Nearly 40 years ago, when Countrywide was founded, we were primarily an FHA/VA lender.  Back then, as today, our mission was to provide the opportunity of homeownership to individuals and families who had historically been shut out.  Since our humble beginnings, we have labored year after year to stay true to our mission and along the way we have helped more than 25 million borrowers own a home in the United States.  Countrywide has also become the very best mortgage company on the face of the earth, and we are rightly proud of what we have accomplished. 

Ours is a cyclical business, and over the years Countrywide has weathered a variety of market environments.  Each cycle brings with it a unique set of challenges, and this time is no different.  In fact, this current cycle is certainly the most severe in the contemporary history of our industry.  We have recently communicated with you regarding specific steps we are taking to address the challenges we face in the current environment. The purpose of these ongoing communications is to continue to keep all of our employees informed about relevant developments impacting our Company, how Countrywide is addressing and adjusting to these developments, and to update you on our strategic direction looking ahead.  This communication represents a further update on the market environment and our plans. 

There is no question that our industry, our company and many of our borrowers continue to face significant challenges. During the past two years the growth in home price appreciation has stopped dead in its tracks and in many areas of the country it has turned in the wrong direction.  There have also been significant increases in delinquencies and foreclosures among far too many borrowers. More recently the secondary market for jumbo and non-agency conforming loans has become nearly illiquid. 

Addressing The Current Market Challenges and Positioning Countrywide for Long-term Growth

To tackle these extraordinary issues, we have taken decisive action to ensure that the Company continues to be well-positioned for further success. As we carry out our plan, the Company ,s overarching focus is exactly where it has always been: to continue to deliver value and world-class service to our customers and business partners, to remain the leader in the U.S. residential lending industry, to enhance shareholder value, and to provide career opportunities for our people.  Summarized below are the key aspects of our plan that we have put in place and are executing. 

The most important aspect of our strategic plan that we have implemented was to migrate our residential lending business under Countrywide Bank. This will materially enhance and strengthen our business model and will deliver tangible benefits to Countrywide including greater and more stable liquidity, reduced borrowing costs, and greater operational efficiencies among other advantages.

We have strengthened Countrywide’s capital base by securing a $2 billion strategic equity investment from Bank of America, which was also an important vote of confidence in Countrywide by one of the largest and most respected companies in the world.  This part of our plan has been very helpful in stemming negative perceptions about Countrywide ,s stability, which was another important reason for the investment.

We have made many changes to our product guidelines to ensure that we are only originating loans which can be sold into the secondary market or which otherwise qualify under the investment criteria for our Bank ,s loan investment portfolio.  In connection with these changes, we are no longer originating any subprime loans other than those eligible for sale or securitization under programs supported by the GSE ,s (Fannie Mae, Freddie Mac) and FHA.  It is important to note however that in spite of our product guideline changes, Countrywide continues to offer among the broadest and most competitive product menus in the industry.

In our Wholesale Division, we will no longer maintain a separate subprime sales organization.  We will be consolidating our  &Specialty Lending Group 8 sales force with our prime sales organization thereby creating a single wholesale sales team offering our entire product line to our mortgage broker customers, and working together to continue growing our Wholesale market share.

In our Full Spectrum Lending Division, we will also continue to offer our complete product line, both prime and GSE-eligible non-prime loans, through direct-to-consumer marketing channels such as direct mail, the internet and other media advertising.  One of the primary strategies for FSL has been, and will continue to be our focus on identifying eligible borrowers currently in a subprime loan and assisting them in refinancing out of subprime and into a prime loan.  In fact, 75% of FSL ,s originations in 2007 have been prime loans, and many of those were with borrowers who were refinancing out of a subprime mortgage.

In our Correspondent Division, we will be materially curtailing our loan purchase activity in the lower margin segment of that business, which we refer to as the  &assignment of trade 8 business.  Our focus in CLD going forward will be on growing our traditional  &spot 8 purchase business and supporting the Division ,s core customers which are small to midsized mortgage companies, banks, thrifts and credit unions.

In our Consumer Markets Division, we will continue to aggressively pursue profitable market share growth by expanding our sales force as well as our relationships and alliances with Realtors and Builders.  One of the silver linings from the current turmoil in the market is that many outstanding sales people have been displaced and CMD today—more than ever—represents one of the most desirable homes for talented sales people in our industry.  In the month of August alone, CMD hired almost 1,000 new sales people, its all-time record for monthly sales force hires.

In Countrywide Bank, in addition to now housing our traditional mortgage banking activities, our primary strategies will focus on growing our residential and commercial loan investment portfolio, and expanding our financial centers and deposit franchise. We are finding that the current environment is presenting us with significantly greater opportunity to source high quality and attractive yielding loans for portfolio than we have seen for many years. 

The last component of our strategic plan which we need to address with you is the most difficult.  It relates to our need to materially reduce our costs and expenses.  We are confident that the actions which we have taken, the plans which we are implementing and the opportunities which the current market is presenting to us will position Countrywide for continued success.  In the immediate term, however, we nevertheless expect to see significantly lower origination volumes in the overall market, and correspondingly material declines in our own volumes.  We currently anticipate that the size of the originations market in 2008 will be down by 25% or more from 2007 volumes. 

While workforce reductions are always very difficult, you can be certain that these decisions are being made with the utmost attention and sensitivity to the impact they will have on our Company and our people.  Each employee at Countrywide is considered an extremely important member of the Countrywide family, and we regret having to undertake these necessary actions, as they will affect the lives of our friends and colleagues.  Please know that we are providing job placement services for displaced employees, and we will work to find them opportunities both inside and outside the Company.
 
Continuing to Live Our Mission by Serving Our Customers

Turning now to what we are doing to support our customers, you should know that Countrywide remains steadfastly committed to our mission of delivering and preserving homeownership.  Our Loan Administration division interacts with our customers every day, far too many of whom are experiencing difficulties making their loan payments.  The same market conditions that have affected our company and industry have also inflicted financial pressure on many of our customers. When a Countrywide customer is unable to keep current with his or her payments, nobody benefits.  It is in everyone ,s interest to work to find solutions that help our customers who are facing financial difficulty avoid foreclosure.

Just as we are working hard to cope with the market tumult, we are heartened to see that the Federal Reserve and the Bush administration are also looking for ways to both ease the credit markets and help borrowers in distress to keep their homes. We applaud the efforts being made by policymakers across the political spectrum and regulators at both the federal and state level, and we have pledged to work with industry and government leaders to find solutions to the challenges that many homeowners are facing.     

Notwithstanding the efforts of government officials, we are not sitting back and waiting for solutions to come from somewhere else.  Our philosophy is that if a borrower has the desire to stay in their home and the means with which to afford their home, then we believe we can often find a solution that will help address difficulties they are having making their loan payments, and help them avoid losing their home.  As part of our efforts to help our borrowers this year, Countrywide ,s Home Retention Division, which is comprised of 2,600 dedicated Countrywide personnel, has undertaken extraordinary efforts to help our borrowers. This includes performing loan modifications and finding other solutions that have kept more than 35,000 borrowers out of foreclosure during this year alone, as well as conducting extensive in-person and telephonic counseling with borrowers across the country. We will also continue working with not-for-profit counseling agencies who share our desire to help as many borrowers as possible.

We will continue to remain focused on these efforts while ensuring that all of our actions are consistent with our contractual obligations to the investors of the loans we service.  We will do whatever we can to help borrowers who are facing difficulty because it is both good business and consistent with our core values.

Recent Media Coverage

Lastly, as some of you know, we recently have been the target of critical and inaccurate coverage by media woefully uninformed about our Company, our business and our industry.  We would like to address this issue because Countrywide ,s reputation is of paramount importance to all of us and it is crucial that you, our valued employees, are informed of the facts. Let us be clear: we categorically reject the assertions in the media that are either false or taken out of context, such as many of those in a recent New York Times article as well as others that followed it. Furthermore, it has always been Countrywide ,s policy to act responsibly, with the highest ethical standards, and to deliver outstanding value to our customers.  Our key differentiator has been—and continues to be—our relentless focus on our customers, and offering them the broadest choice of competitively priced products, and doing so while providing full disclosures so that our borrowers make informed decisions about the loan product that best meets their needs and financial situation. 

Some of our constituents might assume that simply because something is published in the press it is or might be true.  For this reason we prepared a lengthy rebuttal to set the record straight in response to the recent New York Times article. The rebuttal is posted on our website and we invite you to read it in its entirety. Versions of it have been sent directly to various constituencies.

Conclusion

While we have talked about the short term challenges faced by our industry and the Company, let us conclude by commenting on the opportunities presenting themselves to us now, and why we are very bullish on our future. 

As a result of the market turmoil many of our competitors have exited the business permanently, which will provide Countrywide with the opportunity to gain greater market share and improve our margins. Our Bank is also a beneficiary of this environment as we ,ve discussed and is seeing increased opportunity to grow its investment portfolio with better quality loans and higher yielding loans. While tighter credit standards and soft housing market conditions will result in the reduction of our origination volumes, our servicing portfolio will, however, benefit from slower prepayment speeds resulting in greater earnings from our servicing sector. And most importantly, operating our core business out of Countrywide Bank will enhance Countrywide ,s stability, economics, competitiveness, and overall strength.

These are challenging times for all of us, but we believe that the combination of our strategic plan and great team working together will ensure that Countrywide will successfully navigate this difficult period and become a stronger company as a result. 

We cannot express to you enough how much we deeply appreciate your extraordinary dedication to Countrywide, to our customers, our business partners and each other.  We will get through this challenging environment together, and we fully expect that our future will be as bright as our past.

Our deep gratitude to each of you for all you do on behalf of Countrywide.