**UNITED STATES SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**Form 10-K**

**(Mark One)**

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

**Forthe fiscal year ended December 31, 2006**

**or**

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

**Commissionfile number: 1-8422**

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**Countrywide FinancialCorporation**

(Exact name of registrantas specified 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                        |
| Preferred Stock Purchase  Rights |       | New York 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

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes  o    No  x

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

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filer  x          Acceleratedfiler  o          Non-acceleratedfiler  o

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes  o    No  x

As of June 30, 2006,the last business day of the registrant’s most recently completed second fiscalquarter, the aggregate market value of the Registrant’s Common Stock held bynon-affiliates was $23,108,648,689 based on the closing price as reported onthe New York Stock Exchange.

As of February 26, 2007,there were 589,817,197 shares of Countrywide Financial Corporation CommonStock, $0.05 par value, outstanding.

**DocumentsIncorporated By Reference**

| Document                        | ** ** | **Parts Into Which Incorporated** |
|---------------------------------|------------|-----------------------------------|
| Proxy Statement  for the        |       | Part III                     |
| Annual Meeting of  Stockholders |       |                              |
| to be held  June 13, 2007  |       |                              |

 

 

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**CountrywideFinancial Corporation**

**2006 Annual Reporton 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                                                                                                                 |       | 10       |
|         |       | Capital  Markets Segment                                                                                                        |       | 12       |
|         |       | Insurance Segment                                                                                                               |       | 13       |
|         |       | Global  Operations Segment                                                                                                      |       | 15       |
|         |       | Financing of  Operations                                                                                                        |       | 15       |
|         |       | Regulations                                                                                                                     |       | 17       |
|         |       | Workforce                                                                                                                       |       | 27       |
|         |       | Additional  Information                                                                                                         |       | 27       |
|         |       | Loan  Production Tables                                                                                                         |       | 28       |
|         | Item 1A.   | Risk Factors                                                                                                                    |       | 35       |
|         | Item  1B.  | Unresolved  Staff Comments                                                                                                      |       | 40       |
|         | Item 2.    | Properties                                                                                                                      |       | 40       |
|         | Item 3.    | Legal  Proceedings                                                                                                              |       | 40       |
|         | Item  4.   | Submission  of Matters to a Vote of Security Holders                                                                            |       | 40       |
| PART II |       |                                                                                                                            |
|         | Item  5.   | Market  for the Company’s Common Stock, Related Stockholder Matters and Issuer  Purchase of Equity Securities              |       | 41       |
|         | Item  6.   | Selected  Consolidated Financial Data                                                                                           |       | 43       |
|         | Item  7.   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations       |       | 45       |
|         |       | Overview                                                                                                                        |       | 45       |
|         |       | Critical  Accounting Policies                                                                                                   |       | 47       |
|         |       | Results  of Operations Comparison—Year Ended December 31, 2006 and Year Ended  December 31, 2005                 |       | 53       |
|         |       | Results  of Operations Comparison—Year Ended December 31, 2005 and Year Ended  December 31, 2004                 |       | 75       |
|         |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                     |       | 94       |
|         |       | Credit Risk Management                                                                                                          |       | 100      |
|         |       | Loan Servicing                                                                                                                  |       | 113      |
|         |       | Inflation                                                                                                                       |       | 114      |
|         |       | Seasonality                                                                                                                     |       | 114      |
|         |       | Liquidity  and Capital Resources                                                                                                |       | 114      |
|         |       | Off-Balance  Sheet Arrangements and Aggregate Contractual Obligations                                                           |       | 122      |
|         |       | Prospective  Trends                                                                                                             |       | 123      |
|         | Item  7A.  | Quantitative  and Qualitative Disclosures About Market Risk                                                                     |       | 128      |
|         | Item  8.   | Financial  Statements and Supplementary Data                                                                                    |       | 128      |
|         | Item  9.   | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure                  |       | 129      |
|         | Item  9A.  | Controls  and Procedures                                                                                                        |       | 129      |
|         | Item 9B.   | Other Information                                                                                                               |       | 132      |

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| PART III |      |                                                                                                  |
|---------------|-----------|-------------------------------------------------------------------------------------------------------|
|          | Item  10. | Directors  and Executive Officers of the Registrant                                                   |   | 133 |
|          | Item  11. | Executive  Compensation                                                                               |   | 133 |
|          | Item  12. | Security  Ownership of Certain Beneficial Owners and Management and  Related Stockholder Matters |   | 133 |
|          | Item  13. | Certain  Relationships and Related Transactions                                                       |   | 133 |
|          | Item  14. | Principal  Accountant Fees and Services                                                               |   | 133 |
| PART IV  |      |                                                                                                  |
|          | Item  15. | Exhibits,  Financial Statement Schedules                                                              |   | 134 |

 

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**PART I**

**Item 1.**                        *Business*

**Overview**

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

We manage ourbusiness through five business segments—Mortgage Banking, Banking, CapitalMarkets, Insurance and Global Operations. We primarily conduct the followingoperations in these segments:

·       *Mortgage Banking*—We originate, purchase,sell and service non-commercial mortgage loans nationwide.

·       *Banking*—We take deposits and invest inmortgage loans and home equity lines of credit, sourced primarily through ourmortgage banking operation as well as through purchases from non-affiliates. Wealso provide short-term secured financing to mortgage lenders.

·       *Capital Markets*—We operate aninstitutional broker-dealer that primarily specializes in trading andunderwriting mortgage-backed securities. We also trade derivative products andU.S. Treasury securities, provide asset management services and originate forsale loans secured by commercial real estate. Within this segment we also managethe acquisition and disposition of mortgage loans on behalf of the MortgageBanking Segment.

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

·       *Global Operations*—We license proprietarytechnology to mortgage lenders in the UK. We also perform certain of theCompany’s administrative and loan servicing functions through our Indiaoperations.

Mortgage banking continuesto be our core business, generating 48% of our pre-tax earnings in 2006. Ourother segments generated the following percentages of our pre-tax earnings in2006: Banking—32%; Capital Markets—13%; Insurance—6%; and Global Operations—1%.We remain a real-estate lending-centered company and have built upon ourmortgage banking operations in recent years to capitalize on meaningful relatedopportunities with the intent of stabilizing our consolidated earnings profile.For financial information about our segments, see the *Management’sDiscussion and Analysis of Financial Condition and Results of Operations—OperatingSegment Results* section and Note 26—*Segments andRelated Information* in the financial statement section of thisReport.

**AvailableInformation**

We have a Web site locatedat www.countrywide.com on which we make our Annual Reports on Form 10-K,Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and allexhibits and amendments to these reports available, free of charge, as soon asreasonably practicable after such material is electronically filed with, orfurnished to, the Securities and Exchange Commission. Our Corporate GovernanceGuidelines, our Code of Business Ethics, the charters of the committees of ourBoard of Directors and all amendments and updates to these documents are alsoavailable on 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. Nearly all of the mortgage loans that we produce in theMortgage Banking and Capital Markets Segments are sold into the secondarymortgage market, primarily in the form of securities and to a lesser extent inthe form of loans. We generally perform the ongoing servicing functions relatedto the residential mortgage loans that we produce. Loans produced in ourBanking Segment have generally been held for investment.

***Types of Products***

We originate andpurchase mortgage loans that generally fall into one of the following fourcategories:

·       *Prime Mortgage Loans*—These are primecredit quality first-lien mortgage loans secured by single-family residences.References to loans secured by single-family residences in this documentinclude loans secured 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, office buildings, industrial sites, hotels andother commercial properties.

The majority of our loan production consists of PrimeMortgage Loans. Prime Mortgage Loans include conventional mortgage loans, loansinsured by the Federal Housing Administration (“FHA”) and loans guaranteed bythe Veterans Administration (“VA”). A significant portion of the conventionalloans qualify for inclusion in guaranteed mortgage securities backed by FannieMae or Freddie Mac (“conforming loans”). Some of the conventional loans weproduce either have an original loan amount in excess of the Fannie Mae andFreddie Mac loan limit for single-family loans ($417,000 for 2007) or otherwisedo not meet Fannie Mae or Freddie Mac guidelines. Loans that do not meet FannieMae or Freddie Mac guidelines are referred to as “nonconforming loans.” Incertain tables and elsewhere in this Report, FHA and VA loans may be referredto as Government Loans.

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Thefollowing table summarizes our mortgage loan production by segment and product,net of intersegment sales:

| ** **                                   | ** ** | **Mortgage Loan Production**      | ** ** |
|----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                   | ** ** | **Years Ended December 31,** | ** ** |
| ** **                                   | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                   | ** ** | **(in millions)**                      | ** ** |
| Segment:                                     |       |                                        |       |   |   |   |   |   |   |   |   |
| Mortgage Banking                             |       | $                                           | 421,084    |   | $ | 427,916 |   | $ | 317,811 |   | $ | 398,310 |   | $ | 242,437 |   |
| Banking Operations                           |       | 23,759                                      |       | 46,432 |   | 27,116 |   | 14,354 |   | 805 |   |
| Capital Markets—conduit acquisitions(1) |       | 17,658                                      |       | 21,028 |   | 18,079 |   | 22,200 |   | 8,659 |   |
| Total Mortgage Loans Fundings                |       | 462,501                                     |       | 495,376 |   | 363,006 |   | 434,864 |   | 251,901 |   |
| Commercial Real Estate                       |       | 5,671                                       |       | 3,925 |   | 358 |   | — |   | — |   |
| Total Mortgage Loans                         |       | $                                           | 468,172    |   | $ | 499,301 |   | $ | 363,364 |   | $ | 434,864 |   | $ | 251,901 |   |
| Product:                                     |       |                                        |       |   |   |   |   |   |   |   |   |
| Prime Mortgage                               |       | $                                           | 374,029    |   | $ | 405,889 |   | $ | 292,672 |   | $ | 396,934 |   | $ | 230,830 |   |
| Prime Home Equity                            |       | 47,876                                      |       | 44,850 |   | 30,893 |   | 18,103 |   | 11,650 |   |
| Nonprime Mortgage                            |       | 40,596                                      |       | 44,637 |   | 39,441 |   | 19,827 |   | 9,421 |   |
| Commercial Real Estate                       |       | 5,671                                       |       | 3,925 |   | 358 |   | — |   | — |   |
| Total Mortgage  Loans                        |       | $                                           | 468,172    |   | $ | 499,301 |   | $ | 363,364 |   | $ | 434,864 |   | $ | 251,901 |   |

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(1)          Acquisitions from thirdparties.

For additional loanproduction statistics, see the section in this Report entitled *Business—Loan Production Tables.*

**Mortgage BankingSegment**

Our Mortgage BankingSegment produces mortgage loans through a variety of channels on a nationalscale. The mortgage loans we produce in this segment are generally sold intothe secondary mortgage market, primarily in the form of securities, and to alesser extent in the form of loans. We typically perform the ongoing servicingfunctions related to the mortgage loans that we produce. We also providevarious loan closing services such as escrow, flood determinations andappraisal. We group the activities of our Mortgage Banking Segment into threebusiness sectors—Loan Production, Loan Servicing and Loan Closing Services.

***Loan Production***

We produce mortgage loansthrough three production channels of Countrywide Home Loans (“CHL”)—RetailChannel (Consumer Markets and Full Spectrum Lending), Wholesale Lending Channeland Correspondent Lending Channel. These loans are funded either through one ofthese channels or through Countrywide Bank. Countrywide Bank funds loans forboth our Mortgage Banking and Banking Segments.

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Thefollowing table summarizes our Mortgage Banking loan production by channel:

| ** **                            | ** ** | **Mortgage Loan Production(1)(2)** | ** ** |
|---------------------------------------|------------|----------------------------------------------|------------|
| ** **                            | ** ** | **Years Ended December 31,**  | ** ** |
| ** **                            | ** ** | **2006**                                     | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                            | ** ** | **(in millions)**                       | ** ** |
| Retail Channel:                       |       |                                         |       |   |   |   |   |   |   |   |   |
| Consumer Markets                      |       | $                                            | 118,596    |   | $ | 120,324 |   | $ | 95,619 |   | $ | 104,216 |   | $ | 62,189 |   |
| Full Spectrum Lending                 |       | 35,067                                       |       | 25,670 |   | 15,756 |   | 7,935 |   | 3,586 |   |
|                                  |       | 153,663                                      |       | 145,994 |   | 111,375 |   | 112,151 |   | 65,775 |   |
| Wholesale Lending                     |       | 89,393                                       |       | 83,564 |   | 72,848 |   | 91,211 |   | 67,188 |   |
| Total originated                      |       | 243,056                                      |       | 229,558 |   | 184,223 |   | 203,362 |   | 132,963 |   |
| Purchased—Correspondent  Lending |       | 178,028                                      |       | 198,358 |   | 133,588 |   | 194,948 |   | 109,474 |   |
| Total Loans                           |       | $                                            | 421,084    |   | $ | 427,916 |   | $ | 317,811 |   | $ | 398,310 |   | $ | 242,437 |   |

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(1)          For additionalproduction statistics, see the section in this Report entitled *Business—Loan Production Tables*.

(2)          $106.0billion and $8.1 billion of these loans were funded by Countrywide Bank duringthe years ended December 31, 2006 and 2005, respectively.

*Retail Channel*

The retail channels consist of the Consumer MarketsDivision (“CMD”) and the Full Spectrum Lending Division (“FSLD”). CMD generallyoriginates prime loans through existing relationships with customers andorganizations that influence the placement of mortgage services, while the FullSpectrum Lending Division focuses on new customer acquisitions through massmedia advertising. In addition, FSLD originates nonprime mortgage loans.

For 2006, Countrywide wasranked by *Inside Mortgage Finance*asthe second largest retail lender, in terms of volume, among residential retailmortgage lenders nationwide. (Reprintedwith the permission of Inside Mortgage Finance Inc. (“IMF”) Copyrighted. Allrights reserved by IMF.)

*Consumer MarketsDivision*

CMD originates mortgage loans through three businessgroups: the Distributed Retail group, the Business-to-Consumer group and the StrategicBusiness Alliances group.

The Distributed Retail group is the branch networkwhich originates loans through relationships with consumers, builders,Realtors® and through joint ventures. As of December 31, 2006, this groupconsisted of 773 branch offices in 48 states and the District of Columbia,including 62 dedicated joint venture branches. This group has a sales force of6,602, which includes those dedicated to joint venture relationships. TheDistributed Retail group (including the joint venture relationships) originated74% of CMD total volume for the year ended December 31, 2006.

The Business-to-Consumer group primarily originatesmortgage loans directly from existing customers through the Internet andthrough our call centers. The Business-to-Consumer group focuses on customerretention through marketing and by providing our existing customers with anefficient and convenient means to obtain financing for a new home or for refinancingtheir existing mortgage or a home equity loan. As of December 31, 2006,the Business-to-Consumer group consisted of five call centers with a salesstaff of 985. This group accounted for 18% of CMD’s total volume for the yearended December 31, 2006.

The Strategic BusinessAlliance group facilitates and manages the development of new sources of loansthrough relationships with organizations that influence the placement ofmortgage services. This 

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groupfocuses primarily on developing revenue-sharing arrangements such as jointventures, third party outsourcing, relocation lending, marketing serviceagreements and brokered-in agreements. This group accounted for 8% (excludingDistributed Retail volume from joint venture relationships) of CMD’s totalvolume for the year ended December 31, 2006.

*Full SpectrumLending Division*

FSLD originates Nonprime and Prime Mortgage Loans withthe primary focus on refinance and home equity products. FSLD operates througha network of 226 retail branch offices located in 39 states, as wellas 11 call centers. The branches and call centers of FSLD are supported by fourfulfillment centers for processing, underwriting and funding of these mortgageloans.

FSLD’s mortgage productionis generated primarily through customer retention efforts directed toCountrywide’s nonprime servicing portfolio and new customer acquisition throughdirect mail, Internet, mass media and joint venture relationships. Of the 226FSLD retail branch offices, 56 operate with a large network of sales associateswho are dedicated to the fulfillment of referrals of Nonprime Mortgage Loancustomers from Countrywide’s Consumer Markets Division.

*Wholesale LendingChannel*

Our Wholesale Lending Channel (“WLD”) underwrites andfunds mortgage loans sourced by mortgage loan brokers and other financialintermediaries. WLD sources loans through approximately 30,000 mortgage loanbrokers nationwide. WLD offers a wide variety of Prime and Nonprime MortgageLoans and Prime Home Equity Loan products. Business is solicited through asales force, the Internet and advertising.

As of December 31, 2006, WLD operated 52 branchoffices and seven fulfillment centers in various parts of the United States.

For 2006, Countrywide wasranked by *Inside Mortgage**Finance*as the largest wholesaleoriginator, in terms of volume, among residential wholesale mortgage lendersnationwide. (Reprinted with thepermission of IMF Copyrighted. All rights reserved by IMF.)

*CorrespondentLending Channel*

Our Correspondent Lending Channel (“CLD”) purchasesmortgage loans from other lenders, which include mortgage bankers, commercialbanks, savings and loan associations, home builders and credit unions. As of December 31,2006, this Channel had correspondent relationships with approximately 2,100lenders, who are subject to initial and ongoing credit evaluation andmonitoring. CLD operates in all 50 states.

For 2006, Countrywide wasranked by *Inside Mortgage**Finance*as the largest correspondentlender, in terms of volume, among residential correspondent mortgage lendersnationwide. (Reprinted with thepermission of IMF Copyrighted. All rights reserved by IMF.)

*Countrywide BankMortgage Banking Activities*

As well as funding loansfor its investment portfolio, Countrywide Bank funds loans that are originatedfor sale by our Mortgage Banking Segment. Because this activity is a MortgageBanking activity, the mortgage loan production, the related balance sheet andthe income relating to the holding and sale of these loans is included in ourMortgage Banking Segment. The funding of loans by Countrywide Bank for ourMortgage Banking operations provides an efficient means of financing loansduring the period the loans are held for sale.

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*Affordable andMulticultural Home Loan Programs*

Since 1992, we have adopted a variety of affordablehome loan initiatives designed to increase homeownership opportunities forlow-to moderate-income borrowers and those with diverse backgrounds. Ourlong-time initiative, known as *We*HouseAmerica®, supports affordable housing programs undertaken by Fannie Mae andpromoted by various government agencies, including the U.S. Department ofHousing and Urban Development (“HUD”).

We have specifically designed*We*House America® loan programs to meet the needs of low-to moderate-incomeborrowers and others with financial, employment or personal situations whichmight prevent them from qualifying for traditional mortgages. These loanprograms enable such borrowers to qualify for a home loan by allowing, forexample, lower down payments, lower cash reserves, alternative income sourcesand more flexible underwriting criteria than on a typical loan. The mortgageloans 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 Internet-basedresources to educate prospective first-time minority and low-to moderate-incomehomebuyers about the home loan process. *We*HouseAmerica® also provides Spanish-speaking counselors and instructors, andeducational materials 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 than930 mortgage loan programs that assist borrowers with down payments and closingcosts, 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 borrower populations by the endof 2010. As of December 31, 2006, we made loans to 4.2 million borrowersand funded $668 billion (including Prime and Nonprime Mortgage Loans) towardthis goal.

***Loan Servicing***

When we sell or securitize mortgage loans, wegenerally retain the rights to service these loans. These are referred to asmortgage servicing rights (“MSRs”). We may also retain financial interests whenwe securitize mortgage loans. We include the value of these retained interestson our balance sheet. The results of the Loan Servicing Sector income statementincludes the changes in value related to our MSRs and retained interests, aswell as the revenues and expenses arising from servicing the mortgage 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 andsupervise foreclosures and property dispositions. We receive servicing fees andother remuneration in return for performing these functions.

***Mortgage Servicing Rights, Retained Interests and theServicing Hedge***

Our MSRs arise from contractual agreements between usand investors (or their agents) in mortgage-backed securities and mortgageloans. Although MSRs generally arise from the sale or securitization ofmortgage loans that we originate, we also occasionally purchase MSRs fromothers. For a more complete description of MSRs, see Note 3—*Loan Sales* in the financial statement section of thisReport.

MSRs and retainedinterests are generally subject to a loss in value when mortgage rates decline.To moderate the effect on earnings caused by a rate-driven decline in value ofMSRs and retained interests, we maintain a portfolio of financial instruments,primarily derivative contracts, which generally increase in value when interestrates decline. This portfolio of financial instruments is referred to as the “Servicing

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Hedge.”See Note 4—*Derivative Financial Instruments—Risk ManagementActivities Related to Mortgage Servicing Rights (MSRs) and Retained Interests*in the financial statement section of this Report for a further discussion ofour Servicing Hedge.

**Loan ServicingOperations**

The various functionswithin our loan servicing operations are briefly described in the followingparagraphs. These operations are performed in eight primary locations using thesame systems and processes: two in California, three in Texas, one in Arizonaand two in India.

***Customer Service***

Our Customer Service CallCenters managed nearly 58 million contacts with customers in 2006. Thesecontacts were primarily handled through our customer service representatives,automated phone system and Website (www.customers.countrywide.com). Thisdivision also prints monthly statements and oversees outbound customercorrespondence.

***Remittance Processing***

Our Remittance Processingdivision processes all payments, loan payoffs and payoff demand statements.

***Collections and Loss Mitigation***

Our Collections and LossMitigation units work with delinquent borrowers to bring their mortgages backto current status and avoid foreclosure if possible. These efforts are tailoredto the specific circumstances of a borrower and comply with the requirements ofthe mortgage investor.

***Investor Accounting***

Our Investor Accountingdepartment reconciles custodial accounts, processes investor remittances andmaintains accounting records on behalf of our mortgage investors, includingFannie Mae, Freddie Mac and the Government National Mortgage Association (“GinnieMae”), as well as private investors.

***Foreclosure and Bankruptcy***

Foreclosure and bankruptcyare complex processes that are subject to federal and state laws andregulations, as well as mortgage investor and insurer requirements. Ourworkflow-based systems facilitate consistent and compliant processing ofdefaulted mortgage loans, as well as an efficient flow of data between internaland external business partners. We use our own companies in support of many ofour foreclosure and bankruptcy activities to minimize related costs and toincrease efficiency.

***Related Services***

We perform several loanservicing functions internally that other loan servicers commonly outsource tothird parties. Our integrated services include performing property tax paymentprocessing, property inspections, and insurance tracking and premium paymentprocessing. We believe the integration of these functions gives us acompetitive advantage by lowering overall servicing costs and enabling us toprovide a high level of service to our mortgage customers and mortgageinvestors.

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Thefollowing table sets forth certain information regarding the Company’s loanservicing portfolio of single-family mortgage loans, including loans andsecurities held for sale, loans held for investment and loans subserviced undersubservicing agreements, for the periods indicated:

| ** **                           | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------|------------|---------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                           | ** ** | **(in millions)**                      | ** ** |
| Beginning owned  servicing portfolio |       | $                                           | 1,081,189  |   | $ | 821,475 |   | $ | 630,451 |   | $ | 441,267 |   | $ | 327,541 |   |
| Add: Residential  loan production(1) |       | 456,949                                     |       | 494,380 |   | 363,006 |   | 434,864 |   | 251,901 |   |
| Purchased MSRs (bulk acquisitions)   |       | 15,781                                      |       | 51,377 |   | 40,723 |   | 6,944 |   | 4,228 |   |
| Less: Principal  repayments          |       | (273,800                                    | )          | (284,924 | ) | (212,705 | ) | (252,624 | ) | (140,445 | ) |
| Servicing sold                       |       | —                                      |       | (1,119 | ) | — |   | — |   | (1,958 | ) |
| Ending owned  servicing portfolio    |       | 1,280,119                                   |       | 1,081,189 |   | 821,475 |   | 630,451 |   | 441,267 |   |
| Subservicing  portfolio              |       | 18,275                                      |       | 29,901 |   | 16,847 |   | 14,404 |   | 11,138 |   |
| Total servicing portfolio            |       | $                                           | 1,298,394  |   | $ | 1,111,090 |   | $ | 838,322 |   | $ | 644,855 |   | $ | 452,405 |   |
| MSR portfolio                        |       | $                                           | 1,174,874  |   | $ | 979,207 |   | $ | 758,975 |   | $ | 581,964 |   | $ | 422,328 |   |
| Mortgage loans  owned                |       | 105,245                                     |       | 101,982 |   | 62,500 |   | 48,487 |   | 18,939 |   |
| Subservicing  portfolio              |       | 18,275                                      |       | 29,901 |   | 16,847 |   | 14,404 |   | 11,138 |   |
| Total servicing  portfolio           |       | $                                           | 1,298,394  |   | $ | 1,111,090 |   | $ | 838,322 |   | $ | 644,855 |   | $ | 452,405 |   |

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(1)          Excludes purchases fromthird parties in which the servicing rights were not acquired.

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| ** **                                               | ** ** | **As of December 31,**           | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                        | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                               | ** ** | **(dollar amounts in millions)** | ** ** |
| Composition of owned  servicing portfolio at period end: |       |                                            |       |   |   |   |   |   |   |   |   |
| Conventional mortgage                                    |       | $                                               | 1,063,141  |   | $ | 861,926 |   | $ | 639,148 |   | $ | 512,889 |   | $ | 343,420 |   |
| Nonprime Mortgage                                        |       | 116,270                                         |       | 116,101 |   | 84,608 |   | 36,332 |   | 21,976 |   |
| Prime Home Equity                                        |       | 47,628                                          |       | 53,253 |   | 45,053 |   | 24,174 |   | 15,667 |   |
| FHA-insured mortgage                                     |       | 39,011                                          |       | 36,949 |   | 39,618 |   | 43,281 |   | 45,252 |   |
| VA-guaranteed mortgage                                   |       | 14,069                                          |       | 12,960 |   | 13,048 |   | 13,775 |   | 14,952 |   |
| Total owned servicing portfolio                          |       | $                                               | 1,280,119  |   | $ | 1,081,189 |   | $ | 821,475 |   | $ | 630,451 |   | $ | 441,267 |   |
| Delinquent mortgage  loans(1):                           |       |                                            |       |   |   |   |   |   |   |   |   |
| 30 days                                                  |       | 2.95                                            | %          | 2.59 | % | 2.35 | % | 2.35 | % | 2.73 | % |
| 60 days                                                  |       | 0.98                                            | %          | 0.87 | % | 0.70 | % | 0.72 | % | 0.87 | % |
| 90 days or more                                          |       | 1.09                                            | %          | 1.15 | % | 0.78 | % | 0.84 | % | 1.02 | % |
| Total delinquent mortgage loans                          |       | 5.02                                            | %          | 4.61 | % | 3.83 | % | 3.91 | % | 4.62 | % |
| Loans pending  foreclosure(1)                            |       | 0.65                                            | %          | 0.44 | % | 0.42 | % | 0.43 | % | 0.55 | % |
| Delinquent mortgage  loans(1):                           |       |                                            |       |   |   |   |   |   |   |   |   |
| Conventional mortgage                                    |       | 2.76                                            | %          | 2.60 | % | 2.24 | % | 2.21 | % | 2.43 | % |
| Nonprime Mortgage                                        |       | 19.03                                           | %          | 15.20 | % | 11.29 | % | 12.46 | % | 14.41 | % |
| Prime Home Equity                                        |       | 2.93                                            | %          | 1.57 | % | 0.79 | % | 0.73 | % | 0.80 | % |
| Government mortgage                                      |       | 13.94                                           | %          | 14.61 | % | 13.14 | % | 13.29 | % | 12.61 | % |
| Total delinquent mortgage loans                          |       | 5.02                                            | %          | 4.61 | % | 3.83 | % | 3.91 | % | 4.62 | % |
| Loans pending foreclosure(1):                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Conventional mortgage                                    |       | 0.31                                            | %          | 0.20 | % | 0.21 | % | 0.21 | % | 0.23 | % |
| Nonprime Mortgage                                        |       | 3.53                                            | %          | 2.03 | % | 1.74 | % | 2.30 | % | 2.93 | % |
| Prime Home Equity                                        |       | 0.12                                            | %          | 0.06 | % | 0.03 | % | 0.02 | % | 0.05 | % |
| Government mortgage                                      |       | 1.28                                            | %          | 1.09 | % | 1.21 | % | 1.20 | % | 1.32 | % |
| Total loans  pending foreclosure                         |       | 0.65                                            | %          | 0.44 | % | 0.42 | % | 0.43 | % | 0.55 | % |

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(1)          This excludessubserviced loans and loans purchased at a discount due to their collectionstatus. Expressed as a percentage of the number of loans serviced.

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 the total unpaid principal balance at December 31, 2006:
| State            | ** ** | ** **             | ** ** | **Unpaid Principal  Balance** | ** ** | **% Total  Balance** | ** ** |
|------------------|------------|------------------------|------------|------------------------------------|------------|---------------------------|------------|
| ** **       | ** ** | **(in millions)** | ** ** |
| California       |       |                   |       |                               |       |                      |       |   |   |
| Southern         |       |                   | $          | 237,013                            |       |                      |       | 18 | % |   |
| Northern         |       |                   | 130,409    |                               |       |                      | 10         | % |   |
|             |       |                   | 367,422    |                               |       |                      | 28         | % |   |
| Florida          |       |                   | 97,442     |                               |       |                      | 8          | % |   |
| Texas            |       |                   | 57,724     |                               |       |                      | 4          | % |   |
| All other states |       |                   | 775,806    |                               |       |                      | 60         | % |   |
| Total            |       |                   | $          | 1,298,394                          |       |                      |       | 100 | % |   |

 

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***Loan Closing Services Sector***

We provide loan closingproducts and services such as credit reports, appraisals, property valuationservices and flood determinations through our LandSafe, Inc. group ofcompanies. We provide these services primarily to customers referred by ourloan production channels, but also to third parties.

***Competition and Consolidation***

The mortgage lending industry is dominated by large,sophisticated financial institutions. To continue to compete effectively, wewill be required to maintain a high level of operational, technological, andmanagerial expertise, as well as an ability to attract capital at a competitivecost. Recently, well-capitalized Wall Street investment banking firms haveincreased their participation in the mortgage banking business. We expect theentrance of these firms to the marketplace to increase competition in thenear-term, especially in the nonconforming and nonprime loan products.

The industry continues toundergo consolidation. We expect this trend to continue. We believe that wewill benefit from industry consolidation through increased market share andenhanced ability to recruit talented personnel.

**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***

*Banking Operations*

Our Banking Operations primarily fund and purchasemortgage loans and home equity loans for investment purposes. The majority ofthese loans are sourced through our Mortgage Banking production channels. Forliquidity and asset-liability management purposes, we also invest in securitiessuch as collateralized mortgage obligations and agency Mortgage-BackedSecurities (“MBS”). The Bank activities provide the Company with an expandedproduct menu, lower cost funding sources and opportunities for a stable sourceof revenue in the form of net interest income.

Our Banking Operations continue to leverage therelationship with our Mortgage Banking Segment, sourcing high-quality mortgageassets for our investment portfolio through the Mortgage Banking Segment’sexisting production distribution channels, as well as through purchases ofloans from non-affiliated lenders. Asset growth is funded by the Bank’s liabilitybase. The Bank obtains retail deposits, primarily certificates of deposit,through 99 financial centers, 78 of which are located in CHL’s retail branchoffices as of December 31, 2006, call centers and the Internet. CountrywideBank also offers deposit accounts through deposit brokers (generally,well-recognized financial intermediaries).

A significant portion of Countrywide Bank’s depositliabilities are comprised of custodial funds that relate to the loan servicingportfolio of CHL. Countrywide Bank also borrows funds from other sources tosupplement its deposit liabilities, including mortgage loan-secured borrowingsfrom the Federal Home Loan Bank (“FHLB”) of Atlanta, repurchase agreementssecured by purchased federal funds. Countrywide Bank also offers commercialdeposit accounts to title and mortgage insurance companies through a developingcommercial business unit.

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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 services,including safekeeping, collateral review/certification, collateral releases andcustomer reporting.

Propertiessecuring the mortgage loans in our Banking Operations’ portfolio of loans heldfor investment are concentrated in the State of California. The following is asummary of the geographical distribution of loans included in the Bank’s loanportfolio for the states with more than five percent of the total unpaidprincipal balance at December 31, 2006:
| State            | ** ** | ** **              | ** ** | **Unpaid Principal  Balance** | ** ** | **% Total  Balance** | ** ** |
|------------------|------------|-------------------------|------------|------------------------------------|------------|---------------------------|------------|
| ** **       | ** ** | **(in thousands)** | ** ** |
| California       |       |                    |       |                               |       |                      |       |   |   |
| Southern         |       |                    | $          | 19,638,756                         |       |                      |       | 27 | % |   |
| Northern         |       |                    | 13,272,718 |                               |       |                      | 19         | % |   |
|             |       |                    | 32,911,474 |                               |       |                      | 46         | % |   |
| Florida          |       |                    | 4,292,588  |                               |       |                      | 6          | % |   |
| Virginia         |       |                    | 3,777,253  |                               |       |                      | 5          | % |   |
| All other states |       |                    | 30,816,948 |                               |       |                      | 43         | % |   |
| Total            |       |                    | $          | 71,798,263                         |       |                      |       | 100 | % |   |

 

Mortgage Banking Activities

Countrywide Bank producesloans for sale which we have defined as a Mortgage Banking activity. Themortgage loan production, the related balance sheet and the income relating tothe holding and sale of these loans is therefore included in our MortgageBanking Segment. We fund loans through Countrywide Bank for sale by ourMortgage Banking Segment as an efficient means of financing loans during theperiod the loans are held for sale.

***Countrywide Warehouse Lending***

We provide committed anduncommitted lines of credit to mortgage bankers to finance their mortgage loaninventories, which we refer to as warehouse lending, through both anon-depository lending company and Countrywide Bank. Most of these mortgagebankers sell loans to our Mortgage Banking Segment’s Correspondent LendingChannel. All of these advances are secured by mortgage loans that have a marketvalue in excess of the balance of our advances.

***Competition***

We operate in a highly competitive environment.Competition for retail deposits comes primarily from other insured depositoryinstitutions, which include more than 7,400 commercial banks andapproximately 1,300 savings institutions. We attract and retain depositsthrough a combination of competitive rates, physical presence, experiencedbanking professionals and easy access to our products through call centers andthe Internet at www.countrywidebank.com. Because of our low-cost structurerelative to other financial institutions, we are able to offer deposit ratesthat are among the most competitive in the industry.

Countrywide Bank invests primarily in adjustable-rateand short duration residential mortgage loans. Competition in making realestate loans comes principally from other savings institutions, mortgagebanking companies and commercial banks. The majority of loans that the BankingSegment invests in are sourced by the Mortgage Banking Segment. CountrywideBank also competes with commercial banks and investment banks in the purchaseof loans from third parties.

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Our Banking Segment’scompetitive position is enhanced by its relationship with our Mortgage BankingSegment. For example, a significant portion of Countrywide Bank’s depositliabilities consists of custodial funds controlled by CHL. As discussed above,Countrywide Bank obtains retail deposit products through financial centersplaced within certain of CHL’s retail branch offices. This economical use ofspace reduces the Bank’s deposit acquisition costs.

**Capital MarketsSegment**

Our Capital Markets Segment primarily operates as aregistered securities broker-dealer, which is also a primary dealer of U.S.Treasury securities, a residential mortgage loan manager and a commercialmortgage loan originator. We also operate broker-dealers in Japan, Hong Kongand the United Kingdom; an introducing broker of futures contracts; an assetmanager; a broker of MSRs and a derivatives dealer. With the exception of ourcommercial mortgage activities, we transact primarily with institutionalcustomers, such as banks, other depository institutions, insurance companies,asset managers, mutual funds, pension plans, other broker-dealers and governmentalagencies. Customers of our commercial real estate finance business are theowners 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 CHL. In our conduits, we manage both Nonprime Mortgage Loansand Prime Mortgage Loans which are either acquired from third parties ororiginated by CHL. We accumulate these loans for sale either throughsecuritizations or loan sales. We also manage the acquisition and dispositionof delinquent or otherwise illiquid residential mortgage loans, some of whichhave been originated under FHA and VA programs. We attempt to cure the loans,using the servicing operations of CHL, with the intent to securitize thoseloans that become eligible for securitization. The remaining loans are servicedthrough foreclosure and liquidation, which includes the collection ofgovernment insurance and guarantee proceeds relating to defaulted FHA and VAprogram loans.

***Underwriting***

Capital Marketsparticipates in both competitive bid and negotiated underwritings andunderwrites for both CHL and third parties. Underwriting activities may encompassthe assumption of the market risk of buying a new issue of securities from theissuer and reselling the securities to investors, either directly or throughdealers. Capital Markets primarily underwrites mortgage-related debtsecurities. Capital Markets earns an underwriting spread that is the differencebetween the amount paid to the issuer of securities and the offering price toinvestors, net of expenses. The spread earned on each transaction and the levelof market risk assumed may vary based upon the nature of the market and theterms of the underwriting agreement.

***Securities Trading***

Securities tradingactivities include the trading of debt securities in the secondary market afterthe original issuance of the security and, to a much lesser extent, trading ofderivative financial instruments. We generally trade mortgage-relatedfixed-income securities, including MBS, collateralized mortgage obligations andasset-backed securities (“ABS”) issued by Fannie Mae, Freddie Mac, Ginnie Maeand other financial institutions, including CHL. We also trade securitiesissued by the U.S. Department of Treasury and other governmental agencies.

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***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,office buildings, industrial sites and hotels.

***Brokering***

Brokering activitiesinclude brokerage of residential mortgage loan transactions, brokerage of MSRs,brokerage of exchange-traded future contracts, advisory services and brokeringof exchange traded futures contracts and commodity options in an agentcapacity. The brokerage of residential mortgage loans, MSRs and futurescontracts may be between third parties or between CHL and third parties.

***Asset Management***

Asset managementactivities are conducted for the benefit of investors. This includes managing aprivate equity fund, as well as management of collateralized debt and bondobligations. We receive fees, including performance fees, for providing theseservices. We may also share in the results of the funds when we hold aninvestment 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 CHL and by specializing in the mortgage securities market, wecan offer information, products and services tailored to the unique needs ofinstitutional customers, giving us an advantage in the market. In contrast, manyof our competitors offer a broader range of products and services, which mayplace us at a competitive disadvantage. However, we believe that ourcompetitive position is strengthened by our offerings of more non-residentialmortgage related products and services to the global institutional investormarkets.

For 2006, according to *Inside MBS & ABS,* we rankedsecond among Non-Agency MBS Underwriters.

**Insurance Segment**

Our InsuranceSegment’s primary activities are:

·       Offeringproperty, casualty, life and disability insurance as an underwriter and as aninsurance agent, offering warranty products and services, insurance trackingservices affiliated with our lender-placed insurance programs and an array ofcommercial insurance products through our agency (“Insurance Operations”).

·       Providingreinsurance coverage to primary mortgage insurers (“Reinsurance Operations”).

We manage these activitiesthrough two business units—Balboa Insurance Group and Balboa ReinsuranceCompany.

***Insurance Operations***

Our insurance operations include our insuranceunderwriters/carriers and their affiliated businesses, and our agencyoperations.

We underwrite property, casualty, life and disabilityinsurance in 50 states and the District of Columbia through the insurers thatmake up Balboa Insurance Group. Our retail insurance products are offered byselect general insurance agents serving the consumer market, including ourinsurance agency.

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Our insuranceoperations offer the following insurance product lines:

·       *Lender-Placed Property and Automobile*—Weoffer lender-placed real-property hazard insurance and lender-placed automobileinsurance. Such insurance is provided on behalf of mortgage and automobilelenders when borrowers fail to have agreed-upon insurance coverage in place toprotect the lender’s security interest. We also provide insurance trackingservices, which alert a lender when there is a lapse in a borrower’s insurance,for more than 18.5 million loans, including nearly 8.2 million loansserviced within our Mortgage Banking Segment.

·       *Voluntary Homeowners and Automobile*—Weunderwrite retail homeowners and automobile insurance for consumers under thebrand name Countrywide Insurance Group. We also offer home warranties toconsumers.

·       *Life, Disability and Credit*—We underwriteterm life, credit disability and credit life insurance products. Our retailinsurance products are offered by select general insurance agents servicing theconsumer market, including our affiliated agency.

During 2005, we filed a notice with the Florida Officeof Insurance Regulation to discontinue underwriting voluntary homeowners andrenters insurance in Florida. In March 2006, the Florida office ofInsurance Regulation approved our plan to discontinue underwriting voluntaryhomeowners and renters insurance in Florida, with non-renewal of residentialpolicies beginning July 1, 2006.

Our Insurance Operations’ property and casualtydivision has received an “A (Excellent)” rating from A.M. Best Company, aninsurance company rating and information service. Our life insurance operationsmaintain an “A- (Excellent)” rating from A.M. Best Company. The “Excellent”rating is defined by the A.M. Best Company as having “an excellent abilityto meet ongoing obligations to policy holders.”

Our insurance agenciesprovide consumers, in particular our mortgage customers, with homeowners, life,disability, automobile and various other insurance products. Our insuranceagencies also operate a full-service commercial insurance program that offers acomprehensive menu of products and services to meet the insurance needs ofsmall, mid-size and large businesses. The commercial insurance groupdistributes a wide array of competitively priced property & casualtyand employee benefits programs in specialty niche markets, including homebuilders, mortgage brokers and bankers, real estate brokers and commercialproperty owners.

***Reinsurance Operations***

We provide mortgagereinsurance to the insurance companies that provide primary mortgage insurance(“PMI”) on loans in our servicing portfolio. This reinsurance covers losses inexcess of a specified percentage of the principal balance of a given pool ofmortgage loans, subject to a contractual limit, in exchange for a portion ofthe pools’ mortgage insurance premium. 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 amount inexcess of 80% of the property’s appraised value. In return for providing thiscoverage, 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 andprice.

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The homeowners, automobile, term life, credit-life andcredit-disability marketplaces are dominated by large, well-known providers.Consumers select such insurance based on price, service and the efficiency andeffectiveness 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 OperationsSegment**

The primaryactivities we conduct in our Global Operations Segment include:

·       *Loan Processing and Subservicing—*Weprovided mortgage loan application processing and mortgage loan subservicing inthe UK until July 31, 2006, when we discontinued such businesses. However,we continue to license certain of the related technology to mortgage lenders inthe UK.

·       *Offshore Services—*We perform business process and technologyservices for various units of the Company at three locations in India.

***Competition***

Our competitors in thissegment include business process outsourcers and technology companies operatingin Europe and India. We compete by leveraging Countrywide’s mortgage expertiseand our proprietary technology.

**Financing ofOperations**

***Uses of Financing***

We have significantfinancing needs. Our short-term financing needs arise primarily from thefollowing:

·       Warehousingof mortgage loans pending sale

·       Tradingactivities of our broker-dealer

·       Providingmortgage warehouse credit to others.

Our long-termfinancing needs arise primarily from the following:

·       Investmentsin mortgage loans

·       Investmentsin MSRs and interests that we retain when we securitize mortgage loans

·       Financial instrumentsacquired to manage the interest rate risk associated with those investments.

***Sources of Financing***

We meet ourfinancing needs primarily through the following means:

·       Unsecuredcommercial paper and medium-term notes

·       Asset-backedcommercial paper

·       Revolvinglines of credit

·       Short-termrepurchase agreements

·  Deposit-gathering

·       FHLBadvances

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·       Unsecuredsubordinated debt and junior subordinated debt, which includes high equitycontent debt securities

·       Retainedearnings.

We typically access the public corporate debt marketby issuing unsecured commercial paper, asset-backed commercial paper and unsecuredmedium-term notes. At times, we may also issue subordinated debt, convertibledebt and securities that rating agencies credit with high equity content.

Ourongoing access to the public debt markets is dependent on a high credit rating.For the last 14 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 standby lines of credit.We also must maintain a conservative debt-to-equity ratio. Current creditratings are as follows:
|                                 | ** ** | **Countrywide  Financial Corporation** | ** ** | **Countrywide  Home Loans** | ** ** | **Countrywide  Bank** | ** ** |
|---------------------------------|------------|---------------------------------------------|------------|----------------------------------|------------|-----------------------|------------|
| **Rating Agency**          | ** ** | ** **                                  | ** ** | **Short-Term**                   | ** ** | **Long-Term**         | ** ** | **Short-Term** | ** ** | **Long-Term** | ** ** | **Short-Term** | ** ** | **Long-Term** | ** ** |
| Standard &  Poors      |       |                                        | A-1        |                             |       |                  | A          |   |   |   | A-1 |   |   |   | A |   |   |   | A-1 |   |   |   | A |   |   |
| Moody’s Investors  Service |       |                                        | P-2        |                             |       |                  | A3         |   |   |   | P-2 |   |   |   | A3 |   |   |   | P-2 |   |   |   | A3 |   |   |
| Fitch                           |       |                                        | F1         |                             |       |                  | A          |   |   |   | F1 |   |   |   | A |   |   |   | F1 |   |   |   | A |   |   |
|                                 |            |                                             |            |                                  |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

We use short-term secured financing such asasset-backed commercial paper conduits and repurchase agreements to finance asubstantial portion of our mortgage loan inventory and securities tradingportfolio. Countrywide Bank finances its investments in mortgage loansprimarily with a combination of deposit liabilities and secured FHLB 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 andCapital Markets Segment are sold in the secondary mortgage market, primarily inthe form of MBS and ABS.

Our strategy is to ensure our ongoing access to thesecondary mortgage market by consistently producing quality mortgages andservicing those mortgages at levels that meet or exceed secondary mortgagemarket standards. We make significant investments in personnel and technologyto ensure the quality of our mortgage loan production.

Our primary source of equity capital is retainedearnings. We supplement our equity capital with subordinated and juniorsubordinated debt that receives varying degrees of “equity treatment” fromrating agencies, bank lenders and regulators. From time to time, we may issuecommon stock or other debt securities that receive high equity treatment as ameans of supplementing our capital base and supporting our growth. We may alsorepurchase common stock pursuant to the repurchase program approved by ourBoard of Directors.

For a further discussionof our liquidity and capital management see the section in this Report entitled*Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Liquidity and Capital Resources.*

***Interest Rate Risk***

We typically bear interestrate risk from the time we commit to make a loan at a specified interest ratethrough the sale or repayment of the loan. We also bear interest rate riskrelated to the interests we retain in the loans we sell, which are typically inthe form of MSRs and retained securities, and to the extent that our loan andsecurities investment portfolios’ yields change on a different basis or atdifferent times than 

16

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therates we pay on our borrowings. For a further discussion of our interest raterisk and how this risk is managed, see the section in this Report entitled *Management’s Discussion and Analysis of Financial Condition and Resultsof Operations—Quantitative and Qualitative Disclosures About Market Risk*.

***Credit Risk***

Credit risk is the riskthat a borrower will not repay the loan’s balance as agreed and the risk thatthe proceeds from liquidation of the collateral securing the loan will not beadequate to repay the loan’s balance. Historically, our primary source ofcredit risk has been the continuing investments and/or obligations we retaineither in the form of credit-enhancing subordinated interests, corporateguarantees or representations and warranties issued when we sell or securitizeloans. As our portfolio of investment loans has grown, our portfolio creditrisk has also grown. For a further discussion of our exposure to credit riskand how we manage this risk, see the section in this Report entitled *Management’s Discussion and Analysis of Financial Condition and Resultsof 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 ofFinancial Condition and Results of Operations—Operational Risk*.

**Regulations**

***Regulations Applicable to Financial Institutions andtheir Holding Companies***

***General***

On December 6, 2006, we applied to the Office ofThrift Supervision (the “OTS”) to convert Countrywide Bank to a federallychartered savings bank and thereby Countrywide will become a savings and loanholding company subject to regulation by the OTS. We expect the conversionapplication to be acted upon, and the conversion implemented in the firstquarter of 2007, although there can be no assurances when or if regulatoryapproval will be obtained. However, as of February 28, 2007, we were abank holding company that had elected to become a financial holding companyunder the Bank Holding Company Act, as amended (the “BHC Act”).

The references in thefollowing 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.

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***RegulationsApplicable to our Current Status***

*RegulationsApplicable to Bank Holding Companies*

General:   As a financial holding company, we aresubject to supervision and examination by the Board of Governors of the FederalReserve System (the “FRB”). The FRB has authority to issue cease and desistorders against holding companies if it determines that their actions representunsafe and unsound practices or violations of law. The FRB is empowered toimpose civil money penalties for violations of banking statutes andregulations. Regulation by the FRB is primarily intended to protect depositorsof the Bank and the Deposit Insurance Fund of the Federal Deposit InsuranceCorporation, not our shareholders or creditors.

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 at least “satisfactory”Community Reinvestment Act (“CRA”) ratings, may elect to become a “financialholding company” and engage in a broader range of powers that are financial innature or incidental to a financial activity (such as insurance, securitiesunderwriting and dealing, and merchant banking). The Company is a financialholding 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 of a financial holding companyreceives a CRA rating of less than “satisfactory,” then the financial holdingcompany is prohibited from engaging in new activities or acquiring companiesother than bank holding companies, banks or savings associations until the ratingis raised to “satisfactory” or better.

Regulatory Capital Requirements: The FRB haspromulgated capital adequacy guidelines for use in its examination andsupervision of bank holding companies. If a bank holding company’s capitalfalls below minimum required levels, then the bank holding company mustimplement a plan to increase its capital, and its ability to pay dividends andmake acquisitions of new bank subsidiaries may be restricted or prohibited.

To be classified as “adequately capitalized,” the FRB’scapital adequacy guidelines require that a bank holding company maintain a Tier1 Leverage ratio equal to at least 4.0% of its average total consolidatedassets, a Tier 1 Risk-Based Capital ratio equal to 4.0% of its risk-weightedassets and a Total Risk-Based Capital ratio equal to 8.0% of its risk-weightedassets. To be classified as “well capitalized,” a bank holding company isrequired to maintain a Tier 1 Leverage ratio of 5.0% or greater, a Tier 1Risk-Based Capital ratio of 6.0% or greater, and a Total Risk-Based Capitalratio of 10.0% or greater. On December 31, 2006, the Company was incompliance with all of the FRB’s capital adequacy guidelines to be classifiedas “well capitalized” with a Leverage ratio of 6.9%, Tier 1 Risked-BasedCapital ratio of 11.6% and a Total Risk-Based Capital ratio of 12.8%.

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The federal banking regulatory agencies are in theprocess of proposing revised capital standards that would apply to allfinancial institutions that are not subject to the Basel II Accord (“Basel 1A”),with the expressed intention to align those standards more closely with thosethat would be applicable to Basel II institutions. These standards would applyto Countrywide if it is neither required to adopt, nor voluntarily elects toadopt, the Basel II Accord. For a discussion of the Basel II Accord, see thesection of this Report entitled “Business-Regulation-Basel II and Basel 1ACapital Standards.”

Source of Strength:   FRBpolicy expects a bank holding company to serve as a source of financial andmanagerial strength to its subsidiary banks. Under this “source of strengthdoctrine,” a bank holding company is expected to stand ready to use itsavailable resources to provide adequate capital funds to its subsidiary banksduring periods of financial stress or adversity, and to maintain resources andthe capacity to raise capital that it can commit to its subsidiary banks.Furthermore, the FRB has the right to order a bank holding company to terminateany activity that the FRB believes is a serious risk to the financial safety,soundness or stability of any subsidiary bank.

*RegulationsApplicable to Countrywide Bank as a National Bank*

General:   Countrywide Bank, N.A. (the “Bank”), anational banking association, is subject to regulation and examination by theOffice of the Comptroller of the Currency (the “OCC”). The Bank’s deposits areinsured by the Deposit Insurance Fund of the Federal Deposit InsuranceCorporation (“FDIC”) to the maximum extent permitted by law. The OCC isempowered to issue cease and desist orders against the Bank if it determinesthat activities of the Bank represent unsafe and unsound banking practices orviolations of law. The OCC has the power to impose civil money penalties forviolations of banking statutes and regulations. Regulation by this agency isprimarily intended to protect the depositors of the Bank and the DepositInsurance Fund of the FDIC, not shareholders or other creditors of the Companyor the Bank.

Bank Regulatory Capital Requirements:   The OCChas adopted minimum capital requirements applicable to national banks, whichare similar to the capital adequacy guidelines established by the FRB for bankholding companies. Federal banking laws classify an insured financialinstitution in one of the following five categories, depending upon the amountof its regulatory capital: well capitalized, adequately capitalized,undercapitalized, significantly undercapitalized and criticallyundercapitalized. The Bank must be well capitalized and well managed for theCompany to remain a financial holding company. On December 31, 2006, theBank was in compliance with the OCC’s minimum capital requirements to beclassified as well capitalized, with a leverage ratio of 7.3%, a Tier 1Risked-Based Capital ratio of 12.4% and a Total-Risk Based Capital ratio of12.8%.

Deposit Insurance and Assessments:   As a resultof the Federal Deposit Insurance Reform Act of 2005, the FDIC adopted a revisedrisk-based assessment system to determine assessment rates to be paid by memberinstitutions such as the Bank, including institutions that are well managed andwell capitalized. Under this revised assessment system, risk is defined andmeasured using an institution’s supervisory ratings with certain other riskmeasures, including certain financial ratios and, for large institutions, suchas the Bank, long-term debt issuer ratings. The annual rates for 2007 forinstitutions in risk category I, the lowest risk category, range from 5 to 7basis points. These rates may be offset by a one time assessment credit held byan institutions, based on the assessment base of that institution as of December 31,1996, and in the future by dividends that may be declared by the FDIC if thedeposit reserve ratio increases above a certain amount.

Limitations on Interest Rates and Loans to OneBorrower:   The rate of interest a bank may charge on certain classes ofloans is limited by state and federal law. At certain times in the past, theselimitations have resulted in reductions of net interest margins on certainclasses of loans. Federal and state laws impose additional restrictions on thelending activities of banks. The maximum amount that a national 

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bank may loan to oneborrower generally is limited to 15% of the bank’s capital, plus an additional10% for loans fully secured by readily marketable collateral, as such term isdefined in applicable regulation.

Payment of Dividends:   The Bank is subject tofederal laws limiting the payment of dividends. Under the Federal DepositInsurance Act (“FDIA”), an FDIC-insured institution may not pay dividends whileit is undercapitalized or if payment would cause it to become undercapitalized.The OCC also generally prohibits the declaration of a dividend out of thecapital and surplus of a bank.

Community Reinvestment Act (“CRA”):   The Bank issubject to the CRA and implementing regulations. CRA regulations establish theframework and criteria by which the bank regulatory agencies assess aninstitution’s record of helping to meet the credit needs of its community,including low- and moderate- income neighborhoods. CRA ratings are taken intoaccount by regulators in reviewing certain applications made by the Company andits banking subsidiaries. The Bank’s CRA rating is “satisfactory.”

Limitations onTransactions with Affiliates:   Countrywide Financial Corporation and itsnon-bank subsidiaries are affiliates of the Bank within the definition ofSections 23A and 23B of the Federal Reserve Act and regulations promulgatedthereunder. Transactions between a bank and an affiliate are generally subjectto the requirement that they be on terms and conditions, including creditstandards, substantially the same as, or at least as favorable to the bank as,those prevailing at the time for comparable transactions with non-affiliatesor, in the absence of comparable transactions, on terms and conditions thatwould be offered to nonaffiliates. In addition, certain transactions between abank and an affiliate, such as asset purchases by a bank from an affiliate, andbank extensions of credit to or for the benefit of an affiliate, are defined as“covered transactions,” and are subject to quantitative limitations and morestringent qualitative restrictions, including but not limited tocollateralization and safety and soundness requirements.

*Regulationof Other Activities of National Banks*

The investments andactivities of the Bank as a national 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-moneylaundering

·       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

·       Mergersand acquisitions.

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In addition, CountrywideBank is subject to the Bank Secrecy Act and other anti-money laundering lawsand regulations including the USA Patriot Act of 2001. These laws andregulations require Countrywide Bank to have an effective anti-money launderingprogram that would prevent the use of Countrywide Bank for facilitating theflow of illegal funds by for example, reporting large currency transactions,filing suspicious activity reports, implementing appropriate know your customerprograms, and maintaining appropriate compliance programs. Violation of theseprovisions can result in substantial civil and criminal penalties. In addition,the federal bank regulatory agencies, including the FRB, OCC and OTS, arerequired to consider the effectiveness of an institution’s anti-moneylaundering program when reviewing bank mergers and acquisitions.

***RegulationsApplicable After Conversion of Countrywide Bank to a Federal Chartered SavingsBank***

*RegulationsApplicable to Savings and Loan Holding Companies*

Limitation on Activities:   As a unitary savingsand loan holding company, Countrywide will be limited to business activitiesthat are permitted under applicable provisions of the Home Owners’ Loan Act andregulations promulgated thereunder. These activities include those permitted tobank or financial holding companies under the BHC Act, any activities in whicha multiple savings and loan holding company was authorized to engage in directlyon March 5, 1987 (which include certain real estate related activities)and certain other activities outlined in applicable law and regulation. Managementbelieves that the restrictions on our activities as a savings and loan holdingcompany will not substantially differ from those applicable to a bank holdingcompany.

Regulatory Capital Requirements: As a savings and loanholding company, Countrywide will not be subject to the consolidated regulatorycapital requirements applicable to a bank holding company. However, the OTSexpects savings and loan holding companies to maintain capital that is sufficientto support the holding company’s business activities, and the risks inherent inthose activities. Countrywide Bank will remain subject to capital requirementsthat are substantially similar to those applicable to national banks.

Enforcement:   The OTS has the power to takeenforcement action against savings and loan holding companies and theiraffiliates to the extent that any action or business taken or conducted by theholding company or affiliate threatens the safety, soundness or stability ofthe subsidiary insured institution.

Qualified Thrift LenderTest: Federal savings banks must comply with the Qualified Thrift Lender (“QTL”)Test. The QTL Test requires that a savings association, including a federalsavings bank, have assets designated as “qualified thrift investments”constituting no less than 65% of its portfolio assets. Qualified thriftinvestments are defined to include mortgage loans, home improvement loans, homeequity loans, mortgage-backed securities, shares of stock issued by any federalhome loan bank, small business loans, credit card loans, certain qualifying CRAinvestments and certain consumer loans. If an institution does not meet the QTLTest, it may be precluded from interstate branching and engaging in any newactivities, and certain other restrictions. The Company believes that upon theconversion of the Bank to a federally chartered savings bank, it will be incompliance with the QTL Test. The QTL Test does not apply to national banks ortheir holding companies.

*RegulationsApplicable to Countrywide Bank as a Federally Chartered Savings Bank*

General:   As a federal savings bank, the Bankwill be subject to regulation and examination by the OTS. The Bank’s depositswill continue to be insured by the Deposit Insurance Fund of the FDIC. The OTSis empowered to issue cease and desist orders against a federal savings bank ifit determines that activities of the institution represent unsafe and unsoundbanking practices or violations of law. The OTS has the power to impose upon federalsavings banks and certain affiliated parties civil money penalties forviolations of banking statutes and regulations. Regulation by this agency isprimarily intended to protect 

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the depositors of thefederal savings bank and the Deposit Insurance Fund of the FDIC, notshareholders or other creditors of the federal savings bank or its holdingcompanies.

Bank Regulatory Capital Requirements:   A federalsavings bank is generally subject to regulatory capital requirements similar tothose applicable to national banks. In addition, federal savings banks arerequired to maintain tangible equity capital, as defined in OTS regulations, ofno less than 1.5% of adjusted total assets. While intangible assets arededucted from the assets to make this calculation, a substantial portion ofMSRs are not considered intangible assets for this purpose. The Companybelieves that the Bank will be in compliance with the tangible equity capitalrequirement upon its conversion to a federal savings bank.

Deposit Insurance and Assessments:   As a federalsavings bank, the Bank will be subject to the same deposit insurance assessmentlevel as is applicable to it as a national bank.

Limitations on Interest Rate and Loans to OneBorrower:   The rate of interest a federal savings bank may charge oncertain classes of loans is limited by the same laws as are applicable tonational banks. The maximum amount that a federal savings bank may loan to oneborrower generally is limited to 15% of the bank’s capital, plus an additional10% for loans fully secured by readily marketable collateral, as such term isdefined in applicable regulation.

Payment of Dividends:   As a federal savings bank,the Bank will continue to be subject to the provisions of the FDIA relating todividends and will not be permitted to pay dividends while it isundercapitalized or if payment would cause it to become undercapitalized. TheOTS requires federal savings banks that are subsidiaries of savings and loanholding companies to provide notice to the OTS of the declaration of a dividend.In certain instances, such as where the dividend, when aggregated with allother capital distributions in the applicable year, would exceed net income forthat year plus retained net income for the preceding two years, or where thefederal savings bank would not be at least adequately capitalized, OTS approvalof a dividend is required.

Community Reinvestment Act:   As a federal savingsbank, the Bank will continue to be subject to the CRA and implementingregulations. CRA ratings will be taken into account by the OTS in reviewingcertain applications made by the Company and the Bank.

Limitations on Transactionswith Affiliates:   The federal banking laws and regulations applicable totransactions between the Bank and its affiliates will continue to be applicableto the Bank after its conversion to a federal savings bank. In addition, as afederal savings bank, the Bank will not be permitted to extend credit toaffiliates that are engaged in certain business activities that were notpermitted to bank holding companies prior to the enactment of the GLB Act, norwill it be permitted to invest in securities of an affiliate other than asubsidiary of the Bank.

*Regulationof Other Activities of Federally Chartered Savings Bank*

The investments andactivities of the Bank following its conversion to a federally charteredsavings bank are subject to regulation by federal Banking agencies as describedin the *Regulations Applicable to Our Current Status—Regulationof Other Activities of National Banks* section of this Report. Inaddition, Countrywide Bank will continue to be subject to the Bank Secrecy Actand other anti-money laundering laws and regulations including the USA PatriotAct of 2001.

***Regulations Applicable 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 

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stateand federal regulatory agencies. There are also a number of proposed andenacted federal, state and local laws aimed at protecting a consumer’s privacy.Generally, privacy laws cover a wide range of issues including limiting acompany’s ability to share information with third parties or affiliates,providing stronger identity theft protection, victim’s assistance programs andsecurity breach notification, providing the ability to avoid telemarketingsolicitations through “do-not-call” lists, and limiting e-mail and faxadvertising. These laws also impose penalties for non-compliance.

***Mortgage Banking Segment***

Our mortgagebanking business is subject to the rules, regulations or guidelines of, and/orexamination or investigation by, the following entities with respect to theprocessing, 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

·       TheOCC or OTS as applicable

·       TheFederal Home Loan Bank (“FHLB”)

·       TheFederal Trade Commission

·       Stateregulatory authorities and Attorneys General

·       RegulationAB of the Securities and Exchange Commission

The rules, regulations and requirements of theseentities, among other things, impose licensing obligations on the Company orits subsidiaries; establish standards for advertising as well as processing; underwritingand servicing mortgage loans and appraisal practices; prohibit discrimination;restrict certain loan features in some cases and fix maximum interest rates andfees in some states.

As an FHA lender, we are required to submit to the FHACommissioner, on an annual basis, audited financial statements. Ginnie Mae,HUD, Fannie Mae and Freddie Mac require the maintenance of specified net worthlevels (which vary among the entities). Our affairs are also subject toexamination by the Federal Housing Commissioner to assure compliance with FHAregulations, policies and procedures.

Mortgage origination activities are subject to theFair Housing Act, Equal Credit Opportunity Act, Truth-in-Lending Act, HomeMortgage Disclosure Act, the Real Estate Settlement Procedures Act and the HomeOwnership Equity Protection Act and the regulations promulgated under thosestatutes, as well as other federal laws and other regulations. These lawsprohibit discrimination, require the disclosure of certain basic information tomortgagors concerning credit terms and settlement costs, prohibit referral feesand require the maintenance and disclosure of information regarding thedisposition of mortgage applications based on race, gender, geographicaldistribution, income level and annual percentage rate 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 a number of proposed and recentlyenacted federal, state and local laws and regulations and guidance addressingresponsible lending practices with respect to borrowers with blemished creditor nontraditional mortgage products. In general, these laws and regulationswould or will impose new loan disclosure requirements; restrict or prohibitcertain loan terms, fees and charges such as 

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prepayment penalties; mayrequire borrower counseling; and increase penalties for non-compliance. Theimpact of these regulations and guidance on the industry and us is uncertain atthis time.

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 Markets Segment***

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,Securities and Futures Commission of Hong Kong, Financial Services Authority ofthe United Kingdom, the National Futures Association and the Commodities andFutures Trading Commission. State, federal and foreign securities laws governmany aspects of the broker-dealer’s business, including the maintenance ofrequired levels of capital requirements, 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 of its ownership of insurancecompanies, is a member of an insurance holding company group pursuant to theprovisions of the insurance holding company acts (collectively the “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 andforms; the issuance of securities by insurers; periodic examinations of theaffairs of insurers; and the establishment of reserves required to bemaintained for 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 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.

Deferred taxes are provided for the future tax effectsof temporary differences between the book and tax basis of assets andliabilities. The Company’s primary temporary difference relates to itsinvestment in MSRs created upon the sale of mortgage loans. According to theInternal Revenue Code and related 

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administrative guidance,substantially all of the Company’s gain on sale of loans is recognized infuture periods as servicing fee income is earned.

Countrywide is generally subject to California’shigher income tax rate for financial corporations in lieu of having to paycertain state and local personal property and other taxes that are paid bynon-financial corporations. The statutory financial corporation tax rate was10.84% for 2006 and 2005. The Company apportions taxable income to the variousstates in which it does business based on its level of business activity inthose states, which is determined primarily by reference to payroll costs,revenues and property (including loans outstanding). Among the many factorsthat the Company considers in determining where to conduct its businessactivities 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 iscurrently under examination for tax years 2003 and 2004 by the CaliforniaFranchise Tax Board, which has previously audited tax years through 2001.Management believes it has adequately provided for probable tax liabilitiesthat may be assessed for years in which the statute of limitations remain open.

***Interagency Guidance on Residential Mortgage Products***

On October 4, 2006, the FRB, OCC, OTS and thefederal financial regulatory agencies issued final interagency guidance onresidential mortgage products that allow borrowers to defer repayment ofprincipal and/or interest, including “interest-only” mortgage loans and “paymentoption” adjustable-rate mortgages, which provide a borrower with flexiblepayment options, including payments that have the potential for negativeamortization. While acknowledging that innovations in mortgage lending canbenefit some consumers, in issuing this guidance, the federal banking agenciesstated their concern that these and other practices described in the guidancecan present risks that institutions must appropriately manage.

The guidance requires thatmanagement assess a borrower’s ability to repay the loan, including anyadditional principal balances resulting from negative amortization, whichresults when deferred interest payments are added to the principal balance. Inparticular, the guidance requires that for all nontraditional mortgage loanproducts, an institution’s analysis of a borrower’s repayment capacity shouldinclude an evaluation of their ability to repay the debt at final maturity atthe fully indexed rate, assuming a fully amortizing repayment schedule. Inaddition, for products that permit negative amortization, the repayment analysisshould be based upon the initial loan amount plus any balance increase that mayaccrue from the negative amortization features. The guidance contains furthersteps which must be taken with respect to loans that have additionalrisk-layering features, such as reduced documentation programs and simultaneoussecond liens. The guidance also articulated portfolio management measures thatshould be taken by institutions that originate or invest in nontraditionalmortgage products. Finally, the guidance also requires that financialinstitutions provide customers sufficient information to clearly understand theloan terms and associated risks prior to a customer’s choosing a nontraditionalmortgage product. The impact of this guidance on the industry and the Company isuncertain at this time.

***Future Legislation***

Various legislation,including proposals to change substantially the financial institutionregulatory system, is from time to time proposed for adoption. Any newlegislation may change banking or other statutes and the operating environmentof the Company in substantial and unpredictable ways. If enacted, thislegislation could increase or decrease the cost of doing business, limit orexpand permissible activities or affect the competitive balance among banks,savings associations, credit unions and other financial institutions. We cannotpredict whether any of this potential legislation will be enacted and, ifenacted, the 

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effectthat it, or any implementing regulations, could have on the Company’s business,results of operations or financial condition.

*Basel II CapitalStandards*

We may be required to comply with, or decide to adopt,certain new capital and other regulatory requirements proposed by the BaselCommittee on Banking Supervision, as proposed to be implemented in the UnitedStates. These proposed requirements, which are often referred to as the BaselII Accord, would, among other things, modify the capital charge applicable tocredit risk and incorporate a capital charge for operational risk. The Basel IIAccord also places greater reliance on market discipline than currentstandards. The Basel II standards will be mandatory with respect to bankingorganizations with total banking assets of $250 billion or more or totalon-balance-sheet foreign exposure of $10 billion or more. As a bank holdingcompany, the threshold for mandatory adoption is determined by reference to theconsolidated company; following conversion to a federal savings bank, thethreshold for mandatory adoption is determined by reference to the federalsavings bank subsidiary. We have not yet determined whether to adopt the BaselII Accord prior to the time when the Company is required to adopt it.

If we choose to opt in, Countrywide FinancialCorporation will be required to implement advanced measurement techniquesemploying internal estimates of certain key risk drivers to derive capitalrequirements. Prior to our implementation of the new capital regime, we will berequired to demonstrate to our primary federal regulator that our measurementapproaches meet relevant supervisory standards. Opting into Basel II mayrequire us to meet more onerous computational requirements. U.S. regulatorshave proposed an effective date of January 1, 2009 with a gradual phase-inschedule. If Countrywide Financial Corporation adopts Basel II, voluntarily ormandatorily, the Basel II Accord requirements would replace existing risk-basedcapital requirements, or, if adopted earlier, the Basel 1A standards describedbelow, but not the leverage capital requirements imposed under U.S. law andregulation.

In December 2006, the bank regulatory agenciesissued a revised notice of proposed rulemaking with respect to a new regulatorycapital framework (“Basel 1A”) which will be available to bankingorganizations that are not required to adopt, and have not elected to adopt, theBasel II Framework. Countrywide Bank may implement the Basel IA framework onceit has been finalized and an implementation date is established, unless it hasadopted the Basel II Accord. The comment period for the Basel 1A proposedrulemaking expires on March 26, 2007, after which the bank regulatoryagencies will evaluate the proposed rule in light of the comments that aresubmitted. Among the key issues under consideration in connection with Basel 1Aare the use of loan-to-value ratios to determine risk weights for mostresidential mortgages, an increase in the number of risk weight categories towhich credit exposures may be assigned; expansion of the use of external creditratings for certain externally rated exposures, expansion of the range ofcollateral and guarantors that may qualify an exposure for lower risk weights,and assessment of a risk-based capital charge to reflect the risk insecuritizations with early amortization provisions.

At this time, Countrywidecannot predict the final form the Basel IA capital framework will take, when itwill be implemented, the effect that it might have on Countrywide Bank’sfinancial condition or results of its operations, or how these effects mightimpact Countrywide Financial Corporation. We are monitoring the evolution ofthe Basel IA capital framework, its potential impact on the Bank, CountrywideFinancial Corporation and the industry at large.

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**Workforce**

At December 31,2006, we had a workforce of 54,655, including regular employees and temporarystaff, engaged in the following activities:

| ** **                          | ** ** | **Workforce** | ** ** |
|-------------------------------------|------------|---------------|------------|
| Mortgage Banking:                   |       |          |       |   |   |
| Loan Production:                    |       |          |       |   |   |
| Retail Lending:                     |       |          |       |   |   |
| Consumer Markets                    |       |          | 16,257     |   |   |
| Full Spectrum Lending               |       |          | 8,834      |   |   |
|                                |       |          | 25,091     |   |   |
| Wholesale Lending                   |       |          | 4,009      |   |   |
| Correspondent Lending               |       |          | 2,506      |   |   |
| Total Loan Production               |       |          | 31,606     |   |   |
| Loan Servicing                      |       |          | 6,980      |   |   |
| Loan Closing Services               |       |          | 1,681      |   |   |
| Banking                             |       |          | 1,997      |   |   |
| Capital Markets                     |       |          | 886        |   |   |
| Insurance                           |       |          | 1,980      |   |   |
| Global Operations                   |       |          | 2,784      |   |   |
| Corporate Administration  and Other |       |          | 6,741      |   |   |
| Total                               |       |          | 54,655     |   |   |

 

**AdditionalInformation**

Countrywide FinancialCorporation was incorporated in New York on March 14, 1969, and onFebruary 6, 1987, was reincorporated in Delaware. The Company wasoriginally named OLM Credit Industries, Inc., and has also been known asCountrywide Credit Industries, Inc.

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**Loan ProductionTables**

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

| ** **                         | ** ** | **Consolidated Mortgage Loan Production**                            | ** ** |
|------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **Years Ended December 31,**                                         | ** ** |
| ** **                         | ** ** | **2006**                                                                            | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                         | ** ** | **(dollars in millions, except average loan amount)** | ** ** |
| Conventional Conforming  Loans     |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 723,933                                                                             |       | 776,479 |   | 826,914 |   | 1,509,925 |   | 993,538 |   |
| Volume of Loans                    |       | $                                                                                   | 149,095    |   | $ | 159,561 |   | $ | 134,762 |   | $ | 234,526 |   | $ | 149,072 |   |
| Percent of Total Dollar Volume     |       | 31.9                                                                                | %          | 32.0 | % | 37.1 | % | 53.9 | % | 59.2 | % |
| Conventional  Non-conforming Loans |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 730,511                                                                             |       | 866,476 |   | 529,192 |   | 562,389 |   | 283,536 |   |
| Volume of Loans                    |       | $                                                                                   | 211,841    |   | $ | 235,614 |   | $ | 144,663 |   | $ | 138,006 |   | $ | 62,665 |   |
| Percent of Total Dollar Volume     |       | 45.2                                                                                | %          | 47.2 | % | 39.8 | % | 31.7 | % | 24.9 | % |
| Nonprime Mortgage Loans            |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 245,881                                                                             |       | 278,112 |   | 250,030 |   | 124,205 |   | 63,195 |   |
| Volume of Loans                    |       | $                                                                                   | 40,596     |   | $ | 44,637 |   | $ | 39,441 |   | $ | 19,827 |   | $ | 9,421 |   |
| Percent of Total Dollar Volume     |       | 8.7                                                                                 | %          | 8.9 | % | 10.9 | % | 4.6 | % | 3.7 | % |
| Prime Home Equity Loans            |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 716,353                                                                             |       | 728,252 |   | 587,046 |   | 453,817 |   | 316,049 |   |
| Volume of Loans                    |       | $                                                                                   | 47,876     |   | $ | 44,850 |   | $ | 30,893 |   | $ | 18,103 |   | $ | 11,650 |   |
| Percent of Total Dollar Volume     |       | 10.2                                                                                | %          | 9.0 | % | 8.5 | % | 4.2 | % | 4.6 | % |
| FHA/VA Loans                       |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 89,753                                                                              |       | 80,555 |   | 105,562 |   | 196,063 |   | 157,626 |   |
| Volume of Loans                    |       | $                                                                                   | 13,093     |   | $ | 10,714 |   | $ | 13,247 |   | $ | 24,402 |   | $ | 19,093 |   |
| Percent of Total Dollar Volume     |       | 2.8                                                                                 | %          | 2.1 | % | 3.6 | % | 5.6 | % | 7.6 | % |
| Commercial Real Estate  Loans      |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 620                                                                                 |       | 258 |   | 30 |   | — |   | — |   |
| Volume of Loans                    |       | $                                                                                   | 5,671      |   | $ | 3,925 |   | $ | 358 |   | — |   | — |   |
| Percent of Total Dollar Volume     |       | 1.2                                                                                 | %          | 0.8 | % | 0.1 | % | 0.0 | % | 0.0 | % |
| Total Loans                        |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 2,507,051                                                                           |       | 2,730,132 |   | 2,298,774 |   | 2,846,399 |   | 1,813,944 |   |
| Volume of Loans                    |       | $                                                                                   | 468,172    |   | $ | 499,301 |   | $ | 363,364 |   | $ | 434,864 |   | $ | 251,901 |   |
| Average Loan Amount(1)             |       | $                                                                                   | 185,000    |   | $ | 181,000 |   | $ | 158,000 |   | $ | 153,000 |   | $ | 139,000 |   |
| Non-Purchase Transactions(2)       |       | 55                                                                                  | %          | 53 | % | 51 | % | 72 | % | 66 | % |
| Adjustable-Rate  Loans(2)          |       | 45                                                                                  | %          | 52 | % | 52 | % | 21 | % | 14 | % |

----

(1)           Excludes commercial real estate loans.

(2)           Percentage of total loan production based on dollarvolume.

28

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Thefollowing table presents our Mortgage Banking Segment loan production by loantype:

| ** **                         | ** ** | **Mortgage Banking Segment Mortgage Loan Production(1)**   | ** ** |
|------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **Years Ended December 31,**                                         | ** ** |
| ** **                         | ** ** | **2006**                                                                            | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                         | ** ** | **(dollars in millions, except average loan amount)** | ** ** |
| Conventional Conforming  Loans     |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 708,613                                                                             |       | 766,613 |   | 821,932 |   | 1,509,721 |   | 993,243 |   |
| Volume of Loans                    |       | $                                                                                   | 145,711    |   | $ | 157,271 |   | $ | 133,852 |   | $ | 234,455 |   | $ | 148,941 |   |
| Percent of Total Dollar Volume     |       | 34.6                                                                                | %          | 36.8 | % | 42.1 | % | 58.9 | % | 61.5 | % |
| Conventional  Non-conforming Loans |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 648,786                                                                             |       | 712,270 |   | 430,362 |   | 492,512 |   | 265,972 |   |
| Volume of Loans                    |       | $                                                                                   | 185,566    |   | $ | 186,526 |   | $ | 114,315 |   | $ | 111,661 |   | $ | 57,041 |   |
| Percent of Total Dollar Volume     |       | 44.1                                                                                | %          | 43.6 | % | 36.0 | % | 28.0 | % | 23.5 | % |
| Nonprime Mortgage Loans            |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 227,313                                                                             |       | 254,172 |   | 218,821 |   | 95,062 |   | 43,938 |   |
| Volume of Loans                    |       | $                                                                                   | 36,752     |   | $ | 40,089 |   | $ | 33,481 |   | $ | 15,525 |   | $ | 6,590 |   |
| Percent of Total Dollar Volume     |       | 8.7                                                                                 | %          | 9.3 | % | 10.5 | % | 3.9 | % | 2.7 | % |
| Prime Home Equity Loans            |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 580,969                                                                             |       | 492,586 |   | 391,967 |   | 292,171 |   | 290,285 |   |
| Volume of Loans                    |       | $                                                                                   | 39,962     |   | $ | 33,334 |   | $ | 23,351 |   | $ | 12,268 |   | $ | 10,848 |   |
| Percent of Total Dollar Volume     |       | 9.5                                                                                 | %          | 7.8 | % | 7.4 | % | 3.1 | % | 4.5 | % |
| FHA/VA Loans                       |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 89,753                                                                              |       | 80,445 |   | 102,207 |   | 196,058 |   | 157,359 |   |
| Volume of Loans                    |       | $                                                                                   | 13,093     |   | $ | 10,696 |   | $ | 12,812 |   | $ | 24,401 |   | $ | 19,017 |   |
| Percent of Total Dollar Volume     |       | 3.1                                                                                 | %          | 2.5 | % | 4.0 | % | 6.1 | % | 7.8 | % |
| Commercial Real Estate  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                    |       | 2,255,434                                                                           |       | 2,306,086 |   | 1,965,289 |   | 2,585,524 |   | 1,750,797 |   |
| Volume of Loans                    |       | $                                                                                   | 421,084    |   | $ | 427,916 |   | $ | 317,811 |   | $ | 398,310 |   | $ | 242,437 |   |
| Average Loan  Amount               |       | $                                                                                   | 187,000    |   | $ | 186,000 |   | $ | 162,000 |   | $ | 154,000 |   | $ | 138,000 |   |

----

(1)           $106.0 billionand $8.1 billion of these loans were funded by Countrywide Bank during theyears ended December 31, 2006 and 2005, respectively.

29

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

| ** **                         | ** ** | **Correspondent Lending Channel Loan Production**               | ** ** |
|------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **Years Ended December 31,**                                         | ** ** |
| ** **                         | ** ** | **2006**                                                                            | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                         | ** ** | **(dollars in millions, except average loan amount)** | ** ** |
| Conventional Conforming  Loans     |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 411,247                                                                             |       | 462,572 |   | 422,505 |   | 847,914 |   | 484,795 |   |
| Volume of Loans                    |       | $                                                                                   | 84,916     |   | $ | 95,105 |   | $ | 72,411 |   | $ | 139,569 |   | $ | 77,503 |   |
| Percent of Total Dollar Volume     |       | 47.7                                                                                | %          | 47.9 | % | 54.2 | % | 71.6 | % | 70.8 | % |
| Conventional  Non-conforming Loans |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 255,368                                                                             |       | 307,176 |   | 153,036 |   | 151,248 |   | 74,051 |   |
| Volume of Loans                    |       | $                                                                                   | 70,633     |   | $ | 80,854 |   | $ | 40,781 |   | $ | 34,525 |   | $ | 16,188 |   |
| Percent of Total Dollar Volume     |       | 39.7                                                                                | %          | 40.8 | % | 30.5 | % | 17.7 | % | 14.8 | % |
| Nonprime Mortgage Loans            |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 48,700                                                                              |       | 62,420 |   | 62,895 |   | 26,836 |   | 13,590 |   |
| Volume of Loans                    |       | $                                                                                   | 8,067      |   | $ | 10,055 |   | $ | 9,446 |   | $ | 4,110 |   | $ | 1,869 |   |
| Percent of Total Dollar Volume     |       | 4.5                                                                                 | %          | 5.1 | % | 7.1 | % | 2.1 | % | 1.7 | % |
| Prime Home Equity Loans            |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 111,658                                                                             |       | 106,311 |   | 69,769 |   | 31,279 |   | 44,709 |   |
| Volume of Loans                    |       | $                                                                                   | 6,910      |   | $ | 6,496 |   | $ | 3,916 |   | $ | 1,542 |   | $ | 1,873 |   |
| Percent of Total Dollar Volume     |       | 3.9                                                                                 | %          | 3.3 | % | 2.9 | % | 0.8 | % | 1.7 | % |
| FHA/VA Loans                       |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 49,401                                                                              |       | 41,948 |   | 52,752 |   | 115,182 |   | 93,932 |   |
| Volume of Loans                    |       | $                                                                                   | 7,502      |   | $ | 5,848 |   | $ | 7,034 |   | $ | 15,202 |   | $ | 12,041 |   |
| Percent of Total Dollar Volume     |       | 4.2                                                                                 | %          | 2.9 | % | 5.3 | % | 7.8 | % | 11.0 | % |
| Commercial Real Estate  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                    |       | 876,374                                                                             |       | 980,427 |   | 760,957 |   | 1,172,459 |   | 711,077 |   |
| Volume of Loans                    |       | $                                                                                   | 178,028    |   | $ | 198,358 |   | $ | 133,588 |   | $ | 194,948 |   | $ | 109,474 |   |
| Average Loan  Amount               |       | $                                                                                   | 203,000    |   | $ | 202,000 |   | $ | 176,000 |   | $ | 166,000 |   | $ | 154,000 |   |

 

30

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Thefollowing table presents our Consumer Markets Division of our retail channel’smortgage loan production by loan type:

| ** **                         | ** ** | **Consumer Markets Division’s Mortgage Loan Production** | ** ** |
|------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **Years Ended December 31,**                                            | ** ** |
| ** **                         | ** ** | **2006**                                                                               | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                         | ** ** | **(dollars in millions, except average loan amount)**    | ** ** |
| Conventional Conforming  Loans     |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 153,738                                                                                |       | 155,759 |   | 230,994 |   | 355,790 |   | 259,738 |   |
| Volume of Loans                    |       | $                                                                                      | 33,206     |   | $ | 33,724 |   | $ | 34,852 |   | $ | 48,864 |   | $ | 35,167 |   |
| Percent of Total Dollar Volume     |       | 28.0                                                                                   | %          | 28.0 | % | 36.4 | % | 46.9 | % | 56.5 | % |
| Conventional  Non-conforming Loans |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 191,989                                                                                |       | 246,060 |   | 157,543 |   | 183,711 |   | 74,447 |   |
| Volume of Loans                    |       | $                                                                                      | 56,086     |   | $ | 61,419 |   | $ | 40,859 |   | $ | 39,515 |   | $ | 15,451 |   |
| Percent of Total Dollar Volume     |       | 47.3                                                                                   | %          | 51.1 | % | 42.7 | % | 37.9 | % | 24.9 | % |
| Nonprime Mortgage Loans            |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 4,503                                                                                  |       | 1,608 |   | 408 |   | 217 |   | 138 |   |
| Volume of Loans                    |       | $                                                                                      | 559        |   | $ | 152 |   | $ | 16 |   | $ | 8 |   | $ | 5 |   |
| Percent of Total Dollar Volume     |       | 0.5                                                                                    | %          | 0.1 | % | 0.0 | % | 0.0 | % | 0.0 | % |
| Prime Home Equity Loans            |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 333,013                                                                                |       | 303,335 |   | 258,985 |   | 213,732 |   | 159,792 |   |
| Volume of Loans                    |       | $                                                                                      | 23,844     |   | $ | 20,935 |   | $ | 15,003 |   | $ | 8,167 |   | $ | 5,408 |   |
| Percent of Total Dollar Volume     |       | 20.1                                                                                   | %          | 17.4 | % | 15.8 | % | 7.8 | % | 8.7 | % |
| FHA/VA Loans                       |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 34,994                                                                                 |       | 32,473 |   | 42,311 |   | 69,422 |   | 56,905 |   |
| Volume of Loans                    |       | $                                                                                      | 4,901      |   | $ | 4,094 |   | $ | 4,889 |   | $ | 7,662 |   | $ | 6,158 |   |
| Percent of Total Dollar Volume     |       | 4.1                                                                                    | %          | 3.4 | % | 5.1 | % | 7.4 | % | 9.9 | % |
| Commercial Real Estate  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                    |       | 718,237                                                                                |       | 739,235 |   | 690,241 |   | 822,872 |   | 551,020 |   |
| Volume of Loans                    |       | $                                                                                      | 118,596    |   | $ | 120,324 |   | $ | 95,619 |   | $ | 104,216 |   | $ | 62,189 |   |
| Average Loan  Amount               |       | $                                                                                      | 165,000    |   | $ | 163,000 |   | $ | 139,000 |   | $ | 127,000 |   | $ | 113,000 |   |

 

31

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Thefollowing table presents our Full Spectrum Lending Division of our retailchannel’s mortgage loan production by loan type:

| ** **                         | ** ** | **Full Spectrum Lending Division Loan Production**         | ** ** |
|------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **Years Ended December 31,**                                         | ** ** |
| ** **                         | ** ** | **2006**                                                                            | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                         | ** ** | **(dollars in millions, except average loan amount)** | ** ** |
| Conventional Conforming  Loans     |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 33,906                                                                              |       | 24,328 |   | 11,775 |   | 4,757 |   | 621 |   |
| Volume of Loans                    |       | $                                                                                   | 6,185      |   | $ | 4,344 |   | $ | 1,604 |   | $ | 607 |   | $ | 81 |   |
| Percent of Total Dollar Volume     |       | 17.6                                                                                | %          | 16.9 | % | 10.2 | % | 7.7 | % | 2.3 | % |
| Conventional  Non-conforming Loans |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 53,137                                                                              |       | 27,668 |   | 7,028 |   | 3,772 |   | 1,328 |   |
| Volume of Loans                    |       | $                                                                                   | 11,310     |   | $ | 5,619 |   | $ | 1,312 |   | $ | 580 |   | $ | 188 |   |
| Percent of Total Dollar Volume     |       | 32.3                                                                                | %          | 21.9 | % | 8.3 | % | 7.3 | % | 5.2 | % |
| Nonprime Mortgage Loans            |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 90,428                                                                              |       | 95,498 |   | 77,533 |   | 38,915 |   | 20,583 |   |
| Volume of Loans                    |       | $                                                                                   | 14,673     |   | $ | 14,679 |   | $ | 12,194 |   | $ | 6,403 |   | $ | 3,077 |   |
| Percent of Total Dollar Volume     |       | 41.8                                                                                | %          | 57.2 | % | 77.4 | % | 80.7 | % | 85.8 | % |
| Prime Home Equity Loans            |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 49,964                                                                              |       | 16,665 |   | 10,432 |   | 5,286 |   | 3,319 |   |
| Volume of Loans                    |       | $                                                                                   | 2,899      |   | $ | 1,028 |   | $ | 646 |   | $ | 345 |   | $ | 240 |   |
| Percent of Total Dollar Volume     |       | 8.3                                                                                 | %          | 4.0 | % | 4.1 | % | 4.3 | % | 6.7 | % |
| FHA/VA Loans                       |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | —                                                                              |       | — |   | — |   | — |   | — |   |
| Volume of Loans                    |       | —                                                                              |       | — |   | — |   | — |   | — |   |
| Percent of Total Dollar Volume     |       | 0.0                                                                                 | %          | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % |
| Commercial Real Estate  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                    |       | 227,435                                                                             |       | 164,159 |   | 106,768 |   | 52,730 |   | 25,851 |   |
| Volume of Loans                    |       | $                                                                                   | 35,067     |   | $ | 25,670 |   | $ | 15,756 |   | $ | 7,935 |   | $ | 3,586 |   |
| Average Loan  Amount               |       | $                                                                                   | 154,000    |   | $ | 156,000 |   | $ | 148,000 |   | $ | 150,000 |   | $ | 139,000 |   |

 

32

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Thefollowing table presents our Wholesale Lending Channel mortgage loan productionby loan type:

| ** **                         | ** ** | **Wholesale Lending Channel Loan Production**                   | ** ** |
|------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **Years Ended December 31,**                                         | ** ** |
| ** **                         | ** ** | **2006**                                                                            | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                         | ** ** | **(dollars in millions, except average loan amount)** | ** ** |
| Conventional Conforming  Loans     |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 109,722                                                                             |       | 123,954 |   | 156,658 |   | 301,260 |   | 248,089 |   |
| Volume of Loans                    |       | $                                                                                   | 21,404     |   | $ | 24,098 |   | $ | 24,985 |   | $ | 45,415 |   | $ | 36,190 |   |
| Percent of Total Dollar Volume     |       | 23.9                                                                                | %          | 28.8 | % | 34.3 | % | 49.8 | % | 53.9 | % |
| Conventional  Non-conforming Loans |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 148,292                                                                             |       | 131,366 |   | 112,755 |   | 153,781 |   | 116,146 |   |
| Volume of Loans                    |       | $                                                                                   | 47,537     |   | $ | 38,634 |   | $ | 31,363 |   | $ | 37,041 |   | $ | 25,214 |   |
| Percent of Total Dollar Volume     |       | 53.2                                                                                | %          | 46.3 | % | 43.1 | % | 40.6 | % | 37.5 | % |
| Nonprime Mortgage Loans            |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 83,682                                                                              |       | 94,646 |   | 77,985 |   | 29,094 |   | 9,627 |   |
| Volume of Loans                    |       | $                                                                                   | 13,453     |   | $ | 15,203 |   | $ | 11,825 |   | $ | 5,004 |   | $ | 1,639 |   |
| Percent of Total Dollar Volume     |       | 15.0                                                                                | %          | 18.2 | % | 16.2 | % | 5.5 | % | 2.4 | % |
| Prime Home Equity Loans            |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 86,334                                                                              |       | 66,275 |   | 52,781 |   | 41,874 |   | 82,465 |   |
| Volume of Loans                    |       | $                                                                                   | 6,309      |   | $ | 4,875 |   | $ | 3,786 |   | $ | 2,214 |   | $ | 3,327 |   |
| Percent of Total Dollar Volume     |       | 7.1                                                                                 | %          | 5.8 | % | 5.2 | % | 2.4 | % | 5.0 | % |
| FHA/VA Loans                       |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 5,358                                                                               |       | 6,024 |   | 7,144 |   | 11,454 |   | 6,522 |   |
| Volume of Loans                    |       | $                                                                                   | 690        |   | $ | 754 |   | $ | 889 |   | $ | 1,537 |   | $ | 818 |   |
| Percent of Total Dollar Volume     |       | 0.8                                                                                 | %          | 0.9 | % | 1.2 | % | 1.7 | % | 1.2 | % |
| Commercial Real Estate  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                    |       | 433,388                                                                             |       | 422,265 |   | 407,323 |   | 537,463 |   | 462,849 |   |
| Volume of Loans                    |       | $                                                                                   | 89,393     |   | $ | 83,564 |   | $ | 72,848 |   | $ | 91,211 |   | $ | 67,188 |   |
| Average Loan  Amount               |       | $                                                                                   | 206,000    |   | $ | 198,000 |   | $ | 179,000 |   | $ | 170,000 |   | $ | 145,000 |   |

 

33

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Thefollowing table presents our Capital Markets mortgage loan production by loantype. Non-commercial real estate loans consist of mortgage loans managed onbehalf of CHL:

| ** **                         | ** ** | **Capital Markets Mortgage Loan Production**                    | ** ** |
|------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **Years Ended December 31,**                                         | ** ** |
| ** **                         | ** ** | **2006**                                                                            | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                         | ** ** | **(dollars in millions, except average loan amount)** | ** ** |
| Conventional Conforming  Loans     |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | —                                                                              |       | — |   | — |   | — |   | — |   |
| Volume of Loans                    |       |             —           |       |             — |   |             — |   |             — |   |             — |   |
| Percent of Total Dollar Volume     |       | 0.0                                                                                 | %          | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % |
| Conventional  Non-conforming Loans |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 47,363                                                                              |       | 56,398 |   | 37,211 |   | 45,284 |   | 17,564 |   |
| Volume of Loans                    |       | $                                                                                   | 13,710     |   | $ | 16,384 |   | $ | 11,410 |   | $ | 17,609 |   | $ | 5,624 |   |
| Percent of Total Dollar Volume     |       | 58.8                                                                                | %          | 65.6 | % | 61.8 | % | 79.3 | % | 65.0 | % |
| Nonprime Mortgage Loans            |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 18,568                                                                              |       | 23,940 |   | 31,209 |   | 29,143 |   | 19,257 |   |
| Volume of Loans                    |       | $                                                                                   | 3,844      |   | $ | 4,548 |   | $ | 5,960 |   | $ | 4,302 |   | $ | 2,831 |   |
| Percent of Total Dollar Volume     |       | 16.5                                                                                | %          | 18.2 | % | 32.3 | % | 19.4 | % | 32.6 | % |
| Prime Home Equity Loans            |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 1,832                                                                               |       | 1,407 |   | 2,440 |   | 6,228 |   | 3,037 |   |
| Volume of Loans                    |       | $                                                                                   | 104        |   | $ | 80 |   | $ | 274 |   | $ | 288 |   | $ | 128 |   |
| Percent of Total Dollar Volume     |       | 0.4                                                                                 | %          | 0.3 | % | 1.5 | % | 1.3 | % | 1.5 | % |
| FHA/VA Loans                       |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | —                                                                              |       | 83 |   | 3,355 |   | 5 |   | 267 |   |
| Volume of Loans                    |       | —                                                                              |       | $ | 16 |   | $ | 435 |   | $ | 1 |   | $ | 76 |   |
| Percent of Total Dollar Volume     |       | 0.0                                                                                 | %          | 0.2 | % | 2.4 | % | 0.0 | % | 0.9 | % |
| Commercial Real Estate  Loans      |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 620                                                                                 |       | 258 |   | 30 |   | — |   | — |   |
| Volume of Loans                    |       | $                                                                                   | 5,671      |   | $ | 3,925 |   | $ | 358 |   | — |   | — |   |
| Percent of Total Dollar Volume     |       | 24.3                                                                                | %          | 15.7 | % | 2.0 | % | 0.0 | % | 0.0 | % |
| Total Loans                        |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 68,383                                                                              |       | 82,086 |   | 74,245 |   | 80,660 |   | 40,125 |   |
| Volume of Loans                    |       | $                                                                                   | 23,329     |   | $ | 24,953 |   | $ | 18,437 |   | $ | 22,200 |   | $ | 8,659 |   |
| Average Loan  Amount(1)            |       | $                                                                                   | 261,000    |   | $ | 257,000 |   | $ | 244,000 |   | $ | 275,000 |   | $ | 216,000 |   |

----

(1)          Excludes commercial realestate loans

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The following tablepresents our mortgage loan production for our Banking Operations by loan type:

| ** **                         | ** ** | **Banking Operations Mortgage Loan Production**                 | ** ** |
|------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **Years Ended December 31,**                                         | ** ** |
| ** **                         | ** ** | **2006**                                                                            | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                         | ** ** | **(dollars in millions, except average loan amount)** | ** ** |
| Conventional Conforming  Loans     |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 15,320                                                                              |       | 9,866 |   | 4,982 |   | 204 |   | 295 |   |
| Volume of Loans                    |       | $                                                                                   | 3,384      |   | $ | 2,290 |   | $ | 910 |   | $ | 71 |   | $ | 131 |   |
| Percent of Total Dollar Volume     |       | 14.2                                                                                | %          | 4.9 | % | 3.4 | % | 0.5 | % | 16.3 | % |
| Conventional  Non-conforming Loans |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | 34,362                                                                              |       | 97,808 |   | 61,619 |   | 24,593 |   | — |   |
| Volume of Loans                    |       | $                                                                                   | 12,565     |   | $ | 32,704 |   | $ | 18,938 |   | $ | 8,736 |   | — |   |
| Percent of Total Dollar Volume     |       | 52.9                                                                                | %          | 70.5 | % | 69.8 | % | 60.9 | % | 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                    |       | 133,552                                                                             |       | 234,259 |   | 192,639 |   | 155,418 |   | 22,727 |   |
| Volume of Loans                    |       | $                                                                                   | 7,810      |   | $ | 11,436 |   | $ | 7,268 |   | $ | 5,547 |   | $ | 674 |   |
| Percent of Total Dollar Volume     |       | 32.9                                                                                | %          | 24.6 | % | 26.8 | % | 38.6 | % | 83.7 | % |
| FHA/VA Loans                       |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Number of Loans                    |       | —                                                                              |       | 27 |   | — |   | — |   | — |   |
| Volume of Loans                    |       | —                                                                              |       | $ | 2 |   | — |   | — |   | — |   |
| Percent of Total Dollar Volume     |       | 0.0                                                                                 | %          | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % |
| Commercial Real Estate  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                    |       | 183,234                                                                             |       | 341,960 |   | 259,240 |   | 180,215 |   | 23,022 |   |
| Volume of Loans                    |       | $                                                                                   | 23,759     |   | $ | 46,432 |   | $ | 27,116 |   | $ | 14,354 |   | $ | 805 |   |
| Average Loan  Amount               |       | $                                                                                   | 130,000    |   | $ | 136,000 |   | $ | 105,000 |   | $ | 80,000 |   | $ | 35,000 |   |

 

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

**Forward-LookingStatements**

***Factors That May Affect OurFuture Results***

We make forward-looking statements in this Report andin other reports we file with the SEC and in press releases. Our management maymake forward-looking statements orally in a public forum 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.

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

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

***Generalbusiness, economic, market and political conditions may significantly affectour 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.

Our business and earningsare significantly affected by the fiscal and monetary policies of the federalgovernment and its agencies. We are particularly affected by the policies ofthe Federal Reserve Board (“FRB”), which regulates the supply of money andcredit in the United States. The FRB’s policies influence the size of themortgage origination market, which significantly impacts the earnings of ourLoan Production Sector and the value of our investment in MSRs and retainedinterests. The FRB’s policies also influence the yield on our interest-earningassets and the cost of our interest-bearing liabilities. Changes in thosepolicies are beyond our control and difficult to predict and can have amaterial effect on the Company’s business, results of operations and financialcondition.

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.

***Thevolatility of interest rates may significantly affect our earnings***

The level and volatilityof interest rates significantly affect the mortgage industry. For example, adecline in mortgage rates generally increases the demand for home loans asborrowers refinance, but also generally leads to accelerated payoffs in ourmortgage servicing portfolio, which negatively impacts the value of our MSRs.

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 to manage the interest rate, orprice, risk inherent in our assets, liabilities and loan commitments. Our mainobjective in managing interest rate risk is to moderate the impact of changesin interest rates on our earnings over time; however our interest rate riskmanagement strategies may result in significant earnings volatility in theshort term. The success of our interest rate risk management strategies 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.

***We mayexperience credit losses due to downward trends in the economy and in the realestate market***

Our profitability in ourMortgage Banking, Banking and Capital Markets Segments is impacted by theability of our customers to repay their loans. These loans are underwritten inaccordance with prescribed 

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guidelines.While we sell most of the loans we produce, we retain credit risk in the formof credit-subordinated securities and loans held for investment, and throughthe representations and warranties we make to the investors in the loans wesell and through the issuance of corporate guarantees. Our credit-subordinatedsecurities are the first beneficial interests in loan sales to absorb anycredit losses, and the buyers of our loans will make more claims against ourcorporate guarantees and representations and warranties if more of ourborrowers default on their loans. While we estimate and provide for creditlosses accruing to our credit-subordinated securities and for the corporateguarantees and representations and warranties, worsening economic and realestate market conditions could negatively impact the value of the creditsubordinated securities we retain and increase our liabilities under ourcorporate guarantees and representations and warranties.

Likewise, worseningeconomic conditions increase the risk that our borrowers will not be able torepay our portfolio loans, and worsening real estate market conditions increasethe risk that the value of the properties securing our loans will beinsufficient to repay amounts owing to us in the event our borrowers default onthe loans. Another factor that may contribute to higher delinquency and defaultrates is the increase in monthly payments on adjustable rate mortgage loans.Any increase in prevailing market interest rates may result in increasedpayments for borrowers who have adjustable rate mortgage loans. Moreover, withrespect to hybrid mortgage loans after their initial fixed rate period, andwith respect to mortgage loans with a negative amortization feature which reachtheir negative amortization cap, borrowers may experience a substantialincrease in their monthly payment even without an increase in prevailing marketinterest rates.

***Our profitability can be affected by secondary mortgagemarket investor demand***

Nearlyall of the mortgage loans that we originate in our Mortgage Banking and CapitalMarkets Segments are sold into the secondary mortgage market. Our ability to sellloans at acceptable margins is affected by many factors including the relativedemands for such loans and mortgage-backed securities evidencing interests insuch loans, the cost of credit enhancements, investor perceptions of such loansand mortgage-backed securities and the risks posed by such products.

***Ouraccounting policies and methods are fundamental to how we report our financialcondition and results of operations, and they may require management to makeestimates about matters that are inherently uncertain***

We have identified severalaccounting policies as being “critical” to the presentation of our financialcondition and results of operations because they involve major aspects of ourbusiness, they require management to make judgments about matters that areinherently uncertain and because of the likelihood that materially differentamounts would be recorded under different conditions or using differentassumptions. These critical accounting policies relate to our gain on sale ofloans and securities, valuation of MSRs and retained interests, valuation ofliabilities incurred in sale or securitization of loans, allowance for loanlosses, and accounting for derivatives and our related interest rate riskmanagement activities. Because of the inherent uncertainty of the estimatesassociated with these critical accounting policies, we cannot provide anyassurance that we will not make significant subsequent adjustments to therelated amounts recorded. For more information, please refer to the *Management’s Discussion and Analysis of Financial Condition and Resultsof Operations—Critical Accounting Policies* section in this Report.

***Theindustries in which we operate are highly competitive***

We operate in highlycompetitive industries that could become even more competitive as a result ofeconomic, legislative, regulatory and technological changes. For example, competitionto produce mortgage loans comes primarily from large commercial banks, savingsinstitutions and investment banks. Many of our competitors in this market havefewer regulatory constraints. For example, national banks and federal savingsand loan institutions are not subject to certain state laws and regulationstargeted at 

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predatorylending practices and we could be at a competitive disadvantage with respect tofulfilling legitimate nonprime credit opportunities. Another competitiveconsideration is that other companies are less reliant on the secondarymortgage market for funding due to their greater portfolio lending capacity.

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.

***Negativepublic opinion 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.

***Changesin laws and regulations 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 and local governments, review such laws,regulations and policies and periodically propose changes or issue guidancethat could affect us in substantial and unpredictable ways. Such changes could,for example, limit the types of financial services and products we offer, orlimit our liability or increase our cost to offer such services and products.It is possible that one or more legislative proposals may be adopted orregulatory changes may be implemented that would have an adverse effect on ourbusiness. Our failure to comply with such laws or regulations, whether actualor alleged, could expose us to fines, penalties or potential litigationliabilities, including costs, settlements and judgments, any of which couldadversely affect our earnings.

***Wedepend on the accuracy and completeness of information about customers andcounterparties***

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 borrowers under certain loanprograms, we assume that the information provided by a customer is accurate andcomplete and we do not independently verify that information. Our financialcondition and results of operations could be negatively impacted to the extentwe rely on customer information that is not complete or accurate.

***Weare exposed to operational risks***

Countrywide, like alllarge corporations, is exposed to many types of operational risk, including therisk of fraud by employees or outsiders, misinterpretation or misapplication ofrules, regulations or other 

38

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requirements,unauthorized transactions by employees or operational errors, includingclerical or record-keeping errors or those resulting from faulty or disabledcomputer or telecommunications systems. Given the high volume of transactionsat Countrywide, certain errors may be repeated or compounded before they arediscovered and successfully corrected. Our dependence upon automated systems torecord and process transaction volume may further increase the risk thattechnical system flaws, or employee tampering or mistakes or manipulation ofthose systems will result in losses that are difficult to detect. We may besubject to disruptions of our systems arising from events that are wholly or partiallybeyond our control (including, for example, computer viruses or electrical ortelecommunications outages), which may give rise to losses in service tocustomers and to loss or liability. We are exposed to the risk that ourexternal vendors may be unable to fulfill their contractual obligation to us(or will be subject to the same risk of fraud or operational errors by theirrespective employees as we are), and to the risk that our (or our vendors’)business continuity and data security systems prove not to be adequate to allowus to resume operations in the event of a disruption to our (or our vendors’)operations. We also face the risk that the design of our controls andprocedures prove inadequate or are circumvented, thereby causing delays in detectionor errors in information. Although we maintain a system of controls designed tomanage operational risk at appropriate levels, there can be no assurance thatwe will not suffer losses from operational risks in the future that may bematerial in amount.

***Ourbusiness could suffer if we fail to attract and retain a highly skilledworkforce***

Our success depends, inlarge part, on our ability to attract and retain a highly skilled workforce. Competitionfor the best people in most activities we engage in can be intense. If we areunable to attract and retain such people, our business and financial resultscould be adversely impacted.

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

We are focused onimplementing new lines of business and offering new products or services withinexisting lines of business. There are substantial uncertainties and risksassociated with these efforts. For example, profitability targets may not provefeasible as a result of various factors, such as compliance with regulations,competitive alternatives, and shifting market preferences. Failure tosuccessfully achieve performance expectations or manage these risks could havea material adverse effect on our business, results of operations and financialcondition.

***OtherFactors***

The above description ofrisk factors is not exhaustive. Other factors that could cause actual resultsto differ materially from historical results or those anticipated include, butare not limited to:

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

·       Unforeseencash or capital requirements

·  A reduction in government support ofhomeownership

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

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

·  Changes in generally accepted accountingprinciples or in the legal, regulatory and legislative environments in themarkets in which the Company operates

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

39

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·       Theoccurrence of natural disasters or other events or circumstances that could impactour operations or could impact the level of claims in the Insurance Segment.

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.

**Item2.**                        *Properties*

We have 40 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, Tampa,Florida and Chandler, Arizona. Of these locations, we own 22 properties andlease 18 properties, which are generally on one- to ten-year terms. Theselocations are primarily used in our Mortgage Banking and Banking Segments, withapproximately 11 being used by our Capital Markets and Insurance Segments. Wehave two locations in the U.K. and three 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.

**Item3.**                        *Legal Proceedings*

We are defendants in, orparties to, a number of pending and threatened legal actions and proceedings involvingmatters that are generally incidental to our business. These matters includeactions and proceedings involving alleged breaches of contract, violations ofconsumer protection and other laws and regulations, and other disputes arisingout of our operations. Certain of these matters involve claims for substantialmonetary damages, and others purport to be class actions.

Based on our currentknowledge, we do not believe that liabilities beyond those already recorded, ifany, arising from any single pending action or proceeding will have a materialadverse effect on the consolidated financial position, results of operations orcash flows of the Company and its subsidiaries. We are not, however, able topredict with certainty the outcome or timing of the resolution of any of theseactions or proceedings or the ultimate impact on us or our results ofoperations in a particular future period.

**Item 4.**                        *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 (Symbol: CFC). Until January 27,2007, the Company’s common stock was also listed on the NYSE Arca, Inc.,formerly the Pacific Stock Exchange. The Company decided to voluntarily delistits common stock from NYSE Arca, Inc. to streamline operations andeliminate duplicative requirements inherent in dual listings as a result of theNYSE Group’s recent merger with the parent company of NYSE Arca, Inc. Thefollowing table sets forth the high and low sales prices (as reported by theNew York Stock Exchange) for the Company’s common stock and the amount of cashdividends declared during the last two periods:

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

 

**Forthe Year Ended December 31, 2006**

| ** **               | ** ** | **Stock Price** | ** ** | **Cash Dividends** | ** ** |
|--------------------------|------------|----------------------|------------|-------------------------|------------|
| **Period Ended**    | ** ** | ** **           | ** ** | **High**                | ** ** | **Low** | ** ** | **Declared** | ** ** |
| March 31,  2006     |       | $                    | 37.23      |                    | $          | 31.86 |   |   | $ | 0.15 |   |   |
| June 30,  2006      |       | $                    | 43.67      |                    | $          | 35.93 |   |   | $ | 0.15 |   |   |
| September 30,  2006 |       | $                    | 39.99      |                    | $          | 32.20 |   |   | $ | 0.15 |   |   |
| December 31, 2006   |       | $                    | 43.09      |                    | $          | 34.50 |   |   | $ | 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, 2006 and 2005, theCompany declared quarterly cash dividends totaling $0.60 and $0.59 per share,respectively.

The ability of the Company to pay dividends in thefuture is limited by the earnings, cash position, retained earnings and capitalneeds of the Company, projected growth rates, liquidity, general businessconditions and other factors deemed relevant by the Company’s Board ofDirectors. The Company is prohibited under certain of its debt agreements,including its guarantee of CHLs’ revolving credit facility, from payingdividends on any capital stock (other than dividends payable in capital stockor stock rights) if in default. The ability of the Company to pay dividends mayalso be limited by banking regulations.

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 andCHL each maintains specified minimum levels of net worth and certain otherfinancial ratios, dividends cannot be paid by the Company and CHL to remain incompliance with certain of CHL debt obligations (including its revolving creditfacility). See *Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Liquidity and Capital Resources*.

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As of February 26, 2007 there were 1,831shareholders of record of the Company’s common stock, with 589,817,197 commonshares outstanding.

Thefollowing table shows Company repurchases of its common stock for each calendarmonth during the quarter ended December 31, 2006.

| **Calendar Month** | ** ** | ** ** | ** ** | **Total Number  of Shares  Purchased(1)** | ** ** | **Average Price Paid  per Share** | ** ** | **Total Number of  Shares Purchased  as Part of Publicly  Announced Plan  or Program(2)** | ** ** | **Maximum Amount  That May Yet Be  Purchased Under the  Plan or Program(2)** | ** ** |
|-------------------------|------------|------------|------------|-----------------------------------------------------|------------|--------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|
| October                 |       |       | 3,079      |                                                |       |                                             | $          | 38.18                                                                                                                             |       |                                                                                                                 |       | — |   |   |   | n/a |   |   |
| November                |       |       | 38,641,941 |                                                |       |                                             | $          | 38.82                                                                                                                             |       |                                                                                                                 |       | 38,639,876 |   |   |   | $ | 1.0 billion |   |   |
| December                |       |       | 675        |                                                |       |                                             | $          | 40.41                                                                                                                             |       |                                                                                                                 |       | — |   |   |   | n/a |   |   |
| Total                   |       |       | 38,645,695 |                                                |       |                                             | $          | 38.82                                                                                                                             |       |                                                                                                                 |       | — |   |   |   | n/a |   |   |
|                         |            |            |            |                                                     |            |                                                  |            |                                                                                                                                   |            |                                                                                                                      |            |  |  |  |  |  |  |  |  |  |  |

----

(1)          The shares indicated inthis table represent shares of common stock repurchased and the withholding ofa portion of restricted shares and stock appreciation rights to cover taxes onvested restricted shares and exercised stock appreciation rights.

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

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

| ** **                                                                        | ** ** | **Years Ended December 31,**                                                 | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2006**                                                                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                        | ** ** | **(dollar amounts in thousands, except per share data)** | ** ** |
| **Statement of Earnings Data(1):**                                                |       |                                                                                        |       |   |   |   |   |   |   |   |   |
| Revenues:                                                                         |       |                                                                                        |       |   |   |   |   |   |   |   |   |
| Gain on sale of loans and securities                                              |       | $                                                                                           | 5,681,847  |   | $ | 4,861,780 |   | $ | 4,842,082 |   | $ | 5,887,436 |   | $ | 3,471,209 |   |
| Net interest income after provision for loan losses                               |       | 2,688,514                                                                                   |       | 2,237,935 |   | 1,965,541 |   | 1,359,390 |   | 765,665 |   |
| Net loan servicing fees and other income (loss) from  MSRs and retained interests |       | 1,300,655                                                                                   |       | 1,493,167 |   | 465,650 |   | (463,050 | ) | (865,752 | ) |
| Net insurance premiums earned                                                     |       | 1,171,433                                                                                   |       | 953,647 |   | 782,685 |   | 732,816 |   | 561,681 |   |
| Other                                                                             |       | 574,679                                                                                     |       | 470,179 |   | 510,669 |   | 462,050 |   | 358,864 |   |
| Total revenues                                                                    |       | 11,417,128                                                                                  |       | 10,016,708 |   | 8,566,627 |   | 7,978,642 |   | 4,291,667 |   |
| Expenses:                                                                         |       |                                                                                        |       |   |   |   |   |   |   |   |   |
| Compensation                                                                      |       | 4,373,985                                                                                   |       | 3,615,483 |   | 3,137,045 |   | 2,590,936 |   | 1,773,318 |   |
| Occupancy and other office                                                        |       | 1,030,164                                                                                   |       | 879,680 |   | 643,378 |   | 525,192 |   | 403,976 |   |
| Insurance claims                                                                  |       | 449,138                                                                                     |       | 441,584 |   | 390,203 |   | 360,046 |   | 277,614 |   |
| Advertising and promotion                                                         |       | 260,652                                                                                     |       | 229,183 |   | 171,585 |   | 103,902 |   | 86,278 |   |
| Other                                                                             |       | 969,054                                                                                     |       | 703,012 |   | 628,543 |   | 552,794 |   | 407,458 |   |
| Total expenses                                                                    |       | 7,082,993                                                                                   |       | 5,868,942 |   | 4,970,754 |   | 4,132,870 |   | 2,948,644 |   |
| Earnings before  income taxes                                                     |       | 4,334,135                                                                                   |       | 4,147,766 |   | 3,595,873 |   | 3,845,772 |   | 1,343,023 |   |
| Provision for  income taxes                                                       |       | 1,659,289                                                                                   |       | 1,619,676 |   | 1,398,299 |   | 1,472,822 |   | 501,244 |   |
| Net earnings                                                                      |       | $                                                                                           | 2,674,846  |   | $ | 2,528,090 |   | $ | 2,197,574 |   | $ | 2,372,950 |   | $ | 841,779 |   |
| **Per  Share Data:**                                                              |       |                                                                                        |       |   |   |   |   |   |   |   |   |
| Earnings                                                                          |       |                                                                                        |       |   |   |   |   |   |   |   |   |
| Basic                                                                             |       | $                                                                                           | 4.42       |   | $ | 4.28 |   | $ | 3.90 |   | $ | 4.44 |   | $ | 1.69 |   |
| Diluted                                                                           |       | $                                                                                           | 4.30       |   | $ | 4.11 |   | $ | 3.63 |   | $ | 4.18 |   | $ | 1.62 |   |
| Cash dividends  declared                                                          |       | $                                                                                           | 0.60       |   | $ | 0.59 |   | $ | 0.37 |   | $ | 0.15 |   | $ | 0.09 |   |
| Stock price at  end of period                                                     |       | $                                                                                           | 42.45      |   | $ | 34.19 |   | $ | 37.01 |   | $ | 25.28 |   | $ | 12.91 |   |
| **Selected  Financial Ratios:**                                                   |       |                                                                                        |       |   |   |   |   |   |   |   |   |
| Return on average  assets                                                         |       | 1.28                                                                                        | %          | 1.46 | % | 1.80 | % | 2.65 | % | 1.77 | % |
| Return on average  equity                                                         |       | 18.81                                                                                       | %          | 22.67 | % | 23.53 | % | 34.25 | % | 18.20 | % |
| Dividend payout  ratio                                                            |       | 13.49                                                                                       | %          | 13.81 | % | 9.53 | % | 3.39 | % | 6.67 | % |
| **Selected  Operating Data (in millions):**                                       |       |                                                                                        |       |   |   |   |   |   |   |   |   |
| Loan servicing  portfolio(2)                                                      |       | $                                                                                           | 1,298,394  |   | $ | 1,111,090 |   | $ | 838,322 |   | $ | 644,855 |   | $ | 452,405 |   |
| Volume of loans  originated                                                       |       | $                                                                                           | 468,172    |   | $ | 499,301 |   | $ | 363,364 |   | $ | 434,864 |   | $ | 251,901 |   |
| Volume of Mortgage  Banking loans sold                                            |       | $                                                                                           | 403,035    |   | $ | 411,848 |   | $ | 326,313 |   | $ | 374,245 |   | $ | 241,601 |   |

----

(1)          Certain amounts in theconsolidated financial statements have been reclassified to conform to currentyear presentation.

(2)          Includeswarehoused loans and loans under subservicing agreements.

43

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| ** **                                                                                        | ** ** | **December 31,**                                                                       | ** **  |
|---------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|-------------|
| ** **                                                                                        | ** ** | **2006**                                                                                    | ** **  | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                        | ** ** | **(dollar amounts in thousands, except per share data)** | ** **  |
| **Selected Balance Sheet Data at  End of Period(1):**                                             |       |                                                                                        |        |   |   |   |   |   |   |   |   |
| Loans:                                                                                            |       |                                                                                        |        |   |   |   |   |   |   |   |   |
| Held for sale                                                                                     |       | $                                                                                           | 31,272,630  |   | $ | 36,808,185 |   | $ | 37,347,326 |   | $ | 24,103,625 |   | $ | 15,042,072 |   |
| Held for investment                                                                               |       | 78,085,757                                                                                  |        | 69,865,447 |   | 39,661,191 |   | 26,375,958 |   | 6,081,598 |   |
|                                                                                              |       | 109,358,387                                                                                 |        | 106,673,632 |   | 77,008,517 |   | 50,479,583 |   | 21,123,670 |   |
| Securities purchased under agreements to resell,  securities borrowed and federal funds sold |       | 27,269,897                                                                                  |        | 23,317,361 |   | 13,456,448 |   | 10,448,102 |   | 5,997,368 |   |
| Investments in other financial  instruments                                                       |       | 12,769,451                                                                                  |        | 11,260,725 |   | 9,834,214 |   | 12,647,213 |   | 10,736,244 |   |
| Mortgage servicing rights, at fair value                                                          |       | 16,172,064                                                                                  |        | — |   | — |   | — |   | — |   |
| Mortgage servicing rights, net                                                                    |       | —                                                                                      |        | 12,610,839 |   | 8,729,929 |   | 6,863,625 |   | 5,384,933 |   |
| Other assets                                                                                      |       | 34,376,431                                                                                  |        | 21,222,813 |   | 19,466,597 |   | 17,539,150 |   | 14,816,316 |   |
| Total assets                                                                                      |       | $                                                                                           | 199,946,230 |   | $ | 175,085,370 |   | $ | 128,495,705 |   | $ | 97,977,673 |   | $ | 58,058,531 |   |
| Deposit liabilities                                                                               |       | $                                                                                           | 55,578,682  |   | $ | 39,438,916 |   | $ | 20,013,208 |   | $ | 9,327,671 |   | $ | 3,114,271 |   |
| Securities sold under agreements to repurchase and  federal funds purchased                       |       | 42,113,501                                                                                  |        | 34,153,205 |   | 20,465,123 |   | 32,013,412 |   | 22,634,839 |   |
| Notes payable                                                                                     |       | 71,487,584                                                                                  |        | 76,187,886 |   | 66,613,671 |   | 39,948,461 |   | 19,821,536 |   |
| Other liabilities                                                                                 |       | 16,448,617                                                                                  |        | 12,489,503 |   | 11,093,627 |   | 8,603,413 |   | 7,326,752 |   |
| Common shareholders’ equity                                                                  |       | 14,317,846                                                                                  |        | 12,815,860 |   | 10,310,076 |   | 8,084,716 |   | 5,161,133 |   |
| Total liabilities and shareholders’ equity                                                   |       | $                                                                                           | 199,946,230 |   | $ | 175,085,370 |   | $ | 128,495,705 |   | $ | 97,977,673 |   | $ | 58,058,531 |   |
| **Selected  Financial Ratios:**                                                                   |       |                                                                                        |        |   |   |   |   |   |   |   |   |
| Equity to average assets                                                                          |       | 6.82                                                                                        | %           | 6.45 | % | 7.66 | % | 7.74 | % | 9.70 | % |
| MSR capitalization ratio at period end                                                            |       | 1.38                                                                                        | %           | 1.29 | % | 1.15 | % | 1.18 | % | 1.28 | % |
| Tier 1 risk-based capital ratio                                                                   |       | 11.6                                                                                        | %           | 10.7 | % | 11.1 | % | 12.8 | % | 12.2 | % |
| Total risk-based  capital ratio                                                                   |       | 12.8                                                                                        | %           | 11.7 | % | 11.7 | % | 13.7 | % | 13.6 | % |

----

(1)           Certain amounts in the consolidated financialstatements have been reclassified to conform to current year presentation.

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**Item 7.**                        *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. This discussion includes forward-looking statements which aresubject to certain risks and uncertainties as discussed in the preceding ItemIA. *Risk Factors* of this Report.

**Overview**

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

***Who We Are***

We are a diversifiedfinancial services company engaged in real estate-finance related businesses. Weorganize our business into five segments—Mortgage Banking, Banking, CapitalMarkets, Insurance and Global Operations.

***Results of Operations***

Followingis a summary of our key performance measurements for the years ended December 31,2006 and 2005:

| ** **                                         | ** ** | **Years Ended December 31,**                                 | ** ** | ** **                                                     | ** ** |
|----------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                         | ** ** | **     2006    **              | ** ** | **    2005     ** | ** ** | **% Change** | ** ** |
| ** **                                         | ** ** | **($ in millions, except per share amounts)** | ** ** |                                                           |
| **Consolidated Company**                           | ** ** |                                                                        | ** ** | ** **                                                     |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |
| Revenues                                           |       |                                                                        | $          | 11,417                                                         | ** ** |   |   | $ | 10,017 | ** ** |   |   | 14 | % |   |   |
| Net Earnings                                       |       |                                                                        | $          | 2,675                                                          | ** ** |   |   | $ | 2,528 | ** ** |   |   | 6 | % |   |   |
| Diluted EPS                                        |       |                                                                        | $          | 4.30                                                           | ** ** |   |   | $ | 4.11 | ** ** |   |   | 5 | % |   |   |
| Total Assets ($ in  billions)                 |       |                                                                        | $          | 200                                                            | ** ** |   |   | $ | 175 | ** ** |   |   | 14 | % |   |   |
| **Key  Segment Pre-tax Earnings**                  | ** ** |                                                                        | ** ** | ** **                                                     |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |
| Mortgage Banking                                   |       |                                                                        | $          | 2,062                                                          | ** ** |   |   | $ | 2,435 | ** ** |   |   | (15 | %) |   |   |
| Banking                                            |       |                                                                        | $          | 1,380                                                          | ** ** |   |   | $ | 1,074 | ** ** |   |   | 28 | % |   |   |
| Capital Markets                                    |       |                                                                        | $          | 554                                                            | ** ** |   |   | $ | 452 | ** ** |   |   | 23 | % |   |   |
| Insurance                                          |       |                                                                        | $          | 320                                                            | ** ** |   |   | $ | 184 | ** ** |   |   | 74 | % |   |   |
| **Key Operating Statistics** ($ in  billions) |       |                                                                        | ** ** | ** **                                                     |       |   | ** ** | ** ** |   |   |   |   |   |   |
| Total Loan Fundings                                |       |                                                                        | $          | 468                                                            | ** ** |   |   | $ | 499 | ** ** |   |   | (6 | %) |   |   |
| Mortgage Banking Loan Sales                        |       |                                                                        | $          | 403                                                            | ** ** |   |   | $ | 413 | ** ** |   |   | (2 | %) |   |   |
| Ending Loan Servicing Portfolio                    |       |                                                                        | $          | 1,298                                                          | ** ** |   |   | $ | 1,111 | ** ** |   |   | 17 | % |   |   |
| Ending Assets of  Banking Operations               |       |                                                                        | $          | 83                                                             | ** ** |   |   | $ | 73 | ** ** |   |   | 13 | % |   |   |

 

Our consolidated net earnings for 2006 were $2,675million, an increase of 6% from 2005’s net earnings of $2,528 million. Theincrease in our earnings resulted primarily from an increase in earnings fromour Banking and Capital Markets Segments, which produced pre-tax earnings of$1,380 million and $554 million, respectively, increases of 28% and 23% fromthe prior year. These increases partially were offset by a decrease in theprofitability of our Mortgage Banking Segment. The increase in profitability ofour Banking Segment was primarily due to a 31% increase in averageinterest-earning assets in Banking Operations from 2005. The increase inprofitability of our Capital Markets Segment was due to an increase in revenuefrom all of the segment’s activities.

Our Mortgage BankingSegment remains the largest contributor to our earnings. The Mortgage BankingSegment is comprised of three sectors: Loan Production, Loan Servicing and ClosingServices. In 

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2006,the Mortgage Banking Segment contributed 48% of consolidated pre-tax income, or$2,062 million. This was a decrease of 15% from 2005, primarily due to a 21%decrease in the profitability of our Production Sector. The Production Sector’sresults were negatively impacted by reduced loan production and sales, alongwith our continuing investment in increasing the sector’s production capacity. Loanproduction was affected by the reduced size of the mortgage market, which weestimated was $2.9 trillion for 2006 compared to $3.3 trillion for 2005. Basedon our estimates of the size of the mortgage market, we increased our consolidatedmarket share to 16.0% for 2006 from 14.9% in the year-ago period. Our marketshare growth came from increased production primarily from our Retail Channel.

***Credit***

Historically, our primary source of credit risk hasbeen the continuing investment and/or obligations we retain either in the formof credit-enhancing subordinated interests, representations and warrantiesissued when we sell or securitize loans or corporate guarantees. Estimatedcredit losses are considered in the valuation of our subordinated interests;however, the entire carrying value of such interests is generally at risk inthat cash flow accruing to these interests is available to absorb credit lossesin the loan pools underlying such subordinated interests. We held $2.0 billionof subordinated interests at December 31, 2006, an increase of 16% from December 31,2005. Our recorded liability for representations and warranties was$390.2 million at December 31, 2006, an increase of 108% from December 31,2005. Our corporate guarantees provided in the financial statements at December 31,2006 and 2005 were $45.4 million and $27.6 million, respectively. Thecontractual limit of our corporate guarantees exceeded the amounts recorded by$490.5 million and $349.9 million at December 31, 2006 and 2005,respectively.

As our portfolio ofinvestment loans has grown, our portfolio credit risk has also grown. Ourallowance for credit losses was $269.2 million at December 31, 2006, anincrease of 36% from December 31, 2005. The increase in our allowance forloan losses reflects prevailing real estate market and economic conditions andthe seasoning of the Bank’s investment loan portfolio. We expect the allowancefor loan losses to increase, both in absolute terms and as a percentage of ourloan portfolio as our loan portfolio continues to season and as current marketconditions develop. However, we believe that our investment criteria haveprovided us with a high quality investment portfolio and that our credit lossesshould stay within acceptable levels. We also believe our allowances andprovisions for credit losses are adequate pursuant to generally acceptedaccounting principles.

***Liquidity and Capital***

As part of our ongoing capital optimization plan, ourBoard of Directors authorized a share repurchase program of up to $2.5 billion.In connection with this program, we repurchased $1.5 billion of our commonstock in November 2006 and financed this activity through the issuance ofjunior subordinated debentures. The transaction is subject to a market priceadjustment payment based on the actual volume-weighted average price of ourcommon stock during the repurchase period. The price adjustment payment will besettled, at our election, in our common stock or cash. The final settlement isexpected to occur in the second quarter of 2007.

At December 31, 2006,we exceeded the regulatory capital requirements to be classified as “wellcapitalized,” with a Tier 1 risk-based capital ratio of 11.6% and a total riskbased ratio of 12.8%. Our public ratings were classified “investment grade,”with long-term ratings of A, A3 and A by Standard & Poors, Moody’sInvestors Service and Fitch, respectively.

***Outlook***

We estimate the mortgagemarket for 2007 to be $2.6 trillion as compared to our estimate of$2.9 trillion for 2006. We believe that this decline will result infurther industry consolidation as companies 

46

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eitherexit the business or attempt to align themselves with stronger entities. Inaddition to lower mortgage loan volumes in 2007, we believe that the industrywill also experience continued pressure on margins and housing prices, as wellas increased defaults and foreclosures.

In early 2007, we have observedan increase in investor yield requirements for nonprime loans, which mayadversely impact the gain on sale realized from such loans. The increasedinvestor yield requirements, separately or combined with the trend ofincreasing defaults and foreclosures, may also have a negative impact on thevalue of our credit-subordinated securities. In addition, increasing defaultsand foreclosures, along with a slowdown in home price appreciation (or pricedepreciation in some markets) and worsening economic conditions may result inhigher credit losses in the future.

**Critical AccountingPolicies**

The accounting policies with the greatest impact onour financial condition and results of operations that require the mostjudgment, and which are most likely to result in materially different amountsbeing recorded under different conditions or using different assumptions, pertainto our mortgage securitization activities; our investments in MSRs and retainedinterests; our measurement of provisions and reserves associated with thecredit risk inherent in our operations and our use of derivatives to manageinterest rate risk. Our critical accounting policies involve the following fiveareas: 1) accounting for gain on sales of loans and securities; 2) accountingfor MSRs and retained interests, including valuation of MSRs and retainedinterests; 3) valuation of liabilities incurred in sale or securitizationof loans; 4) allowance for loan losses; and 5) accounting for derivativesand our related interest rate risk management activities.

Effective January 1, 2006, we adoptedStatement of Financial Accounting Standards No. 156—*Accountingfor Servicing of Financial Assets* (“SFAS 156”), which amendsStatement of Financial Accounting Standards No. 140—*Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities* (“SFAS 140”). SFAS 156 changes the accounting for,and reporting of, the recognition and measurement of separately recognizedservicing assets and liabilities. Accordingly, the adoption of SFAS 156 haschanged the Company’s accounting policies relating to gain on sale of loans andsecurities and the accounting for MSRs subsequent to their initial recognition,effective January 1, 2006.

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

When we sell loans in the secondary mortgage market,we generally do not sell the MSRs that are created. Depending on the type ofsecuritization, we may also retain other financial interests, includinginterest-only securities, principal-only securities and residualsecurities.

We determine the gain on sale of a security or loansby allocating the carrying value of the underlying mortgage loans betweensecurities or loans sold and the interests we continue to hold, based on theirrelative fair values. The gain on sale we report is the difference between theproceeds we receive from the sale and the cost allocated to the securities orloans sold. The proceeds include cash and other assets obtained (primarily MSRs)less any liabilities incurred (i.e., liabilities for representations andwarranties or other recourse provisions). The timing of gain recognition isdependent on the terms of the transaction meeting very specific accountingcriteria and, as a result, the gain on sale may be recorded in a different formor in a different accounting period from when the transfer of the loans iscompleted. In addition, the amount of gain on sale recorded is influenced bythe values of the MSRs and retained interests at the time of sale. See the *Valuation of MSRs and Retained Interest* section of thisReport for a discussion of the judgments and estimates involved in thevaluation of MSRs and retained interests.

47

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Hereis an example of how this accounting works:

| Carrying value of  mortgage loans underlying a security(1)                           |   | $       | 1,000,000 |   |
|--------------------------------------------------------------------------------------|--------|---------|-----------|--------|
| Fair values:                                                                         |   |    |      |
| Security                                                                             |   | $       | 999,000   |   |
| MSRs                                                                                 |   | 10,000  |      |
| Retained interests                                                                   |   | 4,000   |      |
| Liabilities incurred                                                                 |   | (1,000  | )         |
| Sales proceeds:                                                                      |   |    |      |
| Cash                                                                                 |   | $       | 999,000   |   |
| MSRs                                                                                 |   | 10,000  |      |
| Liabilities incurred                                                                 |   | (1,000  | )         |
|                                                                                 |   | $       | 1,008,000 |   |
| Fair value used to  allocate basis:                                                  |   |    |      |
| Loans sold (sales proceeds)                                                          |   | $       | 1,008,000 |   |
| Retained interests                                                                   |   | 4,000   |      |
|                                                                                 |   | $       | 1,012,000 |   |
| Computation of gain on  sale of security:                                            |   |    |      |
| Sales proceeds                                                                       |   | $       | 1,008,000 |   |
| Less: Cost allocated to loans sold [$1,000,000  ́  ($1,008,000÷$1,012,000)] |   | 996,047 |      |
| Gain on sale                                                                         |   | $       | 11,953    |   |
| Initial recorded value  of retained interests ($1,000,000 - $996,047)                |   | $       | 3,953     |   |

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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.

***Valuation of MSRs and Retained Interests***

The precise market value of MSRs and retained interestscannot be readily determined because these assets are not actively traded instand-alone markets. Considerable judgment is required to determine the fairvalues of our MSRs and retained interests, and the exercise of such judgmentcan significantly impact the Company’s earnings. Small changes in theassumptions used to estimate the value of MSRs and retained interests can havea significant effect on our estimates of value. Similarly, relatively smallchanges in value of these assets can have a material effect on earnings for aparticular period. As a result, senior financial management exercises extensiveand active oversight of this process. The Company’s Asset/Liability Committee,which is comprised of several of our senior financial executives, ultimatelydetermines the valuation of MSRs and retained interests.

Our MSR valuation process combines the use of adiscounted cash flow model and extensive analysis of current market data toarrive at an estimate of fair value at each balance sheet date. The cash flowassumptions and prepayment assumptions used in our discounted cash flow modelare based on market factors and encompass the historical performance of ourMSRs. We believe that the assumptions we use are consistent with assumptionsand data used by market participants valuing similar MSRs. The key assumptionsused in the valuation of MSRs include mortgage prepayment speeds and thediscount rate (projected London Inter Bank Offering Rate (“LIBOR”) plusoption-adjusted spread). These variables can, and generally do, 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 

48

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reasonableness of ourvaluation is obtained from peer group MSR valuation surveys, MSR market trades,MSR broker valuations and prices of interest-only securities.

Thefollowing table shows the key assumptions we used to determine the fair valuesof our MSRs at December 31, 2006 and the value sensitivity of our MSRs tochanges in such assumptions.

| ** **                                   | ** ** | **MSRs**                                     | ** ** |
|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                   | ** ** | **(dollar amounts  in thousands)** | ** ** |
| Fair value of  MSRs                          |       |                                         | $          | 16,172,064 |   |   |
| Fair value as a  percentage of MSR portfolio |       |                                         | 1.38       | % |   |
| Weighted-average  service fee                |       |                                         | 0.34       | % |   |
| Multiple of net  service fee                 |       |                                         | 4.0        |   |   |
| Weighted-average  life (in years)            |       |                                         | 5.8        |   |   |
| Weighted-average  annual prepayment speed    |       |                                         | 21.0       | % |   |
| Impact of 5% adverse change                  |       |                                         | $          | 116,095 |   |   |
| Impact of 10% adverse change                 |       |                                         | $          | 227,104 |   |   |
| Impact of 20% adverse change                 |       |                                         | $          | 435,845 |   |   |
| Weighted-average  OAS(1)                     |       |                                         | 6.2        | % |   |
| Impact of 5% adverse change                  |       |                                         | $          | 129,460 |   |   |
| Impact of 10% adverse change                 |       |                                         | $          | 256,746 |   |   |
| Impact of 20%  adverse change                |       |                                         | $          | 505,029 |   |   |

----

(1)          Option-adjusted spreadover LIBOR.

The yield implied in the market value of the MSRs was10.4% at December 31, 2006.

For our retained interests, we also estimate fairvalue through the use of discounted cash flow models. The key assumptions usedin the valuation of our retained interests include mortgage prepayment speeds,discount rates, and for retained interests containing credit risk, the netlifetime credit losses. For further discussion of credit risk, see section inthis Report entitled *Management’s Discussionand Analysis of Financial Condition and Results of Operations—Credit RiskRetained in Loan Sales.* We develop cash flow, prepayment and netlifetime credit loss assumptions based on the historical performance of theloans underlying our retained interests. We believe that such empirical dataare consistent with assumptions that other major market participants use indetermining such assets’ fair values. The process for estimating lifetimecredit losses used in the valuation of residual interests or the valuation ofliabilities incurred is similar. See the section following entitled *Valuation of Liabilities Incurred in the Sale of Loans* foradditional discussion of estimated lifetime credit losses.

49

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Thefollowing table shows the key assumptions we used to determine the fair valuesof our retained interests at December 31, 2006, and the fair valuesensitivity of our retained interests to changes in such assumptions.

| ** **                                   | ** ** | **Retained  Interests**                      | ** ** |
|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                   | ** ** | **(dollar amounts  in thousands)** | ** ** |
| Fair value of  retained interests            |       |                                         | $          | 3,040,575 |   |   |
| Weighted-average  life (in years)            |       |                                         | 2.8        |   |   |
| Weighted-average  annual prepayment speed    |       |                                         | 32.2       | % |   |
| Impact of 5% adverse change                  |       |                                         | $          | 91,746 |   |   |
| Impact of 10% adverse change                 |       |                                         | $          | 172,883 |   |   |
| Impact of 20% adverse change                 |       |                                         | $          | 313,420 |   |   |
| Weighted-average  annual discount rate       |       |                                         | 17.3       | % |   |
| Impact of 5% adverse change                  |       |                                         | $          | 33,809 |   |   |
| Impact of 10% adverse change                 |       |                                         | $          | 60,475 |   |   |
| Impact of 20% adverse change                 |       |                                         | $          | 127,056 |   |   |
| Weighted-average  net lifetime credit losses |       |                                         | 2.6        | % |   |
| Impact of 5% adverse change                  |       |                                         | $          | 48,550 |   |   |
| Impact of 10% adverse change                 |       |                                         | $          | 117,336 |   |   |
| Impact of 20%  adverse change                |       |                                         | $          | 224,616 |   |   |

 

These sensitivities shownfor MSRs and retained interests are solely for illustrative purposes and shouldbe used with caution. This information is furnished to provide the reader witha basis for assessing the sensitivity of the values presented to changes in keyassumptions. As the figures indicate, changes in fair value based on a givenpercentage variation in individual assumptions generally cannot beextrapolated. In addition, in the above tables, the effect of a variation in aparticular assumption on the fair value of the MSRs or retained interests iscalculated without changing any other assumption. In reality, changes in onefactor may coincide with changes in another, which could compound or counteractthe sensitivities.

***Valuation of Liabilities Incurred in Sale of Loans***

We incurliabilities in our loan sales and securitizations through representations andwarranties we make or through other recourse provisions, such as corporateguarantees. An active market to transfer the liabilities relating torepresentations and warranties and corporate guarantees does not exist. Therefore,management must estimate the fair value of such liabilities. When credit riskis retained through liabilities incurred in the sale or securitization ofloans, the lifetime credit losses are estimated as follows and are discountedat a risk-free rate of return.

·       Lifetimecredit losses are developed by estimating when and how many loans will defaultand multiplying that amount by how much of the loan will be uncollectible (“lossseverity”).

·       Default rates are estimated using default curves usedfor pricing securities backed by the type of loans for which the obligation isbeing retained.

·       Lossseverities are estimated using multi-attribute severity models similar innature to those used to calculate probability of default.

Ourprocess for estimating lifetime credit losses benefits from the extensivehistory and experience we have developed from our mortgage loan servicingportfolio. This estimation process is also subject to the uncertainties thatreliance on historical information factors giving rise to losses and offsettingrecoveries 

50

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does not accurately reflect current conditions orpredict future events. The effect of changes in certain key assumptions on ourestimated liability for representations and warranties and corporate guaranteesis as follows:

| ** **                                                                                        | ** ** | **Liability for  Representations  and Warranties  and Corporate  Guarantees** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                                                                        | ** ** | **(in thousands)**                                                                      | ** ** |
| Liability for  representations and warranties and corporate guarantees at December 31,  2006 |       |                                                                                         | $          | 435,536 |   |   |
| Impact of a  change in default rates on the liability of a:                                       |       |                                                                                         |       |   |   |
| 5% adverse change                                                                                 |       |                                                                                         | $          | 9,925 |   |   |
| 10% adverse change                                                                                |       |                                                                                         | $          | 19,849 |   |   |
| 20% adverse change                                                                                |       |                                                                                         | $          | 39,698 |   |   |
| Impact of a  change in loss severity on the liability of a:                                       |       |                                                                                         |       |   |   |
| 5% adverse change                                                                                 |       |                                                                                         | $          | 17,643 |   |   |
| 10% adverse change                                                                                |       |                                                                                         | $          | 35,286 |   |   |
| 20% adverse  change                                                                               |       |                                                                                         | $          | 70,572 |   |   |

 

Credit risk is an integralconsideration in the valuation of retained interests. The impact of changes incredit loss assumptions on the value of retained interests is included in thesection, *Valuation of MSRs and Retained Interests*.

***Allowance for Loan Losses***

The allowance for loan losses is our best estimate ofthe credit losses incurred in our loan investment portfolio.

We continually assess thecredit quality of our portfolios of loans held for investment to identify andprovide for losses incurred. Once a loan is included in our investmentportfolio, how we assesses loan credit quality is based on whether the loan ispart of a pool of homogeneous loans or is individually evaluated forimpairment.

*Homogeneous LoanPools*

Our mortgage loan portfolios are comprised primarilyof large groups of homogeneous loans that are secured by residential realestate and are made to consumers. We do not evaluate individual homogenousloans for impairment. We estimate the losses incurred in our homogeneous loanpools by estimating how many of the loans will default and how much of theloans’ balances will be lost in the event of default.

We estimate how many of our homogeneous loans willdefault based on the loans’ attributes (occupancy, loan-to-value, borrowercredit score, etc.) which is further broken down by present collection status (delinquency).This estimate is based on our historical experience with our loan servicingportfolio. The likelihood of default is based on analysis of movement of loanswith the measured attributes from each delinquency category to default over atwelve-month period. Loans more than 90 days past due are assigned a rate ofdefault that measures the percentage of such loans that will default over theirlives as we assume that the condition causing the ultimate default presentlyexists. We estimate how much of the defaulted loans’ balances will be lostbased on our estimate of the average loss severity for defaulted loans by type(Prime Mortgage, Nonprime Mortgage or Prime Home Equity Loans).

Loan losses are charged offagainst the allowance for loan losses when management believes the loss isconfirmed.

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*IndividuallyEvaluated Loans*

On a regular basis, weindividually evaluate loans in our warehouse lending portfolio for impairmentbased on borrower-provided financial information and our assessments ofcollateral. We have an internally-developed loan rating system for ourwarehouse lending loans that is used to determine when an allowance for loanloss is required for a given loan. We charge off losses in individuallyevaluated loans when the loss is confirmed. The charge-off is based on ourestimate of value of the collateral securing the loan. We develop an allowancefor losses on warehouse lending loans for which specific losses have not beenidentified. This allowance is developed by applying credit loss factorsapplicable to the individual loan’s assigned ratings.

*Sensitivity ofEstimates*

Our allowance estimation process benefits from theextensive history and experience we have developed in our mortgage loanservicing activities. However, this process is subject to risks anduncertainties, including reliance on historical loss information that may notrepresent current conditions and the proper identification of factors givingrise to credit losses. For example, new products may have default rates andloss severities which differ from those products we have historically offeredand upon which our estimates are based. We address this risk by activelymonitoring the delinquency and default experience of our homogenous pools by consideringcurrent economic and market conditions. Based on our assessments of currentconditions, we make appropriate adjustments to our historically developedassumptions when necessary to adjust historical factors to account for presentconditions. Our senior management is actively involved in the review andapproval of our allowance for loan losses.

Thefollowing example illustrates the sensitivity of our allowance for loan lossesto changes in assumptions:

| ** **                                                         | ** ** | **Allowance for  Loan Losses** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                         | ** ** | **(in thousands)**                  | ** ** |
| Allowance for  loan losses at December 31, 2006               |       |                                     | $          | 261,054 |   |   |
| Impact of a change in  default rates on the required allowance of: |       |                                     |       |   |   |
| 5% adverse change                                                  |       |                                     | $          | 14,887 |   |   |
| 10% adverse change                                                 |       |                                     | $          | 29,774 |   |   |
| 20% adverse change                                                 |       |                                     | $          | 59,548 |   |   |
| Impact of a change in  loss severity on required allowance of:     |       |                                     |       |   |   |
| 5% adverse change                                                  |       |                                     | $          | 5,499 |   |   |
| 10% adverse change                                                 |       |                                     | $          | 10,998 |   |   |
| 20% adverse  change                                                |       |                                     | $          | 21,996 |   |   |

 

These sensitivities arehypothetical and should be used with caution. In the preceding tables, theeffect of a variation in a particular assumption on the allowance for loanlosses is calculated independently without changing any other assumption. Inreality, changes in one factor may result in changes in another which mightcompound 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 expectation and demonstration initiallyand on an ongoing basis that our interest rate risk management activity ishighly effective. We use standard 

52

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statistical measures todetermine the effectiveness of our hedging activity. If we are unable to, orchoose not to, qualify certain interest rate risk management activities forhedge accounting, then a possible earnings mismatch may be created because,unlike the derivative instruments, the change in fair value of the relatedasset or liability may not be reflected in current-period earnings. This issueis potentially most significant with our inventory of loans held for sale,which is required to be carried at the lower of amortized cost or market andour debt instruments and other liabilities that are carried at historical cost.

In connection with our mortgage loan originationactivities, we issue interest rate lock commitments (“IRLCs”) to loanapplicants and financial intermediaries. An IRLC guarantees a loan’s terms,subject to credit approval, for a period typically between seven and 75 days.The majority of our IRLCs qualify as derivative instruments and, therefore, arerequired to be recorded at fair value with changes in fair value reflected incurrent-period earnings. However, there is no active market for IRLCs that canbe used to determine their fair value and as result we utilize an alternativemethod for estimating the fair value of our IRLCs.

We estimate the fair valueof an IRLC based on the change in estimated fair value of the underlyingmortgage loan, adjusted for the probability that the loan will fund within theterms of the IRLC. The change in fair value of the underlying mortgage loan isbased on quoted MBS prices and is measured from the date we issue thecommitment. Therefore, at the time of issuance the estimated fair value of anIRLC is zero. After 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 thecommitment 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 empirical datathat take into account all of these variables, as well as renegotiations ofrate and point commitments that tend to occur when mortgage rates fall. Theseclosing ratio estimates are used to calculate the aggregate balance of loansthat we expect to fund within the terms of the IRLCs.

**Results of Operations Comparison—Year EndedDecember 31, 2006 (“2006”) and Year Ended December 31, 2005 (“2005”)**

***Consolidated Earnings Performance***

Net earnings for 2006 were $2,674.8 million, a 6%increase from 2005. Our diluted earnings per share were $4.30, a 5% increasefrom the year-ago period.

The increase in our earnings resulted primarily from theBanking Segment, which produced pre-tax earnings of $1,380.4 million, anincrease of 28% from the prior year; and our Capital Markets Segment, whichproduced pre-tax earnings of $553.5 million, an increase of 23% from the prioryear. The increase in profitability of our Banking Segment was primarily due toa 31% increase in average interest-earning assets in Banking Operations fromthe prior year. The increase in profitability of our Capital Markets Segmentwas due to increased revenue from all sources.

The increase in earningsfrom our Banking and Capital Market Segments was partially offset by a decreasein the profitability of our Mortgage Banking Segment, which produced pre-taxearnings of $2,062.4 million for 2006, a decrease of 15% from 2005. Thedecrease in the profitability of our Mortgage Banking Segment was primarily dueto a decline in the profitability of our Loan Production Sector, as theincrease in revenues from higher gain on sale margins was more than offset byincreased operating expenses as the Company continued to build its productioncapacity.

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**Operating SegmentResults**

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

| ** **             | ** ** | **Years Ended  December 31,** | ** ** |
|------------------------|------------|-----------------------------------------|------------|
| ** **             | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **             | ** ** | **(in thousands)**                 | ** ** |
| Mortgage Banking:      |       |                                    |       |   |   |
| Loan Production        |       | $                                       | 1,310,895  |   | $ | 1,659,457 |   |
| Loan Servicing         |       | 660,021                                 |       | 669,611 |   |
| Loan Closing Services  |       | 91,483                                  |       | 105,457 |   |
| Total Mortgage Banking |       | 2,062,399                               |       | 2,434,525 |   |
| Banking                |       | 1,380,384                               |       | 1,074,480 |   |
| Capital Markets        |       | 553,500                                 |       | 451,629 |   |
| Insurance              |       | 320,133                                 |       | 183,716 |   |
| Global Operations      |       | 28,642                                  |       | 35,353 |   |
| Other                  |       | (10,923                                 | )          | (31,937 | ) |
| Total                  |       | $                                       | 4,334,135  |   | $ | 4,147,766 |   |

 

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

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

| ** **                                   | ** ** | **Years Ended  December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **                                   | ** ** | **(in millions)**                  | ** ** |
| Segment:                                     |       |                                    |       |   |   |
| Mortgage Banking                             |       | $                                       | 421,084    |   | $ | 427,916 |   |
| Banking Operations                           |       | 23,759                                  |       | 46,432 |   |
| Capital Markets—conduit acquisitions(1) |       | 17,658                                  |       | 21,028 |   |
| Total Mortgage Loan Fundings                 |       | 462,501                                 |       | 495,376 |   |
| Commercial Real Estate                       |       | 5,671                                   |       | 3,925 |   |
|                                         |       | $                                       | 468,172    |   | $ | 499,301 |   |
| Product:                                     |       |                                    |       |   |   |
| Prime Mortgage                               |       | $                                       | 374,029    |   | $ | 405,889 |   |
| Prime Home Equity                            |       | 47,876                                  |       | 44,850 |   |
| Nonprime Mortgage                            |       | 40,596                                  |       | 44,637 |   |
| Commercial Real Estate                       |       | 5,671                                   |       | 3,925 |   |
|                                         |       | $                                       | 468,172    |   | $ | 499,301 |   |

----

(1)          Acquisitions from thirdparties.

Our total loan production was $468.2 billion for 2006,a 6% decrease from 2005. The decrease was primarily due to a 14% decrease intotal U.S. residential mortgage production, offset by an increase in our marketshare.

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

| ** **              | ** ** | **Years Ended  December 31,** | ** ** |
|-------------------------|------------|-----------------------------------------|------------|
| ** **              | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **              | ** ** | **(in millions)**                  | ** ** |
| **Purpose:**            |       |                                    |       |   |   |
| Non-purchase            |       | $                                       | 257,031    |   | $ | 263,260 |   |
| Purchase                |       | 211,141                                 |       | 236,041 |   |
|                    |       | $                                       | 468,172    |   | $ | 499,301 |   |
| **Interest Rate Type:** |       |                                    |       |   |   |
| Fixed-Rate              |       | $                                       | 256,087    |   | $ | 237,724 |   |
| Adjustable-Rate         |       | 212,085                                 |       | 261,577 |   |
|                    |       | $                                       | 468,172    |   | $ | 499,301 |   |

 

**Mortgage BankingSegment**

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

***Loan Production Sector***

The Loan Production Sectorsources mortgage loans through the three production channels of CHL—the RetailChannel (Consumer Markets and Full Spectrum Lending), Wholesale Lending Channeland Correspondent Lending Channel. These loans are funded through any one ofthese channels or through Countrywide Bank.

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

| ** **                           | ** ** | **Years Ended  December 31,(1)** | ** ** |
|--------------------------------------|------------|--------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **(in millions)**                     | ** ** |
| **Channel:**                         |       |                                       |       |   |   |
| Originated:                          |       |                                       |       |   |   |
| Retail:                              |       |                                       |       |   |   |
| Consumer Markets                     |       | $                                          | 118,596    |   | $ | 120,324 |   |
| Full Spectrum Lending                |       | 35,067                                     |       | 25,670 |   |
|                                 |       | 153,663                                    |       | 145,994 |   |
| Wholesale Lending                    |       | 89,393                                     |       | 83,564 |   |
| Total originated                     |       | 243,056                                    |       | 229,558 |   |
| Purchased—Correspondent Lending |       | 178,028                                    |       | 198,358 |   |
|                                 |       | $                                          | 421,084    |   | $ | 427,916 |   |
| **Mortgage Loan Type:**              |       |                                       |       |   |   |
| Prime Mortgage                       |       | $                                          | 344,370    |   | $ | 354,493 |   |
| Prime Home Equity                    |       | 39,962                                     |       | 33,334 |   |
| Nonprime Mortgage                    |       | 36,752                                     |       | 40,089 |   |
|                                 |       | $                                          | 421,084    |   | $ | 427,916 |   |
| **Purpose:**                         |       |                                       |       |   |   |
| Non-purchase                         |       | $                                          | 230,536    |   | $ | 226,400 |   |
| Purchase                             |       | 190,548                                    |       | 201,516 |   |
|                                 |       | $                                          | 421,084    |   | $ | 427,916 |   |
| **Interest Rate Type:**              |       |                                       |       |   |   |
| Fixed-Rate                           |       | $                                          | 245,215    |   | $ | 224,692 |   |
| Adjustable-Rate                      |       | 175,869                                    |       | 203,224 |   |
|                                 |       | $                                          | 421,084    |   | $ | 427,916 |   |

----

(1) $106.0billion and $8.1 billion of these loans were funded by Countrywide Bank during2006 and 2005, respectively.

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The pre-tax earnings of the Loan Production Sector aresummarized below:

| ** **                              | ** ** | **Years Ended December 31,**      | ** **  |
|-----------------------------------------|------------|--------------------------------------------------|-------------|
| ** **                              | ** ** | **2006**                                         | ** **  | **2005** | ** ** |
| ** **                              | ** ** | **Amount**                                       | ** **  | **Percentage of  Loan  Production  Volume** | ** ** | **Amount** | ** ** | **Percentage of  Loan  Production  Volume** | ** ** |
| ** **                              | ** ** | **(dollar amounts in thousands)** | ** **  |
| Revenues:                               |       |                                             |        |   |   |   |   |   |   |   |   |   |   |
| Prime Mortgage                          |       | $                                                | 4,069,733   |   |   |   |   |   | $ | 3,223,177 |   |   |   |   |   |
| Nonprime Mortgage                       |       | 847,314                                          |        |   |   |   |   | 1,096,145 |   |   |   |   |   |
| Prime Home Equity                       |       | 809,069                                          |        |   |   |   |   | 820,072 |   |   |   |   |   |
| Total revenues                          |       | 5,726,116                                        |        |   | 1.36 | % |   | 5,139,394 |   |   | 1.20 | % |   |
| Expenses:                               |       |                                             |        |   |   |   |   |   |   |   |   |   |   |
| Compensation                            |       | 2,412,101                                        |        |   | 0.57 | % |   | 2,015,339 |   |   | 0.47 | % |   |
| Other operating                         |       | 1,447,367                                        |        |   | 0.35 | % |   | 1,054,173 |   |   | 0.24 | % |   |
| Allocated corporate                     |       | 555,753                                          |        |   | 0.13 | % |   | 410,425 |   |   | 0.10 | % |   |
| Total expenses                          |       | 4,415,221                                        |        |   | 1.05 | % |   | 3,479,937 |   |   | 0.81 | % |   |
| Pre-tax earnings                        |       | $                                                | 1,310,895   |   |   | 0.31 | % |   | $ | 1,659,457 |   |   | 0.39 | % |   |
| Total Mortgage Banking  loan production |       | $                                                | 421,084,000 |   |   |   |   |   | $ | 427,916,000 |   |   |   |   |   |

 

Revenues (in dollars and expressed as a percentage ofmortgage loans produced) increased from 2005 primarily driven by improved PrimeMortgage revenues resulting from improved secondary market executions onpay-option ARM loans, partially offset by the effect of continuing competitivepressure on Nonprime Mortgage Loans and Prime Home Equity Loans gain on sale.In 2006 and 2005, $403.0 billion and $411.8 billion of mortgage loans,respectively, or 96% of Mortgage Banking loan production in each period, wassold.

Expenses (in dollars and as a percentage of loansproduced) increased from the prior year, primarily due to costs incurred tosupport our investment in expanding the loan sales force and distributed branchnetwork in furtherance of our long-term strategy of market share growth. Inaddition, a lower deferral rate of expenses under SFAS 91 contributed to theincrease in expenses. We have adjusted our production capacity in markets wheredeclines in production require such adjustments. We continue to expand our loanproduction capacity in markets where we have identified opportunities forgrowth.

Following is a summary of our loan productionchannels’ sales organizations:

| ** **            | ** ** | **December 31,** | ** ** |
|-----------------------|------------|-----------------------|------------|
| ** **            | ** ** | **2006**              | ** ** | **2005** | ** ** |
| ** **            | ** ** | **Sales  Force**      | ** ** | **Branches** | ** ** | **Call  Centers** | ** ** | **Sales   Force** | ** ** | **Branches** | ** ** | **Call  Centers** | ** ** |
| **Channel:**          | ** ** | ** **            | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Retail:               |       |                  |       |   |   | ** ** |   |   |   | ** ** |   |   |   |   |   | ** ** |   |   |   | ** ** |   |
| Consumer Markets      |       | 8,897                 |       |   | 773 | ** ** |   |   | 5 | ** ** |   | 8,442 |   |   | 662 | ** ** |   |   | 4 | ** ** |   |
| Full Spectrum Lending |       | 6,071                 |       |   | 226 | ** ** |   |   | 11 | ** ** |   | 4,871 |   |   | 195 | ** ** |   |   | 7 | ** ** |   |
| Wholesale Lending     |       | 1,510                 |       |   | 52 | ** ** |   |   | — | ** ** |   | 1,311 |   |   | 52 | ** ** |   |   | — | ** ** |   |
| Correspondent Lending |       | 184                   |       |   | — | ** ** |   |   | — | ** ** |   | 182 |   |   | — | ** ** |   |   | — | ** ** |   |

 

The primary capacity constraint in our loanorigination activities is the number of loan operations personnel we have onstaff. Management adjusts staffing levels to account for changes in the currentand projected near-term mortgage market.

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

| ** **                              | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Sales                                   |       | 16,662                |       | 14,806 |   |
| Operations:                             |       |                  |       |   |   |
| Regular employees                       |       | 10,247                |       | 10,990 |   |
| Temporary staff                         |       | 1,448                 |       | 1,843 |   |
|                                    |       | 11,695                |       | 12,833 |   |
| Administration and  support             |       | 3,249                 |       | 2,980 |   |
| Total Loan Production Sector  workforce |       | 31,606                |       | 30,619 |   |

 

***Loan Servicing Sector***

Our Loan Servicing Sector includes a workforce ofapproximately 7,000 who service almost 8.2 million mortgage loans. The LoanServicing Sector’s results include fees and other income earned and expensesincurred for servicing loans for others; the financial performance of ourinvestments in MSRs and retained interests and the risk management activities related to these assets; and profits fromour subservicing activities. The long-term performance of this sector isaffected primarily by the level of interest rates, the corresponding effect onthe level of projected and actual prepayments in our servicing portfolio,projected and actual credit losses, our operational effectiveness and ourability to manage interest rate risk.

Our servicing portfolio grew to $1.3 trillion atDecember 31, 2006, a 17% increase from December 31, 2005. At the sametime, the overall weighted-average note rate of loans in our servicingportfolio increased to 6.5% from 6.1% at December 31, 2005.

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The following table summarizes the results for theLoan Servicing Sector:

| ** **                                                         | ** ** | **Years Ended December 31,**      | ** **    |
|--------------------------------------------------------------------|------------|--------------------------------------------------|---------------|
| ** **                                                         | ** ** | **2006**                                         | ** **    | **2005** | ** ** |
| ** **                                                         | ** ** | **Amount**                                       | ** **    | **Percentage of  Average  Servicing  Portfolio** | ** ** | **Amount** | ** ** | **Percentage of  Average  Servicing  Portfolio** | ** ** |
| ** **                                                         | ** ** | **(dollar amounts in thousands)** | ** **    |
| Servicing fees,  net of guarantee fees                             |       | $                                                | 3,804,442     |   |   | 0.320 | % |   | $ | 3,194,395 |   |   | 0.333 | % |   |
| Escrow balance  income                                             |       | 845,631                                          |          |   | 0.071 | % |   | 366,848 |   |   | 0.038 | % |   |
| Miscellaneous  fees                                                |       | 645,001                                          |          |   | 0.054 | % |   | 508,576 |   |   | 0.053 | % |   |
| Income from  retained interests                                    |       | 513,136                                          |          |   | 0.043 | % |   | 455,986 |   |   | 0.048 | % |   |
| Realization of  expected cash flows from mortgage servicing rights |       | (3,192,583                                       | )             |   | (0.268 | %) |   | — |   |   | — |   |   |
| Amortization of  mortgage servicing rights                         |       | —                                           |          |   | — |   |   | (2,288,354 | ) |   | (0.238 | %) |   |
| Operating revenues                                                 |       | 2,615,627                                        |          |   | 0.220 | % |   | 2,237,451 |   |   | 0.234 | % |   |
| Direct expenses                                                    |       | 742,802                                          |          |   | 0.062 | % |   | 647,898 |   |   | 0.067 | % |   |
| Allocated  corporate expenses                                      |       | 85,789                                           |          |   | 0.007 | % |   | 64,659 |   |   | 0.007 | % |   |
| Total expenses                                                     |       | 828,591                                          |          |   | 0.069 | % |   | 712,557 |   |   | 0.074 | % |   |
| Operating  earnings                                                |       | 1,787,036                                        |          |   | 0.151 | % |   | 1,524,894 |   |   | 0.160 | % |   |
| Interest expense                                                   |       | 663,180                                          |          |   | 0.056 | % |   | 354,155 |   |   | 0.037 | % |   |
| Change in fair  value of mortgage servicing rights                 |       | 431,988                                          |          |   | 0.036 | % |   | — |   |   | — |   |   |
| Recovery of  mortgage servicing rights                             |       | —                                           |          |   | — |   |   | 387,851 |   |   | 0.040 | % |   |
| Impairment of  retained interests                                  |       | (282,117                                         | )             |   | (0.024 | %) |   | (365,901 | ) |   | (0.038 | %) |   |
| Servicing hedge  losses                                            |       | (613,706                                         | )             |   | (0.051 | %) |   | (523,078 | ) |   | (0.055 | %) |   |
| Valuation changes, net of Servicing Hedge                          |       | (463,835                                         | )             |   | (0.039 | %) |   | (501,128 | ) |   | (0.053 | %) |   |
| Pre-tax earnings                                                   |       | $                                                | 660,021       |   |   | 0.056 | % |   | $ | 669,611 |   |   | 0.070 | % |   |
| Average servicing  portfolio                                       |       | $                                                | 1,188,101,000 |   |   |   |   |   | $ | 959,691,000 |   |   |   |   |   |

 

Pre-tax earnings in the Loan Servicing Sector were$660.0 million during 2006, a decrease of $9.6 million from 2005. The decreasein pre-tax earnings is primarily due to increased interest expensesubstantially offset by an improvement in operating earnings. The increase ininterest expense was driven by a larger average investment in Servicing Sectorassets, increased leverage on those assets and increased cost of debt. Theincrease in operating earnings was due mainly to a larger portfolio and higherescrow balance benefit resulting from an increase in the escrow earnings rate.

As a result of theadoption of SFAS 156, MSRs are carried at fair value with the change in valuerecorded in current period earnings. The primary factors causing a change infair value of MSRs are changes in discount rates and prepayment speedassumptions, primarily due to changes in interest rates and other marketfactors (shown as “Change in fair value of mortgage servicing rights” in thepreceding table) and realization of expected cash flows from MSRs.

***Loan Closing Services Sector***

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

The LandSafe companiesproduced $91.5 million in pre-tax earnings in 2006, representing a decrease of13% from 2005. The decrease in LandSafe’s pre-tax earnings was primarily due tothe decline in loan production.

59

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**Banking Segment**

The Banking Segment includes the investment andfee-based activities of Countrywide Bank (“Banking Operations”), along with theactivities of Countrywide Warehouse Lending (“CWL”), a provider of mortgageinventory financing to other mortgage bankers.

The Bank also produces loans for sale through ourMortgage Banking Segment. This activity is a mortgage banking activity and themortgage loan production, the related balance sheet and the income relating tothe holding and sale of these loans are included in the Mortgage BankingSegment.

TheBanking Segment achieved pre-tax earnings of $1,380.4 million during 2006,compared to $1,074.5 million for the prior year. Following is the compositionof pre-tax earnings:

| ** **                              | ** ** | **Years Ended  December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                              | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **                              | ** ** | **(in thousands)**                 | ** ** |
| Banking  Operations                     |       | $                                       | 1,384,390  |   | $ | 1,017,313 |   |
| CWL                                     |       | 56,158                                  |       | 90,033 |   |
| Allocated  corporate expenses(1)        |       | (60,164                                 | )          | (32,866 | ) |
| Total Banking  Segment pre-tax earnings |       | $                                       | 1,380,384  |   | $ | 1,074,480 |   |

 

----

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

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

| ** **             | ** ** | **Years Ended  December 31,** | ** ** |
|------------------------|------------|-----------------------------------------|------------|
| ** **             | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **             | ** ** | **(in millions)**                  | ** ** |
| Purchases              |       | $                                       | 8,196      |   | $ | 4,429 |   |
| Correspondent  Lending |       | 7,302                                   |       | 13,529 |   |
| Wholesale Lending      |       | 6,144                                   |       | 19,178 |   |
| Consumer Markets       |       | 2,117                                   |       | 9,296 |   |
|                   |       | $                                       | 23,759     |   | $ | 46,432 |   |

 

The loan production retained in our investmentportfolio was $23.8 billion in 2006, compared to $46.4 billion in 2005.This decline contributed to slower asset growth in our Banking Operations. Ourstrategic plan calls for continued long-term growth in Bank assets; however,many factors may impact the asset growth in any period. These include generalmortgage market conditions, the availability of assets which meet the yieldrequirements of our Banking Operations and our consolidated capital andearnings considerations.

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

| ** **                                          | ** ** | **Years Ended  December 31,**          | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                                          | ** ** | **(dollar amounts in thousands)** | ** ** |
| Interest income                                     |       | $                                                | 5,182,460  |   | $ | 3,219,590 |   |
| Interest expense                                    |       | (3,386,463                                       | )          | (1,938,450 | ) |
| Net interest income                                 |       | 1,795,997                                        |       | 1,281,140 |   |
| Provision for  loan losses                          |       | (154,009                                         | )          | (81,644 | ) |
| Net interest income after provision for loan losses |       | 1,641,988                                        |       | 1,199,496 |   |
| Non-interest  income                                |       | 147,702                                          |       | 147,990 |   |
| Non-interest  expense                               |       | (405,300                                         | )          | (330,173 | ) |
| Pre-tax earnings                                    |       | $                                                | 1,384,390  |   | $ | 1,017,313 |   |
| Efficiency  ratio(1)                                |       | 21                                               | %          | 23 | % |
| After-tax return on  average assets                 |       | 1.05                                             | %          | 1.01 | % |

 

----

(1)          Non-interest expensedivided by the sum of net interest income plus non-interest income. The BankingOperations’ efficiency ratio reflects the expense structure resulting from itsrelationship with CHL. If the Banking Operations of Countrywide Bank were astand-alone entity, the nature and amount of its expenses would differ fromthose reported. For example, the fulfillment fees paid by Countrywide Bank tothe Loan Production Sector for origination costs incurred on investmentmortgage loans funded by Countrywide Bank are generally determined on anincremental cost basis which is less than would be incurred in an arms-lengthtransaction.

61

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The components of netinterest income of Banking Operations are summarized below:

| ** **                                         | ** ** | **Years Ended December 31,**      | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                                         | ** ** | **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)                                  |       | $                                                | 71,945,544 |   | $ | 4,790,697 |   |   | 6.66 | % |   | $ | 52,741,015 |   | $ | 2,861,280 |   |   | 5.43 | % |   |
| Securities available for sale(2)                   |       | 5,838,757                                        |       | 282,459 |   |   | 4.84 | % |   | 6,091,499 |   | 284,867 |   |   | 4.68 | % |   |
| Short-term investments                             |       | 514,081                                          |       | 25,856 |   |   | 5.03 | % |   | 723,341 |   | 25,049 |   |   | 3.46 | % |   |
| FHLB securities and FRB stock                      |       | 1,449,951                                        |       | 83,448 |   |   | 5.76 | % |   | 1,131,121 |   | 48,394 |   |   | 4.28 | % |   |
| Total earning assets                               |       | 79,748,333                                       |       | 5,182,460 |   |   | 6.50 | % |   | 60,686,976 |   | 3,219,590 |   |   | 5.31 | % |   |
| Allowance for loan losses                          |       | (149,392                                         | )          |   |   |   |   |   |   | (77,150 | ) |   |   |   |   |   |   |
| Other assets                                       |       | 1,164,213                                        |       |   |   |   |   |   |   | 714,995 |   |   |   |   |   |   |   |
| Total assets                                       |       | $                                                | 80,763,154 |   |   |   |   |   |   |   | $ | 61,324,821 |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                     |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Money market deposits and savings accounts         |       | $                                                | 6,755,339  |   | 334,134 |   |   | 4.95 | % |   | $ | 2,735,107 |   | 98,878 |   |   | 3.62 | % |   |
| Company-controlled custodial deposits(3)      |       | 15,790,741                                       |       | 775,484 |   |   | 4.91 | % |   | 11,895,480 |   | 382,332 |   |   | 3.21 | % |   |
| Time deposits                                      |       | 27,308,975                                       |       | 1,277,143 |   |   | 4.68 | % |   | 16,204,803 |   | 585,139 |   |   | 3.61 | % |   |
| Total interest-bearing deposits                    |       | 49,855,055                                       |       | 2,386,761 |   |   | 4.79 | % |   | 30,835,390 |   | 1,066,349 |   |   | 3.46 | % |   |
| FHLB advances                                      |       | 21,496,353                                       |       | 910,281 |   |   | 4.23 | % |   | 22,086,532 |   | 769,711 |   |   | 3.48 | % |   |
| Other borrowed funds                               |       | 1,771,797                                        |       | 89,421 |   |   | 5.05 | % |   | 3,175,166 |   | 102,390 |   |   | 3.22 | % |   |
| Total borrowed funds                               |       | 23,268,150                                       |       | 999,702 |   |   | 4.30 | % |   | 25,261,698 |   | 872,101 |   |   | 3.45 | % |   |
| Total interest-bearing   liabilities               |       | 73,123,205                                       |       | 3,386,463 |   |   | 4.63 | % |   | 56,097,088 |   | 1,938,450 |   |   | 3.46 | % |   |
| Non  interest-bearing liabilities and equity: |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non interest-bearing checking                      |       | 1,189,123                                        |       |   |   |   |   |   |   | 460,624 |   |   |   |   |   |   |   |
| Other liabilities                                  |       | 945,387                                          |       |   |   |   |   |   |   | 777,737 |   |   |   |   |   |   |   |
| Shareholder’s equity                          |       | 5,505,439                                        |       |   |   |   |   |   |   | 3,989,372 |   |   |   |   |   |   |   |
| Total non interest-bearing liabilities and equity  |       | 7,639,949                                        |       |   |   |   |   |   |   | 5,227,733 |   |   |   |   |   |   |   |
| Total liabilities and shareholder’s  equity   |       | $                                                | 80,763,154 |   |   |   |   |   |   |   | $ | 61,324,821 |   |   |   |   |   |   |   |
| Net interest income                                |       |                                             |       | $ | 1,795,997 |   |   |   |   |   |   |   | $ | 1,281,140 |   |   |   |   |   |
| Net interest spread(4)                             |       |                                             |       |   |   |   | 1.87 | % |   |   |   |   |   |   | 1.85 | % |   |
| Net interest  margin(5)                            |       |                                             |       |   |   |   | 2.25 | % |   |   |   |   |   |   | 2.11 | % |   |

----

(1)           Average balancesinclude nonaccrual loans.

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

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

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

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

Thedollar amounts of interest income and interest expense change depending uponchanges in interest rates and in the relative volumes of our interest-earningassets and interest-bearing liabilities. Changes attributable to (i) changesin volume (changes in average outstanding balances multiplied by the 

62

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prior period’s rate), (ii) changes in rate(changes in average interest rate multiplied by the prior period’s volume), and(iii) changes in rate/volume (changes in rate multiplied by the change involume)—which were allocated proportionately to the changes in volume and thechanges in rate and included in the relevant column below—are as follows:

| ** **                                 | ** ** | **2006 vs. 2005**                   | ** ** |
|--------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                 | ** ** | **Increase (Decrease) Due to** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **Volume**                                    | ** ** | **Rate** | ** ** | **Total Changes** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                       | ** ** |
| Interest-earning  assets:                  |       |                                          |       |   |   |   |   |   |   |
| Mortgage loans                             |       | $                                             | 1,107,833  |   | $ | 821,584 |   |   | $ | 1,929,417 |   |   |
| Securities available for sale              |       | (12,042                                       | )          | 9,634 |   |   | (2,408 | ) |   |
| Short-term investments                     |       | (8,525                                        | )          | 9,332 |   |   | 807 |   |   |
| FHLB securities and FRB stock              |       | 15,662                                        |       | 19,392 |   |   | 35,054 |   |   |
| Total interest income                      |       | $                                             | 1,102,928  |   | $ | 859,942 |   |   | $ | 1,962,870 |   |   |
| Interest-bearing  liabilities:             |       |                                          |       |   |   |   |   |   |   |
| Money market deposits and savings accounts |       | $                                             | 188,130    |   | $ | 47,126 |   |   | $ | 235,256 |   |   |
| Company-controlled custodial deposits      |       | 150,500                                       |       | 242,652 |   |   | 393,152 |   |   |
| Time deposits                              |       | 483,676                                       |       | 208,328 |   |   | 692,004 |   |   |
| Total deposits                             |       | 822,306                                       |       | 498,106 |   |   | 1,320,412 |   |   |
| FHLB advances                              |       | (21,056                                       | )          | 161,626 |   |   | 140,570 |   |   |
| Other borrowed funds                       |       | (56,478                                       | )          | 43,509 |   |   | (12,969 | ) |   |
| Total borrowings                           |       | (77,534                                       | )          | 205,135 |   |   | 127,601 |   |   |
| Total interest expense                     |       | 744,772                                       |       | 703,241 |   |   | 1,448,013 |   |   |
| Net interest  income                       |       | $                                             | 358,156    |   | $ | 156,701 |   |   | $ | 514,857 |   |   |

 

The increase in net interest income is primarily dueto a $19.1 billion or 31% increase in average interest-earning assets, combinedwith a 14 basis point increase in net interest margin. The increase in the netinterest margin from the prior year was a result of the reduced impact ofteaser rates earned on recently funded pay-option ARM loans owing to the reducedlevel of additions in 2006 combined with an increase in the proportion of thenon-interest bearing liabilities and equity used to finance interest-earningassets. These benefits were partially offset by an increase in 2006 in therepricing lag between the LIBOR rates to which most of the Banking Operations’liabilities are indexed and the MTA index (12-month Treasury Average) towhich an increasing percentage of its assets are indexed.

The Banking Operation’s provision for loan lossesincreased by $72.4 million during 2006 compared to 2005. This increase reflectsincreased delinquencies and loss levels resulting from seasoning of loansacquired during the past years of rapid portfolio growth, as well as prevailingreal estate and market conditions. In addition, current portfolio growth hasalso contributed to the increase in the provision for loan losses. The increasein the Banking Operation’s provision for loan losses is partially offset byprovision reductions which occur when the Bank requires the Mortgage BankingSegment to purchase loans sourced by the Production Sector for underwriting orprocessing defects or other matters. The provision for loan losses and therelated allowance for loan losses is impacted by many factors, includingeconomic conditions (for example, housing prices, interest rates andunemployment rates), the borrower’s credit profile, the loan’s paymentrequirements, delinquency, loan seasoning and prepayments.

Banking Operations holds a substantial investment inpay-option ARM loans. These loans have interest rates that adjust monthly andminimum required payments that adjust annually, resulting in the potential fornegative amortization. Minimum monthly payments may increase by no more than 71¤2%per year unless the unpaid balance increases to a specified limit, which is nomore than 115% of the original loan amount, at which time a new monthly paymentamount adequate to repay the loan over its remaining 

63

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contractual life isestablished. To ensure that contractual loan payments are adequate to repay aloan, the fully amortizing loan payment amount is re-established after eitherfive or ten years and again every five years thereafter.

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

We manage the credit risk relating to pay-option ARMloans through a variety of methods, including active borrower communicationsboth before and after funding and through our underwriting standards. Ourunderwriting standards conform to those required to make the pay-option ARMloans salable 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 and assuming theloan’s interest rate is fully indexed. (A fully indexed note rate equals thesum of the current index rate plus the margin applicable to the loan.)

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

| ** **                                                                              | ** ** | **December 31,**   | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                              | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                                                              | ** ** | **(in thousands)** | ** ** |
| Total pay-option  ARM loan portfolio                                                    |       | $                       | 32,732,581 |   | $ | 26,101,306 |   |
| Total principal balance of pay-option ARM loans with  accumulated negative amortization |       | $                       | 28,958,718 |   | $ | 13,963,721 |   |
| Accumulated negative amortization (from original  loan  balance)                        |       | $                       | 653,974    |   | $ | 74,748 |   |
| Average original  loan-to-value ratio(1)                                                |       | 75                      | %          | 75 | % |
| Average combined original  loan-to-value ratio(2)                                       |       | 78                      | %          | 78 | % |
| Average original  FICO score(3)                                                         |       | 718                     |       | 720 |   |
| Loans delinquent 90 days  or more                                                       |       | 0.63                    | %          | 0.10 | % |

----

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

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

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

64

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Thecomposition of the Banking Operations balance sheets is as follows: 

| ** **                                                                               | ** ** | **December 31,**                            | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                               | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                                                                               | ** ** | **Amount**                                       | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** |
| ** **                                                                               | ** ** | **(dollar amounts in thousands)** | ** ** |
| **Assets**                                                                               |       |                                             |       |   |   |   |   |   |   |
| Short-term investments                                                                   |       | $                                                | 50,974     |   | 5.14 | % | $ | 245,046 |   | 4.08 | % |
| Mortgage loans, net of allowance for loan losses of  $228,692 and $102,756, respectively |       | 73,481,762                                       |       | 7.39 | % | 64,279,198 |   | 6.11 | % |
| Securities available for sale                                                            |       | 6,208,477                                        |       | 4.63 | % | 6,250,929 |   | 5.02 | % |
| FHLB securities and FRB stock                                                       |       | 1,431,403                                        |       | 5.91 | % | 1,332,820 |   | 4.73 | % |
| Total interest-earning assets                                                            |       | 81,172,616                                       |       | 7.16 | % | 72,107,993 |   | 5.98 | % |
| Other assets                                                                             |       | 1,601,952                                        |       |   |   | 918,613 |   |   |   |
| Total assets                                                                             |       | $                                                | 82,774,568 |   |   |   | $ | 73,026,606 |   |   |   |
| **Liabilities  and Equity**                                                              |       |                                             |       |   |   |   |   |   |   |
| Deposits:(1)                                                                             |       |                                             |       |   |   |   |   |   |   |
| Customer                                                                                 |       | $                                                | 39,904,633 |   | 5.08 | % | $ | 25,299,605 |   | 4.09 | % |
| Company-controlled escrow deposit accounts                                               |       | 14,609,269                                       |       | 5.28 | % | 13,332,801 |   | 4.18 | % |
| FHLB advances                                                                            |       | 18,900,053                                       |       | 4.35 | % | 26,266,861 |   | 3.88 | % |
| Other borrowings                                                                         |       | 97,914                                           |       | 5.35 | % | 1,279,878 |   | 4.23 | % |
| Total interest-bearing liabilities                                                       |       | 73,511,869                                       |       | 4.93 | % | 66,179,145 |   | 4.03 | % |
| Other liabilities                                                                        |       | 2,924,317                                        |       |   |   | 1,574,072 |   |   |   |
| Shareholder’s equity                                                                |       | 6,338,382                                        |       |   |   | 5,273,389 |   |   |   |
| Total liabilities and equity                                                             |       | $                                                | 82,774,568 |   |   |   | $ | 73,026,606 |   |   |   |
| Primary spread(2)                                                                        |       |                                             |       | 2.23 | % |   |   | 1.95 | % |
| Nonaccrual loans                                                                         |       | $                                                | 519,083    |   |   |   | $ | 153,942 |   |   |   |

----

(1)          Includes inter-companydeposits.

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

The Banking Segment alsoincludes the operations of CWL. CWL’s pre-tax earnings decreased by $33.9million during 2006, in comparison to the prior year, primarily due to a 31% or$1.9 billion decrease in average mortgage warehouse advances, which resultedprimarily from a decrease in overall market funding activity. Warehouse lendingadvances were $3.2 billion at December 31, 2006 and had an average yieldof 6.3% during the year then ended.

65

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**Capital MarketsSegment**

Our Capital Markets Segment achieved pre-tax earningsof $553.5 million for 2006, an increase of $101.9 million, or 23%, from 2005,driven by a 24% increase in revenues in all of its business lines.

The following table showsrevenues, expenses and pre-tax earnings of the Capital Markets Segment:

| ** **                   | ** ** | **Years Ended  December 31,** | ** ** |
|------------------------------|------------|-----------------------------------------|------------|
| ** **                   | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **                   | ** ** | **(in thousands)**                 | ** ** |
| Revenues:                    |       |                                    |       |   |   |
| Conduit                      |       | $                                       | 394,629    |   | $ | 301,237 |   |
| Underwriting                 |       | 294,583                                 |       | 271,729 |   |
| Securities trading           |       | 113,779                                 |       | 92,658 |   |
| Commercial real estate       |       | 104,014                                 |       | 67,298 |   |
| Brokering                    |       | 37,260                                  |       | 36,095 |   |
| Other                        |       | 48,888                                  |       | 29,234 |   |
| Total revenues               |       | 993,153                                 |       | 798,251 |   |
| Expenses:                    |       |                                    |       |   |   |
| Operating expenses           |       | 410,189                                 |       | 332,880 |   |
| Allocated corporate expenses |       | 29,464                                  |       | 13,742 |   |
| Total expenses               |       | 439,653                                 |       | 346,622 |   |
| Pre-tax earnings             |       | $                                       | 553,500    |   | $ | 451,629 |   |

 

During 2006, the Capital Markets Segment generatedrevenues totaling $394.6 million from its conduit activities, primarilymanaging the acquisition and sale or securitization of loans on behalf of theMortgage Banking Segment. Conduit revenues for the reporting period increased31% in comparison to 2005 because of an increase in volume and margins ofadjustable-rate products offset by a decline in margins on nonprime products.

Underwriting revenues increased $22.9 million over theprior year because of increased securitization volume, primarily adjustable-rateproducts.

Securities trading revenue increased 23% over theprior year due to an increase in trading margins and volume, partially offsetby lower net interest income due to a tightening of net spreads resulting fromthe flattening and inversion of the yield curve.

During 2006, the commercial real estate financeactivities of the Capital Markets Segment generated revenues totaling $104.0million primarily from sales of commercial real estate loans compared to $67.3million in 2005. The increase in revenue was due to an increase in the volumeof loans sold and an increase in net interest income related to a higherbalance in loan inventory partially offset by a decrease in margins resultingfrom price competition and a change in the mix of loans sold.

66

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

| ** **                       | ** ** | **Years Ended  December 31,** | ** ** |
|----------------------------------|------------|-----------------------------------------|------------|
| ** **                       | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **                       | ** ** | **(in millions)**                  | ** ** |
| Mortgage-backed  securities      |       | $                                       | 2,190,008  |   | $ | 1,841,783 |   |
| Asset-backed  securities         |       | 161,434                                 |       | 163,975 |   |
| Other                            |       | 154,777                                 |       | 125,508 |   |
| Subtotal(1)                      |       | 2,506,219                               |       | 2,131,266 |   |
| U.S. Treasury  securities        |       | 1,326,681                               |       | 1,420,217 |   |
| Total securities  trading volume |       | $                                       | 3,832,900  |   | $ | 3,551,483 |   |

 

----

(1)          Approximately 15% and16% of the segment’s non-U.S. Treasury securities trading volume was with CHLduring 2006 and 2005, respectively.

Trading volume in U.S.Treasury securities decreased $93.5 billion or 7% from 2005 because of lessfavorable market conditions, including the inverted yield curve and lowervolatility in the market during 2006 as compared to 2005.

**Insurance Segment**

TheInsurance Segment’s pre-tax earnings increased by $136.4 million over the prioryear to $320.1 million during 2006. The following table shows pre-tax earningsby component:

| ** **                                | ** ** | **Years Ended  December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **                                | ** ** | **(in thousands)**                 | ** ** |
| Balboa  Reinsurance Company               |       | $                                       | 215,523    |   | $ | 178,647 |   |
| Balboa  Life & Casualty(1)       |       | 138,478                                 |       | 23,836 |   |
| Allocated  corporate expenses             |       | (33,868                                 | )          | (18,767 | ) |
| Total Insurance  Segment pre-tax earnings |       | $                                       | 320,133    |   | $ | 183,716 |   |

----

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

Thefollowing table shows net insurance premiums earned:

| ** **                           | ** ** | **Years Ended  December 31,** | ** ** |
|--------------------------------------|------------|-----------------------------------------|------------|
| ** **                           | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **(in thousands)**                 | ** ** |
| Balboa  Reinsurance Company          |       | $                                       | 223,613    |   | $ | 180,716 |   |
| Balboa  Life & Casualty     |       | 947,820                                 |       | 772,931 |   |
| Total net  insurance premiums earned |       | $                                       | 1,171,433  |   | $ | 953,647 |   |

 

67

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Thefollowing table shows insurance claim expenses:

| ** **                       | ** ** | **Years Ended December 31,**      | ** ** |
|----------------------------------|------------|--------------------------------------------------|------------|
| ** **                       | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                       | ** ** | **Amount**                                       | ** ** | **As Percentage  of Net  Earned  Premiums** | ** ** | **Amount** | ** ** | **As Percentage  of Net  Earned  Premiums** | ** ** |
| ** **                       | ** ** | **(dollar amounts in thousands)** | ** ** |
| Balboa  Reinsurance Company      |       | $                                                | 35,753     |   |   | 16 | % |   | $ | 30,756 |   |   | 17 | % |   |
| Balboa  Life & Casualty |       | 413,385                                          |       |   | 44 | % |   | 410,828 |   |   | 53 | % |   |
| Total insurance  claim expenses  |       | $                                                | 449,138    |   |   |   |   |   | $ | 441,584 |   |   |   |   |   |

 

Our mortgage reinsurance business produced $215.5million in pre-tax earnings, an increase of 21% over the prior year, drivenprimarily by an increase of 15% in the mortgage loans included in our loanservicing portfolio that are covered by reinsurance contracts and an increasein the reinsurance premium rate earned.

Our Life and Casualty insurance business produced pre-taxearnings of $138.5 million, an increase of $114.6 million from the prior year.The increase in earnings was driven by a 23% increase in net earned premiums in2006 over 2005, and by a decrease in catastrophe losses of $98.5 million from2005. The increase in net earned premiums was primarily attributable to anincrease in voluntary homeowners and auto insurance and to a lesser extent anincrease in lender-placed insurance. Insurance claim expenses decreased as apercentage of net earned premiums primarily due to a reduction in hurricanerelated claims in the current year as compared to the prior year.

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

**Global OperationsSegment**

Global Operations pre-taxearnings totaled $28.6 million during 2006, a decrease of $6.7 million from2005. The decrease in earnings was primarily due to the termination of thejoint venture with Barclays Bank, PLC.

68

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

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

Gainon sale of loans and securities is summarized below:

| ** **                   | ** ** | **Years Ended December 31,**      | ** **  |
|------------------------------|------------|--------------------------------------------------|-------------|
| ** **                   | ** ** | **2006**                                         | ** **  | **2005** | ** ** |
| ** **                   | ** ** | ** **                                       | ** **  | **Gain on Sale** | ** ** | ** ** | ** ** | **Gain on Sale** | ** ** |
| ** **                   | ** ** | **Loans Sold**                              | ** **  | **Amount** | ** ** | **Margin(2)** | ** ** | **Loans Sold** | ** ** | **Amount** | ** ** | **Margin(2)** | ** ** |
| ** **                   | ** ** | **(dollar amounts in thousands)** | ** **  |
| Mortgage Banking:            |       |                                             |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Prime Mortgage Loans         |       | $                                                | 333,628,014 |   | $ | 3,583,316 |   |   | 1.07 | % |   | $ | 340,483,290 |   | $ | 2,787,108 |   |   | 0.82 | % |   |
| Nonprime Mortgage Loans      |       | 38,293,998                                       |        | 703,686 |   |   | 1.84 | % |   | 43,774,272 |   | 881,843 |   |   | 2.01 | % |   |
| Prime Home Equity  Loans:    |       |                                             |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Initial sales                |       | 26,812,059                                       |        | 459,158 |   |   | 1.71 | % |   | 24,258,329 |   | 510,109 |   |   | 2.10 | % |   |
| Subsequent draws             |       | 4,301,326                                        |        | 151,611 |   |   | 3.52 | % |   | 3,331,610 |   | 121,519 |   |   | 3.65 | % |   |
|                         |       | 31,113,385                                       |        | 610,769 |   |   | 1.96 | % |   | 27,589,939 |   | 631,628 |   |   | 2.29 | % |   |
| Total Production Sector      |       | 403,035,397                                      |        | 4,897,771 |   |   | 1.22 | % |   | 411,847,501 |   | 4,300,579 |   |   | 1.04 | % |   |
| Reperforming  loans          |       | 247,162                                          |        | 2,630 |   |   | 1.06 | % |   | 1,186,033 |   | 32,595 |   |   | 2.75 | % |   |
|                         |       | $                                                | 403,282,559 |   | 4,900,401 |   |   | 1.22 | % |   | $ | 413,033,534 |   | 4,333,174 |   |   | 1.05 | % |   |
| Capital Markets:             |       |                                             |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Conduit activities(1)        |       | $                                                | 62,922,367  |   | 356,586 |   |   | 0.57 | % |   | $ | 55,475,610 |   | 258,910 |   |   | 0.47 | % |   |
| Underwriting                 |       | N/A                                              |        | 268,252 |   |   | N/A |   |   | N/A |   | 232,008 |   |   | N/A |   |   |
| Commercial real estate       |       | $                                                | 4,738,001   |   | 73,614 |   |   | 1.55 | % |   | $ | 3,155,389 |   | 62,242 |   |   | 1.97 | % |   |
| Securities trading and other |       | N/A                                              |        | 18,555 |   |   | N/A |   |   | N/A |   | (54,021 | ) |   | N/A |   |   |
|                         |       |                                             |        | 717,007 |   |   |   |   |   |   |   | 499,139 |   |   |   |   |   |
| Other                        |       | N/A                                              |        | 64,439 |   |   | N/A |   |   | N/A |   | 29,467 |   |   | N/A |   |   |
|                         |       |                                             |        | $ | 5,681,847 |   |   |   |   |   |   |   | $ | 4,861,780 |   |   |   |   |   |

 

----

(1)          Includes loans sourcedfrom the Mortgage Banking Segment.

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

The increase in Capital Markets’ gain on sale relatedto its conduit activities was due to increased sales of mortgage loans andimproved margins. The increase in Capital Markets’ gain on sale related to itscommercial real estate activities was due to an increase in sales, partiallyoffset by a decrease in margins resulting from price competition and a changein the mix of products sold. Capital Markets’ revenues from its securitiestrading activities consist of gain on sale and interest income. In a steepyield curve environment, net interest income will comprise a larger percentageof total securities trading revenue. As the yield curve flattens and inverts,the mix of revenues will shift toward gain on sale of securities. During 2006,the yield curve was flatter than in 2005 and was inverted during part of theyear, which resulted in a shift in trading revenues from interest income togain on sale.

69

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

| ** **                | ** ** | **2006 vs. 2005**                   | ** ** |
|---------------------------|------------|-----------------------------------------------|------------|
| ** **                | ** ** | **Increase (Decrease) Due to** | ** ** | ** ** | ** ** |
| ** **                | ** ** | **Loans Sold**                           | ** ** | **Margin** | ** ** | **Total** | ** ** |
| ** **                | ** ** | **(in thousands)**                       | ** ** |
| Mortgage Banking:         |       |                                          |       |   |   |   |   |
| Prime Mortgage Loans      |       | $                                             | (57,177    | ) | $ | 853,385 |   | $ | 796,208 |   |
| Nonprime Mortgage Loans   |       | (104,703                                      | )          | (73,454 | ) | (178,157 | ) |
| Prime Home Equity  Loans: |       |                                          |       |   |   |   |   |
| Initial sales             |       | 50,093                                        |       | (101,044 | ) | (50,951 | ) |
| Subsequent draws          |       | 34,303                                        |       | (4,211 | ) | 30,092 |   |
|                      |       | 84,396                                        |       | (105,255 | ) | (20,859 | ) |
| Total Production Sector   |       | (77,484                                       | )          | 674,676 |   | 597,192 |   |
| Reperforming loans        |       | (16,890                                       | )          | (13,075 | ) | (29,965 | ) |
| Total Mortgage  Banking   |       | $                                             | (94,374    | ) | $ | 661,601 |   | $ | 567,227 |   |

 

Gain on sale of Prime Mortgage Loans increased in2006, as compared to 2005, due primarily to higher margins, primarily on thesale of pay-option ARM loans, partially offset by decreased sales.

Gain on sale of Nonprime Mortgage Loans decreased in2006, as compared to 2005, due primarily to decreased sales of such loans andlower margins resulting from increased pricing competition.

Gain on sale of Prime Home Equity Loans decreased in2006, as compared to 2005, due primarily to reduced margins on such loansresulting from increased pricing competition that more than offset increasedsales of such loans.

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 loans, the slope of the yieldcurve and the effectiveness of our associated interest rate risk managementactivities.

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

Netinterest income is summarized below:

| ** **                                           | ** ** | **Years Ended  December 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **                                           | ** ** | **(in thousands)**                 | ** ** |
| Net interest income  (expense):                      |       |                                    |       |   |   |
| Banking Segment loans and securities                 |       | $                                       | 1,860,966  |   | $ | 1,381,672 |   |
| Mortgage Banking  Segment:                           |       |                                    |       |   |   |
| Loans and securities                                 |       | 591,192                                 |       | 607,041 |   |
| Loan Servicing  Sector:                              |       |                                    |       |   |   |
| Net interest income on custodial balances            |       | 845,631                                 |       | 366,848 |   |
| Interest expense                                     |       | (718,353                                | )          | (382,324 | ) |
| Capital Markets Segment securities inventory         |       | 94,956                                  |       | 167,131 |   |
| Other                                                |       | 247,969                                 |       | 213,252 |   |
| Net interest income                                  |       | 2,922,361                               |       | 2,353,620 |   |
| Provision for loan losses                            |       | (233,847                                | )          | (115,685 | ) |
| Net interest  income after provision for loan losses |       | $                                       | 2,688,514  |   | $ | 2,237,935 |   |

 

70

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The increase in netinterest income from the Banking Segment was attributable to both growth in theaverage investment in mortgage loans and an increase in net interest margin.Average assets in the Banking Segment increased to $84.0 billion during 2006, anincrease of $17.1 billion, or 26%, over 2005. Net interest margin increased to2.22% during 2006, from 2.05% during 2005.

The decrease in netinterest income from Mortgage Banking Segment loans and securities reflects adecrease in net interest margin partially offset by an increase in averagebalances from the prior year. The Mortgage Banking Segment loan and securitiesinventory is primarily financed with borrowings tied to short-term indices. Theflattening and inversion of the yield curve reduced the net interest margin.

Net interest income fromcustodial balances increased in the current year primarily due to an increasein the earnings rate from 3.26% during 2005, to 5.18% during 2006, and to alesser extent to an increase of $445.7 million, or 2%, in average custodialbalances over the prior year. Interest income on custodial balances is reducedby the interest we are required to pass through to security holders on paid-offloans. We are required to pass through a full month’s interest to security holderson paid-off loans, regardless of the payoff date, at the underlying securityrates, which were substantially higher than the short-term rates earned by uson the payoff float. The amount of such interest passed through to the securityholders was $308.1 million and $343.2 million in 2006 and 2005, respectively.

Interest expense allocatedto the Loan Servicing Sector increased primarily due to the effect of risinginterest rates, combined with an increase in total Servicing Sector assets andincreased leverage of those assets.

The decrease in netinterest income from the Capital Markets’ securities portfolio is attributableto a decrease in the net interest margin from 0.47% in 2005 to 0.31% in 2006,partially offset by an increase of 18% in the average inventory of securitiesheld. The decrease in the net interest margin earned on the securitiesportfolio is primarily due to the flattening and inversion of the yield curve.The decline in net interest income was offset by an increase in gain on sale ofloans.

The increase in theprovision for loan losses is due to the continuing growth and seasoning of theBanking Segment’s loan portfolio. In addition, deteriorating credit performanceof loans held for investment in our Mortgage Banking Segment during 2006contributed to the increase in the provision for loan losses. A significantportion of these loans have been liquidated or written down and transferred toheld for sale as evidenced by an increase in Mortgage Banking Segmentcharge-offs during 2006. For further discussion of credit risk see the sectionin this report entitled *Management’s Discussionand Analysis of Financial Condition and Results of Operations—Credit RiskManagement*.

***Loan Servicing Feesand Other Income from MSRs and Retained Interests***

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

| ** **                                                             | ** ** | **Years Ended  December 31,** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                             | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **                                                             | ** ** | **(in thousands)**                 | ** ** |
| Servicing fees,  net of guarantee fees(1)                              |       | $                                       | 3,804,442  |   | $ | 3,194,395 |   |
| Income from  retained interests                                        |       | 513,136                                 |       | 455,986 |   |
| Late charges                                                           |       | 285,009                                 |       | 237,112 |   |
| Prepayment  penalties                                                  |       | 268,191                                 |       | 211,668 |   |
| Global Operations  Segment subservicing fees                           |       | 12,034                                  |       | 108,378 |   |
| Ancillary fees                                                         |       | 77,738                                  |       | 73,715 |   |
| Total loan  servicing fees and income from MSRs and retained interests |       | $                                       | 4,960,550  |   | $ | 4,281,254 |   |

----

(1)          Includes contractuallyspecified servicing fees.

71

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The increase in servicing fees, net of guarantee fees,was principally due to a 24% increase in the average servicing portfolio,partially offset by a decrease in the overall annualized net service fee earnedfrom 0.333% of the average portfolio balance during 2005, to 0.320% during2006.

The increase in incomefrom retained interests was due primarily to a 22% increase in the averageinvestment in these assets, partially offset by a reduction in the averageyield from 22% to 21%. Income from retained interests excludes any impairmentcharges or recoveries, which are included in impairment of retained interestsin the consolidated statements of earnings. These investments includeinterest-only, principal-only and residual securities that arise from thesecuritization of mortgage loans, primarily Nonprime Mortgage and Prime HomeEquity Loans.

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

Effective January 1,2006, we adopted SFAS 156 and elected to carry our MSRs at fair value withchanges in fair value recorded in earnings. The change in fair value of theMSRs that is included in earnings for 2006 consists of two primary components—areduction in fair value due to the realization of expected cash flows from theMSRs and a change in value resulting from changes in discount rates andprepayment speed assumptions, primarily due to changes in interest rates, andother market factors. The realization of expected cash flows from MSRs during2006 resulted in a value reduction of $3,193.7 million.

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

We recorded an increase inthe fair value of the MSRs in 2006 of $432.2 million primarily as a result ofthe increase in mortgage rates during the period.

***Amortization of Mortgage Servicing Rights***

We recorded amortizationof MSRs of $2,288.4 million, or an annual rate of 20.8%, during 2005. Theamortization rate of the MSRs was dependent on the forecasted prepayment speedsat the beginning of the period.

***Recovery of Mortgage Servicing Rights***

During 2005, we recoveredpreviously recorded impairment of MSRs of $387.9 million, primarily driven byan increase in mortgage interest rates during the period.

***Impairment of Retained Interests***

In 2006, we recognized impairment of retainedinterests of $284.7 million. The collateral underlying certain of the retainedinterests (residual securities) is fixed-rate for a defined period of time whilethe pass-through rate is floating. An increase in projected short-term interestrates during the period caused compression of the spread on such residuals,which resulted in a decline in their value. Our interest-only securities alsodecreased in value, caused primarily by an increase in market yields requiredon these securities.

In 2005, we recognizedimpairment of retained interests of $364.5 million largely due to thecompression of the spread on our residual securities.

***Servicing Hedge Losses***

The Servicing Hedge is designed to supplement themacro hedge and to offset a portion of the change in value of MSRs and retainedinterests caused by changes in interest rates recorded in current periodearnings. The values of the derivatives that are the primary components of theServicing Hedge are tied to long-term Treasury, Eurodollar, mortgage and swaprate indices. During 2006, the Servicing Hedge 

72

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incurred a loss of $613.7million, including $476 million of time value decay of the optionsincluded in the Servicing Hedge (our “hedge cost”). During 2005, the ServicingHedge incurred a loss of $523.1 million, including $564 million of hedge cost.

In a stable interest rateenvironment, we expect to incur no significant declines in value of MSRs otherthan recovery of our investment through the realization of cash flows. However,we expect to incur expenses related to the hedge costs. The level of ServicingHedge gains or losses in any period depends on various factors such as the sizeand composition of the hedge, the shape of the yield curve and the level ofimplied interest rate volatility.

***Net Insurance Premiums Earned***

Net insurance premiumsearned increased $217.8 million as a result of increases in voluntaryhomeowners and auto insurance as well as lender-placed property lines ofbusiness along with an increase in reinsurance premiums earned.

***Other Revenue***

Otherrevenue consisted of the following:

| ** **                                          | ** ** | **Years Ended  December 31,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **                                          | ** ** | **(in thousands)**                 | ** ** |
| Appraisal fees,  net                                |       | $                                       | 136,989    |   | $ | 109,898 |   |
| Credit report  fees, net                            |       | 73,845                                  |       | 77,830 |   |
| Title services                                      |       | 44,185                                  |       | 44,293 |   |
| Insurance agency  commissions                       |       | 29,574                                  |       | 28,785 |   |
| Increase in cash  surrender value of life insurance |       | 22,869                                  |       | 8,324 |   |
| Global Operations  Segment processing fees          |       | 22,068                                  |       | 64,688 |   |
| Other                                               |       | 245,149                                 |       | 136,361 |   |
| Total other revenue                                 |       | $                                       | 574,679    |   | $ | 470,179 |   |

 

Global Operations Segmentprocessing fees decreased during 2006 as compared to the prior year due to thetermination of our joint venture with Barclays Bank, PLC.

***Compensation Expenses***

Compensationexpenses increased $758.5 million, or 21%, during 2006 as compared to 2005.Details are presented below:

| ** **                          | ** ** | **Years Ended  December 31,** | ** ** |
|-------------------------------------|------------|-----------------------------------------|------------|
| ** **                          | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **(in thousands)**                 | ** ** |
| Base salaries                       |       | $                                       | 2,317,613  |   | $ | 1,994,158 |   |
| Incentive bonus  and commissions    |       | 1,914,284                               |       | 1,940,426 |   |
| Payroll taxes and  other benefits   |       | 845,934                                 |       | 630,545 |   |
| Deferral of loan  origination costs |       | (703,846                                | )          | (949,646 | ) |
| Total  compensation expenses        |       | $                                       | 4,373,985  |   | $ | 3,615,483 |   |

 

73

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Averageworkforce by segment is summarized below:

| ** **                                    | ** ** | **Years Ended  December 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| Mortgage Banking                              |       | 40,806                                  |       | 35,699 |   |
| Banking                                       |       | 2,276                                   |       | 1,804 |   |
| Capital Markets                               |       | 802                                     |       | 624 |   |
| Insurance                                     |       | 2,106                                   |       | 2,016 |   |
| Global Operations                             |       | 2,315                                   |       | 2,650 |   |
| Corporate  Administration                     |       | 7,072                                   |       | 5,921 |   |
| Average  workforce, including temporary staff |       | 55,377                                  |       | 48,714 |   |

 

In the Loan Production Sector, compensation expensesincreased $130.4 million, or 5%, prior to the deferral of loan originationcosts, because of a 15% increase in average staff to support our long-termobjective of market share growth.

In the Loan Servicing Sector, compensation expenseincreased $59.6 million, or 20%, to accommodate a 10% increase in the number ofloans serviced as well as an increased focus on customer satisfaction and onregulatory compliance. Compensation expenses increased $322.7 million inmost other business segments and corporate areas, reflecting growth in theCompany.

Incremental direct costsassociated with the origination of loans are deferred when incurred. Subsequenttreatment of these costs is based on whether the loans are held for sale orheld for investment. If the loan is sold, the costs deferred are included as acomponent of gain on sale; if the loan is held for investment, the deferredcosts are amortized to interest income over the life of the loan. Deferral ofloan origination costs decreased due to a decline in the volume of loansproduced and a decrease in the deferral rate during 2006.

***Occupancy and Other Office Expenses***

Occupancyand other office expenses are summarized below:

| ** **                                 | ** ** | **Years Ended  December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                 | ** ** |
| Office and  equipment rentals              |       | $                                       | 230,634    |   | $ | 186,335 |   |
| Depreciation  expense                      |       | 206,498                                 |       | 181,598 |   |
| Utilities                                  |       | 161,598                                 |       | 134,735 |   |
| Postage and  courier service               |       | 109,889                                 |       | 101,064 |   |
| Office supplies                            |       | 85,635                                  |       | 85,232 |   |
| Repairs and  maintenance                   |       | 77,629                                  |       | 63,756 |   |
| Dues and  subscriptions                    |       | 64,398                                  |       | 53,154 |   |
| Other                                      |       | 93,883                                  |       | 73,806 |   |
| Total occupancy  and other office expenses |       | $                                       | 1,030,164  |   | $ | 879,680 |   |

 

Occupancy and other officeexpenses for 2006, increased by 17%, or $150.5 million, primarily to accommodatea 14% increase in the average workforce.

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***Insurance Claim Expenses***

Insurance claim expenseswere $449.1 million for 2006 as compared to $441.6 million for the prior year.The change in insurance claim expenses reflects the growth in our insurancebook of business offset by a $98.5 million reduction in catastrophe claimexpenses.

***Advertising and Promotion Expenses***

Advertising and promotionexpenses increased 14% from 2005 as a result of a shift in the mortgage loanproduction market. Purchase activity, which was more prevalent in 2006,generally requires more advertising and promotion than refinance activity,which is customarily driven by increased consumer demand for mortgagesresulting from low interest rates.

***Other Operating Expenses***

Otheroperating expenses are summarized below:

| ** **                                           | ** ** | **Years Ended  December 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **                                           | ** ** | **(in thousands)**                 | ** ** |
| Legal,  consulting, accounting and auditing expenses |       | $                                       | 239,919    |   | $ | 141,028 |   |
| Insurance  commission expense                        |       | 188,872                                 |       | 166,970 |   |
| Travel and  entertainment                            |       | 122,756                                 |       | 115,473 |   |
| Insurance                                            |       | 73,001                                  |       | 55,071 |   |
| Losses on  servicing-related advances                |       | 62,749                                  |       | 51,370 |   |
| Software  amortization and impairment                |       | 59,198                                  |       | 64,962 |   |
| Taxes and  licenses                                  |       | 58,427                                  |       | 49,488 |   |
| Other                                                |       | 275,381                                 |       | 213,983 |   |
| Deferral of loan  origination costs                  |       | (111,249                                | )          | (155,333 | ) |
| Total other  operating expenses                      |       | $                                       | 969,054    |   | $ | 703,012 |   |

 

The increase in operatingexpenses reflects overall growth in the Company.

**Results of Operations Comparison—Year EndedDecember 31, 2005, (“2005”) and Year Ended 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 prior year.

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 prior year. This increasewas due mainly to a 115% increase in average interest-earning assets atCountrywide Bank from the prior year.

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 prior year.

75

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The pre-tax earnings inthe Loan Servicing Sector, which incorporates the performance of our MSRs andretained interests, was $669.6 million, an improvement of$1,103.1 million from the prior year. This increase in pre-tax earningswas primarily attributable to higher revenue resulting from a 32% increase inthe size of the average loan servicing portfolio, higher earnings on escrowbalances and an improvement in the amount of impairment/recovery of ourretained interests, net of the Servicing Hedge.

**Operating SegmentResults**

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

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

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

| ** **                                   | ** ** | **Years Ended  December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                   | ** ** | **2005**                                | ** ** | **2004** | ** ** |
| ** **                                   | ** ** | **(in millions)**                  | ** ** |
| Segment:                                     |       |                                    |       |   |   |
| Mortgage Banking                             |       | $                                       | 427,916    |   | $ | 317,811 |   |
| Banking Operations                           |       | 46,432                                  |       | 27,116 |   |
| Capital Markets—conduit acquisitions(1) |       | 21,028                                  |       | 18,079 |   |
| Total Mortgage Loan Fundings                 |       | 495,376                                 |       | 363,006 |   |
| Commercial Real Estate                       |       | 3,925                                   |       | 358 |   |
|                                         |       | $                                       | 499,301    |   | $ | 363,364 |   |
| Product:                                     |       |                                    |       |   |   |
| Prime Mortgage                               |       | $                                       | 405,889    |   | $ | 292,672 |   |
| Prime Home Equity                            |       | 44,850                                  |       | 30,893 |   |
| Nonprime Mortgage                            |       | 44,637                                  |       | 39,441 |   |
| Commercial Real Estate                       |       | 3,925                                   |       | 358 |   |
|                                         |       | $                                       | 499,301    |   | $ | 363,364 |   |

----

(1)          Acquisitions from thirdparties.

76

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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            |       | $                                       | 263,260    |   | $ | 186,781 |   |
| Purchase                |       | 236,041                                 |       | 176,583 |   |
|                    |       | $                                       | 499,301    |   | $ | 363,364 |   |
| **Interest Rate Type:** |       |                                    |       |   |   |
| Adjustable-Rate         |       | $                                       | 261,577    |   | $ | 189,931 |   |
| Fixed-Rate              |       | 237,724                                 |       | 173,433 |   |
|                    |       | $                                       | 499,301    |   | $ | 363,364 |   |

 

**Mortgage BankingSegment**

The Mortgage BankingSegment includes the Loan Production, Loan Servicing and Loan Closing ServicesSectors. 

***Loan Production Sector***

Mortgage Banking loan production volume for 2005increased 35% from the year-ago period. Our market share increased in 2005,which resulted in an increase in both purchase and non-purchase loanproduction. Purchase loan production increased 30% from the prior year. Theincrease in purchase loans is significant because this component of themortgage market has historically offered relatively stable growth, averaging11% per year over the last 10 years. The non-purchase, or refinance, componentof the mortgage market is highly volatile because it is driven almostexclusively by prevailing mortgage interest rates.

77

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

| ** **                           | ** ** | **Years Ended  December 31,(1)** | ** ** |
|--------------------------------------|------------|--------------------------------------------|------------|
| ** **                           | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| ** **                           | ** ** | **(in millions)**                     | ** ** |
| **Channel:**                         |       |                                       |       |   |   |
| Originated:                          |       |                                       |       |   |   |
| Retail:                              |       |                                       |       |   |   |
| Consumer Markets                     |       | $                                          | 120,324    |   | $ | 95,619 |   |
| Full Spectrum Lending                |       | 25,670                                     |       | 15,756 |   |
|                                 |       | 145,994                                    |       | 111,375 |   |
| Wholesale Lending                    |       | 83,564                                     |       | 72,848 |   |
| Total originated                     |       | 229,558                                    |       | 184,223 |   |
| Purchased—Correspondent Lending |       | 198,358                                    |       | 133,588 |   |
| ** **                           |       | $                                          | 427,916    |   | $ | 317,811 |   |
| **Mortgage Loan Type:**              |       |                                       |       |   |   |
| Prime Mortgage                       |       | $                                          | 354,493    |   | $ | 260,979 |   |
| Nonprime Mortgage                    |       | 40,089                                     |       | 33,481 |   |
| Prime Home Equity                    |       | 33,334                                     |       | 23,351 |   |
| ** **                           |       | $                                          | 427,916    |   | $ | 317,811 |   |
| **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 |   |

----

(1)          $8.1 billion of theseloans were funded by Countrywide Bank during 2005. 

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

In 2005, 47% of our loan production wasadjustable-rate in comparison to 49% in the prior year. The decrease inadjustable-rate production reflects the increase in short-term interest ratesduring the current year and the relatively flat yield curve, increasing therelative attractiveness of fixed-rate financing.

The Consumer Markets Division’s commissioned salesforce contributed $48.5 billion in purchase originations during 2005, a 31%increase over the prior year. Such purchase production generated by thecommissioned sales force represented 77% of the Consumer Markets Division’stotal purchase production for 2005.

78

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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                            |       | 2,015,339                                        |        |   | 0.47 | % |   | 1,808,887 |   |   | 0.57 | % |   |
| Other operating                         |       | 1,054,173                                        |        |   | 0.24 | % |   | 788,609 |   |   | 0.25 | % |   |
| 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 prior year. Production Sector revenues were affected by market pricepressure and by the effect of flattening of the yield curve on the net interestincome earned while we hold loans for sale. Normally, a decline in net interestincome caused by a flatter yield curve would be mitigated by an increase ingain on sale, but in 2005 this was hindered by pricing pressure. In 2005,$411.8 billion of mortgage loans, or 96% of loan production, was sold comparedto $326.3 billion of mortgage loans, or 103% of loan production, in 2004. Thisdecline in sales as a percentage of production contributed to the decline inrevenues as a percentage of mortgage loan production in the current year.

Expenses increased from the prior year, primarily dueto an increase in loan production. A shift in the mix of production towards ourcorrespondent 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.

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

| ** **            | ** ** | **December 31,** | ** ** |
|-----------------------|------------|-----------------------|------------|
| ** **            | ** ** | **2005**              | ** ** | **2004** | ** ** |
| ** **            | ** ** | **Sales  Force**      | ** ** | **Branches** | ** ** | **Call  Centers** | ** ** | **Sales   Force** | ** ** | **Branches** | ** ** | **Call  Centers** | ** ** |
| **Channel:**          | ** ** | ** **            | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Retail:               |       |                  |       |   |   | ** ** |   |   |   | ** ** |   |   |   |   |   | ** ** |   |   |   | ** ** |   |
| Consumer Markets      |       | 8,442                 |       |   | 662 | ** ** |   |   | 4 | ** ** |   | 6,639 |   |   | 577 | ** ** |   |   | 3 | ** ** |   |
| Full Spectrum Lending |       | 4,871                 |       |   | 195 | ** ** |   |   | 7 | ** ** |   | 3,544 |   |   | 160 | ** ** |   |   | 5 | ** ** |   |
| Wholesale Lending     |       | 1,311                 |       |   | 52 | ** ** |   |   | — | ** ** |   | 1,123 |   |   | 51 | ** ** |   |   | — | ** ** |   |
| Correspondent Lending |       | 182                   |       |   | — | ** ** |   |   | — | ** ** |   | 100 |   |   | — | ** ** |   |   | — | ** ** |   |

 

79

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

| ** **                              | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Sales                                   |       | 14,806                |       | 11,406 |   |
| Operations:                             |       |                  |       |   |   |
| Regular employees                       |       | 10,990                |       | 9,326 |   |
| Temporary staff                         |       | 1,843                 |       | 934 |   |
|                                    |       | 12,833                |       | 10,260 |   |
| Administration  and support             |       | 2,980                 |       | 2,381 |   |
| Total Loan  Production Sector workforce |       | 30,619                |       | 24,047 |   |

 

***Loan Servicing Sector***

The Loan Servicing Sector includes a workforce ofapproximately 7,900 who service our 7.4 million mortgage loans. 

Our servicing portfolio grew to $1.1 trillion 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.

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  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 | )% |   |
| Operating revenues                                  |       | 2,237,451                                        |        |   | 0.234 | % |   | 1,269,995 |   |   | 0.174 | % |   |
| Direct expenses                                     |       | 647,898                                          |        |   | 0.067 | % |   | 460,552 |   |   | 0.063 | % |   |
| Allocated  corporate expenses                       |       | 64,659                                           |        |   | 0.007 | % |   | 77,015 |   |   | 0.011 | % |   |
| Total expenses                                      |       | 712,557                                          |        |   | 0.074 | % |   | 537,567 |   |   | 0.074 | % |   |
| Operating  earnings                                 |       | 1,524,894                                        |        |   | 0.160 | % |   | 732,428 |   |   | 0.100 | % |   |
| Interest expense                                    |       | 354,155                                          |        |   | 0.037 | % |   | 306,752 |   |   | 0.042 | % |   |
| Recovery  (impairment) of mortgage servicing rights |       | 387,851                                          |        |   | 0.040 | % |   | (279,842 | ) |   | (0.038 | )% |   |
| Impairment of  retained interests                   |       | (365,901                                         | )           |   | (0.038 | )% |   | (364,022 | ) |   | (0.050 | )% |   |
| Servicing hedge  losses                             |       | (523,078                                         | )           |   | (0.055 | )% |   | (215,343 | ) |   | (0.030 | )% |   |
| Valuation changes, net of Servicing Hedge           |       | (501,128                                         | )           |   | (0.053 | )% |   | (859,207 | ) |   | (0.118 | )% |   |
| Pre-tax earnings  (loss)                            |       | $                                                | 669,611     |   |   | 0.070 | % |   | $ | (433,531 | ) |   | (0.060 | )% |   |
| Average servicing  portfolio                        |       | $                                                | 959,691,000 |   |   |   |   |   | $ | 727,821,000 |   |   |   |   |   |

 

80

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Pre-tax earnings in theLoan Servicing Sector were $669.6 million during 2005, an improvement of$1,103.1 million from the prior year. 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.

***Loan Closing Services Sector***

The LandSafe companiesproduced $105.5 million in pre-tax earnings in 2005, an increase of 24% fromthe prior year. The increase in LandSafe’s pre-tax earnings was primarily dueto the increase in our loan origination activity.

**Banking Segment**

TheBanking Segment achieved pre-tax earnings of $1,074.5 million during 2005, ascompared to $582.5 million for 2004. Following is the composition of pre-taxearnings by component:

| ** **                              | ** ** | **Years Ended  December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                              | ** ** | **2005**                                | ** ** | **2004** | ** ** |
| ** **                              | ** ** | **(in thousands)**                 | ** ** |
| Banking  Operations                     |       | $                                       | 1,017,313  |   | $ | 534,091 |   |
| CWL                                     |       | 90,033                                  |       | 71,414 |   |
| Allocated  corporate expenses(1)        |       | (32,866                                 | )          | (23,022 | ) |
| Total Banking  Segment pre-tax earnings |       | $                                       | 1,074,480  |   | $ | 582,483 |   |

----

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

Thefollowing table shows total Banking Operations loan production and purchasevolume by origination channel:

| ** **             | ** ** | **Years Ended  December 31,** | ** ** |
|------------------------|------------|-----------------------------------------|------------|
| ** **             | ** ** | **2005**                                | ** ** | **2004** | ** ** |
| ** **             | ** ** | **(in millions)**                  | ** ** |
| Wholesale Lending      |       | $                                       | 19,178     |   | $ | 13,018 |   |
| Correspondent  Lending |       | 13,529                                  |       | 8,923 |   |
| Consumer Markets       |       | 9,296                                   |       | 5,175 |   |
| Purchases              |       | 4,429                                   |       | — |   |
|                   |       | $                                       | 46,432     |   | $ | 27,116 |   |

 

81

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

| ** **                                          | ** ** | **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)                                 |       | 23                                               | %          | 22 | % |
| After-tax return on  average assets                 |       | 1.01                                             | %          | 1.13 | % |

----

(1)          Non-interest expensedivided by the sum of net interest income plus non-interest income. The BankingOperations’ efficiency ratio reflects the expense structure resulting from itsrelationship with CHL. If the Banking Operations of Countrywide Bank were astand-alone entity, the nature and amount of its expenses would differ fromthose reported. For example, the fulfillment fees paid by Countrywide Bank tothe Loan Production Sector for origination costs incurred on investment mortgageloans funded by Countrywide Bank are generally determined on an incrementalcost basis which is less than would be incurred in an arms-length transaction.

82

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Thecomponents of net interest income of Banking Operations are 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% |   |   |
| FHLB securities and FRB stock                     |       | 1,131,121                                        |       | 48,394 |   |   | 4.28% |   |   | 567,682 |   | 21,567 |   |   | 3.80% |   |   |
| Total earning assets                              |       | 60,686,976                                       |       | 3,219,590 |   |   | 5.31% |   |   | 28,163,249 |   | 1,301,351 |   |   | 4.62% |   |   |
| Allowance for loan losses                         |       | (77,150                                          | )          |   |   |   |   |   |   | (29,008 | ) |   |   |   |   |   |   |
| Other assets                                      |       | 714,995                                          |       |   |   |   |   |   |   | 471,333 |   |   |   |   |   |   |   |
| Total assets                                      |       | $                                                | 61,324,821 |   |   |   |   |   |   |   | $ | 28,605,574 |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                    |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Money market deposits and savings accounts        |       | $                                                | 2,735,107  |   | 98,878 |   |   | 3.62% |   |   | $ | 796,823 |   | 18,317 |   |   | 2.30% |   |   |
| Company-controlled custodial deposits(3)          |       | 11,895,480                                       |       | 382,332 |   |   | 3.21% |   |   | 7,870,918 |   | 102,096 |   |   | 1.30% |   |   |
| Time deposits                                     |       | 16,204,803                                       |       | 585,139 |   |   | 3.61% |   |   | 6,435,178 |   | 197,389 |   |   | 3.07% |   |   |
| Total interest-bearing deposits                   |       | 30,835,390                                       |       | 1,066,349 |   |   | 3.46% |   |   | 15,102,919 |   | 317,802 |   |   | 2.10% |   |   |
| FHLB advances                                     |       | 22,086,532                                       |       | 769,711 |   |   | 3.48% |   |   | 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                              |       | 25,261,698                                       |       | 872,101 |   |   | 3.45% |   |   | 10,902,563 |   | 313,386 |   |   | 2.87% |   |   |
| Total interest-bearing liabilities                |       | 56,097,088                                       |       | 1,938,450 |   |   | 3.46% |   |   | 26,005,482 |   | 631,188 |   |   | 2.43% |   |   |
| Non interest-bearing liabilities and equity: |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non interest-bearing checking                     |       | 460,624                                          |       |   |   |   |   |   |   | 95,310 |   |   |   |   |   |   |   |
| Other liabilities                                 |       | 777,737                                          |       |   |   |   |   |   |   | 414,033 |   |   |   |   |   |   |   |
| Shareholder’s equity                         |       | 3,989,372                                        |       |   |   |   |   |   |   | 2,090,749 |   |   |   |   |   |   |   |
| Total non interest-bearing liabilities and equity |       | 5,227,733                                        |       |   |   |   |   |   |   | 2,600,092 |   |   |   |   |   |   |   |
| Total liabilities and shareholder’s equity   |       | $                                                | 61,324,821 |   |   |   |   |   |   |   | $ | 28,605,574 |   |   |   |   |   |   |   |
| Net interest  income                              |       |                                             |       | $ | 1,281,140 |   |   |   |   |   |   |   | $ | 670,163 |   |   |   |   |   |
| Net interest  spread(4)                           |       |                                             |       |   |   |   | 1.85% |   |   |   |   |   |   |   | 2.19% |   |   |
| Net interest margin(5)                            |       |                                             |       |   |   |   | 2.11% |   |   |   |   |   |   |   | 2.38% |   |   |

----

(1)           Average balancesinclude nonaccrual loans.

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

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

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

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

83

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The dollar amounts of interest income and interestexpense change depending upon changes in interest rates and in the relativevolumes of our interest-earning assets and interest-bearing liabilities.Changes attributable to (i) changes in volume (changes in averageoutstanding balances multiplied by the prior period’s rate), (ii) changesin rate (changes in average interest rate multiplied by the prior period’svolume), and (iii) changes in rate/volume (changes in rate multiplied thechange in volume)—which were allocated proportionately to the changes in volumeand the changes in rate and included in the relevant column below—were asfollows:

| ** **                                 | ** ** | **Year Ended 2005 vs 2004** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                 | ** ** | **Increase (Decrease) Due to**   | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **Volume**                                      | ** ** | **Rate** | ** ** | **Total Changes** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                         | ** ** |
| Interest-earning assets:                   |       |                                            |       |   |   |   |   |   |   |
| Mortgage loans                             |       | $                                               | 1,500,308  |   | $ | 212,993 |   |   | $ | 1,713,301 |   |   |
| Securities available for sale              |       | 141,938                                         |       | 18,843 |   |   | 160,781 |   |   |
| Short-term investments                     |       | 2,028                                           |       | 15,302 |   |   | 17,330 |   |   |
| FHLB securities and FRB stock              |       | 23,686                                          |       | 3,141 |   |   | 26,827 |   |   |
| Total interest income                      |       | $                                               | 1,667,960  |   | $ | 250,279 |   |   | $ | 1,918,239 |   |   |
| Interest-bearing  liabilities:             |       |                                            |       |   |   |   |   |   |   |
| Money market deposits and savings accounts |       | $                                               | 65,210     |   | $ | 15,351 |   |   | $ | 80,561 |   |   |
| Company-controlled custodial deposits      |       | 72,036                                          |       | 208,200 |   |   | 280,236 |   |   |
| Time deposits                              |       | 347,220                                         |       | 40,530 |   |   | 387,750 |   |   |
| Total deposits                             |       | 484,466                                         |       | 264,081 |   |   | 748,547 |   |   |
| FHLB advances                              |       | 401,443                                         |       | 63,236 |   |   | 464,679 |   |   |
| Other borrowed funds                       |       | 73,742                                          |       | 20,294 |   |   | 94,036 |   |   |
| Total borrowings                           |       | 475,185                                         |       | 83,530 |   |   | 558,715 |   |   |
| Total interest expense                     |       | 959,651                                         |       | 347,611 |   |   | 1,307,262 |   |   |
| Net interest  income                       |       | $                                               | 708,309    |   | $ | (97,332 | ) |   | $ | 610,977 |   |   |

 

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 prior year mainlyas a result of a lag in the re-pricing of the Bank’s loan portfoliocompared to the increase in the cost of its interest-bearing liabilities and tothe large volume of loans held by the Bank that are earning interest at theirreduced introductory interest rates.

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.

84

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

| ** **                                                                              | ** ** | **December 31,**   | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                              | ** ** | **2005**                | ** ** | **2004** | ** ** |
| ** **                                                                              | ** ** | **(in thousands)** | ** ** |
| Total pay-option  ARM loan portfolio                                                    |       | $                       | 26,101,306 |   | $ | 4,698,665 |   |
| Total principal balance of pay-option ARM loans with  accumulated negative amortization |       | $13,963,721             |       | $32,818 |   |
| Accumulated negative amortization (from original  loan balance)                         |       | $                       | 74,748     |   | $ | 29 |   |
| Average original  loan-to-value ratio(1)                                                |       | 75                      | %          | 73 | % |
| Average combined original  loan-to-value ratio(2)                                       |       | 78                      | %          | 75 | % |
| Average original  FICO score (3)                                                        |       | 720                     |       | 730 |   |
| Loans delinquent 90 days  or more                                                       |       | 0.10                    | %          | 0.02 | % |

----

(1)          Theratio of the lower of the amount of the loan that is secured by the property tothe original appraised value or purchase price of the property.

(2)          Theratio of the lower of the amount of all loans secured by the property to the originalappraised value or purchase price of the property.

(3)          AFICO score is a measure of borrower creditworthiness determined using astatistical model. FICO scores range from approximately 300 to 850, with ahigher score indicating an individual with a more favorable credit profile.

Thecomposition of the Banking Operations balance sheets is as follows:

| ** **                                                                             | ** ** | **December 31,**                            | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2005**                                         | ** ** | **2004** | ** ** |
| ** **                                                                             | ** ** | **Amount**                                       | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** |
| ** **                                                                             | ** ** | **(dollar amounts in thousands)** | ** ** |
| **Assets**                                                                             |       |                                             |       |   |   |   |   |   |   |
| Short-term  investments                                                                |       | $                                                | 245,046    |   | 4.08% |   | $ | 314,799 |   | 2.15% |   |
| Mortgage loans, net  of allowance for loan losses of $102,756 and $48,972 respectively |       | 64,279,198                                       |       | 6.11% |   | 34,230,360 |   | 5.25% |   |
| Securities  available for sale                                                         |       | 6,250,929                                        |       | 5.02% |   | 4,795,762 |   | 5.02% |   |
| FHLB  securities and FRB stock                                                    |       | 1,332,820                                        |       | 4.73% |   | 794,695 |   | 3.96% |   |
| Total interest-earning assets                                                          |       | 72,107,993                                       |       | 5.98% |   | 40,135,616 |   | 5.17% |   |
| Other assets                                                                           |       | 918,613                                          |       |   |   | 827,740 |   |   |   |
| Total assets                                                                           |       | $                                                | 73,026,606 |   |   |   | $ | 40,963,356 |   |   |   |
| **Liabilities and Equity**                                                             |       |                                             |       |   |   |   |   |   |   |
| Deposits:(1)                                                                           |       |                                             |       |   |   |   |   |   |   |
| Customer                                                                               |       | $                                                | 25,299,605 |   | 4.09% |   | $ | 12,035,961 |   | 3.27% |   |
| Company-controlled escrow deposit accounts                                             |       | 13,332,801                                       |       | 4.18% |   | 7,900,901 |   | 2.19% |   |
| FHLB advances                                                                          |       | 26,266,861                                       |       | 3.88% |   | 15,475,000 |   | 2.97% |   |
| Other borrowings                                                                       |       | 1,279,878                                        |       | 4.23% |   | 1,811,149 |   | 2.37% |   |
| Total interest-bearing liabilities                                                     |       | 66,179,145                                       |       | 4.03% |   | 37,223,011 |   | 2.87% |   |
| Other liabilities                                                                      |       | 1,574,072                                        |       |   |   | 815,565 |   |   |   |
| Shareholder’s  equity                                                             |       | 5,273,389                                        |       |   |   | 2,924,780 |   |   |   |
| Total liabilities and equity                                                           |       | $                                                | 73,026,606 |   |   |   | $ | 40,963,356 |   |   |   |
| Primary spread(2)                                                                      |       |                                             |       | 1.95% |   |   |   | 2.30% |   |
| Nonaccrual loans                                                                       |       | $                                                | 153,942    |   |   |   | $ | 21,808 |   |   |   |

----

(1)          Includes inter-companydeposits.

85

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

The Banking Segment alsoincludes the operation of CWL. CWL’s pre-tax earnings increased by $18.6 millionduring 2005 in comparison to 2004, primarily due to a 62% increase in averagemortgage warehouse advances. Such advances increased from $3.8 billion in 2004to $6.1 billion in 2005, primarily due to an overall increase in activity withMortgage Banking Segment customers. At December 31, 2005, warehouselending advances were $3.9 billion.

**Capital MarketsSegment**

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 prior year. 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 prior year.

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 ofthe Mortgage Banking Segment. Conduit revenues for 2005 decreased 6% incomparison to the prior year, primarily because of a decrease in margins,driven by a flattening of the yield curve and increased competition.

Underwriting revenues decreased $17.4 million from theprior year because of decreased underwriting of CHL securitizations by CapitalMarkets and a decrease in margins.

Trading volumes increased 2% from the prior yearexcluding U.S. Treasury securities. Including U.S. Treasury securities,the total securities volume traded increased 14% over the prior year. Despitethe increase in trading volumes, securities trading revenue declined 16% due toa decline in trading margins and a shift in product mix to lower marginproduct.

86

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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 Segment, by instrument:

| ** **                       | ** ** | **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 was withCHL during 2005 and 2004, respectively.

**Insurance Segment**

The Insurance Segment’s pre-tax earnings increased 15%over the prior year, to $183.7 million. The following table shows pre-taxearnings by component:

| ** **                                | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| ** **                                | ** ** | **(in thousands)**                     | ** ** |
| Balboa  Reinsurance Company               |       |                                        | $          | 178,647 |   |   |   | $ | 134,928 |   |   |
| Balboa  Life & Casualty(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 & Casualty     |       |                                        | 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 & Casualty |       | 410,828                                          |       |   | 53 | % |   | 348,674 |   |   | 56 | % |   |
| Total insurance  claim expenses  |       | $                                                | 441,584    |   |   |   |   |   | $ | 390,203 |   |   |   |   |   |

 

87

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Our mortgage reinsurance business produced $178.6million in pre-tax earnings, an increase of 32% over the prior year, drivenprimarily by growth of 9% in the mortgage loans included in our loan servicingportfolio that are covered by reinsurance contracts, along with a reducedprovision, as a percentage of premiums earned, for insured losses due tofaster-than expected prepayments of older pools of reinsured loans.

Our Life and Casualtyinsurance business produced pre-tax earnings of $23.8 million, a decrease of$25.7 million from the prior year. The decrease in earnings was driven by $87.7million in catastrophe losses, including $85.2 million relating to thehurricanes that struck the Gulf Coast states in 2005, in comparison to $67.9million incurred in the prior year and an increase in expenses due to thegrowth in our business. The impact of these losses and increase in expenses waspartially offset by an increase in net earned premiums during 2005 incomparison to the prior year. The increase in net earned premiums was primarilyattributable to an increase in voluntary homeowners and auto insurance.

**Global OperationsSegment**

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

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

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

Gainon sale of loans and securities is summarized below:

| ** **                   | ** ** | **Years Ended December 31,**      | ** **  |
|------------------------------|------------|--------------------------------------------------|-------------|
| ** **                   | ** ** | **2005**                                         | ** **  | **2004** | ** ** |
| ** **                   | ** ** | ** **                                       | ** **  | **Gain on Sale** | ** ** | ** ** | ** ** | **Gain on Sale** | ** ** |
| ** **                   | ** ** | **Loans Sold**                              | ** **  | **Amount** | ** ** | **Margin(2)** | ** ** | **Loans Sold** | ** ** | **Amount** | ** ** | **Margin(2)** | ** ** |
| ** **                   | ** ** | **(dollar amounts in thousands)** | ** **  |
| Mortgage Banking:            |       |                                             |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Prime Mortgage Loans         |       | $                                                | 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             |       | 3,331,610                                        |        | 121,519 |   |   | 3.65 | % |   | 1,586,859 |   | 59,012 |   |   | 3.72 | % |   |
|                         |       | 27,589,939                                       |        | 631,628 |   |   | 2.29 | % |   | 27,436,045 |   | 778,622 |   |   | 2.84 | % |   |
| Total Production Sector      |       | 411,847,501                                      |        | 4,300,579 |   |   | 1.04 | % |   | 326,312,766 |   | 4,386,536 |   |   | 1.34 | % |   |
| Reperforming loans           |       | 1,186,033                                        |        | 32,595 |   |   | 2.75 | % |   | 2,770,673 |   | 127,149 |   |   | 4.59 | % |   |
|                         |       | $                                                | 413,033,534 |   | 4,333,174 |   |   | 1.05 | % |   | $ | 329,083,439 |   | 4,513,685 |   |   | 1.37 | % |   |
| 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 sourced from the Mortgage BankingSegment.

(2)           Gain on sale as a percentage of loans sold.

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’ 

88

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revenues from itssecurities trading activities consist of gain on sale and interest income. In asteep yield curve environment, net interest income will comprise a largerpercentage of total securities trading revenue. As the yield curve flattens,the mix of revenues will naturally shift toward gain on sale of securities.During 2005 the yield curve was flatter than in 2004, which resulted in a shiftin trading revenues from interest income to gain on sale. The decrease in losson sale of the trading securities was more than offset by a decline in netinterest income due to the overall decline in trading margins.

For the Mortgage BankingSegment, the effects of changes in the volume of loan sales and the margin onsale on the amount of gain on sale is summarized in the following table:

| ** **                | ** ** | **Year Ended 2005 vs. 2004**   | ** ** |
|---------------------------|------------|-----------------------------------------------|------------|
| ** **                | ** ** | **Increase (Decrease) Due to** | ** ** | ** ** | ** ** |
| ** **                | ** ** | **Loans Sold**                           | ** ** | **Margin** | ** ** | **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          |       | 63,660                                        |       | (1,153 | ) | 62,507 |   |
|                      |       | 21,550                                        |       | (168,544 | ) | (146,994 | ) |
| Total Production Sector   |       | 1,010,784                                     |       | (1,096,741 | ) | (85,957 | ) |
| Reperforming loans        |       | (55,577                                       | )          | (38,977 | ) | (94,554 | ) |
| Total Mortgage  Banking   |       | $                                             | 955,207    |   | $ | (1,135,718 | ) | $ | (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 ofReperforming loans decreased in 2005 as compared to 2004 due primarily to adecrease in the volume of loans sold combined with lower margins. Reperformingloans are reinstated loans that had previously defaulted and were repurchasedfrom mortgage securitization trusts we sponsor. The note rate on these loans istypically higher than the currently offered mortgage interest rates andtherefore, the margin on these loans is typically higher than margins on PrimeMortgage Loans.

89

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

Net interest income issummarized 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:                              |       |                                   |       |   |   |
| Net interest income (expense) on custodial balances  |       | 366,848                                |       | (86,514 | ) |
| Interest expense                                     |       | (382,324                               | )          | (353,454 | ) |
| Capital Markets Segment securities inventory         |       | 167,131                                |       | 343,385 |   |
| Other                                                |       | 213,252                                |       | 195,092 |   |
| Net interest income                                  |       | 2,353,620                              |       | 2,037,316 |   |
| Provision for loan losses                            |       | (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 prior year. Offsetting this increase, the net interest margindecreased to 2.05% during 2005 from 2.31% during the prior year.

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 2004 and 2005, reducing the net interest income relating to outstandingbalances. The decline in net interest margin was not offset by an increase ingain 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 prior year. We are requiredto pass through monthly interest to security holders on paid-off loans at theunderlying security rates, which were substantially higher than the short-termrates earned by us on the payoff float. The amount of such interest passedthrough 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% in 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.

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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.

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 loansheld for investment at Countrywide Bank.

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

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

| ** **                                                              | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                              | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| ** **                                                              | ** ** | **(in thousands)**                | ** ** |
| Servicing fees,  net of guarantee fees(1)                               |       | $                                      | 3,194,395  |   | $ | 2,382,685 |   |
| Income from  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 income from MSRs and retained  interests |       | $                                      | 4,281,254  |   | $ | 3,269,587 |   |

----

(1)          Includes contractuallyspecified servicing fees.

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 retained interests was due primarily to a 23% increase in the averageinvestment in these assets. This income excludes any impairment charges, whichare included in recovery (impairment) of retained interests in the consolidatedstatement of earnings. Retained interests include interest-only andprincipal-only securities as well as residual interests that arise from thesecuritization of mortgage loans, particularly Nonprime Mortgage and Prime HomeEquity 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 2004. Dollar amortization was higher becausethe MSR asset balance was higher during 2005.

***Recovery (Impairment) of Mortgage Servicing Rights***

During 2005, we recoveredpreviously recorded impairment of MSRs of $387.9 million, compared toimpairment of $279.8 million in 2004. Total recovery of MSRs during 2005resulted from an increase in the estimated fair value of MSRs resultingprimarily from the increase in mortgage interest rates during the period. MSRimpairment in 2004 resulted generally from a decrease in the MSRs’ estimatedfair value driven by a slight decrease in mortgage rates during the period.

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***Impairment of Retained Interests***

In 2005 and 2004 werecognized impairment of retained interests of $364.5 million and $368.3million, respectively, resulting from a decline in the value of suchsecurities. The collateral underlying certain of these residuals is fixed-rate fora defined period of time while the pass-through rate is floating. An increasein projected short-term interest rates during both periods caused compressionof the spread on such residuals, which resulted in a decline in their value.

***Servicing Hedge Losses***

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***

Compensationexpenses increased $478.4 million, or 15%, during 2005 as compared to the prioryear. Details are summarized below:

| ** **                          | ** ** | **Years Ended  December 31,** | ** ** |
|-------------------------------------|------------|-----------------------------------------|------------|
| ** **                          | ** ** | **2005**                                | ** ** | **2004** | ** ** |
| ** **                          | ** ** | **(in thousands)**                 | ** ** |
| Base salaries                       |       | $                                       | 1,994,158  |   | $ | 1,607,602 |   |
| Incentive bonus  and commissions    |       | 1,940,426                               |       | 1,636,833 |   |
| Payroll taxes and  other benefits   |       | 630,545                                 |       | 471,402 |   |
| Deferral of loan  origination costs |       | (949,646                                | )          | (578,792 | ) |
| Total  compensation expenses        |       | $                                       | 3,615,483  |   | $ | 3,137,045 |   |

 

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Average workforce bysegment is summarized below:

| ** **                                    | ** ** | **Years Ended  December 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                    | ** ** | **2005**                                | ** ** | **2004** | ** ** |
| Mortgage Banking                              |       | 35,699                                  |       | 28,345 |   |
| Banking                                       |       | 1,804                                   |       | 1,015 |   |
| Capital Markets                               |       | 624                                     |       | 532 |   |
| Insurance                                     |       | 2,016                                   |       | 1,834 |   |
| Global Operations                             |       | 2,650                                   |       | 2,131 |   |
| Corporate  Administration                     |       | 5,921                                   |       | 5,074 |   |
| Average  workforce, including temporary staff |       | 48,714                                  |       | 38,931 |   |

 

In the Loan ProductionSector, compensation expenses increased $505.4 million, or 21%, prior to thedeferral of loan origination costs, because of a 27% increase in average staff.

In the Loan ServicingSector, compensation expense rose $62.5 million, or 26%, to accommodate a 20%increase in the number of loans serviced. Compensation expenses increased inmost other business segments and corporate areas, reflecting growth in theCompany.

Incremental direct costsassociated with the origination of loans are deferred when incurred. Subsequenttreatment of these costs is based on whether the loans are held for sale orheld for investment. If the loan is sold, the costs deferred are included as acomponent of gain on sale; if the loan is held for investment, the deferredcosts are amortized to interest income over the life of the loan.

***Occupancy and OtherOffice Expenses***

Occupancy and other officeexpenses are summarized below:

| ** **                                 | ** ** | **Years Ended  December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                 | ** ** | **2005**                                | ** ** | **2004** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                 | ** ** |
| Office and  equipment rentals              |       | $                                       | 186,335    |   | $ | 159,316 |   |
| Depreciation expense                       |       | 181,598                                 |       | 111,664 |   |
| Utilities                                  |       | 134,735                                 |       | 106,259 |   |
| Postage and  courier service               |       | 101,064                                 |       | 89,193 |   |
| Office supplies                            |       | 85,232                                  |       | 68,623 |   |
| Repairs and  maintenance                   |       | 63,756                                  |       | 54,924 |   |
| Dues and  subscriptions                    |       | 53,154                                  |       | 44,859 |   |
| Other                                      |       | 73,806                                  |       | 8,540 |   |
| 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 2004. Theincrease in insurance claim expenses was due mainly to growth in our insuredrisk and a $19.8 million increase in catastrophe losses over the prior year.

***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.

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***Other Operating Expenses***

Other operating expenses are summarized below:

| ** **                                           | ** ** | **Years Ended  December 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                           | ** ** | **2005**                                | ** ** | **2004** | ** ** |
| ** **                                           | ** ** | **(in thousands)**                 | ** ** |
| Insurance  commission expense                        |       | $                                       | 166,970    |   | $ | 123,225 |   |
| Legal,  consulting, accounting and auditing expenses |       | 141,028                                 |       | 103,990 |   |
| Travel and  entertainment                            |       | 115,473                                 |       | 85,319 |   |
| Software  amortization and impairment                |       | 64,962                                  |       | 53,235 |   |
| Insurance                                            |       | 55,071                                  |       | 55,608 |   |
| Losses on  servicing-related advances                |       | 51,370                                  |       | 48,555 |   |
| Taxes and  licenses                                  |       | 49,488                                  |       | 37,582 |   |
| Other                                                |       | 213,983                                 |       | 196,433 |   |
| Deferral of loan  origination costs                  |       | (155,333                                | )          | (75,404 | ) |
| Total other  operating expenses                      |       | $                                       | 703,012    |   | $ | 628,543 |   |

 

**Quantitative andQualitative Disclosures About Market Risk**

The primary market risk facing the Company is interestrate risk, which includes the risk that changes in interest rates will resultin changes in the value of our assets or liabilities (“price risk”) and therisk that net interest income from our mortgage loan and investment portfolioswill change in response to changes in interest rates. The overall objective ofthe Company’s interest rate risk management activities is to reduce thevariability of earnings caused by changes in interest rates.

The Company manages price risk through the naturalcounterbalance of its loan production and servicing businesses. The Companyalso uses various financial instruments, including derivatives, to manage pricerisk related specifically to the values of its IRLC, mortgage loans and MBSheld by the Company pending sale (“Mortgage Loan Inventory”), MSRs and retainedinterests and trading securities, as well as a portion of its debt.

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

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

We are exposed to price risk relative to our MortgageLoan Inventory and our IRLCs. The Mortgage Loan Inventory is comprised ofmortgage loans held pending sale, and is presently held for an average ofapproximately 26 days. IRLCs guarantee the rate and points on the underlyingmortgage or group of mortgages for a specified period, generally from seven to75 days.

With regard to loans held for sale, we are exposed toprice risk from the time an IRLC is made to a mortgage applicant or financialintermediary to the time the resulting mortgage loan is sold. For loans heldfor investment, we are exposed to price risk from the time an IRLC is made to afinancial intermediary to the time the loan is purchased. During these periods,the Company is exposed to losses if mortgage rates rise, because the value ofthe IRLC or mortgage loan held for sale declines. To manage this price risk theCompany uses derivatives.

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 

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ultimately close withinthe terms of the IRLC increases if mortgage rates rise and decreases ifmortgage rates fall. This is due primarily to the relative attractiveness ofcurrent mortgage rates compared to the applicants’ committed rates. The closingpercentage is also influenced by the source and age of the applications,purpose for the loans (purchase or refinance) and the application approvalrate. We have developed closing ratio estimates using historical experiencethat take into account all of these variables, as well as renegotiations ofrate and point commitments that tend to occur when mortgage rates fall. Thoseclosing ratios are used to estimate the aggregate balance of loans that weexpect to fund within the terms of the IRLCs. Our closing ratio estimates arerevised periodically.

To manage the price risk associated with IRLCs, wegenerally use a combination of net forward sales of MBS and put and calloptions on MBS, U.S. Treasury futures and Eurodollar futures. We generallyenter into forward sales contracts of MBS in an amount equal to the portion ofthe IRLCs expected to close, assuming no change in mortgage rates. We acquireput and call options to protect against the variability of the rate of loanclosings caused by changes in mortgage rates. To manage credit spread riskassociated with our IRLCs, we may enter into credit default swaps.

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. Tomanage credit spread risk associated with our Mortgage Loan Inventory, we mayenter into credit default swaps.

We manage the price risk and credit risk related toour commercial mortgage loans using interest rate swaps, total rate of returnand credit default swaps.

We actively manage the risk profiles of our IRLCs andMortgage Loan Inventory 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 MBS at a specified price on a specifieddate in the future. The value increases as mortgage rates rise.

·       ForwardPurchases of MBS: An obligation to buy MBS at a specified price on a specifieddate in the future. The value increases as mortgage rates fall.

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

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

·       LongCall Options on U.S. Treasury Futures: A right to acquire a U.S. Treasuryfutures contract at a specified price on a specified date in the future. Thevalue increases as the benchmark U.S. Treasury rate falls.

·       LongPut Options on U.S. Treasury Futures: A right to sell a U.S. Treasury futurescontract at a specified price on a specified date in the future. The valueincreases as the benchmark U.S. Treasury rate 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.

·       InterestRate Floors:**Represents a right to receive cash if areference interest rate falls below a contractual strike rate; therefore, itsvalue increases as the reference interest rate falls. The 

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reference interest ratesused in the Company’s interest rate floors include mortgage rates, Treasuryrates and U.S. dollar (“USD”) LIBOR.

·       TotalRate of Return Swaps: An agreement to pay or receive the total return on afinancial index or security in exchange for the payment or receipt of afloating rate of interest over the term of the contract. For use in the riskmanagement of the commercial mortgage portfolio, the Company pays the return ona published CMBS index and receives the floating rate of interest. The value ofthese contracts increases as the value of the index declines.

·       Credit Default Swaps: Anagreement to purchase credit event protection based on a financial index orsecurity in exchange for paying a fixed fee or premium over the term of thecontract. For use in the risk management primarily of commercial mortgageloans, the Company receives credit protection and pays a fixed fee or premium.The value of these contracts increases when the probability of the occurrenceof a credit event rises.

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

Our MSRs and retained interests are generally subjectto loss in value when mortgage rates decline. Declining mortgage rates normallyprecipitate increased mortgage refinancing activity. Increased refinancingactivity reduces the life of the loans underlying the MSRs and retainedinterests, thereby reducing their value. Reductions in the value of theseassets impact earnings primarily through change in fair value and impairmentcharges. To moderate the effect on earnings caused by a rate-driven decline infair value, we maintain a portfolio of financial instruments, includingderivatives, which generally increase in aggregate value when interest ratesdecline (the “Servicing Hedge”).

We use thefollowing financial instruments in our Servicing Hedge:

·       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, U.S. Treasury ratesand USD LIBOR.

·       LongU.S. Treasury Futures: An agreement to purchase a U.S. Treasury security at aspecified price on a specified date in the future. The value increases as thebenchmark U.S. Treasury rate falls.

·       LongCall Options on U.S. Treasury and Eurodollar futures: A right to acquire a U.S.Treasury or Eurodollar futures contract at a specified price on a specifieddate in the future. The value increases as the benchmark U.S. Treasury orEurodollar rate falls.

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

·       ForwardPurchases of MBS: An obligation to buy MBS at a specified price on a specifieddate in the future. 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). For use in the Servicing Hedge, we generallyreceive the fixed rate and pay the floating rate. Such contracts increase invalue 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.

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·       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 Constant Mortgage Maturity index, onthe settlement date. For use in the Servicing Hedge, we generally receive thefixed rate and pay the floating rate. Such contracts increase in value as thespread between the current coupon mortgage rate and the swap curve tightens, orwhen interest rates fall.

·       InterestRate Caps:  A right to receive cash if areference interest rate rises above a contractual strike rate. The value increasesas the reference interest rate rises. The reference interest rates used in theCompany’s interest rate caps include mortgage rates, U.S. Treasury rates andUSD LIBOR.

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

***Securities TradingActivities***

Withinour Capital Markets operations, we maintain a trading portfolio of fixed-incomesecurities, primarily MBS. We are exposed to price changes in our tradingportfolio arising from interest rate changes during the period we hold thesecurities. To manage this risk, we use the following derivative instruments:

·       ForwardSales of To-Be-Announced (“TBA”) MBS: An obligation to sell at a specifiedprice on a specified date in the future, agency pass-through MBS that have notyet been issued. The value increases as mortgage rates rise.

·       ForwardPurchases of TBA MBS: An obligation to purchase at a specified price on aspecified date in the future, agency pass-through MBS that have not yet beenissued. The value increases as mortgage rates fall.

·       ForwardSale of U.S. Treasury Securities:  Anagreement to sell a specified quantity of U.S. Treasury securities for aspecified price on a specified date in the future. The value increases wheninterest rates rise.

·       ForwardPurchase of U.S. Treasury Securities:  Anagreement to buy a specified quantity of U.S Treasury Securities for aspecified price on a specified date in the future. The value increases wheninterest rates fall.

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

·       LongFutures Contract: A standardized exchange-traded contract, the value of whichis tied to the spot Federal Funds or Eurodollar rates at specified futuredates. The value of these contracts increases when Federal Funds or Eurodollarrates 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 typically receives the floating rate andpays the fixed rate. Such contracts increase in value as rates rise.

·       LongPut Options on Federal Funds and Eurodollar futures:  A right to sell Federal Funds or Eurodollarfutures contract at a specified price on a specified date in the future. Thevalue increases as the benchmark Federal Funds or Eurodollar rate rises.

·       LongCall Options on Federal Funds and Eurodollar futures:  A right to acquire Federal Funds orEurodollar futures contract at a specified price on a specified date in thefuture. The value increases as the benchmark Federal Funds or Eurodollar ratefalls.

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·       InterestRate Caps:  A right to receive cash if areference interest rate rises above a contractual strike rate. The valueincreases as the reference interest rate rises. The reference interest ratesused in the Company’s interest rate caps include mortgage rates, U.S. Treasuryrates, and USD LIBOR.

·       Receiver Swaptions:  A right to enter a predetermined InterestRate Swap at a future date where we receive the fixed rate and pay the floatingrate. These contracts increase in value as rates fall.

***Banking Operations***

The primary component ofthe earnings of our Banking Operations is net interest income from our mortgageloan and securities investment portfolios. In our Banking Operations, we investprimarily in adjustable-rate and short duration residential mortgages. Oursecurities portfolio is comprised primarily of short duration sequentialcollateralized mortgage obligations and Agency MBS. We manage our interest raterisk primarily by matching our short duration assets with interest-bearingliabilities that have similar duration and re-pricing characteristics. Depositsare priced to encourage consumers to choose maturity terms consistent with ourassets. Interest rate swaps are also used to efficiently and cost effectivelymodify the repricing characteristics of our liabilities to be more closelyaligned with our interest-earning assets.

***Long-term Debt and Deposit Liabilities***

Management’s objective infinancing the activities of the Company is to ensure access to reliable andcost-effective funding from a variety of sources in order to meet the Company’sfinancing requirements under various market conditions. These financingactivities subject the Company to interest rate risk. Specifically, the Companyis exposed to the risk that the interest expense it incurs on its long-termborrowings will change at a different speed than the income it earns on theassets financed by the long-term debt, contributing to variability of netinterest income earnings. To address this risk, management seeks long-term debtstructured to reprice in a manner similar to the assets it is financing. However,the Company may not be able to obtain access to borrowings structured to matchthe repricing characteristics of the assets being financed at optimal interestrates (i.e., cost). Management addresses this constraint, in part, by enteringinto interest rate and foreign currency swap agreements designed to modify thestructure of its borrowings. These agreements have the effect of changing thestructure of a debt agreement to one that approximates the repricingcharacteristics of the assets financed.

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

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

We employ various commonly used modeling techniques tovalue our financial instruments in connection with these sensitivity analyses.For mortgage loans, MBS, MBS forward contracts, collateralized mortgageobligations, interest-only securities and MSRs, option-adjusted spread (“OAS”)models are used. The primary assumptions used in these models for the purposeof these sensitivity analyses are the prepayment speeds and implied marketvolatility of interest rates. For options and interest rate floors, anoption-pricing model is used. The primary assumption used in this model isimplied market volatility of interest rates. Retained interests, with theexception of interest-only securities, are valued using a zero volatilitydiscounted cash flow model. The primary assumptions used in these models areprepayment rates, discount rates and credit losses.

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

| ** **                                                            | ** ** | **Change in Fair Value** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------|------------|
| **Change in Interest Rate (basis points)**   | ** ** | ** **                              | ** ** | **-100** | ** ** | **-50** | ** ** | **+50** | ** ** | **+100** | ** ** |
| ** **                                                            | ** ** | **(in millions)**                  | ** ** |
| MSRs and financial  instruments:                                      |       |                                    |       |   |   |   |   |   |   |
| MSR and retained interests                                            |       | $                                       | (3,285     | ) | $ | (1,518 | ) | $ | 1,182 |   | $ | 2,024 |   |
| Impact of  Servicing Hedge:                                           |       |                                    |       |   |   |   |   |   |   |
| Mortgage-based                                                        |       | 418                                     |       | 209 |   | (208 | ) | (416 | ) |
| Swap-based                                                            |       | 3,000                                   |       | 1,266 |   | (887 | ) | (1,533 | ) |
| Treasury-based                                                        |       | 389                                     |       | 124 |   | (11 | ) | (11 | ) |
| MSRs and retained interests, net                                      |       | 522                                     |       | 81 |   | 76 |   | 64 |   |
| Interest rate lock commitments                                        |       | 282                                     |       | 191 |   | (301 | ) | (671 | ) |
| Mortgage Loan Inventory                                               |       | 1,032                                   |       | 667 |   | (926 | ) | (2,027 | ) |
| Impact of  associated derivative instruments:                         |       |                                    |       |   |   |   |   |   |   |
| Mortgage-based                                                        |       | (1,361                                  | )          | (863 | ) | 1,163 |   | 2,520 |   |
| U.S. Treasury-based                                                   |       | 108                                     |       | 41 |   | 11 |   | 41 |   |
| Eurodollar-based                                                      |       | (95                                     | )          | (55 | ) | 66 |   | 134 |   |
| Interest rate lock commitments and Mortgage Loan  Inventory, net      |       | (34                                     | )          | (19 | ) | 13 |   | (3 | ) |
| Banking Operations:                                                   |       |                                    |       |   |   |   |   |   |   |
| Securities portfolio                                                  |       | 148                                     |       | 91 |   | (118 | ) | (256 | ) |
| Mortgage loans held for investment                                    |       | 641                                     |       | 344 |   | (383 | ) | (803 | ) |
| Deposit liabilities                                                   |       | (358                                    | )          | (183 | ) | 192 |   | 387 |   |
| Federal Home Loan Bank advances                                       |       | (241                                    | )          | (113 | ) | 100 |   | 192 |   |
| Countrywide Bank, net                                                 |       | 190                                     |       | 139 |   | (209 | ) | (480 | ) |
| Notes payable and capital securities                                  |       | (744                                    | )          | (372 | ) | 357 |   | 683 |   |
| Impact of  associated derivative instruments:                         |       |                                    |       |   |   |   |   |   |   |
| Swap-based                                                            |       | 212                                     |       | 108 |   | (110 | ) | (220 | ) |
| Notes payable and capital securities, net                             |       | (532                                    | )          | (264 | ) | 247 |   | 463 |   |
| Insurance company investment portfolios                               |       | 59                                      |       | 31 |   | (33 | ) | (65 | ) |
| Net change in  fair value related to MSRs and financial instruments   |       | $                                       | 205        |   | $ | (32 | ) | $ | 94 |   | $ | (21 | ) |
| Net change in fair value  related to broker-dealer trading securities |       | $                                       | 26         |   | $ | 16 |   | $ | (17 | ) | $ | (40 | ) |
|                                                                       |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Thefollowing table summarizes the estimated change in fair value of the Company’sinterest-rate-sensitive assets, liabilities and commitments as of December 31,2005, given selected hypothetical (instantaneous) parallel shifts in the yieldcurve:

| ** **                                                            | ** ** | **Change in Fair Value** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------|------------|
| **Change in Interest Rate (basis points)**   | ** ** | ** **                              | ** ** | **-100** | ** ** | **-50** | ** ** | **+50** | ** ** | **+100** | ** ** |
| ** **                                                            | ** ** | **(in millions)**                  | ** ** |
| Net change in  fair value related to MSRs and financial instruments   |       | $                                       | (429       | ) | $ | (419 | ) | $ | 695 |   | $ | 1,333 |   |
| Net change in fair value  related to broker-dealer trading securities |       | $                                       | (18        | ) | $ | (3 | ) | $ | (11 | ) | $ | (33 | ) |
|                                                                       |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

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

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

**Credit RiskManagement**

Credit risk is 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.

Management’s CreditCommittee, comprised of our Chief Risk Officer and other senior executives, hasprimary responsibility for setting strategies to achieve our credit risk goalsand objectives. Those goals and objectives are documented in our Credit Policy.

***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.

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.

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We evaluate collateral quality through the use ofappraisals, property inspections and/or automated valuation model.

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.

Our conventional conforming underwriting guidelinesare based on the guidelines accepted by Fannie Mae and 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 secondarymortgage market. We developed these guidelines to meet the requirements ofprivate investors, rating agencies and third-party credit enhancementproviders.

These standards and procedures encompass underwriterqualifications and authority levels, appraisal review requirements, fraudcontrols, funds disbursement controls, training of our employees and ongoingreview of their work. We help to ensure that our origination standards are metby employing accomplished and seasoned management, underwriters and processorsand through the extensive use of technology. We also employ proprietaryunderwriting systems in our loan origination process that improve the consistencyof underwriting standards, assess collateral adequacy and help to preventfraud, while at the same time increasing productivity.

We supplement our loanorigination standards and procedures with a post-funding quality controlprocess. Our Quality Control Department is responsible for completing loanaudits that may consist of a re-verification of loan documentation, anunderwriting and appraisal review, and, if necessary, a fraud investigation. Wealso employ a pre-and post-funding proprietary loan performance evaluationsystem. This system helps to identify fraud and poor performance of individualsand business entities associated with the origination of our loans. Thecombination of this system and our audit results allows us to evaluate andmeasure adherence to prescribed underwriting guidelines and compliance withlaws and regulations.

*Sale of Loans*

Nearly all of the mortgage loans that we originate orpurchase in our Mortgage Banking and Capital Markets Segments are sold into thesecondary mortgage market primarily in the form of securities, and to a lesserextent as whole loans. In connection with such sales, we have liability underthe representations and warranties we make to purchasers and insurers of theloans. In the event of a breach of such representations and warranties, we maybe required to either repurchase the mortgage loans with the identified defectsor indemnify the investor or insurer. In such cases, we bear any subsequentcredit loss on the mortgage loans. Our representations and warranties aregenerally not subject to stated limits. However, our contractual liabilityarises only when the representations and warranties are breached. We attempt tolimit our risk of incurring these losses by structuring our operations toensure consistent production of quality mortgages and servicing those mortgagesat levels that meet or exceed secondary mortgage market standards. We makesignificant investments in personnel and technology to ensure the quality ofour mortgage loan production. The liability for this recourse resulting from abreach of our representations and warranties totaled $390.2 million and$187.5 million at December 31, 2006 and 2005, respectively. The increasein this liability is due mainly to the addition of the liabilities related tosecuritizations in the current period together with an increase in loan sales,which generally have more extensive representations and warranties thansecuritizations. The expense of $290.4 million, $66.5 million and $85.4 millionfor 2006, 2005 and 2004, respectively, associated with the liability forrepresentations and warranties was recorded as a component of gain on sale ofloans in the consolidated income statement.

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We generally sell ourPrime Mortgage Loans on a non-recourse basis, either in the form of securitiesor as loans. In addition, we may sell a portion of our Nonprime and Prime HomeEquity Loans on a non-recourse basis in the form of whole loans.

***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 MBS guaranteed by Fannie Mae or Freddie Mac.Subject to certain representations and warranties we make, nearly allconventional loans securitized through Fannie Mae or Freddie Mac are sold on anon-recourse basis. We pay guarantee fees to these agencies to compensate themfor their assumption of credit risk on the securitized loans.

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

FHA-insured andVA-guaranteed mortgage loans are generally pooled into MBS guaranteed by theGovernment National Mortgage Association (“Ginnie Mae”). We are insured againstforeclosure loss by the FHA or partially guaranteed against foreclosure loss bythe VA. Fees charged by the FHA and VA for assuming such risks are paiddirectly by the borrower. We are exposed to credit losses on defaulted VA loansto the extent that the partial guarantee provided by the VA is inadequate tocover the total credit losses incurred. We pay 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 Prime Loans***

Non-conforming conventional prime mortgage loans aregenerally pooled into “private-label” (non-agency) MBS. Such securitizationsinvolve some form of credit enhancement such as senior/subordinated structures,including residual interests, overcollateralization or mortgage pool insurance.Securitizations that involve senior/subordinated structures contain securitiesthat assume varying levels of credit risk. Holders of subordinated securitiesare compensated for the credit risk assumed through a higher yield. When wesell the subordinated securities created in connection with thesesecuritizations we transfer the related credit risk subject to representationsand warranties we make when the loans are securitized.  When we retain the subordinated securities,generally the residual interests, we are in the first loss position; however,the recourse for credit losses is limited to the carrying value of the residualsecurities.

In some cases a portion ofthe retained residual interest is deposited into a net interest margin (“NIM”)security, which enables us to sell some of the future residual cash flows andretain a smaller residual interest (“Back-end NIM Residual”). The holder of theBack-end NIM Residual is in the first loss position; however, the recourse forcredit losses is limited to the carrying value of the Back-end NIM residual.

***Prime Home Equity Loans***

Prime Home Equity Loansare generally pooled into private-label asset-backed securities. We generallysecuritize these loans with limited recourse for credit losses throughretention of residual interests and other subordinated interests, such astransferor’s interests. We, as the holder of the residual interest are in thefirst loss position; however, the recourse for credit losses is limited to thecarrying value 

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of theresidual interest. These securities generally contain credit enhancement in theform of over-collateralization and guarantees provided by a third-party surety.In some cases, the securitizations also contain mortgage pool insurance or alimited corporate guarantee as a form of credit enhancement.

***Nonprime Mortgage Loans***

Nonprime Mortgage Loans are generally pooled intoprivate-label asset-backed securities. We generally securitize these loans withlimited recourse for credit losses through retention of residual interests, thevalue of which ranges from 1.00% to 5.50% 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 havecontained lender-paid mortgage insurance as a form of credit enhancement or alimited corporate guarantee from us. We also have pooled a portion of ourNonprime Mortgage Loans into securities guaranteed by Fannie Mae. In such cases,we have paid Fannie Mae a guarantee fee in exchange for Fannie Mae assuming aportion of the credit risk of the underlying loans.

In some cases a portion of the retained residualinterest is deposited into a net interest margin (“NIM”) security, which enablesus to sell some of the future residual cash flows and retain a smaller residualinterest (“Back-end NIM Residual”). The value of the Back-end NIM Residualsranges from 0.00% to 1.50% of the principal balance of the loans underlying theresidual security. 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 recourse securitization activities islimited to the carrying value of our subordinated interests and to thecontractual limit of reimbursable losses under our corporate guarantees lessthe recorded liability for such guarantees. These amounts are as follows:
|                                                               | ** ** | **December 31,**   | ** ** |
|---------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                    | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                                    | ** ** | **(in thousands)** | ** ** |
| Subordinated Interests:                                       |       |                    |       |   |   |
| Prime home equity residual securities                         |       | $                       | 778,574    |   | $ | 882,139 |   |
| Prime home equity line of credit transferor’s  interests |       | 698,047                 |       | 253,930 |   |
| Nonprime residual securities                                  |       | 401,590                 |       | 527,050 |   |
| Prime residual securities                                     |       | 152,874                 |       | 84,716 |   |
| Subordinated mortgage-backed pass-through securities          |       | 1,382                   |       | 2,059 |   |
|                                                          |       | $                       | 2,032,467  |   | $ | 1,749,894 |   |
| Corporate guarantees in  excess of recorded liability         |       | $                       | 490,542    |   | $ | 349,864 |   |

 

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

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Thetotal credit losses incurred for 2006, 2005 and 2004 related to all of ourmortgage loan sales activities are summarized as follows:
|                                                                     | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                          | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                          | ** ** | **(in thousands)**                     | ** ** |
| Nonprime and  prime securitizations with retained residual interest |       | $                                           | 94,852     |   | $ | 69,269 |   | $ | 43,021 |   |
| Repurchased or  indemnified loans                                   |       | 87,795                                      |       | 31,001 |   | 42,063 |   |
| Prime home equity  securitizations with retained residual interest  |       | 79,357                                      |       | 34,173 |   | 29,370 |   |
| Nonprime  securitizations with corporate guarantee                  |       | 8,494                                       |       | 9,724 |   | 20,039 |   |
| Prime home equity  securitizations with corporate  guarantee        |       | 3,711                                       |       | 10,798 |   | 6,930 |   |
| VA losses in  excess of VA guarantee                                |       | 2,607                                       |       | 1,810 |   | 1,658 |   |
|                                                                |       | $                                           | 276,816    |   | $ | 156,775 |   | $ | 143,081 |   |

 

***Portfolio Lending Activities***

In our Banking Segment,our portfolio of loans held for investment includes mortgage loans originatedor purchased for investment purposes and mortgage loan warehouse lendingadvances. In our Mortgage Banking Segment, loans held for investment includemortgage loans repurchased due to violations of representations and warranties;government-guaranteed or insured loans repurchased from Ginnie Maesecuritizations in lieu of continuing to advance delinquent principal andinterest installments to security holders; and loans transferred from loansheld for sale at the lower of cost or fair value.

*Mortgage LoansOriginated or Purchased for Investment*

Our portfolio of mortgage loans originated orpurchased for investment is held in our Banking Operations. Banking Operationsmanages credit risk through the establishment of underwriting standards, whichinclude assessing both a borrower’s quality and the adequacy of collateralsecuring the loan. The various positive and negative factors presented in aloan application are balanced in the assessment of the acceptability of theloan’s risk to us. For example, a borrower with a very strong credit rating maypresent a superior credit risk, even if the proposed loan includes a highloan-to-value ratio. Conversely, a borrower who presents a weaker creditrating, but who is applying for a loan with a low loan-to value ratio, may alsopresent a positive credit risk.

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OurBanking Operations’ portfolio of loans held for investment is summarized below:
|                                                                                    | ** ** | **December 31, 2006**            | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                         | ** ** | **Unpaid   Principal   Balance** | ** ** | **Average   Note   Rate** | ** ** | **Average   Original   FICO   Score** | ** ** | **Average   Original   Combined   Loan-to-  Value Ratio** | ** ** |
| ** **                                                                         | ** ** | **(dollars in thousands)**       | ** ** |
| Mortgage loans:                                                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Pay-option ARMs                                                                    |       | $                                          | 32,732,581 |   |   | 7.87 | % |   |   | 718 |   |   |   | 78 |   |   |
| Hybrid ARMs                                                                        |       | 14,459,105                                 |       |   | 5.36 | % |   |   | 735 |   |   |   | 80 |   |   |
| HELOCs                                                                             |       | 12,640,039                                 |       |   | 9.49 | % |   |   | 733 |   |   |   | 80 |   |   |
| Fixed-rate seconds                                                                 |       | 7,393,067                                  |       |   | 8.08 | % |   |   | 725 |   |   |   | 82 |   |   |
| Fixed-rate firsts                                                                  |       | 3,338,341                                  |       |   | 5.88 | % |   |   | 724 |   |   |   | 73 |   |   |
| Other ARMs                                                                         |       | 1,235,130                                  |       |   | 8.03 | % |   |   | 733 |   |   |   | 73 |   |   |
| Total mortgage loans                                                               |       | 71,798,263                                 |       |   | 7.58 | % |   |   | 726 |   |   |   | 79 |   |   |
| Warehouse lending  advances secured by mortgage loans                              |       | 690,881                                    |       |   | 6.28 | % |   |   |   |   |   |   |   |   |   |
| Commercial real  estate                                                            |       | 19,413                                     |       |   | 7.42 | % |   |   |   |   |   |   |   |   |   |
| Total loans                                                                        |       | 72,508,557                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Purchase premiums  and discounts and deferred loan origination fees and costs, net |       | 1,201,897                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for  loan losses                                                         |       | (228,692                                   | )          |   |   |   |   |   |   |   |   |   |   |   |   |
| Banking Operations’  portfolio of loans held for investment                   |       | $                                          | 73,481,762 |   |   |   |   |   |   |   |   |   |   |   |   |   |

 

A commonly used measure of consumer creditworthinessis the borrower’s “FICO score,” a measure of borrower creditworthinessdeveloped by Fair Isaac Corporation and used by many lenders, includingCountrywide, to assess a prospective borrower’s credit history and the impactof the prospect’s current borrowing arrangements on their ability to repay aloan. Borrowers can be assigned a FICO score of between 300 (leastcreditworthy) and 850 (most creditworthy) based on their payment history,current indebtedness, length of credit history, recently-established credit andtypes of credit used.

The following is abreakdown of Banking Operations’ portfolio of residential mortgage loans heldfor investment by original FICO score bands:
|                                    | ** ** | **December 31, 2006** | ** ** |
|------------------------------------|------------|---------------------------------|------------|
| **Original FICO Score:** | ** ** | ** **                      | ** ** | **Unpaid Principal   Balance** | ** ** |
| ** **                         | ** ** | **(in thousands)**         | ** ** |
| Below 620                          |       |                            | $          | 159,817 |   |   |
| 620-659                            |       |                            | 3,451,742  |   |   |
| 660-699                            |       |                            | 17,514,622 |   |   |
| 700-759                            |       |                            | 34,714,558 |   |   |
| 760-850                            |       |                            | 15,957,524 |   |   |
|                               |       |                            | $          | 71,798,263 |   |   |
|                                    |            |                                 |            |  |  |  |  |  |

 

As discussed above, we assess a loan’s quality byconsidering the borrower’s credit profile and the quality of collateralsecuring the loan. Where a proposed loan’s combined loan-to-value ratio ishigher than a specified level, which is usually 80% for conventional loans, wegenerally require the borrower to supplement the collateral with primarymortgage insurance. In addition, we have taken steps in recent years to creditenhance our investment loan portfolio by acquiring supplemental mortgageinsurance 

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coverage. Prior to 2006,such coverage provided protection on second lien mortgages only. During 2006,we began purchasing coverage on first lien pay-option ARMs as well. As of December 31,2006, $9.1 billion of Banking Operations’ residential loan portfolio was coveredby supplemental mortgage insurance purchased by the Bank on specified pools ofloans. The maximum coverage available under these policies on a combined basisis $500 million. While these policies provide for first loss coverage, someBank-purchased policies require premium adjustments if claims exceed specifiedlevels. Furthermore, coverage limits vary by policy, with some policies havinglimits at the pool level, and others at the loan level.

Followingis a summary of our Banking Operations’ residential mortgage loans, togetherwith applicable mortgage insurance, by original combined loan-to-value ratio atDecember 31, 2006:

| ** **                                     | ** ** | **December 31, 2006** | ** ** |
|------------------------------------------------|------------|---------------------------------|------------|
| **Original Combined Loan-to-Value:** | ** ** | ** **                      | ** ** | **Unpaid   Principal   Balance** | ** ** | **UPB with   Lender   Purchased   Mortgage   Insurance(1)** | ** ** | **UPB with  Borrower  Purchased  Mortgage  Insurance** | ** ** |
| ** **                                     | ** ** | **(in thousands)**         | ** ** |
| < 50%                                       |       |                            | $          | 3,685,778 |   |   | $ | 365,876 |   | $ | — |   |
| 50.01 – 60.00%                            |       |                            | 3,395,564  |   |   | 216,356 |   | — |   |
| 60.01 – 70.00%                            |       |                            | 8,447,687  |   |   | 584,413 |   | — |   |
| 70.01 – 80.00%                            |       |                            | 24,280,734 |   |   | 2,190,411 |   | — |   |
| 80.01 – 90.00%                            |       |                            | 20,601,596 |   |   | 3,081,523 |   | 2,138,439 |   |
| 90.01 – 100.00%                           |       |                            | 11,336,322 |   |   | 2,658,592 |   | 1,333,421 |   |
| >100.00%                                    |       |                            | 50,582     |   |   | 5,106 |   | 12,088 |   |
|                                           |       |                            | $          | 71,798,263 |   |   | $ | 9,102,277 |   | $ | 3,483,948 |   |
|                                                |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |

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

Subsequent to December 31, 2006, we acquiredadditional policies such that the specific pools of loans aggregating $18.7 billionare covered under supplemental mortgage insurance with a maximum availablecoverage under all polices of $900 million as of February 21, 2007.

Whilewe make loans on a nationwide basis, our portfolio of residential mortgageloans originated for investment purposes is concentrated in the States ofCalifornia, Florida and Virginia at December 31, 2006 as shown in thefollowing table:

| **State**        | ** ** | ** **              | ** ** | **Unpaid Principal  Balance** | ** ** | **% Total  Balance** | ** ** |
|------------------|------------|-------------------------|------------|------------------------------------|------------|---------------------------|------------|
| ** **       | ** ** | **(in thousands)** | ** ** | ** **                         | ** ** |
| California       |       |                    |       |                               |       |                      |       |   |   |
| Southern         |       |                    | $          | 19,638,756                         |       |                      |       | 27 | % |   |
| Northern         |       |                    | 13,272,718 |                               |       |                      | 19         | % |   |
|             |       |                    | 32,911,474 |                               |       |                      | 46         | % |   |
| Florida          |       |                    | 4,292,588  |                               |       |                      | 6          | % |   |
| Virginia         |       |                    | 3,777,253  |                               |       |                      | 5          | % |   |
| All other states |       |                    | 30,816,948 |                               |       |                      | 43         | % |   |
| Total            |       |                    | $          | 71,798,263                         |       |                      |       | 100 | % |   |

 

A significant portion of our loan portfolio consistsof pay-option ARM loans. These loans are different than “traditional” loans inthat they may allow paying less than full interest payments (thereby increasingthe loan balance) in the early periods of a loan’s life. While we believe thatwe have prudently underwritten these loans, such loans present additionalrisks.

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Pay-option ARM 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 after either five or tenyears and again every five years thereafter. Due to the lack of significanthistorical experience at Countrywide, the credit performance of these loans hasnot been established for the Company.

Due to pay-option ARM loans’ amortizationcharacteristics, the loss that the Company would realize in the event ofdefault may be higher than that realized on a “traditional” loan that does notprovide for deferral of a portion of the fully amortizing loan payment.Countrywide’s pay-option ARM loans are designed with features that address therisk of borrower default and the increased risk of loss in the event ofdefault. Specifically, Countrywide’s underwriting standards conform to thoserequired to make the pay-option ARM loans salable into the secondary market atthe date of funding, including a requirement that the borrower meet secondarymarket debt-service ratio tests based on their making the fully amortizing loanpayment assuming the loan’s interest rate is fully indexed. (A fully indexedloan rate equals the sum of the current index rate plus the margin applicableto the loan.) The loans’ terms limit the amount of potential increase of lossin the event of default by restricting the amount of interest that may be addedto the loan’s balance as described in the preceding paragraph.

In addition, weaddress the increased risk through active written communication with ourborrowers including:

·       Brochuresexplaining the loan to prospective borrowers

·       “Welcome”brochures sent to new borrowers informing them of the risk of habitually makingminimum monthly payments

·       Specializedmonthly statements with extensive information on the loan, including a reminderthat making less than the minimum payment can increase the loan’s balance

·       “WarningNotices” to borrowers whose loan balances have increased past certain levels,informing the borrower how much their payment will increase if their paymentpattern continues.

Followingis a summary of Banking Operations’ pay-option ARM loans originated orpurchased for investment purposes: 

| ** **                                                                              | ** ** | **December 31,**   | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                              | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                                                              | ** ** | **(in thousands)** | ** ** |
| Total pay-option  ARM loan portfolio                                                    |       | $                       | 32,732,581 |   | $ | 26,101,306 |   |
| Total principal balance of pay-option ARM loans with  accumulated negative amortization |       | $                       | 28,958,718 |   | $ | 13,963,721 |   |
| Accumulated negative amortization (from original  loan balance)                         |       | $                       | 653,974    |   | $ | 74,748 |   |
| Average original  loan-to-value ratio(1)                                                |       | 75                      | %          | 75 | % |
| Average combined original  loan-to-value ratio(2)                                       |       | 78                      | %          | 78 | % |
| Average original  FICO score(3)                                                         |       | 718                     |       | 720 |   |
| Loans delinquent 90 days  or more                                                       |       | 0.63                    | %          | 0.10 | % |

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

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

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

The increase in delinquency is due to seasoning of thepay-option ARM loan portfolio. Management expects the delinquency rate in theCompany’s pay-option ARM loan portfolio to increase as this product continuesto season.

As discussed in the *Business—Regulation—Interagency Guidance on Residential Mortgage Products* section ofthis Report, pay-option ARM loans are subject to regulatory underwriting andborrower disclosure requirements. The impact of this guidance on the industryand us is uncertain at this time.

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

| ** **                  | ** ** | **December 31, 2006**                  | ** ** | **December 31, 2005**                            | ** ** |
|-----------------------------|------------|--------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                  | ** ** | **Amount**                                       | ** ** | **% of Banking   Operations   Assets** | ** ** | **Amount** | ** ** | **% of Banking   Operations   Assets** | ** ** |
| ** **                  | ** ** | **(dollar amounts in thousands)** | ** ** |
| Nonaccrual loans:           |       |                                             |       |                                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                 |       |                                             | $          | 519,083                                                    |       |   |   | 0.63 | % |   |   | $ | 153,942 |   |   |   | 0.21 | % |   |
| Foreclosed real  estate:    |       |                                             |       |                                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                 |       |                                             | 27,416     |                                                       |       |   | 0.03 | % |   |   | 4,258 |   |   |   | 0.01 | % |   |
| Total  nonperforming assets |       |                                             | $          | 546,499                                                    |       |   |   | 0.66 | % |   |   | $ | 158,200 |   |   |   | 0.22 | % |   |

 

| ** **                              | ** ** | **Amount** | ** ** | **% of   Nonaccrual   Loans** | ** ** | **Amount** | ** ** | **% of   Nonaccrual   Loans** | ** ** |
|-----------------------------------------|------------|------------|------------|----------------------------------------------|------------|------------|------------|----------------------------------------------|------------|
| Allowances for credit  losses:          |       |       |       |                                         |       |       |       |                                         |       |   |   |   |   |   |   |   |   |
| Allowance for  loan losses:             |       |       |       |                                         |       |       |       |                                         |       |   |   |   |   |   |   |   |   |
| Residential                             |       |       | $          | 228,692                                      |       |       |       | 44.06                                        | %          |   |   | $ | 102,757 |   |   |   | 66.75 | % |   |
| Liability for unfunded loan commitments |       |       | 8,104      |                                         |       |       |       |                                         |       |   | 9,391 |   |   |   |   |   |   |
| Total allowances for  credit losses     |       |       | $          | 236,796                                      |       |       |       | 45.62                                        | %          |   |   | $ | 112,148 |   |   |   | 72.85 | % |   |

 

| ** **          | ** ** | **Year Ended   December 31, 2006** | ** ** | **Year Ended   December 31, 2005**                                                                                                                                | ** ** |
|---------------------|------------|--------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **          | ** ** | **Amount**                                             | ** ** | **Net Charge-offs   as % Average   Investment           Loans        ** | ** ** | **Amount** | ** ** | **Net Charge-offs   as % Average   Investment           Loans        ** | ** ** |
| Net charge-offs:    |       |                                                   |       |                                                                                                                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Banking  Operations |       | $                                                      | 33,718     |                                                                                                                                                                                  |       | 0.05 | % |   |   | $ | 6,779 |   |   |   | 0.01 | % |   |
|                     |            |                                                        |            |                                                                                                                                                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The increase in our nonperforming assets and theincrease in the allowance for loans losses from 2005 reflect prevailing realestate market and economic conditions and the growth and seasoning of ourinvestment loan portfolio. We expect the level of nonperforming assets andcredit losses to increase, both in absolute terms and as a percentage of ourloan portfolio as our loan portfolio continues to season and as current marketconditions develop. However, we believe that our investment criteria haveprovided us with a high quality investment portfolio and that our credit lossesshould stay within acceptable levels. We also 

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believe our allowances andprovisions for credit losses are adequate pursuant to generally accepted accountingprinciples.

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

***Mortgage Warehouse Lending Advances***

We hold a portfolio ofcommercial loans made to other mortgage lenders to finance their inventoriespending sale to Countrywide and other lenders. The average loan balance was $22.8 millionat December 31, 2006. These loans are underwritten by assessing thecreditworthiness of the borrowers. The borrowers’ ability to repay their loansis assessed by reviewing both borrower-provided financial information andpublicly available credit rating information and press coverage, as well asupdating operational controls, product risk and assessments of collateral. Wemonitor the length of time that advances are outstanding against specific loansand may require the borrower to pay off aged advances. We also monitor the fairvalue of our collateral to ensure that the level of collateral posted isadequate to repay our advance in the event of default by our borrower and wemay require our warehouse lending borrowers to post specified levels of cashcollateral to supplement the mortgage loan collateral. We also regularly reviewupdated financial information of borrowers, including pipeline and hedgingpositions.

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

Other loans held forinvestment are held in our Mortgage Banking Segment and include loans we haverepurchased—either to remedy a violation of a representation or warranty madein a loan sale, to minimize the cost of servicing a severely delinquent loaninsured or partially guaranteed by the FHA or VA or in connection with aclean-up call. We make provisions for losses that may arise from breaches ofrepresentations and warranties when we record the sale of these loans and weadjust our estimates for losses on these loans quarterly. We record such loansat fair value when they are repurchased and any resulting loss is chargedagainst the liability we established when the loans were sold. In addition, wemay determine that a small percentage of the loans that we originate orpurchase for sale will not be sold because of a defect, which may include adocument deficiency or deterioration of the credit status of the loan while itwas held for sale.  Such loans aretransferred to the held for investment category at the lower of cost or fairvalue and any loss is recorded as a component of gain on sale of loans orsecurities in current period earnings. Subsequent losses that may result fromdeteriorations in the credit quality of the loans are included in our provisionfor loan losses.

***Mortgage Loans Held for Sale***

At December 31, 2006, mortgage loans held forsale amounted to $31.3 billion. While the loans are in inventory of theMortgage Banking and Capital Markets Segments, we bear credit risk after takinginto consideration primary mortgage insurance (which is generally required forconventional loans with a loan-to-value ratio greater than 80%), FHA insuranceor VA guarantees. These loans are carried at lower of cost or market value,which incorporates a reduction in value for impaired loans.

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

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

| ** **                                                         | ** ** | **December 31, 2006**                  | ** ** | **December 31, 2005** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                         | ** ** | **Amount**                                       | ** ** | ** **                      | ** ** | **Amount** | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | **(dollar amounts in thousands)** | ** ** |
| Non-accrual loans(1)(2):                                           |       |                                             |       |                            |       |   |   |   |   |   |   |   |   |
| Residential                                                        |       |                                             |       |                            |       |   |   |   |   |   |   |   |   |
| Loans held for investment-credit risk   retained by Countrywide(3) |       |                                             | $          | 158,802                         |       |   |   |   |   | $ | 160,364 |   |   |   |   |
| Commercial                                                         |       |                                             | —     |                            |       |   |   |   | — |   |   |   |   |
| Total non-accrual loans                                            |       |                                             | 158,802    |                            |       |   |   |   | 160,364 |   |   |   |   |
| Foreclosed real estate:                                            |       |                                             |       |                            |       |   |   |   |   |   |   |   |   |
| Other                                                              |       |                                             |       |                            |       |   |   |   |   |   |   |   |   |
| Residential                                                        |       |                                             | 223,747    |                            |       |   |   |   | 106,241 |   |   |   |   |
| Commercial                                                         |       |                                             | —     |                            |       |   |   |   | — |   |   |   |   |
| Total foreclosed real estate                                       |       |                                             | 223,747    |                            |       |   |   |   | 106,241 |   |   |   |   |
| Total  nonperforming assets                                        |       |                                             | $          | 382,549                         |       |   |   |   |   | $ | 266,605 |   |   |   |   |

 

| ** **                      | ** ** | **Amount** | ** ** | **% of   Nonaccrual   Loans** | ** ** | **Amount** | ** ** | **% of   Nonaccrual   Loans** | ** ** |
|---------------------------------|------------|------------|------------|----------------------------------------------|------------|------------|------------|----------------------------------------------|------------|
| Allowances for loan  losses(4): |       |       |       |                                         |       |       |       |                                         |       |   |   |   |   |   |   |   |   |
| Residential                     |       |       | $          | 19,524                                       |       |       |       | 12.29                                        | %          |   |   | $ | 73,606 |   |   |   | 45.90 | % |   |
| Commercial                      |       |       | 12,838     |                                         |       |       | N/M        |                                         |       |   | 12,838 |   |   |   | N/M |   |   |
|                            |       |       | $          | 32,362                                       |       |       |       | N/M                                          |       |   |   | $ | 86,444 |   |   |   | N/M |   |   |

 

| ** **                         | ** ** | **Year Ended   December 31, 2006** | ** ** | **Year Ended  December 31, 2005**                                | ** ** |
|------------------------------------|------------|--------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **Amount**                                             | ** ** | **Net Charge-offs  as % Average   Investment   Loans** | ** ** | **Amount** | ** ** | **Net Charge-offs  as % Average   Investment   Loans** | ** ** |
| Net charge-offs:                   |       |                                                   |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Mortgage  Banking & Other |       | $                                                      | 123,124    |                                                                            |       | 2.78 | % |   | $ | 18,394 |   |   | 0.29 | % |   |
|                                    |            |                                                        |            |                                                                                 |            |  |  |  |  |  |  |  |  |  |  |

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(1)          Excludes$1,088.5 million and $553.0 million, at December 31, 2006 and 2005, respectively,of government-insured loans eligible for repurchase which are required to beincluded in our balance sheets but which we have not exercised the option torepurchase.

(2)          Excludesnonaccrual loans that are carried on the consolidated balance sheet at thelower of cost or fair value and government-guaranteed loans held forinvestment, as shown below:
|                                                   | ** ** | **December 31,**   | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|
| ** **                                        | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                        | ** ** | **(in thousands)** | ** ** |
| Loans held for sale                               |       | $                       | 566,610    |   | $ | 388,896 |   |
| Government guaranteed  loans, held for investment |       | 334,465                 |       | 547,834 |   |
|                                              |       | $                       | 901,075    |   | $ | 936,730 |   |

 

(3)          Generally these loanshave been repurchased and recorded at fair value or transferred to held forinvestment at lower of cost or fair value. Fair values incorporate the impairedstatus at the date of repurchase of the loans. Losses related to subsequentdeterioration in the credit quality of the loans are recorded in the allowancefor loan losses.

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(4)          Theallowance for loan losses excludes any reduction to the cost basis of loansrecorded to reflect fair value at repurchase or transfer to held forinvestment.

The decrease in theallowance for loan losses from 2005 is due mainly to a reduction in theallowance requirements for loans held for investment in the Mortgage BankingSegment. The reduction in the allowance requirements in the Mortgage BankingSegment is the result of liquidation or write-down and transfer of loans toheld for sale as evidenced by the increase in charge-offs during 2006.  As of December 31, 2006, the majority ofthe loans held for investment had charge offs that were recorded in 2006, reflectingcredit impairment included in their carrying values. As a result, the allowancefor credit losses as a percentage of nonperforming assets decreased from 2005to 2006.

***Mortgage Reinsurance***

We provide mortgagereinsurance on certain mortgage loans included in our servicing portfoliothrough contracts with several primary mortgage insurance companies. Underthese contracts, we provide aggregate excess loss coverage in a mezzanine layerin exchange for a portion of the pools’ mortgage insurance premium. As of December 31,2006, approximately $90.0 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, 2006, themaximum aggregate losses under the reinsurance contracts were limited to $854.6million. We are required to pledge securities to cover this potential liability.For the years ended December 31, 2006 and 2005, we did not experience anylosses under our reinsurance contracts. We recorded provisions for lossesrelated to this activity of $35.8 million, $30.8 million and $41.5 million in2006, 2005 and 2004, respectively. The accumulated liability recorded forestimated reinsurance totaled $156.2 million and $120.5 million at December 31,2006 and 2005, respectively.

***Counterparty Credit Risk***

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

Theaggregate amount of counterparty credit exposure after consideration ofrelevant netting agreements at December 31, 2006, before and aftercollateral held by us, was as follows:
|                                                   | ** ** | **December 31,**  | ** ** |
|---------------------------------------------------|------------|------------------------|------------|
| ** **                                        | ** ** | **2006**               | ** ** | **2005** | ** ** |
| ** **                                        | ** ** | **(in millions)** | ** ** |
| Aggregate credit  exposure before collateral held |       | $                      | 1,580      |   | $ | 936 |   |
| Less: collateral held                             |       | (1,003                 | )          | (519 | ) |
| Net aggregate unsecured credit exposure           |       | $                      | 577        |   | $ | 417 |   |

 

For the years ended December 31,2006, 2005 and 2004 we incurred no credit losses due to non-performance of anyof our counterparties.

***Operational Risk***

All businesses faceoperational risk, which is the risk of loss from inadequate or failed internalprocesses, people, and systems or from external events. CFC categorizesoperational risk into the areas of human resources, vendor management, custodyof assets, accounting and financial disclosure, technology, 

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physicalsecurity, natural hazard and environment, fraud and embezzlement (internal andexternal), political and governmental affairs, modeling, compliance, regulatoryand governance. CFC has documented its operational risks and correspondingcontrols in its proprietary risk and control assessment system. Currently 9,000operational risks and 29,000 corresponding controls are documented in thissystem. This information is utilized by executive officers and appropriategovernance groups within the Company for ongoing risk assessment, monitoring,testing and review. Responsibility for operational risk identification andmanagement is assigned to each of our business units with centralized corporateoversight and support. Operational risk management is embedded 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 and evaluation of internal controls is conducted on a sample basis byour internal audit function

·       Reviewof corporate processes and operational risks (including the sufficiency ofgovernance structures to mitigate those risks) is conducted by an independententerprise risk assessment function

·       Staffis dedicated to specific areas of key operational risk mitigation, such as adisaster recovery, central compliance oversight and fraud risk management

·       Oversightof operational risk on an enterprise-wide basis is conducted by Countrywide’sOperational Risk Committee comprised of senior CFC executives; a risk managers’roundtable comprised of divisional operation risk managers; and on a divisionalbasis, by business unit risk committees comprised of the business unit’sleaders and risk managers

·       Theprocesses supporting our key business activities are evaluated and redesignedas needed in a structured manner that minimizes errors and improves efficiency

·       A corporate expectation ofethical behavior is set with a formalized code of ethics, mandatory annualcompliance training, provision for anonymous reporting of suspected breaches ofcorporate ethics, and independent monitoring by and reporting of allegedbreaches of corporate ethics to the Audit and Ethics Committee of the Board ofDirectors.

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**Loan Servicing**

Thefollowing table sets forth certain information regarding our servicingportfolio of single-family mortgage loans, including loans held for sale, loansheld for investment and loans serviced under subservicing agreements, for theperiods indicated.
|                                                 | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(in millions)**                      | ** ** |
| Beginning owned  servicing portfolio            |       | $                                           | 1,081,189  |   | $ | 821,475 |   |
| Add: Residential loan  production(1)            |       | 456,949                                     |       | 494,380 |   |
|   Purchased  MSRs (bulk acquisitions) |       | 15,781                                      |       | 51,377 |   |
| Less: Principal  repayments                     |       | (273,800                                    | )          | (284,924 | ) |
|   Servicing  sold                     |       | —                                      |       | (1,119 | ) |
| Ending owned servicing  portfolio               |       | 1,280,119                                   |       | 1,081,189 |   |
| Subservicing portfolio                          |       | 18,275                                      |       | 29,901 |   |
| Total servicing  portfolio                      |       | $                                           | 1,298,394  |   | $ | 1,111,090 |   |
| MSR portfolio                                   |       | $                                           | 1,174,874  |   | $ | 979,207 |   |
| Mortgage loans owned                            |       | 105,245                                     |       | 101,982 |   |
| Subservicing portfolio                          |       | 18,275                                      |       | 29,901 |   |
| Total servicing portfolio                       |       | $                                           | 1,298,394  |   | $ | 1,111,090 |   |

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

| ** **                                               | ** ** | **December 31,**                      | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| ** **                                               | ** ** | **(dollar amounts in millions)** | ** ** |
| Composition of owned servicing portfolio at period  end: |       |                                       |       |   |   |
| Conventional mortgage                                    |       | $                                          | 1,063,141  |   | $ | 861,926 |   |
| Nonprime Mortgage                                        |       | 116,270                                    |       | 116,101 |   |
| Prime Home Equity                                        |       | 47,628                                     |       | 53,253 |   |
| FHA-insured mortgage                                     |       | 39,011                                     |       | 36,949 |   |
| VA-guaranteed mortgage                                   |       | 14,069                                     |       | 12,960 |   |
| Total owned portfolio                                    |       | $                                          | 1,280,119  |   | $ | 1,081,189 |   |
| Delinquent mortgage loans(1):                            |       |                                       |       |   |   |
| 30 days                                                  |       | 2.95                                       | %          | 2.59 | % |
| 60 days                                                  |       | 0.98                                       | %          | 0.87 | % |
| 90 days or more                                          |       | 1.09                                       | %          | 1.15 | % |
| Total delinquent  mortgage loans                         |       | 5.02                                       | %          | 4.61 | % |
| Loans pending foreclosure(1)                             |       | 0.65                                       | %          | 0.44 | % |
| Delinquent mortgage loans(1):                            |       |                                       |       |   |   |
| Conventional                                             |       | 2.76                                       | %          | 2.60 | % |
| Nonprime Mortgage                                        |       | 19.03                                      | %          | 15.20 | % |
| Prime Home Equity                                        |       | 2.93                                       | %          | 1.57 | % |
| Government                                               |       | 13.94                                      | %          | 14.61 | % |
| Total delinquent  mortgage loans                         |       | 5.02                                       | %          | 4.61 | % |
| Loans pending foreclosure(1):                            |       |                                       |       |   |   |
| Conventional                                             |       | 0.31                                       | %          | 0.20 | % |
| Nonprime Mortgage                                        |       | 3.53                                       | %          | 2.03 | % |
| Prime Home Equity                                        |       | 0.12                                       | %          | 0.06 | % |
| Government                                               |       | 1.28                                       | %          | 1.09 | % |
| Total loans pending foreclosure                          |       | 0.65                                       | %          | 0.44 | % |

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

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We attribute the overallincrease in delinquencies in our servicing portfolio primarily to portfolioseasoning, changing economic and housing market conditions and increaseddelinquency in the loans in hurricane-affected areas, which contributed 9 basispoints to the increase. In addition, changing borrower profiles and highercombined loan-to-value ratios contributed to the increased nonprimedelinquency. We believe the delinquency rates in our servicing portfolio areconsistent with rates for similar mortgage loan portfolios in the industry.

**Inflation**

Our operations that wouldbe most significantly impacted by an increase in inflation are our MortgageBanking and Capital Markets Segments. Interest rates normally increase duringperiods of rising inflation. Historically, as interest rates increase, mortgageloan production decreases. An environment of gradual interest rate increasesmay, however, signify an improving economy or increasing real estate values,which in turn may stimulate increased home buying activity. Generally, in suchperiods of reduced mortgage loan production, the associated profit margins alsodecline due to increased competition among mortgage loan originators and tohigher unit costs, thus further reducing our loan production earnings. Conversely,in a rising interest rate environment, our loan servicing earnings generallyincrease because mortgage prepayment rates tend to slow down, thereby extendingthe average life of our servicing portfolio and related MSRs. Within ourbroker-dealer operations, rising interest rates generally lead to a reductionin trading and underwriting activities in its primary niche, the mortgagesecurities market.

**Seasonality**

The mortgage bankingindustry is generally subject to seasonal trends, reflecting the pattern in thenational housing market. Home sales typically rise during the spring and summerseasons and decline during the fall and winter seasons. Seasonality has less ofan effect on mortgage refinancing activity, which is primarily driven byprevailing mortgage rates. In addition, mortgage delinquency rates typicallyrise temporarily in the winter months, driven by mortgagor payment patterns.

**Liquidity andCapital Resources**

We meet our financing requirements using a combinationof debt and equity capital. Our short-term financing needs arise primarily fromour holding of mortgage loans pending sale, our warehouse lending business andthe trading activities of our broker-dealer. Our long-term financing needsarise primarily from our investments in our mortgage loan portfolio, MSRs andretained interests and the financial instruments acquired to manage theinterest rate risk associated with those investments. The structure and mix ofour debt and equity capital are primarily driven by our strategic objectivesbut are also influenced by regulatory and credit rating agency requirements.These requirements effect the type of financing we are able to obtain and therate at which we are able to grow.

Our primary sources of debt include the publiccorporate debt markets, the FHLB, the secondary mortgage market, repurchaseagreements and deposits taken by our Bank. Our primary source of equity capitalis retained earnings. We also have $2.2 billion outstanding in juniorsubordinated debentures that receive varying degrees of “equity treatment” fromrating agencies, bank lenders and regulators. In addition, we have a $5.3billion deferred tax liability related to our MSRs that would offset a portionof any potential loss in the value of our MSRs, and which is generally offsetagainst our MSRs in determining our capital requirements. From time to time, wemay issue common stock, subordinated debt or other high-equity contentsecurities as a means of increasing our capital base and supporting our growth.

On November 9, 2006,in connection with a share repurchase program authorized by our Board ofDirectors, we entered into an agreement to purchase 38.6 million shares of ouroutstanding common stock for an aggregate purchase price of $1.5 billion underan accelerated share repurchase program. The 

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transactionis subject to a market price adjustment payment based on the actualvolume-weighted average price of our common stock during the repurchase period.The price adjustment payment will be settled, at our election, in our commonstock or cash. The final settlement is expected to occur in the second quarterof 2007.

***Liquidity Management***

Liquidity risk is the risk that we will be unable tomeet our obligations as they come due because of an inability to liquidateassets or obtain adequate funding without significantly lowering market pricesbecause of inadequate market depth or market disruptions. We have developed acomprehensive Liquidity Management Plan (“LMP”) to moderate this risk andensure that we maintain adequate, appropriate and cost-effective sources ofliquidity under all market conditions.

A key element of the LMP is to finance our assets in amanner consistent with their liquidity profile. Liquid assets are those thatcan be liquidated within 30 days under all market conditions either by sale (atprices no less than values reported on our balance sheet prepared in accordancewith generally accepted accounting principles) or are readily able to befinanced. These assets primarily consist of mortgage loans held for sale,warehouse advance lines and trading securities. Liquid assets are financedusing a combination of committed and uncommitted warehouse financing programsincluding unsecured commercial paper, asset-backed commercial paper, federalfunds, repurchase agreements and short-term deposits.

Less liquid assets are those that are not readilysaleable into active markets. These assets primarily consist of mortgage loansheld for investment, MSRs and retained interests. Less liquid assets arefinanced with long-term capital, which we define for this purpose as equity anddebt, including long-term deposits, with a maturity greater than six months.

Another key component of the LMP is the minimizationof refinancing risk. To that end, we manage our long-term public debtmaturities (debt maturing after six months) and committed credit facilityexpirations to limit the amount maturing in any given month. We also manage thetiming of our short-term debt maturities to limit the amount maturing on anygiven day. We diversify our financing programs, credit providers, dealers anddebt investors to reduce reliance upon any one source of liquidity. Finally, weassess all sources of financing based upon their reliability, recognizing thatcertain of our financing programs are sensitive to temporary market disruptionsand therefore may not always be available to us. To moderate that risk, we paycommitment fees to some of our creditors to ensure access to certain fundsregardless of market conditions.

To ensure compliance with the LMP, CHL, CSC, andCountrywide Bank are required to maintain adequate liquidity to operate in anormal environment, maintain adequate contingent liquidity regardless ofconditions and to diversify funding sources. Each business unit has detailed metricswhich are appropriate to its business line. The metrics are compared withactual performance positions and reported to executive management monthly.

We regularly forecast our potential funding needs overa rolling twelve-month horizon, taking into account debt maturities andpotential peak balance sheet levels under several interest rate scenarios. Wealso forecast our potential funding needs in various stress scenarios todetermine our contingent liquidity needs. Based on these forecasts, we size ourexisting financing programs and, if necessary, establish new ones to meetexpected future funding requirements. The forecasts are also used to size ourcontingent liquidity sources, which are credit facilities or financing programsunder which our creditors are committed to fund. Our sources of contingentliquidity include committed unsecured credit lines, committed revolvingmortgage purchase agreements and secured FHLB advances.

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At December 31, 2006,we had $96.4 billion in available sources of secured and unsecured short-termliquidity, of which $66.9 billion is committed and therefore considered asource of contingent liquidity. We also had $14.4 billion of availableborrowing capacity at the FHLB. Our long-term debt typically consists ofunsecured debt issued in the public corporate debt markets and secured termadvances (maturities greater than one year) from the FHLB. At December 31,2006, we had $21.7 billion in unsecured long-term debt and $28.2 billion ofsecured term FHLB advances outstanding. See Note 15—*NotesPayable* in the financial statement section of this Report foradditional descriptions of our committed financing programs.

***Unsecured 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 unsecured medium-termnotes. We also have issued unsecured subordinated debt, convertible debt andjunior subordinated debentures. At December 31, 2006, we had a total of$26.2 billion 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 investment-grade credit ratings over the past 14 years.In 2005, we sought and received investment-grade credit ratings for CountrywideBank as well. Given our current ratings, we generally have deep access to thepublic corporate debt markets. Current credit ratings are as follows:

| ** **                      | ** ** | **Countrywide  Financial Corporation** | ** ** | **Countrywide  Home Loans** | ** ** | **Countrywide  Bank** | ** ** |           |
|---------------------------------|------------|---------------------------------------------|------------|----------------------------------|------------|-----------------------|------------|----------------|
| **Rating Agency**          | ** ** | ** **                                  | ** ** | **Short-Term**                   | ** ** | **Long-Term**         | ** ** | **Short-Term** | ** ** | **Long-Term** | ** ** | **Short-Term** | ** ** | **Long-Term** | ** ** |
| Standard &  Poors      |       |                                        | A-1        |                             |       |                  | A          |           |   |   | A-1 |   |   |   | A |   |   |   | A-1 |   |   |   | A |   |   |   |
| Moody’s Investors  Service |       |                                        | P-2        |                             |       |                  | A3         |           |   |   | P-2 |   |   |   | A3 |   |   |   | P-2 |   |   |   | A3 |   |   |   |
| Fitch                           |       |                                        | F1         |                             |       |                  | A          |           |   |   | 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 stand-bylines of credit provided by highly-rated banks. We must also maintain aconservative capital structure. To mitigate the risk of ratings downgrades, wemaintain an active dialogue with all three rating agencies, meeting throughoutthe year to review operational and financial performance and to addressspecific areas of focus.

In the event our creditratings 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 the event of a ratingsdowngrade below investment grade, we could be required to rely upon alternativenon-public sources of financing, such as bank lines, increased FHLB advancesand private debt placements (secured and unsecured). Furthermore, we wouldlikely be unable to retain all of our existing bank credit commitments beyondthe then-existing maturity dates. As a consequence, our cost of financing wouldrise significantly and we may be required to curtail some of ourcapital-intensive activities, such as our ongoing investment in our portfolioof mortgage loans held for investment, MSRs and retained interests. On theother hand, given the highly liquid nature of our mortgage inventory andbroker-dealer trading portfolio, we would likely be able to arrange securedfinancing for such assets. Over the long-term, however, it would be difficultfor us to compete effectively without investment-grade ratings. Managementbelieves the likelihood of a reduction in our credit ratings to belowinvestment grade in the foreseeable future is remote.

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***Asset-Backed Commercial Paper Market***

An important source offunding for us is the asset-backed commercial paper market. This form offinancing generally involves the temporary transfer of legal ownership ofassets to a separate legal entity (conduit) in exchange for short-termfinancing. Some financing programs have commercial bank sponsors that providesome form of liquidity support and/or credit enhancement such as back-up linesof credit. Other programs rely on market value swap contracts under whichcommercial banks provide protection against interest-rate driven declines invalues of assets transferred to a conduit. Investors that purchase secureddebt, typically commercial paper, issued by these conduits look primarily tothe collateral’s asset value to ensure repayment, rather than to the creditstanding of the company that utilizes the conduit for financing. As such, wehave been able to structure such programs so that they carry the highestshort-term credit ratings of A-1+/P-1 which allows us to achievelower funding costs. We have used this market primarily to finance asignificant portion of our mortgage loan inventory held for sale. We use suchprograms as a cost-effective means to expand and diversify our sources ofliquidity. At December 31, 2006, we had borrowed a total of$9.9 billion through such asset-backed financing programs.

***Federal Home Loan Bank Advances***

Our Bank is a member of the FHLB of Atlanta and isable to participate in certain member financing programs. Under these programs,we typically pledge a security interest in certain mortgage loans to the FHLB inexchange for financing. The amount the FHLB advances against the collateralvaries depending on the lien status of the mortgages securing the advance. TheFHLB also requires that we purchase a certain percentage of its stock for everydollar we borrow. Our current stock purchase requirement is 4.5% of totaloutstanding FHLB advances.

Our FHLB advancesgenerally have maturities of 1-3 years, consistent with the weightedaverage expected life of our mortgage loans held for investment. Our access tosuch financing is limited to no more than 50% of our Bank’s ending assets forthe prior month. The FHLB’s financing support is uncommitted and requests foradditional advances are evaluated at the time they are received. While wenormally consider uncommitted financing programs to be less reliable sources offunding, given the FHLB’s status as a government sponsored entity and itsmandate to provide a stable source of funds to support the residential mortgagemarket, we classify FHLB advances as a highly reliable source of contingentliquidity.

***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 MBS and ABS. Significant portions of the MBSwe sell are guaranteed 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 and ABS are registered with the SEC and have separate creditratings. Private-label MBS and ABS generally require some form of creditenhancement, such as over-collateralization, senior-subordinated structures,primary mortgage insurance, Countrywide guarantees and/or private suretyguarantees.

Our strategy is to ensureour ongoing access to the secondary mortgage market by consistently producingquality mortgages and servicing those mortgages at levels that meet or exceedsecondary mortgage market standards. We are focused on ensuring the quality ofour mortgage loan production and we make significant investments in personneland technology to support the quality of our mortgage loan production.

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***Repurchase Agreements***

We also use short-termrepurchase agreements as a means of financing securities and mortgage loanspending sale. Although this method of financing is uncommitted and short-termin nature, it has proven to be a reliable and cost-effective financingalternative.

***Deposit Liabilities***

We offer both retail andcommercial deposit accounts which provide another source of liquidity to us.These deposits are sourced through our banking centers, call centers, onlineand through deposit brokers. As of December 31, 2006, our deposit balanceswere $55.6 billion, $23.3 billion of which were custodial funds that relate toour loan servicing portfolio. A significant portion of our deposits are stableand are therefore considered to be core deposits.

***Capital Management***

Our capital managementframework is designed to ensure that the risk-taking activities by our businessare supported by an adequate capital base, consistent with approved investmentguidelines and risk tolerances. Our capital adequacy monitoring givesconsideration to regulatory and rating agency requirements and to our estimatedeconomic capital requirements.

***Economic Capital***

We currently use economic capital concepts for assessingsafety and soundness of the entire Company. We have integrated economic capitalinto business segment performance assessments. Business segment economiccapital calculations ensure that the capital allocations are consistent, elicitdisciplined risk taking, and facilitate business segment performancecomparisons by senior management. Where possible, we have made conservativechoices in our economic capital estimates; for example, market risk capitalcovers risks over time horizons longer than needed for risk management.

We define economic capital as the amount of capitalrequired to absorb unexpected losses given our risk profile and risk managementstrategies. We estimate unexpected losses based on the level of losses that weare likely to incur in severe scenarios. We establish the severity of thescenarios based on our risk tolerances and target credit ratings for publicdebt market access (“debt market access standards”).

For unhedged risks, our capital adequacy is assessed atthe consolidated level, and take into account certain offsettingdiversification benefits that arise across risks and business lines, where thebenefits are determined to be robust. We continue to refine our economiccapital calculations and improve our estimates of required capital. Weemphasize a comprehensive measurement of company-wide hedged and un-hedgedrisks within the context of maintaining approved debt market access targets inour capital adequacy measurement processes.

Our estimates of economic capital rely on acombination of internally developed risk measurement methods, external modelsand benchmarks. We measure and hold economic capital for the following primaryrisks: credit, market, operational, insurance and modeling.

Credit risk:   Thisis risk of loss due to borrower defaults or declines in value due to changes incredit conditions. Credit capital is calculated at debt market access standardsfor the unexpected losses in excess of those we have provided for in our assetvaluations and reserve calculations. Our credit risk loss estimation processconsiders the seasoning profile of our assets with credit risk to ensurecapital sufficiency through the business cycle. Estimates of credit capital aredeveloped separately for retail mortgage, commercial mortgage and counterpartyexposures. The amounts outstanding at the time of default (exposures atdefault) are constructed using a combination of historical data and forwardsimulation 

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techniquesand include the use of rating agency models that are broadly used in themortgage-backed securities market. We estimate our credit risk as follows:

·       Retailcredit risk:   We base our estimates of credit risk on projections frominternal data and external models. We estimate subordination levels on thecredit portfolio using rating agency models and review subordination levels onmarket transactions to determine the required capital. We also review lossdevelopment under various stress scenarios to ensure adequacy of the capitalrequirement.

·       Commercialcredit risk:   We base our estimates of credit risk on internal data andbenchmarks derived from market transactions.

·       Counterpartycredit risk:   For non-derivative counterparty exposures, we base ourestimates of credit risk on our internal risk evaluation assignments andcapital assessments by type of exposure mapped to rating agency-style scales.We estimate our capital requirement for derivative counterparty exposures usinga similar process as well as calculating current and potential exposureestimates using projected movements in underlying market rates.

Market risk:   Marketrisk is the risk of loss in value due to variations in underlying marketvariables such as the yield curve and market prices, which for us ispredominately interest rate driven. We assess capital separately for ourtrading financial instruments, which includes the activities of CSC, and thenon-trading financial instruments by computing estimates of market value lossover a one-year horizon at a confidence level consistent with our debt marketaccess standards. Our assessments take into consideration the probabilities oflarge movements in underlying driver variables over the one year horizon. Ourestimates of value loss are calculated using internally developed andexternally sourced risk measurement technologies. Risk measurement focuses onestimating the extent of un-hedged risks. Market value changes are alsodeveloped using plausible but unlikely scenarios and these scenarios are givenconsideration in the assessment of our market risk capital requirements.

·       Tradingfinancial instruments:   We use a value-at-risk measurement to estimate thepotential loss in market value of an asset to a 99% confidence level. Ourvalue-at-risk measure facilitates comparisons of our market risk exposureestimates and our daily trading results over time. We use back-testing in ourtrading unit to verify the predictive power of our value-at-risk calculations.In the back-testing procedures, we compare actual profits and losses againstlosses indicated by the estimates from our value-at-risk model. During calendaryear 2006, we had no back-testing exceptions.

·       Non-tradingfinancial instruments:   We compute the aggregate market risk exposure forour non-trading financial instruments by developing a detailed representationof our positions, and identification and modeling of the driver variables. Wecalculate market risk capital for the aggregated non-trading book by computingthe equivalent of a one-year value-at-risk loss estimate consistent with debtmarket access standards. For risk management purposes, value-at-risk lossmeasurements are computed over monthly horizons and a market risk profile consistentwith desired debt market access standards is maintained. During calendar year2006, the Company’s year value-at-risk loss estimates were well within theoperating limits. We look at the sensitivity of the non-trading financialinstruments in a variety of parallel and historical scenarios to assess thevulnerabilities in the risk profile.

·       StressTesting:   While our value-at-risk estimate supplies forecasts forpotentially large losses under normal market conditions, we also perform stresstests in which we value the portfolios under stylized economic scenarios of thedriver risk variables outside the value-at-risk models. We use market riskinformation provided by the stress scenarios to adjust our economic capitalrequirements as needed. We develop the stress scenarios using historicalinformation and 

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management judgment. Westylize the stress scenarios regularly for our trading and non-tradingfinancial instruments.

Operational risk:   Operational risk is the riskof loss due to inadequate or failed processes or systems. We have begun theprocess of collecting loss data for the development of our economic capitalrequirement, which is not yet complete. Until we complete the development ofour operational loss estimation models, we are basing our estimates of requiredcapital on the basic indicator approach described in the international Basel IIaccord.

A significant proportion of our risk managementstrategies and risk evaluation rely on internally developed and externallyprocured models. Further, in certain areas of our risk management we use modelsto establish strategies aimed at eliminating much of the risk due tofluctuations in market factors. Thus we have significant exposure to the riskthat our models may be inaccurate and therefore expose us to loss. We managemodel risk throughout Countrywide using a variety of techniques including:independent reviews of model documentation and appropriateness at the time ofmodel development and introduction; ongoing model monitoring through backtesting and validation, and benchmarking to peer models. Ongoing modelperformance results are reviewed at governance forums attended by modeldevelopers and users of the models. At present, we assess model risk capital atthe consolidated level.

Insurance risk:   Insurance risk arises fromunexpectedly high payouts on insurance liabilities. Our insurance operationsare exposed to a variety of risks including operational, market, counterpartyand catastrophic risks. These risks arise due to our underwriting activities,portfolio investments, re-insurance transfers and exposure to catastrophicnatural disasters. The bulk of the capital allocated to the insurance businessis to cover catastrophic risks, the largest component of which is hurricanerisk. Our insurance operations partially manage the risks by reinsuringportions of the risks. The reinsurance activities are considered whileassessing allocated capital requirements. 

Creditcapital scenario analysis:   We use scenario and stress analyses to assessportfolio vulnerabilities and to complement economic capital results. Forcredit exposures, we maintain a credit risk profile that has been developed tohelp ensure that instantaneous erosions of housing equity, or a similar shockscenario, does not lead to increases in credit capital beyond established risktolerances. These equity erosion tests provide valuable information about a keysource of risk exposure for the Company. 

Ourestimates of aggregate economic capital are lower than the current capitalrequirements of the rating agencies, which are generally our operative capitalrequirement at this time.

***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.

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AtDecember 31, 2006 and 2005, the Company’s and the Bank’s regulatorycapital ratios and amounts and minimum required capital ratios for each entityto maintain a “well capitalized” status were as follows:

| ** **               | ** ** | **December 31, 2006**                  | ** ** |
|--------------------------|------------|--------------------------------------------------|------------|
| ** **               | ** ** | **Minimum**                                      | ** ** | **Countrywide Financial  Corporation** | ** ** | **Countrywide Bank** | ** ** |
| ** **               | ** ** | **Required(1)**                                  | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** |
| ** **               | ** ** | **(dollar amounts in thousands)** | ** ** |
| Tier 1 Leverage  Capital |       |                                             | 5.0        | % |   |   | 6.9 | % |   | $ | 15,362,994 |   |   | 7.3 | % |   | $ | 7,100,439 |   |
| Risk-Based  Capital:     |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Tier 1                   |       |                                             | 6.0        | % |   |   | 11.6 | % |   | $ | 15,362,994 |   |   | 12.4 | % |   | $ | 7,100,439 |   |
| Total                    |       |                                             | 10.0       | % |   |   | 12.8 | % |   | $ | 17,031,228 |   |   | 12.8 | % |   | $ | 7,337,235 |   |

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

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

While the Bank has nothistorically been a source of cash to Countrywide Financial Corporation,banking regulations limit the Bank’s ability to transfer funds to the parentcompany. As of December 31, 2006, $2.3 billion of the Bank’s retainedearnings were available for payment of dividends to the parent company withoutprior regulatory approval. At December 31, 2006, the Bank’s retainedearnings unavailable for dividends totaled $172.0 million.

***Cash Flow***

*Year EndedDecember 31, 2006 compared to 2005*

Cash flow used by operating activities was $3.3billion for 2006, compared to $11.4 billion for 2005. 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 FlowInformation* in the financial statement section of this report. In2006, proceeds from the sales of mortgage loans exceeded funds used tooriginate and purchase mortgage loans by $5.7 billion. This decrease in cashused by operations was offset by an $11.4 billion increase in cash used tosettle trading securities, which resulted in cash flows used by operatingactivities. In 2005, funds used to originate and purchase mortgage loansexceeded proceeds from the sales of mortgage loans by $11.2 billion, whichresulted in cash used by operating activities.

Net cash used by investing activities was $14.0billion for 2006, compared to $42.2 billion for 2005. The decrease in net cashused in investing activities was attributable to a $24.4 billion decrease incash used to fund loans held for investment combined with a $5.9 billiondecrease in securities purchased under agreements to resell, securitiesborrowed and federal funds sold.

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Net cash provided byfinancing activities for 2006 totaled $17.7 billion, compared to $53.8 billionfor 2005. The decrease in cash provided by financing activities was comprisedof an $18.6 billion net decrease in short-term borrowings, including securitiessold under agreements to repurchase. Also contributing to the decline in netcash provided by financing activities was the amount of net additions tolong-term debt. In 2005, long-term debt increased $13.4 billion compared to adecline in long-term debt of $0.6 billion in 2006.

*Year Ended December 31,2005 compared to 2004*

Cash flow used by operating activities was $11.4billion for 2005, compared to $5.0 billion for 2004. In 2005 and 2004, fundsused to originate and purchase mortgage loans exceeded proceeds from sales ofmortgage loans by $11.2 billion and $5.3 billion, respectively, which resultedin cash flows used by operating activities.

Net cash used by investing activities was $42.2billion for 2005, compared to $9.8 billion for 2004. The increase in net cashused in investing activities was attributable to a $19.6 billion increase incash used to fund loans held for investment combined with a $10.3 billiondecrease in proceeds from sale and repayment of investments in other financialinstruments and a $6.9 billion increase in securities purchased underagreements to resell, federal funds sold and securities borrowed.

Net cash provided byfinancing activities for 2005 totaled $53.8 billion, compared to $14.9 billionfor 2004. The increase in cash provided by financing activities was comprisedof a $26.3 billion net increase in short-term borrowings, including securitiessold under agreements to repurchase, and an $8.7 billion net increase in bankdeposit liabilities. Also contributing to the increase in net cash provided byfinancing activities was the amount of net additions to long-term debt. In2004, long-term debt increased $9.6 billion compared to an increase inlong-term debt of $13.4 billion in 2005.

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

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

In the ordinary course of our business we engage infinancial transactions that are not reflected on our balance sheet. (See Note 2—*Summary of Significant Accounting Policies* in the financialstatement section of this Report for a description of our consolidationpolicy.) Such transactions are structured to manage our interest rate, creditor liquidity risks, to diversify funding 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 SFAS 140, andas 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 2006, wesecuritized $47.7 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 

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losses under our corporateguarantees less the recorded liability for such guarantees. For a furtherdiscussion of our exposure to credit risk, see the section in this Reportentitled *Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Credit Risk Management*.

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

The sales proceeds andcash flows from our securitizations for 2006 and additional information withrespect to securitization activities are included in the financial statementssection of this Report (Note 3—*Loan Sales*).

***Contractual Obligations***

Thefollowing table summarizes our significant contractual obligations at December 31,2006, 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        |       |                    | 15         | ** **                      |       | $                  | 20,514,000 |               | $          | 26,161,693                       |       | $          | 6,561,243  |   | $ | 3,706,527 |   | $ | 56,943,463 |   |
| Time deposits        |       |                    | 13         | ** **                      |       | $                  | 23,662,684 |               | $          | 3,870,616                        |       | $          | 1,001,443  |   | $ | 1,687,650 |   | $ | 30,222,393 |   |
| Operating leases     |       |                    | 31         | ** **                      |       | $                  | 205,197    |               | $          | 309,328                          |       | $          | 131,687    |   | $ | 62,417 |   | $ | 708,629 |   |
| Purchase obligations |       |                    | —     | ** **                      |       | $                  | 122,277    |               | $          | 17,634                           |       | $          | 2,461      |   | $ | 550 |   | $ | 142,922 |   |

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

As of December 31, 2006, the Company hadundisbursed home equity lines of credit and construction loan commitments of$9.5 billion and $3.5 billion, respectively. As of December 31, 2006,outstanding commitments to fund mortgage loans totaled $35.5 billion andoutstanding net commitments to sell mortgage loans totaled $18.4 billion.

In connection with ourunderwriting activities, at December 31, 2006 we had commitments topurchase and sell new issues of securities aggregating $3.5 billion and $3.2billion, respectively.

**Prospective Trends**

***United States Mortgage Market***

Over the last decade, total mortgage indebtedness inthe United States has grown at an average annual rate of 11%. Over the long term,we believe that continued population growth, ongoing developments in themortgage market and the prospect of relatively low interest rates supportgrowth in the market for the foreseeable future. Some of the ongoingdevelopments in the mortgage market that we believe will contribute to itsgrowth include government-sponsored programs targeted to increase homeownershipin low-income and minority communities, the growth in nonprime lending, thegrowth of prime home equity lending as a major form of consumer finance and theincreasing efficiency of the secondary mortgage market that lowers the overallcost of homeownership. In the short term however, the U.S. housing market isundergoing a significant contraction and both mortgage origination volumes andgrowth in total mortgage indebtedness is likely to decline.

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Over time, thelevel 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

·       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.These volume swings 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 because of these factors, the industry has undergoneconsolidation in recent years.

Today, large and sophisticated financial institutionsdominate the residential mortgage industry. These industry leaders areprimarily commercial banks operating through their mortgage bankingsubsidiaries. According to the trade publication *InsideMortgage Finance*, the top 5 originators produced 47% of all loansoriginated during 2006, up from 37% five years ago. (Reprinted with the permission of IMF Copyrighted. All rights reservedby IMF.)

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

| ** **                   | ** ** | **Years Ended  December 31,** | ** ** |
|------------------------------|------------|-----------------------------------------|------------|
| **Institution**              | ** ** | ** **                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                   | ** ** | **(in billions)**                  | ** ** |
| *Countrywide*                |       | $                                       | 463        |   | $ | 491 |   |
| Wells Fargo Home  Mortgage   |       | 398                                     |       | 392 |   |
| Washington Mutual            |       | 196                                     |       | 249 |   |
| CitiMortgage(1)              |       | 183                                     |       | — |   |
| Chase Home  Finance          |       | 173                                     |       | 183 |   |
| Bank of America  Mortgage(1) |       | —                                  |       | 159 |   |
| Total for Top  Five          |       | $                                       | 1,413      |   | $ | 1,474 |   |
|                              |            |                                         |            |  |  |  |  |  |  |

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(1)          Comparative data notincluded for the year in which the institution was not in the top fiveoriginators.

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This consolidationtrend has naturally carried over to the loan servicing side of the mortgagebusiness. Today, the top 5 mortgage servicers combined have a 45% share of thetotal mortgages outstanding, up from 36% five years ago. Following is ayear-over-year comparison of loan volume for the top five servicers, accordingto *Inside Mortgage Finance*(Reprinted with the permission of IMFCopyrighted. All rights reserved by IMF.):

| ** **                 | ** ** | **Years Ended  December 31,** | ** ** |
|----------------------------|------------|-----------------------------------------|------------|
| **Institution**            | ** ** | ** **                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                 | ** ** | **(in billions)**                  | ** ** |
| Wells Fargo Home  Mortgage |       |                                    | $          | 1,342 |   |   | $ | 1,005 |   |
| *Countrywide*              |       |                                    | 1,298      |   |   | 1,111 |   |
| Washington Mutual          |       |                                    | 711        |   |   | 747 |   |
| Chase Home  Finance        |       |                                    | 674        |   |   | 604 |   |
| CitiMortgage               |       |                                    | 522        |   |   | 403 |   |
| Total for Top  Five        |       |                                    | $          | 4,547 |   |   | $ | 3,870 |   |
|                            |            |                                         |            |  |  |  |  |  |  |  |  |

 

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

Recently, well-capitalized Wall Street investmentbanking firms have increased their participation in the mortgage bankingbusiness. We expect the entrance of these firms to the marketplace to increasecompetition in the near-term, especially in the nonconforming and nonprime loanproducts.

Compared to Countrywide,the other industry leaders are less reliant on the secondary mortgage market asan outlet for mortgages, due to their greater portfolio lending capacity. Thiscould place us at a competitive disadvantage in the future if the demand foradjustable-rate mortgages continues, and either the secondary mortgage marketdoes not continue to provide a competitive outlet for these loans, or we areunable to sustain an adequate portfolio lending capacity.

***Housing Appreciation***

Increasing housing valuesaffect us in several ways. Rising housing values point to healthy demand forpurchase-money mortgage financing and increased average loan balances and areduction in the risk of loss on sale of foreclosed real estate in the event aloan defaults. However, as housing values appreciate, prepayments of existingmortgages tend to increase as 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 rate in thecoming years than in the past several years. Although it is likely that certainmarkets will experience housing price depreciation, we believe that pricedepreciation will not persist nationwide for an extended period of time. Overthe long term, we expect that housing appreciation will be positivelycorrelated with both consumer price inflation and growth in personal income.

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***Secondary MortgageMarket Investor Demand***

***Changes in investor demand for nonprime mortgage loans canhave a significant impact on our ability to access the secondary mortgagemarket as a competitive outlet. In 2007, we have seen an increase in investorrequired yields for nonprime loans together with a lessening in the liquidityof such loans. This trend may negatively impact our willingness to sell suchloans into the secondary mortgage market, the gain we may realize on any suchsales and the pricing of such loans to consumers. In addition, the marketvalues of the credit-subordinated securities that we currently hold may be negativelyaffected by this trend and accordingly, our consolidated earnings may beadversely affected.***

***Impact of Declinesin Credit Performance***

***With the current contraction in the U.S. housing market andthe resulting slowdown in price appreciation (or price depreciation in somemarkets), along with worsening economic conditions, the credit losses weexperience may increase in the future. In 2007, we have observed a decline incredit performance (as adjusted for age) in the nonprime loans we produced,especially those funded in 2006. Deterioration in the credit performance ofthese loans could result in increased losses, future impairment of our relatedcredit-subordinated securities and higher claims under our representations andwarranties.***

***Regulatory Trends***

The regulatory environments in which we operate havean impact on the activities in which we may engage, how the activities may becarried out and the profitability of those activities. Therefore, changes tolaws, regulations or regulatory policies can affect whether and to what extentwe are able to operate profitably.

For example, as discussed in the preceding Part I,Item I, *Regulations—Interagency Guidance on ResidentialMortgage Products*, on October 4, 2006, the federal financialregulatory agencies issued final interagency guidance on residential mortgageproducts that allow borrowers to defer repayment of principal and/or interest,including “interest-only” mortgage loans and “payment option” adjustable-ratemortgages, which provide a borrower with flexible payment options, includingpayments that have the potential for negative amortization. The impact of thisguidance on the industry and the Company is uncertain at this time.

The aforementionedinteragency guidance notwithstanding, proposed local, state and federallegislation targeted at predatory lending could have the unintended consequenceof raising the cost or otherwise reducing the availability of mortgage creditfor those potential borrowers with less than prime-quality credit histories. Thiscould result in a reduction of otherwise legitimate nonprime lendingopportunities. In addition, there may be future local, state and federallegislation that restricts our ability to communicate with and solicit businessfrom current and prospective customers in such a way that we are not able tooriginate new loans or sell other products at current profit margins.

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***Mortgage Originations***

Followingis our estimate of total United States mortgage originations market for each ofthe last five years:

| **Calendar Year** | ** ** | ** **             | ** ** | **United States  Mortgage  Originations** | ** ** |
|------------------------|------------|------------------------|------------|------------------------------------------------|------------|
| ** **             | ** ** | **(in billions)** | ** ** |
| 2006                   |       |                   | $          | 2,864                                          |       |   |
| 2005                   |       |                   | $          | 3,335                                          |       |   |
| 2004                   |       |                   | $          | 3,355                                          |       |   |
| 2003                   |       |                   | $          | 4,369                                          |       |   |
| 2002                   |       |                   | $          | 2,996                                          |       |   |

 

We estimate the mortgageorigination market for 2007 to be $2.6 trillion. The forecasted reduction isattributable to an expected decline in both purchase and refinance activity. Webelieve that the forecasted market would still be favorable for our loanproduction business, although we would expect increased competitive pressuresto have some impact on its profitability. This forecast would imply decliningpressure on our loan servicing business due to a reduction in mortgage loanprepayment activity. In our Capital Markets Segment business, such a drop inmortgage originations would likely result in a reduction in mortgage securitiestrading and underwriting volume and our conduit activities, which would have anegative impact on profitability.

***New Accounting Standards***

In September 2005,the Accounting Standards Executive Committee of the AICPA issued Statement ofPosition 05-01 (“SOP 05-01”), Accounting by Insurance Enterprisesfor Deferred Acquisition Costs in Connection with Modifications or Exchanges ofInsurance Contracts. SOP 05-01 provides guidance on accounting byinsurance enterprises for deferred acquisition costs on internal replacementsof insurance and investment contracts. This SOP is effective for internalreplacements that occur in fiscal years beginning January 1, 2007, and isnot expected to have a significant impact on the consolidated financialposition or earnings of the Company.

In February 2006,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards No. 155, *Accounting for CertainHybrid Financial Instruments*, an amendment of SFAS 133 andSFAS 140 (“SFAS 155”). This statement:

·       Establishesa requirement to evaluate interests in securitized financial instruments thatcontain an embedded derivative requiring bifurcation

·       Permitsfair value remeasurement for any hybrid financial instrument that contains anembedded derivative that otherwise would require bifurcation

·       Clarifieswhich interest-only strips and principal-only strips are not subject to SFAS133

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

SFAS 155 is effective for all financial instrumentsacquired or issued after January 1, 2007. The adoption of SFAS 155 is notexpected to have a significant impact on the consolidated financial position orearnings of the Company.

During July 2006, the FASB issued FASBInterpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”).FIN 48 was issued to clarify the requirements of Statement of Financial 

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Accounting Standards No. 109,*Accounting for Income Taxes*, relating tothe recognition of income tax benefits.

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

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

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

FIN 48 is applicable beginning January 1, 2007.The cumulative effect of applying the provisions of FIN 48 upon adoptionwill be reported as an adjustment to beginning retained earnings. The adoptionof FIN 48 is not expected to be material.

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 157, *Fair ValueMeasurements* (“SFAS 157”). SFAS 157 provides a framework formeasuring fair value when such measurements are utilized for accountingpurposes. The framework focuses on an exit price in the principal (or,alternatively, the most advantageous) market accessible in an orderlytransaction between willing market participants. SFAS 157 establishes athree-tiered fair value hierarchy with Level 1 representing quoted prices foridentical assets or liabilities in an active market and the Level 3representing estimated values based on unobservable inputs. Under SFAS 157,related disclosures are segregated for assets and liabilities measured at fairvalue based on the level used within the hierarchy to determine their fairvalues. The Company has determined that it will adopt SFAS 157 on its effectivedate, January 1, 2008, and the financial impact, if any, upon adoption hasnot yet been determined.

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

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

In response to this Item,the information set forth on pages 94 to 100 and Note 4 to the FinancialStatements of this Form 10-K is 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.

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**Item 9.***                        Changesin and Disagreements with Accountants on Accounting and Financial Disclosure*

Not Applicable.

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

**(1)****   *Evaluation of Disclosure Controls and Procedures***

We have conducted an evaluation, with theparticipation of our Chief Executive Officer and Chief Financial Officer, ofthe effectiveness of our disclosure controls and procedures (as such term isdefined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”)), as of theend 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.

**(2)   *Management’s Report 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 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 and procedures maydeteriorate.

In making its assessment of internal control overfinancial reporting, management used the criteria established in “InternalControl—Integrated Framework” issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Based on this assessment,management concluded that the Company’s internal control over financialreporting was effective as of December 31, 2006.

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, 2006, 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 below.

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

The Board of Directors and ShareholdersCountrywide 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, 2006, 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 31,2006, 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, 2006, based on criteria establishedin Internal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).

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We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheets of Countrywide FinancialCorporation and subsidiaries as of December 31, 2006 and 2005, and therelated consolidated statements of earnings, changes in shareholders’ equityand comprehensive income and cash flows for each of the years in the three-yearperiod ended December 31, 2006, and our report dated February 28,2007, expressed an unqualified opinion on those consolidated financialstatements.
|                          | KPMG LLP      |
|--------------------------|---------------|
|                     | /s/  KPMG LLP |   |
| Los Angeles,  California |          |
| February 28,  2007  |          |

 

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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 required by this Item 10 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.

**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*

**Equity CompensationPlan Information**

Thefollowing table shows aggregate information, as of December 31, 2006, 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     |       |       | 51,669,443 |                                                                                                                                                 |       |                                                                                                        | $          | 25.19                                                                                                                                                                                                     |       |   |   | 31,922,524 |   |   |
| Equity  Compensation Plans Not Approved by Security Holders |       |       | N/A        |                                                                                                                                                 |       |                                                                                                        | N/A        |                                                                                                                                                                                                      |       |   | N/A |   |   |
| **Total**                                                   |       |       | 51,669,443 |                                                                                                                                                 |       |                                                                                                        | $          | 25.19                                                                                                                                                                                                     |       |   |   | 31,922,524 |   |   |

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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, 4,319,906 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 andFinancial Statement Schedules.

The information called for by this section of Item 15is set forth in the Financial Statements and Auditors’ Report beginning at page F-2of this Form 10-K. The index to Financial Statements and Schedules is setforth at page F-1 of 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 (incorporated by reference to Exhibit 3.7 to the Company’s  Quarterly Report on Form 10-Q, for the quarter ended June 30,  2006).                                                                                                                                                                                                                                           |
| 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 (incorporated by reference to Exhibit 4.2 to the Company’s  Annual Report on Form 10-K, for the year ended December 31, 2005).          |
| 4.3*          |       | Second Amendment to  Amended and Restated Rights Agreement dated June 14, 2006 by and between  the Company and American Stock Transfer & Trust Company  (incorporated by reference to Exhibit 10.12 to the Company’s Current  Report on Form 8-K, filed with the SEC on June 20, 2006).                                                                                                          |
| 4.4*          |       | 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).                                                                                                                                                                                                                                      |
| 4.5*          |       | Specimen Debenture  Certificate (incorporated by reference to Exhibit 4.3 to the Company’s  Current Report on Form 8-K, dated February 6, 1987).                                                                                                                                                                                                                                                               |
| 4.6*          |       | 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).                                                                                                           |
| 4.7*          |       | 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). |
| 4.8*          |       | 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).                                                                                                                |

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| 4.9*  |   | 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).                                                          |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.10* |   | 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).                                                                                              |
| 4.11* |   | 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).                                                                                           |
| 4.12* |   | 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).                                                                                           |
| 4.13* |   | 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).                                                                                             |
| 4.14* |   | 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).                                                                                                            |
| 4.15* |   | 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).    |
| 4.16* |   | 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). |
| 4.17* |   | 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).                                                             |
| 4.18* |   | 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).                                                          |
| 4.19* |   | 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).                                                             |
| 4.20* |   | 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).                                                               |

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| 4.21* |   | 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).                                                                                             |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.22* |   | 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).                                                                                          |
| 4.23* |   | Indenture,  dated February 1, 2005, among the Company, CHL and The Bank of New York,  as Trustee (incorporated by reference to Exhibit 4.58 to the Company’s  Quarterly Report on Form 10-Q, for the quarter ended March 31,  2006).                                                                                                                                                   |
| 4.24* |   | Form of  Medium-Term Notes, Series B (fixed-rate) of the Company (incorporated by  reference to Exhibit 4.11 to the registration statement on Form S-3  of the Company and CHL (File Nos. 333-131707, 333-131707-01, 333-131707-02  and 333-131707-03), filed with the SEC on February 9, 2006).                                                                                       |
| 4.25* |   | Form of  Medium-Term Notes, Series B (floating-rate) of the Company (incorporated  by reference to Exhibit 4.12 to the registration statement on  Form S-3 of the Company and CHL (File Nos. 333-131707, 333-131707-01,  333-131707-02 and 333-131707-03), filed with the SEC on February 9,  2006).                                                                                   |
| 4.26* |   | 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).                                                                                                                      |
| 4.27* |   | 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).                        |
| 4.28* |   | 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). |
| 4.29* |   | 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).        |
| 4.30* |   | 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).       |

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| 4.31* |   | 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).                                                                                                                                                                                                  |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.32* |   | First Supplemental Trust  Deed, between the Company, as Issuer, CHL, as Guarantor and Deutsche Trustee  Company Limited, as Trustee, dated August 31, 2006 (incorporated by  reference to Exhibit 4.63 to the Company’s Quarterly Report on  Form 10-Q, for the quarter ended September 30, 2006).                                                                                                                                                                                |
| 4.33* |   | 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).                                                                                                                                                                                              |
| 4.34* |   | 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).                                                                                                           |
| 4.35* |   | 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).                                                                                                                                                                                    |
| 4.36* |   | 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).                                                                                                                                                                  |
| 4.37* |   | 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).                                                                                                                                                                      |
| 4.38* |   | 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). |
| 4.39  |   | Form of 8.05%  Subordinated Capital Income Securities, Series A (liquidation amount  $1,000 per Security) of Countrywide Capital III.                                                                                                                                                                                                                                                                                                                                                            |
| 4.40  |   | Form of 8.05%  Subordinated Capital Income Securities, Series B (liquidation amount  $1,000 per Security) of Countrywide Capital III.                                                                                                                                                                                                                                                                                                                                                            |
| 4.41  |   | Form of 8.05%  Junior Subordinated Debentures due June 15, 2027, Series A of CHL.                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.42  |   | Form of 8.05%  Junior Subordinated Debentures due June 15, 2027, Series B of CHL.                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.43* |   | 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).                                                                                                                                                                                                                                                         |

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| 4.44*       |   | 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).                                                                                                                        |
|-------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.45*       |   | 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). |
| 4.46        |   | Form of 6.75% Trust  Preferred Securities (liquidation amount $25 per Preferred Security) of  Countrywide Capital IV.                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.47        |   | Form of 6.75%  Junior Subordinated Deferrable Interest Debenture due April 1, 2033 of  the Company.                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.48*       |   | Indenture,  dated May 16, 2006, between the Company and The Bank of New York, as  Trustee, relating to the 6.25% Subordinated Notes due May 15, 2016  (incorporated by reference to Exhibit 4.27 to the Company’s Current  Report on Form 8-K, filed with the SEC on May 16, 2006).                                                                                                                                                                                                                     |
| 4.49*       |   | Form of  6.25% Subordinated Note due May 15, 2016 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 May 16, 2006).                                                                                                                                                                                                                                                                                                         |
| 4.50*       |   | Junior  Subordinated Indenture, dated as of November 8, 2006, by and between the  Company and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.28  to the Company’s Current Report on Form 8-K, filed with the SEC on  November 13, 2006).                                                                                                                                                                                                                                           |
| 4.51*       |   | Supplemental  Indenture, dated as of November 8, 2006 by and between the Company and  The Bank of New York, as Trustee, providing for the 7% Junior Subordinated  Deferrable Interest Debentures Due October 15, 2036 of the Company  (incorporated by reference to Exhibit 4.29 to the Company’s Current  Report on Form 8-K, filed with the SEC on November 13, 2006).                                                                                                                                |
| 4.52*       |   | Amended  and Restated Declaration of Trust of Countrywide Capital V, dated as of  November 8, 2006, by and among Sandor E. Samuels, Jennifer Sandefur and  Eric P. Sieracki, as Administrative Trustees, The Bank of New York  (Delaware), as Delaware Trustee, The Bank of New York, as Property Trustee  and the Company, as Sponsor and Debenture Issuer (incorporated by reference  to Exhibit 4.31 to the Company’s Current Report on Form 8-K, filed  with the SEC on November 13, 2006).              |
| 4.53*       |   | Form of  7% Junior Subordinated Deferrable Interest Debenture Due October 15,  2036 of the Company (incorporated by reference to Exhibit 4.30 to the  Company’s Current Report on Form 8-K, filed with the SEC on  November 13, 2006).                                                                                                                                                                                                                                                                  |
| 4.54*       |   | Form of  7% Capital Security (liquidation amount $25 per Capital Security) of  Countrywide Capital V (included in Exhibit 4.31) (incorporated by  reference to Exhibit 4.32 to the Company’s Current Report on Form 8-K,  filed with the SEC on November 13, 2006).                                                                                                                                                                                                                                     |
| †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).                                                                                                                                                                                                                                                                            |

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| †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*  |   | Extension Agreement  reached on October 20, 2006 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, filed with the SEC on October 24, 2006).                                  |
| †10.5*  |   | Employment Agreement  dated December 22, 2006 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, filed with the SEC on December 26, 2006).                                    |
| †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).               |
| †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* |   | 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).                                                                                            |
| †10.12* |   | 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).                                          |
| †10.13* |   | Director  Emeritus Agreement dated April 26, 2006 by and between the Company and  Ben M. Enis (incorporated by reference to Exhibit 10.1 to the Company’s  Current Report on Form 8-K, filed with the SEC on May 1, 2006).                                           |
| †10.14* |   | Director  Emeritus Agreement dated April 26, 2006 by and between the Company and  Edwin Heller (incorporated by reference to Exhibit 10.2 to the Company’s  Current Report on Form 8-K, filed with the SEC on May 1, 2006).                                          |
| †10.15* |   | 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).                                         |
| †10.16* |   | 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).                                          |

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| †10.17* |   | 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).        |
|--------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| †10.18* |   | 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).                                     |
| †10.19* |   | 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).                                                             |
| †10.20* |   | 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).                                   |
| †10.21* |   | 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).                                 |
| †10.22* |   | 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). |
| †10.23* |   | 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).                                                                           |
| †10.24* |   | 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).                                                                                 |
| †10.25* |   | Supplemental Savings and  Investment Deferred Compensation Plan, dated as of December 30, 2005,  effective as of February 1, 2006 (incorporated by reference to  Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed  with the SEC on January 6, 2006).  |
| †10.26* |   | 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).                                                                   |
| †10.27* |   | 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).                                                               |
| †10.28* |   | 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).                                                              |
| †10.29* |   | 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).                                                               |
| †10.30* |   | 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).                                                                   |

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| †10.31* |   | 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).                              |
|--------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| †10.32* |   | 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).                               |
| †10.33* |   | 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). |
| †10.34* |   | 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).                                                           |
| †10.35* |   | 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).      |
| †10.36* |   | 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).                                                                                                |
| †10.37* |   | 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).                                                                      |
| †10.38* |   | 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).                                                                     |
| †10.39* |   | 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).                                                                      |
| †10.40* |   | 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).                                                                     |
| †10.41* |   | 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).                                                                      |
| †10.42* |   | 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).                                                                          |
| †10.43* |   | 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).                                                                        |
| †10.44* |   | 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).                                                                           |

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| †10.45* |   | 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).            |
|--------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| †10.46* |   | 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).         |
| †10.47* |   | 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).      |
| †10.48* |   | 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).           |
| †10.49* |   | 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).                        |
| †10.50* |   | 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).                       |
| †10.51* |   | 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).                             |
| †10.52* |   | 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).        |
| †10.53* |   | 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).        |
| †10.54* |   | 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).                               |
| †10.55* |   | 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).      |
| †10.56* |   | 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). |
| †10.57* |   | 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).  |
| †10.58* |   | 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).       |
| †10.59* |   | 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).     |

142

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| †10.60* |   | 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).             |
|--------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| †10.61* |   | 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).                                            |
| †10.62* |   | 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).                |
| †10.63* |   | 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).                 |
| †10.64* |   | 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).                        |
| †10.65* |   | 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).                   |
| †10.66* |   | 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).                                                    |
| †10.67* |   | 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).       |
| †10.68* |   | 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). |
| †10.69* |   | 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).                     |
| †10.70* |   | 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).   |
| †10.71* |   | 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).                               |
| †10.72* |   | 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).                     |
| †10.73* |   | 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).    |

143

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| †10.74* |   | Form of Stock Appreciation Right Agreement  pursuant to the 2000 Equity Incentive Plan of the Company (incorporated by  reference to Exhibit 10.l to the Company’s Current Report on Form 8-K,  filed with the SEC on April 7, 2006). |
|--------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| †10.75* |   | 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).                    |
| †10.76* |   | 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).         |
| †10.77* |   | 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).             |
| †10.78* |   | 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).                                  |
| †10.79* |   | 2006 Equity Incentive  Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current  Report on Form 8-K, filed with the SEC on June 20, 2006).                                                                                 |
| †10.80* |   | Form of 2006 Equity  Incentive Plan Stock Appreciation Rights Award Agreement (incorporated by  reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K,  filed with the SEC on June 20, 2006).                         |
| †10.81* |   | Form of 2006 Equity  Incentive Plan Restricted Stock Unit Award Agreement (incorporated by  reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K,  filed with the SEC on June 20, 2006).                             |
| †10.82* |   | Form of 2006 Equity  Incentive Plan Restricted Stock Award Agreement (incorporated by reference to  Exhibit 10.4 to the Company’s Current Report on Form 8-K, filed  with the SEC on June 20, 2006).                                  |
| †10.83* |   | Form of 2006 Equity  Incentive Plan Performance-Based Stock Appreciation Rights Award Agreement  (incorporated by reference to Exhibit 10.5 to the Company’s Current  Report on Form 8-K, filed with the SEC on June 20, 2006).       |
| †10.84* |   | Form of 2006 Equity  Incentive Plan Performance-Based Restricted Stock Unit Award Agreement  (incorporated by reference to Exhibit 10.6 to the Company’s Current  Report on Form 8-K, filed with the SEC on June 20, 2006).           |
| †10.85* |   | Form of 2006 Equity  Incentive Plan Performance-Based Restricted Stock Award Agreement  (incorporated by reference to Exhibit 10.7 to the Company’s Current  Report on Form 8-K, filed with the SEC on June 20, 2006).                |
| †10.86* |   | Form of 2006 Equity  Incentive Plan Performance-Based Non-Qualified Stock Option Award Terms  (incorporated by reference to Exhibit 10.8 to the Company’s Current  Report on Form 8-K, filed with the SEC on June 20, 2006).          |
| †10.87* |   | Form of 2006 Equity  Incentive Plan Performance-Based Incentive Stock Option Award Terms  (incorporated by reference to Exhibit 10.9 to the Company’s Current  Report on Form 8-K, filed with the SEC on June 20, 2006).              |
| †10.88* |   | Form of 2006 Equity  Incentive Plan Non-Qualified Stock Option Award Terms (incorporated by  reference to Exhibit 10.10 to the Company’s Current Report on  Form 8-K, filed with the SEC on June 20, 2006).                           |

144

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| †10.89*  |   | Form of 2006 Equity Incentive Plan Incentive  Stock Option Award Terms (incorporated by reference to Exhibit 10.11 to  the Company’s Current Report on Form 8-K, filed with the SEC on  June 20, 2006).                                                                               |
|---------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| †10.90*  |   | 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).                                                                                    |
| †10.91*  |   | 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).  |
| †10.92*  |   | 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).                               |
| †10.93*  |   | 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).                                  |
| †10.94*  |   | 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).                                                                    |
| †10.95*  |   | 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).                                                                                      |
| †10.96*  |   | 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).                                                                                                                       |
| †10.97*  |   | 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). |
| †10.98*  |   | 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).                                                                                                                                 |
| †10.99*  |   | 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).                                                                                       |
| †10.100* |   | 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).                                                                                            |
| †10.101* |   | 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).                                                                                           |
| †10.102* |   | Amended  and Restated Annual Incentive Plan, dated as of June 16, 2005  (incorporated by reference to Exhibit 10.1 to the Company’s Current  Report on Form 8-K, filed with the SEC on June 21, 2005).                                                                                |

145

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| †10.103* |   | Change in Control Severance Plan, as amended and  restated as of June 14, 2006 (incorporated by reference to  Exhibit 10.13 to the Company’s Current Report on Form 8-K, filed  with the SEC on June 20, 2006).                                                                                              |
|---------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| †10.104* |   | 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).  |
| †10.105* |   | 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).                                                                |
| †10.106* |   | 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). |
| †10.107* |   | 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).                                                                |
| †10.108* |   | 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).                                                            |
| †10.109* |   | 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).                                                                                                                              |
| †10.110* |   | 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).                                                                                       |
| †10.111* |   | 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).                                                                                          |
| †10.112* |   | 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).                                                                                                                              |
| †10.113* |   | 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).                                                                                                                               |
| †10.114* |   | 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).                                                                                                           |
| †10.115* |   | 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).                                                                                                              |
| †10.116* |   | 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).                                                                                                               |

146

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| †10.117* |   | 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).                                                                                                                                                                                                                                                                                                   |
|---------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| †10.118* |   | 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).                                                                                                                                                                                                                                                                          |
| †10.119* |   | 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).                                                                                                                                                                                                                                                                                    |
| †10.120* |   | 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).                                                                                                                                                                                                                                                                   |
| †10.121* |   | 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).                                                                                                                                                                                                                                                                             |
| †10.122* |   | 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).                                                                                                                                                                                                                                                                                                  |
| †10.123* |   | 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).                                                                                                                                                                                                                                                                                                   |
| †10.124* |   | The Company’s Executive  Contribution Account Plan (incorporated by reference to Exhibit 10.129  to the Company’s Quarterly Report on Form 10-Q, for the quarter ended  March 31, 2006).                                                                                                                                                                                                                                                                                                                                    |
| 10.125*       |   | 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).                                   |
| 10.126*       |   | 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). |
| 10.127*       |   | 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).                                      |

147

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| 10.128* |   | 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).                                                                                                                                                                                                |
|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.129* |   | 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).                                                                                                                                                                                                                                                     |
| 10.130* |   | 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 (incorporated by reference  to Exhibit 10.125 to the Company’s Annual Report on Form 10-K, for  the year ended December 31, 2005).                                                                  |
| 10.131* |   | 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 (incorporated by reference to  Exhibit 10.126 to the Company’s Annual Report on Form 10-K, for the  year ended December 31, 2005).                                                                                          |
| 10.132* |   | Third Amendment, dated  as of May 10, 2006, to the Credit Agreement, dated as of  November 19, 2004 (as amended, supplemented or otherwise modified from  time to time), by and among the Company, CHL, the lenders party thereto, 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 (incorporated by reference to  Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed  with the SEC on May 16, 2006). |
| 10.133* |   | Five-Year Credit  Agreement, dated as of May 10, 2006, among the Company, CHL, JPMorgan  Chase Bank, N.A., as managing administrative agent, Bank of America, N.A., as  administrative agent, ABN AMRO Bank N.V., as syndication agent, Citibank,  N.A., and Deutsche Bank AG New York Branch, as documentation agents, and the  lenders party thereto (incorporated by reference to Exhibit 10.1 to the  Company’s Current Report on Form 8-K, filed with the SEC on May 16,  2006).                                                                                                   |
| 10.134* |   | 364-Day Credit  Agreement, dated as of May 10, 2006, among the Company, CHL, JPMorgan  Chase Bank, N.A., as managing administrative agent, Bank of America, N.A., as  administrative agent, ABN AMRO Bank N.A., as syndication agent, Citibank,  N.A., and Deutsche Bank AG New York Branch, as documentation agents, and the  lenders party thereto (incorporated by reference to Exhibit 10.2 to the  Company’s Current Report on Form 8-K, filed with the SEC on May 16,  2006).                                                                                                     |
| 10.135* |   | Five-Year Credit  Agreement, dated as of November 17, 2006, among the Company, CHL,  Countrywide Bank, N.A., Barclays Bank PLC, as managing administrative agent,  BNP Paribas, as administrative agent, Royal Bank of Canada, as syndication  agent, Societe Generale, as documentation agent, and the lenders party  thereto (incorporated by reference to Exhibit 10.2 to the Company’s  Current Report on Form 8-K, filed with the SEC on November 22,  2006).                                                                                                                      |

148

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| 10.136* |   | 364-Day Credit Agreement, dated as of  November 17, 2006, among the Company, CHL, Countrywide Bank, N.A.,  Barclays Bank PLC, as managing administrative agent, BNP Paribas, as  administrative agent, Royal Bank of Canada, as syndication agent, Societe  Generale, as documentation agent, and the lenders party thereto (incorporated  by reference to Exhibit 10.1 to the Company’s Current Report on  Form 8-K, filed with the SEC on November 22, 2006). |
|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 12.1    |   | Computation of the Ratio  of Earnings to Fixed Charges.                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 21      |   | List of subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 23      |   | Consent of KPMG 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.

149

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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, 2007 |     |     |                               |   |

 

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, 2007 |
| Angelo R. Mozilo           |           | Chief Executive Officer (Principal Executive  Officer) |       |                   |
| /s/  ERIC P. SIERACKI      |           | Financial Officer  (Executive Managing Director,       |       | February 28, 2007 |
| Eric P. Sieracki           |           | Chief Financial Officer)                               |       |                   |
| /s/  LAURA K. MILLEMAN     |           | Chief Accounting Officer  (Senior Managing Director,   |       | February 28, 2007 |
| Laura K. Milleman          |           | Principal Accounting Officer)                          |       |                   |
| /s/  KATHLEEN BROWN        |           | Director                                               |       | February 28, 2007 |
| Kathleen Brown             |           |                                                   |       |                   |
| /s/  HENRY G. CISNEROS     |           | Director                                               |       | February 28, 2007 |
| Henry G. Cisneros          |           |                                                   |       |                   |
| /s/  JEFFREY M. CUNNINGHAM |           | Director                                               |       | February 28, 2007 |
| Jeffrey M.  Cunningham     |           |                                                   |       |                   |
| /s/  ROBERT J. DONATO      |           | Director                                               |       | February 28, 2007 |
| Robert J. Donato           |           |                                                   |       |                   |
| /s/  MICHAEL E. DOUGHERTY  |           | Director                                               |       | February 28, 2007 |
| Michael E.  Dougherty      |           |                                                   |       |                   |

150

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| /s/ MARTIN R. MELONE   |   | Director |   | February 28, 2007 |
|------------------------|--------|----------|--------|------------------------|
| Martin R. Melone       |   |     |   |                   |
| /s/ ROBERT T. PARRY    |   | Director |   | February 28, 2007 |
| Robert T. Parry        |   |     |   |                   |
| /s/ OSCAR P. ROBERTSON |   | Director |   | February 28, 2007 |
| Oscar P. Robertson     |   |     |   |                   |
| /s/ KEITH P. RUSSELL   |   | Director |   | February 28, 2007 |
| Keith P. Russell       |   |     |   |                   |
| /s/ HARLEY W. SNYDER   |   | Director |   | February 28, 2007 |
| Harley W. Snyder       |   |     |   |                   |

 

151

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**COUNTRYWIDEFINANCIAL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDFINANCIAL STATEMENTS AND REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

**December 31,2006**

----

**COUNTRYWIDEFINANCIAL CORPORATION AND SUBSIDIARIES**

**INDEX TOCONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES**

**December 31,2006**

|                                                                                                                                                     | ** ** | Page   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------|
| Report of Independent  Registered Public Accounting Firm—KPMG LLP                                                                              |       | F-2    |   |
| Financial Statements:                                                                                                                               |       |   |   |
| Consolidated Balance Sheets at  December 31, 2006 and 2005                                                                                     |       | F-3    |   |
| Consolidated Statements of  Earnings for the years ended December 31, 2006, 2005 and 2004                                                      |       | F-4    |   |
| Consolidated Statement of  Changes in Shareholders’ Equity and Comprehensive Income for the years ended  December 31, 2006, 2005 and 2004 |       | F-5    |   |
| Consolidated Statements of  Cash Flows for the years ended December 31, 2006, 2005 and 2004                                                    |       | F-7    |   |
| Notes to Consolidated Financial Statements                                                                                                          |       | F-8    |   |
| Schedules:                                                                                                                                          |       |   |   |
| Schedule I—Condensed Financial Information of Registrant                                                                                       |       | F-89   |   |
| Schedule  II—Valuation and Qualifying Accounts                                                                                                 |       | F-93   |   |

 

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 ofIndependent Registered Public Accounting Firm**

**The Board of Directors and Shareholders**

**CountrywideFinancial Corporation:**

We have audited the accompanying consolidated balancesheets of Countrywide Financial Corporation and subsidiaries as of December 31,2006 and 2005, and the related consolidated statements of earnings, changes inshareholders’ equity and comprehensive income and cash flows for each of theyears in the three-year period ended December 31, 2006. In connection withour audits of the consolidated financial statements, we have also auditedfinancial statement schedules I and II. These consolidated financial statementsand financial statement schedules are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements and financial statement schedules based on our audits.

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 31,2006 and 2005, and the results of their operations and their cash flows foreach of the years in the three-year period ended December 31, 2006, inconformity with U.S. generally accepted accounting principles. Also in ouropinion, the related financial statement schedules, when considered in relationto the basic consolidated financial statements taken as a whole, presentfairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theeffectiveness of the Company’s internal control over financial reporting as of December 31,2006, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO), and our report dated February 28, 2007 expressed an unqualifiedopinion on management’s assessment of, and the effective operation of, internalcontrol over financial reporting.

Asdiscussed in Note 2 to the consolidated financial statements, effective January 1,2006, the Company adopted the provisions of Statement of Financial AccountingStandards (“SFAS”) No. 123R, Share-Based Payment (as amended). Asdiscussed in Note 2 to the consolidated financial statements, effective January 1,2006, the Company adopted the provisions of SFAS No. 156, Accounting forServicing of Financial Assets, an amendment of SFAS No. 140. As discussedin Note 20 to the consolidated financial statements, effective December 31,2006, the Company adopted the provisions of SFAS No. 158, Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans.

|        |   | KPMG LLP      |
|--------|--------|---------------|
|   |   | /s/  KPMG LLP |

 

LosAngeles, California

February 28, 2007

F-2

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS**

| ** **                                                                                                                                                                                                                                                                                  | ** ** | **December 31,**                                     | ** **  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|-------------|
| ** **                                                                                                                                                                                                                                                                                  | ** ** | **2006**                                                  | ** **  | **2005** | ** ** |
| ** **                                                                                                                                                                                                                                                                                  | ** ** | **(in thousands, except share data)** | ** **  |
| **ASSETS**                                                                                                                                                                                                                                                                                  | ** ** | ** **                                                | ** **  | ** ** | ** ** |
| Cash                                                                                                                                                                                                                                                                                        |       | $                                                         | 1,407,000   |   | $ | 1,031,108 |   |
| Mortgage loans  held for sale                                                                                                                                                                                                                                                               |       | 31,272,630                                                |        | 36,808,185 |   |
| Trading  securities owned, at fair value                                                                                                                                                                                                                                                    |       | 20,036,668                                                |        | 10,314,384 |   |
| Trading  securities pledged as collateral, at fair value                                                                                                                                                                                                                                    |       | 1,465,517                                                 |        | 668,189 |   |
| Securities  purchased under agreements to resell, securities borrowed and federal funds  sold                                                                                                                                                                                               |       | 27,269,897                                                |        | 23,317,361 |   |
| Loans held for  investment, net of allowance for loan losses of $261,054 and $189,201,  respectively                                                                                                                                                                                        |       | 78,085,757                                                |        | 69,865,447 |   |
| Investments in  other financial instruments, at fair value                                                                                                                                                                                                                                  |       | 12,769,451                                                |        | 11,260,725 |   |
| Mortgage  servicing rights, at fair value                                                                                                                                                                                                                                                   |       | 16,172,064                                                |        | — |   |
| Mortgage  servicing rights, net                                                                                                                                                                                                                                                             |       | —                                                    |        | 12,610,839 |   |
| Premises and  equipment, net                                                                                                                                                                                                                                                                |       | 1,625,456                                                 |        | 1,279,659 |   |
| Other assets                                                                                                                                                                                                                                                                                |       | 9,841,790                                                 |        | 7,929,473 |   |
| Total assets                                                                                                                                                                                                                                                                                |       | $                                                         | 199,946,230 |   | $ | 175,085,370 |   |
| **LIABILITIES**                                                                                                                                                                                                                                                                             | ** ** | ** **                                                | ** **  | ** ** | ** ** |
| Deposit  liabilities                                                                                                                                                                                                                                                                        |       | $                                                         | 55,578,682  |   | $ | 39,438,916 |   |
| Securities sold  under agreements to repurchase and federal funds purchased                                                                                                                                                                                                                 |       | 42,113,501                                                |        | 34,153,205 |   |
| Trading  securities sold, not yet purchased, at fair value                                                                                                                                                                                                                                  |       | 3,325,249                                                 |        | 2,285,171 |   |
| Notes payable                                                                                                                                                                                                                                                                               |       | 71,487,584                                                |        | 76,187,886 |   |
| Accounts payable  and accrued liabilities                                                                                                                                                                                                                                                   |       | 8,187,605                                                 |        | 6,358,158 |   |
| Income taxes  payable                                                                                                                                                                                                                                                                       |       | 4,935,763                                                 |        | 3,846,174 |   |
| Total liabilities                                                                                                                                                                                                                                                                           |       | 185,628,384                                               |        | 162,269,510 |   |
| 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, 585,466,719 shares and 600,169,268 shares at December 31,  2006 and 2005, respectively; outstanding, 585,182,298 shares and 600,030,686  shares at December 31, 2006 and 2005, respectively |       | 29,273                                                    |        | 30,008 |   |
| Additional  paid-in capital                                                                                                                                                                                                                                                                 |       | 2,154,438                                                 |        | 2,954,019 |   |
| Accumulated other  comprehensive (loss) income                                                                                                                                                                                                                                              |       | (17,556                                                   | )           | 61,114 |   |
| Retained earnings                                                                                                                                                                                                                                                                           |       | 12,151,691                                                |        | 9,770,719 |   |
| Total shareholders’ equity                                                                                                                                                                                                                                                             |       | 14,317,846                                                |        | 12,815,860 |   |
| Total liabilities  and shareholders’ equity                                                                                                                                                                                                                                            |       | $                                                         | 199,946,230 |   | $ | 175,085,370 |   |

 

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

F-3

----

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

| ** **                                                                                      | ** ** | **Years Ended December 31,**                        | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                      | ** ** | **2006**                                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                      | ** ** | **(in thousands, except per share data)** | ** ** |
| **Revenues**                                                                                    |       |                                                               |       |   |   |   |   |
| Gain on sale of loans and securities                                                            |       | $                                                                  | 5,681,847  |   | $ | 4,861,780 |   | $ | 4,842,082 |   |
| Interest income                                                                                 |       | 12,056,043                                                         |       | 7,970,045 |   | 4,645,654 |   |
| Interest expense                                                                                |       | (9,133,682                                                         | )          | (5,616,425 | ) | (2,608,338 | ) |
| Net interest income                                                                             |       | 2,922,361                                                          |       | 2,353,620 |   | 2,037,316 |   |
| Provision for loan losses                                                                       |       | (233,847                                                           | )          | (115,685 | ) | (71,775 | ) |
| Net interest income after provision for loan losses                                             |       | 2,688,514                                                          |       | 2,237,935 |   | 1,965,541 |   |
| Loan servicing fees and other income from mortgage  servicing rights and retained interests     |       | 4,960,550                                                          |       | 4,281,254 |   | 3,269,587 |   |
| Realization of expected cash flows from mortgage servicing  rights                              |       | (3,193,740                                                         | )          | — |   | — |   |
| Amortization of mortgage servicing rights                                                       |       | —                                                             |       | (2,288,354 | ) | (1,940,457 | ) |
| Change in fair value of mortgage servicing rights                                               |       | 432,241                                                            |       | — |   | — |   |
| Recovery (impairment) of mortgage servicing rights                                              |       | —                                                             |       | 387,851 |   | (279,842 | ) |
| Impairment of retained interests                                                                |       | (284,690                                                           | )          | (364,506 | ) | (368,295 | ) |
| Servicing hedge losses                                                                          |       | (613,706                                                           | )          | (523,078 | ) | (215,343 | ) |
| Net loan servicing fees and other income from  mortgage servicing rights and retained interests |       | 1,300,655                                                          |       | 1,493,167 |   | 465,650 |   |
| Net insurance premiums earned                                                                   |       | 1,171,433                                                          |       | 953,647 |   | 782,685 |   |
| Other                                                                                           |       | 574,679                                                            |       | 470,179 |   | 510,669 |   |
| Total revenues                                                                                  |       | 11,417,128                                                         |       | 10,016,708 |   | 8,566,627 |   |
| **Expenses**                                                                                    |       |                                                               |       |   |   |   |   |
| Compensation                                                                                    |       | 4,373,985                                                          |       | 3,615,483 |   | 3,137,045 |   |
| Occupancy and other office                                                                      |       | 1,030,164                                                          |       | 879,680 |   | 643,378 |   |
| Insurance claims                                                                                |       | 449,138                                                            |       | 441,584 |   | 390,203 |   |
| Advertising and promotion                                                                       |       | 260,652                                                            |       | 229,183 |   | 171,585 |   |
| Other                                                                                           |       | 969,054                                                            |       | 703,012 |   | 628,543 |   |
| Total expenses                                                                                  |       | 7,082,993                                                          |       | 5,868,942 |   | 4,970,754 |   |
| Earnings before  income taxes                                                                   |       | 4,334,135                                                          |       | 4,147,766 |   | 3,595,873 |   |
| Provision for income taxes                                                                      |       | 1,659,289                                                          |       | 1,619,676 |   | 1,398,299 |   |
| **NET EARNINGS**                                                                                |       | $                                                                  | 2,674,846  |   | $ | 2,528,090 |   | $ | 2,197,574 |   |
| **Earnings per share**                                                                          |       |                                                               |       |   |   |   |   |
| Basic                                                                                           |       | $                                                                  | 4.42       |   | $ | 4.28 |   | $ | 3.90 |   |
| Diluted                                                                                         |       | $                                                                  | 4.30       |   | $ | 4.11 |   | $ | 3.63 |   |

 

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

F-4

----

**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, 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    | )         |       |   | — |   |   | — |   | — |   |
| Issuance of common  stock pursuant to stock-based compensation plans |       |                                                      | 7,043,996   |              |       |                             | 353        |                                                      |       |                   | 137,603    |      |       |   | — |   |   | — |   | 137,956 |   |
| Tax benefit of  stock options exercised                              |       |                                                      | —      |              |       |                             | —     |                                                      |       |                   | 93,057     |      |       |   | — |   |   | — |   | 93,057 |   |
| Issuance of common  stock, net of treasury  stock                    |       |                                                      | 136,197     |              |       |                             | 7          |                                                      |       |                   | 5,989      |      |       |   | — |   |   | — |   | 5,996 |   |
| Issuance of common  stock in 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 |   |
| 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 |   |
| 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 |   |
| Issuance of common  stock pursuant to stock-based compensation plans |       |                                                      | 14,902,964  |              |       |                             | 749        |                                                      |       |                   | 215,893    |      |       |   | — |   |   | — |   | 216,642 |   |
| Tax benefit of  stock options exercised                              |       |                                                      | —      |              |       |                             | —     |                                                      |       |                   | 115,117    |      |       |   | — |   |   | — |   | 115,117 |   |
| Issuance of common  stock, net of treasury  stock                    |       |                                                      | 1,070,624   |              |       |                             | 54         |                                                      |       |                   | 36,516     |      |       |   | — |   |   | — |   | 36,570 |   |
| Issuance of common  stock in 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 |   |
| 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-5

----

**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)** | ** **  |
| **Balance at December 31, 2005**                                                                 |       |                                                      | 600,030,686 |              |       |                             | $          | 30,008                                                    |       |                   | $          | 2,954,019 |       |   | $ | 61,114 |   |   | $ | 9,770,719 |   | $ | 12,815,860 |   |
| Remeasurement of mortgage servicing rights to fair  value upon adoption of SFAS 156                   |       |                                                      | —      |              |       |                             | —     |                                                      |       | —                 |       |      | —     |   |   | 67,065 |   | 67,065 |   |
| Balance at, January 1, 2006                                                                      |       |                                                      | 600,030,686 |              |       |                             | 30,008     |                                                      |       | 2,954,019              |       |      | 61,114     |   |   | 9,837,784 |   | 12,882,925 |   |
| Net earnings for the year                                                                             |       |                                                      | —      |              |       |                             | —     |                                                      |       | —                 |       |      | —     |   |   | 2,674,846 |   | 2,674,846 |   |
| Other comprehensive income (loss), net of tax:                                                        |       |                                                      |        |              |       |                             |       |                                                      |       |                   |       |      |       |   |   |   |   |   |   |
| Net unrealized losses from available-for-sale  securities                                             |       |                                                      | —      |              |       |                             | —     |                                                      |       | —                 |       |      | (57,269    | ) |   | — |   | (57,269 | ) |
| Net unrealized losses from cash flow hedging  instruments                                             |       |                                                      | —      |              |       |                             | —     |                                                      |       | —                 |       |      | (9,986     | ) |   | — |   | (9,986 | ) |
| Net change in foreign currency translation adjustment                                                 |       |                                                      | —      |              |       |                             | —     |                                                      |       | —                 |       |      | 18,312     |   |   | — |   | 18,312 |   |
| Total comprehensive income                                                                            |       |                                                      |        |              |       |                             |       |                                                      |       |                   |       |      |       |   |   |   |   | 2,625,903 |   |
| Unfunded liability relating to defined benefits plans  recorded upon adoption of SFAS 158, net of tax |       |                                                      | —      |              |       |                             | —     |                                                      |       | —                 |       |      | (29,727    | ) |   | — |   | (29,727 | ) |
| Issuance of common stock pursuant to stock-based  compensation plans                                  |       |                                                      | 22,177,796  |              |       |                             | 1,116      |                                                      |       | 518,319                |       |      | —     |   |   | — |   | 519,435 |   |
| Excess tax benefit related to stock-based  compensation                                               |       |                                                      | —      |              |       |                             | —     |                                                      |       | 143,955                |       |      | —     |   |   | — |   | 143,955 |   |
| Issuance of common stock, net of treasury stock                                                       |       |                                                      | 1,198,824   |              |       |                             | 60         |                                                      |       | 43,365                 |       |      | —     |   |   | — |   | 43,425 |   |
| Issuance of common stock in conversion of convertible  debt                                           |       |                                                      | 414,868     |              |       |                             | 21         |                                                      |       | 1,444                  |       |      | —     |   |   | — |   | 1,465 |   |
| Repurchase and cancellation of common  stock                                                          |       |                                                      | (38,639,876 | )                 |       |                             | (1,932     | )                                                         |       | (1,506,664             | )          |      | —     |   |   | — |   | (1,508,596 | ) |
| Cash dividends paid—$0.60 per common  share                                                      |       |                                                      | —      |              |       |                             | —     |                                                      |       | —                 |       |      | —     |   |   | (360,939 | ) | (360,939 | ) |
| **Balance  at December 31, 2006**                                                                |       |                                                      | 585,182,298 |              |       |                             | $          | 29,273                                                    |       |                   | $          | 2,154,438 |       |   | $ | (17,556 | ) |   | $ | 12,151,691 |   | $ | 14,317,846 |   |

 

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

F-6

----

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

| ** **                                                                                                | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                | ** ** | **(in thousands)**                     | ** ** |
| **Cash flows from operating activities:**                                                                 |       |                                        |       |   |   |   |   |
| Net earnings                                                                                              |       | $                                           | 2,674,846  |   | $ | 2,528,090 |   | $ | 2,197,574 |   |
| Adjustments to reconcile net earnings to net cash  used by operating activities:                          |       |                                        |       |   |   |   |   |
| Gain on sale of  loans and securities                                                                     |       | (5,681,847                                  | )          | (4,861,780 | ) | (4,842,082 | ) |
| Accretion of  discount on securities                                                                      |       | (439,769                                    | )          | (386,322 | ) | (422,683 | ) |
| Interest capitalized  on loans                                                                            |       | (734,244                                    | )          | (123,457 | ) | (1,503 | ) |
| Amortization of  deferred premiums, discounts, fees and costs, net                                        |       | 366,477                                     |       | 234,738 |   | 117,629 |   |
| Accretion of fair  value adjustments and discounts on notes payable                                       |       | (66,578                                     | )          | (58,397 | ) | (32,783 | ) |
| Change in fair  value of hedged notes payable and related interest-rate and foreign-currency  swaps       |       | (23,271                                     | )          | 266 |   | 370 |   |
| Amortization of  deferred fees on time deposits                                                           |       | 21,281                                      |       | 13,706 |   | 4,928 |   |
| Provision for loan  losses                                                                                |       | 233,847                                     |       | 115,685 |   | 71,775 |   |
| Change in MSR value  due to realization of expected cash flows from mortgage servicing rights             |       | 3,193,740                                   |       | — |   | — |   |
| Amortization of  mortgage servicing rights                                                                |       | —                                      |       | 2,288,354 |   | 1,940,457 |   |
| Change in fair  value of mortgage servicing rights                                                        |       | (432,241                                    | )          | — |   | — |   |
| (Recovery)  impairment of mortgage servicing rights                                                       |       | —                                      |       | (601,017 | ) | 279,842 |   |
| Changes in fair  value of mortgage servicing rights attributable to hedged risk                           |       | —                                      |       | 213,166 |   | — |   |
| Impairment of  retained interests                                                                         |       | 195,269                                     |       | 346,121 |   | 404,226 |   |
| Servicing hedge  losses                                                                                   |       | 613,706                                     |       | 523,078 |   | 215,343 |   |
| Depreciation and  other amortization                                                                      |       | 264,041                                     |       | 243,101 |   | 151,159 |   |
| Stock-based  compensation expense                                                                         |       | 150,562                                     |       | 39,909 |   | 32,776 |   |
| Provision for  deferred income taxes                                                                      |       | 817,301                                     |       | 1,469,093 |   | 492,188 |   |
| Origination and  purchase of loans held for sale                                                          |       | (444,412,275                                | )          | (448,686,210 | ) | (335,890,238 | ) |
| Proceeds from sale  and principal repayments of loans held for sale                                       |       | 450,154,350                                 |       | 437,499,910 |   | 330,625,475 |   |
| (Increase)  decrease in trading securities                                                                |       | (10,519,612                                 | )          | 878,821 |   | (573,301 | ) |
| Net change in  retained interests accounted for as trading securities                                     |       | (849,496                                    | )          | (731,871 | ) | (783,284 | ) |
| Increase in other  assets                                                                                 |       | (1,943,255                                  | )          | (2,137,920 | ) | (1,038,513 | ) |
| Increase  (decrease) in trading securities sold, not yet purchased, at fair value                         |       | 1,040,078                                   |       | (627,449 | ) | 1,442,976 |   |
| Increase in  accounts payable and accrued liabilities                                                     |       | 1,763,639                                   |       | 649,168 |   | 772,655 |   |
| Increase  (decrease) in income taxes payable                                                              |       | 283,654                                     |       | (181,598 | ) | (184,439 | ) |
| Net cash used by  operating activities                                                                    |       | (3,329,797                                  | )          | (11,352,815 | ) | (5,019,453 | ) |
| **Cash flows from investing activities:**                                                                 |       |                                        |       |   |   |   |   |
| Increase in securities  purchased under agreements to resell, federal funds sold and securities  borrowed |       | (3,952,536                                  | )          | (9,860,913 | ) | (3,008,346 | ) |
| Additions to loans held  for investment, net                                                              |       | (8,759,199                                  | )          | (33,109,959 | ) | (13,473,134 | ) |
| Sales of loans held for  investment                                                                       |       | 73,699                                      |       | 2,678,737 |   | — |   |
| Additions to investments  in available-for-sale other financial instruments                               |       | (4,058,245                                  | )          | (5,752,699 | ) | (7,549,531 | ) |
| Proceeds from sale and  repayment of investments in available-for-sale other financial instruments        |       | 3,360,534                                   |       | 4,642,119 |   | 14,986,551 |   |
| Purchase of mortgage  servicing rights                                                                    |       | (149,638                                    | )          | (302,441 | ) | (385,459 | ) |
| Purchase of premises and  equipment, net                                                                  |       | (552,295                                    | )          | (475,907 | ) | (341,738 | ) |
| Net cash used by  investing activities                                                                    |       | (14,037,680                                 | )          | (42,181,063 | ) | (9,771,657 | ) |
| **Cash flows from financing  activities:**                                                                |       |                                        |       |   |   |   |   |
| Net increase in deposit  liabilities                                                                      |       | 16,118,485                                  |       | 19,412,002 |   | 10,680,609 |   |
| Net increase (decrease)  in securities sold under agreements to repurchase and federal funds purchased    |       | 7,960,296                                   |       | 13,688,082 |   | (11,548,289 | ) |
| Net (decrease) increase  in short-term borrowings                                                         |       | (5,568,271                                  | )          | 7,289,162 |   | 6,204,613 |   |
| Issuance of long-term  debt                                                                               |       | 13,748,994                                  |       | 18,121,269 |   | 17,585,096 |   |
| Repayment of long-term  debt                                                                              |       | (13,195,815                                 | )          | (4,676,169 | ) | (8,000,736 | ) |
| Excess tax benefits  related to stock-based compensation                                                  |       | 136,917                                     |       | — |   | — |   |
| Tax benefit of stock  options exercised                                                                   |       | —                                      |       | 115,117 |   | 93,057 |   |
| Issuance of common stock                                                                                  |       | 412,298                                     |       | 213,303 |   | 111,176 |   |
| Repurchase and  cancellation of common stock                                                              |       | (1,508,596                                  | )          | — |   | — |   |
| Payment of dividends                                                                                      |       | (360,939                                    | )          | (349,017 | ) | (209,362 | ) |
| Net cash provided by  financing activities                                                                |       | 17,743,369                                  |       | 53,813,749 |   | 14,916,164 |   |
| Net increase in  cash                                                                                     |       | 375,892                                     |       | 279,871 |   | 125,054 |   |
| Cash at beginning  of year                                                                                |       | 1,031,108                                   |       | 751,237 |   | 626,183 |   |
| Cash at end of year                                                                                       |       | $                                           | 1,407,000  |   | $ | 1,031,108 |   | $ | 751,237 |   |

 

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

F-7

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**Note 1—Organization**

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

**Note 2—Summary ofSignificant Accounting Policies**

A summary of the Company’ssignificant accounting policies applied in the preparation of the accompanyingconsolidated financial statements follows.

***Use of Estimates***

Management is required tomake estimates and assumptions to prepare financial statements in conformitywith U.S. generally accepted accounting principles (“GAAP”). Management’sestimates and assumptions materially affect the reported amounts of assets andliabilities and the disclosure of contingent liabilities at the date of thefinancial statements, and revenues and expenses during the reporting period.Actual results could differ from those estimates.

***Principles of Consolidation***

The Company comprises both operating and specialpurpose entities (“SPEs”). With respect to operating entities, the consolidatedfinancial statements include the accounts of Countrywide Financial Corporation,all majority-owned subsidiaries and all joint ventures for which it hasoperational control. 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 investments.

Special purpose entities are evaluated first forclassification as “qualifying special purpose entities” (“QSPEs”) as specifiedby Statement of Financial Accounting Standards No. 140, *Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities,* (“SFAS 140”). Special purposeentities that are classified as QSPEs are excluded from the consolidatedfinancial statements of the Company. Special purpose entities that are notclassified as QSPEs are further evaluated for classification as variableinterest entities as specified by FASB Interpretation No. 46 (revised), *Consolidation of Variable Interest Entities*. Special purposeentities that meet the definition of variable interest entities where theCompany is identified as the primary beneficiary of the entity are included inCountrywide’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, in the Company’s consolidated statements ofearnings.

***Financial Statement Reclassifications***

Certain amounts reflectedin the consolidated financial statements for the years ended December 31,2005 and 2004, have been reclassified to conform to the presentation for theyear ended December 31, 2006.

F-8

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

***Quantification of Misstatements***

In September 2006,the Securities and Exchange Commission (“SEC”) issued Staff Accounting BulletinNo. 108 (“SAB 108”), *Considering the Effects ofPrior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements*. SAB 108 provides the SEC staff’s viewsregarding the process of quantifying financial statement misstatements. Itrequires the use of two different approaches to quantifying misstatements—(1) the“rollover approach” and (2) the “iron curtain approach”—when assessingwhether such a misstatement is material to the current period financialstatements. The rollover approach focuses on the impact on the income statementof a misstatement originating in the current reporting period. The iron curtainapproach focuses on the cumulative effect on the balance sheet as of the end ofthe current reporting period of uncorrected misstatements regardless of whenthey originated. If a material misstatement is quantified under either approach,after considering quantitative and qualitative factors, the financialstatements would require adjustment. Depending on the magnitude of thecorrection with respect to the current period financial statements, changes tofinancial statements for prior periods could result. SAB 108 is effectivefor the Company’s fiscal year ended December 31, 2006. The application ofSAB 108 did not have a significant effect on the Company’s previously reportedfinancial statements or on the current consolidated financial position andearnings of the Company.

***Derivative Financial Instruments***

The Company uses derivative financial instrumentsextensively as part of its interest rate and foreign currency risk managementactivities. (See Note 4—*Derivative FinancialInstruments*, for further discussion about the Company’s riskmanagement activities.) All derivative financial instruments are recognized onthe balance sheet at fair value.

The Company designates each derivative instrument ithas entered into as either a hedge of the fair value of a recognized asset orliability, or of an unrecognized firm commitment (“fair value” hedge); a hedgeof a forecasted transaction or of the variability of cash flows to be receivedor paid related to a recognized asset or liability (“cash flow” hedge); or as afree-standing derivative 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 the 

F-9

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

hedge and on an ongoingbasis, whether the derivative instruments used are highly effective inoffsetting changes in fair values or cash flows of hedged items. If it isdetermined that the derivative instrument is not highly effective 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) the Companydetermines that the designation of a derivative instrument as a hedge is nolonger appropriate. When hedge accounting is discontinued, the derivativeinstrument continues to be carried on the balance sheet at its fair value withchanges in fair value recognized in current-period earnings. However, thecarrying value of the previously hedged asset or liability is no longeradjusted for changes in fair value.

When hedge accounting is discontinued because it isprobable that a forecasted transaction will not occur, the derivative instrumentcontinues to be carried on the balance sheet at its fair value, and gains andlosses that were accumulated in other accumulated comprehensive income arerecognized in current-period earnings. When hedge accounting is discontinuedbecause the hedging instrument is sold or terminated, the amount reported inaccumulated other comprehensive income to the date of sale or termination, ifany, is reported in accumulated other comprehensive income until the forecastedtransaction impacts earnings.

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, then the embedded derivative instrument is recorded apart from thehost contract and carried at fair value with changes recorded in current-periodearnings.

***Sales, Securitizations and Servicing of Financial Instruments***

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 includemortgage servicing rights (“MSRs”) and certain retained interests, such asinterest-only securities, principal-only securities and residual securities,which the Company generally holds as long-term investments. (See Note 3—*Loan Sales*, for a description of MSRs.)

When the Company sells mortgage loans, it allocatesthe cost of the mortgage loans between the securities or loans sold and theinterests it continues to hold, based on their relative fair values. Note 3—*Loan Sales*, describes how the Company estimates fair value.The reported gain is the difference between the proceeds from the sale of thesecurities or loans and the cost allocated to the securities or loans sold. 

F-10

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

The proceeds include cashand other assets obtained (i.e., MSRs) less any liabilities incurred (i.e.,liabilities for representations and warranties or other recourse provisions).

In March 2006, the FASB issued Statement ofFinancial Accounting Standards 156, *Accounting for Servicingof Financial Assets,*(“SFAS 156”), which amends SFAS 140. SFAS 156changes SFAS 140 by requiring that MSRs be initially recognized at their fairvalue and by providing the option to either: (1) carry MSRs at fair valuewith changes in fair value recognized in current period earnings; or (2) continuerecognizing periodic amortization expense and assess the MSRs for impairment asoriginally required by SFAS 140. This option may be applied by class ofservicing asset or liability.

The Company adopted SFAS 156 effective January 1,2006. The Company identified MSRs relating to all existing residential mortgageloans as a class of servicing rights and elected to apply fair value accountingto these MSRs. Presently, this class represents all of the Company’s MSRs. SFAS156 required the transition adjustment necessary to record MSRs at fair valueat adoption to be recognized in beginning shareholders’ equity. Accordingly,the following adjustment was made to the opening balances of MSRs, income taxespayable and retained earnings:

| ** **                                                          | ** ** | **MSRs**                | ** ** | **Income Taxes  Payable** | ** ** | **Retained  Earnings** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------|------------|--------------------------------|------------|------------------------|------------|
| ** **                                                          | ** ** | **(in thousands)** | ** ** |
| Balance at December 31,  2005                                  |       | $                       | 12,610,839 |                           |       | $                      | 3,846,174  |   |   | $ | 9,770,719 |   |
| Remeasurement of MSRs to fair value upon adoption of  SFAS 156 |       | 109,916                 |       |                           | 42,851     |                   |       | 67,065 |   |
| Balance at  January 1, 2006                                    |       | $                       | 12,720,755 |                           |       | $                      | 3,889,025  |   |   | $ | 9,837,784 |   |

 

As a result of adopting SFAS 156 and applying fairvalue accounting to MSRs, the hedge accounting provisions of Statement ofFinancial Accounting Standards No. 133, *Accountingfor Derivative Instruments and Hedging Activities*, (“SFAS 133”) nolonger apply to the risk management activities of the Company’s MSRs.Therefore, concurrent with the election to carry MSRs at fair value, theCompany discontinued fair value hedge accounting under SFAS 133 related to itsMSRs.

Before December 31, 2005, MSRs were carried atthe lower of amortized cost or estimated fair value. To the extent the MSR wasa part of a fair value hedge accounting relationship, the cost basis wasadjusted for the change in value attributable to the hedge risk. Thisadjustment was reflected in current period earnings. The adjusted cost basisvalue of the MSR was then assessed for impairment. If MSRs were impaired, theimpairment was recognized in current-period earnings and the carrying value ofthe MSRs was adjusted through a valuation allowance. If the value of the MSRs subsequentlyincreased, the recovery in value was recognized in current-period earnings tothe extent of the valuation allowance.

For purposes of performing that MSR impairmentevaluation, the Company stratified its servicing portfolio on the basis of certainrisk characteristics including loan type (fixed-rate or adjustable-rate) andnote rate. Fixed-rate loans were stratified into note-rate pools of 50 basispoints for note rates between 5% and 8% and single pools for note rates above8% and less than or equal to 5%.

Management periodically reviewed the variousimpairment strata to determine whether the value of the impaired MSRs in agiven stratum was likely to recover. When management deemed recovery of thevalue to be unlikely in the foreseeable future, a write-down of the MSRs in thestratum to the estimated recoverable value was charged to the valuationallowance.

F-11

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

Retained interests are designated as trading oravailable-for-sale securities at the time of securitization and are carried atfair value in the consolidated balance sheets.

Trading securities are recorded at fair value withchanges in fair value recorded in current period earnings. The adjustment torecord such securities at fair value from allocated basis is included as acomponent of gain on sale of loans and securities. Subsequent changes in thevalue of retained interests classified as trading securities are included incurrent-period earnings as a component of impairment of retained interests.

Unrealized gains and losses of retained interestsclassified as available-for-sale, net of deferred income taxes, are excludedfrom earnings and reported as a component of accumulated other comprehensiveincome, which is included in shareholders’ equity. Realized gains and losses onsales of these assets are computed by the specific identification method andare recorded in earnings at the time of disposition. Unrealized losses that areother than temporary are recognized in earnings in the period such other thantemporary impairment is identified. Once impairment of retained interestsclassified as available-for-sale is charged to earnings, subsequent increasesin value are recognized in earnings over the estimated remaining life of theinvestment through a higher effective yield.

Recourse retained in loansales and securitization activities is discussed in Note 30—*Credit Losses Related to**Securitized Loans*.

***Loans***

*Mortgage Loans Heldfor Sale*

Mortgage loans held for sale includes mortgage loansoriginated or purchased for resale together with loans transferred intransactions that do not qualify for sales treatment under SFAS 140. Mortgageloans originated and purchased for resale are recorded initially at theprincipal amount outstanding adjusted for any premiums or discounts and thefair value of any related loan commitment at the time of origination. Mortgageloans purchased for resale are initially recorded at fair value. Loanorigination fees, as well as incremental direct origination costs, areinitially recorded as an adjustment of the cost of the loan and are reflectedin earnings when the loan is sold.

The cost basis of certainmortgage loans held for sale is adjusted to reflect changes in the loans’ fairvalue as applicable through fair value hedge accounting. All mortgage loansheld for sale are carried at the lower of adjusted cost or market, which iscomputed by the aggregate method (unrealized losses are offset by unrealizedgains). The market value of mortgage loans held for sale is generally based onquoted market prices for MBS.

*Loans Held forInvestment*

Loans are classified asheld-for-investment based on management’s intent and ability to hold the loansfor the foreseeable future or to maturity. Loans held for investment arecarried at amortized cost reduced by a valuation allowance for estimated creditlosses incurred in the portfolio as of the balance sheet date. A loan’s costincludes its unpaid principal balance along with unearned income, comprised offees charged to borrowers offset by incremental direct origination costs forloans originated by the Company or any premiums or discounts paid for loanspurchased. Unearned income is amortized over the loan’s contractual life. Forrevolving lines of credit, unearned income is amortized using the straight-linemethod. For other loans, unearned income is amortized using the interestmethod.

F-12

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

*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 theultimate collection of principal or interest. When a loan is placed onnonaccrual status, the accrued and unpaid interest is reversed and interestincome is recorded when the principal balance has been reduced to an amountthat is deemed collectible. Loans return to accrual status when principal andinterest become current and are anticipated to be fully collectible on a timelybasis.

*Credit Quality andLoan Impairment*

The Company provides for incurred losses on loans withan allowance for loan losses. The allowance for loan losses is a valuationallowance established to provide for estimated incurred credit losses in theportfolio of loans held for investment as of the balance sheet date. Theallowance for loan losses is evaluated on a periodic basis by management and isbased on a variety of factors, including historical default and loss rates forsimilar loans originated by the Company estimates of collateral value forindividually evaluated loans and evaluations of the effect of current economicand market conditions. This evaluation is inherently subjective as it requiresestimates that are susceptible to significant revision as factors change or asmore information becomes available.

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 generally placed onnonaccrual status when they become 90 days delinquent. Loans in the Company’swarehouse lending and commercial real estate lending portfolios areindividually evaluated for impairment on a regular basis.

Once a loan is acquiredand included in the Company’s portfolio of loans held for investment, Countrywideassesses loan credit quality and estimates its allowance requirement based onwhether the loan is individually evaluated or part of a pool of homogenousloans:

·       Homogenousloans, such as mortgage loans and repurchased loans, are evaluated based on theloans’ present collection status (delinquency, foreclosure and bankruptcystatus). Our estimate of the required allowance for these loans is developed byestimating both the rate of default of the loans and the amount of loss in theevent of default. The rate of default is assigned to the loans based on theirattributes (e.g., original loan-to-value, borrower credit score, documentationtype, etc.) and collection status. The rate of default is based on analysis ofmigration of loans from each aging category to default over a twelve-monthperiod. Loans more than 90 days past due are assigned a rate of default thatmeasures the percentage of such loans that default over their lives as it isassumed that the condition causing the ultimate default currently exists. Thedefault rate for the loan is then multiplied by an average loss rate for thetype of loan.

·       Warehouselending and commercial real estate loans are individually evaluated by therespective credit administration staff, both for borrower creditworthiness andfor collateral quality. Credit quality is expressed in a Company-developedcredit rating. The allowance for loans that are not identified as impaired isdeveloped by applying credit loss factors applicable to the individual credits’assigned credit grades for unimpaired loans. The allowance for loans identifiedas impaired 

F-13

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

is based on creditmanagement’s estimate of recoverability and value of the collateral securingthe loans.

This evaluation is inherently subjective, as itrequires estimates that are susceptible to significant revision as factorschange or as more information becomes available.

Loan losses are chargedagainst the allowance when management believes the loss is confirmed.

***Trading Securities***

Trading securities consistof securities purchased by the Company’s broker-dealer subsidiary, along withassociated derivative instruments used to manage the price risk of suchsecurities. Trading securities are recorded at fair value on a trade datebasis, and gains and losses, both realized and unrealized, are included in gainon sale of loans and securities in the consolidated statements of earnings.

***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. Realized gains and losses on sales of these assets are computed by thespecific identification method and are recorded in earnings at the time ofdisposition. 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 securitiesare recognized in current-period earnings;

·       Allother instruments are accounted for as available-for-sale securities;therefore, unrealized gains or losses, net of deferred income taxes, areexcluded from earnings and reported as a component of accumulated othercomprehensive income, which is included in shareholders’ equity. Unrealizedlosses that are other than temporary are recognized in earnings in the periodthat the other-than-temporary impairment is identified. Once impairment ofretained 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 accruedas earned. Unamortized premiums and unaccreted discounts are amortized andaccrued to interest income as an adjustment of the instruments’ yield using theinterest method. Yields are estimated using market prepayment expectations forsimilar 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 

F-14

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

the same securities beforematurity at a fixed or determinable price are accounted for as purchases andsales 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. Under master netting arrangements, $29.8 billion and $11.9billion of securities purchased under agreements to resell and securitiesborrowed were offset against securities sold under agreements to repurchase at December 31,2006 and 2005, 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 limited to amounts estimated to be recoverable from the related premiumsand anticipated investment income less anticipated losses, loss adjustment expensesand policy maintenance expenses. Deferred acquisition costs totaling $109.9million and $115.2 million were included in other assets at December 31,2006 and 2005, respectively. Amortization of policy acquisition costs totaling$202.6 million, $167.0 million and $138.1 million was included in otheroperating expenses for the years ended December 31, 2006, 2005 and 2004,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, liabilitiesare recorded for future claims, estimated based upon statutory standards, onall policies-in-force at the end of the period, as well as the present value ofamounts not yet due on disability claims. The liability for policy and contractclaims represents the estimated ultimate net cost of all reported andunreported claims incurred through the end of the period, except for thepresent value of amounts not yet due on disability claims, which are includedin 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 period 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,is estimated based on projected defaults, losses and prepayments.

F-15

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

***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 to operationsover their estimated service lives using the straight-line method. Leaseholdimprovements are amortized over the lesser of the term of the lease or servicelife of the improvement using the straight-line method. Renovations andimprovements that add utility or significantly extend the useful life of assetsare capitalized. Repair and maintenance costs are expensed as incurred.

***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. Loan servicing fees are recognized as earned over the life of theloans in the servicing portfolio.

***Income from Retained Interests***

Income from 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”). Lender-placed insurance is obtainedfor the benefit of the lender when a borrower cancels or fails to renewinsurance on a property securing a mortgage loan. GAP insurance providescoverage for leased automobiles’ residual value to the lessor of the vehicle.For GAP insurance, revenue recognition is correlated to the exposure andaccelerated over the life of the contract. For lender-placed 

F-16

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

insurance,premiums are “slowed,” or recognized later in the life of the policy, due tohigh cancellation rates experienced early in the life of the policy. Mortgagereinsurance premiums are recognized as earned over the life of the policy.Prepaid premiums applicable to the unexpired term of policies-in-force arerecorded as unearned premiums in accounts payable and accrued liabilities.

***Stock-Based Compensation***

Effective January 1, 2006, the Company adoptedStatement of Financial Accounting Standards No. 123R, *Share-BasedPayment*, (“SFAS 123R”), an amendment of FASB Statement No. 123,*Accounting for Stock-Based Compensation*,using the modified prospective application approach. In accordance with SFAS123R, the Company began charging the unamortized value of previously grantedemployee stock options to compensation expense during the current period. Forawards made on or after January 1, 2006 made to retirement-eligibleemployees that vest upon retirement, the Company is required under SFAS 123R toimmediately charge the associated value to expense. The value of grants made onor after January 1, 2006, to other employees must be amortized over thelesser of (a) the nominal vesting period or (b) for options that vestupon retirement, the period until the grantee becomes retirement-eligible. Priorto January 1, 2006, the Company recognized compensation expense related toits stock option plans only to the extent that the fair value of the shares atthe grant date exceeded the exercise price.

As of December 31, 2006, the Company has awardedstock options and shares of restricted stock that, depending on the yeargranted and other factors, have different vesting requirements. Generally,stock options issued before 2004 vest over a period of three to four years andexpire five or ten years after the grant date. Stock options awarded in 2004become vested upon attainment of specific earnings performance targets or, inany event, four and a half years after the grant date regardless of attainmentof the earnings targets and expire five years after the date of grant.Generally, stock options granted in 2005 were fully vested on the grant date.Stock options and stock appreciation rights awarded in 2006 vest over athree-year period and expire five to ten years after grant date. Off-cycleawards and awards to new employees have various vesting schedules. Generally,restricted stock awards vest over a period of three years although somerestricted stock awards granted in 2004 had a performance-based componentsimilar to the stock options granted that year.

The impact of adopting SFAS 123R for the year ended December 31,2006, was a charge of approximately $89.0 million ($60.8 million, net of tax,or $0.10 per diluted share) to compensation expense. The remaining unrecognizedcompensation cost related to unvested awards as of December 31, 2006, was$88.5 million and the weighted average period of time over which this cost willbe recognized is 1.5 years.

F-17

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

Hadthe estimated fair value of the options granted been included in compensationexpense for the years indicated below, the Company’s net earnings and earningsper share would have been as follows:

| ** **                                                                        | ** ** | **Years Ended December 31,**                    | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2005**                                                       | ** ** | **2004** | ** ** |
| ** **                                                                        | ** ** | **(in thousands,  except per share data)** | ** ** |
| Net Earnings:                                                                     |       |                                                           |       |   |   |
| As reported                                                                       |       | $                                                              | 2,528,090  |   | $ | 2,197,574 |   |
| Add: Stock-based compensation included in net  earnings, net of taxes   |       | 3,441                                                          |       | 3,292 |   |
| Deduct: Stock-based employee compensation under SFAS 123, net  of taxes |       | (104,269                                                       | )          | (41,317 | ) |
| Pro forma                                                                         |       | $                                                              | 2,427,262  |   | $ | 2,159,549 |   |
| Basic Earnings Per  Share:                                                        |       |                                                           |       |   |   |
| As reported                                                                       |       | $                                                              | 4.28       |   | $ | 3.90 |   |
| Pro forma                                                                         |       | $                                                              | 4.11       |   | $ | 3.83 |   |
| Diluted Earnings Per  Share:                                                      |       |                                                           |       |   |   |
| As reported                                                                       |       | $                                                              | 4.11       |   | $ | 3.63 |   |
| Pro forma                                                                         |       | $                                                              | 3.94       |   | $ | 3.57 |   |

 

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. Those options were immediately vested andbecame exercisable on May 1, 2005. As a result of this vesting provision,the pro-forma expense associated with the entire stock option grant amountingto $55.7 million, net of income taxes, is included in the above stock-basedcompensation pro-forma disclosure for the year ended December 31, 2005.

Theweighted-average assumptions used to value grants of stock options and stockappreciation rights and the resulting average estimated values were as follows:

| ** **                       | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------|------------|---------------------------------------------|------------|
| ** **                       | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Weighted Average  Assumptions:   |       |                                        |       |   |   |   |   |
| Dividend yield                   |       | 1.65                                        | %          | 1.70 | % | 0.85 | % |
| Expected volatility              |       | 29.66                                       | %          | 32.50 | % | 36.02 | % |
| Risk-free interest rate          |       | 4.72                                        | %          | 4.15 | % | 2.90 | % |
| Expected life (in years)         |       | 3.03                                        |       | 3.15 |   | 5.59 |   |
| Per-share fair  value of options |       | $                                           | 10.14      |   | $ | 6.95 |   | $ | 11.09 |   |
| Weighted-average  exercise price |       | $                                           | 36.45      |   | $ | 32.63 |   | $ | 31.85 |   |

 

The Company began using alattice model to estimate the fair value of certain stock awards(i.e., stock appreciation rights and options) granted after the firstquarter of 2006. Management believes the lattice model provides a betterestimate of the fair value of those awards because it permits probabilities tobe assigned to future changes in key assumptions (e.g., risk-free interestrate, stock volatility and dividend rate). It also derives an expected termthat captures patterns of exercise by participants prior to the end of thestated terms of those awards.

F-18

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

***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.

***Recently Issued Accounting Pronouncements***

In September 2005,the Accounting Standards Executive Committee of the AICPA issued Statement ofPosition 05-01 (“SOP 05-01”), *Accountingby Insurance Enterprises for Deferred Acquisition Costs in Connection withModifications or Exchanges of Insurance Contracts.* SOP 05-01provides guidance on accounting by insurance enterprises for deferredacquisition costs on internal replacements of insurance and investmentcontracts. This SOP is effective for internal replacements that occur in fiscalyears beginning January 1, 2007, and is not expected to have a significantimpact on the consolidated financial position or earnings of the Company.

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

·       Establishesa requirement to evaluate interests in securitized financial instruments thatcontain an embedded derivative requiring bifurcation;

·       Permitsfair value remeasurement for any hybrid financial instrument that contains anembedded derivative that otherwise would require bifurcation;

·       Clarifieswhich interest-only strips and principal-only strips are not subject to SFAS133; and

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

SFAS 155 is effective for all financial instrumentsacquired or issued after January 1, 2007. The adoption of SFAS 155 is notexpected to have a significant impact on the consolidated financial position orearnings of the Company.

During July 2006, the FASB issued FASBInterpretation No. 48, *Accounting for Uncertaintyin Income Taxes,* (“FIN 48”). FIN 48 was issued to clarify therequirements of Statement of Financial Accounting Standards No. 109, *Accounting for Income Taxes*, relating to the recognition ofincome tax benefits.

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

·       Incometax benefits should be recognized when, based on the technical merits of a taxposition, the entity believes that if a dispute arose with the taxing authorityand were taken to a court of last 

F-19

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

resort, it is more likelythan not (i.e., a probability of greater than 50 percent) that the tax positionwould be sustained as filed; and

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

FIN 48 is applicable beginning January 1, 2007.The cumulative effect of applying the provisions of FIN 48 upon adoptionwill be reported as an adjustment to beginning retained earnings. The adoptionof FIN 48 is not expected to be material.

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 157, *Fair ValueMeasurements,* (“SFAS 157”). SFAS 157 provides a framework formeasuring fair value when such measurements are utilized for accountingpurposes. The framework focuses on an exit price in the principal (or,alternatively, the most advantageous) market accessible in an orderlytransaction between willing market participants. SFAS 157 establishes athree-tiered fair value hierarchy with Level 1 representing quoted prices foridentical assets or liabilities in an active market and Level 3 representingestimated values based on unobservable inputs. Under SFAS 157, relateddisclosures are segregated for assets and liabilities measured at fair valuebased on the level used within the hierarchy to determine their fair values.The Company has determined that it will adopt SFAS 157 on its effective date ofJanuary 1, 2008 and the financial impact, if any, upon adoption has notyet been determined.

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

**Note 3—Loan Sales**

The Company routinely originates, purchases and sellsmortgage loans into the secondary mortgage market. Prime mortgage loan salesare generally structured without recourse to the Company. However, the Companygenerally has limited recourse on the Prime Home Equity and Nonprime MortgageLoans it securitizes, through retention of a subordinated interest or throughits issuance of a corporate guarantee of losses up to a negotiated maximumamount. While the Company generally does not retain credit risk on the PrimeMortgage Loans it sells, it has potential liability under representations andwarranties it makes to purchasers and insurers of the loans.

The Company had a liability for losses relating torepresentations and warranties included in accounts payable and accruedliabilities totaling $390.2 million and $187.5 million at December 31,2006 and 2005, respectively. The Company recognized gains of $4.7 billion, $4.0billion, and $4.3 billion from sales of mortgage loans in securitizations inthe years ended December 31, 2006, 2005 and 2004, respectively. The 

F-20

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

Company includedprovisions for losses on representations and warranties in gain on sale ofloans and securities totaling $290.4 million, $66.5 million and $85.4 millionduring the years ended December 31, 2006, 2005 and 2004, respectively. TheCompany had charge-offs totaling $87.7 million, $31.0 million, and $42.1million relating to its representations and warranties during the years ended December 31,2006, 2005 and 2004, respectively.

When the Company sells mortgage loans it generallyreceives cash and MSRs and, when those sales take the form of securitizations,Countrywide may also retain interest-only securities, principal-onlysecurities, 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.

The value of MSRs is derived from the net positivecash flows associated with the servicing contracts. The Company receives aservicing fee ranging generally from 0.125% 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 fromcollecting and remitting mortgage payments, as well as rights to variousmortgagor-contracted fees such as late charges, collateral reconveyance chargesand loan prepayment penalties. The Company also generally has the right tosolicit the mortgagors for other products and services, such as secondmortgages and insurance, as well as for new mortgages for those considering refinancingor purchasing a new home.

The precise market value of MSRs and retainedinterests cannot be readily determined because these assets are not activelytraded in stand-alone markets. Considerable judgment is required to determinethe fair values of those assets 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/Liability Committee, which is comprised of several of oursenior financial executives, ultimately determines the valuation of MSRs andretained interests.

Our MSR valuation process combines the use of adiscounted cash flow model and analysis of current market data to arrive at anestimate of fair value at each balance sheet date. The cash flow assumptions(which consider only contractual cash flows) and prepayment assumptions used inour discounted cash flow model are based on market factors and encompass thehistorical performance of our MSRs, which we believe are consistent withassumptions and data used by market participants valuing similar MSRs. The keyassumptions used in the valuation of MSRs include mortgage prepayment speedsand the discount rate (projected LIBOR plus option-adjusted spread). Thesevariables can, and generally do, change from quarter to quarter as marketconditions and projected interest rates change. The current market datautilized in the MSR valuation process and in the assessment of thereasonableness of our valuation is obtained from peer group MSR valuationsurveys, MSR market trades, MSR broker valuations and prices of interest-onlysecurities.

F-21

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

The cash flow model andunderlying prepayment and interest rate models used to value the MSRs aresubjected to validation in accordance with the Company’s model validationpolicies. This process includes review of the theoretical soundness of themodels and the related development process, back testing of actual results tomodel predictions, benchmarking to commercially available models and ongoingperformance monitoring.

For retained interests,the Company also estimates fair value through the use of discounted cash flowmodels. The key assumptions used in the valuation of its retained interestsinclude mortgage prepayment speeds, discount rates, and for residual interestscontaining credit risk, the net lifetime credit losses. The discounted cashflow models incorporate cash flow and prepayment assumptions based on datadrawn from the historical performance of the loans underlying the Company’sretained interests, which management believes is consistent with assumptionsother major market participants would use in determining the assets’ fairvalue.

Keyeconomic assumptions used in determining the fair value of MSRs at the time ofsecuritization are as follows:

| ** **                                          | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Weighted-average  life (in years)                   |       |                                        | 5.9        |   |   |   | 5.8 |   |   |   | 6.2 |   |   |
| Weighted-average  annual prepayment speed           |       |                                        | 22.2       | % |   |   | 23.0 | % |   |   | 21.2 | % |   |
| Weighted-average  option-adjusted spread over LIBOR |       |                                        | 6.7        | % |   |   | 6.5 | % |   |   | 5.9 | % |   |

 

Keyeconomic assumptions used in determining the fair value of retained interestsat the time of securitization are as follows:

| ** **                                | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                | ** ** | ** 2006 **                        | ** ** | ** 2005 ** | ** ** | ** 2004 ** | ** ** |
| Weighted-average  life (in years)         |       |                                        | 4.0        |   |   |   | 3.5 |   |   |   | 3.5 |   |   |
| Weighted-average  annual prepayment speed |       |                                        | 29.0       | % |   |   | 30.2 | % |   |   | 32.9 | % |   |
| Weighted-average  annual discount rate    |       |                                        | 18.7       | % |   |   | 20.1 | % |   |   | 25.0 | % |   |
| Weighted-average  lifetime credit losses  |       |                                        | 1.9        | % |   |   | 2.0 | % |   |   | 2.7 | % |   |

 

Thefollowing table summarizes cash flows between the Company and securitizationspecial purpose entities:

| ** **                                                           | ** ** | **Years Ended December 31,** | ** **  |
|----------------------------------------------------------------------|------------|---------------------------------------------|-------------|
| ** **                                                           | ** ** | **2006**                                    | ** **  | **2005** | ** ** | **2004** | ** ** |
| ** **                                                           | ** ** | **(in thousands)**                     | ** **  |
| Proceeds from new securitizations                                    |       | $                                           | 362,265,135 |   | $ | 364,669,509 |   | $ | 259,102,621 |   |
| Proceeds from collections reinvested in  securitizations             |       | 4,260,106                                   |        | 3,329,840 |   | 1,836,796 |   |
| Service fees received                                                |       | 2,318,092                                   |        | 1,877,780 |   | 1,586,166 |   |
| Purchases of delinquent loans and cleanup   calls                    |       | (1,490,999                                  | )           | (3,786,551 | ) | (3,387,739 | ) |
| Servicing advances                                                   |       | (4,178,052                                  | )           | (2,524,067 | ) | (3,334,357 | ) |
| Repayment of servicing advances                                      |       | 3,978,490                                   |        | 2,352,253 |   | 3,576,598 |   |
| Cash flows received on retained interests other than  servicing fees |       | 2,422,291                                   |        | 1,309,437 |   | 704,813 |   |
|                                                                      |            |                                             |             |  |  |  |  |  |  |  |

 

F-22

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

Keyassumptions used in measuring the fair value of the Company’s MSRs at December 31,2006 and 2005, and the effect on the fair value of those MSRs from adversechanges in those assumptions, are as follows:

| ** **                                | ** ** | **December 31,**                            | ** ** |
|-------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                                | ** ** | **(dollar amounts in thousands)** | ** ** |
| Fair value of  MSRs                       |       | $                                                | 16,172,064 |   | $ | 12,720,755 |   |
| Weighted-average  life (in years)         |       | 5.8                                              |       | 5.6 |   |
| Weighted-average  annual prepayment speed |       | 21.0                                             | %          | 22.8 | % |
| Impact of 5% adverse change               |       | $                                                | 116,095    |   | $ | 238,131 |   |
| Impact of 10% adverse change              |       | $                                                | 227,104    |   | $ | 463,010 |   |
| Impact of 20% adverse change              |       | $                                                | 435,845    |   | $ | 877,291 |   |
| Weighted-average  OAS                     |       | 6.2                                              | %          | 6.4 | % |
| Impact of 5% adverse change               |       | $                                                | 129,460    |   | $ | 94,600 |   |
| Impact of 10% adverse change              |       | $                                                | 256,746    |   | $ | 187,660 |   |
| Impact of 20%  adverse change             |       | $                                                | 505,029    |   | $ | 367,225 |   |

 

Keyassumptions used in measuring the fair value of the Company’s retainedinterests at December 31, 2006 and 2005, and the effect on the fair valueof those retained interests from adverse changes in those assumptions are asfollows:

| ** **                                   | ** ** | **December 31,**                            | ** ** |
|----------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                                   | ** ** | **(dollar amounts in thousands)** | ** ** |
| Fair value of  retained interests            |       |                                             | $          | 3,040,575 |   |   |   | $ | 2,675,461 |   |   |
| Weighted-average  life (in years)            |       |                                             | 2.8        |   |   |   | 2.4 |   |   |
| Weighted-average  annual prepayment speed    |       |                                             | 32.2       | % |   |   | 38.3 | % |   |
| Impact of 5% adverse change                  |       |                                             | $          | 91,746 |   |   |   | $ | 57,329 |   |   |
| Impact of 10% adverse change                 |       |                                             | $          | 172,883 |   |   |   | $ | 110,297 |   |   |
| Impact of 20% adverse change                 |       |                                             | $          | 313,420 |   |   |   | $ | 214,392 |   |   |
| Weighted-average  annual discount rate       |       |                                             | 17.3       | % |   |   | 17.9 | % |   |
| Impact of 5% adverse change                  |       |                                             | $          | 33,809 |   |   |   | $ | 25,646 |   |   |
| Impact of 10% adverse change                 |       |                                             | $          | 60,475 |   |   |   | $ | 54,844 |   |   |
| Impact of 20% adverse change                 |       |                                             | $          | 127,056 |   |   |   | $ | 117,472 |   |   |
| Weighted-average  net lifetime credit losses |       |                                             | 2.6        | % |   |   | 1.7 | % |   |
| Impact of 5% adverse change                  |       |                                             | $          | 48,550 |   |   |   | $ | 44,834 |   |   |
| Impact of 10% adverse change                 |       |                                             | $          | 117,336 |   |   |   | $ | 90,552 |   |   |
| Impact of 20%  adverse change                |       |                                             | $          | 224,616 |   |   |   | $ | 177,589 |   |   |

 

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 be extrapolated.Also, in the preceding tables, the effect of a variation in a particularassumption on the fair value of the MSRs or retained interests is calculatedindependently without changing any other assumption. In reality, changes in onefactor may result in changes in another which might compound or counteract thesensitivities.

F-23

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

Thefollowing table presents information about delinquencies and components ofPrime Home Equity and Nonprime Mortgage Loans for which the Company hasretained some level of credit risk:

| ** **                                            | ** ** | **December 31,**   | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|
| ** **                                            | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                            | ** ** | **(in thousands)** | ** ** |
| Prime Home Equity  and Nonprime Mortgage Loans:       |       |                    |       |   |   |
| Loans and securities sold—total principal amount |       | $                       | 82,853,246 |   | $ | 65,657,207 |   |
| Principal amount  60 days or more past due            |       | $                       | 4,577,045  |   | $ | 1,639,436 |   |

 

The Company incurredcredit losses of $186.4 million, $124.0 million and $99.4 million related tothe Prime Home Equity and Nonprime Mortgage Loans with retained credit riskduring the years ended December 31, 2006, 2005 and 2004, respectively.

**Note 4—DerivativeFinancial Instruments**

***Derivative Financial Instruments***

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

The Company manages interest rate risk in its MortgageBanking Segment through the natural counterbalance of its loan production andservicing businesses. The Company also use various financial instruments,including derivatives, to manage the interest rate risk related specifically tothe values of its commitments to make loans, (also referred to as interest ratelock commitments or “IRLCs”), mortgage loans held by the Company pending sale (“MortgageLoan Inventory”), retained interests and trading securities, as well as aportion of its debt.

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

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

*Description of RiskManagement Activities*

The Company is exposed to price risk relative to itsMortgage Loan Inventory and its IRLCs. The Mortgage Loan Inventory is comprisedof mortgage loans held by the Company pending sale, and is presently held foran average of approximately 26 days. IRLCs guarantee the rate and points on theunderlying mortgage or group of mortgages for a specified period, generallyfrom seven to 75 days.

With regard to loans held for sale, the Company isexposed to price risk from the time an IRLC is made to a mortgage applicant orfinancial intermediary to the time the resulting mortgage loan is sold. Forloans held for investment, the Company is exposed to price risk from the timean IRLC is made to a financial intermediary to the time the loan is purchased.During these periods, the Company is exposed to 

F-24

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

losses if mortgage ratesrise, because the value of the IRLC or mortgage loan held for sale declines. Tomanage this price risk the Company uses derivatives.

The price risk management of IRLCs is complicated bythe fact that the ultimate percentage of applications that close within theterms of the IRLC is variable. The probability that the loan will fund withinthe terms of the IRLC is affected by a number of factors, in particular anychange in mortgage rates subsequent to the lock date. This probabilitygenerally increases if mortgage rates rise, and decreases if mortgage ratesfall, due primarily to the relative attractiveness of current mortgage ratescompared to the applicant’s committed rate. The probability that a loan willfund within the terms of the IRLC is also influenced by the source and age ofthe application, purpose for the loan (purchase or refinance), and theapplication approval rate. The Company has developed closing ratio estimates,using historical experience that take into account all of these variables, aswell as renegotiations of rate and point commitments that tend to occur whenmortgage rates fall. Those closing ratio estimates are used to estimate theaggregate balance of loans that will fund within the terms of IRLCs.

To manage the price risk associated with the IRLCs,the Company generally uses a combination of net forward sales of MBS and putand call options on MBS, Treasury futures and Eurodollar futures. The Companygenerally makes forward sales of MBS in an amount equal to the portion of theIRLCs expected to close, assuming no change in mortgage rates. The Companyacquires put and call options to protect against the variability of loanclosings caused by changes in mortgage rates. To manage the credit spread riskassociated with its IRLC’s the Company may enter into credit default swaps.

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. Tomanage the credit spread risk associated with its Mortgage Loan Inventory, theCompany may enter into credit default swaps. The Company actively manages therisk profiles of its IRLCs and Mortgage Loan Inventory on a daily basis.

The Company manages the price risk and credit riskrelated to its commercial mortgage loans using interest rate swaps, total rateof return and credit default 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 MBS at a specified price on a specified date in the future. The valueincreases as mortgage rates rise.

·       *Forward Purchases of MBS:*   Anobligation to buy MBS at a specified price on a specified date in the future. Thevalue increases as mortgage rates fall.

·       *Long Call Options on MBS:*   A right tobuy MBS at a specified price on a specified date in the future. The valueincreases as mortgage rates fall.

·       *Long Put Options on MBS:*   A right tosell MBS at a specified price on a specified date in the future. The valueincreases as mortgage rates rise.

·       *Long Call Options on U.S. Treasury Futures:*   Aright to acquire a U.S. Treasury futures contract at a specified price in thefuture. The value increases as the benchmark U.S. Treasury rate falls.

F-25

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

·       *Long Put Options on U.S. Treasury Futures:*   Aright to sell a U.S. Treasury futures contract at a specified price on aspecified date in the future. The value increases as the benchmark U.S.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 fee or premium over the term of the contract. For use in the riskmanagement primarily of commercial and residential mortgage loans, the Companyreceives credit protection and pays a fixed fee or premium. The value of thesecontracts increases when the probability of the occurrence of a credit eventrises.

·       *Interest Rate Floors:*   Represents aright to receive cash if a reference interest rate falls below a contractualstrike rate; therefore, its value increases as the reference interest falls. Thereference interest rates used in the Company’s interest rate floors includemortgage rates, Treasury rates and U.S. dollar (“USD”) LIBOR.

F-26

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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 31,2006:

| ** **                       | ** ** | **(in billions)** | ** ** |
|----------------------------------|------------|------------------------|------------|
| Mortgage Loan Inventory:         |       |                   |       |   |   |
| Fixed rate                       |       |                   | $          | 13.8 |   |   |
| Adjustable rate                  |       |                   | 17.5       |   |   |
| Total                            |       |                   | $          | 31.3 |   |   |
| Interest rate lock  commitments: |       |                   |       |   |   |
| Fixed rate                       |       |                   | $          | 12.2 |   |   |
| Adjustable rate                  |       |                   | 8.6        |   |   |
| Total                            |       |                   | $          | 20.8 |   |   |
| Mandatory forward  trades:       |       |                   |       |   |   |
| Sales                            |       |                   | $          | (43.2 | ) |   |
| Buys                             |       |                   | 33.6       |   |   |
| Net mandatory positions          |       |                   | $          | (9.6 | ) |   |
| Long U.S. Treasury  options:     |       |                   |       |   |   |
| Calls                            |       |                   | $          | 29.6 |   |   |
| Puts                             |       |                   | (1.0       | ) |   |
| Net long U.S. Treasury options   |       |                   | $          | 28.6 |   |   |
| Short Eurodollar  futures        |       |                   | $          | (55.7 | ) |   |
| Total rate of  return swaps      |       |                   | $          | 9.6 |   |   |
| Credit default  swaps            |       |                   | $          | 0.9 |   |   |
| Interest rate floor              |       |                   | $          | 1.0 |   |   |

 

*Accounting for RiskManagement Activities*

The change in value of all derivative instruments usedin the risk management activities related to Mortgage Loan Inventory and IRLCsare recorded at fair value with changes in fair value included as a componentof gain on sale of loans and securities in the consolidated statement ofearnings.

IRLCs that qualify as derivative instruments arerecorded at fair value with changes in fair value recognized in current periodearnings as a component of gain on sale of loans and securities. The IRLCsrelated to loans held for sale and the IRLCs related to loans purchased forinvestment generally qualify as derivative instruments.

The Company estimates the fair value of an IRLC basedon the change in estimated fair value of the underlying mortgage loan and theprobability that the mortgage loan will fund within the terms of the IRLC. Thechange in fair value of the underlying mortgage loan is based upon quoted MBSprices and 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 thechange in value of the underlying mortgage loan.

During 2006, the interestrate risk management activities associated with 66% of the fixed-rate mortgageloan inventory and 41% of the adjustable-rate mortgage loan inventory wereaccounted for as fair value hedges. For the years ended December 31, 2006,2005 and 2004, the Company recognized pre-

F-27

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

taxlosses of $116.9 million, $49.7 million and $116.2 million, respectively,representing the ineffective portion of the hedges of its mortgage inventorythat qualified as fair value hedges under SFAS 133. These amounts are includedin gain on Sale of Loan and securities in the consolidated statements ofearnings.

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

*Description of RiskManagement Activities*

MSRs and retained interests, specifically interest-onlysecurities and residual securities, are generally subject to a loss in valuewhen mortgage interest rates decline. The fair value of MSRs and retainedinterests are based on the present value of cash flow streams that are closelylinked to the expected life of the underlying loans. Declining mortgageinterest rates generally precipitate increased mortgage refinancing activity,which decreases the expected life of the underlying loans, thereby decreasingthe value of the MSRs and retained interests. Changes in the value of theseassets are reflected in current period earnings for MSRs and retained interestsaccounted for as trading securities. Impairment of retained interests accountedfor as available-for-sale securities is also reflected in current periodearnings; however appreciation in value above such interests’ amortized cost isreflected as a component of other comprehensive income. To moderate anynegative impact on earnings caused by a rate-driven decline in fair value, theCompany maintains a portfolio of financial instruments, including derivatives,which generally increase in aggregate value when interest rates decline. Thisportfolio of financial instruments is collectively referred to herein as the “ServicingHedge.”

The Company uses thefollowing financial instruments in its Servicing Hedge:

·       *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 the Company receives the fixedrate and pays the floating rate. These contracts increase in value as ratesfall.

·       *Payor Swaptions:*   A right to enterinto a predetermined Interest Rate Swap at a future date, where the Companypays the fixed rate and receives the floating rate. These contracts increase invalue as rates rise.

·       *Mortgage Forward Rate Agreement:*    Amutual agreement to exchange a single cash flow at a forward settlement date,based on the difference between the forward fixed rate and floating rate setequal to the 30-day forward current coupon mortgage rate,  known as the constant maturity index on thesettlement date. For use in the Servicing Hedge, the Company generally receivesthe fixed rate and pays the floating rate. Such contracts increase in value asthe spread between the current coupon mortgage rate and the swap curvetightens, or when interest rates fall.

·       *Long Call Options on U.S. Treasury and EurodollarFutures:*   A right to acquire a U.S. Treasury or Eurodollarfutures contract at a specified price in the future. The value increases as thebenchmark U.S. Treasury or Eurodollar deposit rate falls.

F-28

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

·       *Long Put Options on U.S. Treasury and EurodollarFutures:*   A right to sell a U.S. Treasury or Eurodollar futurescontract at a specified price in the future. The value increases as thebenchmark U.S. Treasury or Eurodollar deposit rate rises.

·       *Long U.S. Treasury Futures:*   Anagreement to purchase a U.S. Treasury security at a specified price in thefuture. The value increases as the benchmark U.S. Treasury rate falls.

·       *Interest Rate Caps:*   A right to receive cash if areference interest rate rises above a contractual strike rate. The valueincreases as the reference interest rate rises. The reference interest ratesused in the Company’s interest rate caps include mortgage rates, U.S. Treasuryrates, and USD LIBOR.

·       *Interest Rate Floors:*   A right toreceive cash if a reference interest rate falls below a contractual strike rate.The value increases as reference interest rates fall. The reference interestrates used include mortgage rates, U.S. Treasury rates, and USD LIBOR.

These instruments are combined to manage the overallrisk portfolio of the MSRs and retained interests. The Company actively managesits retained interests risk profile on a daily basis.

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

| ** **                                  | ** ** | **Balance,  December 31,  2005** | ** ** | **Additions** | ** ** | **Dispositions/  Expirations** | ** ** | **Balance,  December 31,  2006** | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|---------------|------------|--------------------------------|------------|---------------------------------------|------------|
| ** **                                  | ** ** | **(in millions)**                | ** ** |
| Interest rate  swaps                        |       |                                  | $          | 53,850        |       |                           |       | $                                     | 45,720     |   |   |   | $ | (70,545 | ) |   |   | $ | 29,025 |   |   |
| Interest rate  swaptions                    |       |                                  | 50,425     |          |       |                           | 75,450     |                                  |       |   | (84,125 | ) |   |   | 41,750 |   |   |
| Mortgage forward  rate agreements           |       |                                  | 31,125     |          |       |                           | 99,100     |                                  |       |   | (82,225 | ) |   |   | 48,000 |   |   |
| Long call options  on interest rate futures |       |                                  | 17,500     |          |       |                           | 38,250     |                                  |       |   | (51,250 | ) |   |   | 4,500 |   |   |
| Long treasury  futures                      |       |                                  | 1,160      |          |       |                           | 1,000      |                                  |       |   | (2,160 | ) |   |   | — |   |   |
| Interest rate  caps                         |       |                                  | 300        |          |       |                           | —     |                                  |       |   | (300 | ) |   |   | — |   |   |
| Long put options on interest  rate futures  |       |                                  | —     |          |       |                           | 3,500      |                                  |       |   | (3,500 | ) |   |   | — |   |   |

 

The Servicing Hedge isintended to reduce the impact on reported earnings of the decline in value ofMSRs and retained interests that generally results from a decline in mortgagerates. Should mortgage rates increase, the value of the MSRs and retainedinterests is expected to increase while the value of the Servicing Hedge isexpected to decrease.

*Accounting for RiskManagement Activities*

The changes in fair value of derivative contractsincluded in the Servicing Hedge are recorded as a component of the gain or lossfrom the Servicing Hedge in the consolidated statements of earnings.

As a result of electing fair value accounting uponadoption of SFAS 156 effective January 1, 2006, the hedge provisions of SFAS133 no longer apply to the risk management activities of the Company’s MSRs.Effective April 1, 2005, a portion of the Servicing Hedge qualified as afair value hedge under SFAS 133. During the nine months ended December 31,2005, the portion of the Servicing Hedge that qualified as a fair value hedgecovered approximately 28% of the risk associated with a change in fair value ofthe MSRs attributable to changes in interest rates of up to 50 basis points. Atno other time during the years ended December 31, 2005 and 2004, did anyportion of the Servicing Hedge qualify as a hedge under SFAS 133. 

F-29

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

For the nine months ended December 31,2005, the Company recognized a loss of $29.3 million in earnings, whichrepresents the amount of hedge ineffectiveness for the portion of the ServicingHedge that qualified as a fair value hedge under SFAS 133.

There was no portion of the related hedge instruments’gain or loss that was excluded from the assessment of the hedge effectiveness.

Application of fair valuehedge accounting under SFAS 133 resulted 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 MSRs interests in the statement of earnings.

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

*Description of RiskManagement Activities*

Management’s objective in financing the activities ofthe Company is to ensure access to reliable and cost-effective funding from avariety of sources in order to meet the Company’s financing requirements undervarious market conditions. These financing activities subject the Company tointerest rate risk. Specifically, the Company is exposed to the risk that theinterest expense it incurs on its long-term borrowings will change at adifferent speed than the income it earns on the assets financed by thelong-term debt, contributing to variability of net income. To address thisrisk, management seeks long-term debt structured to reprice in a manner similarto the assets it is financing. However, the Company may not be able to obtainaccess to borrowings structured to match the repricing characteristics of theassets being financed at optimal interest rates (i.e., cost). Managementaddresses this constraint, in part, by entering into interest rate and foreigncurrency swap agreements designed to modify the structure of its borrowings. Theseagreements have the effect of changing the structure of a debt agreement to onethat approximates the repricing characteristics of the assets financed.

The Company has entered into interest rate swapcontracts swaps in which the rate received is fixed and the rate paid isadjustable and is indexed to LIBOR (“Receiver Swap”). These interest rate swapsenable the Company to convert a portion of its fixed-rate, long-term debt toU.S. dollar LIBOR-based floating-rate debt (notional amount of $5.5 billion asof December 31, 2006) and a portion of its foreign currency-denominatedfixed and floating-rate, long-term debt to U.S. dollar LIBOR-basedfloating-rate debt (notional amount of $4.5 billion as of December 31,2006). These transactions are generally designated as fair value hedges underSFAS 133.

Thefollowing summarizes the notional amounts and the average interest rates of theswaps as of December 31, 2006:

| ** **     | ** ** | **Notional  Amount**                            | ** ** | **Fixed  Rate** | ** ** | **Floating  Rate** | ** ** |
|----------------|------------|-------------------------------------------------|------------|-----------------|------------|--------------------|------------|
| ** **     | ** ** | **(dollar amounts in millions)** | ** ** |
| Receiver swaps |       | $                                               | 10,063     |            |       | 5.21               | %          |   |   | 5.80 | % |   |
|                |            |                                                 |            |                 |            |                    |            |  |  |  |  |  |

 

Payments on interest rateswaps are based on a specified notional amount and payments are dueperiodically through the termination date of each contract. The swap contractsexpire between February 2007 and November 2036.

F-30

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

*Accounting for RiskManagement Activities*

The interest rate swaps are recognized on the balance sheetat fair value.

For the years ended December 31, 2006, 2005 and2004, the Company recognized a pre-tax gain of $23.3 million, a pre-tax loss of$2.1 million, and a pre-tax loss of $3.8 million, respectively, representingthe ineffective portion of its fair value hedges of debt. These amounts areincluded in interest expense in the consolidated statements of earnings.

For the years ended December 31,2006, 2005 and 2004, the Company recognized no pre-tax gain or loss, a pre-taxgain of $0.5 million, and a pre-tax gain of $0.04 million, respectively,representing the ineffective portion of such cash flow hedges. As of December 31,2006, deferred net gains or losses on derivative instruments included inaccumulated other comprehensive income that are expected to be reclassified asearnings during the next twelve months are not material.

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

*Description of RiskManagement Activities*

The Company faces interest rate risk in theinterest-earning activities of its Bank. Specifically, the Company is exposedto the risk that the interest expense it incurs on its deposits will change ata different rate than the income it earns on its interest-earning assets,resulting in variability in net interest income. Management manages this riskby matching the duration and re-pricing characteristics of the Bank’sinterest-bearing liabilities with those of its interest-earning assets. Toalign the repricing characteristics of its interest-earning assets, the Companyenters into interest rate swap contracts that have the effect of converting aportion of its fixed-rate deposit liabilities to LIBOR-based variable-ratedeposit liabilities.

Thefollowing summarizes the notional amounts and the average interest rates of theswaps as of December 31, 2006:

| ** **              | ** ** | **Notional  Amount**                            | ** ** | **Fixed  Rate** | ** ** | **Floating  Rate** | ** ** |
|-------------------------|------------|-------------------------------------------------|------------|-----------------|------------|--------------------|------------|
| ** **              | ** ** | **(dollar amounts in millions)** | ** ** |
| Receiver swaps          |       |                                            | $          | 417             |       |               |       | 3.77 | % |   |   | 5.38 | % |   |
| Receiver callable swaps |       |                                            | $          | 2,553           |       |               |       | 5.42 | % |   |   | 5.30 | % |   |

 

Payments are dueperiodically through the termination date of each swap contract. The contractsexpire between September 2007 and November 2026.

*Accounting for RiskManagement Activities*

The Bank’s interest rateswap transactions are designated as fair value hedges. For the year ended December 31,2006 and 2005, the Company recognized pre-tax losses of $1.6 million and$0.3 million, respectively, representing the ineffectiveness related to theseswaps. These amounts are included in interest expense in the consolidatedstatement of earnings. For the year ended December 31, 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.

F-31

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

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

*Description of RiskManagement Activities*

In connection withits broker-dealer activities, the Company maintains a trading portfolio offixed-income securities, primarily MBS. The Company is exposed to price changesin its trading portfolio arising from interest rate changes during the periodit holds the securities. To manage this risk, the Company utilizes thefollowing derivative instruments:

·       *Forward Sales of To-Be Announced (“TBA”) MBS:*   Anobligation to sell agency pass-through MBS that have not yet been issued on aspecified price and at a specified date in the future. The value increases asmortgage rates rise.

·       *Forward Purchases of TBA MBS:*   Anobligation to purchase at a specified price on a specified date in the futureagency pass-through MBS that have not yet been issued. The value increases asmortgage rates fall.

·       *Short Futures Contract:*   Astandardized exchange-traded contract, the value of which is tied to spotFederal Funds or Eurodollar rates at specified future dates. The value of thesecontracts increases when Federal Funds or Eurodollar rates rise.

·       *Long Futures Contracts:*   Astandardized exchange-traded contract, the value of which is tied to the spotFederal Funds or Eurodollar rates at specified future dates. The value of thesecontracts increases when Federal Funds or Eurodollar rates fall.

·       *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 its trading portfolio risk management activities, theCompany receives the floating rate and pays the fixed rate. Such contractsincrease in value as rates rise.

·       *Long Put Options on Federal Funds and EurodollarFutures:*   A right to sell Federal Funds or Eurodollar futurescontract at a specified price on a specified date in the future. The valueincreases as the benchmark Federal Funds or Eurodollar rate rises.

·       *Long Call Options on Federal Funds and EurodollarFutures:*   A right to acquire Federal Funds or Eurodollarfutures contract at a specified price on a specified date in the future. Thevalue increases as the benchmark Federal Funds or Eurodollar rate falls.

·       *Interest Rate Caps:*   Represents acontract that requires the issuer to make a payment to the holder when anunderlying interest rate exceeds a specified level. Interest rate caps increasein value as interest rates rise.

·       *Receiver Swaptions:*   A right to entera predetermined Interest Rate Swap at a future date where we receive the fixedrate and pay the floating rate. These contracts increase in value as ratesfall.

F-32

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

Thefollowing summarizes the notional amounts of the derivative contracts includedin the broker-dealer’s trading portfolio at December 31, 2006:

| ** **                              | ** ** | **Notional  Amount**   | ** ** |
|-----------------------------------------|------------|------------------------|------------|
| ** **                              | ** ** | **(in millions)** | ** ** |
| Forward sales of  TBA MBS               |       |                   | $          | 86,741 |   |   |
| Forward purchases  of TBA MBS           |       |                   | 67,747     |   |   |
| Short futures  contracts                |       |                   | 43,387     |   |   |
| Interest rate  swap contracts           |       |                   | 9,937      |   |   |
| Long call options  on futures contracts |       |                   | 9,450      |   |   |
| Long futures  contracts                 |       |                   | 7,471      |   |   |
| Long put options  on futures contracts  |       |                   | 4,500      |   |   |
| Total rate of  return swaps             |       |                   | 3,175      |   |   |
| Swaption                                |       |                   | 138        |   |   |
| Interest rate cap                       |       |                   | 21         |   |   |

 

*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.

***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 that the Companybelieves to be financially strong, spreading the credit risk among many suchcounterparties, by placing contractual limits on the amount of unsecured creditextended to any single counterparty and by entering into netting agreementswith the counterparties as appropriate.

Theaggregate amount of counterparty credit exposure after consideration ofrelevant netting agreements at December 31, 2006, before and aftercollateral held by the Company is as follows:

| ** **                                        | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------|------------|-----------------------------|------------|
| ** **                                        | ** ** | **(in millions)**      | ** ** |
| Aggregate credit  exposure before collateral held |       |                        | $          | 1,580 |   |   |
| Less: collateral  held                            |       |                        | (1,003     | ) |   |
| Net aggregate unsecured  credit exposure          |       |                        | $          | 577 |   |   |

 

For the three-year periodended December 31, 2006, we incurred no credit losses due to non-performanceof any of our counterparties.

F-33

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Note 5—MortgageLoans Held for Sale**

Mortgageloans held for sale include the following:

| ** **                                         | ** ** | **December 31,**   | ** ** |
|----------------------------------------------------|------------|-------------------------|------------|
| ** **                                         | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                         | ** ** | **(in thousands)** | ** ** |
| Prime                                              |       | $                       | 22,597,825 |   | $ | 27,085,467 |   |
| Nonprime                                           |       | 4,895,438               |       | 6,736,946 |   |
| Prime home equity                                  |       | 1,825,483               |       | 1,948,874 |   |
| Commercial real  estate                            |       | 1,930,100               |       | 1,089,262 |   |
| Deferred  premiums, discounts, fees and costs, net |       | 23,784                  |       | (52,364 | ) |
|                                               |       | $                       | 31,272,630 |   | $ | 36,808,185 |   |

 

At December 31, 2006, the Company had pledged$7.9 billion and $0.6 billion in mortgage loans held for sale to secureasset-backed commercial paper and a secured revolving line of credit,respectively.

At December 31, 2005,the Company had pledged $13.0 billion and $3.0 billion in mortgage loans heldfor sale to secure asset-backed commercial paper and a secured revolving lineof credit, respectively.

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

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

| ** **                                            | ** ** | **December 31,**   | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|
| ** **                                            | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                            | ** ** | **(in thousands)** | ** ** |
| Mortgage pass-through  securities:                    |       |                    |       |   |   |
| Fixed-rate                                            |       | $                       | 13,502,403 |   | $ | 5,638,161 |   |
| Adjustable-rate                                       |       | 1,381,675               |       | 915,302 |   |
| Total mortgage pass-through securities                |       | 14,884,078              |       | 6,553,463 |   |
| Collateralized  mortgage obligations                  |       | 3,307,594               |       | 2,377,764 |   |
| U.S. Treasury  securities                             |       | 1,801,221               |       | 1,037,749 |   |
| Obligations of  U.S. Government-sponsored enterprises |       | 781,657                 |       | 429,726 |   |
| Interest-only  securities                             |       | 287,206                 |       | 255,127 |   |
| Asset-backed  securities                              |       | 203,979                 |       | 234,818 |   |
| Mark-to-market on  to-be-announced securities         |       | 144,674                 |       | 77,094 |   |
| Residual  securities                                  |       | 52,097                  |       | 16,494 |   |
| Other                                                 |       | 39,679                  |       | 338 |   |
|                                                  |       | $                       | 21,502,185 |   | $ | 10,982,573 |   |

 

F-34

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

Tradingsecurities sold, not yet purchased, include the following:

| ** **                                            | ** ** | **December 31,**   | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|
| ** **                                            | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                            | ** ** | **(in thousands)** | ** ** |
| U.S. Treasury  securities                             |       | $                       | 2,803,030  |   | $ | 1,985,219 |   |
| Obligations of  U.S. Government-sponsored enterprises |       | 305,826                 |       | 176,726 |   |
| Mark-to-market on  to-be-announced securities         |       | 190,354                 |       | 122,307 |   |
| Mortgage  pass-through securities, fixed-rate         |       | 26,024                  |       | 911 |   |
| Other                                                 |       | 15                      |       | 8 |   |
|                                                  |       | $                       | 3,325,249  |   | $ | 2,285,171 |   |

 

As of December 31, 2006 and 2005, $19.5 billionand $9.0 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 $1.5 billion and $0.7 billion,respectively.

For the years ended December 31,2006, 2005 and 2004, the Company recorded $25.9 million in gains, $203.7million in gains and $1.7 million in losses, respectively, on tradingsecurities that related to trading securities still held at the respectiveperiod-end reporting dates.

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

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

| ** **                                       | ** ** | **December 31,**   | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|
| ** **                                       | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                       | ** ** | **(in thousands)** | ** ** |
| Securities  purchased under agreements to resell |       | $                       | 22,559,194 |   | $ | 18,536,475 |   |
| Securities  borrowed                             |       | 3,460,703               |       | 4,740,886 |   |
| Federal funds  sold                              |       | 1,250,000               |       | 40,000 |   |
|                                             |       | $                       | 27,269,897 |   | $ | 23,317,361 |   |

 

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. Collateral isvalued daily, and the Company may require counterparties to deposit additionalcollateral or may return collateral pledged when appropriate. Securitiesborrowed transactions require the Company to deposit cash, letters of credit orother collateral with the lender in an amount generally in excess of the marketvalue of the securities borrowed.

As of December 31,2006 and 2005, the Company had accepted collateral related to securitiespurchased under agreements to resell and securities borrowed with a fair valueof $56.0 billion and $33.7 billion, respectively, that it had the contractualability to sell or re-pledge, including $30.0 billion and $12.1 billion,respectively, related to amounts offset by securities sold under agreements torepurchase under master netting arrangements. As of December 31, 2006 and2005, the Company had re-pledged $52.1 billion and $28.3 billion, respectively,of such collateral for financing purposes.

F-35

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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,**   | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                          | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                                                          | ** ** | **(in thousands)** | ** ** |
| Mortgage loans:                                                                     |       |                    |       |   |   |
| Banking Operations:                                                                 |       |                    |       |   |   |
| Prime                                                                               |       | $                       | 51,634,926 |   | $ | 48,487,991 |   |
| Prime home equity                                                                   |       | 20,163,337              |       | 14,956,377 |   |
|                                                                                |       | 71,798,263              |       | 63,444,368 |   |
| Mortgage Banking and Capital Markets:                                               |       |                    |       |   |   |
| Prime                                                                               |       | 230,139                 |       | 157,781 |   |
| Prime home equity                                                                   |       | 56,029                  |       | 33,457 |   |
| Nonprime                                                                            |       | 55,262                  |       | 145,374 |   |
|                                                                                |       | 341,430                 |       | 336,612 |   |
| Commercial real estate                                                              |       | 72,413                  |       | — |   |
| Total mortgage loans                                                                |       | 72,212,106              |       | 63,780,980 |   |
| Warehouse lending  advances secured by mortgage loans                               |       | 3,185,248               |       | 3,943,046 |   |
| Defaulted  FHA-insured and VA-guaranteed loans repurchased from securities          |       | 1,760,484               |       | 1,392,398 |   |
|                                                                                |       | 77,157,838              |       | 69,116,424 |   |
| Purchase premiums  and discounts, and deferred loan origination fees and costs, net |       | 1,188,973               |       | 938,224 |   |
| Allowance for  loan losses                                                          |       | (261,054                | )          | (189,201 | ) |
| Loans held for  investment, net                                                     |       | $                       | 78,085,757 |   | $ | 69,865,447 |   |

 

Mortgage loans held for investment totaling $57.5billion and $52.2 billion were pledged to secure Federal Home Loan Bank (“FHLB”)advances and to enable additional borrowings from the FHLB at December 31,2006 and 2005, respectively.

Mortgage loans held for investment totaling$2.9 billion and $2.0 billion were pledged to secure an unused borrowingfacility with the Federal Reserve Bank (“FRB”) at December 31, 2006 and2005, respectively.

The Company had accepted mortgage loan collateral of$3.5 billion and $4.1 billion securing warehouse-lending advances that it hadthe contractual ability to re-pledge as of December 31, 2006 and 2005,respectively. Of this amount, $1.6 billion has been re-pledged to secureborrowings under a secured revolving line of credit as of December 31,2006. No mortgage loan collateral was re-pledged as of December 31, 2005.

F-36

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

Propertiessecuring the mortgage loans in the Company’s portfolio of loans held forinvestment are concentrated in the State of California. The following is asummary of the geographical distribution of loans included in the Company’sloan portfolio for the states with more than five percent of the total unpaidprincipal balance at December 31, 2006:

| **State**        | ** ** | ** **              | ** ** | **Unpaid Principal  Balance** | ** ** | **% Total  Balance** | ** ** |
|------------------|------------|-------------------------|------------|------------------------------------|------------|---------------------------|------------|
| ** **       | ** ** | **(in thousands)** | ** ** | ** **                         | ** ** |
| California:      |       |                    |       |                               |       |                      |       |   |   |
| Southern         |       |                    | $          | 19,699,276                         |       |                      |       | 27 | % |   |
| Northern         |       |                    | 13,289,894 |                               |       |                      | 19         | % |   |
|             |       |                    | 32,989,170 |                               |       |                      | 46         | % |   |
| Florida          |       |                    | 4,340,575  |                               |       |                      | 6          | % |   |
| Virginia         |       |                    | 3,784,177  |                               |       |                      | 5          | % |   |
| All other states |       |                    | 31,098,184 |                               |       |                      | 43         | % |   |
| Total            |       |                    | $          | 72,212,106                         |       |                      |       | 100 | % |   |

 

The Company has notidentified any individually evaluated loans as impaired as of December 31,2006 and 2005. The Company has placed loans on nonaccrual status totaling $2.1billion and $1.4 billion at December 31, 2006 and 2005, respectively.Included in total nonaccrual loans were Government-insured or guaranteed loanstotaling $1.4 billion and $1.1 billion at December 31, 2006 and 2005,respectively. No warehouse lending loans were considered by management to beimpaired as of December 31, 2006 or 2005.

Changesin the allowance for the loan losses were as follows:

| ** **                                                        | ** ** | **December 31,**   | ** ** |
|-------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                        | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                                        | ** ** | **(in thousands)** | ** ** |
| Balance,  beginning of period                                     |       | $                       | 189,201    |   | $ | 125,046 |   |
| Provision for loan losses                                         |       | 233,847                 |       | 115,685 |   |
| Net charge-offs                                                   |       | (156,841                | )          | (25,173 | ) |
| Reduction of allowance due to sales of loans held  for investment |       | —                  |       | (15,771 | ) |
| Reclassification of allowance for unfunded  commitments and other |       | (5,153                  | )          | (10,586 | ) |
| Balance, end of  period                                           |       | $                       | 261,054    |   | $ | 189,201 |   |

 

***Concentrations ofCredit Risk***

The Company reviews itsportfolio of loans held for investment for concentrations of loans that mightcontain disproportionate credit risk. Specifically, the Company’s credit riskmanagement staff monitors loan performance by state and by MetropolitanStatistical Area, as well as by product. Underwriting guidelines and investmentobjectives are adjusted based on management’s assessment of the results ofperformance monitoring.

Although pay-option ARMs have decreased in prominence,from approximately 19% of loan originations during the year ended December 31,2005, to approximately 14% during the year ended December 31, 2006, theCompany has retained a significant portion of its pay-option adjustable-rate (“pay-optionARM”) loan production in its investment portfolio. Pay-option ARM loansrepresent 46% and 41% of the Company’s investment in mortgage loans held forinvestment at December 31, 2006 and 2005, respectively.

F-37

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

Pay-option ARM loans haveinterest rates that adjust monthly and contain features that allow the borrowerto defer making the full interest payment for at least the first year of theloan. After this “option” period, minimum monthly payments increase by no morethan 71⁄2% per year unless the unpaid balance increases to a specified limit,which is no more than 115% of the original loan amount, at which time a newmonthly payment amount adequate to repay the loan over its remainingcontractual life is established. To ensure that contractual loan payments areadequate to repay a loan, the fully amortizing loan payment amount isre-established after either, five or ten years and again every five yearsthereafter. Due to the lack of significant historical experience atCountrywide, the credit performance of these loans has not been established forthe Company.

Due to pay-option ARMloans’ amortization characteristics, the loss that the Company would realize inthe event of default may be higher than that realized on a “traditional” loanthat does not provide for deferral of a portion of the fully amortizing loanpayment. Countrywide’s pay-option ARM loans are designed with features thataddress the risk of borrower default and the increased risk of loss in theevent of default. Specifically, Countrywide’s underwriting standards conform tothose required to make the pay-option ARM loans salable into the secondarymarket at the date of funding, including a requirement that the borrower meetsecondary market debt-service ratio tests based on their making the fullyamortizing loan payment assuming the loan’s interest rate is fully indexed. (Afully indexed loan rate equals the sum of the current index rate plus themargin applicable to the loan.) The loans’ terms limit the amount of potentialincrease of loss in the event of default by restricting the amount of interestthat may be added to the loan’s balance as described in the precedingparagraph.

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

| ** **                                                                              | ** ** | **December 31,**   | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                              | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                                                              | ** ** | **(in thousands)** | ** ** |
| Total pay-option  ARM loan portfolio                                                    |       | $                       | 32,866,475 |   | $ | 26,122,952 |   |
| Total principal balance of pay-option ARM loans with  accumulated negative amortization |       | $29,074,810             |       | $13,973,619 |   |
| Accumulated capitalized interest (from original loan  balance)                          |       | $                       | 655,453    |   | $ | 74,815 |   |
| Average original  loan-to-value ratio(1)                                                |       | 75                      | %          | 75 | % |
| Average combined original  loan-to-value ratio(2)                                       |       | 78                      | %          | 78 | % |
| Average original  FICO score(3)                                                         |       | 718                     |       | 720 |   |
| Loans delinquent 90 days  or more                                                       |       | 0.65                    | %          | 0.10 | % |

----

(1)          Theratio of the lower of the amount of the loan that is secured by the property tothe original appraised value or purchase price of the property.

(2)          Theratio of the lower of the amount of all loans secured by the property to the originalappraised value or purchase price of the property.

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

Management expects the delinquency rate in the Company’spay-option ARM loan portfolio to increase as this product seasons.

F-38

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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,**   | ** ** |
|--------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                 | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                                                                 | ** ** | **(in thousands)** | ** ** |
| Available-for-sale  securities:                                                            |       |                    |       |   |   |
| Mortgage-backed securities                                                                 |       | $                       | 7,007,786  |   | $ | 6,866,520 |   |
| Obligations of U.S. Government-sponsored enterprises                                       |       | 776,717                 |       | 547,715 |   |
| Municipal bonds                                                                            |       | 412,886                 |       | 369,748 |   |
| U.S. Treasury securities                                                                   |       | 168,313                 |       | 144,951 |   |
| Other                                                                                      |       | 2,858                   |       | 3,109 |   |
| Subtotal                                                                                   |       | 8,368,560               |       | 7,932,043 |   |
| Interests  retained in securitization accounted for as available-for-sale securities:      |       |                    |       |   |   |
| Prime interest-only and principal-only securities                                          |       | 279,375                 |       | 323,368 |   |
| Nonprime residual securities                                                               |       | 147,703                 |       | 206,033 |   |
| Prime home equity line of credit transferor’s  interest                               |       | 144,346                 |       | 158,416 |   |
| Prepayment penalty bonds                                                                   |       | 52,697                  |       | 112,492 |   |
| Prime home equity residual securities                                                      |       | 40,766                  |       | 124,377 |   |
| Prime home equity interest-only securities                                                 |       | 7,021                   |       | 15,136 |   |
| Prime residual securities                                                                  |       | 6,477                   |       | 21,383 |   |
| Nonprime interest-only securities                                                          |       | 3,757                   |       | 9,455 |   |
| Subordinated mortgage-backed pass-through securities                                       |       | 1,382                   |       | 2,059 |   |
| Total interests retained in securitization accounted  for as available-for-sale securities |       | 683,524                 |       | 972,719 |   |
| Total available-for-sale securities                                                        |       | 9,052,084               |       | 8,904,762 |   |
| Interests retained in  securitization accounted for as trading securities:                 |       |                    |       |   |   |
| Prime home equity residual securities                                                      |       | 737,808                 |       | 757,762 |   |
| Prime home equity line of credit transferor’s  interest                               |       | 553,701                 |       | 95,514 |   |
| Prime interest-only and principal-only securities                                          |       | 549,635                 |       | 180,216 |   |
| Nonprime residual securities                                                               |       | 253,887                 |       | 321,017 |   |
| Prime residual securities                                                                  |       | 146,397                 |       | 63,333 |   |
| Prepayment penalty bonds                                                                   |       | 90,666                  |       | — |   |
| Prime home equity interest-only securities                                                 |       | 22,467                  |       | — |   |
| Interest rate swaps                                                                        |       | 2,490                   |       | 782 |   |
| Total interests retained in securitization accounted  for as trading securities            |       | 2,357,051               |       | 1,418,624 |   |
| Hedging instruments and  mortgage pipeline derivatives:                                    |       |                    |       |   |   |
| Mortgage servicing related                                                                 |       | 837,908                 |       | 741,156 |   |
| Notes payable related                                                                      |       | 444,342                 |       | 107,085 |   |
| Mortgage loans held for sale and pipeline related                                          |       | 78,066                  |       | 89,098 |   |
| Total investments  in other financial instruments                                          |       | $                       | 12,769,451 |   | $ | 11,260,725 |   |

 

F-39

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

At December 31, 2006 and 2005, the Company hadpledged $0.1 billion and $2.1 billion, respectively, of MBS to securesecurities sold under agreements to repurchase, which the counterparty had thecontractual right to re-pledge and $0.1 billion and $0.3 billion, respectively,of MBS to secure an unused borrowing facility with the FRB.

The Company’s insurance subsidiaries have depositedmortgage-backed securities with a fair value of $0.02 billion to meet statestatutory deposit requirements, at December 31, 2006 and 2005.

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

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

 

| ** **                                            | ** ** | **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 |   |
| Interests  retained in securitization                 |       | 774,563                         |       |   | 206,999 |   |   | (8,843 | ) | 972,719 |   |
| Other                                                 |       | 3,109                           |       |   | — |   |   | — |   | 3,109 |   |
|                                                  |       | $                               | 8,835,630  |   |   | $ | 209,787 |   |   | $ | (140,655 | ) | $ | 8,904,762 |   |

 

F-40

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

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

| ** **                                            | ** ** | **December 31, 2006**        | ** ** |
|-------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                            | ** ** | **Less Than 12 Months** | ** ** | **12 Months or More** | ** ** | **Total** | ** ** |
| ** **                                            | ** ** | **Fair Value**                    | ** ** | **Gross  Unrealized  Loss** | ** ** | **Fair Value** | ** ** | **Gross  Unrealized  Loss** | ** ** | **Fair Value** | ** ** | **Gross  Unrealized  Loss** | ** ** |
| ** **                                            | ** ** | **(in thousands)**                | ** ** |
| Mortgage-backed securities                            |       | $                                      | 1,482,240  |   |   | $ | (4,580 | ) |   | $ | 5,106,195 |   | $ | (102,770 | ) | $ | 6,588,435 |   | $ | (107,350 | ) |
| Obligations of  U.S. Government-sponsored enterprises |       | 87,472                                 |       |   | (163 | ) |   | 484,186 |   | (5,729 | ) | 571,658 |   | (5,892 | ) |
| Municipal bonds                                       |       | 58,106                                 |       |   | (317 | ) |   | 212,973 |   | (2,695 | ) | 271,079 |   | (3,012 | ) |
| U.S. Treasury  securities                             |       | 6,477                                  |       |   | (22 | ) |   | 103,018 |   | (803 | ) | 109,495 |   | (825 | ) |
| Interests  retained in securitization                 |       | 42,854                                 |       |   | (4,114 | ) |   | 84,978 |   | (13,585 | ) | 127,832 |   | (17,699 | ) |
| Other                                                 |       | —                                 |       |   | — |   |   | 48 |   | (2 | ) | 48 |   | (2 | ) |
| Total impaired  securities                            |       | $                                      | 1,677,149  |   |   | $ | (9,196 | ) |   | $ | 5,991,398 |   | $ | (125,584 | ) | $ | 7,668,547 |   | $ | (134,780 | ) |

 

| ** **                                            | ** ** | **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 | ) |
| 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 | ) |

 

The Company’s Asset/Liability Committee (“ALCO”)assesses securities classified as available-for-sale for other-than-temporaryimpairment on a quarterly basis. This assessment evaluates whether the Companyintends and is able to recover the amortized cost of the securities when takinginto account the Company’s present investment objectives and liquidityrequirements and whether the creditworthiness of the issuer calls therealization of contractual cash flows into question. Based on the Company’sreview of these securities, ALCO has concluded that Countrywide has both theintent and ability to hold these securities until they recover their amortizedcost and the issuers credit worthiness does not call realization of contractualcash flows into question. Accordingly, other-than-temporary impairment relatedto these securities has not been recognized as of December 31, 2006 and2005.

F-41

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

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

| ** **                                                | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                | ** ** | **(in thousands)**                     | ** ** |
| Mortgage-backed  securities:                              |       |                                        |       |   |   |   |   |
| Gross realized gains                                      |       | $                                           | —     |   | $ | 31 |   | $ | 4,935 |   |
| Gross realized losses                                     |       | —                                      |       | (116 | ) | (1,932 | ) |
| Net                                                       |       | —                                      |       | (85 | ) | 3,003 |   |
| Obligations of U.S.  Government-sponsored enterprises:    |       |                                        |       |   |   |   |   |
| Gross realized gains                                      |       | 23                                          |       | 14 |   | 317 |   |
| Gross realized losses                                     |       | (51                                         | )          | — |   | (2 | ) |
| Net                                                       |       | (28                                         | )          | 14 |   | 315 |   |
| Municipal bonds:                                          |       |                                        |       |   |   |   |   |
| Gross realized gains                                      |       | 77                                          |       | — |   | 126 |   |
| Gross realized losses                                     |       | (208                                        | )          | (106 | ) | (15 | ) |
| Net                                                       |       | (131                                        | )          | (106 | ) | 111 |   |
| U.S. Treasury  securities:                                |       |                                        |       |   |   |   |   |
| Gross realized gains                                      |       | —                                      |       | — |   | 33,483 |   |
| Gross realized losses                                     |       | —                                      |       | — |   | (228 | ) |
| Net                                                       |       | —                                      |       | — |   | 33,255 |   |
| Home equity asset-backed  senior securities:              |       |                                        |       |   |   |   |   |
| Gross realized gains                                      |       | —                                      |       | — |   | 185,331 |   |
| Gross realized losses                                     |       | —                                      |       | — |   | — |   |
| Net                                                       |       | —                                      |       | — |   | 185,331 |   |
| Interests retained in  securitization:                    |       |                                        |       |   |   |   |   |
| Gross realized gains                                      |       | 6,956                                       |       | 16,124 |   | 85,469 |   |
| Gross realized losses                                     |       | (26                                         | )          | (4,384 | ) | (30,376 | ) |
| Net                                                       |       | 6,930                                       |       | 11,740 |   | 55,093 |   |
| Other:                                                    |       |                                        |       |   |   |   |   |
| Gross realized gains                                      |       | —                                      |       | 1,253 |   | — |   |
| Gross realized losses                                     |       | —                                      |       | — |   | — |   |
| Net                                                       |       | —                                      |       | 1,253 |   | — |   |
| Total gains and losses  on available-for-sale securities: |       |                                        |       |   |   |   |   |
| Gross realized gains                                      |       | 7,056                                       |       | 17,422 |   | 309,661 |   |
| Gross realized losses                                     |       | (285                                        | )          | (4,606 | ) | (32,553 | ) |
| Net                                                       |       | $                                           | 6,771      |   | $ | 12,816 |   | $ | 277,108 |   |

 

F-42

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

Thefollowing table summarizes the remaining contractual maturities of debtsecurities classified as available-for-sale as of December 31, 2006:

| ** **                                                                                  | ** ** | **Within one  year** | ** ** | **After one  year  through five  years** | ** ** | **After five  years  through ten  years** | ** ** | **After ten  years** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------------------------------------|------------|---------------------------|------------|----------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------|------------|-----------|------------|
| ** **                                                                                  | ** ** | **(in thousands)**   | ** ** |
| Mortgage-backed  securities                                                                 |       |                      | $          | —                                             |       |                                                |       | $                         | 1,568      |      |       |   | $ | — |   |   | $ | 7,006,218 |   | $ | 7,007,786 |   |
| Obligations of  U.S. Government- sponsored enterprises                                      |       |                      | 214,575    |                                               |       |                                                | 550,226    |                      |       |      | 11,916     |   |   | — |   | 776,717 |   |
| Municipal bonds                                                                             |       |                      | 18,385     |                                               |       |                                                | 144,811    |                      |       |      | 189,667    |   |   | 60,023 |   | 412,886 |   |
| U.S. Treasury  securities                                                                   |       |                      | 89,463     |                                               |       |                                                | 74,336     |                      |       |      | 2,813      |   |   | 1,701 |   | 168,313 |   |
| Other                                                                                       |       |                      | —     |                                               |       |                                                | —     |                      |       |      | 2,844      |   |   | 14 |   | 2,858 |   |
| Subtotal                                                                                    |       |                      | 322,423    |                                               |       |                                                | 770,941    |                      |       |      | 207,240    |   |   | 7,067,956 |   | 8,368,560 |   |
| Interests  retained in securitization accounted for as available-for-sale securities:       |       |                      |       |                                               |       |                                                |       |                      |       |      |       |   |   |   |   |   |   |
| Prime interest-only and  principal-only securities                                          |       |                      | —     |                                               |       |                                                | —     |                      |       |      | —     |   |   | 279,375 |   | 279,375 |   |
| Nonprime residual securities                                                                |       |                      | —     |                                               |       |                                                | —     |                      |       |      | —     |   |   | 147,703 |   | 147,703 |   |
| Prime home equity line of  credit transferor’s interest                                |       |                      | —     |                                               |       |                                                | —     |                      |       |      | —     |   |   | 144,346 |   | 144,346 |   |
| Prepayment penalty bonds                                                                    |       |                      | —     |                                               |       |                                                | 52,697     |                      |       |      | —     |   |   | — |   | 52,697 |   |
| Prime home equity residual securities                                                       |       |                      | —     |                                               |       |                                                | —     |                      |       |      | —     |   |   | 40,766 |   | 40,766 |   |
| Prime home equity interest-only securities                                                  |       |                      | —     |                                               |       |                                                | —     |                      |       |      | —     |   |   | 7,021 |   | 7,021 |   |
| Prime residual securities                                                                   |       |                      | —     |                                               |       |                                                | —     |                      |       |      | —     |   |   | 6,477 |   | 6,477 |   |
| Nonprime interest-only  securities                                                          |       |                      | —     |                                               |       |                                                | —     |                      |       |      | —     |   |   | 3,757 |   | 3,757 |   |
| Subordinated mortgage-backed pass- through  securities                                      |       |                      | —     |                                               |       |                                                | —     |                      |       |      | —     |   |   | 1,382 |   | 1,382 |   |
| Total interests retained in securitization accounted  for  as available-for-sale securities |       |                      | —     |                                               |       |                                                | 52,697     |                      |       |      | —     |   |   | 630,827 |   | 683,524 |   |
| Total  available-for-sale  securities                                                       |       |                      | $          | 322,423                                            |       |                                                |       | $                         | 823,638    |      |       |   | $ | 207,240 |   |   | $ | 7,698,783 |   | $ | 9,052,084 |   |

 

F-43

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Note 10—MortgageServicing Rights**

Theactivity in MSRs carried at fair value was as follows:

| ** **                                                               | ** ** | **Year Ended  December 31,  2006** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                               | ** ** | **(in thousands)**                      | ** ** |
| Mortgage Servicing  Rights                                               | ** ** |                                         | ** ** | ** ** |   |
| Balance at beginning of period                                           |       |                                         | $          | 12,610,839 |   |   |
| Remeasurement to fair value upon adoption of SFAS  156                   |       |                                         | 109,916    |   |   |
| Fair value at beginning of period                                        |       |                                         | 12,720,755 |   |   |
| Additions:                                                               |       |                                         |       |   |   |
| Servicing resulting from transfers of financial  assets                  |       |                                         | 6,063,170  |   |   |
| Purchases of servicing assets                                            |       |                                         | 149,638    |   |   |
| Total additions                                                          |       |                                         | 6,212,808  |   |   |
| Change in fair  value:                                                   |       |                                         |       |   |   |
| Due to changes in valuation inputs or assumptions in  valuation model(1) |       |                                         | 432,241    |   |   |
| Other changes in fair value(2)                                           |       |                                         | (3,193,740 | ) |   |
| Mortgage  Servicing Rights, at fair value                                |       |                                         | $          | 16,172,064 |   |   |

 

----

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

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

F-44

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

Theactivity in MSRs carried at lower of cost or fair value was as follows:

| ** **                                                       | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                       | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| ** **                                                       | ** ** | **(in thousands)**                     | ** ** |
| Mortgage Servicing  Rights                                       |       |                                        |       |   |   |
| Balance at beginning of period                                   |       | $                                           | 9,820,511  |   | $ | 8,065,174 |   |
| Additions:                                                       |       |                                        |       |   |   |
| Servicing resulting from transfers of financial  assets          |       | 5,533,505                                   |       | 3,757,182 |   |
| Purchases of servicing assets                                    |       | 302,441                                     |       | 385,459 |   |
| Total additions                                                  |       | 5,835,946                                   |       | 4,142,641 |   |
| Securitization of MSRs                                           |       | (54,533                                     | )          | (56,038 | ) |
| Amortization                                                     |       | (2,288,354                                  | )          | (1,940,457 | ) |
| Change in fair value attributable to hedged risk                 |       | (213,166                                    | )          | — |   |
| Application of valuation allowance to write down  impaired MSRs  |       | (69,045                                     | )          | (390,809 | ) |
| Balance before valuation allowance at end of period              |       | 13,031,359                                  |       | 9,820,511 |   |
| Valuation Allowance for  Impairment of Mortgage Servicing Rights |       |                                        |       |   |   |
| Balance at beginning of period                                   |       | (1,090,582                                  | )          | (1,201,549 | ) |
| Recoveries (additions)                                           |       | 601,017                                     |       | (279,842 | ) |
| Application of valuation allowance to write down  impaired MSRs  |       | 69,045                                      |       | 390,809 |   |
| Balance at end of period                                         |       | (420,520                                    | )          | (1,090,582 | ) |
| Mortgage Servicing  Rights, net                                  |       | $                                           | 12,610,839 |   | $ | 8,729,929 |   |

 

The estimated fair valuesof MSRs were $12.7 billion and $8.9 billion as of December 31, 2005 and2004, respectively.

**Note 11—Premisesand Equipment, net**

Premisesand equipment consisted of the following:

| ** **                                       | ** ** | **Useful**              | ** ** | ** **            | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|------------|------------|
| ** **                                       | ** ** | **Lives**               | ** ** | **December 31,** | ** ** |
| ** **                                       | ** ** | **(Years)**             | ** ** | **2006**              | ** ** | **2005**   | ** ** |
| ** **                                       | ** ** | **(in thousands)** | ** ** |
| Buildings                                        |       |                    | 19-40      |                  |       |       | $          | 798,157 |   |   | $ | 582,916 |   |
| Equipment                                        |       |                    | 3-10       |                  |       |       | 1,333,838  |   |   | 1,111,624 |   |
| Leasehold  improvements                          |       |                    | 1-11       |                  |       |       | 217,190    |   |   | 176,256 |   |
|                                             |       |                    |       |                  |       |       | 2,349,185  |   |   | 1,870,796 |   |
| Less: accumulated  depreciation and amortization |       |                    |       |                  |       |       | (841,698   | ) |   | (685,019 | ) |
|                                             |       |                    |       |                  |       |       | 1,507,487  |   |   | 1,185,777 |   |
| Land                                             |       |                    |       |                  |       |       | 117,969    |   |   | 93,882 |   |
|                                             |       |                    |       |                  |       |       | $          | 1,625,456 |   |   | $ | 1,279,659 |   |

 

F-45

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

Depreciation andamortization expense totaled $206.5 million, $181.6 million and $111.7 millionfor the years ended December 31, 2006, 2005 and 2004, respectively.

**Note 12—OtherAssets**

Otherassets include the following:

| ** **                                                                    | ** ** | **December 31,**   | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                    | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                                                    | ** ** | **(in thousands)** | ** ** |
| Reimbursable  servicing advances, net                                         |       | $                       | 2,121,486  |   | $ | 2,124,317 |   |
| Securities  broker-dealer receivables                                         |       | 1,605,502               |       | 392,847 |   |
| Investments in  FRB and FHLB stock                                            |       | 1,433,070               |       | 1,334,100 |   |
| Interest  receivable                                                          |       | 997,854                 |       | 777,966 |   |
| Receivables from  custodial accounts                                          |       | 719,048                 |       | 629,075 |   |
| Capitalized  software, net                                                    |       | 367,055                 |       | 331,454 |   |
| Prepaid expenses                                                              |       | 320,597                 |       | 187,377 |   |
| Cash surrender  value of assets held in trust for deferred compensation plans |       | 319,864                 |       | 224,884 |   |
| Receivables from  sale of securities                                          |       | 284,177                 |       | 325,327 |   |
| Real estate  acquired in settlement of loans                                  |       | 251,163                 |       | 110,499 |   |
| Restricted cash                                                               |       | 238,930                 |       | 252,285 |   |
| Derivative margin  accounts                                                   |       | 118,254                 |       | 296,005 |   |
| Other assets                                                                  |       | 1,064,790               |       | 943,337 |   |
|                                                                          |       | $                       | 9,841,790  |   | $ | 7,929,473 |   |

 

The Company had pledged$1.2 billion and $0.1 billion of securities broker-dealer receivables to securesecurities sold under agreements to repurchase at December 31, 2006 and2005, respectively.

F-46

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Note 13—DepositLiabilities**

Thefollowing table summarizes deposit balances:

| ** **                                                | ** ** | **December 31,**                            | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                                                | ** ** | **Amount**                                       | ** ** | **Weighted  Average  Rate** | ** ** | **Amount** | ** ** | **Weighted  Average  Rate** | ** ** |
| ** **                                                | ** ** | **(dollar amounts in thousands)** | ** ** |
| Time deposits:                                            |       |                                             |       |   |   |   |   |   |   |   |   |   |   |
| Retail                                                    |       | $                                                | 17,973,792 |   |   | 5.01 | % |   | $ | 13,434,338 |   |   | 4.01 | % |   |
| Brokered                                                  |       | 11,612,674                                       |       |   | 5.04 | % |   | 7,442,073 |   |   | 4.20 | % |   |
| Commercial                                                |       | 635,927                                          |       |   | 5.10 | % |   | — |   |   | — |   |   |
|                                                      |       | 30,222,393                                       |       |   | 5.02 | % |   | 20,876,411 |   |   | 4.08 | % |   |
| Company-controlled  custodial deposit accounts(1)         |       | 15,737,632                                       |       |   | — |   |   | 14,017,464 |   |   | — |   |   |
| Retail  savings/money market accounts                     |       | 5,970,245                                        |       |   | 5.05 | % |   | 4,467,018 |   |   | 4.13 | % |   |
| Commercial money  market accounts                         |       | 3,557,445                                        |       |   | 5.54 | % |   | — |   |   | — |   |   |
| Non-interest-bearing  checking accounts                   |       | 113,045                                          |       |   | — |   |   | 109,982 |   |   | — |   |   |
|                                                      |       | 55,600,760                                       |       |   | 3.62 | % |   | 39,470,875 |   |   | 2.62 | % |   |
| Basis adjustment through application of hedge  accounting |       | (22,078                                          | )          |   |   |   |   | (31,959 | ) |   |   |   |   |
|                                                      |       | $                                                | 55,578,682 |   |   |   |   |   | $ | 39,438,916 |   |   |   |   |   |

 

----

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

Substantiallyall of the time deposits outstanding were interest-bearing. The contractualmaturities of those deposits as of December 31, 2006, are shown in the followingtable:

| **Year Ending December 31,**               | ** ** | ** **                                       | ** ** | **Time Deposit  Maturities** | ** ** | **Weighted  Average Rate** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| ** **                                                | ** ** | **(dollar amounts in thousands)** | ** ** |
| 2007                                                      |       | $                                                | 23,662,684 |                              |       | 5.10                            | %          |   |
| 2008                                                      |       | 2,259,695                                        |       |                              | 4.30       | %                               |       |
| 2009                                                      |       | 1,610,921                                        |       |                              | 4.46       | %                               |       |
| 2010                                                      |       | 567,556                                          |       |                              | 4.81       | %                               |       |
| 2011                                                      |       | 433,887                                          |       |                              | 5.09       | %                               |       |
| Thereafter                                                |       | 1,687,650                                        |       |                              | 5.55       | %                               |       |
|                                                      |       | 30,222,393                                       |       |                              | 5.02       | %                               |       |
| Basis adjustment  through application of hedge accounting |       | (22,078                                          | )          |                              |       |                            |       |
|                                                      |       | $                                                | 30,200,315 |                              |       |                            |       |   |

 

F-47

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

Theamount of time deposits with a denomination of $100,000 or more wasapproximately $20.9 billion and $13.8 billion at December 31, 2006 and2005, respectively. The contractual maturities of time deposits withdenominations of $100,000 or more are shown in the following table:

| ** **                              | ** ** | **December 31, 2006**                  | ** ** |
|-----------------------------------------|------------|--------------------------------------------------|------------|
| ** **                              | ** ** | **Amount**                                       | ** ** | **Weighted  Average Rate** | ** ** |
| ** **                              | ** ** | **(dollar amounts in thousands)** | ** ** |
| Three months or  less                   |       | $                                                | 5,437,601  |   |   | 4.95 | % |   |
| After three  months through six months  |       | 5,009,903                                        |       |   | 5.19 | % |   |
| After six months  through twelve months |       | 5,462,783                                        |       |   | 5.19 | % |   |
| After twelve  months                    |       | 4,992,510                                        |       |   | 4.84 | % |   |
| Total                                   |       | $                                                | 20,902,797 |   |   | 5.04 | % |   |

 

The amount of demanddeposits with overdrafts at December 31, 2006 were $2.1 million. Therewere no demand deposits with overdrafts at December 31, 2005.

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

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

| ** **                                      | ** ** | **December 31,**   | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|
| ** **                                      | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(in thousands)** | ** ** |
| Securities sold  under agreements to repurchase |       | $                       | 42,113,501 |   | $ | 33,284,205 |   |
| Federal funds  purchased                        |       | —                  |       | 869,000 |   |
|                                            |       | $                       | 42,113,501 |   | $ | 34,153,205 |   |

 

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,**                            | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                             | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                                             | ** ** | **Amount**                                       | ** ** | **Range of  Interest Rates** | ** ** | **Amount** | ** ** | **Range of  Interest Rates** | ** ** |
| ** **                                             | ** ** | **(dollar amounts in thousands)** | ** ** |
| Due within 30  days                                    |       | $                                                | 41,008,406 |   | 0.40% to 5.65% |   | $ | 33,174,552 |   | 1.70% to 5.00% |   |
| After 30 days but  within 90 days                      |       | 1,105,095                                        |       | 4.50% to 5.20% |   | 109,653 |   | 2.60% to 4.30% |   |
| Total securities sold  under agreements to  repurchase |       | $                                                | 42,113,501 |   | 0.40% to 5.65% |   | $ | 33,284,205 |   | 1.70% to 5.00% |   |

 

F-48

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

Financialdata pertaining to securities sold under agreements to repurchase were asfollows:

| ** **                                                            | ** ** | **Years Ended December 31,**      | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                            | ** ** | **2006**                                         | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                            | ** ** | **(dollar amounts in thousands)** | ** ** |
| Weighted-average  interest rate at end of year                        |       | 5.00                                             | %          | 4.04 | % | 2.02 | % |
| Weighted-average  interest rate during the year                       |       | 4.91                                             | %          | 3.11 | % | 1.36 | % |
| Average balance  of securities sold under agreements to repurchase(1) |       | $                                                | 53,024,833 |   | $ | 42,186,332 |   | $ | 36,279,369 |   |
| Maximum amount  outstanding at any month  end                         |       | $                                                | 71,960,135 |   | $ | 48,386,546 |   | $ | 43,658,987 |   |
| Total interest expense                                                |       | $                                                | 2,711,402  |   | $ | 1,476,069 |   | $ | 536,399 |   |

 

----

(1)          Averages represent dailybalance sheet estimates which do not reflect netting of securities under masternetting agreements.

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

At December 31, 2005, repurchase agreements weresecured by $9.0 billion of trading securities, $28.3 billion of securitiespurchased under agreements to resell and securities borrowed, $2.1 billion ininvestments in other financial instruments and $0.1 billion of other assets. AtDecember 31, 2005, $12.1 billion of the pledged securities purchasedunder agreements to resell and securities borrowed related to amounts wereoffset against securities sold under agreements to repurchase pursuant tomaster netting agreements.

Federal funds purchased generally represent overnightborrowings of reserves from other banks in the Federal Reserve Bank System.Interest is generally settled the next business day at the federal funds rate.

Financialdata pertaining to federal funds purchased were as follows:

| ** **                                      | ** ** | **Years Ended December 31,**      | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                         | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                      | ** ** | **(dollar amounts in thousands)** | ** ** |
| Weighted-average  interest rate at end of year  |       | —                                           |       | 4.15 | % | 2.44 | % |
| Weighted-average  interest rate during the year |       | 4.97                                             | %          | 3.34 | % | 1.62 | % |
| Average balance  of federal funds purchased     |       | $                                                | 803,982    |   | $ | 888,732 |   | $ | 4,658 |   |
| Maximum amount  outstanding at any month end    |       | $                                                | 2,455,000  |   | $ | 1,967,000 |   | $ | 50,000 |   |
| Total interest expense                          |       | $                                                | 39,983     |   | $ | 29,668 |   | $ | 76 |   |

 

F-49

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Note 15—NotesPayable**

Thefollowing table summarizes notes payable:

| ** **                                                                  | ** ** | **December 31,**   | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                  | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                                                  | ** ** | **(in thousands)** | ** ** |
| Federal Home Loan  Bank advances                                            |       | $                       | 28,150,000 |   | $ | 26,350,000 |   |
| Medium-term notes:                                                          |       |                    |       |   |   |
| Floating-rate                                                               |       | 13,155,231              |       | 14,466,765 |   |
| Fixed-rate                                                                  |       | 9,783,881               |       | 11,503,592 |   |
|                                                                        |       | 22,939,112              |       | 25,970,357 |   |
| Asset-backed  commercial paper                                              |       | 7,721,278               |       | 12,367,496 |   |
| Unsecured  commercial paper                                                 |       | 6,717,794               |       | 6,248,508 |   |
| Secured revolving  lines of credit                                          |       | 2,174,171               |       | 2,865,152 |   |
| Secured overnight  bank loans                                               |       | 105,049                 |       | — |   |
| Asset-backed  secured financings                                            |       | 241,211                 |       | 22,998 |   |
| Unsecured bank  loans                                                       |       | 130,000                 |       | 730,000 |   |
| Junior  subordinated debentures                                             |       | 2,232,334               |       | 1,085,191 |   |
| Subordinated debt                                                           |       | 1,027,797               |       | 500,000 |   |
| Convertible  securities and liquid yield option note convertible debentures |       | —                  |       | 12,581 |   |
| Other                                                                       |       | 48,838                  |       | 35,603 |   |
|                                                                        |       | $                       | 71,487,584 |   | $ | 76,187,886 |   |

 

***Federal Home Loan Bank Advances***

Scheduledmaturities of FHLB advances were as follows:

| ** **                          | ** ** | **December 31,**                            | ** ** |
|-------------------------------------|------------|--------------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **Amount**                                       | ** ** | **Range of  Interest Rates** | ** ** | **Amount** | ** ** | **Range of  Interest Rates** | ** ** |
| ** **                          | ** ** | **(dollar amounts in thousands)** | ** ** |
| Due within 30  days                 |       | $                                                | 200,000    |   | 2.61% to 3.54% |   | $ | 300,000 |   | 2.17% to 3.04% |   |
| After 30 days but  within 90 days   |       | 1,425,000                                        |       | 2.33% to 5.10% |   | 650,000 |   | 1.81% to 2.59% |   |
| After 90 days but  within 180 days  |       | 1,425,000                                        |       | 2.10% to 5.50% |   | 375,000 |   | 1.69% to 2.50% |   |
| After 180 days  but within one year |       | 6,575,000                                        |       | 2.88% to 5.50% |   | 1,525,000 |   | 2.09% to 4.39% |   |
| After one year                      |       | 18,525,000                                       |       | 2.44% to 5.55% |   | 23,500,000 |   | 1.84% to 4.52% |   |
| Total FHLB  advances                |       | $                                                | 28,150,000 |   | 2.10% to 5.55% |   | $ | 26,350,000 |   | 1.69% to 4.52% |   |

 

F-50

----

**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

Financialdata pertaining to FHLB advances were as follows:

| ** **                                      | ** ** | **Years Ended December 31,**      | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                         | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                      | ** ** | **(dollar amounts in thousands)** | ** ** |
| Weighted-average  interest rate at end of year  |       | 4.68                                             | %          | 3.89 | % | 2.97 | % |
| Weighted-average  interest rate during the year |       | 4.53                                             | %          | 3.50 | % | 2.95 | % |
| Average balance  of FHLB advances               |       | $                                                | 28,808,374 |   | $ | 22,368,536 |   | $ | 10,323,708 |   |
| Maximum amount  outstanding at any month end    |       | $                                                | 31,775,000 |   | $ | 26,900,000 |   | $ | 15,475,000 |   |
| Total interest expense                          |       | $                                                | 1,304,159  |   | $ | 781,970 |   | $ | 305,032 |   |

 

Of the total advances, $17.9 billion were fixed-rateand $10.3 billion were adjustable-rate.

At December 31, 2006and 2005, the Company had pledged $57.5 billion and $52.2 billion of mortgageloans to secure its outstanding FHLB advances and enable future advances,respectively.

***Medium-Term Notes***

As of December 31,2006, outstanding medium-term notes issued by Countrywide Financial Corporation(CFC) and Countrywide Home Loans (CHL) under various shelf registrations filedwith the Securities and Exchange Commission or issued by CFC and CHL under itsEuropean and Australian medium-term note programs were as follows:

| ** **                                                | ** ** | **Outstanding Balance**                     | ** ** | **Interest Rate** | ** ** | **Maturity Date** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                | ** ** | **Floating-Rate**                                | ** ** | **Fixed-Rate**         | ** ** | **Total**              | ** ** | **From** | ** ** | **To** | ** ** | **From** | ** ** | **To** | ** ** |
| ** **                                                | ** ** | **(dollar amounts in thousands)** | ** ** |
| Series A                                             |       | $                                                | 2,345,000  |                   | $          | 747,879                |       | $ | 3,092,879 |   |   | 4.00 | % |   | 6.03 | % | April, 2007 |   | February, 2036 |   |
| Series B                                             |       | 5,544,989                                        |       | 479,717                |       | 6,024,706              |       |   | 4.80 | % |   | 6.30 | % | May, 2007 |   | April, 2036 |   |
| Series E                                             |       | —                                           |       | 175,000                |       | 175,000                |       |   | 6.94 | % |   | 7.23 | % | July, 2007 |   | 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 K                                             |       | —                                           |       | 3,537,579              |       | 3,537,579              |       |   | 4.25 | % |   | 6.85 | % | February, 2007 |   | April, 2022 |   |
| Series L                                             |       | —                                           |       | 2,874,626              |       | 2,874,626              |       |   | 2.88 | % |   | 6.00 | % | February, 2007 |   | May, 2023 |   |
| Series M                                             |       | 650,000                                          |       | 1,299,461              |       | 1,949,461              |       |   | 4.13 | % |   | 6.20 | % | November, 2007 |   | July, 2029 |   |
| Euro Notes                                                |       | 3,529,324                                        |       | —                 |       | 3,529,324              |       |   | 5.50 | % |   | 6.10 | % | March, 2007 |   | February, 2011 |   |
| Australian Notes                                          |       | 809,350                                          |       | —                 |       | 809,350                |       |   | 5.70 | % |   | 5.84 | % | September, 2007 |   | December, 2010 |   |
| Sub-total                                                 |       | 12,878,663                                       |       | 9,744,262              |       | 22,622,925             |       |   |   |   |   |   |   |   |   |   |   |
| Basis adjustment  through application of hedge accounting |       | 276,568                                          |       | 39,619                 |       | 316,187                |       |   |   |   |   |   |   |   |   |   |   |
| Total                                                     |       | $                                                | 13,155,231 |                   | $          | 9,783,881              |       | $ | 22,939,112 |   |   |   |   |   |   |   |   |   |   |   |
|                                                           |            |                                                  |            |                        |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

During the year ended December 31, 2006, theCompany issued $6.6 billion and $0.6 billion of floating-rate and fixed-ratemedium-term notes, respectively. Of the $0.6 billion of fixed-rate medium-term 

F-51

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

notes issued by theCompany during the year-ended December 31, 2006, $0.5 billion wereeffectively converted to floating-rate debt using interest rate swaps.

As of December 31,2006, $4.5 billion of foreign currency-denominated medium-term notes wereoutstanding. Such notes are denominated in Pounds Sterling, Canadian Dollars,Australian Dollars, Euros, Swiss Francs and Singapore Dollars. These notes havebeen effectively converted 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 of short-term securedliquidity notes (“SLNs”) with initial maturities of up to 180 days. The SLNsbear interest at prevailing money market rates approximating LIBOR. The SLNprograms’ capacities, based on aggregate commitments from underlying creditenhancers, totaled $30.7 billion at December 31, 2006.

Financialdata pertaining to SLNs were as follows:

| ** **                                        | ** ** | **Years Ended December 31,**      | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                        | ** ** | **2006**                                         | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                        | ** ** | **(dollar amounts in thousands)** | ** ** |
| Weighted-average  interest rate at end of year    |       | 5.41                                             | %          | 4.35 | % | 2.35 | % |
| Weighted-average  interest rate during the year   |       | 5.12                                             | %          | 3.44 | % | 1.60 | % |
| Average balance  of asset-backed commercial paper |       | $                                                | 18,770,520 |   | $ | 19,249,101 |   | $ | 13,016,253 |   |
| Maximum amount  outstanding at any month  end     |       | $                                                | 20,237,716 |   | $ | 25,037,769 |   | $ | 15,147,748 |   |
| Total interest expense                            |       | $                                                | 968,015    |   | $ | 664,781 |   | $ | 193,176 |   |

 

At December 31, 2006,the Company had pledged $7.9 billion in mortgage loans held for sale to securethe SLNs.

***Unsecured Commercial Paper***

Financialdata pertaining to unsecured commercial paper were as follows:

| ** **                                      | ** ** | **Years Ended December 31,**      | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                         | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                      | ** ** | **(dollar amounts in thousands)** | ** ** |
| Weighted-average  interest rate at end of year  |       | 5.41                                             | %          | 4.37 | % | — |   |
| Weighted-average  interest rate during the year |       | 5.12                                             | %          | 3.43 | % | 1.62 | % |
| Average balance  of unsecured commercial paper  |       | $                                                | 6,798,481  |   | $ | 6,353,327 |   | $ | 3,222,044 |   |
| Maximum amount  outstanding at any month end    |       | $                                                | 9,157,471  |   | $ | 9,167,673 |   | $ | 4,088,770 |   |
| Total interest expense                          |       | $                                                | 347,955    |   | $ | 221,162 |   | $ | 49,071 |   |

 

***Secured Revolving Lines 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 interest based on prevailingmoney market rates 

F-52

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

approximating the cost ofasset-backed commercial paper. At December 31, 2006, the entity hadaggregate commitments from the bank-sponsored conduits totaling $10.4 billionand had $0.6 billion outstanding borrowings, secured by $0.6 billion ofmortgage loans held for sale.

Financialdata pertaining to secured revolving line of credit were as follows:

| ** **                                           | ** ** | **Years Ended December 31,**      | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                         | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                           | ** ** | **(dollar amounts in thousands)** | ** ** |
| Weighted-average  interest rate at end of year       |       | 5.35                                             | %          | 4.28 | % | — |   |
| Weighted-average  interest rate during the year      |       | 4.81                                             | %          | 3.86 | % | 2.71 | % |
| Average balance  of secured revolving line of credit |       | $                                                | 998,190    |   | $ | 2,399,281 |   | $ | 41,705 |   |
| Maximum amount  outstanding at any month end         |       | $                                                | 1,690,168  |   | $ | 8,419,168 |   | — |   |
| Total interest expense                               |       | $                                                | 48,683     |   | $ | 93,849 |   | $ | 958 |   |

 

A new $4.0 billion master trust facility commenced on June 2,2006 to finance Countrywide Warehouse Lending (“CWL”) receivables backed bymortgage loans. A multi-asset conduit finance company funds the purchase ofnotes backed by CWL receivables which are financed by issuing extendablematurity asset-backed commercial paper. The borrowing under this facility at December 31,2006, was $1.5 billion, and the Company had pledged $1.6 billion in loans heldfor investment to secure this facility.

Financialdata pertaining to the master trust facility secured revolving line of creditwere as follows:

| ** **                                           | ** ** | **Years Ended December 31,**      | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                         | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                           | ** ** | **(dollar amounts in thousands)** | ** ** |
| Weighted-average  interest rate at end of year       |       | 5.40                                             | %          |   | — |   |   |   | — |   |   |
| Weighted-average  interest rate during the year      |       | 5.39                                             | %          |   | — |   |   |   | — |   |   |
| Average balance  of secured revolving line of credit |       | $                                                | 664,384    |   |   | — |   |   |   | — |   |   |
| Maximum amount  outstanding at any month end         |       | $                                                | 1,500,000  |   |   | — |   |   |   | — |   |   |
| Total interest expense                               |       | $                                                | 36,310     |   |   | — |   |   |   | — |   |   |

 

***Asset-Backed Secured Financings***

The Company recordedcertain securitization transactions as secured borrowings as of December 31,2006 and 2005, because they did not qualify for sales treatment under SFAS 140.The amounts accounted for as secured borrowings totaled $241.2 million and$23.0 million at December 31, 2006 and 2005, respectively.

***Junior Subordinated Debentures***

In December 2006, the Company redeemed at parplus accrued interest, the 8% Capital Securities of Countrywide Capital I (the “SubsidiaryTrust I”).

Countrywide Capital III (the “Subsidiary Trust III”),a subsidiary trust of the Company, has $200 million outstanding 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 (the “SubordinatedDebt Securities III”). The Subordinated Debt Securities III are due on June 15,2027 

F-53

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

with interest payablesemi-annually on June 15 and December 15 of each year. The soleassets of the Subsidiary Trust III are, and will be, the Subordinated DebtSecurities III.

Countrywide Capital IV (the “Subsidiary Trust IV”), asubsidiary trust of the Company, has $500 million outstanding of 6.75%preferred securities, which are fully and unconditionally guaranteed by theCompany and CHL (the “6.75% Securities”). In connection with the issuance byCountrywide Capital IV of the 6.75% Securities, the Company issued toCountrywide Capital IV $500 million of its 6.75% Junior SubordinatedDebentures, which are fully and unconditionally guaranteed by CHL (the “SubordinatedDebentures”). Countrywide Capital IV exists for the sole purpose of issuing the6.75% 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 November 2006, Countrywide Capital V (the “SubsidiaryTrust V”), a subsidiary trust of the Company, issued $1.5 billion of 7.00%Capital and Common Securities (the “7.00% Capital and Common Securities”). Inconnection with the Subsidiary Trust V issuance of 7.00% Capital and CommonSecurities, the Company issued to the Subsidiary Trust V $1.5 billion of its7.00% Junior Subordinated Deferrable Interest Debentures (the “SubordinatedDebt Securities V”). The Subordinated Debt Securities V are due on November 1,2036 only to the extent that the Company has raised sufficient net proceedsfrom the issuance of securities that qualify as capital securities under theagreement, during the 180-day period ending on a notice date not morethan 15 or less than 10 business days prior to the scheduled maturity date,with a final maturity of November 1, 2066. Interest is payable quarterlyon February 1, May 1, August 1 and November 1 of each year,beginning February 1, 2007, in arrears, until November 1, 2036 and,thereafter, on the first day of each month, in arrears, beginning December 1,2036. The sole assets of the Subsidiary Trust V are, and will be, theSubordinated Debt Securities V. The Company has the right to redeem thesecurities at a redemption price equal to 100% of their principal amount plus accruedand unpaid interest beginning on November 1, 2011, and prior to November 1,2011, in whole, if certain changes occur relating to the capital or taxtreatment of the capital securities or certain changes of law occur withrespect to the Investment Company Act of 1940, as amended.

In relation to Subsidiary Trust III, the Company hasthe right to defer payment of interest by extending the interest paymentperiod, from time to time, for up to 10 consecutive semi-annual periods. Ifinterest payments on the debentures are so deferred, the Company may notdeclare or pay dividends on, or make a distribution with respect to, or redeem,purchase or acquire, or make a liquidation payment with respect to any of itscapital 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, amongother things, declare or pay dividends on, or make a distribution with respectto, or redeem, purchase or acquire, or make a liquidation payment with respectto any of its capital stock.

In relation to Subsidiary Trust V, the Company maydefer interest payments for one or more consecutive payment periods not toexceed ten years. In the event the Company elects to defer interest, theCompany will be obligated to sell qualifying warrants and/or noncumulativeperpetual preferred stock and apply the net proceeds of the issuance to therepayment of unpaid and deferred interest, including compound interest, uponthe earlier of (i) the Company’s resumption of current interest paymentsor 

F-54

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

(ii) five years fromthe commencement of the deferral period. The Company will be excused from itsobligation to sell qualifying warrants and/or noncumulative perpetual preferredstock in respect of any interest payment date in the event and to the extent ofa market disruption event. If payments on the debentures are deferred, theCompany may not 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 one of the subsidiary trusts,Countrywide Capital III, which is excluded from the Company’s consolidatedfinancial statements. Following is summarized information for that trust:

| ** **                                                                     | ** ** | **December 31,**   | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                     | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                                                     | ** ** | **(in thousands)** | ** ** |
| Balance Sheet:                                                                 |       |                    |       |   |   |
| Junior subordinated debentures receivable                                      |       | $                       | 205,312    |   | $ | 205,269 |   |
| Other assets                                                                   |       | 1,191                   |       | 692 |   |
| Total assets                                                                   |       | $                       | 206,503    |   | $ | 205,961 |   |
| Notes payable                                                                  |       | $                       | 6,173      |   | $ | 6,172 |   |
| Other liabilities                                                              |       | 1,191                   |       | 692 |   |
| Company-obligated guaranteed redeemable capital  trust pass-through securities |       | 199,139                 |       | 199,097 |   |
| Shareholder’s equity                                                      |       | —                  |       | — |   |
| Total liabilities  and shareholder’s equity                               |       | $                       | 206,503    |   | $ | 205,961 |   |

 

| ** **                 | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------|------------|--------------------------------------------|------------|
| ** **                 | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| ** **                 | ** ** | **(in thousands)**                    | ** ** |
| Statement of Earnings:     |       |                                       |       |   |   |
| Revenues                   |       | $                                          | 16,642     |   | $ | 16,642 |   |
| Expenses                   |       | (16,642                                    | )          | (16,642 | ) |
| Provision for income taxes |       | —                                     |       | — |   |
| Net earnings               |       | $                                          | —     |   | $ | — |   |

 

***Subordinated Debt***

In May 2006, theCompany issued $1.0 billion of 6.25% fixed rate unsecured subordinated notesmaturing May 2016. The notes rank subordinate and junior to all of theCompany’s senior indebtedness, and rank senior to the Company’s juniorsubordinated debentures underlying the Company’s trust preferred securities.

***Convertible Securities and Liquid Yield Option NotesConvertible Debentures***

During the year ended December 31,2006, the Company converted its remaining convertible securities and LiquidYield Option Notes outstanding through the payment of cash and issuance ofcommon stock.

F-55

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

***Backup Credit Facilities***

As of December 31,2006, the Company had unsecured credit agreements (revolving credit facilities)with a group of commercial banks permitting the Company to borrow an aggregatemaximum amount of $11.5 billion. The composition of the facilities was asfollows:

| ** **                                     | ** ** | **December 31, 2006** | ** ** |
|------------------------------------------------|------------|---------------------------------|------------|
| **Number of Bank Participants** | ** ** | ** **                      | ** ** | **Amount** | ** ** | **Expiration Date** | ** ** |
| ** **                                     | ** ** | **(in billions)**          | ** ** | ** ** | ** ** |
| 33                                             |       |                            | $          | 6.4 |   |   | May, 2011 |   |
| 33                                             |       |                            | 2.8        |   |   | May, 2007 |   |
| 14                                             |       |                            | 1.5        |   |   | November, 2011 |   |
| 14                                             |       |                            | 0.6        |   |   | November, 2007 |   |
| 1                                              |       |                            | 0.1        |   |   | May, 2011 |   |
| 1                                              |       |                            | 0.1        |   |   | May, 2007 |   |
|                                           |       |                            | $          | 11.5 |   |   |   |   |
|                                                |            |                                 |            |  |  |  |  |  |  |  |

 

As consideration for these facilities, the Companypays annual facility fees of $8.7 million. The primary purpose of thesecredit facilities is to provide liquidity support for the Company’s unsecured commercialpaper programs. No amount was outstanding under these facilities at December 31,2006. 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 31,2006 and 2005, the Company had $2.5 billion and $2.1 billion, respectively, ofunused borrowing facility with the FRB. The Company had placed collateral withthe FRB totaling $3.0 billion and $2.4 billion, respectively to secure theavailability of this facility.

***Maturities of Notes Payable***

Maturitiesof notes payable are as follows:

| **Year Ending December 31,** | ** ** | ** **              | ** ** | **Principal, Net  of Premiums  and Discounts** | ** ** | **Hedge Basis  Adjustment** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|---------------------------------------------------------------|------------|----------------------------------|------------|-----------|------------|
| ** **                                  | ** ** | **(in thousands)** | ** ** |
| 2007                                        |       |                    | $          | 35,009,236                                                    |       |                             |       | $         | 48,885     |   |   | $ | 35,058,121 |   |
| 2008                                        |       |                    | 16,289,851 |                                                          |       |                             | 187,541    |      |       | 16,477,392 |   |
| 2009                                        |       |                    | 9,706,123  |                                                          |       |                             | (21,822    | )         |       | 9,684,301 |   |
| 2010                                        |       |                    | 3,904,805  |                                                          |       |                             | 88,439     |      |       | 3,993,244 |   |
| 2011                                        |       |                    | 2,530,360  |                                                          |       |                             | 37,639     |      |       | 2,567,999 |   |
| Thereafter                                  |       |                    | 3,731,023  |                                                          |       |                             | (24,496    | )         |       | 3,706,527 |   |
| Total                                       |       |                    | $          | 71,171,398                                                    |       |                             |       | $         | 316,186    |   |   | $ | 71,487,584 |   |

 

F-56

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Note 16—CommittedReusable Purchase Facilities**

As of December 31,2006, the Company had in place a reusable $7.0 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, transfers of loans to this facilityare accounted for as sales. As consideration for the facility, CHL pays anannual commitment fee. CHL’s commitment fee expense relating to thesefacilities totaled $3.1 million, $4.3 million and $7.2 million for the yearsended December 31, 2006, 2005 and 2004.

**Note 17—IncomeTaxes**

Componentsof the provision for income taxes are as follows:

| ** **                  | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------|------------|---------------------------------------------|------------|
| ** **                  | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                  | ** ** | **(in thousands)**                     | ** ** |
| Current taxes:              |       |                                        |       |   |   |   |   |
| Federal                     |       | $                                           | 699,211    |   | $ | 96,447 |   | $ | 761,318 |   |
| State                       |       | 138,109                                     |       | 45,381 |   | 132,912 |   |
| Foreign                     |       | 4,668                                       |       | 8,755 |   | 11,881 |   |
|                        |       | 841,988                                     |       | 150,583 |   | 906,111 |   |
| Deferred taxes:             |       |                                        |       |   |   |   |   |
| Federal                     |       | 713,178                                     |       | 1,269,187 |   | 380,550 |   |
| State                       |       | 104,123                                     |       | 199,906 |   | 111,638 |   |
|                        |       | 817,301                                     |       | 1,469,093 |   | 492,188 |   |
| Provision for income  taxes |       | $                                           | 1,659,289  |   | $ | 1,619,676 |   | $ | 1,398,299 |   |

 

Thefollowing is a reconciliation of the statutory federal income tax rate to theeffective income tax rate as reflected in the consolidated statements ofearnings:

| ** **                                                   | ** ** | **Years Ended  December 31,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                   | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| Statutory federal  income tax rate                           |       | 35.0                                    | %          | 35.0 | % | 35.0 | % |
| State income and  franchise taxes, net of federal tax effect |       | 3.6                                     | %          | 3.8 | % | 4.2 | % |
| Other                                                        |       | (0.3                                    | )%         | 0.2 | % | (0.3 | )% |
| Effective income  tax rate                                   |       | 38.3                                    | %          | 39.0 | % | 38.9 | % |

 

The Company’s state income and franchise tax rate, netof federal tax effect, reflects the apportioned statutory rates of the variousstates in which the Company does business and adjustments to current anddeferred state tax payables resulting from tax planning, tax examinations androutine activities.

F-57

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

The components of incometaxes payable are as follows:

| ** **                            | ** ** | **December 31,**   | ** ** |
|---------------------------------------|------------|-------------------------|------------|
| ** **                            | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                            | ** ** | **(in thousands)** | ** ** |
| Taxes currently payable  (receivable) |       | $                       | 1,600      |   | $ | (288,748 | ) |
| Deferred income taxes  payable        |       | 4,934,163               |       | 4,134,922 |   |
|                                  |       | $                       | 4,935,763  |   | $ | 3,846,174 |   |

 

Thetax effects of temporary differences that gave rise to deferred income taxassets and liabilities are presented below:

| ** **                                     | ** ** | **December 31,**   | ** ** |
|------------------------------------------------|------------|-------------------------|------------|
| ** **                                     | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                     | ** ** | **(in thousands)** | ** ** |
| Deferred income tax  assets:                   |       |                    |       |   |   |
| Employee benefits                              |       | $                       | 291,230    |   | $ | 197,756 |   |
| Reserve for losses                             |       | 198,979                 |       | 136,188 |   |
| Deferred servicing hedge losses                |       | 188,709                 |       | 138,740 |   |
| Net operating losses                           |       | 86,021                  |       | 68,399 |   |
| Other                                          |       | 144,899                 |       | 54,114 |   |
| Gross deferred tax assets                      |       | 909,838                 |       | 595,197 |   |
| Valuation allowance                            |       | (86,021                 | )          | (68,399 | ) |
|                                           |       | 823,817                 |       | 526,798 |   |
| Deferred income tax  liabilities:              |       |                    |       |   |   |
| Mortgage servicing rights                      |       | 5,346,219               |       | 4,175,429 |   |
| Depreciation and amortization                  |       | 179,548                 |       | 173,653 |   |
| Mortgage guaranty insurance tax and loss bonds |       | 170,359                 |       | 129,180 |   |
| Other                                          |       | 61,854                  |       | 183,458 |   |
|                                           |       | 5,757,980               |       | 4,661,720 |   |
| Deferred income taxes  payable                 |       | $                       | 4,934,163  |   | $ | 4,134,922 |   |

 

Foreign pre-tax earnings approximated $34.9 million,$43.6 million and $44.9 million in 2006, 2005 and 2004, respectively.

Earnings of a foreign subsidiary are subject to U.S.taxation when effectively repatriated. The Company is required to provide U.S.income taxes on the undistributed earnings of non-U.S. subsidiaries except tothe extent such earnings are indefinitely invested outside the U.S. At December 31,2006, $66.8 million of accumulated undistributed earnings on non-U.S.subsidiaries was indefinitely invested outside the U.S. It is not practicableat this time to determine the income tax liability that would result uponrepatriation of these earnings. No income tax is provided against othercomprehensive income for the translation adjustments for such unremittedearnings of a subsidiary that are indefinitely invested 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 

F-58

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

certainforeign earnings that are repatriated, as defined in the AJCA. The taxresulting from the repatriated earnings was $3.7 million in 2005.

**Note 18—Shareholders’Equity**

In February 1988, the Company’s Board ofDirectors declared a dividend distribution of one preferred stock purchaseright (“Right”) for each outstanding share of the Company’s common stock. As aresult of stock splits and stock dividends, 0.25 of a Right is presentlyassociated with each outstanding share of the Company’s common stock issuedbefore the Distribution Date (as defined below). Each Right, when exercisable,entitles the holder to purchase from the Company one two-thousandth of a shareof Series A Participating Preferred Stock, par value $.05 per share, ofthe Company (the “Series A Preferred Stock”). In June 2006, thepurchase price was adjusted to $624, subject to adjustments in certain cases toprevent dilution.

The Rights are evidenced by the common stockcertificates and are not exercisable or transferable, apart from the commonstock, until the date (the “Distribution Date”) of the earlier of a publicannouncement that a person or group, without prior consent of the Company, hasacquired 15% or more of the common stock (“Acquiring Person”), or 10 days(subject to extension by the Board of Directors) after the commencement of atender offer made without the prior consent of the Company.

In the event a person becomes an Acquiring Person,then each Right (other than those owned by the Acquiring Person) will entitleits holder to purchase, at the then current exercise price of the Right, thatnumber of shares of common stock, or the equivalent thereof, of the Company,which at the time of such transaction, would have a market value of two timesthe exercise price of the Right. The Board of Directors of the Company maydelay the exercise of the Rights during the period in which they areexercisable only for Series A Preferred Stock (and not common stock).

In the event that, after a person has become anAcquiring Person, the Company is acquired in a merger or other businesscombination, as defined for the purposes of the Rights, each Right (other thanthose held by the Acquiring Person) will entitle its holder to purchase, at thethen current exercise price of the Right, that number of shares of common stock,or the equivalent thereof, of the other party (or publicly-traded parentthereof) to such merger or business combination which at the time of suchtransaction would have a market value of two times the exercise price of theRight. In November 2001, the Company extended the life of the Rights to February 10,2012.

The Company declared a 3-for-2 and a 2-for-1split of the Company’s $0.05 par value common stock, which were effected asstock dividends on April 12, 2004 and August 30, 2004, respectively.The effects of these stock splits are detailed in the consolidated statement ofchanges in shareholders’ equity.

In November 2006, theCompany’s Board of Directors authorized a share repurchase program of up to$2.5 billion. In connection with this program, the Company repurchased38,639,876 shares of its common stock in November 2006, financed throughthe issuance of junior subordinated debentures. The transaction is subject to amarket price adjustment payment based on the actual volume-weighted averageprice of our common stock during the repurchase period. The price adjustmentpayment will be settled, at our election, in our common stock or cash. Thefinal settlement is expected to occur in the second quarter of 2007.

F-59

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Note 19—Fair Value ofFinancial Instruments**

***FairValue of Financial Instruments***

The following disclosure of the estimated fair valueof financial instruments as of December 31, 2006 and 2005, is made by theCompany using available market information and valuation methods whichmanagement believes are appropriate for each instrument. In some casesconsiderable judgment is required to interpret market data to develop theestimates of fair value. Accordingly, the estimates presented herein are notnecessarily indicative of the amounts the Company could realize in a currentmarket exchange. The use of different market assumptions and/or estimationmethods may have a material effect on the estimated fair value amounts.

| ** **                                                                                   | ** ** | **December 31,**   | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                   | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                                                                   | ** ** | **Carrying  Amount**    | ** ** | **Estimated  Fair Value** | ** ** | **Carrying  Amount** | ** ** | **Estimated  Fair Value** | ** ** |
| ** **                                                                                   | ** ** | **(in thousands)** | ** ** |
| Assets:                                                                                      |       |                    |       |   |   |   |   |   |   |
| Mortgage loans held for  sale                                                                |       | $                       | 31,272,630 |   | $ | 31,919,756 |   | $ | 36,808,185 |   | $ | 37,007,407 |   |
| Trading securities owned                                                                     |       | 20,036,668              |       | 20,036,668 |   | 10,314,384 |   | 10,314,384 |   |
| Trading securities  pledged as collateral                                                    |       | 1,465,517               |       | 1,465,517 |   | 668,189 |   | 668,189 |   |
| Securities purchased  under agreements to resell, securities borrowed and federal funds sold |       | 27,269,897              |       | 27,274,159 |   | 23,317,361 |   | 23,313,832 |   |
| Loans held for  investment                                                                   |       | 78,085,757              |       | 78,426,911 |   | 69,865,447 |   | 69,931,654 |   |
| Investments in other  financial instruments                                                  |       | 11,409,136              |       | 11,409,136 |   | 10,323,386 |   | 10,323,386 |   |
| Liabilities:                                                                                 |       |                    |       |   |   |   |   |   |   |
| Deposit liabilities                                                                          |       | 55,578,682              |       | 55,614,200 |   | 39,438,916 |   | 39,449,169 |   |
| Securities sold under  agreements to repurchase and federal funds purchased             |       | 42,113,501              |       | 42,108,440 |   | 34,153,205 |   | 34,148,390 |   |
| Trading securities sold,  not yet purchased                                                  |       | 3,325,249               |       | 3,325,249 |   | 2,285,171 |   | 2,285,171 |   |
| Notes payable                                                                                |       | 71,487,584              |       | 70,576,548 |   | 76,187,886 |   | 76,026,306 |   |
| Corporate guarantees                                                                         |       | 45,425                  |       | 45,425 |   | 27,614 |   | 27,614 |   |
| Derivatives:                                                                                 |       |                    |       |   |   |   |   |   |   |
| Interest rate lock  commitments                                                              |       | (29,928                 | )          | (29,928 | ) | 11,546 |   | 11,546 |   |
| Loan purchase  commitments                                                                   |       | (8,900                  | )          | (8,900 | ) | (837 | ) | (837 | ) |
| Interest rate caps                                                                           |       | 6                       |       | 6 |   | — |   | — |   |
| Forward contracts on MBS                                                                     |       | 52,819                  |       | 52,819 |   | (115,324 | ) | (115,324 | ) |
| Options on MBS                                                                               |       | —                  |       | — |   | 3,787 |   | 3,787 |   |
| Options on interest rate  futures                                                            |       | 28,740                  |       | 28,740 |   | 26,643 |   | 26,643 |   |
| Swaptions                                                                                    |       | 600,071                 |       | 600,071 |   | 677,742 |   | 677,742 |   |
| Total return swaps                                                                           |       | (4,760                  | )          | (4,760 | ) | (3,427 | ) | (3,427 | ) |
| Credit default swaps                                                                         |       | 10,911                  |       | 10,911 |   | (402 | ) | (402 | ) |
| Interest rate swaps                                                                          |       | 343,485                 |       | 343,485 |   | 129,720 |   | 129,720 |   |
| Forward rate agreements                                                                      |       | 94,880                  |       | 94,880 |   | (67,428 | ) | (67,428 | ) |
| Forward spot agreements                                                                      |       | (776                    | )          | (776 | ) | (1,814 | ) | (1,814 | ) |
| Off balance sheet instruments:                                                               |       |                    |       |   |   |   |   |   |   |
| Commitments to extend credit                                                                 |       | —                  |       | (39,121 | ) | — |   | 113,715 |   |
|                                                                                              |            |                         |            |  |  |  |  |  |  |  |  |  |  |

 

F-60

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

The fair value estimates as of December 31, 2006and 2005 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 Heldfor 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, Securities Borrowed and Federal FundsSold*

These financialinstruments are recorded at accreted cost. Fair value was determined bycalculating the net present value of future cash flows of each contract. Thediscount rate used was the market rate that would be required to enter thesesame contracts at the balance sheet date. Fair value was considered to be equalto book value for some contracts, such as those with open or overnightmaturities.

*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 that it believes other major market participants would consider inderiving the fair value of principal-only securities.

***Interest-Only Securities***

Fair value is estimatedthrough the use of a proprietary, multiple rate path discounted cash flow model.The Company has incorporated mortgage prepayment assumptions in its valuationmodel that it believes other major market participants would consider inderiving the fair value of interest-only securities.

F-61

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

***Interests Retained in Securitization***

Fair value of retainedinterests, with the exception of interest-only securities, is estimated throughthe use of proprietary, “static” (single rate path) discounted cash flowmodels. The Company has incorporated mortgage prepayment and credit loss assumptionsin its valuation models that it believes other major market participants wouldconsider in deriving the fair value of its retained interests.

***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 similar instruments, and valuation pricingmodels intended to approximate the amounts that would be received from or paidto 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-SponsoredEnterprises***

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. Fair valuewas determined by calculating the net present value of future cash flows ofeach contract. The discount rate used was the market rate that would berequired to enter these same contracts at the balance sheet date. Fair valuewas considered to be equal to book value for some contracts, such as those withopen or overnight maturities.

*Trading SecuritiesSold, Not Yet 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 

F-62

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

depositis estimated with a discounted cash flow calculation using interest ratescurrently being offered on similar accounts.

*CorporateGuarantees*

Fair value is estimatedthrough the use of a proprietary model consisting of a loan-level frequencymodel estimated with survival analysis and a loan-level severity modelestimated with multiple least square regressions. The modeling processincorporates the use of relevant risk factors.

*Derivatives*

Fair value is defined asthe amount that the Company would receive or pay to terminate the contracts atthe reporting date. Market or dealer quotes are available for many derivatives;otherwise, pricing or valuation models are applied using current market informationto estimate fair value. The Company estimates the fair value of an IRLC basedon the change in estimated fair value of the underlying mortgage loan and theprobability that the mortgage loan will fund within the terms of the IRLC. Thechange in fair value of the underlying mortgage loan is based upon quoted MBSprices. The change in fair value of the underlying mortgage loan is measuredfrom the date the IRLC is issued. At the time of issuance the estimated fairvalue of an IRLC is zero. Subsequent to issuance, the value of an IRLC can beeither positive or negative depending on the change in value of the underlyingmortgage loan.

*Commitments toExtend Credit*

The fair value ofcommitments to extend credit represents the fair value of loan commitmentsrelated to loans that will be originated for investment. The fair value isbased on observed market prices for loans of a similar type, coupon andmaturity and the probability that the mortgage loan will fund within the termsof the loan commitment.

**Note 20—EmployeeBenefits**

***Stock Compensation Plans***

The Company has stock compensation plans (the “Plans”)that provide for the granting of both qualified and non-qualified stockoptions, stock appreciation rights and shares of restricted stock to employees anddirectors. Stock options and stock appreciation rights are granted at theaverage market price of the Company’s common stock on the date of grant and aregenerally exercisable beginning one year from the date of grant and expire upto 10 years from the date of grant. Stock options and stock appreciation rightsgenerally vest over a period of three to four years.

F-63

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

Stock option and stock appreciation right transactionsunder the Plans are as follows:

| ** **                                               | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Number of Shares:                                        |       |                                        |       |   |   |   |   |
| Outstanding at beginning  of year                        |       | 58,424,402                                  |       | 59,109,336 |   | 59,389,524 |   |
| Granted                                                  |       | 13,971,033                                  |       | 13,431,370 |   | 12,005,516 |   |
| Exercised                                                |       | (19,608,579                                 | )          | (13,068,735 | ) | (11,266,468 | ) |
| Expired or canceled                                      |       | (1,117,413                                  | )          | (1,047,569 | ) | (1,019,236 | ) |
| Outstanding at end of  year                              |       | 51,669,443                                  |       | 58,424,402 |   | 59,109,336 |   |
| Weighted-Average Exercise Price:                         |       |                                        |       |   |   |   |   |
| Outstanding at beginning  of year                        |       | $                                           | 20.06      |   | $ | 15.35 |   | $ | 10.83 |   |
| Granted                                                  |       | 36.45                                       |       | 32.64 |   | 31.85 |   |
| Exercised                                                |       | 17.63                                       |       | 11.71 |   | 9.05 |   |
| Expired or canceled                                      |       | 30.36                                       |       | 19.89 |   | 15.70 |   |
| Outstanding at end of  year                              |       | $                                           | 25.19      |   | $ | 20.06 |   | $ | 15.35 |   |
| Exercisable at end of  year                              |       | 33,071,185                                  |       | 40,902,898 |   | 27,230,988 |   |
| Available for future  grant                              |       | 27,602,618                                  |       | 18,467,664 |   | 29,903,747 |   |
| Weighted-Average Remaining Contractual Term: (in  years) |       |                                        |       |   |   |   |   |
| Outstanding at end of  year                              |       | 4.35                                        |       | 5.23 |   | 4.91 |   |
| Exercisable at end of  year                              |       | 4.22                                        |       | 5.04 |   | 4.29 |   |
| Aggregate Intrinsic Value: (in thousands)                |       |                                        |       |   |   |   |   |
| Outstanding at end of  year                              |       | $                                           | 902,964    |   | $ | 818,589 |   | $ | 1,277,380 |   |
| Exercisable at end of  year                              |       | $                                           | 708,702    |   | $ | 612,150 |   | $ | 746,175 |   |

 

Stockoption and stock appreciation rights exercise activity for years endedDecember 31, 2006, 2005 and 2004 is summarized below:

| ** **      | ** ** | **Years Ended December 31,** | ** ** |
|-----------------|------------|---------------------------------------------|------------|
| ** **      | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **      | ** ** | **(in thousands)**                     | ** ** |
| Cash Proceeds   |       | $                                           | 345,699    |   | $ | 153,035 |   | $ | 101,962 |   |
| Intrinsic Value |       | $                                           | 382,086    |   | $ | 314,505 |   | $ | 258,788 |   |

 

F-64

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

Outstandingstock options and stock appreciation rights under the Plans as of December 31,2006, are summarized below:

| ** **                     | ** ** | **Outstanding** | ** ** | **Exercisable**                                                  | ** ** |
|--------------------------------|------------|-----------------|------------|------------------------------------------------------------------|------------|
| **Exercise  Price Range** | ** ** | ** **      | ** ** | **Weighted  Average  Remaining  Contractual  Life (Years)** | ** ** | **Number** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $4.25-$8.50                    |       |            | 0.4        |                                                             |       | 359,746 |   |   | $ | 6.77 |   |   | 359,746 |   |   | $ | 6.77 |   |   |
| $8.51-$12.74                   |       |            | 4.6        |                                                             |       | 12,187,510 |   |   | 10.30 |   |   | 11,710,828 |   |   | 10.22 |   |   |
| $12.75-$16.99                  |       |            | 6.1        |                                                             |       | 6,122,117 |   |   | 14.64 |   |   | 4,310,502 |   |   | 14.68 |   |   |
| $17.00-$21.24                  |       |            | 6.3        |                                                             |       | 2,734,888 |   |   | 18.97 |   |   | 2,018,617 |   |   | 18.97 |   |   |
| $21.25-$25.49                  |       |            | 6.9        |                                                             |       | 58,502 |   |   | 24.78 |   |   | 27,001 |   |   | 24.72 |   |   |
| $25.50-$29.74                  |       |            | 5.0        |                                                             |       | 12,862 |   |   | 28.11 |   |   | 7,139 |   |   | 27.92 |   |   |
| $29.75-$33.98                  |       |            | 3.2        |                                                             |       | 16,710,838 |   |   | 32.25 |   |   | 13,519,077 |   |   | 32.34 |   |   |
| $33.99-$38.23                  |       |            | 4.4        |                                                             |       | 13,341,524 |   |   | 36.44 |   |   | 1,098,078 |   |   | 36.39 |   |   |
| $38.24-$42.48                  |       |            | 4.1        |                                                             |       | 141,456 |   |   | 38.70 |   |   | 20,197 |   |   | 38.62 |   |   |
|                           |       |            | 4.4        |                                                             |       | 51,669,443 |   |   | $ | 25.19 |   |   | 33,071,185 |   |   | $ | 21.24 |   |   |
|                                |            |                 |            |                                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Thetable below summarizes restricted stock activity for the year ended December 31,2006:

| ** **                               | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------|------------|---------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Number of Shares:                        |       |                                        |       |   |   |   |   |
| Outstanding at beginning of year         |       | 839,406                                     |       | 781,079 |   | 705,284 |   |
| Granted                                  |       | 382,034                                     |       | 355,496 |   | 286,483 |   |
| Vested                                   |       | (569,051                                    | )          | (286,305 | ) | (191,102 | ) |
| Cancelled                                |       | (56,041                                     | )          | (10,864 | ) | (19,586 | ) |
| Outstanding at end of year               |       | 596,348                                     |       | 839,406 |   | 781,079 |   |
| Weighted-Average Grant  Date Fair Value: |       |                                        |       |   |   |   |   |
| Outstanding at beginning of year         |       | $                                           | 26.37      |   | $ | 20.99 |   | $ | 14.78 |   |
| Granted                                  |       | 35.86                                       |       | 33.87 |   | 31.81 |   |
| Vested                                   |       | 25.52                                       |       | 21.46 |   | 15.25 |   |
| Expired or canceled                      |       | 31.95                                       |       | 18.20 |   | 16.28 |   |
| Outstanding at end of year               |       | $                                           | 32.74      |   | $ | 26.37 |   | $ | 20.99 |   |
| Available for future  grant              |       | 4,319,906                                   |       | 4,645,461 |   | 4,986,516 |   |

 

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 recordedcompensation expense relating to restricted stock totaling $11.8 million, $5.7million and $5.4 million for the years ended December 31, 2006, 2005 and2004, respectively. The balance of unamortized restricted stock awards was$10.0 million and $12.5 million at December 31, 2006 and 2005,respectively.

F-65

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

***Pension Plan***

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

The Company’s policy is to contribute the amountactuarially determined to be necessary to pay the benefits under the PensionPlan, and in no event to pay less than the amount necessary to meet the minimumfunding standards of ERISA. In the year ended December 31, 2006, theCompany made the maximum tax-deductible contribution to the Plan.

In September 2006,the FASB issued SFAS No. 158, *Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans,* (“SFAS 158”),an amendment of FASB Statement Nos. 87, 88, 106, and 132(R). SFAS 158 requiresa liability (or an asset) to be recorded that reflects the underfunded (oroverfunded) status of its postretirement benefit plans. SFAS 158 pertains tothe Company’s Pension Plan and other defined benefit plans. The portion of thatliability (or asset) that has not been recognized in earnings is recorded inaccumulated other comprehensive income (a component of equity), net of taxes.SFAS 158 also requires the measurement date for those obligations to coincidewith an entity’s fiscal year-end, which is the measurement date currently usedby the Company. SFAS 158 is effective as of December 31, 2006. Thefollowing table illustrates the incremental effect of applying SFAS No. 158on individual line items in the balance sheet for December 31, 2006: 

| ** **                                     | ** ** | **Before  Application  of SFAS 158** | ** **  | **Adjustments** | ** ** | **After  Application  of SFAS 158** | ** ** |
|------------------------------------------------|------------|------------------------------------------------|-------------|-----------------|------------|-----------------------------------------------|------------|
| ** **                                     | ** ** | **(in thousands)**                        | ** **  |
| Accounts payable  and accrued liabilities      |       | $                                              | 8,138,551   |            |       | $                                             | 49,054     |   |   | $ | 8,187,605 |   |
| Income taxes  payable                          |       | $                                              | 4,955,090   |            |       | $                                             | (19,327    | ) |   | $ | 4,935,763 |   |
| Total liabilities                              |       | $                                              | 185,598,657 |            |       | $                                             | 29,727     |   |   | $ | 185,628,384 |   |
| Accumulated other  comprehensive income (loss) |       | $                                              | 12,171      |            |       | $                                             | (29,727    | ) |   | $ | (17,556 | ) |
| Total stockholders’  equity               |       | $                                              | 14,347,573  |            |       | $                                             | (29,727    | ) |   | $ | 14,317,846 |   |

 

F-66

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

The following table sets forth the Pension Plan’sfunded status and amounts recognized in the Company’s financial statements:

| ** **                                                          | ** ** | **December 31,**   | ** ** |
|---------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                          | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                                          | ** ** | **(in thousands)** | ** ** |
| Change in benefit obligation                                        |       |                    |       |   |   |
| Benefit  obligation at beginning of year                            |       | $                       | 373,350    |   | $ | 271,796 |   |
| Service cost                                                        |       | 73,029                  |       | 61,731 |   |
| Interest cost                                                       |       | 19,269                  |       | 15,795 |   |
| Actuarial (gain)  or loss                                           |       | (22,321                 | )          | 3,335 |   |
| Benefits paid                                                       |       | (1,542                  | )          | (1,258 | ) |
| Change in discount  rate                                            |       | (25,284                 | )          | 21,951 |   |
| Benefit  obligation at end of year                                  |       | $                       | 416,501    |   | $ | 373,350 |   |
| Change in plan assets                                               |       |                    |       |   |   |
| Fair value of  plan assets at beginning of year                     |       | $                       | 220,551    |   | $ | 157,050 |   |
| Actual return on  plan assets                                       |       | 32,947                  |       | 11,016 |   |
| Employer  contribution                                              |       | 62,556                  |       | 53,743 |   |
| Benefits paid                                                       |       | (1,542                  | )          | (1,258 | ) |
| Fair value of  plan assets at end of year                           |       | $                       | 314,512    |   | $ | 220,551 |   |
| Funded status at  end of year                                       |       | $                       | (101,989   | ) | $ | (152,799 | ) |
| Unfunded pension liability recorded in other  comprehensive income: |       |                    |       |   |   |
| Net loss                                                            |       | 34,043                  |       | — |   |
| Prior service  cost                                                 |       | 3,011                   |       | — |   |
| Unrecognized net  actuarial loss                                    |       | —                  |       | 102,150 |   |
| Unrecognized prior  service cost                                    |       | —                  |       | 3,360 |   |
| Net amount  recognized                                              |       | $                       | (64,935    | ) | $ | (47,289 | ) |

 

The accumulated benefit obligation for the PensionPlan was $294 million and $239 million at December 31, 2006 and 2005,respectively.

Thefollowing table sets forth the components of net periodic benefit cost:

| ** **                          | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                          | ** ** | **(in thousands)**                     | ** ** |
| Service cost                        |       | $                                           | 73,029     |   | $ | 61,731 |   | $ | 45,756 |   |
| Interest cost                       |       | 19,269                                      |       | 15,795 |   | 11,925 |   |
| Expected return  on plan assets     |       | (16,669                                     | )          | (12,074 | ) | (7,770 | ) |
| Amortization of  prior service cost |       | 348                                         |       | 348 |   | 349 |   |
| Recognized net  actuarial loss      |       | 4,224                                       |       | 5,332 |   | 5,262 |   |
| Net periodic  benefit cost          |       | $                                           | 80,201     |   | $ | 71,132 |   | $ | 55,522 |   |

 

F-67

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

The weighted-average assumptions used in calculatingthe benefit obligations were as follows:

| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Discount rate                  |       | 5.75                  | %          | 5.50 | % |
| Rate of compensation  increase |       | 5.00                  | %          | 5.00 | % |

 

In the year ended December 31, 2006, the Companychanged certain of its actuarial assumptions. Specifically, the discount rateincreased from 5.50% to 5.75% to reflect changes in the bond rate environment.The increase in discount rate resulted in a decrease of $16.8 million to theaccumulated benefit obligation at December 31, 2006.

Theweighted-average assumptions used in calculating the net periodic benefit costswere as follows:

| ** **                                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Discount rate                             |       | 5.50     | %          | 5.75     | %          | 6.00     | %          |
| Expected  long-term return on plan assets |       | 7.00     | %          | 7.00     | %          | 7.00     | %          |
| Rate of compensation  increase            |       | 5.00     | %          | 5.00     | %          | 5.00     | %          |

 

Pension expense for the years ended December 31,2006, 2005 and 2004, was $80.2 million, $71.1 million and $55.5 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.

The Company’s Pension Plan weighted-average asset allocationsby asset category are as follows:

| ** **                       | ** ** | **Target**     | ** ** | **Plan Assets at** | ** ** |
|----------------------------------|------------|----------------|------------|------------------------------|------------|
| ** **                       | ** ** | **Allocation** | ** ** | **December 31,**        | ** ** |
| **Asset Category**          | ** ** | ** **     | ** ** | **2006**                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| Domestic equity  securities      |       |           | 50         | %                            |       |   | 50 | % |   |   | 50 | % |   |
| International  equity securities |       |           | 25         | %                            |       |   | 26 | % |   |   | 13 | % |   |
| Debt securities                  |       |           | 25         | %                            |       |   | 24 | % |   |   | — |   |   |
| Other (Cash)                     |       |           | —     |                         |       |   | — |   |   |   | 37 | % |   |
| Total                            |       |           | 100        | %                            |       |   | 100 | % |   |   | 100 | % |   |
|                                  |            |                |            |                              |            |  |  |  |  |  |  |  |  |  |  |

 

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 

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

monitored on a regularbasis through quarterly portfolio reviews, annual liability measurements andperiodic asset/liability analyses.

The following benefit payments, which reflect expectedfuture service, as appropriate, are expected to be paid:

| **Year Ending December 31,** | ** ** | ** **              | ** ** | **Pension Benefits** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|---------------------------|------------|
| ** **                                  | ** ** | **(in thousands)** | ** ** |
| 2007                                        |       |                    | $          | 1,846                     |       |   |
| 2008                                        |       |                    | 2,403      |                      |       |
| 2009                                        |       |                    | 3,174      |                      |       |
| 2010                                        |       |                    | 3,936      |                      |       |
| 2011                                        |       |                    | 4,853      |                      |       |
| 2012-2016                                   |       |                    | 43,656     |                      |       |
|                                        |       |                    | $          | 59,868                    |       |   |

 

***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 theCompany to make an additional contribution to the accounts of employees hiredafter December 31, 2005. The 401(k) Plan is subject to the provisionsof ERISA. The Company recorded $47.2 million, $34.2 million, and $27.4 millionin expense for its contributions for the years ended December 31, 2006,2005 and 2004, respectively.

***Other Employee Benefit Plans***

The Company has various non-qualified retirement anddeferred compensation plans for directors and selected employees. The combinedliability for these deferred compensation plans was $362.9 million and $305.0million at December 31, 2006 and 2005, respectively.

The Company also 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, the “SERP”). Effective January 1, 2006, the SERP will nolonger be available to new participants. The Company established anon-qualified defined contribution pension plan (the “CECP”) effective January 1,2006, as a supplemental retirement plan for executives. The actuariallycalculated accumulated benefit obligation for the SERP was $29.1 million and$34.9 million at December 31, 2006 and 2005, respectively. The Companyrecorded $4.1 million in expense for its contribution to the CECP for the yearended December 31, 2006.

The Company informallyfunds some of the Plans with trust-owned life insurance and mutual funds toassist the Company in meeting its obligations. The assets are held within rabbitrusts. The Company’s obligations to pay these benefits, the assets held to settlethe Company’s obligations and the related earnings on the assets and planexpenses are included in the Company’s financial statements. The cash 

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

surrendervalues of the trust-owned life insurance related to these plans are included inother assets and totaled $319.9 million and $224.9 million at December 31,2006 and 2005, respectively. The related mutual funds totaled $53.0 million and$50.3 million at December 31, 2006 and 2005, respectively, and areincluded in other assets.

**Note 21—Regulatoryand Agency Capital Requirements**

At December 31, 2006, the Company was a bankholding company as a result of its acquisition of Countrywide Bank (the “Bank”)(formerly Treasury Bank). Both the Company and the Bank are subject toregulatory capital requirements imposed by the Board of Governors of theFederal Reserve System (the “Federal Reserve”). The Company is also subject toU.S. Department of Housing and Urban Development, Fannie Mae, Freddie Mac andGovernment National Mortgage Association (“Ginnie Mae”) net worth requirements,which are lower than those of 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 the 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 2007, the Bank can declaredividends totaling $2.3 billion plus its net profits for 2007, up to the dateof dividend declaration. As of December 31, 2006, the Bank’s retainedearnings unavailable for dividends totaled $172.0 million.

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

At December 31, 2006 and 2005, the Company andthe Bank’s regulatory capital ratios and amounts and minimum required capitalratios for the Company and the Bank to maintain a “well capitalized” statuswere as follows:

| ** **               | ** ** | **December 31, 2006**                  | ** ** |
|--------------------------|------------|--------------------------------------------------|------------|
| ** **               | ** ** | **Minimum**                                      | ** ** | **Countrywide Financial  Corporation** | ** ** | **Countrywide Bank** | ** ** |
| ** **               | ** ** | **Required(1)**                                  | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** |
| ** **               | ** ** | **(dollar amounts in thousands)** | ** ** |
| Tier 1 Leverage  Capital |       |                                             | 5.0        | % |   |   | 6.9 | % |   | $ | 15,362,994 |   |   | 7.3 | % |   | $ | 7,100,439 |   |
| Risk-Based Capital:      |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Tier 1                   |       |                                             | 6.0        | % |   |   | 11.6 | % |   | $ | 15,362,994 |   |   | 12.4 | % |   | $ | 7,100,439 |   |
| Total                    |       |                                             | 10.0       | % |   |   | 12.8 | % |   | $ | 17,031,228 |   |   | 12.8 | % |   | $ | 7,337,235 |   |

----

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

| ** **               | ** ** | **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)          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, 2006, the Company and CHL’sequity requirements for these agencies ranged up to $992 million. The Companyhad agency capital of $13.3 billion and CHL had agency capital ranging from$3.2 billion to $4.2 billion at December 31, 2006.

Countrywide Securities Corporation is subject to theSecurities and Exchange Commission Uniform Net Capital Rule (SEC Rule 15c3-1),which requires the maintenance of minimum net capital. Countrywide SecuritiesCorporation has elected to use the alternative method, which, as defined in therule, requires that the Company maintain minimum net capital equal to thegreater of $250,000 or 2% of aggregate debit balances arising from customertransactions. Countrywide Securities Corporation net capital was $586.4 millionand $472.9 million and net capital in excess of the minimum required was $554.0million and $447.3 million at December 31, 2006 and 2005, respectively.The rule prohibits CSC from withdrawing equity capital or makingdistributions to Countrywide Financial Corporation if the resulting net capitalwould be less than 5% of aggregate debits arising from customer-relatedreceivables as computed in accordance with the rule.

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

**Note 22—SupplementalCash Flow Information**

Thefollowing table presents supplemental cash flow information:

| ** **                                                                                                                                                                                                   | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                                                                                                   | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                                                                                                   | ** ** | **(in thousands)**                     | ** ** |
| Cash used to pay  interest                                                                                                                                                                                   |       | $9,086,495                                  |       | $ | 5,385,295 |   | $ | 2,546,532 |   |
| Cash used to pay  income taxes                                                                                                                                                                               |       | 423,290                                     |       | 217,617 |   | 1,010,143 |   |
| Non-cash investing  activities:                                                                                                                                                                              |       |                                        |       |   |   |   |   |
| Transfer of loans from loans held for investment to  mortgage loans held for sale                                                                                                                            |       | 672,809                                     |       | — |   | — |   |
| Servicing resulting from transfer of financial  assets                                                                                                                                                       |       | 6,063,170                                   |       | 5,478,972 |   | 3,701,144 |   |
| Retention of available-for-sale other financial  instruments in securitization transactions                                                                                                                  |       | 46,129                                      |       | 565,903 |   | 3,468,869 |   |
| Unrealized loss on available-for-sale securities,  foreign currency translation adjustments, cash flow hedges and initial  recognition of unfunded liability relating to defined benefits plans, net of  tax |       | (78,670                                     | )          | (57,829 | ) | (45,583 | ) |
| Non-cash financing  activities:                                                                                                                                                                              |       |                                        |       |   |   |   |   |
| (Decrease) increase in Mortgage Loans Held in SPEs  and asset-backed secured financings                                                                                                                 |       | —                                      |       | (10,563,299 | ) | 10,563,299 |   |
| Remeasurement of fair value of MSRs upon adoption of  SFAS 156, net of tax                                                                                                                                   |       | 67,065                                      |       | — |   | — |   |
| Issuance of common stock for conversion of  convertible debt                                                                                                                                                 |       | 1,465                                       |       | 10,679 |   | 7,935 |   |
| Tax effect of interest on conversion of convertible  debt                                                                                                                                                    |       | —                                      |       | 5,532 |   | 37,787 |   |
| Exchange of  Liquid Yield Option Notes convertible debentures for convertible securities                                                                                                                     |       | —                                      |       | — |   | 637,177 |   |
|                                                                                                                                                                                                              |            |                                             |            |  |  |  |  |  |  |

 

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

**Note 23—OtherComprehensive Income**

Thecomponents of other comprehensive income, net of related tax effects, were:

| ** **                                                                         | ** **   | **Before Tax**     | ** **   | **Tax Effect** | ** **   | **Net of Tax** | ** **   |
|------------------------------------------------------------------------------------|--------------|-------------------------|--------------|---------------------|--------------|--------------------------|--------------|
| ** **                                                                         | ** **   | **(in thousands)** | ** **   |
| ***2006***                                                                         | *** *** | *** ***            | *** *** | *** ***        | *** *** | *** ***             | *** *** |
| Available-for-sale  securities:                                                    |         |                    |         |                |         |                     |         |
| Net unrealized gains arising during the year                                       |         | $                       | 110,155      |                | $            | (41,498                  | )            | $ | 68,657 |   |
| Reclassification of net gains included in net income                               |         | (202,040                | )            | 76,114              |         | (125,926                 | )            |
| Net unrealized losses arising during the year, net  of reclassification adjustment |         | (91,885                 | )            | 34,616              |         | (57,269                  | )            |
| Net unrealized  losses from cash flow hedging instruments                          |         | (16,451                 | )            | 6,465               |         | (9,986                   | )            |
| Foreign currency  translation adjustments                                          |         | 18,312                  |         | —              |         | 18,312                   |         |
| Other comprehensive loss                                                           |         | $                       | (90,024      | )                   | $            | 41,081                   |         | $ | (48,943 | ) |
| ***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 | ) |

 

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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** | ** ** | **Unfunded   Defined   Benefit Plans   Liability** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** |   |
|-----------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------|------------|--------|
| ** **                                                            | ** ** | **(in thousands)**                                                                    | ** ** |                                                                                               |
| 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 |   |   |
| Net change                                                            |       |                                                                                       | (57,269    | )                                                                                                  |       |                                            | (9,986     | )                                                                      |       |                                          | 18,312     |   |   |   | — |   |   |   | (48,943 | ) |   |
| Initial recognition of liability relating to defined  benefits  plans |       |                                                                                       | —     |                                                                                               |       |                                            | —     |                                                                   |       |                                          | —     |   |   |   | (29,727 | ) |   |   | (29,727 | ) |   |
| Balance at  December 31, 2006                                    |       |                                                                                       | $          | (16,455                                                                                            | )          |                                            |       | $                                                                      | —     |                                          |       |   | $ | 28,626 |   |   |   | $ | (29,727 | ) |   |   | $ | (17,556 | ) |   |

 

**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.

The following table summarizes the basic and dilutedearnings per share calculations for the periods indicated:

| ** **                                  | ** ** | **Years Ended December 31,**                        | ** ** |
|---------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                  | ** ** | **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 |       | $                                                                  | 2,674,846  |   | 605,143 |   |   | $ | 4.42 |   |   | $ | 2,528,090 |   | 590,982 |   |   | $ | 4.28 |   |   | $ | 2,197,574 |   | 563,981 |   |   | $ | 3.90 |   |   |
| Effect of dilutive  securities:             |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Convertible debentures                      |       | 14                                                                 |       | 54 |   |   |   |   |   | 274 |   | 1,685 |   |   |   |   |   | 2,645 |   | 14,102 |   |   |   |   |   |
| Dilutive stock options                      |       | —                                                             |       | 17,101 |   |   |   |   |   | — |   | 23,206 |   |   |   |   |   | — |   | 27,639 |   |   |   |   |   |
| Diluted earnings  and   earnings per share  |       | $                                                                  | 2,674,860  |   | 622,298 |   |   | $ | 4.30 |   |   | $ | 2,528,364 |   | 615,873 |   |   | $ | 4.11 |   |   | $ | 2,200,219 |   | 605,722 |   |   | $ | 3.63 |   |   |

 

During the years ended December 31,2006, 2005 and 2004, stock options to purchase 0.2 million shares, 0.1 millionshares and 0.1 million shares, respectively, were outstanding but not includedin the computation of diluted earnings per share because they wereanti-dilutive.

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

**Note 25—EstimatedHurricane Losses**

During the years ended December 31, 2005 and2004, the Company incurred losses across several of its business units due tohurricanes 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 to beinsured against. Hurricane Katrina was responsible for most of the hurricanelosses during the year ended December 31, 2005. The Company has incurredlosses related to Hurricane Katrina in its loans held for investment andMortgage Banking activities in addition to the losses insured by its InsuranceSegment.

Theestimated hurricane (recoveries) losses are summarized in the following table:

| ** **                               | ** ** | ** **                                                                                                       | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **Income Statement Line**      | ** ** | ** **                                                                                                       | ** ** | **Description**                             | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                               | ** ** | ** **                                                                                                       | ** ** | **(in thousands)**                     | ** ** |
| Insurance  (recoveries) claims   expense |       | Estimated losses insured by   Balboa Insurance Group                                                             |       | $                                           | (6,767     | ) | $ | 85,206 |   | $ | 67,887 |   |
| Gain on sale of  loans and securities    |       | Impairment of loans held for   sale                                                                              |       | (6,390                                      | )          | 15,853 |   | — |   |
| Provision for  loan losses               |       | Estimated credit losses   relating to loans held for   investment                                                |       | (3,280                                      | )          | 7,375 |   | — |   |
| Impairment of  retained interests        |       | Impairment of MSRs   and   retained interests                                                                    |       | (13,044                                     | )          | 22,077 |   | — |   |
| Other operating  expenses                |       | Provision for losses related to   servicing advances for loans   insured by the FHA and   guaranteed by   the VA |       | (52                                         | )          | 6,981 |   | — |   |
| Total estimated  hurricane losses        |       |                                                                                                             |       | $                                           | (29,533    | ) | $ | 137,492 |   | $ | 67,887 |   |
|                                          |            |                                                                                                                  |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

**Note 26—Segmentsand Related Information**

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

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

The Loan Production Sector originates prime andnonprime loans through a variety of channels on a national scale. The LoanProduction Sector is comprised of three lending channels of Countrywide HomeLoans and also includes the mortgage banking activities of Countrywide Bank.The three production channels are: the Retail Channel (Consumer Markets and theFull Spectrum Lending), the Wholesale Lending Channel and the CorrespondentLending Channel. 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 Channel sources mortgage loans primarilyfrom mortgage brokers. The Correspondent Lending Channel 

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

purchases mortgage loansfrom other mortgage lenders, including financial institutions, commercialbanks, savings and loan associations, home builders and credit unions.

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

The Banking Segment’s operations include theinvestment and fee-based activities of Countrywide Bank (“Banking Operations”)together with the activities of Countrywide Warehouse Lending. BankingOperations invests primarily in mortgage loans sourced from the Loan ProductionSector. Countrywide Warehouse Lending provides third-party mortgage lenderswith temporary financing secured by mortgage loans.

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

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

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

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

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

F-76

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

Includedin the columns below labeled “Other” are the holding company activities andcertain reclassifications to conform management reporting to the consolidatedfinancial statements:

| ** **              | ** ** | **Year Ended December 31, 2006** | ** ** |
|-------------------------|------------|------------------------------------------------------|------------|
| ** **              | ** ** | **Mortgage Banking**                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **              | ** ** | **Loan  Production**                                 | ** ** | **Loan  Servicing** | ** ** | **Closing  Services** | ** ** | **Total** | ** ** | **Banking** | ** ** | **Capital  Markets** | ** ** | **Insurance** | ** ** | **Global  Operations** | ** ** | **Other** | ** ** | **Total  Consolidated** | ** ** |
| ** **              | ** ** | **(in thousands)**                              | ** ** |
| Revenues:               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| External                |       | $                                                    | 5,670,775  |   | $ | 790,435 |   | $ | 305,014 |   | $ | 6,766,224 |   | $ | 2,604,117 |   | $ | 722,705 |   | $ | 1,296,473 |   |   | $ | 49,306 |   |   | $ | (21,697 | ) |   | $ | 11,417,128 |   |   |
| Intersegment            |       | 55,341                                               |       | 756,362 |   | — |   | 811,703 |   | (732,521 | ) | 270,448 |   | (3,342 | ) |   | 44,280 |   |   | (390,568 | ) |   | — |   |   |
| Total Revenues          |       | $                                                    | 5,726,116  |   | $ | 1,546,797 |   | $ | 305,014 |   | $ | 7,577,927 |   | $ | 1,871,596 |   | $ | 993,153 |   | $ | 1,293,131 |   |   | $ | 93,586 |   |   | $ | (412,265 | ) |   | $ | 11,417,128 |   |   |
| Pre-tax Earnings (Loss) |       | $                                                    | 1,310,895  |   | $ | 660,021 |   | $ | 91,483 |   | $ | 2,062,399 |   | $ | 1,380,384 |   | $ | 553,500 |   | $ | 320,133 |   |   | $ | 28,642 |   |   | $ | (10,923 | ) |   | $ | 4,334,135 |   |   |
| Total Assets            |       | $                                                    | 33,023,359 |   | $ | 26,510,303 |   | $ | 97,733 |   | $ | 59,631,395 |   | $ | 87,073,017 |   | $ | 55,157,810 |   | $ | 2,906,404 |   |   | $ | 222,411 |   |   | $ | (5,044,807 | ) |   | $ | 199,946,230 |   |   |

 

| ** **              | ** ** | **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                |       | $                                                    | 5,173,559  |   | $ | 1,010,905 |   | $ | 277,646 |   | $ | 6,462,110 |   | $ | 1,796,039 |   | $ | 611,811 |   | $ | 1,061,090 |   |   | $ | 219,325 |   |   | $ | (133,667 | ) |   | $ | 10,016,708 |   |   |
| Intersegment            |       | (34,165                                              | )          | 413,763 |   | — |   | 379,598 |   | (335,173 | ) | 186,440 |   | (1,549 | ) |   | 14,717 |   |   | (244,033 | ) |   | — |   |   |
| 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            |       | $                                                    | 30,997,919 |   | $ | 20,108,354 |   | $ | 77,671 |   | $ | 51,183,944 |   | $ | 76,919,702 |   | $ | 44,204,639 |   | $ | 2,417,692 |   |   | $ | 213,166 |   |   | $ | 146,227 |   |   | $ | 175,085,370 |   |   |

 

| ** **              | ** ** | **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            |       | $                                                    | 33,590,626 |   | $ | 15,711,444 |   | $ | 59,421 |   | $ | 49,361,491 |   | $ | 44,544,160 |   | $ | 32,235,407 |   | $ | 1,814,723 |   |   | $ | 296,077 |   |   | $ | 243,847 |   |   | $ | 128,495,705 |   |   |

 

F-77

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

**Note 27—QuarterlyFinancial Data (Unaudited)**

Thefollowing tables reflect summarized, unaudited data for each quarter in theyears ended December 31, 2006 and 2005:

| ** **                         | ** ** | **Three Months Ended**                                                | ** ** |
|------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **March 31**                                                               | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| ** **                         | ** ** | **(dollars in thousands, except per share data)** | ** ** |
| Year ended  December 31, 2006 |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Revenues                           |       | $                                                                               | 2,835,948  |   | $ | 3,000,216 |   |   | $ | 2,822,495 |   |   | $ | 2,758,469 |   |
| Expenses                           |       | 1,716,585                                                                       |       | 1,806,193 |   |   | 1,786,283 |   |   | 1,773,932 |   |
| Provision for income taxes         |       | 435,852                                                                         |       | 471,833 |   |   | 388,648 |   |   | 362,956 |   |
| Net earnings                       |       | $                                                                               | 683,511    |   | $ | 722,190 |   |   | $ | 647,564 |   |   | $ | 621,581 |   |
| Earnings per  share(1):            |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Basic                              |       | $                                                                               | 1.14       |   | $ | 1.19 |   |   | $ | 1.06 |   |   | $ | 1.04 |   |
| Diluted                            |       | $                                                                               | 1.10       |   | $ | 1.15 |   |   | $ | 1.03 |   |   | $ | 1.01 |   |

 

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

----

(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-78

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

**Note 28—SummarizedFinancial Information**

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

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

 

F-79

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

 

| ** **                             | ** ** | **Year Ended December 31, 2006**        | ** ** |
|----------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                             | ** ** | **Countrywide  Financial  Corporation  (Parent Only)** | ** ** | **Countrywide  Home  Loans, Inc.  (Consolidated)** | ** ** | **Other  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                             | ** ** | **(in thousands)**                                     | ** ** |
| **Statements  of Earnings:**           |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                               |       |                                                        | $          | (57,446 | ) |   |   | $ | 6,397,239 |   |   | $ | 5,861,082 |   | $ | (783,747 | ) | $ | 11,417,128 |   |
| Expenses                               |       |                                                        | 11,636     |   |   |   | 5,175,142 |   |   | 2,680,896 |   | (784,681 | ) | 7,082,993 |   |
| (Benefit) provision for income taxes   |       |                                                        | (26,891    | ) |   |   | 471,918 |   |   | 1,214,024 |   | 238 |   | 1,659,289 |   |
| Equity in net earnings of subsidiaries |       |                                                        | 2,717,037  |   |   |   | — |   |   | — |   | (2,717,037 | ) | — |   |
| Net earnings                           |       |                                                        | $          | 2,674,846 |   |   |   | $ | 750,179 |   |   | $ | 1,966,162 |   | $ | (2,716,341 | ) | $ | 2,674,846 |   |

 

| ** **                                                                                  | ** ** | **December 31, 2005**                             | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **Countrywide  Financial  Corporation  (Parent Only)** | ** ** | **Countrywide  Home  Loans, Inc.  (Consolidated)** | ** ** | **Other  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                                                                  | ** ** | **(in thousands)**                                     | ** ** |
| **Balance Sheets:**                                                                         |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage loans held for  sale                                                               |       |                                                        | $          | — |   |   |   | $ | 35,349,126 |   |   | $ | 1,445,383 |   | $ | 13,676 |   | $ | 36,808,185 |   |
| Trading securities                                                                          |       |                                                        | —     |   |   |   | 255,127 |   |   | 10,729,483 |   | (2,037 | ) | 10,982,573 |   |
| Securities purchased  under agreement to resell, securities borrowed and federal funds sold |       |                                                        | —     |   |   |   | 710,000 |   |   | 24,171,178 |   | (1,563,817 | ) | 23,317,361 |   |
| Loans held for  investment, net                                                             |       |                                                        | —     |   |   |   | 5,588,767 |   |   | 64,279,238 |   | (2,558 | ) | 69,865,447 |   |
| Investments in other  financial instruments, at fair value                                  |       |                                                        | 7,324      |   |   |   | 1,969,097 |   |   | 9,284,304 |   | — |   | 11,260,725 |   |
| Mortgage servicing  rights, net                                                             |       |                                                        | —     |   |   |   | 12,604,453 |   |   | 6,386 |   | — |   | 12,610,839 |   |
| Investments in  subsidiaries                                                                |       |                                                        | 12,657,967 |   |   |   | — |   |   | 2,483 |   | (12,660,450 | ) | — |   |
| Other assets                                                                                |       |                                                        | 16,802,566 |   |   |   | 8,748,527 |   |   | 13,303,484 |   | (28,614,337 | ) | 10,240,240 |   |
| Total assets                                                                                |       |                                                        | $          | 29,467,857 |   |   |   | $ | 65,225,097 |   |   | $ | 123,221,939 |   | $ | (42,829,523 | ) | $ | 175,085,370 |   |
| Deposit liabilities                                                                         |       |                                                        | $          | — |   |   |   | $ | — |   |   | $ | 39,559,051 |   | $ | (120,135 | ) | $ | 39,438,916 |   |
| Securities sold under  agreements to repurchase and federal funds purchased            |       |                                                        | —     |   |   |   | 1,844,789 |   |   | 33,871,846 |   | (1,563,430 | ) | 34,153,205 |   |
| Notes payable                                                                               |       |                                                        | 16,347,891 |   |   |   | 36,181,800 |   |   | 35,152,400 |   | (11,494,205 | ) | 76,187,886 |   |
| Other liabilities                                                                           |       |                                                        | 304,106    |   |   |   | 23,439,496 |   |   | 5,723,435 |   | (16,977,534 | ) | 12,489,503 |   |
| 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-80

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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.  (Consolidated)** | ** ** | **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 |   |
| (Benefit) 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 |   |

 

**Note 29—LoanServicing**

The following table sets forth certain informationregarding the Company’s loan servicing portfolio of single-family mortgageloans, including loans and securities held for sale, loans held for investmentand loans subserviced under subservicing agreements, for the periods indicated:

| ** **                                                  | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                  | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| ** **                                                  | ** ** | **(in millions)**                      | ** ** |
| Beginning owned  servicing portfolio                        |       | $                                           | 1,081,189  |   | $ | 821,475 |   |
| Add:     Residential loan production(1) |       | 456,949                                     |       | 494,380 |   |
| Purchased MSRs (bulk acquisitions)                          |       | 15,781                                      |       | 51,377 |   |
| Less:     Principal repayments          |       | (273,800                                    | )          | (284,924 | ) |
| Servicing sold                                              |       | —                                      |       | (1,119 | ) |
| Ending owned  servicing portfolio                           |       | 1,280,119                                   |       | 1,081,189 |   |
| Subservicing  portfolio                                     |       | 18,275                                      |       | 29,901 |   |
| Total servicing portfolio                                   |       | $                                           | 1,298,394  |   | $ | 1,111,090 |   |
| MSR portfolio                                               |       | $                                           | 1,174,874  |   | $ | 979,207 |   |
| Mortgage loans  owned                                       |       | 105,245                                     |       | 101,982 |   |
| Subservicing  portfolio                                     |       | 18,275                                      |       | 29,901 |   |
| Total servicing  portfolio                                  |       | $                                           | 1,298,394  |   | $ | 1,111,090 |   |

----

(1)          Excludes purchases fromthird parties in which servicing rights were not acquired.

F-81

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

| ** **                                               | ** ** | **December 31,**                           | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                        | ** ** | **2005** | ** ** |
| ** **                                               | ** ** | **(dollar amounts in millions)** | ** ** |
| Composition of owned  servicing portfolio at period end: |       |                                            |       |   |   |
| Conventional mortgage                                    |       | $                                               | 1,063,141  |   | $ | 861,926 |   |
| Nonprime Mortgage                                        |       | 116,270                                         |       | 116,101 |   |
| Prime Home Equity                                        |       | 47,628                                          |       | 53,253 |   |
| FHA-insured mortgage                                     |       | 39,011                                          |       | 36,949 |   |
| VA-guaranteed mortgage                                   |       | 14,069                                          |       | 12,960 |   |
| Total owned portfolio                                    |       | $                                               | 1,280,119  |   | $ | 1,081,189 |   |
| Delinquent mortgage  loans(1):                           |       |                                            |       |   |   |
| 30 days                                                  |       | 2.95                                            | %          | 2.59 | % |
| 60 days                                                  |       | 0.98                                            | %          | 0.87 | % |
| 90 days or more                                          |       | 1.09                                            | %          | 1.15 | % |
| Total delinquent mortgage loans                          |       | 5.02                                            | %          | 4.61 | % |
| Loans pending  foreclosure(1)                            |       | 0.65                                            | %          | 0.44 | % |
| Delinquent mortgage  loans(1):                           |       |                                            |       |   |   |
| Conventional                                             |       | 2.76                                            | %          | 2.60 | % |
| Nonprime Mortgage                                        |       | 19.03                                           | %          | 15.20 | % |
| Prime Home Equity                                        |       | 2.93                                            | %          | 1.57 | % |
| Government                                               |       | 13.94                                           | %          | 14.61 | % |
| Total delinquent mortgage loans                          |       | 5.02                                            | %          | 4.61 | % |
| Loans pending  foreclosure(1):                           |       |                                            |       |   |   |
| Conventional                                             |       | 0.31                                            | %          | 0.20 | % |
| Nonprime Mortgage                                        |       | 3.53                                            | %          | 2.03 | % |
| Prime Home Equity                                        |       | 0.12                                            | %          | 0.06 | % |
| Government                                               |       | 1.28                                            | %          | 1.09 | % |
| Total loans  pending foreclosure                         |       | 0.65                                            | %          | 0.44 | % |

----

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

F-82

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

Propertiessecuring the mortgage loans in the Company’s servicing portfolio are geographicallydispersed. The following is a summary of the geographical distribution of loansincluded in the Company’s servicing portfolio for the top three states asmeasured by the total unpaid principal balance at December 31, 2006:

| **State**        | ** ** | ** **             | ** ** | **Unpaid Principal  Balance** | ** ** | **% Total  Balance** | ** ** |
|------------------|------------|------------------------|------------|------------------------------------|------------|---------------------------|------------|
| ** **       | ** ** | **(in millions)** | ** ** |
| California       |       |                   |       |                               |       |                      |       |   |   |
| Southern         |       |                   | $          | 237,013                            |       |                      |       | 18 | % |   |
| Northern         |       |                   | 130,409    |                               |       |                      | 10         | % |   |
|             |       |                   | 367,422    |                               |       |                      | 28         | % |   |
| Florida          |       |                   | 97,442     |                               |       |                      | 8          | % |   |
| Texas            |       |                   | 57,724     |                               |       |                      | 4          | % |   |
| All other states |       |                   | 775,806    |                               |       |                      | 60         | % |   |
| Total            |       |                   | $          | 1,298,394                          |       |                      |       | 100 | % |   |

 

***Servicing Compensation***

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 0.125% and 0.50% per year ofthe unpaid balance of the loans. With regard to its servicing contracts withFannie Mae, Freddie Mac and Ginnie Mae, the Company can effectively retain alarger net service fee principally through its methods of securitization. Ingeneral, the larger the net servicing fee retained, the smaller the net cashproceeds received upon securitization. Therefore, the decision to retain netservice fees above the contractual minimum amounts is based on the Company’sassessment of the underlying economics as well as its capital requirements. Asof December 31, 2006, the weighted-average service fee, net of applicableguarantee fees, of the Company’s portfolio of loans serviced for others was0.34% 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 collected that are contractually associatedwith the mortgages, such as late charges, mortgage prepayment penalties andcollateral reconveyance fees. The Company generally has the right to solicitthe mortgagors for other products and services that it offers, such asinsurance and second mortgage loans.

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 and other costs requiredto protect the investors’ interest in the collateral securing the loans. TheCompany had $2.1 billion such advances outstanding for each year ended December 31,2006 and 2005, which amounts were included in other assets. Generally,servicing advances are recoverable from either the mortgagor, the insurer ofthe loan or the investor through the non-recourse provision of the loanservicing contract. These advances are recorded on the balance sheet atrealizable value.

F-83

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

***Borrower and Investor Custodial Accounts***

As of December 31,2006 and 2005, the Company managed $23.3 billion and $22.0 billion,respectively, of borrower and investor custodial cash accounts. These custodialaccounts arise in connection with the Company’s mortgage servicing activities.Of these amounts, $15.7 billion and $14.0 billion, respectively, were depositedat the Bank, of which $14.6 billion and $13.2 billion, respectively, wereinterest bearing and included in the Company’s deposit liabilities as custodialdeposit accounts with an additional $1.1 billion and $0.8 billion,respectively, included in deposit liabilities in non-interest bearing checkingaccounts. The remaining balances were deposited with other depositoryinstitutions and are not recorded on the Company’s balance sheets.

**Note 30—CreditLosses Related to Securitized Loans**

Nearly all of the mortgage loans originated by theCompany are sold into the secondary mortgage market, primarily in the form ofsecurities, and to a lesser extent as whole loans. In connection with its loansales, the Company has potential liability under the representations andwarranties made to purchasers and insurers of the loans. In the event of abreach of such representations and warranties, the Company may be required toeither repurchase the mortgage loans with the identified defects or indemnifythe investor or insurer. In such cases, the Company bears any subsequent creditloss on the mortgage loans.

The Company had a liability for representations andwarranties totaling $390.2 million and $187.5 million included in otherliabilities at December 31, 2006 and 2005, respectively. The Companyincluded provisions for losses on representations and warranties in gain onsale of loans and securities totaling $290.4 million, $66.5 million and $85.4million during the years ended December 31, 2006, 2005 and 2004, respectively.The Company had charge-offs totaling $87.7 million, $31.0 million, and $42.1million relating to its representations and warranties during the years ended December 31,2006, 2005 and 2004, respectively.

The Company generallysells its Prime Mortgage Loans on a non-recourse basis, either in the form ofsecurities or whole loans. In addition, it may sell a portion of its Nonprimeand Prime Home Equity Loans on a non-recourse basis in the form of whole loans.

***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.

***ConformingConventional Loans***

We generally poolconforming conventional loans into MBS guaranteed by Fannie Mae or Freddie Mac.Subject to certain representations and warranties we make, nearly allconventional loans securitized through Fannie Mae or Freddie Mac are sold on anon-recourse basis. The Company pays guarantee fees to these agencies tocompensate them for their assumption of credit risk on securitized loans.

F-84

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

***FHA-Insuredand VA-Guaranteed Loans***

FHA-insured andVA-guaranteed mortgage loans are generally pooled into MBS guaranteed by GinnieMae. The Company is 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. The Company isexposed to credit losses on defaulted VA loans to the extent that the partialguarantee provided by the VA is inadequate to cover the total credit lossesincurred. The Company pays guarantee fees to Ginnie Mae for Ginnie Mae’sguarantee on its securities of timely payment of principal and interest. GinnieMae does not assume mortgage credit risk associated with the loans securitizedunder its program.

***Non-conformingConventional Loans***

Non-conforming conventional prime mortgage loans aregenerally pooled into “private-label” (non-agency) MBS. Such securitizationsinvolve some form of credit enhancement such as senior/subordinated structures,including residual interests, overcollateralization or mortgage pool insurance.Securitizations that involve senior/subordinated structures contain securitiesthat assume varying levels of credit risk. Holders of subordinated securitiesare compensated for the credit risk assumed through a higher yield. When wesell the subordinated securities created in connection with thesesecuritizations we transfer the related credit risk subject to representationsand warranties we make when the loans are securitized.  When we retain the subordinated securities,generally the residual interests, we are in the first loss position; however,the recourse for credit losses is limited to the carrying value of the residualsecurities.

In some cases a portion of the retained residualinterest is deposited into a net interest margin (“NIM”) security, whichenables us to sell some of the future residual cash flows and retain a smallerresidual interest (“Back-end NIM Residual”). The holder of the Back-end NIMResidual is in the first loss position; however, the recourse for credit lossesis limited to the carrying value of the Back-end NIM residual.

***PrimeHome Equity Loans***

Prime Home Equity loansare generally pooled into private-label asset-backed securities. The Companygenerally securitizes these loans with limited recourse for credit lossesthrough retention of residual interests and other subordinated interests, suchas transferor’s interests. The holder of the residual interest is in the firstloss position; however, the recourse for credit losses is limited to thecarrying value of the residual interest. These securities generally containcredit enhancement in the form of over-collateralization and guaranteesprovided by a third-party surety. In some cases, the securitizations alsocontain mortgage pool insurance or a limited corporate guarantee as a form ofcredit enhancement.

***NonprimeMortgage Loans***

Nonprime Mortgage Loans generally are pooled intoprivate-label asset-backed securities. The Company generally securitizes theseloans with limited recourse for credit losses through retention of residualinterests, the value of which ranges from 1.00% to 5.50% 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 carrying valueof the residual interest. In some cases, such limited recourse securitizationshave contained lender paid mortgage insurance as a form of credit enhancementor a limited corporate guarantee from Countrywide. The Company also has pooleda portion of our Nonprime Mortgage Loans 

F-85

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

into securities guaranteedby Fannie Mae. In such cases, the Company has paid Fannie Mae a guarantee feein exchange for Fannie Mae assuming the credit risk of the underlying loans.

In some cases the retained residual interest isdeposited into a net interest margin security, which enables the Company tosell future residual cash flows and retain a smaller residual interest (“Back-endNIM Residual’’). The value of the Back-end NIM Residuals range from 0.00% to1.50% 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.

TheCompany’s exposure to credit losses related to its recourse securitizationactivities is limited to the carrying value of its subordinated interests andto the contractual limit of reimbursable losses under its corporate guaranteesless the recorded liability for such guarantees. These amounts are as follows:

| ** **                                                    | ** ** | **December 31,**   | ** ** |
|---------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                    | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                                    | ** ** | **(in thousands)** | ** ** |
| Subordinated  Interests:                                      |       |                    |       |   |   |
| Prime home equity residual securities                         |       | $                       | 778,574    |   | $ | 882,139 |   |
| Prime home equity line of credit transferors’  interests |       | 698,047                 |       | 253,930 |   |
| Nonprime residual securities                                  |       | 401,590                 |       | 527,050 |   |
| Prime residual securities                                     |       | 152,874                 |       | 84,716 |   |
| Subordinated mortgage-backed pass-through securities          |       | 1,382                   |       | 2,059 |   |
|                                                          |       | $                       | 2,032,467  |   | $ | 1,749,894 |   |
| Corporate guarantees in  excess of recorded liabilities       |       | $                       | 490,542    |   | $ | 349,864 |   |

 

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

Thetotal credit losses incurred for 2006, 2005 and 2004 related to all of theCompany’s mortgage loans sales activities are summarized as follows:  

| ** **                                                          | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                          | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                          | ** ** | **(in thousands)**                     | ** ** |
| Nonprime and  prime securitizations with retained residual interest |       | $                                           | 94,852     |   | $ | 69,269 |   | $ | 43,021 |   |
| Repurchased or  indemnified loans                                   |       | 87,795                                      |       | 31,001 |   | 42,063 |   |
| Prime home equity  securitizations with retained residual interest  |       | 79,357                                      |       | 34,173 |   | 29,370 |   |
| Nonprime  securitizations with corporate guarantee                  |       | 8,494                                       |       | 9,724 |   | 20,039 |   |
| Prime home equity  securitizations with corporate guarantee         |       | 3,711                                       |       | 10,798 |   | 6,930 |   |
| VA losses in  excess of VA guarantee                                |       | 2,607                                       |       | 1,810 |   | 1,658 |   |
|                                                                |       | $                                           | 276,816    |   | $ | 156,775 |   | $ | 143,081 |   |

 

F-86

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

**Note 31—Commitmentsand Contingencies**

***Legal Proceedings***

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

***Commitments to Buy or Sell Mortgage-Backed Securitiesand 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 31,2006, totaled $118.3 million.

***Lease Commitments***

TheCompany leases office facilities under operating lease agreements extending throughJuly 31, 2017. Future minimum annual rental commitments under thesenon-cancelable operating leases with initial or remaining terms of one year ormore are as follows:

| **Year Ending December 31,** | ** ** | ** **              | ** ** | **Lease  Commitments** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                  | ** ** | **(in thousands)** | ** ** |
| 2007                                        |       |                    | $          | 205,197                |       |   |
| 2008                                        |       |                    | 176,325    |                   |       |
| 2009                                        |       |                    | 133,003    |                   |       |
| 2010                                        |       |                    | 85,473     |                   |       |
| 2011                                        |       |                    | 46,214     |                   |       |
| Thereafter                                  |       |                    | 62,417     |                   |       |
|                                        |       |                    | $          | 708,629                |       |   |

 

Rent expense was $231.2million, $186.3 million and $160.7 million for the years ended December 31, 2006,2005 and 2004, respectively.

***Restrictions on Transfers of Funds***

The Company and certain ofits subsidiaries are subject to regulatory and credit agreement restrictionswhich limit the subsidiaries’ ability to transfer funds to the Company throughintercompany loans, advances or dividends. Pursuant to revolving creditfacilities existing at December 31, 2006, the Company and CHL are requiredto maintain a minimum consolidated net worth of $7.7 billion and $2.4 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 

F-87

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

FederalHome Loan Bank (“FHLB”) and, therefore, is required to purchase FHLB stock. Forthe year ended December 31, 2006, the Bank was required to purchase FHLBstock at an amount equal to 0.2% of its assets up to a maximum of $25.0million, plus 4.5% of total outstanding FHLB advances.

***Mortgage Reinsurance***

The Company providesmortgage reinsurance on certain mortgage loans included in its servicingportfolio through contracts with several primary mortgage insurance companies.Under these agreements, the Company absorbs mortgage insurance losses in excessof a specified percentage of the principal balance of a given pool of loans,subject to a contractual limit, in exchange for a portion of the pools’mortgage insurance premiums. As of December 31, 2006, approximately $90.0billion of mortgage loans in the Company’s servicing portfolio are covered bysuch mortgage reinsurance contracts. Management believes it has adequatevaluation allowances in place to cover anticipated losses.

***Securities Underwriting***

In connection with theCompany’s underwriting activities, the Company had commitments to purchase andsell new issues of securities aggregating $3.5 billion and $3.2 billion,respectively, at December 31, 2006.

**Note 32—LoanCommitments**

As of December 31,2006 and 2005, the Company had undisbursed home equity lines of creditcommitments of $9.5 billion and $7.2 billion, respectively, as well asundisbursed construction loan commitments of $3.5 billion and $1.5 billion,respectively. As of December 31, 2006, outstanding commitments to fundmortgage loans totaled $35.5 billion.

**Note 33—SubsequentEvents**

On January 30, 2007, the Company announced thatits Board of Directors declared a dividend of $0.15 per common sharepayable February 28, 2007, to shareholders of record on February 9,2007.

F-88

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**COUNTRYWIDEFINANCIAL CORPORATION AND SUBSIDIARIESSCHEDULE I—CONDENSED FINANCIAL INFORMATION OF REGISTRANTCOUNTRYWIDE FINANCIAL CORPORATIONBALANCE SHEETS**

| ** **                                                 | ** ** | **December 31,**   | ** ** |
|------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                 | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                                 | ** ** | **(in thousands)** | ** ** |
| **ASSETS**                                                 | ** ** | ** **              | ** ** | ** ** | ** ** |
| Cash                                                       |       | $                       | 2,387      |   | $ | 290 |   |
| Investments in  other financial instruments, at fair value |       | 191,138                 |       | 7,324 |   |
| Intercompany  receivables from non-bank subsidiaries       |       | 20,023,416              |       | 16,472,108 |   |
| Intercompany  receivable from bank subsidiary              |       | 75,329                  |       | 24,648 |   |
| Investment in  non-bank subsidiaries                       |       | 8,662,135               |       | 7,419,396 |   |
| Investment in  bank holding company subsidiary             |       | 6,969,525               |       | 5,238,571 |   |
| Premises and  equipment, net                               |       | 93                      |       | 114 |   |
| Other assets                                               |       | 9,304,384               |       | 305,406 |   |
| Total assets                                               |       | $                       | 45,228,407 |   | $ | 29,467,857 |   |
| **LIABILITIES**                                            | ** ** | ** **              | ** ** | ** ** | ** ** |
| Note payable                                               |       | $                       | 21,393,849 |   | $ | 16,111,979 |   |
| Intercompany  payable                                      |       | 235,912                 |       | 235,912 |   |
| Accounts payable  and accrued liabilities                  |       | 9,280,800               |       | 304,106 |   |
| Total liabilities                                          |       | 30,910,561              |       | 16,651,997 |   |
| **SHAREHOLDERS’ EQUITY**                              | ** ** | ** **              | ** ** | ** ** | ** ** |
| Common stock                                               |       | 29,273                  |       | 30,008 |   |
| Additional  paid-in capital                                |       | 2,154,438               |       | 2,954,019 |   |
| Accumulated other  comprehensive (loss) income             |       | (17,556                 | )          | 61,114 |   |
| Retained earnings                                          |       | 12,151,691              |       | 9,770,719 |   |
| Total shareholders’ equity                            |       | 14,317,846              |       | 12,815,860 |   |
| Total liabilities  and shareholders’ equity           |       | $                       | 45,228,407 |   | $ | 29,467,857 |   |

 

F-89

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES SCHEDULE I—CONDENSED FINANCIAL INFORMATION OF REGISTRANT—(Continued) COUNTRYWIDE FINANCIAL CORPORATION STATEMENTS OF EARNINGS**

| ** **                                                                                                                 | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                 | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                 | ** ** | **(in thousands)**                     | ** ** |
| Revenues                                                                                                                   |       |                                        |       |   |   |   |   |
| Interest income                                                                                                            |       | $                                           | 980,156    |   | $ | 329,155 |   | $ | 53,191 |   |
| Interest expense                                                                                                           |       | 1,036,276                                   |       | 331,599 |   | 53,234 |   |
| Net interest expense                                                                                                       |       | (56,120                                     | )          | (2,444 | ) | (43 | ) |
| Other (expense) income                                                                                                     |       | (1,326                                      | )          | — |   | 1,452 |   |
| Total revenues                                                                                                             |       | (57,446                                     | )          | (2,444 | ) | 1,409 |   |
| Expenses                                                                                                                   |       | 11,636                                      |       | 24,531 |   | 18,447 |   |
| Loss before income tax benefit, dividends from  subsidiaries and equity in undistributed net earnings of subsidiaries |       | (69,082                                     | )          | (26,975 | ) | (17,038 | ) |
| Income tax  benefit                                                                                                        |       | (26,891                                     | )          | (11,400 | ) | (6,730 | ) |
| Loss before dividends from subsidiaries and equity  in undistributed net earnings of subsidiaries                          |       | (42,191                                     | )          | (15,575 | ) | (10,308 | ) |
| Equity in  undistributed net earnings of non-bank subsidiaries                                                             |       | 997,263                                     |       | 343,573 |   | 1,342,617 |   |
| Equity in  undistributed net earnings of bank subsidiary                                                                   |       | 1,158,340                                   |       | 742,567 |   | 309,770 |   |
| Dividends from  subsidiaries                                                                                               |       | 561,434                                     |       | 1,457,525 |   | 555,495 |   |
| Net earnings                                                                                                               |       | $                                           | 2,674,846  |   | $ | 2,528,090 |   | $ | 2,197,574 |   |

 

F-90

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES SCHEDULE I—CONDENSED FINANCIAL INFORMATION OF REGISTRANT—(Continued) COUNTRYWIDE FINANCIAL CORPORATION STATEMENTS OF CASH FLOWS**

| ** **                                                                           | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                           | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                           | ** ** | **(in thousands)**                     | ** ** |
| **Cash flows from operating activities:**                                            |       |                                        |       |   |   |   |   |
| Net earnings                                                                         |       | $                                           | 2,674,846  |   | $ | 2,528,090 |   | $ | 2,197,574 |   |
| Adjustments to reconcile net earnings to net cash  provided by operating activities: |       |                                        |       |   |   |   |   |
| Equity in undistributed  net earnings of non-bank subsidiaries                       |       | (997,263                                    | )          | (343,573 | ) | (1,342,617 | ) |
| Equity in undistributed  net earnings of bank subsidiary                             |       | (1,158,340                                  | )          | (742,567 | ) | (309,770 | ) |
| Stock based compensation                                                             |       | 3,954                                       |       | 5,693 |   | 5,385 |   |
| Depreciation and  amortization                                                       |       | 38                                          |       | 36 |   | 36 |   |
| Increase in other  financial instruments                                             |       | (183,814                                    | )          | (7,324 | ) | — |   |
| Increase in other  receivables and other assets                                      |       | (8,933,693                                  | )          | (7,212 | ) | (14,901 | ) |
| Increase in accounts  payable and accrued liabilities                                |       | 8,976,694                                   |       | 134,870 |   | 76,293 |   |
| Net cash provided by  operating activities                                           |       | 382,422                                     |       | 1,568,013 |   | 612,000 |   |
| **Cash flows from investing activities:**                                            |       |                                        |       |   |   |   |   |
| Net change in non-bank  intercompany receivables and payables                        |       | (3,504,101                                  | )          | (15,462,505 | ) | 475,456 |   |
| Net change in bank  intercompany receivables and payables                            |       | (50,681                                     | )          | (5,501 | ) | (10,835 | ) |
| Net change in investment  in non-bank subsidiaries                                   |       | (734,907                                    | )          | (1,478,020 | ) | (505,920 | ) |
| Net change in investment  in bank subsidiary                                         |       | (16,118                                     | )          | (15,624 | ) | (558,308 | ) |
| Net cash used by  investing activities                                               |       | (4,305,807                                  | )          | (16,961,650 | ) | (599,607 | ) |
| **Cash flows from financing activities:**                                            |       |                                        |       |   |   |   |   |
| Increase in long-term  debt                                                          |       | 5,283,335                                   |       | 15,529,542 |   | 85,853 |   |
| Issuance of common stock                                                             |       | 511,682                                     |       | 213,303 |   | 111,176 |   |
| Repurchase and  cancellation of common stock                                         |       | (1,508,596                                  | )          | — |   | — |   |
| Cash dividends paid                                                                  |       | (360,939                                    | )          | (349,017 | ) | (209,362 | ) |
| Net cash provided (used)  by financing activities                                    |       | 3,925,482                                   |       | 15,393,828 |   | (12,333 | ) |
| Net change in cash                                                                   |       | 2,097                                       |       | 191 |   | 60 |   |
| Cash at beginning of year                                                            |       | 290                                         |       | 99 |   | 39 |   |
| Cash at end of year                                                                  |       | $                                           | 2,387      |   | $ | 290 |   | $ | 99 |   |
| Supplemental cash flow information:                                                  |       |                                        |       |   |   |   |   |
| Cash used to pay  interest                                                           |       | $                                           | 1,065,122  |   | $ | 294,799 |   | $ | 9,256 |   |
| Non-cash operating, investing and financing  activities:                             |       |                                        |       |   |   |   |   |
| Unrealized loss on available-for-sale  securities, net of tax                        |       | $                                           | (48,943    | ) | $ | (57,829 | ) | $ | (45,583 | ) |
| Unfunded defined benefit  plans liability, net of tax                                |       | $                                           | (29,727    | ) | — |   | — |   |
| Receipt of dividends in  the form of loans from non-bank subsidiary                  |       | $                                           | 556,496    |   | $ | 1,573,076 |   | $ | 550,000 |   |
| Contribution of loans to  bank subsidiary                                            |       | $                                           | (556,496   | ) | $ | (1,573,076 | ) | $ | (550,000 | ) |
| Issuance of common stock  for conversion of convertible  debt                        |       | $                                           | 1,465      |   | $ | 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                               |       | $                                           | 47,224     |   | $ | 34,216 |   | $ | 27,391 |   |
| Excess tax benefits  related to stock-based compensation                             |       | $                                           | 143,955    |   | $ | — |   | $ | — |   |
| Tax benefit of stock options exercised                                               |       | $                                           | —     |   | $ | 115,117 |   | $ | 93,057 |   |

 

F-91

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES SCHEDULE I—CONDENSED FINANCIAL INFORMATION OF REGISTRANT—(Continued) STATEMENTS OF COMPREHENSIVE INCOME**

| ** **                                                                                  | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                  | ** ** | **(in thousands)**                     | ** ** |
| **Net  earnings**                                                                           |       | $                                           | 2,674,846  |   | $ | 2,528,090 |   | $ | 2,197,574 |   |
| Other comprehensive  loss, net of tax:                                                      |       |                                        |       |   |   |   |   |
| Net unrealized losses on available-for-sale  securities, net of reclassification adjustment |       | (57,269                                     | )          | (19,875 | ) | (88,277 | ) |
| Net unrealized (losses) gains from cash flow hedging  instruments                           |       | (9,986                                      | )          | (16,080 | ) | 29,101 |   |
| Foreign currency translation adjustments                                                    |       | 18,312                                      |       | (21,874 | ) | 13,593 |   |
| Other  comprehensive loss, net of tax                                                       |       | (48,943                                     | )          | (57,829 | ) | (45,583 | ) |
| **Comprehensive income**                                                                    |       | $                                           | 2,625,903  |   | $ | 2,470,261 |   | $ | 2,151,991 |   |

 

F-92

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**COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS**

| **Column A**                              | ** ** | ** **              | ** ** | **Column B**   | ** ** | **Column C**   | ** ** | **Column D** | ** ** | **Column E**   | ** ** |
|------------------------------------------------|------------|-------------------------|------------|---------------------|------------|---------------------|------------|-------------------|------------|---------------------|------------|
| ** **                                     | ** ** | ** **              | ** ** | **Additions**       | ** ** | ** **          | ** ** | ** **        | ** ** |
| ** **                                     | ** ** | **Balance at**     | ** ** | **Charged to** | ** ** | **Charged to** | ** ** | ** **        | ** ** | **Balance at** | ** ** |
| ** **                                     | ** ** | **Beginning**           | ** ** | **Costs and**  | ** ** | **Other**           | ** ** | ** **        | ** ** | **End of**     | ** ** |
| ** **                                     | ** ** | **of Period**      | ** ** | **Expenses**        | ** ** | **Accounts**        | ** ** | **Deductions(1)** | ** ** | **Period**          | ** ** |
| ** **                                     | ** ** | **(in thousands)** | ** ** |
| Year ended December 31,  2006             |       |                    |       |                |       |                |       |              |       |                |       |   |   |   |   |   |   |
| Allowance for loan losses                      |       | $                       | 189,201    |                |       | $                   | 233,847    |              |       |                | $          | — |   |   |   | $ | 161,994 |   |   | $ | 261,054 |   |
| Allowance for uncollectible servicing advances |       | 56,606                  |       |                | 62,749     |                |       |              | —     |                |       |   | 45,802 |   |   | 73,553 |   |
| Allowance for trade and other receivables      |       | 13,715                  |       |                | 7,081      |                |       |              | —     |                |       |   | 10,863 |   |   | 9,933 |   |
| Recourse liability and corporate guarantees    |       | 215,057                 |       |                | 309,005    |                |       |              | —     |                |       |   | 88,526 |   |   | 435,536 |   |
|                                           |       | $                       | 474,579    |                |       | $                   | 612,682    |              |       |                | $          | — |   |   |   | $ | 307,185 |   |   | $ | 780,076 |   |
| 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 and corporate guarantees    |       | 187,797                 |       |                | 52,647     |                |       |              | —     |                |       |   | 25,387 |   |   | 215,057 |   |
|                                           |       | $                       | 350,811    |                |       | $                   | 229,960    |              |       |                | $          | — |   |   |   | $ | 106,192 |   |   | $ | 474,579 |   |
| 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 and corporate guarantees    |       | 169,612                 |       |                | 48,032     |                |       |              | —     |                |       |   | 29,847 |   |   | 187,797 |   |
|                                           |       | $                       | 299,879    |                |       | $                   | 179,211    |              |       |                | $          | — |   |   |   | $ | 128,279 |   |   | $ | 350,811 |   |

 

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(1)          Actual losses chargedagainst the valuation allowance, net of recoveries and reclassification.

F-93

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**EXHIBITLIST**
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.39        |       | Form of 8.05% Subordinated Capital Income  Securities, Series A (liquidation amount $1,000 per Security) of Countrywide  Capital III.                                                                                                                                                                                                                                                                                                                                                                |
| 4.40        |       | Form of 8.05% Subordinated  Capital Income Securities, Series B (liquidation amount $1,000 per Security)  of Countrywide Capital III.                                                                                                                                                                                                                                                                                                                                                                |
| 4.41        |       | Form of 8.05% Junior  Subordinated Debentures due June 15, 2027, Series A of CHL.                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.42        |       | Form of 8.05% Junior  Subordinated Debentures due June 15, 2027, Series B of CHL.                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.46        |       | Form of 6.75% Trust  Preferred Security (liquidation amount $25 per Trust Preferred Security) of  Countrywide Capital IV.                                                                                                                                                                                                                                                                                                                                                                            |
| 4.47        |       | Form of 6.75% Junior  Subordinated Deferrable Interest Debenture Due April 1, 2033 of the Company.                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.50*       |       | Junior Subordinated  Indenture, dated as of November 8, 2006, by and between the Company and The  Bank of New York, as Trustee (incorporated by reference to Exhibit 4.28 to  the Company’s Current Report on Form 8-K, filed with the SEC on November 13,  2006).                                                                                                                                                                                                                              |
| 4.51*       |       | Supplemental Indenture,  dated as of November 8, 2006 by and between the Company and The Bank of New  York, as Trustee, providing for the 7% Junior Subordinated Deferrable  Interest Debentures Due October 15, 2036 of the Company (incorporated by  reference to Exhibit 4.29 to the Company’s Current Report on Form 8-K, filed  with the SEC on November 13, 2006).                                                                                                                   |
| 4.52*       |       | Amended and Restated  Declaration of Trust of Countrywide Capital V, dated as of November 8, 2006,  by and among Sandor E. Samuels, Jennifer Sandefur and Eric P. Sieracki, as  Administrative Trustees, The Bank of New York (Delaware), as Delaware  Trustee, The Bank of New York, as Property Trustee and the Company, as  Sponsor and Debenture Issuer (incorporated by reference to Exhibit 4.31 to  the Company’s Current Report on Form 8-K, filed with the SEC on November 13,  2006). |
| 4.53*       |       | Form of 7% Junior  Subordinated Deferrable Interest Debenture Due October 15, 2036 of the  Company (incorporated by reference to Exhibit 4.30 to the Company’s Current  Report on Form 8-K, filed with the SEC on November 13, 2006).                                                                                                                                                                                                                                                           |
| 4.54*       |       | Form of 7% Capital  Security (liquidation amount $25 per Capital Security) of Countrywide Capital  V (included in Exhibit 4.31) (incorporated by reference to Exhibit 4.32 to  the Company’s Current Report on Form 8-K, filed with the SEC on November 13,  2006).                                                                                                                                                                                                                             |
| †10.4* |       | Extension Agreement  reached on October 20, 2006 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, filed with the SEC on October 24, 2006).                                                                                                                                                                                                                                                             |
| †10.5* |       | Employment Agreement  dated December 22, 2006 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, filed with the SEC on December 26, 2006).                                                                                                                                                                                                                                                          |
| 10.135*     |       | Five-Year Credit  Agreement, dated as of November 17, 2006, among the Company, Countrywide Home  Loans, Inc., Countrywide Bank, N.A., Barclays Bank PLC, as managing  administrative agent, BNP Paribas, as administrative agent, Royal Bank of  Canada, as syndication agent, Societe Generale, as documentation agent, and  the lenders party thereto (incorporated by reference to Exhibit 10.2 to the  Company’s Current Report on Form 8-K, filed with the SEC on November 22,  2006).     |

F-94

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| 10.136* |   | 364 Day Credit Agreement, dated as of November 17,  2006, among the Company, Countrywide Home Loans, Inc., Countrywide Bank,  N.A., Barclays Bank PLC, as managing administrative agent, BNP Paribas, as  administrative agent, Royal Bank of Canada, as syndication agent, Societe  Generale, as documentation agent, and the lenders party thereto (incorporated  by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,  filed with the SEC on November 22, 2006). |
|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 12.1    |   | Computation of the Ratio  of Earnings to Fixed Charges.                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 21      |   | List of subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 23      |   | Consent of KPMG 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-95

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