Interest rate-sensitive mortgage stocks dipped Tuesday on a weak earnings report by Countrywide Credit Industries, but recovered in a broad market rally after the Federal Reserve's Open Markets Committee held off on raising rates further.

Countrywide said it had earned $100.6 million, or 87 cents per share, in its third quarter, which ended Nov. 30. Earnings per share were up 3% from the same period last year but down 4% from the prior quarter. They were in line with analysts' expectations, but those expectations had been lowered recently.

"People have been cutting their earnings estimates regularly for the past three months," said Arthur K. Bender, an analyst at Sutro & Co. in San Francisco.

Shares of the Calabasas, Calif., lender were little changed initially but fell sharply by midmorning and were down 1.43% at 10:45 am. They closed at $25.875, down 1.19%.

Among other mortgage-related stocks, Freddie Mac shares were down 0.80%, to $46.6875, after trading as low as $45.6875. Washington Mutual shares were down 0.98%, to $25.1875.

The American Banker index closed up 2.09% on the news that the Fed was maintaining a neutral stance on rates, rather than leaning toward raising them.

The Fed had raised short-term rates by 25 basis points in June, August, and September - for a total of 75 basis points - in attempts to stave off a revival of inflation.

With rates rising, Countrywide, the largest mortgage company not owned by a bank, originated $12.7 billion of loans during the quarter, off 47% from last year.

The company said the current environment "creates challenges" for it to achieve near-term earnings goals, noting that competition has increased for A-quality loans.

"When the size of the pie shrinks, and the number of people eating the pie doesn't shrink, there's more vigorous competition for a piece of the pie," said Angelo R. Mozilo, chairman of Countrywide.

"Considering the state of the market, they had a good quarter," said Michael McMahon, an analyst at Sandler O'Neill & Partners.

The earnings release noted that "mortgage-related diversification activities," including loan-closing services, subprime and home equity loans, and investment banking contributed 31% of Countrywide's third-quarter earnings.

Countrywide has a big loan servicing business, which thrives when interest rates rise. It collects and processes payments on $244 billion of mortgages.

Higher rates made those homeowners less likely to pay off their loans early, increasing the value of the servicing asset. As a result, Countrywide was able to recover $43 million of a previously recorded impairment charge.

"There's no such thing as a perfect hedge, but [having a large servicing book] has certainly helped them a lot," said Gary Gordon, an analyst at PaineWebber.

"If they were just an originator, their earnings would have been near zero."

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