury Options           |       |                   |       |   |   |
| Calls                           |       |                   | $          | 13.5 |   |   |
| Puts                            |       |                   | (30.0      | ) |   |
| Net long Treasury  Options      |       |                   | $          | (16.5 | ) |   |
| Short Eurodollar Futures        |       |                   | $          | 95.0 |   |   |
| Total Rate of Return  Swaps     |       |                   | $          | 17.2 |   |   |
| Credit Default  Swaps           |       |                   | $          | 0.03 |   |   |

 

*Accounting for Risk Management Activities*

During 2005, the interestrate risk management activities connected with 73% of the fixed-rate mortgageloan inventory and 19% of the adjustable-rate mortgage loan inventory wereaccounted for as fair value hedges. The Company recognized pre-tax losses of $45.5million, $139.4 million and $72.8 million, representing the ineffective portionof such fair value hedges of its mortgage inventory for the years ended December 31,2005, 2004 and 2003, respectively. These amounts, along with the change in thefair value of the derivative instruments that were not designated as hedgeinstruments, are included in gain on sale of loans and securities in theconsolidated statements of earnings.

The Company estimates thefair value of an IRLC based on the change in estimated fair value of theunderlying mortgage loan and the probability that the mortgage loan will fundwithin the terms of the IRLC. The change in fair value of the underlyingmortgage loan is based upon quoted MBS prices. The change in fair value of theunderlying mortgage loan is measured from the date we issue the IRLC.Therefore, at the time of issuance the estimated fair value of an IRLC is zero.Subsequent to issuance, the value of an IRLC can be either positive ornegative, depending on the change in value of the underlying mortgage loan.Closing ratios derived from the Company’s recent historical empirical data areused to estimate the quantity of mortgage loans that will fund within the termsof the IRLCs. Because IRLCs are derivatives under SFAS 133, the risk managementactivities do not qualify for hedge accounting under SFAS 133. The freestandingderivative instruments that are used to manage the interest rate risk 

F-26

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

associatedwith the IRLCs are carried at fair value and recorded as a component of gain onsale of loans and securities in the consolidated statements of earnings.

***Risk ManagementActivities Related to Mortgage Servicing Rights (MSRs) and Other RetainedInterests***

*Description of Risk Management Activities*

MSRs and other retainedinterests, specifically interest-only securities and residual securities, aregenerally subject to a loss in value, or impairment, when mortgage interestrates decline. The fair value of MSRs and other retained interests reflect thepresent value of cash flow streams that are closely linked to the expected lifeof the underlying loan servicing portfolio. Declining mortgage interest ratesgenerally precipitate increased mortgage refinancing activity, which decreasesthe expected life of the loans in the servicing portfolio, thereby decreasingthe value of the MSRs and other retained interests. Reductions in the value ofthese assets affects earnings through impairment charges. To moderate theeffect of impairment on earnings, the Company maintains a portfolio offinancial instruments, including derivatives, which generally increase inaggregate value when interest rates decline. This portfolio of financialinstruments is collectively referred to herein as the “Servicing Hedge.”

TheCompany currently uses the following financial instruments in its ServicingHedge:

·       *Interest Rate Swaps:*   A mutualagreement to exchange interest rate payments; one party paying a fixed rate andanother paying a floating rate tied to a reference interest rate (e.g. USDLIBOR). For use in the Servicing Hedge, the Company generally receives thefixed rate and pays the floating rate. Such contracts increase in value asrates fall.

·       *Receiver Swaptions:*   A right to enter into a predeterminedInterest Rate Swap at a future date where we receive the fixed rate andpay the floating rate. These contracts increase in value as rates fall.

·       *Payor Swaptions:*   A right to enterinto a predetermined Interest Rate Swap at a future date, where we pay thefixed rate and receive the floating rate. These contracts increase in value asrates rise.

·       *Mortgage Forward Rate Agreement:*   Amutual agreement to exchange a single cash flow at a forward settlement date,based on the basis point difference between the forward fixed rate and floatingrate set equal to the 30-day forward current coupon mortgage rate, knownas the CMM index, on the settlement date. For use in the Servicing Hedge, wegenerally receive the fixed rate and pay the floating rate. Such contractsincrease in value as the spread between the current coupon mortgage rate andthe swap curve tightens, or when interest rates fall.

·       *Long Call Options on Treasury and Eurodollar Futures:*   Aright to acquire a Treasury or Eurodollar futures contract at a specified pricein the future. The value increases as the benchmark Treasury or Eurodollardeposit rate falls.

·       *Long Treasury Futures:*   An agreementto purchase a Treasury security at a specified price in the future. The valueincreases as the benchmark Treasury rate falls.

·       *Interest Rate Caps:*   A right to receive cash if a referenceinterest rate rises above a contractual strike rate. The value increases as thereference interest rate rises. The reference interest rates used in the Company’sinterest rate caps include mortgage rates, Treasury rates, and U.S. dollar(“USD”) LIBOR.

·       *Long Put Options on Treasury and Eurodollar Futures:*   Aright to sell a Treasury or Eurodollar futures contract at a specified price inthe future. The value increases as the benchmark Treasury or Eurodollar depositrate rises.

F-27

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

·       *Interest Rate Floors:*   A right toreceive cash if a reference interest rate falls below a contractual strikerate. Its value increases as the reference interest rate falls. The referenceinterest rates used in the Company’s interest rate floors include mortgagerates, Treasury rates, and U.S. dollar (“USD”) LIBOR.

These instruments arecombined to manage the overall risk portfolio of the MSRs and other retainedinterests. The Company actively manages its retained interests risk profile ona daily basis.

Thefollowing table summarizes the notional amounts of derivative contractsincluded in the Servicing Hedge:

| ** **                                  | ** ** | **Balance,  December 31,  2004** | ** ** | **Additions** | ** ** | **Dispositions/  Expirations** | ** ** | **Balance,  December 31,  2005** | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|---------------|------------|--------------------------------|------------|---------------------------------------|------------|
| ** **                                  | ** ** | **(in millions)**                | ** ** |
| Interest Rate Swaps                         |       |                                  | $          | —        |       |                           | $          | 141,225                               |       |   | $ | (87,375 | ) |   |   | $ | 53,850 |   |   |
| Interest Rate Swaptions                     |       |                                  | 41,250     |          |       | 78,800                         |       |                                  | (69,625    | ) |   |   | 50,425 |   |   |
| Mortgage Forward Rate  Agreements           |       |                                  | —     |          |       | 93,050                         |       |                                  | (61,925    | ) |   |   | 31,125 |   |   |
| Long Call Options on  Interest Rate Futures |       |                                  | 15,250     |          |       | 51,200                         |       |                                  | (48,950    | ) |   |   | 17,500 |   |   |
| Long Treasury Futures                       |       |                                  | 2,850      |          |       | 1,310                          |       |                                  | (3,000     | ) |   |   | 1,160 |   |   |
| Interest Rate Caps                          |       |                                  | 300        |          |       | 2,434                          |       |                                  | (2,434     | ) |   |   | 300 |   |   |
| Long Put Options on  Interest Rate Futures  |       |                                  | 2,000      |          |       | —                         |       |                                  | (2,000     | ) |   |   | — |   |   |
| Interest Rate Floors                        |       |                                  | 1,000      |          |       | —                         |       |                                  | (1,000     | ) |   |   | — |   |   |
|                                             |            |                                       |            |               |            |                                |            |                                       |            |  |  |  |  |  |  |  |  |  |  |

 

The Servicing Hedge isintended to reduce the impact on reported earnings of MSRs and other retainedinterests impairment that generally results from a decline in mortgage rates.Should mortgage rates increase, the value of the MSRs and other retainedinterests is expected to increase while the value of the Servicing Hedge isexpected to decrease. With respect to the various options and floors includedin the Servicing Hedge, the Company is not exposed to loss beyond its initialoutlay to acquire these derivative instruments, plus any unrealized gainsrecognized to date.

Thefollowing table summarizes the Company’s estimate of its maximum exposure toloss on Servicing Hedge instruments over the instruments’ contractual terms:

| ** **                        | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|
| ** **                        | ** ** | **(in millions)**      | ** ** |
| Mortgage forward  rate agreements |       |                        | $          | 307 |   |   |
| Interest rate  swaps              |       |                        | 46         |   |   |
| Interest rate futures  contracts  |       |                        | 33         |   |   |

 

Although these estimatescould be exceeded, the Company derives its estimates of loss exposure basedupon observed volatilities in the interest rate options market. Using thecurrently observed volatilities, management estimates, to a 95% confidencelevel, the maximum potential rate changes over a one-year time horizon.Management then estimates the Company’s exposure to loss based on the estimatedmaximum adverse rate change as of the measurement date.

*Accounting for Risk Management Activities*

The changes in fair valueof derivative contracts included in the Servicing Hedge are recorded as acomponent of the gain or loss from the Servicing Hedge in the consolidatedstatements of earnings. Principal-only and U.S. Treasury securities included inthe Servicing Hedge are held as available-for-sale 

F-28

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

securities.The changes in fair value of such securities included in the Servicing Hedgeare recorded in accumulated other comprehensive income. Realized gains orlosses on sales of these securities are recorded as a component of the gain orloss from the Servicing Hedge in the consolidated statements of earnings.

Effective April 1,2005, a portion of the Servicing Hedge was qualified as a fair value hedgeunder SFAS 133. During the nine months ended December 31, 2005, theportion of the Servicing Hedge that qualified as a fair value hedge coveredapproximately 28% of the risk associated with a change in fair value of theMSRs attributable to changes in interest rates of up to 50 basis points. At noother time during the years ended December 31, 2005, 2004 and 2003 has anyportion of the Servicing Hedge qualified as a hedge under SFAS 133.

Application of fair valuehedge accounting under SFAS 133 results in the cost basis of the MSRs beingadjusted for the change in fair value of the MSRs attributable to the hedgedrisk, with a corresponding amount included as a component of impairment orrecovery of retained interests in the statement of earnings.

For the nine months ended December 31,2005, the Company recognized a loss of $29.3 million, which represents theamount of hedge ineffectiveness for the portion of the Servicing Hedge thatqualified as a fair value hedge under SFAS 133.

***Risk ManagementActivities Related to Issuance of Long-Term Debt***

The Company acquiresinterest rate swap contracts which enable it to convert a portion of itsfixed-rate, long-term debt to U.S. dollar LIBOR-based floating-rate debt(notional amount of $2.3 billion as of December 31, 2005) and to enablethe Company to convert a portion of its foreign currency-denominated fixed andfloating-rate, long-term debt to U.S. dollar LIBOR-based floating-rate debt(notional amount of $3.5 billion as of December 31, 2005). Thesetransactions are designated as fair value hedges under SFAS 133. For theyears ended December 31, 2005, 2004 and 2003, the Company recognized apre-tax loss of $2.1 million, a pre-tax loss of $3.8 million, and a pre-taxgain of $0.02 million, respectively, representing the ineffective portion ofsuch fair value hedges of debt. These amounts are included in interest expensein the consolidated statements of earnings.

The Company acquiresinterest rate swap contracts which enable it to convert a portion of itsfloating-rate, long-term debt to fixed-rate, long-term debt (notional amount of$1.5 billion as of December 31, 2005) and to convert a portion of itsforeign currency-denominated, fixed-rate, long-term debt to U.S. dollarfixed-rate debt (notional amount of $0.6 billion as of December 31, 2005).These transactions are designated as cash flow hedges under SFAS 133. For theyears ended December 31, 2005, 2004 and 2003, the Company recognized apre-tax gain of $0.5 million, pre-tax gain of $0.04 million, and a pre-tax lossof $0.05 million, respectively, representing the ineffective portion of suchcash flow hedges. As of December 31, 2005, deferred net gains or losses onderivative instruments included in accumulated other comprehensive income thatare expected to be reclassified as earnings during the next 12 months are notconsidered to be material.

Payments on interest rateswaps are based on a specified notional amount. In connection with the debtfair value hedges, the Company has entered into swaps in which the ratereceived is fixed and the rate paid is adjustable and is indexed to LIBOR (“ReceiverSwap”). In connection with the debt cash flow hedges, the Company has enteredinto swaps in which the rate paid is fixed and the rate received is adjustableand is indexed to LIBOR (“Payor Swap”).

F-29

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

Thefollowing summarizes the notional amounts of and the average interest rates onthe swaps as of December 31, 2005:

| ** **     | ** ** | **Notional  Amount**                            | ** ** | **Fixed  Rate** | ** ** | **Floating  Rate** | ** ** |
|----------------|------------|-------------------------------------------------|------------|-----------------|------------|--------------------|------------|
| ** **     | ** ** | **(dollar amounts in millions)** | ** ** |
| Receiver swaps |       |                                            | $          | 6,136           |       |               |       | 4.73 | % |   |   | 4.36 | % |   |
| Payor swaps    |       |                                            | $          | 2,118           |       |               |       | 2.13 | % |   |   | 3.99 | % |   |

 

Payments are dueperiodically through the termination date of each contract. The swap contractsexpire between March 2006 and December 2035.

***Risk ManagementActivities Related to Deposit Liabilities***

The Company acquiresinterest rate swap contracts that have the effect of converting a portion ofits fixed-rate deposit liabilities to LIBOR-based variable-rate depositliabilities. These transactions are designated as fair value hedges. TheCompany recognized a pre-tax loss of $0.3 million, representing theineffectiveness relating to these swaps during 2005. During 2004, certain ofthe swaps with a notional value totaling $752 million, were accounted for asfree-standing derivatives, with changes in the swaps’ fair value and cash flowfrom the swaps recorded in interest expense. Effective January 1, 2005,these swaps were designated and accounted for as fair value hedges of certainfixed-rate deposits.

Thefollowing summarizes the notional amounts of and the average interest rates onthe swaps as of December 31, 2005:

| ** **              | ** ** | **Notional  Amount**                            | ** ** | **Fixed  Rate** | ** ** | **Floating  Rate** | ** ** |
|-------------------------|------------|-------------------------------------------------|------------|-----------------|------------|--------------------|------------|
| ** **              | ** ** | **(dollar amounts in millions)** | ** ** |
| Receiver swaps          |       |                                            | $          | 417             |       |               |       | 3.77 | % |   |   | 4.36 | % |   |
| Receiver callable swaps |       |                                            | $          | 1,566           |       |               |       | 5.06 | % |   |   | 4.28 | % |   |

 

Payments are dueperiodically through the termination date of each swap contract. The contractsexpire between September 2007 and January 2026.

***Risk ManagementActivities Related to the Broker-Dealer Securities Trading Portfolio***

*Description of Risk Management Activities*

Inconnection with its broker-dealer activities, the Company maintains a tradingportfolio of fixed-income securities, primarily MBS. The Company is exposed toprice changes in its trading portfolio arising from interest rate changesduring the period it holds the securities. To manage this risk, the Companyutilizes the following derivative instruments:

·       *Forward Sales of To-Be Announced (“TBA”) MBS:*   Anobligation to sell agency pass-through MBS that have not yet been issued at aspecified price and at a specified date in the future. The value increases asmortgage rates rise.

·       *Forward Purchases of TBA MBS:*   Anobligation to purchase agency pass-through MBS that have not yet been issued ata specified price at a specified date in the future. The value increases asmortgage rates fall.

F-30

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

·       *Short Futures Contracts:*   Astandardized exchange-traded contract, the value of which is tied to spot FedFunds or Eurodollar rates at specified future dates. The value of thesecontracts increases when Fed Funds or Eurodollar rates rise.

·       *Total Rate of Return Swaps:*   An agreement to pay orreceive the total return on a financial index or security in exchange for thepayment or receipt of a floating rate of interest over the term of thecontract. For use in the risk management of the commercial mortgage portfolio,the Company pays the return on a published CMBS index and receives the floatingrate of interest. The value of these contracts increases as the value of theindex declines.

·       *Interest Rate Swaps:*   A mutual agreementto exchange interest rate payments; one party paying a fixed rate and anotherpaying a floating rate tied to a reference interest rate (e.g., USD LIBOR). Foruse in its trading portfolio risk management activities, the Company receivesthe floating rate and pays the fixed rate. Such contracts increase in value asrates rise.

·       *Long Put Options on Futures Contracts:*   Aright to sell futures contracts, the value of which is tied to spot Fed Fundsor Eurodollar rates at specified future dates. The value of these contractsincreases when Fed Funds or Eurodollar rates rise.

·       *Long Call Options on Futures Contracts:*   Aright to purchase futures contracts, the value of which is tied to spot FedFunds or Eurodollar rates at specific future dates. The value of thesecontracts increases when Fed Funds or Eurodollar rates fall.

·       *Long Futures Contracts:*   Astandardized exchange-traded contract, the value of which is tied to the spotFed Funds or Eurodollar rates at specified future dates. The value of thesecontracts increases when Fed Funds or Eurodollar rates fall.

Thefollowing summarizes the notional amounts of the derivative contracts includedin the broker-dealer’s trading portfolio at December 31, 2005:

| ** **                              | ** ** | **Notional  Amount**   | ** ** |
|-----------------------------------------|------------|------------------------|------------|
| ** **                              | ** ** | **(in millions)** | ** ** |
| Forward sales of  TBA MBS               |       |                   | $          | 58,872 |   |   |
| Forward purchases  of TBA MBS           |       |                   | 47,207     |   |   |
| Short futures  contracts                |       |                   | 18,334     |   |   |
| Total rate of return  swaps             |       |                   | 1,950      |   |   |
| Interest rate  swap contracts           |       |                   | 1,414      |   |   |
| Long put options  on futures contracts  |       |                   | 500        |   |   |
| Long call options  on futures contracts |       |                   | 500        |   |   |
| Long futures contracts                  |       |                   | 250        |   |   |

 

*Accounting for RiskManagement Activities*

The changes in fair valueof derivative contracts used in the interest rate management activities relatedto trading activities are recorded as a component of the gain on sale of loansand securities in the consolidated statements of earnings.

F-31

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

***Counterparty Credit Risk***

The Company is exposed to credit loss in the event ofcontractual non-performance by its trading counterparties and counterparties toits various over-the-counter derivative financial instruments. The Companymanages this credit risk by selecting only counterparties management believesto be financially strong, spreading the credit risk among many suchcounterparties and by placing contractual limits on the amount of unsecuredcredit extended to any single counterparty. The Company’s exposure to creditrisk in the event of default by a counterparty is the current cost of replacingthe contracts, net of any available collateral retained by the Company.

Theaggregate amount of counterparty credit exposure after consideration ofrelevant netting agreements at December 31, 2005, is as follows:

| ** **                                        | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------------|------------|-----------------------------|------------|
| ** **                                        | ** ** | **(in millions)**      | ** ** |
| Aggregate credit  exposure before collateral held |       |                        | $          | 936 |   |   |
| Less: collateral  held                            |       |                        | (519       | ) |   |
| Net aggregate unsecured  credit exposure          |       |                        | $          | 417 |   |   |

 

For the three-year periodended December 31, 2005, we incurred no credit losses due to non-performanceof any of our counterparties.

F-32

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

**Note 5—MortgageLoans and Mortgage-Backed Securities Held for Sale**

Mortgageloans and mortgage-backed securities held for sale include the following:

| ** **                                        | ** ** | **December 31,**   | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|
| ** **                                        | ** ** | **2005**                | ** ** | **2004** | ** ** |
| ** **                                        | ** ** | **(in thousands)** | ** ** |
| Prime Mortgage                                    |       | $                       | 27,154,172 |   | $ | 15,589,451 |   |
| Nonprime Mortgage                                 |       | 6,675,267               |       | 9,882,701 |   |
| Prime Home Equity                                 |       | 1,951,321               |       | 1,033,653 |   |
| Commercial Real  Estate Loans                     |       | 1,089,262               |       | 300,292 |   |
| Deferred discounts  and fees, net                 |       | (51,334                 | )          | (19,247 | ) |
| Mortgage loans originated or purchased for resale |       | 36,818,688              |       | 26,786,850 |   |
| Mortgage Loans  Held in SPEs                      |       | —                  |       | 10,563,299 |   |
|                                              |       | $                       | 36,818,688 |   | $ | 37,350,149 |   |

 

At December 31, 2005, the Company had pledged$13.0 billion and $3.0 billion in mortgage loans held for sale to secureasset-backed commercial paper and a secured revolving line of credit,respectively.

At December 31, 2004,the Company had pledged $7.6 billion in mortgage loans held for sale to secureasset-backed commercial paper and $6.7 billion of mortgage loans originated orpurchased for resale and $10.6 billion of Mortgage Loans Held in SPEs ascollateral for asset-backed secured financings.

**Note 6—TradingSecurities**

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

| ** **                                            | ** ** | **December 31,**   | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|
| ** **                                            | ** ** | **2005**                | ** ** | **2004** | ** ** |
| ** **                                            | ** ** | **(in thousands)** | ** ** |
| Mortgage  pass-through securities:                    |       |                    |       |   |   |
| Fixed-rate                                            |       | $                       | 5,638,161  |   | $ | 6,768,864 |   |
| Adjustable-rate                                       |       | 915,302                 |       | 717,194 |   |
| Total mortgage pass-through securities                |       | 6,553,463               |       | 7,486,058 |   |
| Collateralized  mortgage obligations                  |       | 2,377,764               |       | 2,067,066 |   |
| U.S. Treasury  securities                             |       | 1,037,749               |       | 971,438 |   |
| Obligations of  U.S. Government-sponsored enterprises |       | 429,726                 |       | 560,163 |   |
| Interest-only  stripped securities                    |       | 255,127                 |       | 318,110 |   |
| Asset-backed  securities                              |       | 234,818                 |       | 340,684 |   |
| Mark-to-market on  TBA securities                     |       | 77,094                  |       | 58,676 |   |
| Negotiable  certificates of deposit                   |       | 296                     |       | 30,871 |   |
| Corporate debt  securities                            |       | —                  |       | 21,659 |   |
| Other                                                 |       | 16,536                  |       | 6,669 |   |
|                                                  |       | $                       | 10,982,573 |   | $ | 11,861,394 |   |

 

F-33

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

As of December 31, 2005 and 2004, $9.0 billionand $10.0 billion, respectively, of the Company’s trading securities had beenpledged as collateral for financing purposes, of which the counterparty had thecontractual right to sell or re-pledge $0.7 billion and $1.3 billion,respectively.

For the years endedDecember 31, 2005, 2004 and 2003, the Company recorded $203.7 million ingains and $1.7 million in losses and $26.2 million in gains, respectively, ontrading securities that related to trading securities still held at therespective period-end reporting dates.

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

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

| ** **                                       | ** ** | **December 31,**   | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|
| ** **                                       | ** ** | **2005**                | ** ** | **2004** | ** ** |
| ** **                                       | ** ** | **(in thousands)** | ** ** |
| Securities  purchased under agreements to resell |       | $                       | 18,536,475 |   | $ | 12,112,824 |   |
| Securities  borrowed                             |       | 4,740,886               |       | 1,118,624 |   |
| Federal funds  sold                              |       | 40,000                  |       | 225,000 |   |
|                                             |       | $                       | 23,317,361 |   | $ | 13,456,448 |   |

 

It is the policy of the Company to obtain possessionof collateral with a market value equal to or in excess of the principal amountloaned under securities purchased under agreements to resell and securitiesborrowed. Collateral is valued daily, and the Company may requirecounterparties to deposit additional collateral or may return collateralpledged when appropriate. Securities borrowed transactions require the Companyto deposit cash, letters of credit or other collateral with the lender in anamount generally in excess of the market value of the securities borrowed.

As of December 31,2005 and 2004, the Company had accepted collateral with a fair value of $33.7billion and $22.2 billion, respectively, that it had the contractual ability tosell or re-pledge, including $12.1 billion and $8.2 billion, respectively,related to amounts offset against securities purchased under agreements toresell under master netting arrangements. As of December 31, 2005 and2004, the Company had re-pledged $28.3 billion and $18.7 billion of such collateralfor financing purposes.

F-34

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

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

Loansheld for investment include the following:

| ** **                                                                | ** ** | **December 31,**   | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                | ** ** | **2005**                | ** ** | **2004** | ** ** |
| ** **                                                                | ** ** | **(in thousands)** | ** ** |
| Mortgage loans:                                                           |       |                    |       |   |   |
| Prime                                                                     |       | $                       | 48,619,590 |   | $ | 22,588,351 |   |
| Prime home equity                                                         |       | 14,991,351              |       | 11,435,792 |   |
| Nonprime                                                                  |       | 255,677                 |       | 171,592 |   |
| Total mortgage loans                                                      |       | 63,866,618              |       | 34,195,735 |   |
| Warehouse lending  advances secured by mortgage loans                     |       | 3,943,046               |       | 3,681,830 |   |
| Defaulted  mortgage loans repurchased from securitizations                |       | 1,515,660               |       | 1,518,642 |   |
|                                                                      |       | 69,325,324              |       | 39,396,207 |   |
| Purchase  premium/discount and deferred loan origination costs, net  |       | 935,029                 |       | 390,030 |   |
| Allowance for  loan losses                                                |       | (189,201                | )          | (125,046 | ) |
| Loans held for  investment, net                                           |       | $                       | 70,071,152 |   | $ | 39,661,191 |   |

 

Mortgage loans held for investment totaling $52.2billion and $28.8 billion were pledged to secure Federal Home Loan Bank(“FHLB”) advances at December 31, 2005 and 2004, respectively.

Mortgage loans held for investment totaling$2.0 billion were pledged to secure an unused borrowing facility with theFederal Reserve Bank (“FRB”).

The Company had accepted collateral of $4.1 billionand $3.8 billion securing warehouse-lending advances that it had thecontractual ability to re-pledge as of December 31, 2005 and 2004,respectively. No such mortgage loan collateral had been re-pledged as ofDecember 31, 2005 or 2004.

Impaired loans—loans which the Company has placed onnon-accrual status—totaled $2.1 billion and $1.3 billion at December 31,2005 and 2004, respectively. Included in total impaired loans were Governmentinsured or guaranteed loans totaling $1.1 billion and $0.9 billion atDecember 31, 2005 and 2004, respectively.

Changesin the allowance for the loan losses were as follows:

| ** **                                                                                           | ** ** | **December 31,**   | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                           | ** ** | **2005**                | ** ** | **2004** | ** ** |
| ** **                                                                                           | ** ** | **(in thousands)** | ** ** |
| Balance,  beginning of period                                                                        |       | $                       | 125,046    |   | $ | 78,449 |   |
| Provision for  loan losses                                                                           |       | 115,685                 |       | 71,775 |   |
| Net charge-offs                                                                                      |       | (25,173                 | )          | (25,178 | ) |
| Reduction of  allowance due to reclassification of loans held for investment to held for  sale       |       | (15,771                 | )          | — |   |
| Reclassification  of allowance for unfunded commitments to accounts payable and accrued  liabilities |       | (10,586                 | )          | — |   |
| Balance, end of period                                                                               |       | $                       | 189,201    |   | $ | 125,046 |   |

 

F-35

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

***Concentrations of Credit Risk***

Propertiessecuring the mortgage loans in our portfolio of loans held for investment areconcentrated in the State of California. The following is a summary of thegeographical distribution of loans for the top three states of the Company’sloan portfolio (as measured by unpaid principal balance) at December 31,2005:

| **State**        | ** ** | ** **             | ** ** | **Unpaid Principal  Balance** | ** ** | **% Total  Balance** | ** ** |
|------------------|------------|------------------------|------------|------------------------------------|------------|---------------------------|------------|
| ** **       | ** ** | **(In millions)** | ** ** | ** **                         | ** ** |
| California       |       |                   | $          | 29,874                             |       |                      |       | 43 | % |   |
| Virginia         |       |                   | 3,530      |                               |       |                      | 5          | % |   |
| Florida          |       |                   | 2,966      |                               |       |                      | 4          | % |   |
| All other states |       |                   | 32,955     |                               |       |                      | 48         | % |   |
| Total            |       |                   | $          | 69,325                             |       |                      |       | 100 | % |   |

 

Beginning in 2004, one of the adjustable-rate loanproducts offered by the Company increased in prominence, from approximately 6%of loan originations during the year ended December 31, 2004 toapproximately 19% during the year ended December 31, 2005. This product iscommonly referred to as a “pay-option” loan. The Company has retained asignificant portion of its pay-option loan production in its investmentportfolio during the two-year period ended December 31, 2005. TheCompany’s investment in “pay-option” loans comprised 41% and 14% of theCompany’s investment in mortgage loans held for investment at December 31,2005 and 2004, respectively.

Pay-option loans have interest rates that adjustmonthly and contain features that allow the borrower to defer making the fullinterest payment for at least the first year of the loan. After this “option”period, minimum monthly payments increase by no more than 71⁄2% per year unlessthe unpaid balance increases to a specified limit, which is no more than 115%of the original loan amount, at which time a new monthly payment amountadequate to repay the loan over its remaining contractual life is established.To ensure that contractual loan payments are adequate to repay a loan, thefully amortizing loan payment amount is re-established every five years. Due tothe lack of significant historical experience at Countrywide, the creditperformance of these loans has not been established for the Company.

Due to pay-option loans’ amortization characteristics,the loss that the Company would realize in the event of default may be higherthan that realized on a “traditional” loan that does not provide for deferralof a portion of the fully amortizing loan payment. Countrywide’s pay-optionloans are designed with features that address the risk of borrower default andthe increased risk of loss in the event of default. Specifically, Countrywide’sunderwriting standards conform to those required to make the pay-option loanssalable into the secondary market at the date of funding, including arequirement that the borrower meet secondary market debt-service ratio testsbased on their making the fully amortizing loan payment assuming the loan’sinterest rate is fully indexed. (A fully indexed loan rate equals the sum ofthe current index rate plus the margin applicable to the loan.) The loan’sterms limit the amount of potential increase of loss in the event of default byrestricting the amount of interest that may be added to the loan’s balance asdescribed in the preceding paragraph.

F-36

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

Followingis a summary of pay-option loans held for investment:

| ** **                                                      | ** ** | **December 31,**   | ** ** |
|-----------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                      | ** ** | **2005**                | ** ** | **2004** | ** ** |
| ** **                                                      | ** ** | **(In thousands)** | ** ** |
| Total pay-option  loan portfolio                                |       | $                       | 26,122,952 |   | $ | 4,701,795 |   |
| Pay-option loans with accumulated negative  amortization:       |       |                    |       |   |   |
| Principal                                                       |       | $                       | 13,973,619 |   | $ | 32,818 |   |
| Accumulated negative amortization (from original  loan balance) |       | $                       | 142,034    |   | $ | 29 |   |
| Original  loan-to-value ratio(1)                                |       | 75                      | %          | 73 | % |
| Original combined  loan-to-value ratio(2)                       |       | 78                      | %          | 75 | % |
| Average original  FICO score                                    |       | 720                     |       | 730 |   |
| Delinquencies(3)                                                |       | 0.22                    | %          | 0.08 | % |

----

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

(2)          The ratio of the lowerof the appraised value or purchase price of the property to the amount of allloans secured by the property.

(3)          Loans delinquent morethan 60 days, including non-accrual loans.

Management expects the delinquency rate in theCompany’s pay-option loan portfolio to increase to a level consistent with thedelinquency rate of the rest of the portfolio of loans held for investment asthis new product seasons.

F-37

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

**Note 9—Investmentsin Other Financial Instruments, at fair value**

Investmentsin other financial instruments include the following:

| ** **                                                                                       | ** ** | **December 31,**   | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                       | ** ** | **2005**                | ** ** | **2004** | ** ** |
| ** **                                                                                       | ** ** | **(in thousands)** | ** ** |
| Available-for-sale  securities:                                                                  |       |                    |       |   |   |
| Mortgage-backed securities                                                                       |       | $                       | 6,866,520  |   | $ | 6,009,819 |   |
| Obligations of U.S. Government-sponsored enterprises                                             |       | 547,715                 |       | 279,991 |   |
| Municipal bonds                                                                                  |       | 369,748                 |       | 208,239 |   |
| U.S. Treasury securities                                                                         |       | 144,951                 |       | 66,030 |   |
| Other                                                                                            |       | 3,109                   |       | 3,685 |   |
| Subtotal                                                                                         |       | 7,932,043               |       | 6,567,764 |   |
| Other interests  retained in securitization accounted for as available-for-sale securities:      |       |                    |       |   |   |
| Nonconforming interest-only and principal-only  securities                                       |       | 323,368                 |       | 191,502 |   |
| Prime home equity line of credit transferor’s  interest                                     |       | 212,862                 |       | 273,639 |   |
| Nonprime residual securities                                                                     |       | 206,033                 |       | 237,695 |   |
| Prime home equity residual securities                                                            |       | 143,590                 |       | 275,598 |   |
| Prepayment penalty bonds                                                                         |       | 112,492                 |       | 61,483 |   |
| Prime home equity interest-only securities                                                       |       | 15,136                  |       | 27,950 |   |
| Nonprime interest-only securities                                                                |       | 9,455                   |       | 84,834 |   |
| Nonconforming residual securities                                                                |       | 2,170                   |       | 11,462 |   |
| Subordinated mortgage-backed pass-through securities                                             |       | 2,059                   |       | 2,306 |   |
| Total other interests retained in securitization  accounted for as available-for-sale securities |       | 1,027,165               |       | 1,166,469 |   |
| Total available-for-sale securities                                                              |       | 8,959,208               |       | 7,734,233 |   |
| Other interests  retained in securitization accounted for as trading securities:                 |       |                    |       |   |   |
| Prime home equity residual securities                                                            |       | 782,172                 |       | 533,554 |   |
| Nonprime residual securities                                                                     |       | 341,106                 |       | 187,926 |   |
| Prime home equity line of credit transferor’s  interest                                     |       | 325,186                 |       | — |   |
| Nonconforming interest-only securities                                                           |       | 180,216                 |       | — |   |
| Nonconforming residual securities                                                                |       | 18,834                  |       | 20,555 |   |
| Interest rate swaps                                                                              |       | 782                     |       | — |   |
| Total other interests retained in securitization  accounted for as trading securities            |       | 1,648,296               |       | 742,035 |   |
| Hedging instruments:                                                                             |       |                    |       |   |   |
| Servicing                                                                                        |       | 741,156                 |       | 1,024,977 |   |
| Debt                                                                                             |       | 107,085                 |       | 589,812 |   |
| Total investments  in other financial instruments                                                |       | $                       | 11,455,745 |   | $ | 10,091,057 |   |

 

At December 31, 2005 and 2004, the Company hadpledged $2.1 billion and $1.8 billion, respectively, of mortgage-backedsecurities to secure securities sold under agreements to repurchase, which the 

F-38

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

counterparty had thecontractual right to re-pledge and $0.3 billion of mortgage-backed securitiesto secure an unused borrowing facility with the FRB.

At December 31, 2005 and 2004, the Company’sinsurance subsidiaries have deposited $0.02 billion of mortgage-backedsecurities to meet state statutory deposit requirements.

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

| ** **                                            | ** ** | **December 31, 2005** | ** ** |
|-------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | **Amortized  Cost**             | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
| ** **                                            | ** ** | **(in thousands)**         | ** ** |
| Mortgage-backed  securities                           |       | $                               | 6,985,851  |   |   | $ | 329 |   |   | $ | (119,660 | ) | $ | 6,866,520 |   |
| Obligations of  U.S. Government-sponsored enterprises |       | 555,482                         |       |   | 18 |   |   | (7,785 | ) | 547,715 |   |
| Municipal bonds                                       |       | 371,785                         |       |   | 1,115 |   |   | (3,152 | ) | 369,748 |   |
| U.S. Treasury  securities                             |       | 144,840                         |       |   | 1,326 |   |   | (1,215 | ) | 144,951 |   |
| Other interests  retained in securitization           |       | 829,009                         |       |   | 206,999 |   |   | (8,843 | ) | 1,027,165 |   |
| Other                                                 |       | 3,109                           |       |   | — |   |   | — |   | 3,109 |   |
|                                                  |       | $                               | 8,890,076  |   |   | $ | 209,787 |   |   | $ | (140,655 | ) | $ | 8,959,208 |   |

 

| ** **                                            | ** ** | **December 31, 2004** | ** ** |
|-------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | **Amortized  Cost**             | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
| ** **                                            | ** ** | **(in thousands)**         | ** ** |
| Mortgage-backed  securities                           |       | $                               | 6,034,293  |   |   | $ | 6,347 |   |   |   | $ | (30,821 | ) |   | $ | 6,009,819 |   |
| Obligations of  U.S. Government-sponsored enterprises |       | 281,430                         |       |   | 233 |   |   |   | (1,672 | ) |   | 279,991 |   |
| Municipal bonds                                       |       | 205,726                         |       |   | 2,669 |   |   |   | (156 | ) |   | 208,239 |   |
| U.S. Treasury  securities                             |       | 63,977                          |       |   | 2,237 |   |   |   | (184 | ) |   | 66,030 |   |
| Other interests  retained in securitization           |       | 1,045,011                       |       |   | 123,766 |   |   |   | (2,308 | ) |   | 1,166,469 |   |
| Other                                                 |       | 4,370                           |       |   | 15 |   |   |   | (700 | ) |   | 3,685 |   |
|                                                  |       | $                               | 7,634,807  |   |   | $ | 135,267 |   |   |   | $ | (35,841 | ) |   | $ | 7,734,233 |   |

 

F-39

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

The Company’savailable-for-sale securities in an unrealized loss position are as follows:

| ** **                                            | ** ** | **December 31, 2005**        | ** ** |
|-------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                            | ** ** | **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                           |       | $                                      | 4,468,055  |   |   | $ | (62,031 | ) |   | $ | 2,299,667 |   |   | $ | (57,629 | ) |   | $ | 6,767,722 |   | $ | (119,660 | ) |
| Obligations of  U.S. Government-sponsored enterprises |       | 328,679                                |       |   | (2,371 | ) |   | 185,000 |   |   | (5,414 | ) |   | 513,679 |   | (7,785 | ) |
| Municipal bonds                                       |       | 197,748                                |       |   | (1,655 | ) |   | 71,620 |   |   | (1,497 | ) |   | 269,368 |   | (3,152 | ) |
| U.S. Treasury  securities                             |       | 92,933                                 |       |   | (772 | ) |   | 22,055 |   |   | (443 | ) |   | 114,988 |   | (1,215 | ) |
| Other interests  retained in securitization           |       | 29,148                                 |       |   | (1,510 | ) |   | 79,099 |   |   | (7,333 | ) |   | 108,247 |   | (8,843 | ) |
| Other                                                 |       | 50                                     |       |   | — |   |   | — |   |   | — |   |   | 50 |   | — |   |
| Total impaired  securities                            |       | $                                      | 5,116,613  |   |   | $ | (68,339 | ) |   | $ | 2,657,441 |   |   | $ | (72,316 | ) |   | $ | 7,774,054 |   | $ | (140,655 | ) |

 

| ** **                                            | ** ** | **December 31, 2004**        | ** ** |
|-------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                            | ** ** | **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                           |       | $                                      | 3,656,167  |   |   | $ | (18,725 | ) |   | $ | 823,916 |   |   | $ | (12,096 | ) |   | $ | 4,480,083 |   |   | $ | (30,821 | ) |   |
| Obligations of  U.S. Government-sponsored enterprises |       | 185,983                                |       |   | (1,283 | ) |   | 28,648 |   |   | (389 | ) |   | 214,631 |   |   | (1,672 | ) |   |
| Municipal bonds                                       |       | 65,587                                 |       |   | (156 | ) |   | — |   |   | — |   |   | 65,587 |   |   | (156 | ) |   |
| U.S. Treasury  securities                             |       | 27,288                                 |       |   | (184 | ) |   | — |   |   | — |   |   | 27,288 |   |   | (184 | ) |   |
| Other interests  retained in securitization           |       | 27,970                                 |       |   | (1,753 | ) |   | 5,256 |   |   | (555 | ) |   | 33,226 |   |   | (2,308 | ) |   |
| Other                                                 |       | 3,620                                  |       |   | (700 | ) |   | — |   |   | — |   |   | 3,620 |   |   | (700 | ) |   |
| Total impaired  securities                            |       | $                                      | 3,966,615  |   |   | $ | (22,801 | ) |   | $ | 857,820 |   |   | $ | (13,040 | ) |   | $ | 4,824,435 |   |   | $ | (35,841 | ) |   |

 

The impairment reflected in these securities is aresult of a change in market interest rates and management believes that suchimpairment is not indicative of the Company’s ability to recover the securities’amortized cost in the reasonably foreseeable future. Accordingly,other-than-temporary impairment related to these securities has not beenrecognized as of December 31, 2005 or December 31, 2004.

F-40

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

Gross gains and lossesrealized on the sales of available-for-sale securities are as follows:

| ** **                                                | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                | ** ** | **(in thousands)**                     | ** ** |
| Mortgage-backed  securities:                              |       |                                        |       |   |   |   |   |
| Gross realized gains                                      |       | $                                           | 31         |   | $ | 4,935 |   | $ | 2,948 |   |
| Gross realized losses                                     |       | (116                                        | )          | (1,932 | ) | (86 | ) |
| Net                                                       |       | (85                                         | )          | 3,003 |   | 2,862 |   |
| Obligations of  U.S. Government-sponsored enterprises:    |       |                                        |       |   |   |   |   |
| Gross realized gains                                      |       | 14                                          |       | 317 |   | 2,465 |   |
| Gross realized losses                                     |       | —                                      |       | (2 | ) | (154 | ) |
| Net                                                       |       | 14                                          |       | 315 |   | 2,311 |   |
| Municipal bonds:                                          |       |                                        |       |   |   |   |   |
| Gross realized gains                                      |       | —                                      |       | 126 |   | — |   |
| Gross realized losses                                     |       | (106                                        | )          | (15 | ) | — |   |
| Net                                                       |       | (106                                        | )          | 111 |   | — |   |
| U.S. Treasury  securities:                                |       |                                        |       |   |   |   |   |
| Gross realized gains                                      |       | —                                      |       | 33,483 |   | 2,170 |   |
| Gross realized losses                                     |       | —                                      |       | (228 | ) | — |   |
| Net                                                       |       | —                                      |       | 33,255 |   | 2,170 |   |
| Home equity  asset-backed senior securities:              |       |                                        |       |   |   |   |   |
| Gross realized gains                                      |       | —                                      |       | 185,331 |   | 5,740 |   |
| Gross realized losses                                     |       | —                                      |       | — |   | — |   |
| Net                                                       |       | —                                      |       | 185,331 |   | 5,740 |   |
| Other interests  retained in securitization:              |       |                                        |       |   |   |   |   |
| Gross realized gains                                      |       | 16,124                                      |       | 85,167 |   | 27,435 |   |
| Gross realized losses                                     |       | (4,384                                      | )          | (29,915 | ) | (9,227 | ) |
| Net                                                       |       | 11,740                                      |       | 55,252 |   | 18,208 |   |
| Principal-only  securities:                               |       |                                        |       |   |   |   |   |
| Gross realized gains                                      |       | —                                      |       | 302 |   | 99,671 |   |
| Gross realized losses                                     |       | —                                      |       | (461 | ) | — |   |
| Net                                                       |       | —                                      |       | (159 | ) | 99,671 |   |
| Corporate bonds:                                          |       |                                        |       |   |   |   |   |
| Gross realized gains                                      |       | —                                      |       | — |   | 1,248 |   |
| Gross realized losses                                     |       | —                                      |       | — |   | — |   |
| Net                                                       |       | —                                      |       | — |   | 1,248 |   |
| Other:                                                    |       |                                        |       |   |   |   |   |
| Gross realized gains                                      |       | 1,253                                       |       | — |   | 86 |   |
| Gross realized losses                                     |       | —                                      |       | — |   | — |   |
| Net                                                       |       | 1,253                                       |       | — |   | 86 |   |
| Total gains and  losses on available-for-sale securities: |       |                                        |       |   |   |   |   |
| Gross realized gains                                      |       | 17,422                                      |       | 309,661 |   | 141,763 |   |
| Gross realized losses                                     |       | (4,606                                      | )          | (32,553 | ) | (9,467 | ) |
| Net                                                       |       | $                                           | 12,816     |   | $ | 277,108 |   | $ | 132,296 |   |

 

F-41

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

The following table summarizes the remainingcontractual maturities of debt securities classified as available-for-sale asof December 31, 2005:

| ** **                                                                                       | ** ** | **Within one  year** | ** ** | **After one  year  through five  years** | ** ** | **After five  years  through ten  years** | ** ** | **After ten  years** | ** ** | **Total** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|---------------------------|------------|----------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------|------------|-----------|------------|
| ** **                                                                                       | ** ** | **(in thousands)**   | ** ** |
| Mortgage-backed  securities                                                                      |       |                      | $          | —                                             |       |                                                |       | $                         | 1,863      |      |       |   | $ | — |   |   | $ | 6,864,657 |   | $ | 6,866,520 |   |
| Obligations of  U.S. Government- sponsored enterprises                                           |       |                      | 45,773     |                                               |       |                                                | 490,146    |                      |       |      | 11,796     |   |   | — |   | 547,715 |   |
| Municipal bonds                                                                                  |       |                      | 10,261     |                                               |       |                                                | 114,376    |                      |       |      | 180,353    |   |   | 64,758 |   | 369,748 |   |
| U.S. Treasury  securities                                                                        |       |                      | 24,776     |                                               |       |                                                | 115,473    |                      |       |      | 1,547      |   |   | 3,155 |   | 144,951 |   |
| Other                                                                                            |       |                      | —     |                                               |       |                                                | —     |                      |       |      | 2,343      |   |   | 766 |   | 3,109 |   |
| Subtotal                                                                                         |       |                      | 80,810     |                                               |       |                                                | 721,858    |                      |       |      | 196,039    |   |   | 6,933,336 |   | 7,932,043 |   |
| Other interests retained  in securitization accounted for as available-for-sale securities:      |       |                      |       |                                               |       |                                                |       |                      |       |      |       |   |   |   |   |   |   |
| Nonconforming interest-only and principal-only  securities                                       |       |                      | —     |                                               |       |                                                | —     |                      |       |      | —     |   |   | 323,368 |   | 323,368 |   |
| Prime home equity line of credit transferor’s  interest                                     |       |                      |       |                                               |       |                                                | —     |                      |       |      | —     |   |   | 212,862 |   | 212,862 |   |
| Nonprime residual securities                                                                     |       |                      | —     |                                               |       |                                                | —     |                      |       |      | —     |   |   | 206,033 |   | 206,033 |   |
| Prime home equity residual  securities                                                           |       |                      | —     |                                               |       |                                                | —     |                      |       |      | —     |   |   | 143,590 |   | 143,590 |   |
| Prepayment penalty bonds                                                                         |       |                      | —     |                                               |       |                                                | 112,492    |                      |       |      | —     |   |   | — |   | 112,492 |   |
| Prime home equity interest-only securities                                                       |       |                      | —     |                                               |       |                                                | —     |                      |       |      | —     |   |   | 15,136 |   | 15,136 |   |
| Nonprime interest-only securities                                                                |       |                      | —     |                                               |       |                                                |       |                      |       |      | —     |   |   | 9,455 |   | 9,455 |   |
| Nonconforming residual securities                                                                |       |                      | —     |                                               |       |                                                | —     |                      |       |      | —     |   |   | 2,170 |   | 2,170 |   |
| Subordinated mortgage-backed pass- through  securities                                           |       |                      | —     |                                               |       |                                                | —     |                      |       |      | —     |   |   | 2,059 |   | 2,059 |   |
| Total other interests retained in securitization  accounted for as available-for-sale securities |       |                      | —     |                                               |       |                                                | 112,492    |                      |       |      | —     |   |   | 914,673 |   | 1,027,165 |   |
| Total  available-for-sale securities                                                             |       |                      | $          | 80,810                                             |       |                                                |       | $                         | 834,350    |      |       |   | $ | 196,039 |   |   | $ | 7,848,009 |   | $ | 8,959,208 |   |

 

F-42

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

**Note10—Mortgage Servicing Rights, Net**

Theactivity in Mortgage Servicing Rights (“MSRs”) is as follows:

| ** **                                                           | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                           | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                           | ** ** | **(in thousands)**                     | ** ** |
| **Mortgage Servicing Rights**                                        |       |                                        |       |   |   |   |   |
| Balance at beginning of period                                       |       | $                                           | 9,820,511  |   | $ | 8,065,174 |   | $ | 7,420,946 |   |
| Additions                                                            |       | 5,835,946                                   |       | 4,142,641 |   | 6,138,569 |   |
| Securitization of MSRs                                               |       | (54,533                                     | )          | (56,038 | ) | (1,263,890 | ) |
| Amortization                                                         |       | (2,288,354                                  | )          | (1,940,457 | ) | (2,069,246 | ) |
| Change in fair value attributable to hedged risk                     |       | (213,166                                    | )          | — |   | — |   |
| Application of valuation allowance to write down  impaired MSRs      |       | (69,045                                     | )          | (390,809 | ) | (2,161,205 | ) |
| Balance before valuation allowance at end of period             |       | 13,031,359                                  |       | 9,820,511 |   | 8,065,174 |   |
| **Valuation Allowance for  Impairment of Mortgage Servicing Rights** |       |                                        |       |   |   |   |   |
| Balance at beginning of period                                       |       | (1,090,582                                  | )          | (1,201,549 | ) | (2,036,013 | ) |
| Recoveries (additions)                                               |       | 601,017                                     |       | (279,842 | ) | (1,326,741 | ) |
| Application of valuation allowance to write down  impaired MSRs      |       | 69,045                                      |       | 390,809 |   | 2,161,205 |   |
| Balance at end of period                                             |       | (420,520                                    | )          | (1,090,582 | ) | (1,201,549 | ) |
| **Mortgage Servicing Rights, net**                                   |       | $                                           | 12,610,839 |   | $ | 8,729,929 |   | $ | 6,863,625 |   |

 

The estimated fair values of mortgage servicing rightswere $12.7 billion, $8.9 billion and $6.9 billion as of December 31, 2005,2004 and 2003, respectively. (See Note 3—“Loan Sales,” for discussion of thevaluation of MSRs.)

Thefollowing table summarizes the Company’s estimate of amortization of itsexisting MSRs for the five-year period ending December 31, 2010. Thisprojection was developed using the assumptions made by management in its December 31,2005 valuation of MSRs. The assumptions underlying the following estimate willbe affected as market conditions, portfolio composition and behavior change,causing both actual and projected amortization levels to vary over time.Therefore, the following estimates will change in a manner and amount notpresently determinable by management.

| **Year Ending December 31,** | ** ** | ** **              | ** ** | **Estimated MSR  Amortization** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|--------------------------------------|------------|
| ** **                                  | ** ** | **(in thousands)** | ** ** |
| 2006                                        |       |                    | $          | 2,520,254                            |       |   |
| 2007                                        |       |                    | 1,941,506  |                                 |       |
| 2008                                        |       |                    | 1,514,970  |                                 |       |
| 2009                                        |       |                    | 1,197,091  |                                 |       |
| 2010                                        |       |                    | 957,353    |                                 |       |
| Five year total                             |       |                    | $          | 8,131,174                            |       |   |

 

F-43

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

**Note 11—Premises and Equipment**

Premises and equipmentconsist of the following:

| ** **                                       | ** ** | **Useful**  | ** ** | ** **            | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|-------------|------------|-----------------------|------------|------------|------------|
| ** **                                       | ** ** | **Lives**   | ** ** | **December 31,** | ** ** |
| ** **                                       | ** ** | **(Years)** | ** ** | **2005**              | ** ** | **2004**   | ** ** |
| ** **                                       | ** ** | ** **  | ** ** | **(in thousands)**    | ** ** |
| Buildings                                        |       |        | 19-40      |                  |       | $          | 582,916    |   | $ | 377,481 |   |
| Equipment                                        |       |        | 3-10       |                  |       | 1,111,624  |       | 923,514 |   |
| Leasehold  improvements                          |       |        | 1-10       |                  |       | 176,256    |       | 125,099 |   |
|                                             |       |        |       |                  |       | 1,870,796  |       | 1,426,094 |   |
| Less: accumulated  depreciation and amortization |       |        |       |                  |       | (685,019   | )          | (511,283 | ) |
|                                             |       |        |       |                  |       | 1,185,777  |       | 914,811 |   |
| Land                                             |       |        |       |                  |       | 93,882     |       | 70,539 |   |
|                                             |       |        |       |                  |       | $          | 1,279,659  |   | $ | 985,350 |   |

 

Depreciation andamortization expense totaled $181.6 million, $111.7 million and $82.1 millionfor the years ended December 31, 2005, 2004 and 2003, respectively.

**Note 12—Other Assets**

Other assets include the following:

| ** **                                                                   | ** ** | **December 31,**   | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                   | ** ** | **2005**                | ** ** | **2004** | ** ** |
| ** **                                                                   | ** ** | **(in thousands)** | ** ** |
| Reimbursable  servicing advances, net                                        |       | $                       | 1,529,001  |   | $ | 1,355,584 |   |
| Investments in  Federal Reserve Bank and Federal Home Loan Bank stock   |       | 1,334,100               |       | 795,894 |   |
| Interest  receivable                                                         |       | 777,966                 |       | 426,962 |   |
| Receivables from  custodial accounts                                         |       | 629,075                 |       | 391,898 |   |
| Restricted cash                                                              |       | 429,556                 |       | 250,662 |   |
| Securities  broker-dealer receivables                                        |       | 392,847                 |       | 818,299 |   |
| Capitalized  software, net                                                   |       | 331,454                 |       | 286,504 |   |
| Receivables from  sale of securities                                         |       | 325,327                 |       | 143,874 |   |
| Derivative margin  accounts                                                  |       | 296,005                 |       | 131,244 |   |
| Cash surrender  value of assets held in trust for deferred compensation plan |       | 224,884                 |       | 184,569 |   |
| Prepaid expenses                                                             |       | 187,377                 |       | 212,310 |   |
| Other assets                                                                 |       | 1,060,653               |       | 611,150 |   |
|                                                                         |       | $                       | 7,518,245  |   | $ | 5,608,950 |   |

 

The Company had pledged $0.1 billion and $0.3 billionof other assets to secure securities sold under agreements to repurchase at December 31,2005 and 2004, respectively.

F-44

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

**Note 13—Notes Payable**

Notes payable consists of the following:

| ** **                        | ** ** | **December 31,**   | ** ** |
|-----------------------------------|------------|-------------------------|------------|
| ** **                        | ** ** | **2005**                | ** ** | **2004** | ** ** |
| ** **                        | ** ** | **(in thousands)** | ** ** |
| Federal Home Loan  Bank advances  |       | $                       | 26,350,000 |   | $ | 15,475,000 |   |
| Medium-term  notes:               |       |                    |       |   |   |
| Floating rate                     |       | 14,466,765              |       | 11,846,268 |   |
| Fixed rate                        |       | 11,503,592              |       | 13,463,399 |   |
|                              |       | 25,970,357              |       | 25,309,667 |   |
| Asset-backed  commercial paper    |       | 12,367,496              |       | 7,372,138 |   |
| Unsecured  commercial paper       |       | 6,248,508               |       | — |   |
| Secured revolving  line of credit |       | 2,865,152               |       | — |   |
| Asset-backed  secured financings  |       | 22,998                  |       | 17,258,543 |   |
| Unsecured bank  loans             |       | 730,000                 |       | — |   |
| Junior  subordinated debentures   |       | 1,085,191               |       | 1,084,108 |   |
| Subordinated debt                 |       | 500,000                 |       | — |   |
| Convertible  securities           |       | 10,544                  |       | 65,026 |   |
| LYONs convertible  debentures     |       | 2,037                   |       | 12,626 |   |
| Other                             |       | 35,603                  |       | 36,563 |   |
|                              |       | $                       | 76,187,886 |   | $ | 66,613,671 |   |

 

***Federal Home Loan Bank Advances***

Scheduledmaturities of FHLB advances were as follows:

| ** **                          | ** ** | **December 31,**                            | ** ** |
|-------------------------------------|------------|--------------------------------------------------|------------|
| ** **                          | ** ** | **2005**                                         | ** ** | **2004** | ** ** |
| ** **                          | ** ** | **Amount**                                       | ** ** | **Range of  Interest Rates** | ** ** | **Amount** | ** ** | **Range of  Interest Rates** | ** ** |
| ** **                          | ** ** | **(dollar amounts in thousands)** | ** ** |
| Due within 30  days                 |       | $                                                | 300,000    |   | 2.17% to 3.04% |   | $ | 50,000 |   | 4.39% to 4.39% |   |
| After 30 days but  within 90 days   |       | 650,000                                          |       | 1.81% to 2.59% |   | 175,000 |   | 1.33% to 4.05% |   |
| After 90 days but  within 180 days  |       | 375,000                                          |       | 1.69% to 2.50% |   | 50,000 |   | 3.17% to 3.17% |   |
| After 180 days  but within one year |       | 1,525,000                                        |       | 2.09% to 4.39% |   | 575,000 |   | 1.87% to 4.23% |   |
| After one year                      |       | 23,500,000                                       |       | 1.84% to 4.52% |   | 14,625,000 |   | 1.69% to 4.39% |   |
| Total FHLB  advances                |       | $                                                | 26,350,000 |   | 1.69% to 4.52% |   | $ | 15,475,000 |   | 1.33% to 4.39% |   |

 

F-45

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

Financialdata pertaining to FHLB advances were as follows:

| ** **                                      | ** ** | **Years Ended December 31,**      | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                      | ** ** | **2005**                                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                      | ** ** | **(dollar amounts in thousands)** | ** ** |
| Weighted-average  interest rate at end of year  |       | 3.89                                             | %          | 2.97 | % | 3.19 | % |
| Weighted-average  interest rate during the year |       | 3.50                                             | %          | 2.95 | % | 3.23 | % |
| Average balance  of FHLB advances               |       | $                                                | 23,368,536 |   | $ | 10,323,708 |   | $ | 3,541,507 |   |
| Maximum amount  outstanding at any month end    |       | $                                                | 26,900,000 |   | $ | 15,475,000 |   | $ | 6,875,000 |   |
| Total interest expense                          |       | $                                                | 781,970    |   | $ | 305,032 |   | $ | 114,437 |   |

 

Of the total advances, $13.3 billion were fixed-rateand $13.1 billion were adjustable-rate.

The Company had pledged$52.2 billion and $28.8 billion of mortgage loans to secure its outstandingFHLB advances at December 31, 2005 and 2004, respectively.

***Medium-Term Notes***

As of December 31,2005, outstanding medium-term notes issued by CFC and CHL under various shelfregistrations filed with the Securities and Exchange Commission or issued by CFCand CHL under its European and Australian medium-term note programs were asfollows:

| ** **                                                 | ** ** | **Outstanding Balance**                     | ** ** | **Interest Rate** | ** ** | **Maturity Date** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                 | ** ** | **Floating-Rate**                                | ** ** | **Fixed-Rate**         | ** ** | **Total**              | ** ** | **From** | ** ** | **To** | ** ** | **From** | ** ** | **To** | ** ** |
| ** **                                                 | ** ** | **(dollar amounts in thousands)** | ** ** |
| Series A                                              |       |                                             | $          | 6,760,000              |       |                   | $          | 674,521 |   | $ | 7,434,521 |   |   | 4.00 | % |   | 6.03 | % | March 2006 |   | December 2035 |   |
| Series E                                              |       |                                             | —     |                   |       | 275,000                |       | 275,000 |   |   | 6.94 | % |   | 7.23 | % | October 2006 |   | October 2008 |   |
| Series F                                              |       |                                             | —     |                   |       | 30,000                 |       | 30,000 |   |   | 6.66 | % |   | 6.73 | % | April 2010 |   | April 2013 |   |
| Series H                                              |       |                                             | —     |                   |       | 600,000                |       | 600,000 |   |   | 6.25 | % |   | 6.25 | % | April 2009 |   | April 2009 |   |
| Series J                                              |       |                                             | 35,000     |                   |       | 1,625,000              |       | 1,660,000 |   |   | 4.89 | % |   | 5.50 | % | August 2006 |   | October 2006 |   |
| Series K                                              |       |                                             | —     |                   |       | 3,543,244              |       | 3,543,244 |   |   | 4.25 | % |   | 7.00 | % | February 2007 |   | April, 2022 |   |
| Series L                                              |       |                                             | 2,240,000  |                   |       | 2,874,878              |       | 5,114,878 |   |   | 2.88 | % |   | 6.00 | % | February 2006 |   | May 2023 |   |
| Series M                                              |       |                                             | 1,778,000  |                   |       | 1,300,345              |       | 3,078,345 |   |   | 4.13 | % |   | 6.20 | % | January 2006 |   | July 2029 |   |
| Euro Notes                                                 |       |                                             | 2,844,415  |                   |       | 592,650                |       | 3,437,065 |   |   | 2.37 | % |   | 5.53 | % | March 2006 |   | November 2010 |   |
| Australian Notes                                           |       |                                             | 809,350    |                   |       | —                 |       | 809,350 |   |   | 4.44 | % |   | 4.97 | % | September 2007 |   | December 2010 |   |
| Sub-total                                                  |       |                                             | 14,466,765 |                   |       | 11,515,638             |       | 25,982,403 |   |   |   |   |   |   |   |   |   |   |   |
| Basis adjustment through application of hedge   accounting |       |                                             | —     |                   |       | (12,046                | )          | (12,046 | ) |   |   |   |   |   |   |   |   |   |   |
| Total                                                      |       |                                             | $          | 14,466,765             |       |                   | $          | 11,503,592 |   | $ | 25,970,357 |   |   |   |   |   |   |   |   |   |   |   |

 

During the year ended December 31, 2005, theCompany issued $9.0 billion and $0.7 billion of floating-rate and fixed-ratemedium-term notes, respectively. Of the $0.7 billion of fixed-rate medium-termnotes issued by the Company during the year-ended December 31, 2005, $0.6billion were effectively converted to floating-rate debt using interest rateswaps.

F-46

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

As of December 31,2005, $4.1 billion of foreign currency-denominated medium-term notes wereoutstanding. Such notes are denominated in Japanese Yen, Pounds Sterling, CanadianDollars, Australian Dollars and Euros. These notes have been effectivelyconverted to U.S. dollars through currency swaps.

***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 ofshort-term secured liquidity notes (“SLNs”) with initial maturities of up to180 days. The SLNs bear interest at prevailing money market rates approximatingLIBOR. The SLN programs’ capacities, based on aggregate commitments fromunderlying credit enhancers, totaled $30.7 billion at December 31, 2005.

Financial data pertainingto SLNs were as follows:

| ** **                                              | ** ** | **Years Ended December 31,**      | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                              | ** ** | **2005**                                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                              | ** ** | **(dollar amounts in thousands)** | ** ** |
| Weighted-average  interest rate at end of year          |       | 4.35                                             | %          | 2.35 | % | 1.16 | % |
| Weighted-average  interest rate during the year         |       | 3.44                                             | %          | 1.60 | % | 1.18 | % |
| Average balance  of asset-backed commercial paper  |       | $                                                | 19,249,101 |   | $ | 13,016,253 |   | $ | 7,866,318 |   |
| Maximum amount  outstanding at any month end            |       | $                                                | 25,037,769 |   | $ | 15,147,748 |   | $ | 13,543,037 |   |
| Total interest expense                                  |       | $                                                | 664,781    |   | $ | 193,176 |   | $ | 93,484 |   |

 

At December 31,2005, the Company had pledged $13.0 billion in mortgage loans held for sale tosecure such SLNs.

***Unsecured Commercial Paper***

Financialdata pertaining to unsecured commercial paper were as follows:

| ** **                                      | ** ** | **Years Ended December 31,**      | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                      | ** ** | **2005**                                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                      | ** ** | **(dollar amounts in thousands)** | ** ** |
| Weighted-average  interest rate at end of year  |       | 4.37                                             | %          | — |   | 1.12 | % |
| Weighted-average  interest rate during the year |       | 3.43                                             | %          | 1.62 | % | 1.22 | % |
| Average balance  of unsecured commercial paper  |       | $                                                | 6,353,327  |   | $ | 3,222,044 |   | $ | 2,135,352 |   |
| Maximum amount  outstanding at any month end    |       | $                                                | 9,167,673  |   | $ | 4,088,770 |   | $ | 4,821,331 |   |
| Total interest expense                          |       | $                                                | 221,162    |   | $ | 49,071 |   | $ | 26,743 |   |

 

***Secured Revolving Line of Credit***

During 2004, the Company formed a special purposeentity for the purpose of financing inventory with funding provided by a groupof bank-sponsored conduits that are financed through the issuance ofasset-backed commercial paper. The entity incurs an interest charge based onprevailing money market rates approximating the cost of asset-backed commercialpaper. At December 31, 2005, the entity had aggregate commitments from thebank-sponsored conduits totaling $10.1 billion and had $2.8 billion outstandingborrowings.  The secured revolving lineof credit expires on November 22, 2006.

F-47

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

Financialdata pertaining to the secured revolving line of credit were as follows:

| ** **                                           | ** ** | **Years Ended December 31,**  | ** ** |
|------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                           | ** ** | **2005**                                     | ** ** | **2004** | ** ** |
| ** **                                           | ** ** | **(dollar amounts  in thousands)** | ** ** |
| Weighted-average  interest rate at end of year       |       | 4.28                                         | %          | — |   |
| Weighted-average  interest rate during the year      |       | 3.86                                         | %          | 2.71 | % |
| Average balance  of secured revolving line of credit |       | $                                            | 2,399,281  |   | $ | 41,705 |   |
| Maximum amount  outstanding at any month end         |       | $                                            | 8,419,168  |   | $ | — |   |
| Total interest expense                               |       | $                                            | 93,849     |   | $ | 958 |   |

 

***Asset-Backed Secured Financings***

The Company has recorded certain securitizationtransactions as secured borrowings as of December 31, 2005 and 2004because they do not qualify for sales treatment under SFAS 140 at that date. AtDecember 31, 2005, the transfer of a secured commercial real estate loanwith an unpaid balance of $23.0 million was accounted for as a securedborrowing transaction because the transfer did not qualify for sale accounting.At December 31, 2004, the secured borrowings amounted to $6.7 billion. AtDecember 31, 2004, the Company had pledged $6.7 billion of mortgage loansheld for sale to secure such borrowings.

In addition, CSC mayreacquire beneficial interests previously sold to outside third parties in theCompany’s securitization transactions. In the event that such securitiesinclude protection by a derivative financial instrument held by an SPE, untilNovember 2005 that SPE no longer met the conditions as a QSPE under SFAS 140.As a result, the mortgage loans held for sale and asset-backed securedfinancings were included on the Company’s consolidated balance sheets and wereinitially recorded at fair value. Once the securities that include protectionby a derivative financial instrument were sold, typically in less than 90 days,the conditions necessary for QSPE status under SFAS 140 were again met and therelated assets and liabilities were removed from the Company’s consolidatedbalance sheet. At December 31, 2004, such asset-backed secured financingsin the amount of $10.6 billion had been recorded because some of the relatedbeneficial interests that included protection by a derivative financialinstrument had been reacquired. The Company had pledged the related $10.6billion of mortgage loans held for sale to secure such borrowings.

***Junior Subordinated Debentures***

Countrywide Capital I (the “Subsidiary Trust I”), asubsidiary trust of the Company, has outstanding $300 million of 8% CapitalTrust Pass-through Securities (the “8% Capital Securities”). In connection withthe Subsidiary Trust I issuance of the 8% Capital Securities, CHL issued to theSubsidiary Trust I $309 million of its 8% Junior Subordinated DeferrableInterest Debentures (the “Subordinated Debt Securities I”). TheSubordinated Debt Securities I are due on December 15, 2026, with interestpayable semi-annually on June 15 and December 15 of each year. TheCompany has the right to redeem at par, plus accrued interest, the 8% CapitalSecurities at any time on or after December 15, 2006. The sole assets ofthe Subsidiary Trust I are, and will be, the Subordinated Debt Securities I.

Countrywide Capital III (the “Subsidiary Trust III”),a subsidiary trust of the Company, has outstanding $200 million of 8.05%Subordinated Capital Income Securities, Series A (the “8.05% CapitalSecurities”). In connection with the Subsidiary Trust III issuance of 8.05%Capital Securities, CHL issued to the Subsidiary Trust III $206 million of its8.05% Junior Subordinated Deferrable Interest Debentures 

F-48

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

(the “Subordinated DebtSecurities III”). The Subordinated Debt Securities III are due on June 15,2027 with interest payable semi-annually on June 15 and December 15of each year. The sole assets of the Subsidiary Trust III are, and will be, theSubordinated Debt Securities III.

In April 2003, Countrywide Capital IV (the “SubsidiaryTrust IV”), a subsidiary trust of the Company, issued $500 million of 6.75% preferredsecurities, which are fully and unconditionally guaranteed by the Company andCHL (the “6.75% Securities”). In connection with the issuance by CountrywideCapital IV of the 6.75% Securities, the Company issued to Countrywide CapitalIV $500 million of its 6.75% Junior Subordinated Debentures, which are fullyand unconditionally guaranteed by CHL (the “Subordinated Debentures”).Countrywide Capital IV exists for the sole purpose of issuing the 6.75%Securities and investing the proceeds in the Subordinated Debentures. TheSubordinated Debentures are due on April 1, 2033, with interest payablequarterly on January 1, April 1, July 1 and October 1 ofeach year. The Company has the right to redeem, at 100% of their principalamount plus accrued and unpaid interest to the date of redemption, the 6.75%Securities at any time on or after April 11, 2008.

In relation to Subsidiary Trusts I and III, theCompany has the right to defer payment of interest by extending the interestpayment period, from time to time, for up to 10 consecutive semi-annualperiods. If interest payments on the debentures are so deferred, the Companymay not declare or pay dividends on, or make a distribution with respect to, orredeem, purchase or acquire, or make a liquidation payment with respect to anyof its capital stock.

In relation to Subsidiary Trust IV, the Company hasthe right to defer payment of interest on the Subordinated Debentures for up to20 consecutive quarterly periods by extending the payment period. If interestpayments on the Subordinated Debentures are so deferred, the company may not,among other things, declare or pay dividends on, or make a distribution withrespect to, or redeem, purchase or acquire, or make a liquidation payment withrespect to any of its capital stock.

TheCompany guarantees CHL’s indebtedness to two of the subsidiary trusts,Countrywide Capital I and Countrywide Capital III, which are excluded from theCompany’s consolidated financial statements. Following is summarizedinformation for those trusts:

| ** **                                                                     | ** ** | **December 31, 2005** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                     | ** ** | **Countrywide  Capital I** | ** ** | **Countrywide  Capital III** | ** ** |
| ** **                                                                     | ** ** | **(in thousands)**         | ** ** |
| Balance Sheet:                                                                 |       |                            |       |   |   |   |   |   |   |
| Junior subordinated debentures receivable                                      |       |                            | $          | 307,412 |   |   |   | $ | 205,269 |   |   |
| Other assets                                                                   |       |                            | 1,031      |   |   |   | 692 |   |   |
| Total assets                                                                   |       |                            | $          | 308,443 |   |   |   | $ | 205,961 |   |   |
| Notes payable                                                                  |       |                            | $          | 9,223 |   |   |   | $ | 6,172 |   |   |
| Other liabilities                                                              |       |                            | 1,031      |   |   |   | 692 |   |   |
| Company-obligated guaranteed redeemable capital  trust pass-through securities |       |                            | 298,189    |   |   |   | 199,097 |   |   |
| Shareholder’s equity                                                      |       |                            | —     |   |   |   | — |   |   |
| Total liabilities  and shareholder’s equity                               |       |                            | $          | 308,443 |   |   |   | $ | 205,961 |   |   |

 

F-49

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

| ** **                 | ** ** | **Year Ended  December 31, 2005** | ** ** |
|----------------------------|------------|--------------------------------------------------|------------|
| ** **                 | ** ** | **Countrywide  Capital I**                  | ** ** | **Countrywide  Capital III** | ** ** |
| ** **                 | ** ** | **(in thousands)**                          | ** ** |
| Statement of Earnings:     |       |                                             |       |   |   |   |   |   |   |
| Revenues                   |       |                                             | $          | 24,831 |   |   |   | $ | 16,642 |   |   |
| Expenses                   |       |                                             | (24,831    | ) |   |   | (16,642 | ) |   |
| Provision for income taxes |       |                                             | —     |   |   |   | — |   |   |
| Net earnings               |       |                                             | $          | — |   |   |   | $ | — |   |   |

 

| ** **                                                                     | ** ** | **December 31, 2004** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                     | ** ** | **Countrywide  Capital I** | ** ** | **Countrywide  Capital III** | ** ** |
| ** **                                                                     | ** ** | **(in thousands)**         | ** ** |
| Balance Sheet:                                                                 |       |                            |       |   |   |   |   |   |   |
| Junior subordinated debentures receivable                                      |       |                            | $          | 307,323 |   |   |   | $ | 205,226 |   |   |
| Other assets                                                                   |       |                            | 1,031      |   |   |   | 691 |   |   |
| Total assets                                                                   |       |                            | $          | 308,354 |   |   |   | $ | 205,917 |   |   |
| Notes payable                                                                  |       |                            | $          | 9,220 |   |   |   | $ | 6,171 |   |   |
| Other liabilities                                                              |       |                            | 1,031      |   |   |   | 691 |   |   |
| Company-obligated guaranteed redeemable capital  trust pass-through securities |       |                            | 298,103    |   |   |   | 199,055 |   |   |
| Shareholder’s equity                                                      |       |                            | —     |   |   |   | — |   |   |
| Total liabilities  and shareholder’s equity                               |       |                            | $          | 308,354 |   |   |   | $ | 205,917 |   |   |

 

| ** **                 | ** ** | **Year Ended  December 31, 2004** | ** ** |
|----------------------------|------------|--------------------------------------------------|------------|
| ** **                 | ** ** | **Countrywide  Capital I**                  | ** ** | **Countrywide  Capital III** | ** ** |
| ** **                 | ** ** | **(in thousands)**                          | ** ** |
| Statement of Earnings:     |       |                                             |       |   |   |   |   |   |   |
| Revenues                   |       |                                             | $          | 24,831 |   |   |   | $ | 16,642 |   |   |
| Expenses                   |       |                                             | (24,831    | ) |   |   | (16,642 | ) |   |
| Provision for income taxes |       |                                             | —     |   |   |   | — |   |   |
| Net earnings               |       |                                             | $          | — |   |   |   | $ | — |   |   |

 

***Subordinated Debt***

During the year ended December 31,2005, the Company issued $0.5 billion of unsecured subordinated notes maturing April 1,2011. The notes pay interest quarterly at a floating rate equal to thethree-month LIBOR rate plus 73 basis points, and are callable on or after April 1,2006. The notes are unsecured obligations of the Company and rank subordinatedand junior to all of Countrywide’s senior indebtedness. None of these noteswere converted to fixed-rate debt using interest rate swaps. At December 31,2005, the weighted-average interest rate was 4.75%.

***Convertible Securities and LYONs ConvertibleDebentures***

In February 2001, the Company issued zero-couponLiquid Yield Option Notes (“LYONs”) with an aggregate face value of $675million, or $1,000 per note, due February 8, 2031. The LYONs were issuedat 

F-50

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

a discount to yield 1.0%to maturity, or 8.25% to the first call date. Under certain conditions, theLYONs are convertible into the Company’s common stock at the rate of 46.3shares per $1,000 note.

In September 2004,the Company completed an exchange offer, through which LYONs were exchanged forconvertible securities with terms similar to the LYONs, except for a provisionto allow settlement in cash and stock upon the debentures’ conversion. As aresult of the exchange offer, $637.2 million or 94.7% of the outstanding LYONswere exchanged for convertible securities during the year ended December 31,2004. Since inception and during the year ended December 31, 2005, LYONsand convertible securities with a face value totaling $658.8 million and $84.8million, respectively were surrendered for conversion by the security holders.

***Backup Credit Facilities***

As of December 31,2005, the Company had unsecured credit agreements (revolving credit facilities)with a group of commercial banks permitting the Company to borrow an aggregatemaximum amount of $9.2 billion. The composition of the facilities was asfollows:

| ** **                                     | ** ** | **December 31, 2005** | ** ** |
|------------------------------------------------|------------|---------------------------------|------------|
| **Number of Bank Participants** | ** ** | ** **                      | ** ** | **Amount** | ** ** | **Expiration Date** | ** ** |
| ** **                                     | ** ** | **(in billions)**          | ** ** | ** ** | ** ** |
| 27                                             |       |                            | $          | 4.0 |   |   | May,  2009 |   |
| 26                                             |       |                            | 2.6        |   |   | May,  2006 |   |
| 20                                             |       |                            | 2.6        |   |   | November,  2006 |   |
|                                           |       |                            | $          | 9.2 |   |   |   |   |
|                                                |            |                                 |            |  |  |  |  |  |  |  |

 

As consideration for these facilities, the Companypays annual facility fees of $7.9 million. The purpose of these creditfacilities is to provide liquidity backup for the Company’s commercial paperprogram. No amount was outstanding under these revolving credit facilities at December 31,2005. All of the facilities contain various financial covenants andrestrictions, certain of which require the Company and CHL to maintainspecified net worth amounts. Management believes the Company is in compliancewith those covenants and restrictions.

As of December 31,2005, the Company had a $2.1 billion unused borrowing facility with theFRB.

***Maturities of Notes Payable***

Maturitiesof notes payable are as follows:

| **Year Ending December 31,** | ** ** | ** **              | ** ** | **Principal** | ** ** | **Hedge Basis  Adjustment** | ** ** | **Total**  | ** ** |
|---------------------------------------------|------------|-------------------------|------------|---------------|------------|----------------------------------|------------|------------|------------|
| ** **                                  | ** ** | **(in thousands)** | ** ** |
| 2006                                        |       | $                       | 35,626,821 |          |       | $                                | 8,070      |       |       | $ | 35,634,891 |   |
| 2007                                        |       | 14,558,225              |       |          | 32,196     |                             |       | 14,590,421 |       |
| 2008                                        |       | 12,975,145              |       |          | (18,200    | )                                |       | 12,956,945 |       |
| 2009                                        |       | 5,875,259               |       |          | (29,524    | )                                |       | 5,845,735  |       |
| 2010                                        |       | 3,904,805               |       |          | (4,589     | )                                |       | 3,900,216  |       |
| Thereafter                                  |       | 3,202,631               |       |          | 57,047     |                             |       | 3,259,678  |       |
| Total                                       |       | $                       | 76,142,886 |          |       | $                                | 45,000     |       |       | $ | 76,187,886 |   |

 

F-51

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

**Note14—Securities Sold Under Agreements to Repurchase and Federal Funds Purchased**

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

| ** **                                      | ** ** | **December 31,**   | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|
| ** **                                      | ** ** | **2005**                | ** ** | **2004** | ** ** |
| ** **                                      | ** ** | **(in thousands)** | ** ** |
| Securities sold  under agreements to repurchase |       | $                       | 33,284,205 |   | $ | 20,440,123 |   |
| Federal funds  purchased                        |       | 869,000                 |       | 25,000 |   |
|                                            |       | $                       | 34,153,205 |   | $ | 20,465,123 |   |

 

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

Scheduledmaturities of securities sold under agreements to repurchase were as follows:

| ** **                                                 | ** ** | **December 31,**                            | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                 | ** ** | **2005**                                         | ** ** | **2004** | ** ** |
| ** **                                                 | ** ** | **Amount**                                       | ** ** | **Range of  Interest Rates** | ** ** | **Amount** | ** ** | **Range of  Interest Rates** | ** ** |
| ** **                                                 | ** ** | **(dollar amounts in thousands)** | ** ** |
| Due within 30  days                                        |       | $                                                | 33,174,552 |   | 1.70% to 5.00% |   | $ | 19,309,898 |   | 0.30% to 2.43% |   |
| After 30 days but  within 90 days                          |       | 109,653                                          |       | 2.60% to 4.30% |   | 685,128 |   | 1.30% to 2.00% |   |
| After 90 days but  within 180 days                         |       | —                                           |       | — |   | 337,583 |   | 1.90% to 2.50% |   |
| After 180 days  but within one year                        |       | —                                           |       | — |   | 107,514 |   | 1.90% to 1.90% |   |
| Total securities  sold under agreements to repurchase |       | $                                                | 33,284,205 |   | 1.70% to 5.00% |   | $ | 20,440,123 |   | 0.30% to 2.50% |   |

 

Financialdata pertaining to securities sold under agreements to repurchase advances wereas follows:

| ** **                                                         | ** ** | **Years Ended December 31,**      | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                         | ** ** | **2005**                                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                         | ** ** | **(dollar amounts in thousands)** | ** ** |
| Weighted-average  interest rate at end of year                     |       | 4.04                                             | %          | 2.02 | % | 1.02 | % |
| Weighted-average  interest rate during the  year(1)                |       | 3.11                                             | %          | 1.36 | % | 1.26 | % |
| Average balance  of securities sold under agreements to repurchase |       | $                                                | 42,186,332 |   | $ | 36,279,369 |   | $ | 34,205,040 |   |
| Maximum amount  outstanding at any month end                       |       | $                                                | 48,386,546 |   | $ | 43,658,987 |   | $ | 37,573,228 |   |
| Total interest expense                                             |       | $                                                | 1,476,069  |   | $ | 536,399 |   | $ | 439,044 |   |

----

(1)          Averages represent dailybalance sheet estimates which do not reflect netting of securities under masternetting agreements.

F-52

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

Financialdata pertaining to federal funds purchased were as follows:

| ** **                                                         | ** ** | **Years Ended December 31,**      | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                         | ** ** | **2005**                                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                         | ** ** | **(dollar amounts in thousands)** | ** ** |
| Weighted-average  interest rate at end of year                     |       | 4.15                                             | %          | 2.44 | % | — |   |
| Weighted-average  interest rate during the year                    |       | 3.34                                             | %          | 1.62 | % | 1.08 | % |
| Average balance  of securities sold under agreements to repurchase |       | $                                                | 888,732    |   | $ | 4,658 |   | $ | 1,780 |   |
| Maximum amount  outstanding at any month end                       |       | $                                                | 1,967,000  |   | $ | 50,000 |   | $ | — |   |
| Total interest expense                                             |       | $                                                | 29,668     |   | $ | 76 |   | $ | 19 |   |

 

At December 31, 2005,repurchase agreements were secured by $9.0 billion of trading securities, $28.3billion of securities purchased under agreements to resell and securitiesborrowed, $2.1 billion in investments in other financial instruments, and $0.1billion of other assets. At December 31, 2005, $12.1 billion of thepledged securities purchased under agreements to resell and securities borrowedrelated to amounts offset against securities sold under agreements torepurchase pursuant to master netting agreements.

**Note 15—Deposit Liabilities**

Thefollowing table summarizes deposit balances:

| ** **                                                | ** ** | **December 31,**                            | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                | ** ** | **2005**                                         | ** ** | **2004** | ** ** |
| ** **                                                | ** ** | **Amount**                                       | ** ** | **Weighted  Average  Rate** | ** ** | **Amount** | ** ** | **Weighted  Average  Rate** | ** ** |
| ** **                                                | ** ** | **(dollar amounts in thousands)** | ** ** |
| Time deposits:                                            |       |                                             |       |   |   |   |   |   |   |   |   |   |   |
| Retail                                                    |       | $                                                | 13,434,338 |   |   | 4.01 | % |   | $ | 6,695,521 |   |   | 3.32 | % |   |
| Brokered                                                  |       | 7,442,073                                        |       |   | 4.20 | % |   | 3,666,077 |   |   | 3.41 | % |   |
| Company-controlled  custodial deposit accounts            |       | 13,200,801                                       |       |   | 4.18 | % |   | 7,900,900 |   |   | 2.19 | % |   |
| Money market  accounts                                    |       | 4,466,195                                        |       |   | 4.13 | % |   | 1,673,517 |   |   | 2.74 | % |   |
| Non-interest-bearing  checking accounts                   |       | 926,645                                          |       |   | — |   |   | 67,081 |   |   | — |   |   |
| Savings accounts                                          |       | 823                                              |       |   | 1.31 | % |   | 1,947 |   |   | 1.69 | % |   |
|                                                      |       | 39,470,875                                       |       |   | 4.02 | % |   | 20,005,043 |   |   | 2.83 | % |   |
| Basis adjustment through application of hedge  accounting |       | 18,381                                           |       |   |   |   |   | 8,165 |   |   |   |   |   |
|                                                      |       | $                                                | 39,489,256 |   |   |   |   |   | $ | 20,013,208 |   |   |   |   |   |

 

F-53

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

Thetotal of time certificates of deposit and other time deposits issued andoutstanding were $20.9 billion and $10.4 billion at December 31, 2005 and2004, respectively. Substantially all of those deposits were interest bearing.The contractual maturities of those deposits as of December 31, 2005, areshown in the following table:

| **Year Ending December 31,**               | ** ** | ** **                                       | ** ** | **Time Deposit  Maturities** | ** ** | **Weighted  Average Rate** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| ** **                                                | ** ** | **(dollar amounts in thousands)** | ** ** |
| 2006                                                      |       | $                                                | 13,199,755 |                              |       | 3.96                            | %          |   |
| 2007                                                      |       | 2,700,990                                        |       |                              | 3.98       | %                               |       |
| 2008                                                      |       | 1,808,540                                        |       |                              | 4.05       | %                               |       |
| 2009                                                      |       | 1,431,790                                        |       |                              | 4.34       | %                               |       |
| 2010                                                      |       | 404,227                                          |       |                              | 4.55       | %                               |       |
| Thereafter                                                |       | 1,331,109                                        |       |                              | 5.10       | %                               |       |
|                                                      |       | 20,876,411                                       |       |                              | 4.08       | %                               |       |
| Basis adjustment  through application of hedge accounting |       | 18,381                                           |       |                              |       |                            |       |
|                                                      |       | $                                                | 20,894,792 |                              |       |                            |       |   |

 

The amount of time deposits with a denomination of$100,000 or more was approximately $13.8 billion and $6.6 billion at December 31,2005 and 2004, respectively.

Thecontractual maturities of time deposits with denominations of $100,000 or moreare shown in the following table:

| ** **                              | ** ** | **December 31, 2005**                  | ** ** |
|-----------------------------------------|------------|--------------------------------------------------|------------|
| ** **                              | ** ** | **Amount**                                       | ** ** | **Weighted  Average Rate** | ** ** |
| ** **                              | ** ** | **(dollar amounts in thousands)** | ** ** |
| Three months or  less                   |       | $                                                | 1,945,325  |   |   | 3.76 | % |   |
| After three  months through six months  |       | 2,224,977                                        |       |   | 3.85 | % |   |
| After six months  through twelve months |       | 4,126,864                                        |       |   | 4.18 | % |   |
| After twelve  months                    |       | 5,524,524                                        |       |   | 4.33 | % |   |
| Total                                   |       | $                                                | 13,821,690 |   |   | 4.13 | % |   |

 

There were no demanddeposits with overdrafts at December 31, 2005 and demand depositsoverdrafts totaled $0.1 million at December 31, 2004.

**Note16—Committed Reusable Purchase Facilities**

As of December 31,2005, the Company had in place a reusable $6.0 billion commitment from amulti-seller asset-backed commercial paper conduit to purchase conventional,conforming loans held for sale from the Company. This multi-seller commercialpaper conduit was established and is owned by several major, third-partyfinancial institutions. Using funds raised through the issuance of commercialpaper, these conduits purchase residential mortgage loans from the Company,either directly or through a trust or other vehicle. The Company has noobligation to repurchase loans from this conduit other than for breach ofrepresentations and warranties made by the Company in connection with the saleof the loans. The Company has no direct or indirect financial ownership orother interest in the conduit. Accordingly, 

F-54

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

transfersof loans to this facility are accounted for as sales. As consideration for thefacility, CHL’s annual commitment fee expense totaled $4.3 million for the yearended December 31, 2005.

**Note 17—Income Taxes**

Componentsof the provision for income taxes are as follows:

| ** **                  | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------|------------|---------------------------------------------|------------|
| ** **                  | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                  | ** ** | **(in thousands)**                     | ** ** |
| Current taxes:              |       |                                        |       |   |   |   |   |
| Federal                     |       | $                                           | 96,447     |   | $ | 761,318 |   | $ | 982,997 |   |
| State                       |       | 45,381                                      |       | 132,912 |   | 136,442 |   |
| Foreign                     |       | 8,755                                       |       | 11,881 |   | 9,194 |   |
|                        |       | 150,583                                     |       | 906,111 |   | 1,128,633 |   |
| Deferred taxes:             |       |                                        |       |   |   |   |   |
| Federal                     |       | 1,269,187                                   |       | 380,550 |   | 289,820 |   |
| State                       |       | 199,906                                     |       | 111,638 |   | 54,369 |   |
|                        |       | 1,469,093                                   |       | 492,188 |   | 344,189 |   |
| Provision for income  taxes |       | $                                           | 1,619,676  |   | $ | 1,398,299 |   | $ | 1,472,822 |   |

 

The following is a reconciliation of the statutory federalincome tax rate to the effective income tax rate as reflected in theconsolidated statements of earnings:

| ** **                                                   | ** ** | **Years Ended  December 31,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                   | ** ** | **2005**                                | ** ** | **2004** | ** ** | **2003** | ** ** |
| Statutory federal income  tax rate                           |       | 35.0                                    | %          | 35.0 | % | 35.0 | % |
| State income and  franchise taxes, net of federal tax effect |       | 3.8                                     | %          | 4.2 | % | 3.4 | % |
| Other                                                        |       | 0.2                                     | %          | (0.3 | )% | (0.1 | )% |
| Effective income tax rate                                    |       | 39.0                                    | %          | 38.9 | % | 38.3 | % |

 

TheCompany’s state income and franchise tax rate, net of federal tax effect,reflects the apportioned statutory rates of the various states in which theCompany does business and adjustments to current and deferred state taxpayables resulting from tax planning, tax examinations and routine activities.

The components of income taxes payable are as follows:

| ** **                     | ** ** | **December 31,**   | ** ** |
|--------------------------------|------------|-------------------------|------------|
| ** **                     | ** ** | **2005**                | ** ** | **2004** | ** ** |
| ** **                     | ** ** | **(in thousands)** | ** ** |
| Taxes currently receivable     |       | $                       | (288,748   | ) | $ | (105,917 | ) |
| Deferred income taxes  payable |       | 4,134,922               |       | 2,692,160 |   |
|                           |       | $                       | 3,846,174  |   | $ | 2,586,243 |   |

 

F-55

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

Thetax effects of temporary differences that gave rise to deferred income tax assetsand liabilities are presented below:

| ** **                                          | ** ** | **December 31,**   | ** ** |
|-----------------------------------------------------|------------|-------------------------|------------|
| ** **                                          | ** ** | **2005**                | ** ** | **2004** | ** ** |
| ** **                                          | ** ** | **(in thousands)** | ** ** |
| Deferred income tax assets:                         |       |                    |       |   |   |
| Employee benefits                                   |       | $                       | 197,756    |   | $ | 168,315 |   |
| Deferred servicing hedge  losses                    |       | 138,740                 |       | 26,835 |   |
| Reserve for losses                                  |       | 136,188                 |       | 86,503 |   |
| Investment in net  interest margin fixed-rate notes |       | —                  |       | 101,433 |   |
| Other                                               |       | 122,513                 |       | 183,484 |   |
| Gross deferred tax assets                           |       | 595,197                 |       | 566,570 |   |
| Valuation allowance                                 |       | (68,399                 | )          | (32,928 | ) |
|                                                |       | 526,798                 |       | 533,642 |   |
| Deferred income tax liabilities:                    |       |                    |       |   |   |
| Mortgage servicing  rights                          |       | 4,175,429               |       | 2,722,641 |   |
| Depreciation and  amortization                      |       | 173,653                 |       | 158,652 |   |
| Mortgage guaranty  insurance tax and loss bonds     |       | 129,180                 |       | 94,444 |   |
| Gain on  available-for-sale securities              |       | 66,008                  |       | 177,619 |   |
| Investment in net  interest margin fixed-rate notes |       | 33,936                  |       | — |   |
| Other                                               |       | 83,514                  |       | 72,446 |   |
|                                                |       | 4,661,720               |       | 3,225,802 |   |
| Deferred income taxes payable                       |       | $                       | 4,134,922  |   | $ | 2,692,160 |   |

 

Foreign pre-tax earningsapproximated $43.6 million in 2005, $44.9 million in 2004 and $28.2 million in2003.

Earnings of a foreignsubsidiary are subject to U.S. taxation when effectively repatriated. TheCompany is required to provide U.S. income taxes on the undistributed earningsof non-U.S. subsidiaries except to the extent such earnings are indefinitelyinvested outside the U.S. At December 31, 2005, $36.7 million ofaccumulated undistributed earnings on non-U.S. subsidiaries was indefinitelyinvested outside the U.S. It is not practicable at this time to determine theincome tax liability that would result upon repatriation of these earnings. Noincome tax is provided against other comprehensive income for the translationadjustments for such unremitted earnings of a subsidiary that are indefinitelyinvested outside of the U.S.

The Company elected torepatriate qualifying earnings under the American Jobs Creation Act (the“AJCA”) which was signed into law on October 22, 2004. The AJCA includes adeduction of 85% of certain foreign earnings that are repatriated, as definedin the AJCA. The tax resulting from the repatriated earnings was $3.7 million.

**Note 18—Shareholders’Equity**

In February 1988, theCompany’s Board of Directors declared a dividend distribution of one preferredstock purchase right (“Right”) for each outstanding share of the Company’scommon stock. As a result of stock splits and stock dividends, 0.399 of a Rightis presently associated with each outstanding share of the Company’s commonstock issued before the Distribution Date (as defined below). Each Right, whenexercisable, entitles the holder to purchase from the Company one one-hundredthof a share of Series A 

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

ParticipatingPreferred Stock, par value $.05 per share, of the Company (the “Series APreferred Stock”), at a price of $145, subject to adjustments in certain casesto prevent dilution.

The Rights are evidencedby the common stock certificates and are not exercisable or transferable, apartfrom the common stock, until the date (the “Distribution Date”) of the earlierof a public announcement that a person or group, without prior consent of theCompany, has acquired 20% or more of the common stock (“Acquiring Person”), or10 days (subject to extension by the Board of Directors) after the commencementof a tender offer made without the prior consent of the Company.

In the event a personbecomes an Acquiring Person, then each Right (other than those owned by theAcquiring Person) will entitle its holder to purchase, at the then currentexercise price of the Right, that number of shares of common stock, or theequivalent thereof, of the Company, which at the time of such transaction,would have a market value of two times the exercise price of the Right. TheBoard of Directors of the Company may delay the exercise of the Rights duringthe period in which they are exercisable only for Series A Preferred Stock(and not common stock).

In the event that, after aperson has become an Acquiring Person, the Company is acquired in a merger orother business combination, as defined for the purposes of the Rights, eachRight (other than those held by the Acquiring Person) will entitle its holderto purchase, at the then current exercise price of the Right, that number ofshares of common stock, or the equivalent thereof, of the other party (orpublicly-traded parent thereof) to such merger or business combination which atthe time of such transaction would have a market value of two times theexercise price of the Right. In November 2001, the Company extended thelife of the Rights to February 10, 2012.

The Company declared a 4-for-3,a 3-for-2 and a 2-for-1 split of the Company’s $0.05par value common stock, which were effected as stock dividends onDecember 18, 2003, April 12, 2004, and August 30, 2004,respectively. The effects of these stock splits are detailed in theconsolidated statement of changes in shareholders’ equity. All references inthe accompanying consolidated balance sheets, consolidated statements ofearnings, and notes to consolidated financial statements to the number ofcommon shares and earnings per share amounts have been restated to reflect thestock splits.

F-57

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

**Note 19—FairValue of Financial Instruments**

***Fair Value of Financial Instruments***

Thefollowing disclosure of the estimated fair value of financial instruments as ofDecember 31, 2005 and 2004, is made by the Company using available marketinformation and valuation methods which management believes are appropriate foreach instrument. In some cases considerable judgment is required to interpretmarket data to develop the estimates of fair value. Accordingly, the estimatespresented herein are not necessarily indicative of the amounts the Companycould realize in a current market exchange. The use of different marketassumptions and/or estimation methods may have a material effect on theestimated fair value amounts.

| ** **                                                                                   | ** ** | **December 31,**   | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                   | ** ** | **2005**                | ** ** | **2004** | ** ** |
| ** **                                                                                   | ** ** | **Carrying  Amount**    | ** ** | **Estimated  Fair Value** | ** ** | **Carrying  Amount** | ** ** | **Estimated  Fair Value** | ** ** |
| ** **                                                                                   | ** ** | **(in thousands)** | ** ** |
| Assets:                                                                                      |       |                    |       |   |   |   |   |   |   |
| Mortgage loans and  mortgage-backed securities held for sale                                 |       | $                       | 36,729,590 |   | $ | 36,928,812 |   | $ | 37,347,326 |   | $ | 37,565,424 |   |
| Trading securities owned                                                                     |       | 10,314,384              |       | 10,314,384 |   | 10,558,387 |   | 10,558,387 |   |
| Trading securities  pledged as collateral                                                    |       | 668,189                 |       | 668,189 |   | 1,303,007 |   | 1,303,007 |   |
| Securities purchased  under agreements to resell, federal funds sold and securities borrowed |       | 23,317,361              |       | 23,317,361 |   | 13,456,448 |   | 13,456,448 |   |
| Loans held for  investment                                                                   |       | 70,071,152              |       | 70,137,359 |   | 39,661,191 |   | 40,327,516 |   |
| Investments in other  financial instruments                                                  |       | 11,455,745              |       | 11,455,745 |   | 10,091,057 |   | 10,091,057 |   |
| Liabilities:                                                                                 |       |                    |       |   |   |   |   |   |   |
| Notes payable                                                                                |       | 76,187,886              |       | 76,026,306 |   | 66,613,671 |   | 66,004,492 |   |
| Securities sold under  agreements to repurchase and federal funds purchased        |       | 34,153,205              |       | 34,153,205 |   | 20,465,123 |   | 20,465,123 |   |
| Securities sold not yet  purchased                                                           |       | 2,285,171               |       | 2,285,171 |   | 2,912,620 |   | 2,912,620 |   |
| Deposit liabilities                                                                          |       | 39,489,256              |       | 39,499,509 |   | 20,013,208 |   | 19,973,181 |   |
| Corporate guarantees                                                                         |       | 62,487                  |       | 62,487 |   | 48,108 |   | 48,108 |   |
| Derivatives:                                                                                 |       |                    |       |   |   |   |   |   |   |
| Interest rate lock  commitments                                                              |       | 11,546                  |       | 11,546 |   | 19,304 |   | 19,304 |   |
| Loan purchase commitments                                                                    |       | (837                    | )          | (837 | ) | (780 | ) | (780 | ) |
| Interest rate floors                                                                         |       | —                  |       | — |   | 8,317 |   | 8,317 |   |
| Forward contracts on MBS                                                                     |       | (115,324                | )          | (115,324 | ) | (47,372 | ) | (47,372 | ) |
| Options on MBS                                                                               |       | 3,787                   |       | 3,787 |   | 8,460 |   | 8,460 |   |
| Options on interest rate  futures                                                            |       | 26,643                  |       | 26,643 |   | 64,616 |   | 64,616 |   |
| Swaptions                                                                                    |       | 677,742                 |       | 677,742 |   | 966,002 |   | 966,002 |   |
| Total return swaps                                                                           |       | (3,427                  | )          | (3,427 | ) | 205 |   | 205 |   |
| Credit default swaps                                                                         |       | (402                    | )          | (402 | ) | — |   | — |   |
| Interest rate swaps                                                                          |       | 129,720                 |       | 129,720 |   | 565,656 |   | 565,656 |   |
| Forward rate agreements                                                                      |       | (67,428                 | )          | (67,428 | ) | — |   | — |   |
| Off balance sheet  instruments:                                                              |       |                    |       |   |   |   |   |   |   |
| Commitments to extend  credit                                                                |       | —                  |       | 113,715 |   | — |   | 57,577 |   |
|                                                                                              |            |                         |            |  |  |  |  |  |  |  |  |  |  |

 

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

The fair value estimates as of December 31, 2005and 2004 were based on pertinent information that was available to managementas of the respective dates. Although management is not aware of any factorsthat would significantly affect the estimated fair value amounts, such amountshave not been comprehensively revalued for purposes of these financialstatements since those dates and, therefore, current estimates of fair valuemay differ significantly from the amounts presented herein.

The following describesthe methods used by the Company in estimating fair values:

*Mortgage Loans andMortgage-Backed Securities Held for Sale*

Fair value is estimatedusing the quoted market prices for securities backed by similar types of loansand dealer commitments to purchase loans on a servicing-retained basis.

*Trading Securities*

Fair value is generallybased on quoted market prices. If quoted market prices are not available, fairvalue is determined based on other relevant factors, including dealer pricequotations, prices available for similar instruments, and valuation pricingmodels intended to approximate the amounts that would be received from or paidto a third party in settlement of the contracts.

*SecuritiesPurchased Under Agreements to Resell, Federal Funds Sold and SecuritiesBorrowed*

These financialinstruments are recorded at accreted cost, which approximates fair value.

*Loans Held forInvestment*

Fair value is estimatedthrough the use of discounted cash flow models. Warehouse lending advances andre-warehoused FHA-insured and VA-guaranteed loans are recorded at realizablevalue, which approximates fair value.

*Investments inOther Financial Instruments:*

***Principal-Only Securities***

Fair value is estimatedthrough the use of a proprietary, “static” (single rate path) discounted cashflow model. The Company has incorporated mortgage prepayment assumptions in itsvaluation model that it believes other major market participants would considerin deriving the fair value of principal-only securities.

***Other Interests Retained in Securitization***

Fair value is estimatedthrough the use of proprietary, “static” (single rate path) discounted cashflow models. The Company has incorporated mortgage prepayment and credit lossassumptions in its valuation models that it believes other major marketparticipants would consider in deriving the fair value of its retainedinterests.

***Mortgage-Backed Securities***

Fair value is estimatedusing quoted market prices. If quoted market prices are not available, fairvalue is determined based on other relevant factors, including dealer pricequotations, prices available for 

F-59

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

similarinstruments, and valuation pricing models intended to approximate the amountsthat would be received from or paid to a third party in settlement of the securities.

***Collateralized Mortgage Obligations***

Fair value is estimatedusing quoted market prices. If quoted market prices are not available, fairvalue is determined based on other relevant factors, including dealer pricequotations, prices available for similar instruments, and valuation pricingmodels intended to approximate the amounts that would be received from or paidto a third party in settlement of the contracts.

***U.S. Treasury Securities and Obligations of U.S.Government-Sponsored Enterprises***

Fair value is estimatedusing quoted market prices.

***Other Financial Instruments***

Other financialinstruments are primarily composed of tax-exempt municipal bonds, asset-backedsecurities and foreign government bonds. Fair value is estimated using quotedmarket prices.

*Notes Payable*

Fair value is estimated bydiscounting remaining payments using applicable current market rates.

*Securities SoldUnder Agreements to Repurchase and Federal Funds Purchased*

Securities sold underagreements to repurchase are recorded at their accreted balances, and federalfunds purchased are carried at their face values. These amounts approximatefair value.

*Securities Sold NotYet Purchased*

Fair value is estimatedusing quoted market prices.

*Deposit Liabilities*

The fair value for thechecking account and money market liabilities is equal to the amount payable ondemand at the reporting date. (This value is also the carrying amount.) Thefair value of certificates of deposit is estimated with a discounted cash flowcalculation using interest rates currently being offered on similar accounts.

*CorporateGuarantees*

Fair value is estimatedthrough the use of a proprietary model: a loan-level frequency model estimatedwith survival analysis, and a loan-level severity model estimated with multipleleast square regressions. The modeling process incorporates the use of relevantrisk factors.

*Derivatives*

Fair value is defined as the amount that the Companywould receive or pay to terminate the contracts at the reporting date. Marketor dealer quotes are available for many derivatives; otherwise, pricing orvaluation models are applied using current market information to estimate fairvalue. The Company 

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

estimatesthe fair value of an IRLC based on the change in estimated fair value of theunderlying mortgage loan and the probability that the mortgage loan will fund withinthe terms of the IRLC. The change in fair value of the underlying mortgage loanis based upon quoted MBS prices. The change in fair value of the underlyingmortgage loan is measured from the date the IRLC is issued. At the time ofissuance the estimated fair value of an IRLC is zero. Subsequent to issuance,the value of an IRLC can be either positive or negative depending on the changein value of the underlying mortgage loan. Closing ratios derived using theCompany’s recent historical data are utilized to estimate the quantity ofmortgage loans that will fund within the terms of the IRLCs.

*Commitments toExtend Credit*

Thefair value of commitments to extend credit represents the fair value of loancommitments related to loans that will be originated for investment. The fairvalue is based on observed market prices for loans of a similar type, couponand maturity and the probability that the mortgage loan will fund within theterms of the loan commitment.

**Note 20—Employee Benefits**

***Stock Compensation Plans***

The Company has stock compensation plans (the “Plans”)that provide for the granting of both qualified and non-qualified stock options,stock appreciation rights and shares of restricted stock to employees anddirectors. Stock options are generally granted at the average market price ofthe Company’s common stock on the date of grant and are exercisable beginningone year from the date of grant and expire up to 10 years from the date ofgrant. Stock options generally vest over a period of three to four-and-a-halfyears.

Stockoption transactions under the Plans were as follows:

| ** **                               | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------|------------|---------------------------------------------|------------|
| ** **                               | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Number of Shares:                        |       |                                        |       |   |   |   |   |
| Outstanding options at beginning of year |       | 59,109,336                                  |       | 59,389,524 |   | 66,048,879 |   |
| Options granted                          |       | 13,431,370                                  |       | 12,005,516 |   | 16,982,634 |   |
| Options exercised                        |       | (13,068,735                                 | )          | (11,266,468 | ) | (22,209,633 | ) |
| Options expired or cancelled             |       | (1,047,569                                  | )          | (1,019,236 | ) | (1,432,356 | ) |
| Outstanding options at end of year       |       | 58,424,402                                  |       | 59,109,336 |   | 59,389,524 |   |
| Weighted-Average  Exercise Price:        |       |                                        |       |   |   |   |   |
| Outstanding options at beginning of year |       | $                                           | 15.35      |   | $ | 10.83 |   | $ | 8.63 |   |
| Options granted                          |       | 32.64                                       |       | 31.85 |   | 15.71 |   |
| Options exercised                        |       | 11.71                                       |       | 9.05 |   | 7.98 |   |
| Options expired or canceled              |       | 19.89                                       |       | 15.70 |   | 11.22 |   |
| Outstanding options at end of year       |       | $                                           | 20.06      |   | $ | 15.35 |   | $ | 10.83 |   |
| Options  exercisable at end of year      |       | 40,902,898                                  |       | 27,230,988 |   | 25,880,463 |   |
| Options available for  future grant      |       | 23,113,125                                  |       | 34,890,263 |   | 23,183,004 |   |

 

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

Outstandingstock options under the Plans as of December 31, 2005 are summarizedbelow:

| ** **                     | ** ** | **Outstanding Options** | ** ** | **Exercisable Options**                                     | ** ** |
|--------------------------------|------------|------------------------------|------------|------------------------------------------------------------------|------------|
| **Exercise  Price Range** | ** ** | ** **                   | ** ** | **Weighted  Average  Remaining  Contractual  Life (Years)** | ** ** | **Number** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $3.90-$7.79                    |       |                         | 0.8        |                                                             |       | 3,087,866 |   |   | $ | 6.06 |   |   | 3,087,866 |   |   | $ | 6.06 |   |   |
| $7.80-$11.69                   |       |                         | 5.4        |                                                             |       | 16,798,086 |   |   | 10.12 |   |   | 15,344,649 |   |   | 10.14 |   |   |
| $11.70-$15.58                  |       |                         | 7.2        |                                                             |       | 11,682,362 |   |   | 14.11 |   |   | 5,398,347 |   |   | 14.14 |   |   |
| $15.59-$19.48                  |       |                         | 7.4        |                                                             |       | 3,606,211 |   |   | 18.97 |   |   | 1,700,185 |   |   | 18.96 |   |   |
| $23.37-$27.27                  |       |                         | 7.9        |                                                             |       | 75,752 |   |   | 24.96 |   |   | 21,001 |   |   | 25.04 |   |   |
| $27.28-$31.16                  |       |                         | 5.0        |                                                             |       | 21,500 |   |   | 29.65 |   |   | 6,492 |   |   | 29.60 |   |   |
| $31.17-$35.06                  |       |                         | 4.4        |                                                             |       | 23,031,683 |   |   | 32.26 |   |   | 15,336,605 |   |   | 32.44 |   |   |
| $35.07-$38.96                  |       |                         | 4.3        |                                                             |       | 120,942 |   |   | 37.35 |   |   | 7,753 |   |   | 35.95 |   |   |
|                           |       |                         |       |                                                             |       | 58,424,402 |   |   | $ | 20.06 |   |   | 40,902,898 |   |   | $ | 19.10 |   |   |
|                                |            |                              |            |                                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Restricted stock isawarded to employees and directors at no cost to them and generally vests overa one- or three-year period. Unvested restricted shares may not be sold by thegrantee. However, share grantees are entitled to vote on shareholder proposalsand receive dividends on their unvested shares. The Company granted 355,496,286,483 and 621,744 shares in the years ended December 31, 2005, 2004 and2003, respectively. The weighted-average grant date fair value of these awardswas $33.87, $31.85 and $15.21, respectively. The Company recorded compensationexpense relating to restricted stock totaling $5.7 million, $5.4 million and$2.2 million for the years ended December 31, 2005, 2004 and 2003,respectively. The balance of unamortized restricted stock awards was $12.5million and $9.6 million at December 31, 2005 and 2004, respectively.

***Pension Plan***

The Company has a defined benefit pension plan (the “PensionPlan”) covering substantially all of its employees. The Company’s policy is tocontribute the amount actuarially determined to be necessary to pay thebenefits under the Pension Plan, and in no event to pay less than the amountnecessary to meet the minimum funding standards of ERISA. In the year ended December 31,2005, the Company made the maximum tax-deductible contribution to the Plan.

In the year ended December 31, 2005, the Companychanged certain of its actuarial assumptions. Specifically, the discount ratewas lowered from 5.75% to 5.50% to reflect changes in the bond rate environment.The decrease in discount rate resulted in an increase of $13.0 million to theaccumulated benefit obligation at December 31, 2005.

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

Thefollowing table sets forth the Pension Plan’s funded status and amountsrecognized in the Company’s financial statements:

| ** **                                     | ** ** | **December 31,**   | ** ** |
|------------------------------------------------|------------|-------------------------|------------|
| ** **                                     | ** ** | **2005**                | ** ** | **2004** | ** ** |
| ** **                                     | ** ** | **(in thousands)** | ** ** |
| Change in benefit  obligation                  |       |                    |       |   |   |
| Benefit obligation at beginning of year        |       | $                       | 271,796    |   | $ | 218,427 |   |
| Service cost                                   |       | 61,731                  |       | 45,756 |   |
| Interest cost                                  |       | 15,795                  |       | 11,925 |   |
| Actuarial loss or (gain)                       |       | 3,335                   |       | (19,698 | ) |
| Benefits paid                                  |       | (1,258                  | )          | (352 | ) |
| Change in discount rate                        |       | 21,951                  |       | 15,738 |   |
| Benefit obligation at end of year              |       | $                       | 373,350    |   | $ | 271,796 |   |
| Change in plan assets                          |       |                    |       |   |   |
| Fair value of plan assets at beginning of year |       | $                       | 157,050    |   | $ | 97,359 |   |
| Actual return on plan assets                   |       | 11,016                  |       | 13,124 |   |
| Employer contribution                          |       | 53,743                  |       | 46,919 |   |
| Benefits paid                                  |       | (1,258                  | )          | (352 | ) |
| Fair value of plan assets at end of year       |       | $                       | 220,551    |   | $ | 157,050 |   |
| Funded status at  end of year                  |       | $                       | (152,799   | ) | $ | (114,746 | ) |
| Unrecognized net  actuarial loss               |       | 102,150                 |       | 81,138 |   |
| Unrecognized  prior service cost               |       | 3,360                   |       | 3,708 |   |
| Net amount  recognized                         |       | $                       | (47,289    | ) | $ | (29,900 | ) |

 

The accumulated benefit obligation for the Pension Planwas $239 million and $168 million at December 31, 2005 and 2004.

Thefollowing table sets forth the components of net periodic benefit cost:

| ** **                          | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------------|------------|
| ** **                          | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                          | ** ** | **(In thousands)**                     | ** ** |
| Service cost                        |       | $                                           | 61,731     |   | $ | 45,756 |   | $ | 32,250 |   |
| Interest cost                       |       | 15,795                                      |       | 11,925 |   | 9,935 |   |
| Expected return  on plan assets     |       | (12,074                                     | )          | (7,770 | ) | (4,810 | ) |
| Amortization of  prior service cost |       | 348                                         |       | 349 |   | 349 |   |
| Recognized net  actuarial loss      |       | 5,332                                       |       | 5,262 |   | 4,169 |   |
| Net periodic  benefit cost          |       | $                                           | 71,132     |   | $ | 55,522 |   | $ | 41,893 |   |

 

Theweighted-average assumptions used in calculating the benefit obligations wereas follows:

| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Discount rate                  |       | 5.50                  | %          | 5.75 | % |
| Rate of compensation  increase |       | 5.00                  | %          | 5.00 | % |

 

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

Theweighted-average assumptions used in calculating the net periodic benefit costswere as follows:

| ** **                                | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Discount rate                             |       | 5.75     | %          | 6.00     | %          | 6.50     | %          |
| Expected  long-term return on plan assets |       | 7.00     | %          | 7.00     | %          | 7.50     | %          |
| Rate of compensation increase             |       | 5.00     | %          | 5.00     | %          | 5.00     | %          |

 

Pension expense for the years ended December 31,2005, 2004 and 2003 was $71.1 million, $55.5 million and $41.9 million,respectively. The Company makes contributions to the Pension Plan in amountsthat are deductible in accordance with federal income tax regulations.

The Company reviews historical rates of return forequity and fixed-income securities, as well as current economic conditions, todetermine the expected long-term rate of return on Plan assets. The PensionPlan’s total portfolio is currently estimated to return 7.0% over the longterm. The assumed rate of return is based on historical as well as forecastedreturns for the asset categories into which the Pension Plan’s assets will beinvested, given the targeted asset allocation levels. Consideration is given todiversification and periodic rebalancing of the portfolio based on prevailingmarket conditions.

TheCompany’s Pension Plan weighted-average asset allocations by asset category areas follows:

| ** **                       | ** ** | **Target**     | ** ** | **Plan Assets at** | ** ** |
|----------------------------------|------------|----------------|------------|------------------------------|------------|
| ** **                       | ** ** | **Allocation** | ** ** | **December 31,**        | ** ** |
| **Asset Category**          | ** ** | ** **     | ** ** | **2005**                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| Domestic equity  securities      |       | 55%-65%        |       |                         | 50         | % |   |   | 61 | % |   |
| International  equity securities |       | 5%-15%         |       |                         | 13         | % |   |   | 11 | % |   |
| Debt securities                  |       | 25%-35%        |       |                         | 0          | % |   |   | 28 | % |   |
| Other (Cash)                     |       | 0%-5%          |       |                         | 37         | % |   |   | 0 | % |   |
| Total                            |       |           |       |                         | 100        | % |   |   | 100 | % |   |
|                                  |            |                |            |                              |            |  |  |  |  |  |  |  |  |

 

At December 31, 2005, the Pension Plan assets were inthe process of being reallocated. Following this reallocation, the Pension Plan’sassets were allocated as of January 31, 2006, to 50% domestic equitysecurities, 26% international equity securities, 23% debt securities, and 1%other investments.

The Company’s pension trust assets are invested with along-term focus to achieve a return on investment that is based on levels ofliquidity and investment risk that management believes are prudent andreasonable. The investment portfolio contains a diversified blend of equity andfixed-income investments. The equity investments are diversified across U.S.and non-U.S. equities. U.S. equity securities are diversified among growthstrategies, as well as small and large capitalization strategies. Equitysecurities do not include any Company stock. The portfolio’s asset mix isreviewed regularly, and the portfolio is rebalanced based on existing marketconditions. Investment risk is measured and monitored on a regular basisthrough quarterly portfolio reviews, annual liability measurements and periodicasset/liability analyses.

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

Thefollowing benefit payments, which reflect expected future service, asappropriate, are expected to be paid:

| **Year Ending December 31,** | ** ** | ** **              | ** ** | **Pension Benefits** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|---------------------------|------------|
| ** **                                  | ** ** | **(in thousands)** | ** ** |
| 2006                                        |       |                    | $          | 1,386                     |       |   |
| 2007                                        |       |                    | 1,921      |                      |       |
| 2008                                        |       |                    | 2,622      |                      |       |
| 2009                                        |       |                    | 3,580      |                      |       |
| 2010                                        |       |                    | 4,694      |                      |       |
| 2011-2015                                   |       |                    | 57,020     |                      |       |
|                                        |       |                    | $          | 71,223                    |       |   |

 

The Company closed thepension plan to new employees effective January 1, 2006.

***Defined Contribution Plan***

The Company has a definedcontribution plan (“401(k) Plan”) covering all full-time employees of theCompany who are age 21 or older. Participants may contribute up to 40% ofpre-tax annual compensation, as defined in the plan agreement. Participants mayalso contribute, at the discretion of the plan administrator, amountsrepresenting distributions from other qualified defined benefit or contributionplans. The Company makes a discretionary matching contribution equal to 50% ofthe participant contributions up to a maximum contribution of 6% of theparticipants’ base compensation, as defined in the plan agreement. In the yearended December 31, 2005, the 401(k) Plan was amended to permit the Company tomake an additional contribution to employees hired after December 31, 2005. The401(k) Plan is subject to the provisions of ERISA. The Company recorded$34.2 million, $27.4 million, and $21.0 million in expense for matchingcontributions for the years ended December 31, 2005, 2004 and 2003,respectively.

***Other Employee Benefit Plans***

The Company has various non-qualified deferredcompensation plans for directors and selected employees. The liability for thedeferred compensation plans was $305.0 million and $224.1 million at December 31,2005 and 2004, respectively.

The Company has a non-qualified defined benefitpension plan for selected executives along with a separate agreement that willprovide additional benefits to the Company’s chief executive officer. Collectively,this non-qualified defined benefit pension plan and the separate agreement arereferred to as the “SERP”. The actuarially calculated accumulated benefitobligation for the SERP was $34.9 million and $30.1 million at December 31,2005 and 2004, respectively.

These plans (excluding the directors deferredcompensation plan) are informally funded. The Company has purchased trust-ownedlife insurance and mutual funds and set those assets aside in rabbi trusts toassist the Company in meeting the obligations of these plans. The cashsurrender values of the trust-owned life insurance related to these plans areincluded in other assets along with other policies owned by the Company andtotaled $224.9 million and $184.6 million at December 31, 2005 and 2004,respectively. The Company has purchased mutual funds totaling $50.3 million and$41.3 million at December 31, 2005 and 2004, respectively.

F-65

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

**Note21—Regulatory and Agency Capital Requirements**

The Company is a bank holding company as a result ofthe acquisition of Countrywide Bank (the “Bank”) (formerly Treasury Bank). Boththe Company and the Bank are subject to regulatory capital requirements imposedby the Board of Governors of the Federal Reserve System (the “Federal Reserve”).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 Federal Reserve.

Regulatory capital is assessed for adequacy by threemeasures: Tier 1 Leverage Capital, Tier 1 Risk-Based Capital and TotalRisk-Based Capital. Tier 1 Leverage Capital includes common shareholders’equity; preferred stock and capital securities that meet certain guidelinesdetailed in the capital regulations, less goodwill; the portion of MSRs notincludable in regulatory capital (MSRs includable in regulatory capital arelimited to the lesser of the carrying value of MSRs, 100% of Tier 1 capital, or90% of the fair value of the MSRs, net of associated deferred taxes) and otheradjustments. Tier 1 Leverage Capital is measured with respect to average assetsduring the quarter. The Company and the Bank are required to have a Tier 1Leverage Capital ratio of 4.0% to be considered adequately capitalized and 5.0%to be considered well capitalized.

The Tier 1 Risk-Based Capital ratio is calculated as apercent of risk-weighted assets at the end of the quarter. The Company and theBank are required to have a Tier 1 Risk-Based Capital ratio of 4.0% to beconsidered adequately capitalized and 6.0% to be considered well capitalized.

Total Risk-Based Capital includes preferred stock andcapital securities excluded from Tier 1 Capital, mandatory convertible debt,and subordinated debt that meets certain regulatory criteria. The TotalRisk-Based Capital ratio is calculated as a percent of risk-weighted assets atthe end of the quarter. The Company and the Bank are required to have a TotalRisk-Based Capital ratio of 8.0% to be considered adequately capitalized and10.0% to be considered well capitalized.

The Bank is subject to federal and state laws limitingthe payment of dividends. Under the Federal Deposit Insurance Act, anFDIC-insured institution may not pay dividends while it is undercapitalized orif payment would cause it to become undercapitalized. The OCC also generallyprohibits the declaration of a dividend out of the capital and surplus of abank. The amount of dividends that the Bank may distribute in a calendar yearwithout OCC approval is limited to the sum of Bank’s net income for thecalendar year-to date plus the net income of the preceding two years, allreduced by the dividends declared in the period. For 2006, the Bank can declaredividends totaling $1.2 billion plus its net profits for 2006 up to the date ofdividend declaration. As of December 31, 2005, the Bank’s retainedearnings unavailable for dividends totaled $31.4 million.

F-66

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

At December 31,2005 and 2004, the Company and the Bank’s regulatory capital ratios and amountsand minimum required capital ratios for the Company and the Bank to maintain a “wellcapitalized” status were as follows:

| ** **               | ** ** | **December 31, 2005**                  | ** ** |
|--------------------------|------------|--------------------------------------------------|------------|
| ** **               | ** ** | **Minimum**                                      | ** ** | **Countrywide Financial  Corporation** | ** ** | **Countrywide Bank** | ** ** |
| ** **               | ** ** | **Required(1)**                                  | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** |
| ** **               | ** ** | **(dollar amounts in thousands)** | ** ** |
| Tier 1 Leverage  Capital |       |                                             | 5.0        | % |   |   | 6.3 | % |   | $ | 12,564,162 |   |   | 7.3 | % |   | $ | 5,343,675 |   |
| Risk-Based Capital:      |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Tier 1                   |       |                                             | 6.0        | % |   |   | 10.7 | % |   | $ | 12,564,162 |   |   | 12.2 | % |   | $ | 5,343,675 |   |
| Total                    |       |                                             | 10.0       | % |   |   | 11.7 | % |   | $ | 13,760,176 |   |   | 12.5 | % |   | $ | 5,457,019 |   |

----

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

| ** **               | ** ** | **December 31, 2004**                  | ** ** |
|--------------------------|------------|--------------------------------------------------|------------|
| ** **               | ** ** | **Minimum**                                      | ** ** | **Countrywide Financial  Corporation** | ** ** | **Countrywide Bank** | ** ** |
| ** **               | ** ** | **Required(1)**                                  | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** |
| ** **               | ** ** | **(dollar amounts in thousands)** | ** ** |
| Tier 1 Leverage  Capital |       |                                             | 5.0        | % |   |   | 7.9 | % |   | $ | 10,332,383 |   |   | 7.8 | % |   | $ | 2,939,144 |   |
| Risk-Based  Capital:     |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Tier 1                   |       |                                             | 6.0        | % |   |   | 11.1 | % |   | $ | 10,332,383 |   |   | 11.8 | % |   | $ | 2,939,144 |   |
| Total                    |       |                                             | 10.0       | % |   |   | 11.7 | % |   | $ | 10,928,223 |   |   | 12.0 | % |   | $ | 2,988,116 |   |

----

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

The Company and CHL are required to maintain specifiedlevels of shareholders’ equity to remain a seller/servicer in good standing byFannie Mae, Freddie Mac, Ginnie Mae and the U.S. Department of Housing andUrban Development. Such equity requirements generally are tied to the size ofCHL’s servicing portfolio. At December 31, 2005, the Company and CHL’sequity requirements for these agencies ranged up to $887 million. The Companyhad agency capital of $11.8 billion and CHL had agency capital ranging from $0.2billion to $3.8 billion at December 31, 2005.

CSC is subject to theSecurities and Exchange Commission Uniform Net Capital Rule (SEC Rule 15c3-1),which requires the maintenance of minimum net capital. CSC has elected to usethe alternative method, permitted by the rule, which requires that the Companymaintain minimum net capital, as defined in rule, equal to the greater of$250,000 or 2% of aggregate debit balances arising from customer transactions,as defined in the rule. CSC’s net capital was $472.9 million and $474.0 millionand net capital in excess of the minimum required was $447.3 million and $456.4million at December 31, 2005 and 2004, respectively. The rule prohibitsCSC from withdrawing equity capital or making distributions to CountrywideFinancial Corporation if resulting net capital would be less than 5% ofaggregate debits arising from customer-related receivables as computed inaccordance with the rule.

F-67

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

**Note22—Supplemental Cash Flow Information**

Thefollowing table presents supplemental cash flow information:

| ** **                                                                                                                   | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                   | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                                   | ** ** | **(in thousands)**                     | ** ** |
| Cash used to pay  interest                                                                                                   |       | $                                           | 5,385,295  |   | $ | 2,546,532 |   | $ | 1,940,707 |   |
| Cash used to pay  income taxes                                                                                               |       | 217,617                                     |       | 1,010,143 |   | 985,959 |   |
| Non-cash investing  activities:                                                                                              |       |                                        |       |   |   |   |   |
| Unrealized loss on available-for-sale securities,  foreign currency translation adjustments and cash flow hedges, net of tax |       | (57,829                                     | )          | (45,583 | ) | (22,273 | ) |
| Securitization interest-only strips                                                                                          |       | 54,533                                      |       | 56,038 |   | 1,263,890 |   |
| Retention of MSRs in loan sales                                                                                              |       | 5,533,505                                   |       | 3,757,182 |   | 6,088,962 |   |
| Retention of other financial instruments in  securitization transactions                                                     |       | 1,919,623                                   |       | 5,133,888 |   | 1,071,825 |   |
| Exchange of loans  for mortgage-backed securities                                                                            |       | 616,723                                     |       | — |   | — |   |
| Non-cash financing  activities:                                                                                              |       |                                        |       |   |   |   |   |
| (Decrease) increase in Mortgage Loans Held in SPEs  and asset-backed secured financings                                 |       | (10,563,299                                 | )          | 10,563,299 |   | — |   |
| Issuance of common stock for conversion of  convertible debt                                                            |       | 10,679                                      |       | 7,935 |   | — |   |
| Tax effect of interest on conversion of convertible  debt                                                                    |       | 5,532                                       |       | 37,787 |   | — |   |
| Exchange of LYONs  convertible debentures for convertible securities                                                         |       | —                                      |       | 637,177 |   | — |   |
|                                                                                                                              |            |                                             |            |  |  |  |  |  |  |  |

 

F-68

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

**Note 23—Other Comprehensive Income**

Thecomponents of other comprehensive income, net of related tax effects were:

| ** **                                                                         | ** ** | **Before Tax**     | ** ** | **Tax Effect** | ** ** | **Net of Tax** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------|------------|---------------------|------------|--------------------------|------------|
| ** **                                                                         | ** ** | **(in thousands)** | ** ** |
| ***2005***                                                                         |       |                    |       |                |       |                     |       |
| Available-for-sale  securities:                                                    |       |                    |       |                |       |                     |       |
| Net unrealized gains arising during the year                                       |       | $                       | 328,444    |                | $          | (114,364                 | )          | $ | 214,080 |   |
| Reclassification of net gains included in net income                               |       | (358,937                | )          | 124,982             |       | (233,955                 | )          |
| Net unrealized losses arising during the year, net  of reclassification adjustment |       | (30,493                 | )          | 10,618              |       | (19,875                  | )          |
| Net unrealized losses  from cash flow hedging instruments                          |       | (26,350                 | )          | 10,270              |       | (16,080                  | )          |
| Foreign currency  translation adjustments                                          |       | (21,874                 | )          | —              |       | (21,874                  | )          |
| Other comprehensive loss                                                           |       | $                       | (78,717    | )                   | $          | 20,888                   |       | $ | (57,829 | ) |
| ***2004***                                                                         |       |                    |       |                |       |                     |       |
| Available-for-sale  securities:                                                    |       |                    |       |                |       |                     |       |
| Net unrealized losses arising during the year                                      |       | $                       | (269,311   | )                   | $          | 102,116                  |       | $ | (167,195 | ) |
| Reclassification of net losses included in net  income                             |       | 127,118                 |       | (48,200             | )          | 78,918                   |       |
| Net unrealized losses arising during the year, net  of reclassification adjustment |       | (142,193                | )          | 53,916              |       | (88,277                  | )          |
| Net unrealized  gains from cash flow hedging instruments                           |       | 47,730                  |       | (18,629             | )          | 29,101                   |       |
| Foreign currency  translation adjustments                                          |       | 13,593                  |       | —              |       | 13,593                   |       |
| Other comprehensive loss                                                           |       | $                       | (80,870    | )                   | $          | 35,287                   |       | $ | (45,583 | ) |
| ***2003***                                                                         |       |                    |       |                |       |                     |       |
| Available-for-sale  securities:                                                    |       |                    |       |                |       |                     |       |
| Net unrealized losses arising during the year                                      |       | $                       | (159,605   | )                   | $          | 57,105                   |       | $ | (102,500 | ) |
| Reclassification of net losses included in net  income                             |       | 76,091                  |       | (27,225             | )          | 48,866                   |       |
| Net unrealized losses arising during the year, net  of reclassification adjustment |       | (83,514                 | )          | 29,880              |       | (53,634                  | )          |
| Net unrealized  gains from cash flow hedging instruments                           |       | 25,667                  |       | (9,579              | )          | 16,088                   |       |
| Foreign currency  translation adjustments                                          |       | 15,273                  |       | —              |       | 15,273                   |       |
| Other  comprehensive loss                                                          |       | $                       | (42,574    | )                   | $          | 20,301                   |       | $ | (22,273 | ) |

 

F-69

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

Accumulatedother comprehensive income balances were:

| ** **                         | ** ** | **Net Unrealized Gains  (Losses) on  Available-for-Sale  Securities** | ** ** | **Net Unrealized Gains  (Losses) from Cash  Flow Hedging  Instruments** | ** ** | **Foreign  Currency  Translation  Adjustments** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** |
|------------------------------------|------------|--------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                         | ** ** | **(in thousands)**                                                              | ** ** |
| Balance at  December 31, 2002 |       |                                                                                 | $          | 202,600                                                                                          |       |                                            |       | $                                             | (19,123    | ) |   |   | $ | 3,322 |   |   |   | $ | 186,799 |   |   |
| Net change                         |       |                                                                                 | (53,634    | )                                                                                                |       |                                            | 16,088     |                                          |       |   | 15,273 |   |   |   | (22,273 | ) |   |
| Balance at  December 31, 2003 |       |                                                                                 | 148,966    |                                                                                             |       |                                            | (3,035     | )                                             |       |   | 18,595 |   |   |   | 164,526 |   |   |
| Net change                         |       |                                                                                 | (88,277    | )                                                                                                |       |                                            | 29,101     |                                          |       |   | 13,593 |   |   |   | (45,583 | ) |   |
| Balance at  December 31, 2004 |       |                                                                                 | 60,689     |                                                                                             |       |                                            | 26,066     |                                          |       |   | 32,188 |   |   |   | 118,943 |   |   |
| Net change                         |       |                                                                                 | (19,875    | )                                                                                                |       |                                            | (16,080    | )                                             |       |   | (21,874 | ) |   |   | (57,829 | ) |   |
| Balance at  December 31, 2005 |       |                                                                                 | $          | 40,814                                                                                           |       |                                            |       | $                                             | 9,986      |   |   |   | $ | 10,314 |   |   |   | $ | 61,114 |   |   |

 

**Note 24—EarningsPer Share**

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 sharecalculations for the periods indicated:

| ** **                                | ** ** | **Years Ended December 31,**                        | ** ** |
|-------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                | ** ** | **2005**                                                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                | ** ** | **Net  Earnings**                                                  | ** ** | **Shares** | ** ** | **Per-Share  Amount** | ** ** | **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 |       | $                                                                  | 2,528,090  |   | 590,982 |   |   | $ | 4.28 |   |   | $ | 2,197,574 |   | 563,981 |   |   | $ | 3.90 |   |   | $ | 2,372,950 |   | 533,920 |   |   | $ | 4.44 |   |   |
| Effect of dilutive  securities:           |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Convertible debentures                    |       | 274                                                                |       | 1,685 |   |   |   |   |   | 2,645 |   | 14,102 |   |   |   |   |   | 886 |   | 3,936 |   |   |   |   |   |
| Dilutive stock  options                   |       | —                                                             |       | 23,206 |   |   |   |   |   | — |   | 27,639 |   |   |   |   |   | — |   | 29,396 |   |   |   |   |   |
| Diluted earnings  and earnings per share  |       | $                                                                  | 2,528,364  |   | 615,873 |   |   | $ | 4.11 |   |   | $ | 2,200,219 |   | 605,722 |   |   | $ | 3.63 |   |   | $ | 2,373,836 |   | 567,252 |   |   | $ | 4.18 |   |   |

 

During the years endedDecember 31, 2005, 2004 and 2003, stock options to purchase 0.1 millionshares, 0.1 million shares and 4.3 million shares, respectively, wereoutstanding but not included in the computation of diluted earnings per sharebecause they were anti-dilutive.

**Note 25—Estimated Hurricane Losses**

During the years ended December 31, 2005, 2004and 2003, the Company incurred losses across several of its business units dueto hurricanes that struck the Gulf Coast states. Hurricane Katrina of 2005 isnotable because, unlike other hurricanes, it caused losses as a result offlooding that many borrowers had not, and would not generally be expected tobe, insured against. Hurricane Katrina was responsible for most of thehurricane losses during the year ended December 31, 2005. The Company hasincurred losses 

F-70

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

related to HurricaneKatrina in its loans held for investment and Mortgage Banking activities inaddition to the losses insured by its Insurance Segment. The Company’sInsurance Segment also incurred hurricane losses in 2004 and 2003.

Theestimated hurricane losses are summarized in the following table:

| ** **                                   | ** ** | ** **                                                                                                 | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------|------------|------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **Income Statement Line**          | ** ** | ** **                                                                                                 | ** ** | **Description**                             | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                   | ** ** | ** **                                                                                                 | ** ** | **(in thousands)**                     | ** ** |
| Insurance claims  expense                    |       | Estimated losses  insured by   Balboa Insurance Group                                                      |       |                                        | $          | 85,206 |   |   | $ | 67,887 |   | $ | 4,104 |   |
| Gain on sale of  loans and securities        |       | Impairment of  loans held for sale                                                                         |       |                                        | 15,853     |   |   | — |   | — |   |
| Provision for loan  losses                   |       | Estimated credit  losses relating to loans held for investment                                             |       |                                        | 7,375      |   |   | — |   | — |   |
| Recovery  (impairment) of retained interests |       | Impairment of  MSRs and other retained interests                                                           |       |                                        | 22,077     |   |   | — |   | — |   |
| Other operating  expenses                    |       | Provision for  losses related to servicing advances for loans insured by the FHA and  guaranteed by the VA |       |                                        | 6,981      |   |   | — |   | — |   |
| Total estimated  hurricane losses            |       |                                                                                                       |       |                                        | $          | 137,492 |   |   | $ | 67,887 |   | $ | 4,104 |   |
|                                              |            |                                                                                                            |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Management continues toassess the impact of the hurricanes on the Company’s businesses, assets andoperations. While these estimates are based on the best available information,they could ultimately be affected by many factors, including, but not limitedto, the short-term and long-term impact on the economies of the affectedcommunities; the conduct of borrowers in the affected areas; the actions ofvarious third parties, including government agencies and government-sponsored enterprisesthat support housing, insurance companies, lenders and mortgage insurance companies;the apportionment of liability among insurers; the availability of catastrophicreinsurance proceeds; and factors impacting property values in the affectedareas, including any environmental factors such as the presence of toxicchemicals.

**Note26—Segments and Related Information**

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

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

The Loan Production Sector originates prime andnonprime loans through a variety of channels on a national scale. The LoanProduction Sector is comprised of four lending divisions of Countrywide HomeLoans and also includes the mortgage banking activities of Countrywide Bank.The four production divisions are: Consumer Markets Lending Division, the FullSpectrum Lending Division, the Wholesale Lending Division and the CorrespondentLending Division. The Consumer Markets and Full Spectrum Lending Divisionssource mortgage loans directly from consumers through the Company’s retailbranch network and call centers, as well as through real estate agents andhomebuilders. The Wholesale Lending 

F-71

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

Division sources mortgageloans primarily from mortgage brokers. The Correspondent Lending Divisionacquires mortgage loans from other mortgage lenders, including financialinstitutions.

The Loan Servicing Sector includes investments in MSRsand other retained interests, as well as the Company’s loan servicingoperations and subservicing for other domestic financial institutions. The LoanClosing Services Sector is comprised of the LandSafe companies, which providecredit reports, appraisals, title reports and flood determinations to theCompany’s Loan Production Sector, as well as to third parties.

The Banking Segment’s operations includes theinvestment and fee-based activities of Countrywide Bank together with theactivities of Countrywide Warehouse Lending. Countrywide Bank invests primarilyin mortgage loans sourced from the Loan Production Sector. CountrywideWarehouse Lending provides third-party mortgage lenders with temporaryfinancing secured by mortgage loans.

The Capital Markets Segment primarily includes theoperations of Countrywide Securities Corporation, a registered broker-dealerspecializing in the mortgage securities market. In addition, it includes theoperations of Countrywide Asset Management Corporation, Countrywide CommercialReal Estate Finance Inc., Countrywide Servicing Exchange and CCM InternationalLtd.

The Insurance Segment includes Balboa Life andCasualty Group, a national provider of property, life and liability insurance;Balboa Reinsurance Company, a primary mortgage reinsurance company; andCountrywide Insurance Services, Inc., a national insurance agency offeringa 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; UKValuation Limited, a provider of property valuationservices in the UK; Countrywide International Technology Holdings Limited, alicensor of loan origination processing, servicing and residential real estatevalue assessment technology; and CFC India Private Limited, a provider of callcenter, data processing and information technology related services.

In general, intercompany transactions are recorded onan arms-length basis. However, the fulfillment fees paid by Countrywide Bank tothe Production Sector for origination costs incurred on mortgage loans fundedby Countrywide Bank are determined on an incremental cost basis, which may beless than the fees that Countrywide Bank would pay to a third party.

F-72

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

Includedin the tables below labeled “Other” are the holding company activities andcertain reclassifications to conform management reporting to the consolidatedfinancial statements:

| ** **              | ** ** | **Year Ended December 31, 2005** | ** ** |
|-------------------------|------------|------------------------------------------------------|------------|
| ** **              | ** ** | **Mortgage Banking**                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **              | ** ** | **Loan  Production**                                 | ** ** | **Loan  Servicing** | ** ** | **Closing  Services** | ** ** | **Total** | ** ** | **Banking** | ** ** | **Capital  Markets** | ** ** | **Insurance** | ** ** | **Global  Operations** | ** ** | **Other** | ** ** | **Total  Consolidated** | ** ** |
| ** **              | ** ** | **(in thousands)**                              | ** ** |
| Revenues:               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| External                |       | $                                                    | 5,171,282  |   | $ | 1,004,606 |   | $ | 277,646 |   | $ | 6,453,534 |   | $ | 1,796,039 |   | $ | 611,009 |   | $ | 1,059,541 |   |   | $ | 234,042 |   |   | $ | (137,457 | ) | $ | 10,016,708 |   |
| Intersegment            |       | (31,888                                              | )          | 420,062 |   | — |   | 388,174 |   | (335,173 | ) | 187,242 |   | — |   |   | — |   |   | (240,243 | ) | — |   |
| Total Revenues          |       | $                                                    | 5,139,394  |   | $ | 1,424,668 |   | $ | 277,646 |   | $ | 6,841,708 |   | $ | 1,460,866 |   | $ | 798,251 |   | $ | 1,059,541 |   |   | $ | 234,042 |   |   | $ | (377,700 | ) | $ | 10,016,708 |   |
| Pre-tax Earnings (Loss) |       | $                                                    | 1,659,457  |   | $ | 669,611 |   | $ | 105,457 |   | $ | 2,434,525 |   | $ | 1,074,480 |   | $ | 451,629 |   | $ | 183,716 |   |   | $ | 35,353 |   |   | $ | (31,937 | ) | $ | 4,147,766 |   |
| Total Assets            |       | $                                                    | 30,998,000 |   | $ | 20,108,000 |   | $ | 77,000 |   | $ | 51,183,000 |   | $ | 76,920,000 |   | $ | 44,205,000 |   | $ | 2,418,000 |   |   | $ | 213,000 |   |   | $ | 146,000 |   | $ | 175,085,000 |   |

 

| ** **              | ** ** | **Year Ended December 31, 2004** | ** ** |
|-------------------------|------------|------------------------------------------------------|------------|
| ** **              | ** ** | **Mortgage Banking**                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **              | ** ** | **Loan  Production**                                 | ** ** | **Loan  Servicing** | ** ** | **Closing  Services** | ** ** | **Total** | ** ** | **Banking** | ** ** | **Capital  Markets** | ** ** | **Insurance** | ** ** | **Global  Operations** | ** ** | **Other** | ** ** | **Total  Consolidated** | ** ** |
| ** **              | ** ** | **(in thousands)**                              | ** ** |
| Revenues:               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| External                |       | $                                                    | 5,861,232  |   | $ | 32,063 |   | $ | 222,626 |   | $ | 6,115,921 |   | $ | 837,158 |   | $ | 566,790 |   | $ | 896,850 |   |   | $ | 228,002 |   |   | $ | (78,094 | ) | $ | 8,566,627 |   |
| Intersegment            |       | (178,806                                             | )          | 138,744 |   | — |   | (40,062 | ) | (53,558 | ) | 194,648 |   | — |   |   | — |   |   | (101,028 | ) | — |   |
| Total Revenues          |       | $                                                    | 5,682,426  |   | $ | 170,807 |   | $ | 222,626 |   | $ | 6,075,859 |   | $ | 783,600 |   | $ | 761,438 |   | $ | 896,850 |   |   | $ | 228,002 |   |   | $ | (179,122 | ) | $ | 8,566,627 |   |
| Pre-tax Earnings (Loss) |       | $                                                    | 2,684,258  |   | $ | (433,531 | ) | $ | 84,986 |   | $ | 2,335,713 |   | $ | 582,483 |   | $ | 479,115 |   | $ | 160,093 |   |   | $ | 41,865 |   |   | $ | (3,396 | ) | $ | 3,595,873 |   |
| Total Assets            |       | $                                                    | 33,591,000 |   | $ | 15,711,000 |   | $ | 59,000 |   | $ | 49,361,000 |   | $ | 44,544,000 |   | $ | 32,236,000 |   | $ | 1,815,000 |   |   | $ | 296,000 |   |   | $ | 244,000 |   | $ | 128,496,000 |   |

 

| ** **              | ** ** | **Year Ended December 31, 2003** | ** ** |
|-------------------------|------------|------------------------------------------------------|------------|
| ** **              | ** ** | **Mortgage Banking**                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **              | ** ** | **Loan  Production**                                 | ** ** | **Loan  Servicing** | ** ** | **Closing  Services** | ** ** | **Total** | ** ** | **Banking** | ** ** | **Capital  Markets** | ** ** | **Insurance** | ** ** | **Global  Operations** | ** ** | **Other** | ** ** | **Total  Consolidated** | ** ** |
| ** **              | ** ** | **(in thousands)**                              | ** ** |
| Revenues:               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| External                |       | $                                                    | 6,623,715  |   | $ | (787,633 | ) | $ | 217,052 |   | $ | 6,053,134 |   | $ | 400,744 |   | $ | 572,466 |   | $ | 831,719 |   |   | $ | 199,236 |   |   | $ | (78,657 | ) |   | $ | 7,978,642 |   |   |
| Intersegment            |       | (136,255                                             | )          | 69,933 |   | — |   | (66,322 | ) | 3,660 |   | 103,537 |   | — |   |   | — |   |   | (40,875 | ) |   | — |   |   |
| Total Revenues          |       | $                                                    | 6,487,460  |   | $ | (717,700 | ) | $ | 217,052 |   | $ | 5,986,812 |   | $ | 404,404 |   | $ | 676,003 |   | $ | 831,719 |   |   | $ | 199,236 |   |   | $ | (119,532 | ) |   | $ | 7,978,642 |   |   |
| Pre-tax Earnings (Loss) |       | $                                                    | 4,087,866  |   | $ | (1,233,475 | ) | $ | 97,825 |   | $ | 2,952,216 |   | $ | 287,217 |   | $ | 442,303 |   | $ | 138,774 |   |   | $ | 25,607 |   |   | $ | (345 | ) |   | $ | 3,845,772 |   |   |
| Total Assets            |       | $                                                    | 35,643,000 |   | $ | 14,359,000 |   | $ | 63,000 |   | $ | 50,065,000 |   | $ | 21,312,000 |   | $ | 25,627,000 |   | $ | 1,576,000 |   |   | $ | 199,000 |   |   | $ | (801,000 | ) |   | $ | 97,978,000 |   |   |

 

F-73

 

----

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

**Note27—Quarterly Financial Data (Unaudited)**

Thefollowing tables reflect summarized, unaudited data for each quarter in theyears ended December 31, 2005 and 2004.

| ** **                         | ** ** | **Three Months Ended**                                                | ** ** |
|------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **March 31**                                                               | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| ** **                         | ** ** | **(dollars in thousands, except per share data)** | ** ** |
| Year ended  December 31, 2005 |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Revenues                           |       | $                                                                               | 2,404,885  |   | $ | 2,307,943 |   |   | $ | 2,711,618 |   |   | $ | 2,592,262 |   |
| Expenses                           |       | 1,255,888                                                                       |       | 1,373,062 |   |   | 1,659,940 |   |   | 1,580,052 |   |
| Provision for income taxes         |       | 460,145                                                                         |       | 368,423 |   |   | 417,793 |   |   | 373,315 |   |
| Net earnings                       |       | $                                                                               | 688,852    |   | $ | 566,458 |   |   | $ | 633,885 |   |   | $ | 638,895 |   |
| Earnings per  share(1):            |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Basic                              |       | $                                                                               | 1.18       |   | $ | 0.96 |   |   | $ | 1.07 |   |   | $ | 1.07 |   |
| Diluted                            |       | $                                                                               | 1.13       |   | $ | 0.92 |   |   | $ | 1.03 |   |   | $ | 1.03 |   |

 

| ** **                         | ** ** | **Three Months Ended**                                                | ** ** |
|------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **March 31**                                                               | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| ** **                         | ** ** | **(dollars in thousands, except per share data)** | ** ** |
| Year ended  December 31, 2004 |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Revenues                           |       | $                                                                               | 1,965,218  |   | $ | 2,474,746 |   |   | $ | 2,109,503 |   |   | $ | 2,017,160 |   |
| Expenses                           |       | 1,082,535                                                                       |       | 1,190,270 |   |   | 1,322,326 |   |   | 1,375,623 |   |
| Provision for income taxes         |       | 339,494                                                                         |       | 497,997 |   |   | 289,106 |   |   | 271,702 |   |
| Net earnings                       |       | $                                                                               | 543,189    |   | $ | 786,479 |   |   | $ | 498,071 |   |   | $ | 369,835 |   |
| Earnings per  share(1):            |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Basic                              |       | $                                                                               | 0.98       |   | $ | 1.41 |   |   | $ | 0.88 |   |   | $ | 0.64 |   |
| Diluted                            |       | $                                                                               | 0.90       |   | $ | 1.29 |   |   | $ | 0.81 |   |   | $ | 0.61 |   |

----

(1)          Earningsper share is computed independently for each of the quarters presented.Therefore, the sum of the quarterly earnings per share amounts may not equalthe annual amount. This is caused by rounding and the averaging effect of thenumber of share equivalents utilized throughout the year, which changes withthe market price of the common stock.

F-74

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

**Note28—Summarized Financial Information**

Summarized financialinformation for Countrywide Financial Corporation (parent only) andsubsidiaries is as follows:

| ** **                                                                                  | ** ** | **December 31, 2005**                             | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **Countrywide  Financial  Corporation  (Parent Only)** | ** ** | **Countrywide  Home  Loans, Inc.** | ** ** | **Other  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                                                                  | ** ** | **(in thousands)**                                     | ** ** |
| **Balance  Sheets:**                                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Mortgage loans and mortgage-backed securities held  for  sale                               |       |                                                        | $          | — |   |   | $ | 35,357,523 |   | $ | 1,447,489 |   | $ | 13,676 |   | $ | 36,818,688 |   |
| Trading securities                                                                          |       |                                                        | —     |   |   | 255,127 |   | 10,729,483 |   | (2,037 | ) | 10,982,573 |   |
| Securities purchased under agreement to resell,  federal funds sold and securities borrowed |       |                                                        | —     |   |   | 710,000 |   | 24,171,178 |   | (1,563,817 | ) | 23,317,361 |   |
| Loans held for investment, net                                                              |       |                                                        | —     |   |   | 5,794,472 |   | 64,279,238 |   | (2,558 | ) | 70,071,152 |   |
| Investments in other financial instruments                                                  |       |                                                        | 7,324      |   |   | 2,166,222 |   | 9,282,199 |   | — |   | 11,455,745 |   |
| Mortgage servicing rights, net                                                         |       |                                                        | —     |   |   | 12,604,453 |   | 6,386 |   | — |   | 12,610,839 |   |
| Other assets                                                                                |       |                                                        | 29,460,533 |   |   | 8,337,300 |   | 13,305,966 |   | (41,274,787 | ) | 9,829,012 |   |
| Total assets                                                                                |       |                                                        | $          | 29,467,857 |   |   | $ | 65,225,097 |   | $ | 123,221,939 |   | $ | (42,829,523 | ) | $ | 175,085,370 |   |
| Notes payable                                                                               |       |                                                        | $          | 16,347,891 |   |   | $ | 36,181,800 |   | $ | 35,152,400 |   | $ | (11,494,205 | ) | $ | 76,187,886 |   |
| Securities sold under agreements to repurchase and  federal funds purchased       |       |                                                        | —     |   |   | 1,844,789 |   | 33,871,846 |   | (1,563,430 | ) | 34,153,205 |   |
| Deposit liabilities                                                                         |       |                                                        | —     |   |   | — |   | 39,609,391 |   | (120,135 | ) | 39,489,256 |   |
| Other liabilities                                                                           |       |                                                        | 304,106    |   |   | 23,439,496 |   | 5,673,095 |   | (16,977,534 | ) | 12,439,163 |   |
| Equity                                                                                      |       |                                                        | 12,815,860 |   |   | 3,759,012 |   | 8,915,207 |   | (12,674,219 | ) | 12,815,860 |   |
| Total liabilities  and equity                                                               |       |                                                        | $          | 29,467,857 |   |   | $ | 65,225,097 |   | $ | 123,221,939 |   | $ | (42,829,523 | ) | $ | 175,085,370 |   |

 

F-75

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

 

| ** **                             | ** ** | **Year Ended December 31, 2005**        | ** ** |
|----------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                             | ** ** | **Countrywide  Financial  Corporation  (Parent Only)** | ** ** | **Countrywide  Home  Loans, Inc.** | ** ** | **Other  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                             | ** ** | **(in thousands)**                                     | ** ** |
| **Statements  of Earnings**            |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Revenues                               |       |                                                        | $          | (2,444 | ) |   | $ | 6,276,472 |   | $ | 4,223,095 |   | $ | (480,415 | ) | $ | 10,016,708 |   |
| Expenses                               |       |                                                        | 24,531     |   |   | 4,175,460 |   | 2,125,143 |   | (456,192 | ) | 5,868,942 |   |
| Provision for income taxes             |       |                                                        | (11,400    | ) |   | 837,989 |   | 802,976 |   | (9,889 | ) | 1,619,676 |   |
| Equity in net earnings of subsidiaries |       |                                                        | 2,543,665  |   |   | — |   | — |   | (2,543,665 | ) | — |   |
| Net earnings                           |       |                                                        | $          | 2,528,090 |   |   | $ | 1,263,023 |   | $ | 1,294,976 |   | $ | (2,557,999 | ) | $ | 2,528,090 |   |

 

| ** **                                                                                  | ** ** | **December 31, 2004**                             | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **Countrywide  Financial  Corporation  (Parent Only)** | ** ** | **Countrywide  Home  Loans, Inc.** | ** ** | **Other  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                                                                  | ** ** | **(in thousands)**                                     | ** ** |
| **Balance Sheets:**                                                                         |       |                                                        |       |   |   |   |   |   |   |   |   |
| Mortgage loans and mortgage-backed securities held  for sale                                |       | $                                                           | —     |   | $ | 36,937,845 |   | $ | 412,304 |   | $ | — |   | $ | 37,350,149 |   |
| Trading securities                                                                          |       | —                                                      |       | 318,110 |   | 11,543,284 |   | — |   | 11,861,394 |   |
| Securities purchased under agreement to resell,  federal funds sold and securities borrowed |       | —                                                      |       | 2,550,127 |   | 13,579,254 |   | (2,672,933 | ) | 13,456,448 |   |
| Loans held for investment, net                                                         |       | —                                                      |       | 5,431,321 |   | 34,230,360 |   | (490 | ) | 39,661,191 |   |
| Investments in other financial instruments                                                  |       | —                                                      |       | 2,301,416 |   | 7,789,641 |   | — |   | 10,091,057 |   |
| Mortgage servicing rights, net                                                    |       | —                                                      |       | 8,729,929 |   | — |   | — |   | 8,729,929 |   |
| Other assets                                                                                |       | 11,308,342                                                  |       | 4,759,535 |   | 10,227,379 |   | (18,949,719 | ) | 7,345,537 |   |
| Total assets                                                                                |       | $                                                           | 11,308,342 |   | $ | 61,028,283 |   | $ | 77,782,222 |   | $ | (21,623,142 | ) | $ | 128,495,705 |   |
| Notes payable                                                                               |       | $                                                           | 829,030    |   | $ | 51,532,883 |   | $ | 22,856,613 |   | $ | (8,604,855 | ) | $ | 66,613,671 |   |
| Securities sold under agreements to repurchase and  federal funds purchased                 |       | —                                                      |       | — |   | 23,137,028 |   | (2,671,905 | ) | 20,465,123 |   |
| Deposit liabilities                                                                         |       | —                                                      |       | — |   | 20,013,208 |   | — |   | 20,013,208 |   |
| Other liabilities                                                                           |       | 169,236                                                     |       | 5,451,663 |   | 5,736,987 |   | (264,259 | ) | 11,093,627 |   |
| Equity                                                                                      |       | 10,310,076                                                  |       | 4,043,737 |   | 6,038,386 |   | (10,082,123 | ) | 10,310,076 |   |
| Total liabilities  and equity                                                     |       | $                                                           | 11,308,342 |   | $ | 61,028,283 |   | $ | 77,782,222 |   | $ | (21,623,142 | ) | $ | 128,495,705 |   |
|                                                                                             |            |                                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-76

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

 

| ** **                             | ** ** | **Year Ended December 31, 2004**        | ** ** |
|----------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                             | ** ** | **Countrywide  Financial  Corporation  (Parent Only)** | ** ** | **Countrywide  Home  Loans, Inc.** | ** ** | **Other  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                             | ** ** | **(in thousands)**                                     | ** ** |
| **Statements  of Earnings:**           |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                               |       |                                                        | $          | 1,409 |   |   | $ | 4,696,156 |   | $ | 4,196,984 |   | $ | (327,922 | ) |   | $ | 8,566,627 |   |   |
| Expenses                               |       |                                                        | 18,447     |   |   | 2,980,292 |   | 2,299,448 |   | (327,433 | ) |   | 4,970,754 |   |   |
| Provision for income taxes             |       |                                                        | (6,730     | ) |   | 670,266 |   | 734,951 |   | (188 | ) |   | 1,398,299 |   |   |
| Equity in net earnings of subsidiaries |       |                                                        | 2,207,882  |   |   | — |   | — |   | (2,207,882 | ) |   | — |   |   |
| Net earnings                           |       |                                                        | $          | 2,197,574 |   |   | $ | 1,045,598 |   | $ | 1,162,585 |   | $ | (2,208,183 | ) |   | $ | 2,197,574 |   |   |

 

**Note 29—Loan Servicing**

Thefollowing table sets forth certain information regarding the Company’sservicing portfolio of single-family mortgage loans, including loans andsecurities held for sale, loans held for investment and loans subserviced forothers:

| ** **                                | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| ** **                                | ** ** | **(in millions)**                      | ** ** |
| Beginning owned  servicing portfolio      |       | $                                           | 821,475    |   | $ | 630,451 |   |
| Add: Loan  production                     |       | 490,947                                     |       | 363,006 |   |
|  Purchased  MSRs (bulk acquisitions) |       | 51,377                                      |       | 40,723 |   |
| Less: Servicing  sold                     |       | (1,119                                      | )          | — |   |
| Less: Runoff(1)                           |       | (281,491                                    | )          | (212,705 | ) |
| Ending owned  servicing portfolio         |       | 1,081,189                                   |       | 821,475 |   |
| Subservicing  portfolio                   |       | 29,901                                      |       | 16,847 |   |
| Total servicing portfolio                 |       | $                                           | 1,111,090  |   | $ | 838,322 |   |
| MSR portfolio                             |       | $                                           | 978,988    |   | $ | 758,975 |   |
| Mortgage loans  owned                     |       | 102,201                                     |       | 62,500 |   |
| Subservicing  portfolio                   |       | 29,901                                      |       | 16,847 |   |
| Total servicing  portfolio                |       | $                                           | 1,111,090  |   | $ | 838,322 |   |

 

F-77

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

 

| ** **                                               | ** ** | **December 31,**                                                                        | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                               | ** ** | **       2005       ** | ** ** | **      2004       ** | ** ** |
| ** **                                               | ** ** | **(dollar amounts in millions)**                                              | ** ** |
| Composition of owned  servicing portfolio at period end: |       |                                                                                         |       |   |   |   |   |
| Conventional mortgage                                    |       | $                                                                                            | 863,688    |   |   | $ | 639,148 |   |   |
| Nonprime Mortgage                                        |       | 116,101                                                                                      |       |   | 84,608 |   |   |
| Prime Home Equity                                        |       | 51,491                                                                                       |       |   | 45,053 |   |   |
| FHA-insured mortgage                                     |       | 36,949                                                                                       |       |   | 39,618 |   |   |
| VA-guaranteed mortgage                                   |       | 12,960                                                                                       |       |   | 13,048 |   |   |
| Total owned servicing portfolio                          |       | $                                                                                            | 1,081,189  |   |   | $ | 821,475 |   |   |
| Delinquent  mortgage loans(2):                           |       |                                                                                         |       |   |   |   |   |
| 30 days                                                  |       | 2.59                                                                                         | %          |   | 2.35 | % |   |
| 60 days                                                  |       | 0.87                                                                                         | %          |   | 0.70 | % |   |
| 90 days or more                                          |       | 1.15                                                                                         | %          |   | 0.78 | % |   |
| Total delinquent mortgage loans                          |       | 4.61                                                                                         | %          |   | 3.83 | % |   |
| Loans pending  foreclosure(2)                            |       | 0.44                                                                                         | %          |   | 0.42 | % |   |
| Delinquent  mortgage loans(2):                           |       |                                                                                         |       |   |   |   |   |
| Conventional                                             |       | 2.60                                                                                         | %          |   | 2.24 | % |   |
| Nonprime Mortgage                                        |       | 15.20                                                                                        | %          |   | 11.29 | % |   |
| Prime Home Equity                                        |       | 1.57                                                                                         | %          |   | 0.79 | % |   |
| Government                                               |       | 14.61                                                                                        | %          |   | 13.14 | % |   |
| Total delinquent mortgage loans                          |       | 4.61                                                                                         | %          |   | 3.83 | % |   |
| Loans pending  foreclosure(2):                           |       |                                                                                         |       |   |   |   |   |
| Conventional                                             |       | 0.20                                                                                         | %          |   | 0.20 | % |   |
| Nonprime Mortgage                                        |       | 2.03                                                                                         | %          |   | 1.74 | % |   |
| Prime Home Equity                                        |       | 0.06                                                                                         | %          |   | 0.03 | % |   |
| Government                                               |       | 1.09                                                                                         | %          |   | 1.21 | % |   |
| Total loans  pending foreclosure                         |       | 0.44                                                                                         | %          |   | 0.42 | % |   |

----

(1)          Runoff refers toprincipal repayments on loans.

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

Propertiessecuring the mortgage loans in the Company’s servicing portfolio aregeographically dispersed. The following is a summary of the geographicaldistribution of loans included in the Company’s servicing portfolio for the topthree states (as measured by unpaid principal balance) at December 31, 2005:

| **State**        | ** ** | ** **             | ** ** | **Unpaid Principal  Balance** | ** ** | **% Total  Balance** | ** ** |
|------------------|------------|------------------------|------------|------------------------------------|------------|----------------------|------------|
| ** **       | ** ** | **(in millions)** | ** ** |
| California       |       |                   | $          | 329,008                            |       |                 |       | 30 | % |   |
| Florida          |       |                   | 73,389     |                               |       |                 | 7          | % |   |
| Texas            |       |                   | 49,166     |                               |       |                 | 4          | % |   |
| All other states |       |                   | 659,527    |                               |       |                 | 59         | % |   |
| Total            |       |                   | $          | 1,111,090                          |       |                 |       | 100 | % |   |

 

F-78

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

***ServicingCompensation***

As compensation for performance of servicing functionsunder its various loan servicing contracts, the Company is paid a monthlyservice fee that is generally expressed as a percentage of the current unpaidprincipal balance of the underlying loans. The loan servicing contractsgenerally specify a base service fee of between 0.25% and 0.50% per year of theunpaid balance of the loans. With regard to its servicing contracts with FannieMae, Freddie Mac and Ginnie Mae, the Company can effectively retain a largernet service fee principally through its methods of securitization. In general,the larger the net servicing fee retained, the smaller the net cash proceedsreceived upon securitization. Therefore, the decision to retain net servicefees above the contractual minimum amounts is based on the Company’s assessmentof the underlying economics as well as its capital requirements. As of December 31,2005, the weighted-average service fee, net of applicable guarantee fees, ofthe Company’s portfolio of loans serviced for others was 0.35% per annum.

The Company is generally entitled to float benefitsrelated to its collection of mortgagor principal, interest, tax and insurancepayments. The amount of float varies depending on the terms of the servicingcontract and timing of receipt of payments from the mortgagors. The Company isgenerally entitled to various fees that it collects that are contractuallyassociated with the mortgages such as late charges, prepayment penalties andre-conveyance fees, among others. The Company generally has the right tosolicit the mortgagors for other products and services that it offers, such asinsurance and second mortgage loans. The value of the net service fees andother related income in excess of the cost to service the loans, including thecosts of advances on behalf of delinquent mortgagors, is the basis for theCompany’s investment in MSRs.

As part of its loanservicing responsibilities, the Company is required to advance funds to coverdelinquent scheduled principal and interest payments to security holders, aswell as to cover delinquent tax and insurance payments to protect the investors’interest in the collateral securing the loans. The Company had $1.5 billion and$1.4 billion of such advances outstanding at December 31, 2005 and 2004,respectively, which amounts were included in other assets. Generally, servicingadvances are recoverable from either the mortgagor, the insurer of the loan orthe investor through the non-recourse provision of the loan servicing contract.These advances are recorded on the balance sheet at realizable value.

***Borrower and Investor Custodial Accounts***

The Company holds, as custodian, funds collected fromborrowers whose loans it services. These funds include loan payments pendingremittance to investors and funds collected from borrowers to ensure timelypayment of hazard and primary mortgage insurance and property taxes related tothe properties securing the loans. These funds are not owned by the Company. Asof December 31, 2005 and 2004, the Company managed $22.0 billion and $20.6billion, respectively, of off-balance sheet borrower and investor custodialcash accounts as well as related liabilities to those borrowers and investors.Of these amounts, $13.2 billion and $7.9 billion, respectively, were depositedat Countrywide Bank and were included in the Company’s deposit liabilities,with the remaining balances deposited with other depository institutions.

F-79

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

**Note30—Credit Losses Related to Securitized Loans**

Most of the mortgage loansproduced by the Company are sold into the secondary mortgage market, primarilyin the form of securities, and to a lesser extent as whole loans. While theCompany generally sells prime mortgage loans on a non-recourse basis, either inthe form of securities or whole loans, it has potential liability under therepresentations and warranties made to purchasers and insurers of the loans orsecurities. In the event of a breach of such representations and warranties,the Company may be required to either repurchase the subject mortgage loans orindemnify the investor or insurer. In such cases, the Company bears anysubsequent credit loss on the mortgage loans.

***Securitization***

As described below, thedegree to which we retain credit risk on loans that we sell through securitizationsdepends on the structure of the securitization. Our Prime Mortgage Loansgenerally are securitized on a non-recourse basis, while Prime Home Equity and NonprimeMortgage Loans generally are securitized with limited recourse for creditlosses.

***Conforming Conventional Loans***

We generally pool conformingconventional loans  into mortgage-backedsecurities guaranteed by Fannie Mae or Freddie Mac. Subject to certainrepresentations and warranties we make, nearly all conventional loanssecuritized through Fannie Mae or Freddie Mac are sold on a non-recourse basis.The Company pays guarantee fees to these agencies to compensate them for theirassumption of credit risk on securitized loans.

***FHA-Insured and VA-Guaranteed Loans***

FHA-insured andVA-guaranteed mortgage loans are generally pooled into mortgage-backedsecurities guaranteed by Ginnie Mae. The Company is insured against foreclosureloss by the FHA or partially guaranteed against foreclosure loss by the VA.Fees charged by the FHA and VA for assuming such risks are paid by the borrowers.The Company is exposed to credit losses on defaulted VA loans to the extentthat the partial guarantee provided by the VA is inadequate to cover the totalcredit losses incurred. The Company pays guarantee fees to Ginnie Mae forGinnie Mae’s guarantee on its securities of timely payment of principal andinterest. Ginnie Mae does not assume mortgage credit risk associated with theloans securitized under its program.

***Non-conforming Conventional Loans***

Non-conforming conventionalprime mortgage loans are generally pooled into “private-label” (non-agency)mortgage-backed securities. Such securitizations involve some form of creditenhancement, such as senior/subordinated structures, over collateralization ormortgage pool insurance. Securitizations that involve senior/subordinatedstructures contain securities that assume varying levels of credit risk.Holders of subordinated securities are compensated for the credit risk assumedthrough a higher yield. The Company generally sells the subordinated securitiescreated in connection with these securitizations and thereby transfers therelated credit risk subject to representations and warranties we made whenloans are securitized.

F-80

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

***Prime Home Equity Loans***

Prime home equity loansare generally pooled into private-label asset-backed securities. Thesesecurities generally are credit-enhanced through over-collateralization,residual interests that the Company generally retain and guarantees provided bya third-party surety. In some cases, the securitizations also contain mortgagepool insurance or a limited corporate guarantee as a form of creditenhancement. In Prime Home Equity securitizations, Countrywide is generally inthe first loss position; however, the recourse for credit losses is limited tothe carrying value of a residual interest.

***Nonprime Mortgage Loans***

Nonprime Mortgage Loans generally are pooled intoprivate-label asset-backed securities. The Company generally securitize theseloans with limited recourse for credit losses through retention of residualinterests, the value of which usually range from 1.0% to 5.5% of the principalbalance of the loans. The holder of the residual interest is in the first lossposition; however, the recourse for credit losses is limited to the carryingvalue of the residual interest. In some cases, such limited recoursesecuritizations have contained lender paid mortgage insurance as a form ofcredit enhancement or a limited corporate guarantee from Countrywide. TheCompany also has pooled a portion of our Nonprime Mortgage Loans intosecurities guaranteed by Fannie Mae. In such cases, the Company has paid FannieMae a guarantee fee in exchange for Fannie Mae assuming the credit risk of theunderlying loans.

In some cases the retained residual interest isdeposited into a net interest margin security, which enables the Company tomonetize future residual cash flows and retain a smaller residual interest(“Back-end NIM Residual’’). The value of the Back-end NIM Residuals usuallyrange from 0.25% to 1.50% of the principal balance of the loans underlyingthe residual security. The holder of the Back-end NIM Residual is in the firstloss position; however, the recourse for credit losses is limited to thecarrying value of the Back-end NIM residual.

TheCompany’s exposure to credit losses related to its limited recoursesecuritization activities is limited to the carrying value of its subordinatedinterests and to the contractual limit of reimbursable losses under itscorporate guarantees less the recorded liability for such guarantees. Theseamounts at December 31, 2005, are as follows:

| ** **                                                    | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                    | ** ** | **(in thousands)**     | ** ** |
| Subordinated  Interests:                                      |       |                        |       |   |   |
| Prime home equity residual securities                         |       |                        | $          | 925,762 |   |   |
| Nonprime residual securities                                  |       |                        | 547,139    |   |   |
| Prime home equity line of credit transferors’  interests |       |                        | 538,048    |   |   |
| Nonconforming residual securities                             |       |                        | 21,004     |   |   |
| Subordinated mortgage-backed pass-through securities          |       |                        | 2,059      |   |   |
|                                                          |       |                        | $          | 2,034,012 |   |   |
| Corporate guarantees in  excess of recorded liabilities       |       |                        | $          | 349,864 |   |   |

 

F-81

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

Thecarrying value of the residual securities is net of expected future creditlosses. The total credit losses incurred for the periods indicated that arerelated to all of our mortgage securitization activities are summarized asfollows:

| ** **                                                                 | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                 | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                 | ** ** | **(in thousands)**                     | ** ** |
| Nonprime  securitizations with retained residual interest                  |       | $                                           | 69,269     |   | $ | 43,021 |   | $ | 36,699 |   |
| Prime home equity  securitizations with retained residual interest         |       | 34,173                                      |       | 29,370 |   | 15,196 |   |
| Repurchased or  indemnified loans                                          |       | 28,213                                      |       | 42,063 |   | 35,426 |   |
| Prime home equity  line of credit securitizations with corporate guarantee |       | 10,798                                      |       | 6,930 |   | 2,763 |   |
| Nonprime  securitizations with corporate guarantee                         |       | 9,724                                       |       | 20,039 |   | 40,891 |   |
| VA losses in  excess of VA guarantee                                       |       | 1,894                                       |       | 1,658 |   | 2,824 |   |
|                                                                       |       | $                                           | 154,071    |   | $ | 143,081 |   | $ | 133,799 |   |

 

**Note31—Commitments and Contingencies**

***Legal Proceedings***

Countrywide and certainsubsidiaries are defendants in various legal proceedings involving mattersgenerally incidental to their businesses. Although it is difficult to predictthe ultimate outcome of these proceedings, management believes, based ondiscussions with counsel, that any ultimate liability will not materiallyaffect the consolidated financial position or results of operations orliquidity of the Company.

***Commitments to Buyor Sell Mortgage-Backed Securities and Other Derivatives Contracts***

In connection with itsopen commitments to buy or sell MBS and other derivative contracts, the Companymay be required to maintain margin deposits. With respect to the MBScommitments, these requirements are generally greatest during periods ofrapidly declining interest rates. With respect to other derivative contracts,margin requirements are generally greatest during periods of increasinginterest rates. Margin deposits placed by the Company at December 31,2005, totaled $296.0 million.

***Lease Commitments***

The Company leases officefacilities under operating lease agreements extending through August 31,2015. Future minimum annual rental commitments under these non-cancelableoperating leases with initial or remaining terms of one year or more are asfollows:

| **Year Ending December 31,** | ** ** | ** **              | ** ** | **Lease  Commitments** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                  | ** ** | **(in thousands)** | ** ** |
| 2006                                        |       |                    | $          | 157,543                |       |   |
| 2007                                        |       |                    | 130,563    |                   |       |
| 2008                                        |       |                    | 101,105    |                   |       |
| 2009                                        |       |                    | 70,273     |                   |       |
| 2010                                        |       |                    | 34,846     |                   |       |
| Thereafter                                  |       |                    | 29,146     |                   |       |
|                                        |       |                    | $          | 523,476                |       |   |

 

F-82

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

Rent expense was $186.3million, $160.7 million and $109.7 million for the years ended December 31, 2005,2004 and 2003, respectively.

***Restrictions on Transfers of Funds***

The Company and certain ofits subsidiaries are subject to regulatory and credit agreement restrictionswhich limit their ability to transfer funds to the Company through intercompanyloans, advances or dividends. Pursuant to revolving credit facilities existingat December 31, 2005, the Company and CHL are required to maintain aminimum consolidated net worth of $5.6 billion and $1.8 billion, respectively.

***FHLB and FRB Stock***

The Bank is required topurchase stock in the FRB at an amount equal to 6% of its capital, one-half ofwhich must be paid currently with the balance due upon demand. The Bank is alsoa member of the Federal Home Loan Bank (“FHLB”) and, therefore, is required topurchase FHLB stock in an amount equal to the lesser of 1% of the Bank’s realestate loans that are secured by residential properties, or 4.5% of totaladvances for the years ended December 31, 2005 and 2004. The Companyrecords its FRB and FHLB stock at cost and evaluates it periodically forimpairment.

***Mortgage Reinsurance***

Countrywide providesmortgage reinsurance on certain mortgage loans included in its servicingportfolio through contracts with several primary mortgage insurance companies.Under these agreements, the Company is obligated to absorb mortgage insurancelosses in excess of a specified percentage of the principal balance of a givenpool of loans, subject to a cap, in exchange for a portion of the pools’mortgage insurance premiums. Approximately $78.2 billion mortgage loans in ourservicing portfolio are covered by such mortgage reinsurance contracts.Management believes it has adequate valuation allowances in place to coveranticipated losses.

***Securities Underwriting***

In connection with theCompany’s underwriting activities, the Company had commitments to purchase andsell new issues of securities aggregating $40.0 million at December 31,2005.

**Note 32—Loan Commitments**

As of December 31,2005 and 2004, the Company had undisbursed home equity lines of creditcommitments of $7.2 billion and $5.4 billion, respectively, as well asundisbursed construction loan commitments of $1.5 billion and $0.9 billion,respectively. As of December 31, 2005, outstanding commitments to fundmortgage loans totaled $35.8 billion.

**Note 33—Subsequent Events**

On January 31, 2006, the Company announced thatits Board of Directors declared a dividend of $0.15 per common share payable March 2,2006, to shareholders of record on February 13, 2006.

F-83

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**COUNTRYWIDEFINANCIAL CORPORATION AND SUBSIDIARIESSCHEDULE I—CONDENSED FINANCIALINFORMATION OF REGISTRANTCOUNTRYWIDE FINANCIAL CORPORATIONBALANCE SHEETS**

| ** **                                           | ** ** | **December 31,**   | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|
| ** **                                           | ** ** | **2005**                | ** ** | **2004** | ** ** |
| ** **                                           | ** ** | **(in thousands)** | ** ** |
| **ASSETS**                                           | ** ** | ** **              | ** ** | ** ** | ** ** |
| Cash                                                 |       | $                       | 290        |   | $ | 99 |   |
| Investments in  other financial instruments          |       | 7,324                   |       | — |   |
| Intercompany  receivables from non-bank subsidiaries |       | 16,472,108              |       | 975,406 |   |
| Intercompany  receivable from bank subsidiary        |       | 24,648                  |       | 19,147 |   |
| Investment in  non-bank subsidiaries                 |       | 7,419,396               |       | 7,170,879 |   |
| Investment in  bank holding company subsidiary       |       | 5,238,571               |       | 2,907,304 |   |
| Equipment and  leasehold improvements                |       | 114                     |       | 133 |   |
| Other assets                                         |       | 305,406                 |       | 235,374 |   |
| Total assets                                         |       | $                       | 29,467,857 |   | $ | 11,308,342 |   |
| **LIABILITIES**                                      | ** ** | ** **              | ** ** | ** ** | ** ** |
| Note payable                                         |       | $                       | 16,111,979 |   | $ | 593,116 |   |
| Intercompany  payable                                |       | 235,912                 |       | 235,914 |   |
| Accounts payable  and accrued liabilities            |       | 304,106                 |       | 169,236 |   |
| Total liabilities                                    |       | 16,651,997              |       | 998,266 |   |
| **SHAREHOLDERS’ EQUITY**                        | ** ** | ** **              | ** ** | ** ** | ** ** |
| Common stock                                         |       | 30,008                  |       | 29,085 |   |
| Additional  paid-in capital                          |       | 2,954,019               |       | 2,570,402 |   |
| Accumulated other  comprehensive income              |       | 61,114                  |       | 118,943 |   |
| Retained earnings                                    |       | 9,770,719               |       | 7,591,646 |   |
| Total shareholders’ equity                      |       | 12,815,860              |       | 10,310,076 |   |
| Total liabilities  and shareholders’ equity     |       | $                       | 29,467,857 |   | $ | 11,308,342 |   |

 

F-84

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**COUNTRYWIDEFINANCIAL CORPORATION AND SUBSIDIARIESSCHEDULE I—CONDENSED FINANCIAL INFORMATION OF REGISTRANT—(Continued)COUNTRYWIDE FINANCIAL CORPORATIONSTATEMENTS OF EARNINGS**

| ** **                                                                                                                                         | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                                         | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                                                         | ** ** | **(in thousands)**                     | ** ** |
| Revenues                                                                                                                                           |       |                                        |       |   |   |   |   |
| Interest income                                                                                                                                    |       | $                                           | 329,155    |   | $ | 53,191 |   | $ | 24,574 |   |
| Interest expense                                                                                                                                   |       | 331,599                                     |       | 53,234 |   | 11,064 |   |
| Net interest (expense) income                                                                                                                      |       | (2,444                                      | )          | (43 | ) | 13,510 |   |
| Other income                                                                                                                                       |       | —                                      |       | 1,452 |   | — |   |
| Total revenues                                                                                                                                     |       | (2,444                                      | )          | 1,409 |   | 13,510 |   |
| Expenses                                                                                                                                           |       | 24,531                                      |       | 18,447 |   | 9,871 |   |
| (Loss) earnings before income tax (benefit)  provision, dividends from subsidiaries and equity in undistributed net  earnings of subsidiaries |       | (26,975                                     | )          | (17,038 | ) | 3,639 |   |
| Income tax  (benefit) provision                                                                                                                    |       | (11,400                                     | )          | (6,730 | ) | 1,401 |   |
| (Loss) earnings before dividends from subsidiaries  and equity in undistributed net earnings of subsidiaries                                  |       | (15,575                                     | )          | (10,308 | ) | 2,238 |   |
| Equity in  undistributed net earnings of non-bank subsidiaries                                                                                     |       | 343,573                                     |       | 1,342,617 |   | 1,344,651 |   |
| Equity in  undistributed net earnings of bank subsidiary                                                                                           |       | 742,567                                     |       | 309,770 |   | 129,111 |   |
| Dividends from  subsidiaries                                                                                                                       |       | 1,457,525                                   |       | 555,495 |   | 896,950 |   |
| Net earnings                                                                                                                                       |       | $                                           | 2,528,090  |   | $ | 2,197,574 |   | $ | 2,372,950 |   |

 

F-85

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**COUNTRYWIDEFINANCIAL CORPORATION AND SUBSIDIARIESSCHEDULE I—CONDENSED FINANCIAL INFORMATION OF REGISTRANT—(Continued)COUNTRYWIDE FINANCIAL CORPORATIONSTATEMENTS OF CASH FLOWS**

| ** **                                                                           | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                           | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                           | ** ** | **(in thousands)**                     | ** ** |
| **Cash flows from operating  activities:**                                           |       |                                        |       |   |   |   |   |
| Net earnings                                                                         |       | $                                           | 2,528,090  |   | $ | 2,197,574 |   | $ | 2,372,950 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities: |       |                                        |       |   |   |   |   |
| Equity in undistributed net earnings of non-bank  subsidiaries                       |       | (343,573                                    | )          | (1,342,617 | ) | (1,344,651 | ) |
| Equity in undistributed net earnings of bank  subsidiary                             |       | (742,567                                    | )          | (309,770 | ) | (129,111 | ) |
| Stock based compensation                                                             |       | 5,693                                       |       | 5,385 |   | 2,161 |   |
| Depreciation and amortization                                                        |       | 36                                          |       | 36 |   | 31 |   |
| (Increase) decrease in other financial instruments                                   |       | (7,324                                      | )          | — |   | 77,403 |   |
| (Increase) decrease in other receivables and other  assets                           |       | (7,212                                      | )          | (14,901 | ) | 90,210 |   |
| Increase in accounts payable and accrued liabilities                                 |       | 134,870                                     |       | 76,293 |   | 15,046 |   |
| Net cash provided by operating activities                                            |       | 1,568,013                                   |       | 612,000 |   | 1,084,039 |   |
| **Cash flows from investing  activities:**                                           |       |                                        |       |   |   |   |   |
| Net change in non-bank intercompany receivables and  payables                        |       | (15,462,505                                 | )          | 475,456 |   | (664,426 | ) |
| Net change in bank intercompany receivables and  payables                            |       | (5,501                                      | )          | (10,835 | ) | (7,259 | ) |
| Net change in investment in non-bank subsidiaries                                    |       | (1,478,020                                  | )          | (505,920 | ) | (859,119 | ) |
| Net change in investment in bank subsidiary                                          |       | (15,624                                     | )          | (558,308 | ) | (20,032 | ) |
| Net cash used by investing activities                                                |       | (16,961,650                                 | )          | (599,607 | ) | (1,550,836 | ) |
| **Cash flows from financing  activities:**                                           |       |                                        |       |   |   |   |   |
| Increase in long-term debt                                                           |       | 15,529,542                                  |       | 85,853 |   | 5,114 |   |
| Issuance of common stock                                                             |       | 213,303                                     |       | 111,176 |   | 542,075 |   |
| Cash dividends paid                                                                  |       | (349,017                                    | )          | (209,362 | ) | (80,376 | ) |
| Net cash provided by (used) by financing activities                                  |       | 15,393,828                                  |       | (12,333 | ) | 466,813 |   |
| Net change in  cash                                                                  |       | 191                                         |       | 60 |   | 16 |   |
| Cash at beginning  of year                                                           |       | 99                                          |       | 39 |   | 23 |   |
| Cash at end of year                                                                  |       | $                                           | 290        |   | $ | 99 |   | $ | 39 |   |
| Supplemental cash flow  information:                                                 |       |                                        |       |   |   |   |   |
| Cash used to pay interest                                                            |       | $                                           | 294,799    |   | $ | 9,256 |   | $ | 9,269 |   |
| Non-cash operating,  investing and financing activities:                             |       |                                        |       |   |   |   |   |
| Unrealized loss on available-for-sale securities,  net of tax                        |       | $                                           | (57,829    | ) | $ | (45,583 | ) | $ | (22,273 | ) |
| Receipt of dividends in the form of loans from  non-bank subsidiary                  |       | $                                           | 1,573,076  |   | $ | 550,000 |   | $ | 700,000 |   |
| Contribution of loans to bank subsidiary                                             |       | $                                           | (1,573,076 | ) | $ | (550,000 | ) | $ | (700,000 | ) |
| Issuance of common stock for conversion of  convertible debt                         |       | $                                           | 10,679     |   | $ | 7,935 |   | $ | — |   |
| Tax effect of interest on conversion of convertible  debt                            |       | $                                           | 5,532      |   | $ | 37,787 |   | $ | — |   |
| Issuance of common stock for  401(k) contribution                               |       | $                                           | 34,216     |   | $ | 27,391 |   | $ | 21,015 |   |
| Tax benefit of  stock options exercised                                              |       | $                                           | 115,117    |   | $ | 93,057 |   | $ | 88,031 |   |

 

F-86

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**COUNTRYWIDEFINANCIAL CORPORATION AND SUBSIDIARIESSCHEDULE I—CONDENSED FINANCIAL INFORMATION OF REGISTRANT—(Continued)STATEMENTS OFCOMPREHENSIVE INCOME**

| ** **                                                                                  | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                  | ** ** | **(in thousands)**                     | ** ** |
| **Net  earnings**                                                                           |       | $                                           | 2,528,090  |   | $ | 2,197,574 |   | $ | 2,372,950 |   |
| Other comprehensive  loss, net of tax:                                                      |       |                                        |       |   |   |   |   |
| Net unrealized losses on available-for-sale  securities, net of reclassification adjustment |       | (19,875                                     | )          | (88,277 | ) | (53,634 | ) |
| Net unrealized (losses) gains from cash flow hedging  instruments                           |       | (16,080                                     | )          | 29,101 |   | 16,088 |   |
| Foreign currency translation adjustments                                                    |       | (21,874                                     | )          | 13,593 |   | 15,273 |   |
| Other  comprehensive loss, net of tax                                                       |       | (57,829                                     | )          | (45,583 | ) | (22,273 | ) |
| **Comprehensive income**                                                                    |       | $                                           | 2,470,261  |   | $ | 2,151,991 |   | $ | 2,350,677 |   |

y

F-87

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**COUNTRYWIDEFINANCIAL CORPORATION AND SUBSIDIARIESSCHEDULE II—VALUATION ANDQUALIFYING ACCOUNTS**

| **Column A**                              | ** ** | **Column B**                              | ** ** | **Column C**                             | ** ** | **Column D**                    | ** ** | **Column E** | ** ** |
|------------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------|------------|-------------------|------------|
| ** **                                     | ** ** | ** **                                     | ** ** | **Additions**                                 | ** ** | ** **                           | ** ** | ** **        | ** ** |
| ** **                                     | ** ** | **Balance at  Beginning  of Period** | ** ** | **Charged to  Costs and  Expenses** | ** ** | **Charged to  Other  Accounts** | ** ** | **Deductions(1)** | ** ** | **Balance at  End of  Period** | ** ** |
| ** **                                     | ** ** | **(in thousands)**                        | ** ** |
| Year ended  December 31, 2005             |       |                                           |       |                                          |       |                                 |       |              |       |   |   |   |   |   |   |   |   |
| Allowance for loan losses                      |       | $                                              | 125,046    |                                          |       | $                                    | 115,685    |              |       |   | $ | — |   |   |   | $ | 51,530 |   |   | $ | 189,201 |   |
| Allowance for uncollectible servicing advances |       | 28,459                                         |       |                                          | 51,370     |                                 |       |              | —     |   |   |   | 23,223 |   |   | 56,606 |   |
| Allowance for trade and other receivables      |       | 9,509                                          |       |                                          | 10,258     |                                 |       |              | —     |   |   |   | 6,052 |   |   | 13,715 |   |
| Recourse liability                             |       | 175,701                                        |       |                                          | 44,285     |                                 |       |              | —     |   |   |   | 22,599 |   |   | 197,387 |   |
|                                           |       | $                                              | 338,715    |                                          |       | $                                    | 221,598    |              |       |   | $ | — |   |   |   | $ | 103,404 |   |   | $ | 456,909 |   |
| Year ended December 31,  2004             | ** ** |                                           |       |                                          |       |                                 |       |              |       |   |   |   |   |   |   |   |   |
| Allowance for loan losses                      |       | $                                              | 78,449     |                                          |       | $                                    | 71,775     |              |       |   | $ | — |   |   |   | $ | 25,178 |   |   | $ | 125,046 |   |
| Allowance for uncollectible servicing advances |       | 44,847                                         |       |                                          | 48,553     |                                 |       |              | —     |   |   |   | 64,941 |   |   | 28,459 |   |
| Allowance for trade and other receivables      |       | 6,971                                          |       |                                          | 10,851     |                                 |       |              | —     |   |   |   | 8,313 |   |   | 9,509 |   |
| Recourse liability                             |       | 151,659                                        |       |                                          | 53,889     |                                 |       |              | —     |   |   |   | 29,847 |   |   | 175,701 |   |
|                                           |       | $                                              | 281,926    |                                          |       | $                                    | 185,068    |              |       |   | $ | — |   |   |   | $ | 128,279 |   |   | $ | 338,715 |   |
| Year ended  December 31, 2003             | ** ** |                                           |       |                                          |       |                                 |       |              |       |   |   |   |   |   |   |   |   |
| Allowance for loan losses                      |       | $                                              | 42,049     |                                          |       | $                                    | 48,107     |              |       |   | $ | — |   |   |   | $ | 11,707 |   |   | $ | 78,449 |   |
| Allowance for uncollectible servicing advances |       | 56,258                                         |       |                                          | 26,467     |                                 |       |              | —     |   |   |   | 37,878 |   |   | 44,847 |   |
| Allowance for trade and other receivables      |       | 6,287                                          |       |                                          | 12,710     |                                 |       |              | —     |   |   |   | 12,026 |   |   | 6,971 |   |
| Recourse liability                             |       | 124,717                                        |       |                                          | 70,317     |                                 |       |              | —     |   |   |   | 43,375 |   |   | 151,659 |   |
|                                           |       | $                                              | 229,311    |                                          |       | $                                    | 157,601    |              |       |   | $ | — |   |   |   | $ | 104,986 |   |   | $ | 281,926 |   |

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(1)          Actual losses chargedagainst the valuation allowance, net of recoveries and reclassification.

F-88

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**EXHIBIT LIST**

| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                           |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.2              |       | Substitution of Rights Agent and Amendment to  Amended and Restated Rights Agreement dated December 8, 2005, between  the Company and American Stock Transfer & Trust Company which  includes as Exhibit B thereto, the form of Rights Certificate.                                                                                                                    |
| +10.60*          |       | Amendment Number Ten to  the Company’s 1993 Stock Option Plan, effective as of December 23, 2005  (incorporated by reference to Exhibit 10.2 to the Company’s Current  Report on Form 8-K, filed with the SEC on December 30, 2005).                                                                                                                        |
| +10.69*          |       | Fourth Amendment to the  2000 Equity Incentive Plan of the Company, effective as of December 23,  2005 (incorporated by reference to Exhibit 10.1 to the Company’s Current  Report on Form 8-K, filed with the SEC on December 30, 2005).                                                                                                                        |
| +10.108*         |       | Countrywide Bank, N.A.  Non-Employee Directors’ Fee Plan, adopted October 27, 2005 (incorporated  by reference to Exhibit 10.1 to the Company’s Current Report on  Form 8-K, filed with the SEC on November 2, 2005).                                                                                                                                       |
| 10.125           |       | First Amendment to the  364-Day Credit Agreement, dated as of May 11, 2005, among CHL, the  Company, the lenders identified therein, Commerzbank AG, New York and Grand  Cayman Branches and Societe Generale, as Documentation Agents, BNP Paribas,  as Syndication Agent, Barclays Bank PLC, as Administrative Agent, and Royal  Bank of Canada, as Managing Administrative Agent. |
| 10.126           |       | Second Amendment to the  364-Day Credit Agreement, dated as of November 18, 2005, among  CHL, the Company, the lenders identified therein, Lloyds TSB Bank, PLC and  Societe Generale, as Documentation Agents, BNP Paribas, as Syndication Agent,  Barclays Bank PLC, as Administrative Agent, and Royal Bank of Canada, as  Managing Administrative Agent.                         |
| 12.1             |       | Computation of the Ratio  of Earnings to Fixed Charges.                                                                                                                                                                                                                                                                                                                                   |
| 21               |       | List of subsidiaries.                                                                                                                                                                                                                                                                                                                                                                     |
| 23               |       | Consent of KPMG LLP.                                                                                                                                                                                                                                                                                                                                                                      |
| 23.1             |       | Consent of Grant  Thornton LLP.                                                                                                                                                                                                                                                                                                                                                           |
| 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.

F-89

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