updated 10/26/2007 7:05:25 PM ET 2007-10-26T23:05:25

Countrywide Financial Corp. lost $1.2 billion in the third quarter, but its shares soared Friday after the nation's largest mortgage lender said it expects to be profitable this quarter and next year.

It was Countrywide's first quarterly loss in 25 years.

But the Calabasas, California-based company said it will be profitable in the fourth quarter and in 2008, as it restructures its business to take advantage of the current market.

"We continue to be bullish about the longterm prospects of both Countrywide and our industry," Chairman and Chief Executive Angelo Mozilo said during a conference call with Wall Street analysts.

Shares jumped $4.23, or 32.4 percent, to close at $17.30 on Friday after rising as high as $17.51. The stock is down 64 percent from its 52-week high of $45.26.

The loss for the third-quarter came as mortgage market woes forced Countrywide to set aside millions in loan-loss provisions and writedowns, and the lender originated fewer loans.

Countrywide's loss amounted to $2.85 per share for the July-September period in contrast to a profit of $647.6 million, or $1.03 per share, a year ago.

Analysts polled by Thomson Financial, on average, forecast a loss of $1.28 per share for the quarter.

Countrywide reported a revenue figure of negative $50 million in the third quarter because of the impact of impairments and charges, versus $2.82 billion during the same period a year ago.

Mozilo attributed the quarterly loss to "unprecedented disruptions" in the mortgage market and the ongoing national housing slump.

The executive sought to reassure investors, however, noting steps the company has taken to secure financing, tighten underwriting standards and shift its mortgage lending business into its banking subsidiary, Countrywide Bank.

Chris Brendler, an analyst with Stifel Nicolaus & Co. Inc., said he is not convinced the company will turn a profit next quarter.

"They seem to have taken some big write-downs, taken a lot pain this quarter, the pain going forward should be smaller," Brendler said. "I still remain concerned about the potential for another credit write-down and just how profitable this business will be, even after they get past the credit headaches in the near term."

Mozilo also said he was cooperating with informal inquiry by the Securities and Exchange Commission into his sales of his Countrywide stock.

"At no time did I make any trading decisions based on any material non-public information, and I fully complied with all company policies," Mozilo said during the call. "I am confident that this will demonstrate that I've complied with all protocols."

In its earnings report, the company said origination volume fell to $96 billion, from $118 billion as Countrywide shifted its product mix to more traditional loans.

Countrywide ramped up its loan-loss reserves to fight rising delinquencies and defaults, especially among subprime mortgages given to customers with poor credit history. Countrywide reserved $934 million for bad loans in the third quarter, up from $38 million held during the same quarter last year.

The lender moved about $12 billion in nonconforming loans to its held-for-investment portfolio after having to take a write-down on them.

Some 4.41 percent of Countrywide's conventional first mortgage loans were delinquent as of Sept. 30, up from 2.57 percent in the year-ago quarter. For prime home-equity loans, delinquencies inched up to 13.5 percent from 13.4 percent.

The number of subprime loans that were behind in payments soared to 29.08 percent from 18.32 percent in the year-ago period.

In the subprime loan category, 12.63 percent of the loans were behind in payments by 90 days or more, more than twice the year-ago rate.

The company noted the market for new loans, particularly loans that lenders can't sell to government-backed mortgage companies, declined substantially during the quarter as underwriting standards began to tighten industrywide following the subprime mortgage meltdown.

Earnings from the company's loan production unit also suffered because gain-on-sale margins the company had expected to rake in did not materialize.

Countrywide's loan servicing arm posted a pre-tax loss of $27 million compared to earnings of $123 million in the year-ago quarter, as the company took a $690 million impairment charge for home-equity and subprime loan residuals in anticipation of future credit losses.

Earnings in Countrywide's mortgage banking operations posted a pre-tax loss of $389 million, compared to pre-tax income of $378 million in the year-ago quarter as the company boosted its loan-loss reserves to compensate for future charge-offs.

Some Countrywide Bank customers rushed to withdraw funds from the bank during the quarter on fears their deposits might be in danger if the company went bankrupt. But the company said a surge in deposits in September helped offset those withdrawals and the bank's consumer accounts grew by a net of 9 percent by quarter's end.

Countrywide's investment services arm posted a pretax loss of $344 million, compared to income of $141 million in the year-ago quarter. Its insurance business generated pretax earnings of $150 million, up from $91 million in the third quarter last year.

Looking ahead, management said it expects the company's loan origination volume will be lower through the start of next year, unless the housing slump improves or interest rates fall further.

The company expects its earnings per share in the fourth quarter to range between 25 cents and 75 cents. It also anticipates its return on equity for 2008 to range between 10 percent and 15 percent.

The lender has struggled this year as mortgage defaults and foreclosures have spiked, particularly among subprime loans to borrowers with poor credit.

To turn things around in recent weeks, Countrywide announced thousands of layoffs and borrowed billions of dollars, including $2 billion by selling a stake in the company to Bank of America Corp.

The company booked a charge of $57 million related to its plan to cut as many as 12,000 jobs. Countrywide estimated it will have to take between $70 million to $90 million in additional charges, with the bulk of the charges expected to be booked in the fourth quarter.

For the first nine months of the year, the company posted a loss of $281.6 million versus a profit of $2.05 billion a year earlier. Revenue fell 43 percent to $4.9 billion from $8.6 billion in the year-ago period.

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