UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

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

For the transition period from to

Commission file number: 1-8422

Countrywide Financial Corporation

(Exact name of registrant as specified in its charter)

Delaware		13-2641992
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
4500 Park Granada, Calabasas, California		91302
(Address of principal executive offices)		(Zip Code)

(818) 225-3000

(Registrant’s telephone number, including area code)

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

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

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

Yes o No x

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Class		Outstanding at August 6, 2007
Common Stock, $.05 par value		576,016,774

COUNTRYWIDE FINANCIAL CORPORATION

FORM 10-Q

June 30, 2007

TABLE OF CONTENTS

				Page
PART I. FINANCIAL INFORMATION			1
Item 1.	Financial Statements:
	Consolidated Balance Sheets—June 30, 2007 and December 31, 2006		1
	Consolidated Statements of Earnings—Three and Six Months Ended June 30, 2007 and 2006		2
	Consolidated Statement of Changes in Shareholders’ Equity—Six Months Ended June 30, 2007 and 2006		3
	Consolidated Statements of Cash Flows—Six Months Ended June 30, 2007 and 2006		4
	Notes to Consolidated Financial Statements		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		39
	Overview		39
	Results of Operations Comparison—Quarters Ended June 30, 2007 and 2006		41
	Results of Operations Comparison—Six Months Ended June 30, 2007 and 2006		61
	Quantitative and Qualitative Disclosures About Market Risk		80
	Credit Risk Management		82
	Loan Servicing		92
	Liquidity and Capital Resources		93
	Off-Balance Sheet Arrangements and Aggregate Contractual Obligations		94
	Prospective Trends		95
	Regulatory Trends		99
	New Accounting Standards		99
	Factors That May Affect Our Future Results		100
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		101
Item 4.	Controls and Procedures		101
PART II. OTHER INFORMATION		102
Item 1A.	Risk Factors		102
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		103
Item 4.	Submission of Matters to a Vote of Security Holders		103
Item 6.	Exhibits		104

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

	June 30, 2007			December 31, 2006
	(Unaudited)			(Audited)
	(in thousands, except share data)
ASSETS
Cash	$	1,154,032		$	1,407,000
Mortgage loans held for sale	34,090,154			31,272,630
Trading securities owned, at fair value	19,271,559			20,036,668
Trading securities pledged as collateral, at fair value	3,521,522			1,465,517
Securities purchased under agreements to resell, securities borrowed and federal funds sold	26,385,089			27,269,897
Loans held for investment, net of allowance for loan losses of $512,904 and $261,054, respectively	74,056,539			78,085,757
Investments in other financial instruments, at fair value	26,601,298			12,769,451
Mortgage servicing rights, at fair value	20,087,368			16,172,064
Premises and equipment, net	1,644,141			1,625,456
Other assets	10,010,058			9,841,790
Total assets	$	216,821,760		$	199,946,230
LIABILITIES
Deposit liabilities	$	60,292,841		$	55,578,682
Securities sold under agreements to repurchase and federal funds purchased	46,186,848			42,113,501
Trading securities sold, not yet purchased, at fair value	4,145,425			3,325,249
Notes payable	77,669,067			71,487,584
Accounts payable and accrued liabilities	8,914,175			8,187,605
Income taxes payable	5,227,509			4,935,763
Total liabilities	202,435,865			185,628,384
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, 574,655,984 shares and 585,466,719 shares at June 30, 2007 and December 31, 2006, respectively; outstanding, 574,218,312 shares and 585,182,298 shares at June 30, 2007 and December 31, 2006, respectively	28,733			29,273
Additional paid-in capital	1,612,901			2,154,438
Accumulated other comprehensive loss	(136,228		)	(17,556		)
Retained earnings	12,880,489			12,151,691
Total shareholders’ equity	14,385,895			14,317,846
Total liabilities and shareholders’ equity	$	216,821,760		$	199,946,230

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

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
	(Unaudited) (in thousands, except per share data)
Revenues
Gain on sale of loans and securities	$	1,493,458		$	1,527,450		$	2,727,562		$	2,888,628
Interest income	3,499,644			2,845,580			6,851,626			5,439,338
Interest expense	(2,771,648		)	(2,155,106		)	(5,392,693		)	(4,054,429		)
Net interest income	727,996			690,474			1,458,933			1,384,909
Provision for loan losses	(292,924		)	(61,898		)	(444,886		)	(125,036		)
Net interest income after provision for loan losses	435,072			628,576			1,014,047			1,259,873
Loan servicing fees and other income from mortgage servicing rights and retained interests	1,421,255			1,207,159			2,808,544			2,407,046
Realization of expected cash flows from mortgage servicing rights	(1,007,241		)	(768,132		)	(1,931,947		)	(1,506,699		)
Change in fair value of mortgage servicing rights	1,327,446			569,002			1,506,453			1,547,283
(Impairment) recovery of retained interests	(268,117		)	51,498			(697,718		)	(69,156		)
Servicing Hedge losses	(1,373,089		)	(621,074		)	(1,486,827		)	(1,506,944		)
Net loan servicing fees and other income from mortgage servicing rights and retained interests	100,254			438,453			198,505			871,530
Net insurance premiums earned	352,384			284,226			686,561			564,019
Other	167,229			121,511			327,498			252,114
Total revenues	2,548,397			3,000,216			4,954,173			5,836,164
Expenses
Compensation	1,109,016			1,143,707			2,184,424			2,218,525
Occupancy and other office	269,017			261,080			533,230			506,411
Insurance claims	154,769			102,809			212,074			226,851
Advertising and promotion	79,540			65,686			149,557			125,916
Other	271,357			232,911			509,395			445,075
Total expenses	1,883,699			1,806,193			3,588,680			3,522,778
Earnings before income taxes	664,698			1,194,023			1,365,493			2,313,386
Provision for income taxes	179,630			471,833			446,444			907,685
NET EARNINGS	$	485,068		$	722,190		$	919,049		$	1,405,701
Earnings per share
Basic	$	0.83		$	1.19		$	1.57		$	2.32
Diluted	$	0.81		$	1.15		$	1.53		$	2.25

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

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

	Number of Shares of Common Stock			Common Stock				Additional Paid-in Capital				Accumulated Other Comprehensive Income (Loss)				Retained Earnings			Total
	(Unaudited)
	(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 as adjusted, January 1, 2006		600,030,686			30,008				2,954,019				61,114			9,837,784			12,882,925
Comprehensive income:
Net earnings for the period		—			—				—				—			1,405,701			1,405,701
Other comprehensive income (loss), net of tax:
Net unrealized losses from available-for-sale securities		—			—				—				(127,156		)	—			(127,156		)
Net unrealized losses from cash flow hedging instruments		—			—				—				(9,918		)	—			(9,918		)
Net change in foreign currency translation adjustment		—			—				—				12,120			—			12,120
Total comprehensive income																			1,280,747
Issuance of common stock pursuant to stock-based compensation plans		9,811,695			498				232,775				—			—			233,273
Excess tax benefit related to stock-based compensation		—			—				62,343				—			—			62,343
Issuance of common stock, net of treasury stock		487,731			24				17,839				—			—			17,863
Issuance of common stock in conversion of convertible debt		414,868			21				1,444				—			—			1,465
Cash dividends paid—$0.30 per common share		—			—				—				—			(181,659		)	(181,659		)
Balance at June 30, 2006		610,744,980			$	30,551			$	3,268,420			$	(63,840	)	$	11,061,826		$	14,296,957
Balance at December 31, 2006		585,182,298			$	29,273			$	2,154,438			$	(17,556	)	$	12,151,691		$	14,317,846
Remeasurement of income taxes payable upon adoption of FIN 48		—			—				—				—			(12,719		)	(12,719		)
Balance as adjusted, January 1, 2007		585,182,298			29,273				2,154,438				(17,556		)	12,138,972			14,305,127
Comprehensive income:
Net earnings for the period		—			—				—				—			919,049			919,049
Other comprehensive income (loss), net of tax:
Net unrealized losses from available-for-sale securities		—			—				—				(130,123		)	—			(130,123		)
Net change in foreign currency translation adjustment		—			—				—				9,237			—			9,237
Change in unfunded liability relating to defined benefit plans		—			—				—				2,214			—			2,214
Total comprehensive income																			800,377
Issuance of common stock pursuant to stock-based compensation plans		9,887,079			502				226,734				—			—			227,236
Excess tax benefit related to stock-based compensation		—			—				68,348				—			—			68,348
Issuance of common stock, net of treasury stock		652,447			33				25,862				—			—			25,895
Repurchase and cancellation of common stock		(21,503,512	)		(1,075		)		(862,481		)		—			—			(863,556		)
Cash dividends paid—$0.30 per common share		—			—				—				—			(177,532		)	(177,532		)
Balance at June 30, 2007		574,218,312			$	28,733			$	1,612,901			$	(136,228	)	$	12,880,489		$	14,385,895

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

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six Months Ended June 30,
	2007			2006
	(Unaudited)
	(in thousands)
Cash flows from operating activities:
Net earnings	$	919,049		$	1,405,701
Adjustments to reconcile net earnings to net cash used by operating activities:
Gain on sale of loans and securities	(2,727,562		)	(2,888,628		)
Accretion of discount on securities	(260,618		)	(233,832		)
Interest capitalized on loans	(456,973		)	(273,469		)
Amortization of deferred premiums, discounts, fees and costs, net	209,442			160,938
Accretion of fair value adjustments and discount on notes payable	(29,348		)	(57,913		)
Change in fair value of hedged notes payable and related interest-rate and foreign-currency swaps	(9,787		)	8,408
Amortization of deferred fees on time deposits	11,113			9,594
Provision for loan losses	444,886			125,036
Change in MSR value due to realization of expected cash flows from mortgage servicing rights	1,931,947			1,506,699
Change in fair value of mortgage servicing rights	(1,506,453		)	(1,547,283		)
Impairment of retained interests	759,529			84,054
Servicing hedge losses	1,486,827			1,506,944
Stock-based compensation expense	48,353			82,182
Depreciation and other amortization	151,188			124,641
Provision for deferred income taxes	836,807			676,286
Origination and purchase of loans held for sale	(242,781,618		)	(209,604,399		)
Proceeds from sale and principal repayments of loans held for sale	236,995,850			212,007,060
Increase in trading securities	(1,290,896		)	(4,373,143		)
Net increase in retained interests and servicing hedge securities accounted for as trading securities	(2,097,311		)	(466,779		)
Increase in other assets	(267,276		)	(475,592		)
Increase in trading securities sold, not yet purchased, at fair value	820,176			792,156
Increase in accounts payable and accrued liabilities	446,674			798,841
(Decrease) increase in income taxes payable	(473,482		)	152,584
Net cash used by operating activities	(6,839,483		)	(479,914		)
Cash flows from investing activities:
Decrease (increase) in securities purchased under agreements to resell, federal funds sold and securities borrowed	884,808			(1,967,830		)
Repayments (additions) to loans held for investment, net	5,467,977			(10,692,342		)
Sales of loans held for investment, net	—			64,876
Additions to investments in other financial instruments accounted for as available for sale	(15,809,059		)	(2,071,758		)
Proceeds from sale and repayment of investments in other financial instruments accounted for as available for sale	2,182,069			1,395,127
Purchases of mortgage servicing rights	(184,511		)	(8,067		)
Purchases of premises and equipment, net	(135,173		)	(287,142		)
Net cash used by investing activities	(7,593,889		)	(13,567,136		)
Cash flows from financing activities:
Net increase in deposit liabilities	4,703,046			11,103,539
Net increase in securities sold under agreements to repurchase and federal funds purchased	4,073,347			4,008,020
Net increase (decrease) in short-term borrowings	3,510,080			(4,162,083		)
Issuance of long-term debt	24,026,503			8,639,127
Repayment of long-term debt	(21,364,797		)	(4,250,919		)
Excess tax benefit related to stock-based compensation	68,535			60,309
Repurchase and cancellation of common stock	(863,556		)	—
Issuance of common stock	204,778			168,954
Payment of dividends	(177,532		)	(181,659		)
Net cash provided by financing activities	14,180,404			15,385,288
Net (decrease) increase in cash	(252,968		)	1,338,238
Cash at beginning of period	1,407,000			1,031,108
Cash at end of period	$	1,154,032		$	2,369,346

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

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1—Basis of Presentation

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

The accompanying consolidated financial statements have been prepared in compliance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the Securities and Exchange Commission’s instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements.

In preparing financial statements in compliance with U.S. GAAP, management is required to make estimates and assumptions that materially affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.

In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. For further information, including a description of the Company’s significant accounting policies, refer to the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2006, for the Company (the “2006 Annual Report”).

Certain amounts reflected in the prior year consolidated financial statements have been reclassified to conform to current year presentation.

Note 2—Adoption of New Accounting Pronouncements

Statement of Financial Accounting Standards No. 155, Accounting for Certain Hybrid Financial Instruments, an amendment of SFAS 133 and SFAS 140 (“SFAS 155”), was effective for all financial instruments acquired or issued after December 31, 2006. This Statement:

· Establishes a requirement to evaluate whether interests in securitized financial instruments contain an embedded derivative that requires bifurcation;

· Permits fair value accounting to be elected for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation;

· Clarifies which interest-only stripped securities and principal-only stripped securities are not subject to SFAS 133; and

· Clarifies that concentration of credit risks in the form of subordination are not embedded derivatives.

The application of SFAS 155 did not have a significant impact on the consolidated financial position or earnings of the Company.

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (“FIN 48”) was issued to clarify the requirements of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, relating to the recognition of income tax benefits.

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

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

· If a position is determined to be more likely than not of being sustained, the reporting enterprise should recognize the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with the taxing authority.

FIN 48 was applicable beginning January 1, 2007. The opening balances of income taxes payable and retained earnings were adjusted for the cumulative effect of applying the provisions of FIN 48 as follows:

	Income Taxes Payable			Retained Earnings
	(in thousands)
Balance at December 31, 2006		$	4,935,763	$	12,151,691
Remeasurement of income tax liability upon adoption of FIN 48		12,719		(12,719		)
Balance at January 1, 2007		$	4,948,482	$	12,138,972

The total amount of unrecognized tax benefits on uncertain tax positions as of January 1, 2007 was $180.6 million. If recognized, $126.8 million of unrecognized tax benefits would impact the Company’s effective income tax rate. As of June 30, 2007, there have been no material changes to the unrecognized tax benefits, including those that would impact the Company’s effective income tax rate.

As of January 1, 2007 and June 30, 2007, the Company is not aware of any tax positions for which it was reasonably possible that a change in the amount of unrecognized tax benefits during the next twelve months would significantly impact the Company’s effective income tax rate.

The Company recognizes interest and penalties related to income tax uncertainties in its provision for income taxes and income taxes payable. The after-tax equivalent of approximately $17.2 million for interest and penalties on uncertain tax positions was included in income taxes payable at January 1, 2007. As of June 30, 2007 there have been no material changes to the amounts of interest and penalties recognized in the statement of earnings or balance sheet.

As of June 30, 2007, the IRS exam team had completed its fieldwork for tax years for 2003 and 2004, and forwarded the results for administrative review. The California Franchise Tax Board examination for 2003 and 2004 is not expected to be completed by December 31, 2007 and the 2002 tax year is still open to examination.

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

During the quarter ended June 30, 2007, the Company recognized a non-recurring reduction of its deferred income tax liabilities resulting from moving certain of our operations to other states. This adjustment resulted in a reduced income tax rate of 27.0 percent.

Note 3—Earnings Per Share

Basic earnings per share is determined using net earnings divided by the weighted-average common shares outstanding during the period. Diluted earnings per share is computed by dividing net earnings available to common shareholders by the weighted-average shares outstanding, assuming all potentially dilutive common shares were issued.

The following table summarizes the basic and diluted earnings per share calculations for the periods indicated:

	Three Months Ended June 30,
	2007						2006
	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	$	485,068	583,669		$	0.83	$	722,190	607,831		$	1.19
Effect of dilutive securities:
Dilutive stock-based compensation instruments	—		11,871				—		18,779
Diluted earnings and earnings per share	$	485,068	595,540		$	0.81	$	722,190	626,610		$	1.15

	Six Months Ended June 30,
	2007						2006
	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	$	919,049	585,901		$	1.57	$	1,405,701	604,725		$	2.32
Effect of dilutive securities:
Dilutive stock-based compensation instruments	—		12,963				—		18,639
Convertible debentures	—		—				15		109
Diluted earnings and earnings per share	$	919,049	598,864		$	1.53	$	1,405,716	623,473		$	2.25

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

During the quarters ended June 30, 2007 and 2006, options to purchase 172,011 shares and 72,890 shares, respectively, were outstanding but not included in the computation of diluted earnings per share because they were anti-dilutive. During the six months ended June 30, 2007 and 2006, options to purchase 26,390 shares and 123,940 shares, respectively, were outstanding but not included in the computation of diluted earnings per share because they were anti-dilutive.

Note 4—Loan Sales

As more fully discussed in “Note 3—Loan Sales” included in the consolidated financial statements in the 2006 Annual Report, the Company retains financial interests in its loan sales activities in the form of interest-only, principal-only and subordinated interests. The Company also obtains mortgage servicing rights (“MSRs”) through its loan sales activities.

MSRs and retained interests are carried at fair value. The Company estimates fair value through the use of discounted cash flow models. The key assumptions used in the valuation of MSRs include mortgage prepayment speeds and discount rates. The key assumptions used in the valuation of retained interests include mortgage prepayment speeds, discount rates, and for those subordinated interests containing credit risk, net credit losses over the expected lifetime of the security. The discounted cash flow models incorporate cash flow and prepayment projections based on data drawn from the historical performance of the loans underlying the Company’s MSRs and retained interests, which management believes are consistent with assumptions other major market participants would use in determining the assets’ fair value.

Key assumptions used in measuring the fair value of the Company’s MSRs at June 30, 2007 and December 31, 2006, and the effect on their fair value from adverse changes in those assumptions, are as follows:

	June 30, 2007			December 31, 2006
	(dollar amounts in thousands)
Fair value of MSRs	$	20,087,368		$	16,172,064
Weighted-average life (in years)	6.5			5.8
Weighted-average annual prepayment speed	18.5		%	21.0		%
Impact of 5% adverse change	$	335,463		$	293,639
Impact of 10% adverse change	$	654,783		$	571,577
Impact of 20% adverse change	$	1,249,706		$	1,085,394
Weighted-average OAS	6.2		%	6.2		%
Impact of 5% adverse change	$	167,829		$	129,460
Impact of 10% adverse change	$	332,825		$	256,746
Impact of 20% adverse change	$	654,612		$	505,029

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Key assumptions used in measuring the fair value of the Company’s retained interests at June 30, 2007 and December 31, 2006, and the effect on their fair value from adverse changes in those assumptions are as follows:

	June 30, 2007			December 31, 2006
	(dollar amounts in thousands)
Fair value of retained interests	$	2,735,513			$	3,040,575
Weighted-average life (in years)	4.8				3.1
Weighted-average annual prepayment speed	23.4		%		30.6		%
Impact of 5% adverse change	$	85,793			$	97,971
Impact of 10% adverse change	$	164,777			$	184,866
Impact of 20% adverse change	$	297,468			$	335,668
Weighted-average annual discount rate	18.4		%		18.2		%
Impact of 5% adverse change	$	38,765			$	33,809
Impact of 10% adverse change	$	78,115			$	60,475
Impact of 20% adverse change	$	152,084			$	127,056
Weighted-average net lifetime credit losses	5.1		%		2.7		%
Impact of 5% adverse change	$	74,644			$	48,550
Impact of 10% adverse change	$	148,024			$	117,336
Impact of 20% adverse change	$	277,800			$	224,616

These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a given percentage variation in individual assumptions generally cannot be extrapolated. Also, in the preceding tables, the effect of a variation in a particular assumption on the fair value of the MSRs or retained interests is calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another which might compound or counteract the sensitivities.

Note 5—Derivative Financial Instruments

Derivative Financial Instruments

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

The Company manages interest rate risk with derivative financial instruments and by the structure of its activities as follows:

· The Company uses various financial instruments, including derivatives, to manage the interest rate risk related specifically to the values of its commitments to make loans (also referred to as interest rate lock commitments or “IRLCs”), mortgage loans held by the Company pending sale (“Mortgage Loan Inventory”), retained interests and trading securities, as well as a portion of its debt.

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

· Structurally, the Company manages interest rate risk in its Mortgage Banking Segment through the natural counterbalance of its loan production and servicing businesses. In its Banking Segment, the Company manages interest rate risk by funding the segment’s interest-earning assets with liabilities of similar duration or a combination of derivative instruments and certain liabilities that create repricing characteristics that closely reflect the repricing behaviors of those assets.

Risk Management Activities Related to Mortgage Loan Inventory and Interest Rate Lock Commitments

To manage the price risk associated with the IRLCs, the Company generally uses a combination of net forward sales of Mortgage Backed-Securities (“MBS”) and put and call options on MBS, Treasury futures and Eurodollar futures. The Company generally makes forward sales of MBS in an amount equal to the portion of the IRLCs expected to close, assuming no change in mortgage rates. The Company acquires put and call options to protect against the variability of loan closings caused by changes in mortgage rates. To manage the credit spread risk associated with its IRLCs the Company may enter into credit default swaps.

The Company manages the price risk related to the Mortgage Loan Inventory primarily by entering into forward sales of MBS and Eurodollar futures. The values of these forward MBS sales and Eurodollar futures move in opposite direction to the value of the Mortgage Loan Inventory. To manage the credit spread risk associated with its Mortgage Loan Inventory, the Company may enter into credit default swaps or similar instruments. The Company actively manages the risk profiles of its IRLCs and Mortgage Loan Inventory on a daily basis.

The Company manages the price risk, including credit spread risk, related to its commercial mortgage loans, using interest rate, total rate of return and credit default swaps.

During the six months ended June 30, 2007, the interest rate risk management activities associated with 51% of the fixed-rate mortgage loan inventory and 44% of the adjustable-rate mortgage loan inventory were accounted for as fair value hedges. For the six months ended June 30, 2007 and 2006, the Company recognized net pre-tax losses of $6.4 million and $41.8 million, respectively, representing the ineffective portion of the hedges of its Mortgage Loan Inventory that qualified as fair value hedges.

Risk Management Activities Related to Mortgage Servicing Rights and Retained Interests

To moderate negative impacts on earnings caused by a rate-driven decline in fair value of its MSRs and retained interests from securitization, the Company maintains a portfolio of financial instruments, including derivatives and securities, which generally increase in value when interest rates decline. In addition, the Company uses credit default swaps or similar instruments to moderate the negative impact on earnings caused by a credit spread-driven decline in fair value. This portfolio of financial instruments is collectively referred to herein as the “Servicing Hedge.”

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

The following table summarizes the activity for derivative contracts included in the Servicing Hedge expressed by notional amounts:

	Balance, December 31, 2006			Additions			Dispositions/ Expirations				Balance, June 30, 2007
	(in millions)
Mortgage forward rate agreements		$	48,000		$	63,000		$	(84,000	)	$	27,000
Interest rate swaptions		41,750			51,825			(22,500		)	71,075
Interest rate swaps		29,025			46,585			(16,425		)	59,185
Long treasury futures		—			26,750			(5,000		)	21,750
Long call options on interest rate futures		4,500			91,770			(29,320		)	66,950
Credit default swaps		—			424			(424		)	—

Risk Management Activities Related to Issuance of Long-Term Debt

The Company has entered into interest rate swap contracts in which the rate received is fixed and the rate paid is adjustable and is indexed to LIBOR. These interest rate swaps enable the Company to convert a portion of its fixed-rate long-term debt to U.S. dollar LIBOR-based floating-rate debt (notional amount of $26.8 billion as of June 30, 2007) and a portion of its foreign currency-denominated fixed and floating-rate long-term debt to U.S. dollar LIBOR-based floating-rate debt (notional amount of $4.4 billion as of June 30, 2007). These transactions are generally designated as fair value hedges under SFAS 133. For the six months ended June 30, 2007 and 2006, the Company recognized net pre-tax gains of $9.8 million and $8.4 million, respectively, representing the ineffective portion of its fair value hedges of debt.

Risk Management Activities Related to Deposit Liabilities

The Company has entered into interest rate swap contracts that have the effect of converting a portion of its fixed-rate deposit liabilities to LIBOR-based variable-rate deposit liabilities. These transactions are designated as fair value hedges. For the six months ended June 30, 2007 and 2006, the Company recognized a net pre-tax gain of $0.3 million and a net pre-tax loss of $2.2 million, respectively, representing the hedge ineffectiveness relating to these swaps.

Risk Management Activities Related to the Broker-Dealer Securities Trading Portfolio

In connection with its broker-dealer activities, the Company maintains a trading portfolio of fixed-income securities, primarily MBS. The Company is exposed to price changes in its trading portfolio arising from interest rate changes during the period it holds the securities. To manage this risk, the Company utilizes derivative instruments including forward sales/purchases of To-Be-Announced (“TBA”) MBS, short/long interest rate futures contracts, interest rate swaps, credit default swaps, long put/call options on interest rate futures contracts, interest rate caps and receiver swaptions.

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 6—Mortgage Loans Held for Sale

Mortgage loans held for sale include the following:

	June 30, 2007				December 31, 2006
	(in thousands)
Prime		$	23,117,955		$	22,494,274
Prime home equity		5,050,134			1,813,947
Nonprime		3,838,506			4,917,895
Commercial real estate		2,277,855			1,930,100
Deferred premiums, discounts, fees and costs, net		(194,296		)	116,414
		$	34,090,154		$	31,272,630

At June 30, 2007, the Company had pledged $8.3 billion and $2.6 billion in mortgage loans held for sale to secure asset-backed commercial paper and a secured revolving line of credit, respectively.

At December 31, 2006, the Company had pledged $7.9 billion and $0.6 billion in mortgage loans held for sale to secure asset-backed commercial paper and a secured revolving line of credit, respectively.

Note 7—Trading Securities and Trading Securities Sold, Not Yet Purchased

Trading securities, which consist of trading securities owned and trading securities pledged as collateral, include the following:

	June 30, 2007		December 31, 2006
	(in thousands)
Mortgage pass-through securities:
Fixed-rate	$	13,481,757	$	13,502,403
Adjustable-rate	518,346		1,381,675
Total mortgage pass-through securities	14,000,103		14,884,078
Collateralized mortgage obligations	5,100,078		3,307,594
U.S. Treasury securities	1,486,515		1,801,221
Obligations of U.S. Government-sponsored enterprises	1,096,774		781,657
Derivative financial instruments	312,085		15,728
Asset-backed securities	301,029		203,979
Interest-only securities	292,308		287,206
Mark-to-market on TBA securities	183,211		144,674
Residual securities	7,782		52,097
Other	13,196		23,951
	$	22,793,081	$	21,502,185

As of June 30, 2007, $19.4 billion of the Company’s trading securities had been pledged as collateral for financing purposes, of which the counterparty had the contractual right to sell or re-pledge $3.5 billion.

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

As of December 31, 2006, $19.5 billion of the Company’s trading securities had been pledged as collateral for financing purposes, of which the counterparty had the contractual right to sell or re-pledge $1.5 billion.

Trading securities sold, not yet purchased, include the following:

	June 30, 2007			December 31, 2006
	(in thousands)
U.S. Treasury securities		$	2,973,387		$	2,803,030
Obligations of U.S. Government-sponsored enterprises		712,934			305,826
Derivative financial instruments		231,084			9,235
Mark-to-market on TBA securities		221,071			181,119
Mortgage pass-through securities, fixed-rate		3,034			26,024
Other		3,915			15
		$	4,145,425		$	3,325,249

Note 8—Securities Purchased Under Agreements to Resell, Securities Borrowed and Federal Funds Sold

The following table summarizes securities purchased under agreements to resell, securities borrowed and federal funds sold:

	June 30, 2007			December 31, 2006
	(in thousands)
Securities purchased under agreements to resell		$	20,533,604	$	22,559,194
Securities borrowed		4,401,485		3,460,703
Federal funds sold		1,450,000		1,250,000
		$	26,385,089	$	27,269,897

As of June 30, 2007, the Company had accepted collateral related to securities purchased under agreements to resell and securities borrowed with a fair value of $46.2 billion that it had the contractual ability to sell or re-pledge, including $21.1 billion related to amounts offset by securities sold under agreements to repurchase under master netting arrangements. As of June 30, 2007, the Company had re-pledged $41.9 billion of such collateral for financing purposes.

As of December 31, 2006, the Company had accepted collateral related to securities purchased under agreements to resell and securities borrowed with a fair value of $56.0 billion that it had the contractual ability to sell or re-pledge, including $30.0 billion related to amounts offset by securities sold under agreements to repurchase under master netting arrangements. As of December 31, 2006, the Company had re-pledged $52.1 billion of such collateral for financing purposes.

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 9—Loans Held for Investment, Net

Loans held for investment include the following:

	June 30, 2007				December 31, 2006
	(in thousands)
Mortgage loans:
Banking Operations:
Prime		$	44,571,952		$	51,634,926
Prime home equity		22,676,588			20,163,337
Nonprime		13,188			—
		67,261,728			71,798,263
Mortgage Banking:
Prime		772,651			252,731
Prime home equity		168,116			57,518
Nonprime		1,238,836			115,054
		2,179,603			425,303
Commercial real estate		242,954			72,413
Total mortgage loans		69,684,285			72,295,979
Warehouse lending advances secured by mortgage loans		2,457,571			3,185,248
Defaulted FHA-insured and VA-guaranteed loans repurchased from securities		1,670,714			1,761,170
		73,812,570			77,242,397
Premium and discounts, and deferred loan origination fees and costs, net		756,873			1,104,414
Allowance for loan losses		(512,904		)	(261,054		)
Loans held for investment, net		$	74,056,539		$	78,085,757

During the six months ended June 30, 2007, the Company transferred prime, prime home equity and nonprime mortgage loans with an unpaid principal balance of $0.2 billion, $0.7 billion and $1.0 billion, respectively, and a carrying value after recognition of impairment upon transfer of the loans of $0.2 billion, $0.6 billion and $0.8 billion, respectively, from mortgage loans held for sale to loans held for investment, as the Company decided to hold those loans for the foreseeable future.

Mortgage loans totaling $56.6 billion and $57.5 billion were pledged to secure Federal Home Loan Bank (“FHLB”) advances and to enable additional borrowings from the FHLB at June 30, 2007 and December 31, 2006, respectively.

Mortgage loans held for investment totaling $4.6 billion and $2.9 billion were pledged to secure an unused borrowing facility with the Federal Reserve Bank (“FRB”) at June 30, 2007 and December 31, 2006, respectively.

As of June 30, 2007 and December 31, 2006, the Company had accepted mortgage loan collateral of $2.6 billion and $3.5 billion, respectively, that it had the contractual ability to re-pledge. The collateral secures warehouse lending advances. Of this collateral, $1.1 billion and $1.6 billion, respectively, has been

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

re-pledged to secure borrowings under a secured revolving line of credit as of June 30, 2007 and December 31, 2006.

Changes in the allowance for loan losses are as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
	(in thousands)
Balance, beginning of period	$	374,367		$	172,271		$	261,054		$	189,201
Provision for loan losses	292,924			61,898			444,886			125,036
Net charge-offs	(154,387		)	(58,760		)	(193,036		)	(125,181		)
Reclassification of allowance for unfunded commitments and other	—			8,172			—			(5,475		)
Balance, end of period	$	512,904		$	183,581		$	512,904		$	183,581

The Company has recorded a liability for losses on unfunded loan commitments in accounts payable and accrued liabilities totaling $18.2 million and $8.1 million at June 30, 2007 and December 31, 2006, respectively. The provision for these losses is recorded in other expenses. The following is a summary of changes in the liability:

	Three Months Ended June 30,					Six Months Ended June 30,
	2007		2006			2007		2006
	(in thousands)
Balance, beginning of period	$	13,759	$	13,396		$	8,104	$	9,391
Provision for losses on unfunded loan commitments	4,463		1,100			10,118		1,100
Reclassification of allowance for unfunded loan commitments	—		(8,172		)	—		(4,167		)
Balance, end of period	$	18,222	$	6,324		$	18,222	$	6,324

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 10—Investments in Other Financial Instruments, at Fair Value

Investments in other financial instruments include the following:

	June 30, 2007		December 31, 2006
	(in thousands)
Available-for-sale securities:
Mortgage-backed securities	$	19,495,594	$	7,007,786
Obligations of U.S. Government-sponsored enterprises	567,096		776,717
Municipal bonds	409,170		412,886
U.S. Treasury securities	199,019		168,313
Other	2,699		2,858
Subtotal	20,673,578		8,368,560
Interests retained in securitization accounted for as available-for-sale securities:
Prime interest-only and principal-only securities	253,557		279,375
Prime home equity line of credit transferor’s interest	70,774		144,346
Prepayment penalty bonds	29,225		52,697
Nonprime residuals and other related securities	21,797		152,745
Prime home equity residual securities	17,432		40,766
Nonprime interest-only securities	13,491		3,757
Prime home equity interest-only securities	6,627		7,021
Subordinated mortgage-backed pass-through securities	529		1,382
Prime residual securities	154		1,435
Total interests retained in securitization accounted for as available-for-sale securities	413,586		683,524
Total available-for-sale securities	21,087,164		9,052,084
Interests retained in securitization accounted for as trading securities:
Prime interest-only and principal-only securities	781,310		549,635
Prime home equity line of credit transferor’s interest	518,033		553,701
Nonprime residuals and other related securities	419,645		388,963
Prime home equity residual securities	406,210		737,808
Prepayment penalty bonds	117,454		90,666
Subordinated mortgage-backed pass-through securities	28,260		—
Prime home equity interest-only securities	21,644		22,467
Interest rate swaps	21,588		2,490
Prime residual securities	7,783		11,321
Total interests retained in securitization accounted for as trading securities	2,321,927		2,357,051
Servicing hedge principal-only securities accounted for as trading securities	1,488,435		—
Hedging and mortgage pipeline derivatives:
Mortgage servicing related	661,113		837,908
Notes payable related	543,258		444,342
Mortgage loans held for sale and pipeline related	499,401		78,066
Total investments in other financial instruments	$	26,601,298	$	12,769,451

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

At June 30, 2007, the Company had pledged $0.1 billion of MBS to secure securities sold under agreements to repurchase, which the counterparty had the contractual right to re-pledge, $0.1 billion of MBS to secure margin calls on derivative instruments and $0.1 billion of MBS to secure an unused borrowing facility with the FRB.

At December 31, 2006, the Company had pledged $0.1 billion of MBS to secure securities sold under agreements to repurchase, which the counterparty had the contractual right to re-pledge and $0.1 billion of MBS to secure an unused borrowing facility with the FRB.

Amortized cost and fair value of available-for-sale securities are as follows:

	June 30, 2007
	Amortized Cost		Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
	(in thousands)
Mortgage-backed securities	$	19,770,030		$	3,839	$	(278,275	)	$	19,495,594
Obligations of U.S. Government-sponsored enterprises	566,758			338		—			567,096
Municipal bonds	415,165			315		(6,310		)	409,170
U.S. Treasury securities	199,045			888		(914		)	199,019
Interests retained in securitization	372,410			68,672		(27,496		)	413,586
Other	2,699			—		—			2,699
	$	21,326,107		$	74,052	$	(312,995	)	$	21,087,164

	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

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

The Company’s available-for-sale securities in an unrealized loss position are as follows:

	June 30, 2007
	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	$	13,769,545	$	(142,271	)	$	4,603,107	$	(136,004	)	$	18,372,652	$	(278,275	)
Obligations of U.S. Government-sponsored enterprises	—		—			—		—			—		—
Municipal bonds	99,568		(1,318		)	259,953		(4,992		)	359,521		(6,310		)
U.S. Treasury securities	69,275		(535		)	57,532		(379		)	126,807		(914		)
Interests retained in securitization	1,117		(67		)	130,662		(27,429		)	131,779		(27,496		)
Other	—		—			—		—			—		—
Total impaired securities	$	13,939,505	$	(144,191	)	$	5,051,254	$	(168,804	)	$	18,990,759	$	(312,995	)

	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