Countrywide's earnings rose 35% in quarter.

Countrywide Credit Industries, swimming hard against a tide of mortgage prepayments, increased earnings by 35% to $46.2 million in its second fiscal quarter, which ended Aug. 31.

Prepayments climbed to an annual rate of 34% of the total servicing portfolio, from 30% in the preceding quarter and 16% a year earlier. The heavy runoff required amortization of $80 million, including an allowance for further pre-payments. But that charge was offset by a $44 million profit from hedging, mainly a position in long-term Treasuries that has become more valuable with the deadline in interest rates.

"Countrywide's second-quarter performance demonstrates how the company's key business strategy of balancing loan production and servicing designed to work," said David S. Loeb, chairman. "Income from record loan production and the gain from the company's servicing hedge more than offset increased amortization caused by high refinances."

New Loans Outpace Prepayments

Mr. Loeb added that Countrywide was able to add more than twice as many new loans to its servicing portfolio as were prepaid. This "enables us to continue to build a valuable low-coupon servicing portfolio in the face of high levels of refinances," he said.

The servicing portfolio grew to $72.2 billion with an average coupon of 7.5%, from $40.7 billion and 8.6% a year earlier. Loan production reached a record $13.6 billion, up 72%. Refinancings accounted for 73% of fundings.

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