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COUNTRYWIDE FINANCIAL CORPORATION FORM 10-Q March 31, 2008 TABLE OF CONTENTS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Form 10-Q

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2008
Or
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 (State or other jurisdiction of incorporation or organization)		13-2641992 (IRS Employer Identification No.)
4500 Park Granada, Calabasas, California (Address of principal executive offices)		91302 (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  ý     No  o

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

Large accelerated filer  ý

Accelerated filer  o

Non-accelerated filer  o (Do not check if a smaller reporting company)

Smaller reporting company  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  ý

        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 May 9, 2008
Common Stock $0.05 par value		583,344,439

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COUNTRYWIDE FINANCIAL CORPORATION

FORM 10-Q

March 31, 2008

TABLE OF CONTENTS

				Page
PART I. FINANCIAL INFORMATION				1
Item 1.		Financial Statements:
		Consolidated Balance Sheets—March 31, 2008 and December 31, 2007		1
		Consolidated Statements of Operations—Quarters Ended March 31, 2008 and 2007		2
		Consolidated Statement of Changes in Shareholders' Equity—Quarters Ended March 31, 2008 and 2007		3
		Consolidated Statements of Cash Flows—Quarters Ended March 31, 2008 and 2007		4
		Notes to Consolidated Financial Statements		5
Item 2.		Management's Discussion and Analysis of Financial Condition and Results of Operations		49
		Overview		49
		Results of Operations Comparison—Quarters Ended March 31, 2008 and 2007		56
		Liquidity and Capital Resources		78
		Credit Risk Management		81
		Quantitative and Qualitative Disclosures About Market Risk		93
		Loan Servicing		96
		Off-Balance Sheet Arrangements and Aggregate Contractual Obligations		97
		Prospective Trends		99
		Regulatory Trends		102
		Accounting Developments		103
		Factors That May Affect Our Future Results		104
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		106
Item 4.		Controls and Procedures		106
PART II. OTHER INFORMATION				107
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		107
Item 6.		Exhibits		107

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PART I. FINANCIAL INFORMATION

Item 1.     Financial Statements

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

			March 31, 2008			December 31, 2007
			(Unaudited)
			(in thousands, except share data)
ASSETS
Cash			$	9,014,340		$	8,810,399
Mortgage loans held for sale (includes $11,484,414 carried at estimated fair value at March 31, 2008)				15,653,390			11,681,274
Trading securities owned, at estimated fair value				14,101,304			14,504,563
Trading securities pledged as collateral, at estimated fair value				3,358,767			6,838,044
Securities purchased under agreements to resell, securities borrowed and federal funds sold				7,786,346			9,640,879
Loans held for investment, net of allowance for loan losses of $3,351,304 and $2,399,491 at March 31, 2008 and December 31, 2007, respectively				95,264,500			98,000,713
Investments in other financial instruments, at estimated fair value				20,903,537			25,817,659
Mortgage servicing rights, at estimated fair value				17,154,574			18,958,180
Premises and equipment, net				1,582,483			1,564,438
Other assets				14,198,552			12,550,775
	Total assets		$	199,017,793		$	208,366,924
LIABILITIES
Deposit liabilities			$	63,293,392		$	60,200,599
Securities sold under agreements to repurchase				17,862,890			18,218,162
Trading securities sold, not yet purchased, at estimated fair value				2,180,954			3,686,978
Notes payable (includes $1,692,472 carried at estimated fair value at March 31, 2008)				87,651,431			97,227,413
Accounts payable and accrued liabilities				11,641,310			10,194,358
Income taxes payable				3,232,760			4,183,543
	Total liabilities			185,862,737			193,711,053
Commitments and contingencies				—			—
SHAREHOLDERS' EQUITY
Preferred stock, par value $0.05—authorized, 1,500,000 shares; issued and outstanding at March 31, 2008 and December 31, 2007, 20,000 shares of 7.25% Series B non-voting convertible cumulative shares with a total liquidation preference of $2,000,000				1			1
Common stock, par value $0.05—authorized, 1,000,000,000 shares; issued, 581,113,066 shares and 578,881,566 shares at March 31, 2008 and December 31, 2007, respectively; outstanding, 580,603,314 shares and 578,434,243 shares at March 31, 2008 and December 31, 2007, respectively				29,056			28,944
Additional paid-in capital				4,186,868			4,155,724
Retained earnings				9,662,386			10,644,511
Accumulated other comprehensive loss				(723,255	)		(173,309	)
	Total shareholders' equity			13,155,056			14,655,871
	Total liabilities and shareholders' equity		$	199,017,793		$	208,366,924

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

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

				Quarters Ended March 31,
				2008			2007
				(Unaudited) (in thousands, except per share data)
Revenues
	Gain on sale of loans and securities			$	289,311		$	1,234,104
	Interest income				2,806,559			3,351,982
	Interest expense				(2,075,239	)		(2,621,045	)
		Net interest income			731,320			730,937
	Provision for loan losses				(1,501,352	)		(151,962	)
		Net interest (expense) income after provision for loan losses			(770,032	)		578,975
	Loan servicing fees and other income from mortgage servicing rights and retained interests				1,406,409			1,387,289
	Realization of expected cash flows from mortgage servicing rights				(753,626	)		(799,882	)
	Change in fair value of mortgage servicing rights				(1,460,713	)		54,183
	Impairment of retained interests				(741,020	)		(429,601	)
	Servicing Hedge gains (losses)				2,004,407			(113,738	)
		Net loan servicing fees and other income from mortgage servicing rights and retained interests			455,457			98,251
	Net insurance premiums earned				488,829			334,177
	Other				215,309			160,269
		Total revenues			678,874			2,405,776
Expenses
	Compensation				1,053,985			1,075,408
	Occupancy and other office				242,779			264,213
	Insurance claims				355,651			57,305
	Advertising and promotion				73,260			70,017
	Other				445,426			238,038
		Total expenses			2,171,101			1,704,981
(Loss) earnings before income taxes					(1,492,227	)		700,795
	(Benefit) provision for income taxes				(599,174	)		266,814
		NET (LOSS) EARNINGS		$	(893,053	)	$	433,981
(Loss) earnings per share
	Basic			$	(1.60	)	$	0.74
	Diluted			$	(1.60	)	$	0.72

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

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

								Common Stock											Accumulated Other Comprehensive Income (Loss)
					Convertible Preferred Stock								Additional Paid-in Capital			Retained Earnings
								Shares		Amount												Total
					(Unaudited)
					(in thousands, except share data)
Balance at December 31, 2006					$	—		585,182,298		$	29,273		$	2,154,438		$	12,151,691		$	(17,556	)	$	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			12,138,972			(17,556	)		14,305,127
Comprehensive income:
	Net earnings for the period					—		—			—			—			433,981			—			433,981
	Other comprehensive income (loss), net of tax:
		Net unrealized losses from available-for-sale securities				—		—			—			—			—			(5,160	)		(5,160	)
		Net change in foreign currency translation adjustment				—		—			—			—			—			4,251			4,251
		Change in unfunded liability relating to defined benefit plans				—		—			—			—			—			1,930			1,930
			Total comprehensive income																				435,002
Issuance of common stock pursuant to stock-based compensation						—		5,717,442			292			116,035			—			—			116,327
Excess tax benefit related to stock-based compensation plans						—		—			—			38,513			—			—			38,513
Issuance of common stock, net of treasury stock						—		301,802			15			11,774			—			—			11,789
Cash dividends paid—$0.15 per common share						—		—			—			—			(88,309	)		—			(88,309	)
Balance at March 31, 2007					$	—		591,201,542		$	29,580		$	2,320,760		$	12,484,644		$	(16,535	)	$	14,818,449
Balance at December 31, 2007					$	1		578,434,243		$	28,944		$	4,155,724		$	10,644,511		$	(173,309	)	$	14,655,871
Cumulative effect of adoption of SFAS 159						—		—			—			—			34,249			(2,197	)		32,052
Balance as adjusted, January 1, 2008						1		578,434,243			28,944			4,155,724			10,678,760			(175,506	)		14,687,923
Comprehensive income:
	Net loss for the period					—		—			—			—			(893,053	)		—			(893,053	)
	Other comprehensive income (loss), net of tax:
		Net unrealized losses from available-for-sale securities				—		—			—			—			—			(549,118	)		(549,118	)
		Net change in foreign currency translation adjustment				—		—			—			—			—			(212	)		(212	)
		Change in unfunded liability relating to defined benefit plans				—		—			—			—			—			1,581			1,581
			Total comprehensive loss																				(1,440,802	)
Issuance of common stock pursuant to stock-based compensation						—		1,832,058			93			29,868			—			—			29,961
Excess tax benefit related to stock-based compensation plans						—		—			—			(1,027	)		—			—			(1,027	)
Issuance of common stock, net of treasury stock						—		337,013			19			2,303			—			—			2,322
Cash dividends paid—$0.15 per common share						—		—			—			—			(87,071	)		—			(87,071	)
Cash dividends paid—$1,812.50 per preferred share						—		—			—			—			(36,250	)		—			(36,250	)
Balance at March 31, 2008					$	1		580,603,314		$	29,056		$	4,186,868		$	9,662,386		$	(723,255	)	$	13,155,056

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

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

						Quarters Ended March 31,
						2008			2007
						(Unaudited)
						(in thousands)
Cash flows from operating activities:
	Net (loss) earnings					$	(893,053	)	$	433,981
		Adjustments to reconcile net (loss) earnings to net cash provided (used) by operating activities:
			Gain on sale of loans and securities				(289,311	)		(1,234,104	)
			Accretion of discount on securities				(88,167	)		(138,089	)
			Interest capitalized on loans				(178,546	)		(234,589	)
			Amortization of deferred premiums, discounts, fees and costs, net				492			106,761
			Accretion of fair value adjustments and discount on notes payable				61,295			(8,087	)
			Change in fair value of hedged notes payable and related interest-rate and foreign-currency swaps				(27,722	)		(7,959	)
			Amortization of deferred fees on time deposits				7,610			5,981
			Provision for loan losses				1,501,352			151,962
			Changes in MSR value due to realization of expected cash flows from mortgage servicing rights				753,626			799,882
			Change in fair value of mortgage servicing rights				1,460,713			(54,183	)
			Impairment of retained interests and accrual for funding obligation under rapid amortization				695,313			418,109
			Servicing Hedge (gain) losses				(2,004,407	)		113,738
			Write-down of available-for-sale securities				31,117			—
			Stock-based compensation expense				15,550			15,898
			Depreciation and other amortization				74,847			74,503
			Provision for restructuring costs				14,562			—
			Provision for deferred income taxes				(599,008	)		330,322
			Origination and purchase of loans held for sale				(67,411,609	)		(114,407,534	)
			Proceeds from sale and principal repayments of loans held for sale				64,581,639			111,961,746
			Decrease (increase) in trading securities				3,893,514			(131,940	)
			Increase in other assets				(1,116,939	)		(249,756	)
			(Decrease) increase in trading securities sold, not yet purchased, at fair value				(1,506,024	)		55,603
			Increase in accounts payable and accrued liabilities				1,286,748			581,775
			Decrease in income taxes payable				(9,902	)		(109,278	)
				Net cash provided (used) by operating activities			253,690			(1,525,258	)
Cash flows from investing activities:
	Decrease (increase) in securities purchased under agreements to resell, federal funds sold and securities borrowed						1,854,533			(1,581,172	)
	(Additions) repayments to loans held for investment, net						(4,881,217	)		3,480,070
	Additions to investments in other financial instruments						(2,582,088	)		(9,049,487	)
	Proceeds from sale and repayment of investments in other financial instruments						7,939,330			1,901,201
	Proceeds from sale (purchases) of mortgage servicing rights, net						424,045			(116,592	)
	Purchases of premises and equipment, net						(70,217	)		(85,088	)
		Net cash provided (used) by investing activities					2,684,386			(5,451,068	)
Cash flows from financing activities:
	Net increase in deposit liabilities						3,085,183			1,940,398
	Net (decrease) increase in securities sold under agreements to repurchase						(355,272	)		1,972,242
	Net (decrease) increase in short-term borrowings						(2,074,576	)		5,852,162
	Issuance of long-term debt						500,000			5,268,740
	Repayment of long-term debt						(3,781,855	)		(8,325,000	)
	Excess tax benefit related to stock-based compensation						(1,027	)		38,989
	Issuance of common stock						16,733			112,218
	Payment of dividends						(123,321	)		(88,309	)
		Net cash (used) provided by financing activities					(2,734,135	)		6,771,440
Net increase (decrease) in cash							203,941			(204,886	)
Cash at beginning of period							8,810,399			1,407,000
		Cash at end of period				$	9,014,340		$	1,202,114

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

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1—Basis of Presentation

        Countrywide Financial Corporation ("Countrywide" or "CFC") 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.

        As detailed in a Current Report on Form 8-K filed with the Securities and Exchange Commission on January 17, 2008, and the Registration Statement on Form S-4 of Bank of America Corporation ("Bank of America") filed on February 12, 2008, as amended by Amendment No. 1 filed on March 27, 2008 and Amendment No. 2 filed on April 30, 2008, Countrywide entered into an agreement and plan of merger (the "Merger Agreement") with Bank of America. The Merger Agreement provides for Countrywide to merge (the "Merger") with and into a wholly-owned merger subsidiary of Bank of America ("Merger Sub"), with Merger Sub continuing as the surviving company.

        The terms of the Merger Agreement provide for the conversion of each share of Countrywide common stock into 0.1822 of a share of Bank of America common stock. Consummation of the Merger, which is currently anticipated to occur in the third quarter of 2008, is subject to certain conditions, including, among others, Countrywide stockholder and regulatory approvals.

        The Merger Agreement contains certain termination rights for Countrywide and Bank of America, applicable upon the occurrence of certain events specified in the Merger Agreement. The Merger Agreement provides that, in the event of the termination of the Merger Agreement under specified circumstances, Countrywide may be required to pay Bank of America a termination fee equal to $160 million.

        The Merger Agreement provides for both Countrywide and Bank of America to conduct their respective businesses in the ordinary course until the Merger is completed and not to take certain actions during the period from the date of the Merger Agreement until the date of completion of the Merger.

        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 quarter ended March 31, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. 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 Company's Annual Report on Form 10-K for the year ended December 31, 2007 (the "2007 Annual Report").

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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

Note 2—Adoption of New Accounting Pronouncements

        In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, ("SFAS 157"). SFAS 157 provides a framework for measuring fair value when such measurements are used for accounting purposes. The framework focuses on an exit price in the principal (or, alternatively, the most advantageous) market accessible in an orderly transaction between willing market participants. SFAS 157 establishes a three-tiered fair value hierarchy based on the level of observable inputs used in the measurement of fair value (e.g., Level 1 representing quoted prices for identical assets or liabilities in an active market and Level 3 representing estimated values based on significant unobservable inputs). Under SFAS 157, related disclosures are segregated for assets and liabilities measured at fair value based on the level used within the hierarchy to determine their fair values. The Company adopted SFAS 157 on its effective date of January 1, 2008 and there was no financial impact. However, as permitted under FASB Staff Position No. 157-2, "Effective Date of FASB Statement No. 157," the Company elected to defer the application of SFAS 157 to certain nonfinancial assets and liabilities, which are not measured at fair value on a recurring basis, until January 1, 2009.

        In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115, ("SFAS 159"). SFAS 159 permits fair value accounting to be irrevocably elected for most financial assets and liabilities on an individual contract basis at the time of acquisition or remeasurement event date. Upon adoption of SFAS 159, fair value accounting may also be elected for existing financial assets and liabilities. For those instruments for which fair value accounting is elected, changes in fair value will be recognized in earnings and fees and costs associated with origination or acquisition will be recognized as incurred rather than deferred. The Company adopted SFAS 159 on its effective date of January 1, 2008 and the financial impact upon adoption was an increase in beginning retained earnings of $34.2 million. See Note 4— Fair Value for further discussion.

        In April 2007, the FASB issued FASB Staff Position No. FIN 39-1, Amendment of FASB Interpretation No. 39 , ("FSP FIN 39-1"). FSP FIN 39-1 amends certain paragraphs of FASB Interpretation Number 39, Offsetting of Amounts Related to Certain Contracts,—an interpretation of APB Opinion No. 10 and FASB Statement No. 105 ("FIN 39") to permit a reporting entity to offset fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement. Upon adoption on the effective date of January 1, 2008, the Company changed its accounting policy to offset the right to reclaim or obligation to return cash collateral against fair value amounts recognized for derivative instruments under master netting arrangements. Adoption of FSP FIN 39-1 resulted in a reduction in total assets of $3.4 billion at December 31, 2007.

        In November 2007, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 109 ("SAB 109"). SAB 109 supersedes Staff Accounting Bulletin No. 105 ("SAB 105"), Application of Accounting Principles to Loan Commitments . It clarifies that the expected net future cash flows related to the servicing of a loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. However, it retains the guidance in

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

SAB 105 that internally-developed intangible assets should not be recorded as part of the fair value of a derivative loan commitment. The guidance is effective on a prospective basis to derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. This guidance generally has resulted in higher fair values being recorded upon initial recognition of derivative interest rate lock commitments. The initial and subsequent changes in value of interest rate lock commitments are a component of gain on sale of loans and securities. The effect of the adoption of SAB 109 was to increase gain on sale of loans and securities by $357.7 million. This amount represents the revenue recognized at the time the loan commitment was issued that is included in the value of the interest rate lock commitments or Mortgage Loan Inventory at March 31, 2008.

Note 3—(Loss) Earnings Per Share

        Basic (loss) earnings per share is determined using net (loss) earnings (adjusted for dividends declared on preferred stock) divided by the weighted-average common shares outstanding during the period. Diluted earnings per share is computed by dividing net (loss) earnings attributable to common shareholders by the weighted-average shares outstanding, assuming all dilutive potential common shares were issued.

        The Company has potentially dilutive shares in the form of employee stock-based compensation instruments, convertible debentures and convertible preferred stock. As detailed in Note 15— Notes Payable—Convertible Debentures , included in the consolidated financial statements of the 2007 Annual Report, in May 2007, the Company issued two series of convertible debentures totaling $4.0 billion.

        As detailed in Note 18— Shareholders' Equity—Series B Convertible Preferred Stock , included in the consolidated financial statements of the 2007 Annual Report, the Company issued $2.0 billion of convertible preferred stock on August 22, 2007.

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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

        Due to the loss attributable to common shareholders for the quarter ended March 31, 2008, no potentially dilutive shares are included in loss per share calculation as including such shares in the calculation would be anti-dilutive. During the quarter ended March 31, 2007, stock appreciation rights and options to purchase 10,000 shares, were outstanding but not included in the computation of diluted earnings per share because they were anti-dilutive.

Note 4—Fair Value

        The Company's financial statements include assets and liabilities that are measured based on their estimated fair values. The application of fair value estimates may be on a recurring or nonrecurring basis depending on the accounting principles applicable to the specific asset or liability or whether management has elected to carry the item at its estimated fair value as discussed in the following paragraphs.

        Effective January 1, 2008, the Company adopted two pronouncements affecting the Company's fair value measurements and accounting: SFAS 157 and SFAS 159.

        SFAS 157 defines and establishes a framework for measuring fair value. SFAS 157 requires that fair value estimates be based on an exit price in the principal or the most advantageous market accessible in an orderly transaction between willing market participants. SFAS 157 establishes a three-

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

tiered fair value hierarchy that prioritizes the inputs used to estimate fair value into three broad levels, considering the relative reliability of the inputs:

•

Level 1—Assets or liabilities for which quoted market prices for the identical item are observed in an active market, such as actively traded debt or equity instruments or exchange traded futures contracts



•

Level 2—Assets or liabilities valued based on observable market data for similar instruments, including inputs that are derived principally from or corroborated by observable market data by extrapolation or interpolation



•

Level 3—Assets or liabilities for which significant valuation assumptions are not observable in the market; instruments valued based on the best available data, some of which is internally-developed, and considers risk premiums that a market participant would require.

        SFAS 159 permits fair value accounting to be elected for certain assets and liabilities on an individual contract basis at the time of acquisition or under certain other circumstances referred to as "remeasurement event dates." For those items for which fair value accounting is elected, changes in fair value will be recognized in earnings, and fees and costs associated with the origination or acquisition of such items will be recognized as incurred rather than deferred. In addition, SFAS 159 allows application of the Statement's provisions to eligible items existing at the effective date and management has elected to apply SFAS 159 to certain of those items as discussed below.

Transition Adjustment

        Management identified existing mortgage loans held for sale and commitments to purchase mortgage loans within the Capital Markets Segment to be accounted for at estimated fair value for consistency with its peers who generally use fair value accounting as well as to reduce the burden of compliance with the requirements for hedge accounting. Such loans represented 2% of mortgage loans held for sale at the time of adoption of SFAS 159.

        Management elected to account for certain outstanding asset-backed secured financings and the mortgage loans securing such financings at their estimated fair values to eliminate potential timing differences between recognition of changes in the estimated fair value of the loans securing these borrowings (which had been recorded at the lower of cost or estimated fair value) and the estimated fair value of the borrowings (which had been recorded at amortized cost). This election was made for mortgage-backed secured financings collateralized by mortgage loans where the secondary market for the securities backed by the loans was disrupted. Such borrowings represented 25% of mortgage-backed secured financings and the mortgage loans securing such borrowings represented 23% of mortgage loans held for sale at the time of adoption.

        Management elected fair value accounting for those portions of its investments in municipal bonds included in its available for sale securities investment portfolio managed by nonaffiliated investment managers to improve the operational efficiency of using investment managers. Such investments represented 1% of the securities investment portfolio at the time of adoption.

9

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

        As a result of these elections, the Company recorded a $34.2 million cumulative effect adjustment to opening retained earnings as summarized below:

---

(1)

A lower of cost or market valuation allowance of $96.5 million was recorded as part of the basis of the loans accounted for at estimated fair value.

(2)

Interest rate lock commitments include commitments to originate or purchase mortgage loans that qualify as derivative financial instruments under SFAS 133 and commitments to purchase loans accounted for at estimated fair value under the fair value option (SFAS 159).

Prospective Fair Value Accounting Elections

        Management identified certain new mortgage loans originated or purchased for sale in the Mortgage Banking Segment to be accounted for at estimated fair value so the changes in the fair value of such loans will be reflected in earnings as they occur to match the accounting applied to related hedging instruments, as well as to reduce the burden of compliance with the requirements for hedge accounting. The mortgage loans identified were those that have an existing active market (primarily

10

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

agency-eligible mortgage loans). Such loans represented 86% of mortgage loans originated or purchased and held for sale during the quarter ended March 31, 2008.

Fair Value Measurements

        Gains and losses from changes in estimated fair values included in earnings for the quarter ended March 31, 2008 of financial statement items carried at estimated fair value pursuant to the fair value option are summarized below:

---

(1)

$96.5 million of the loss recognized on mortgage loans held for sale was related to changes in the credit risk of the loans.

        Following is the fair value and related principal amount due upon maturity of assets and liabilities accounted for under the fair value option as of March 31, 2008:

11

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

        Following is a summary of financial statement items that are measured at estimated fair value on a recurring basis—including assets measured under the fair value option as of March 31, 2008:

				Level 1			Level 2			Level 3			Netting Adjustments (1)			Total
				(in thousands)
Assets:
	Mortgage loans held for sale			$	—		$	9,073,370		$	2,411,044		$	—		$	11,484,414
	Trading securities				2,078,174			17,142,362			1,346,992			(3,107,457	)		17,460,071
	Investments in other financial instruments:
		Investment securities			320,413			2,325,802			14,658,098			—			17,304,313
		Retained interests			—			—			1,853,177			—			1,853,177
		Interest rate lock commitments(2)			—			—			285,609			—			285,609
		Other derivative instruments			94,904			5,609,091			—			(4,243,557	)		1,460,438
	Mortgage servicing rights				—			—			17,154,574			—			17,154,574
Liabilities:
	Trading securities sold, not yet purchased				2,009,411			3,122,917			—			(2,951,374	)		2,180,954
	Notes Payable:
		Asset-backed secured financings			—			—			1,692,472			—			1,692,472
	Accounts payable and accrued liabilities:
		Interest rate lock commitments(2)			—			—			69,504			—			69,504
		Other derivative instruments			—			1,925,286			—			(1,579,317	)		345,969

---

(1)

Amounts represent the netting of the impact of qualifying master netting agreements that allow the Company to settle positive and negative positions in accordance with FIN 39, and cash collateral held or placed with the same counterparties.

(2)

Interest rate lock commitments include commitments to originate or purchase mortgage loans that qualify as derivative financial instruments under SFAS 133 and commitments to purchase loans accounted for at estimated fair value under the fair value option (SFAS 159).

12

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

        Following is a summary of changes in balance sheet line items measured using Level 3 inputs:

											Investments in Other Financial Instruments
					Mortgage Loans Held for Sale			Trading Securities			Investment Securities			Retained Interests			Interest Rate Lock Commitments, Net			Mortgage Servicing Rights			Total
					(in thousands)
Assets:
Balance, December 31, 2007					$	3,480,673		$	1,924,558		$	16,330,950		$	3,358,756		$	107,718		$	18,958,180		$	44,160,835
	Impact of SFAS 157 and SFAS 159 adoption					237			—			—			—			483			—			720
Balance, January 1, 2008						3,480,910			1,924,558			16,330,950			3,358,756			108,201			18,958,180			44,161,555
	Total gains (losses):
		Included in earnings				(458,183	)		(204,945	)		(34,032	)		(536,333	)		922,736			(2,214,339	)		(2,525,096	)
		Included in other comprehensive income				—			—			(928,065	)		(345	)		—			—			(928,410	)
	Purchases, issuances and settlements					(527,549	)		(372,621	)		(710,755	)		(968,901	)		—			410,733			(2,169,093	)
	Transfers to mortgage loans held for sale
			Level 2			—			—			—			—			(898,966	)		—			(898,966	)
			Level 3			(84,134	)		—			—			—			84,134			—			—
Balance, March 31, 2008					$	2,411,044		$	1,346,992		$	14,658,098		$	1,853,177		$	216,105		$	17,154,574		$	37,639,990
Changes in unrealized gains (losses) relating to assets still held at March 31, 2008					$	(476,327	)	$	(163,756	)	$	(33,998	)	$	(542,537	)	$	216,105		$	(1,460,712	)	$	(2,461,225	)

				Notes Payable: Asset-Backed Secured Financings
				(in thousands)
Liabilities:
Balance, December 31, 2007				$	2,353,250
	Impact of SFAS 157 and SFAS 159 adoption				(51,060	)
Balance, January 1, 2008					2,302,190
	Total gains:
		Included in earnings			(351,160	)
	Purchases, issuances and settlements				(258,558	)
Balance, March 31, 2008				$	1,692,472
Change in unrealized gains relating to liabilities still held at March 31, 2008				$	351,116

        Gains and losses from changes in the estimated fair value of mortgage loans held for sale, IRLCs, trading securities and asset-backed secured financings are included in gain on sale of loans and securities. Gains and losses from changes in the estimated fair value of investment securities are included in other income. Gains and losses from changes in the estimated fair value of retained interests are included in impairment of retained interests. Gains and losses from changes in the

13

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

estimated fair value of mortgage servicing rights are included in realization of expected cash flows from mortgage servicing rights and change in fair value of mortgage servicing rights.

Valuation Techniques

        For a complete discussion of valuation techniques used to value financial instruments, refer to Note 19— Fair Value of Financial Instruments in the consolidated financial statements thereto included in the Company's 2007 Annual Report. The following describes the methods used by the Company in estimating the fair values of Level 3 financial statement items:

Mortgage Loans Held for Sale

        The Company estimates the fair value of Level 3 loans held for sale based on relevant factors, including dealer price quotations, whole loan bid sheets, prices available for similar securities, and valuation models intended to approximate the amounts that would be received from a third party. These techniques and related assumptions are used to approximate the whole loan price that would be received from an unaffiliated buyer.

        The Company regularly compares the values developed from our valuation models to executed trades to assure that the valuations are reflective of actual sale prices. However, due to the illiquidity of the mortgage marketplace prevalent at March 31, 2008, which resulted in a lack of executed trades that could be used to assure that the valuations are reflective of fair value, it was necessary to look for alternative sources of value, including the whole loan purchase market for similar loans, and to apply more judgment to the valuations of non-conforming prime, home equity and nonprime loans, which represented approximately 23% of mortgage loans originated or purchased for resale excluding loans secured by commercial real estate at March 31, 2008.

Trading Securities

        Level 3 trading securities primarily represent collateralized mortgage obligations for which fair value is estimated using valuation models and observable and unobservable assumptions intended to approximate the amounts that would be received from an unaffiliated buyer.

Investments in Other Financial Instruments:

        Investment Securities

        Mortgage-Backed Securities

        Fair value for Level 3 non-agency mortgage-backed securities, which consists primarily of collateralized mortgage obligations, is estimated using valuation models and observable and unobservable assumptions intended to approximate the amounts that would be received from an unaffiliated buyer.

        Retained Interests

        Fair value of retained interests, with the exception of interest-only securities and mortgage-backed securities, is estimated through the use of proprietary, "static" (single rate path) discounted cash flow models. The Company has incorporated mortgage prepayment and credit loss assumptions in its valuation models that it believes other major market participants would consider in deriving the fair value of its retained interests.

14

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

        Principal-Only Securities

        Fair value is estimated through the use of a proprietary, multiple rate path discounted cash flow model. The Company has incorporated mortgage prepayment assumptions in its valuation that it believes other major market participants would consider in deriving the fair value of principal-only securities.

        Interest-Only Securities

        Fair value is estimated through the use of a proprietary, multiple rate path discounted cash flow model. The Company has incorporated mortgage prepayment assumptions in its valuation model that it believes other major market participants would consider in deriving the fair value of interest-only securities.

        Interest Rate Lock Commitments

        Effective January 1, 2008, the Company adopted SAB 109, which is effective on a prospective basis for IRLCs issued or modified after December 31, 2007. For IRLCs issued or modified after December 31, 2007, the Company estimates the fair value of an IRLC based on the estimated fair value of the underlying mortgage loan less the commitment price adjusted for the probability that the mortgage loan will fund within the terms of the IRLC. The Company generally estimates the fair value of the underlying loan based on quoted market prices for securities backed by similar types of loans together with estimated servicing value adjusted for the estimated costs and profit margin associated with securitization to approximate the whole loan price that would be received from an unaffiliated buyer. The estimated probability of mortgage loan funding is based on the Company's historical experience and is adjusted to reflect the risk of variability in such probability using an option pricing model. If quoted market prices for relevant securities are not available, fair value is estimated based on other relevant factors, including dealer price quotations, prices available for similar securities, and valuation models intended to approximate the amounts that would be received from a third party.

        For IRLCs issued before January 1, 2008, the Company estimates the fair value of an IRLC based on the change in estimated fair value of the underlying mortgage loan and the probability that the mortgage loan will fund within the terms of the IRLC. The change in fair value of the underlying mortgage loan is measured from the date the IRLC is issued. At the time of issuance the estimated fair value of an IRLC is zero. Subsequent to issuance, the value of an IRLC can be either positive or negative, depending on the change in value of the underlying mortgage loan. The Company generally estimates the fair value of the underlying loan based on quoted market prices for securities backed by similar types of loans. If quoted market prices are not available, fair value is estimated based on other relevant factors, including dealer price quotations, prices available for similar instruments, and valuation models intended to approximate the amounts that would be received from a third party.

Mortgage Servicing Rights ("MSRs")

        The Company estimates the fair value of its MSRs using a process that combines the use of a discounted cash flow model and analysis of current market data to arrive at an estimate of fair value at each balance sheet date. The cash flow assumptions (which consider only contractual cash flows) and prepayment assumptions used in Countrywide's discounted cash flow model are based on market

15

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

factors and encompass the historical performance of our MSRs, which management believes are consistent with assumptions and data used by market participants valuing similar MSRs. The key assumptions used in the valuation of MSRs include mortgage prepayment speeds and discount rates (projected London Inter Bank Offering Rate ("LIBOR") plus option-adjusted spread). These variables can, and generally do, change from quarter to quarter as market conditions and projected interest rates change. The current market data utilized in the MSR valuation process and in the assessment of the reasonableness of the MSR valuation are obtained from peer group MSR valuation surveys, MSR market trades, MSR broker valuations and prices of interest-only securities.

        The cash flow model and underlying prepayment and interest rate models used to value the MSRs are subjected to validation in accordance with the Company's model validation policies. This process includes review of the theoretical soundness of the models and the related development process, back testing of actual results to model predictions, benchmarking to commercially available models and ongoing performance monitoring.

Asset-Backed Secured Financings

        The Company estimates the fair value of Level 3 asset-backed secured financings based on relevant factors expected to reflect the amounts that would be received by an unaffiliated seller of the financings from an unaffiliated buyer, including dealer price quotations, prices available for similar instruments, and valuation models.

        Mortgage loans held for sale which are not accounted for at estimated fair value under SFAS 159 are recorded initially at the principal amount outstanding adjusted for any purchase premiums or discounts and the fair value of any related loan commitments at the time of origination. Subsequent to origination or purchase, mortgage loans held for sale are carried at the aggregate lower of cost or estimated fair value. When a loan is transferred between balance sheet categories (i.e. held for sale and held for investment) it is transferred at the lower of cost or estimated fair value at the time of transfer. Fair value is estimated using the same approach as discussed in the approach to valuation of mortgage loans held for sale discussed in Note 6— Mortgage Loans Held for Sale .

        Following is a summary of items that are measured at estimated fair value on a nonrecurring basis at period end or during the quarter ended March 31, 2008:

			Level 1			Level 2			Level 3			Total			Gain (Loss)
			(in thousands)
Period end:
	Mortgage loans held for sale		$	—		$	1,419,505		$	2,749,471		$	4,168,976		$	(119,628	)
Transactions:
	Mortgage loans held for sale transferred from mortgage loans held for investment(1)		$	—		$	363,354		$	2,042,953		$	2,406,307		$	(19,477	)
	Mortgage loans held for investment transferred from mortgage loans held for sale		$	—		$	1,058,803		$	14,872		$	1,073,675		$	(4,968	)

---

(1)

The mortgage loans transferred from mortgage loans held for investment to mortgage loans held for sale consist of loans that had been carried as part of the mortgage loan investment portfolio for an average of 4.0 years.

16

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Fair Value of Financial Instruments

        During the first quarter of 2008, management observed continued disruption in the mortgage markets. As a result of this development, management updated its estimates of the fair value of financial instruments subject to the disclosure requirements of Statement of Financial Accounting Standards No. 107, Disclosures about Fair Value of Financial Instruments , not otherwise included above:

        The preceding disclosure of the estimated fair value of financial instruments as of March 31, 2008 and December 31, 2007, is made by the Company using available market information and valuation methods which management believes are appropriate for each instrument. In some cases, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methods may have a material effect on the estimated fair value amounts.

        The fair value estimates as of March 31, 2008 and December 31, 2007 were based on pertinent information that was available to management as of the respective dates. Such amounts have not been comprehensively revalued for purposes of these financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

Note 5—Derivative Financial Instruments

Derivative Financial Instruments

        A significant 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. This risk includes both changes in "risk-free" rates (usually the U.S. Treasury rate for an asset of the same duration) and changes in the premiums to risk-free rates of return required by investors, which may be the result of liquidity and/or investor perceptions of risk ("Market Spread"). 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.

17

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

        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 IRLCs, mortgage loans held by the Company pending sale ("Mortgage Loan Inventory"), MSRs, retained interests, trading securities and a portion of its debt.



•

Structurally, the Company manages interest rate risk in its Mortgage Banking Segment through the natural counterbalance of its loan production and servicing businesses while using portfolios of financial instruments, including derivatives, to moderate interest rate driven changes in value of the Loan Production and Loan Servicing sectors assets. However, the market disruption that began in the latter part of 2007 has impacted the availability and the cost of derivative financial instruments used to mitigate Market-Spread driven changes in the value of our Mortgage Banking assets. Although separate portfolios of financial instruments were maintained to manage the interest rate risk inherent in the Loan Production and Loan Servicing assets, the Company managed in aggregate the changes in value of the Mortgage Banking Segment assets arising from Market Spread risk during the quarter ended March 31, 2008 by relying more on the opposing Market Spread risk of Loan Production and Loan Servicing assets. Specifically, as Market Spreads widen the value of our IRLCs and Mortgage Loan Inventory generally decrease while the value of MSRs increase. Accordingly, Market Spread related changes in the value of sector assets and the related hedge instruments (collectively, the "Position") were allocated between the Loan Production and Loan Servicing Sectors in the quarter ended March 31, 2008.



•

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 enters into forward sales of MBS in an amount equal to the portion of the IRLCs expected to close, assuming no change in mortgage interest rates. The Company acquires put and call options to protect against the variability of loan closings caused by changes in mortgage rates. The Company may enter into credit default swaps or similar instruments as part of its management of Market Spread risk.

        The Company manages the price risk related to the Mortgage Loan Inventory primarily by entering into forward sales of MBS and Eurodollar futures. The value of these forward MBS sales and Eurodollar futures moves in opposite direction to the value of the Mortgage Loan Inventory. The Company may enter into credit default swaps or similar instruments as part of its management of Market Spread-driven changes associated with its Mortgage Loan Inventory. The Company actively manages the risk profiles of its IRLCs and Mortgage Loan Inventory on a daily basis.

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

18

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

        During the quarter ended March 31, 2008, the interest rate risk management activities associated with 13% of the fixed-rate mortgage loan inventory and 11% of the adjustable-rate mortgage loan inventory were accounted for as fair value hedges. These percentages decreased from prior periods because the Company began accounting for a substantial portion of its inventory at its estimated fair value. For the quarters ended March 31, 2008 and 2007, the Company recognized pre-tax losses of $12.9 million and $6.2 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 the impact 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. During early 2007, the Company used credit-related derivative financial instruments to moderate the negative impact on earnings caused by a Market Spread-driven decline in fair value. This portfolio of financial instruments is collectively referred to as the "Servicing Hedge."

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

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 $2.3 billion as of March 31, 2008) 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 $4.0 billion as of March 31, 2008). These transactions are generally designated as fair value hedges. For the quarters ended March 31, 2008 and 2007, the Company recognized pre-tax gains of $27.7 million and $8.0 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 quarters ended March 31, 2008 and 2007, the Company recognized pre-tax gains of $8.3 million and $1.3 million, respectively, representing the hedge ineffectiveness related to these contracts.

19

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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, interest rate futures contracts, interest rate swaps, total rate of return swaps, put/call options on interest rate futures contracts, interest rate caps, receiver swaptions, credit default swaps and forward rate agreements.

Note 6—Mortgage Loans Held for Sale

        Mortgage loans held for sale include the following:

        The Company generally estimates the fair value of loans held for sale based on quoted market prices for securities backed by similar types of loans. If quoted market prices are not available, fair value is estimated based on other relevant factors, including dealer price quotations, prices available for similar instruments, and valuation models intended to approximate the amounts that would be received from a third party. We regularly compare the values developed from our valuation models to executed trades to assure that the valuations are reflective of actual sale prices. However, due to the illiquidity of the mortgage marketplace prevalent at March 31, 2008, which resulted in a lack of executed trades that could be used to assure that the valuations are reflective of fair value, it was necessary to look for alternative sources of value, including the whole loan purchase market for similar loans, and to apply more judgment to the valuations of non-conforming prime, prime home equity and nonprime loans, which represented approximately 23% of mortgage loans held for sale excluding loans secured by commercial real estate at March 31, 2008.

20

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

        At March 31, 2008, the Company had pledged mortgage loans held for sale with unpaid principal balances totaling $0.1 billion, $0.01 billion, $2.6 billion and $0.8 billion to secure a secured revolving line of credit, securities sold under agreements to repurchase, collateral for asset-backed secured financings and to secure Federal Home Loan Bank ("FHLB") advances, respectively.

        At December 31, 2007, the Company had pledged mortgage loans held for sale with unpaid principal balances totaling $0.3 billion, $0.01 billion, $4.4 billion and $0.8 billion to secure a secured revolving line of credit, securities sold under agreements to repurchase, collateral for asset-backed secured financings and to secure FHLB advances, 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:

21

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

        Trading securities by credit rating were as follows:

				March 31, 2008
							Credit Rating
				Total(1)			AAA			AA			A			<A			Not Rated(2)
				(in thousands)
Agency mortgage pass-through securities:
	Fixed-rate			$	13,642,971		$	13,642,971		$	—		$	—		$	—		$	—
	Adjustable-rate				21,975			21,975			—			—			—			—
		Total agency mortgage pass-through securities			13,664,946			13,664,946			—			—			—			—
U.S. Treasury securities					1,242,062			1,242,062			—			—			—			—
Collateralized mortgage obligations					1,051,198			983,679			30,586			9,969			25,512			1,452
Interest-only securities					562,271			56,722			—			—			—			505,549
Obligations of U.S. Government-sponsored enterprises					505,940			505,940			—			—			—			—
Asset-backed securities					162,937			128,100			10,802			18,163			5,872			—
Residual securities					1,813			23			—			—			1,106			684
Other					559			—			—			—			—			559
				$	17,191,726		$	16,581,472		$	41,388		$	28,132		$	32,490		$	508,244

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(1)

Derivative financial instruments including mark-to-market on TBA securities are not included in this table as derivative financial instruments are contracts between Countrywide and a counterparty. Such contracts are not rated by the rating agencies. Countrywide manages its derivatives counterparty risk by entering into derivatives only with creditworthy counterparties and limiting its exposure to individual counterparties.

(2)

These securities are generally not rated due to their illiquidity and the absence of significant trading activity.

        As of March 31, 2008, $14.3 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 $3.4 billion.

        As of December 31, 2007, $15.4 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 $6.8 billion.

22

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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

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:

        As of March 31, 2008, the Company had accepted collateral related to securities purchased under agreements to resell and securities borrowed with a fair value of $34.6 billion, that it had the contractual ability to sell or re-pledge, including $24.9 billion related to amounts offset by securities sold under agreements to repurchase under master netting arrangements. As of March 31, 2008, the Company had re-pledged $32.9 billion of such collateral for financing purposes.

        The Company has an informal agreement with one of its primary securities custodial banks to have on deposit adequate cash to ensure orderly clearance and settlement of securities and financing transactions on the date of settlement. At March 31, 2008, Countrywide had $489.4 million on deposit with the custodial bank available to clear future transactions.

        As of December 31, 2007, the Company had accepted collateral related to securities purchased under agreements to resell and securities borrowed with a fair value of $17.6 billion that it had the contractual ability to sell or re-pledge, including $9.0 billion related to amounts offset by securities sold under agreements to repurchase under master netting arrangements. As of December 31, 2007, the Company had re-pledged $14.3 billion of such collateral for financing purposes.

23

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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:

        During the quarter ended March 31, 2008, the Company transferred prime and prime home equity mortgage loans with an unpaid principal balance of $1.0 billion and $0.1 billion, respectively, from mortgage loans held for sale to mortgage loans held for investment, as management made the decision in the first quarter of 2008 to hold those loans for the foreseeable future. In connection with these transfers, impairment in the amount of $19.5 million was recorded as a component of gain on sale of loans and securities. Loans are transferred from mortgage loans held for sale to mortgage loans held for investment when the Company makes the decision to hold such loans for the foreseeable future, which has been defined as the next twelve months, and has made an assessment that the Company has the ability to hold them for that time.

        Mortgage loans with unpaid principal balances totaling $57.5 billion and $62.6 billion were pledged to secure FHLB advances and to enable additional borrowings from the FHLB at March 31, 2008 and December 31, 2007, respectively.

24

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

        Mortgage loans held for investment with unpaid principal balances totaling $8.8 billion and $6.0 billion were pledged to secure an unused borrowing facility with the Federal Reserve Bank ("FRB") at March 31, 2008 and December 31, 2007, respectively.

        Defaulted FHA-insured and VA-guaranteed loans repurchased from securities totaling $1.2 billion and $1.3 billion were pledged to secure securities sold under agreements to repurchase at March 31, 2008 and December 31, 2007, respectively.

        Mortgage loans with unpaid principal balances totaling $0.4 billion and $1.9 billion were pledged to secure a revolving line of credit at March 31, 2008 and December 31, 2007, respectively.

        Mortgage loans held in special purpose entities ("SPEs") with carrying values totaling $3.1 billion and $5.6 billion were pledged to secure asset-backed secured financings at March 31, 2008 and December 31, 2007, respectively. These assets were re-recognized on the Company's consolidated balance sheets at their estimated fair value after management concluded that certain securities collateralized by these loans it had reacquired as part of its market-making activities would be held for an other-than-temporary period. The carrying value of the mortgage loans held in SPEs includes fair value discounts of $539.4 million and $960.7 million at March 31, 2008 and December 31, 2007, respectively.

        As of March 31, 2008 and December 31, 2007, the Company had accepted mortgage loan collateral of $1.2 billion and $1.0 billion, respectively, that it had the contractual ability to re-pledge. The collateral secures warehouse lending advances.

        The Company modified loans for borrowers who were not otherwise able to refinance based on the terms provided under the modified loan. Other loans were modified to retain borrowers with good payment history but the modifications were considered to represent concessions. These transactions were classified as troubled debt restructurings. The majority of these transactions involved modifications of current loans from payment option adjustable-rate mortgage ("ARM") loans to payment advantage ARM loans with fixed interest rates for five years. However, because these modifications were not comparable to market terms that would be offered if the modified loans were fully underwritten, the Company categorized these transactions as troubled debt restructurings. Accordingly, unless the borrower had a history of making payments on a timely basis and the Company determined that payments under the modified terms were likely to continue to be received on a timely basis, these loans were placed on nonaccrual status pending a satisfactory period of performance under the modified terms.

        Troubled debt restructurings at March 31, 2008 and December 31, 2007 totaled $461.8 million and $282.6 million, respectively, the majority of which were the conversions of current payment-option ARM loans to payment-advantage ARM loans. Of the troubled debt restructurings, $415.1 million and $6.3 million were on accrual status as of March 31, 2008 and December 31, 2007, respectively. An impairment allowance of $13.1 million and $11.0 million relating to these loans is included in the allowance for loan losses as of March 31, 2008 and December 31, 2007, respectively. Management considered $32.6 million and $37.3 million of warehouse lending loans to be impaired as of March 31, 2008 and December 31, 2007, respectively. The average investment in impaired loans, consisting of troubled debt restructurings and nonperforming warehouse lines of credit, during the quarter ended March 31, 2008 was $406.3 million and none during the quarter ended March 31, 2007.

25

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

        Changes in the allowance for loan losses, the composition of the provision for loan losses and the allowance for loan losses were as follows:

        The Company has recorded a liability for losses on unfunded loan commitments in accounts payable and accrued liabilities totaling $65.8 million and $38.4 million at March 31, 2008 and December 31, 2007, respectively. The provision for these losses is recorded in other expenses. The following is a summary of changes in the liability:

26

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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

        Investments in other financial instruments include the following:

						March 31, 2008			December 31, 2007
						(in thousands)
Securities accounted for as available-for-sale:
	Prime non-agency mortgage-backed securities					$	14,655,604		$	16,328,280
	Prime agency mortgage-backed securities						1,640,924			2,944,210
	Nonprime mortgage-backed securities						1,111			35
	Obligations of U.S. Government-sponsored enterprises						229,410			255,205
	Municipal bonds						173,808			419,540
	U.S. Treasury securities						91,003			92,900
	Other						76,438			74,643
		Subtotal					16,868,298			20,114,813
	Interests retained in securitization—non credit-sensitive:
		Mortgage-backed pass-through securities					36,741			37,567
		Prime interest-only and principal-only securities					247,368			256,832
		Prepayment penalty bonds					6,175			9,516
			Total interests retained in securitization—non credit-sensitive				290,284			303,915
	Interests retained in securitization—credit-sensitive(1):
		Mortgage-backed pass-through securities					144			281
		Prime residual securities					9,514			8,026
		Prime home equity retained interests					70,528			84,969
		Prime home equity interest-only securities					8,826			9,143
		Nonprime interest-only securities					21,755			20,918
		Nonprime residuals and other related securities					19,051			8,852
			Total interests retained in securitization—credit-sensitive(1)				129,818			132,189
				Total securities accounted for as available-for-sale			17,288,400			20,550,917
Financial instruments with changes in unrealized gains and losses recognized in earnings in the period of change:
	Securities accounted for as trading:
		Interests retained in securitization—non credit-sensitive:
			Mortgage-backed pass-through securities				351,972			559,880
			Prime interest-only and principal-only securities				664,053			745,160
			Prepayment penalty bonds				63,777			70,401
			Interest rate swaps				—			50
				Total interests retained in securitization—non credit-sensitive			1,079,802			1,375,491
		Interests retained in securitization—credit-sensitive(1):
			Mortgage-backed pass-through securities				12,371			34,424
			Prime residual securities				19,379			12,531
			Prime home equity retained interests				155,080			328,569
			Nonprime residuals and other related securities				166,443			263,278
				Total interests retained in securitization—credit-sensitive(1)			353,273			638,802
		Servicing Hedge principal-only securities					—			908,358
		Municipal bonds					361,166			—
		Other					74,849			72,685
				Total securities accounted for as trading			1,869,090			2,995,336
	Hedging and pipeline derivatives						1,746,047			2,271,406
Total financial instruments with changes in unrealized gains and losses recognized in earnings in the period of change							3,615,137			5,266,742
			Total investments in other financial instruments			$	20,903,537		$	25,817,659

---

(1)

Credit-sensitive securities retained in securitization include securities that are expected to absorb credit losses from interests that are senior in the deal structure.

27

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

        Investments in other financial instruments by credit rating were as follows:

						March 31, 2008
									Credit Rating
						Total(1)			AAA			AA			A			<A			Not Rated(2)
						(in thousands)
Securities accounted for as available-for-sale:
	Prime non-agency mortgage-backed securities					$	14,655,604		$	14,554,027		$	65,546		$	23,259		$	12,772		$	—
	Prime agency mortgage-backed securities						1,640,924			1,640,924			—			—			—			—
	Nonprime mortgage-backed securities						1,111			1,111			—			—			—			—
	Obligations of U.S. Government-sponsored enterprises						229,410			229,410			—			—			—			—
	Municipal bonds						173,808			55,407			112,015			5,351			1,035			—
	U.S. Treasury securities						91,003			91,003			—			—			—			—
	Other						76,438			76,388			—			50			—			—
		Subtotal					16,868,298			16,648,270			177,561			28,660			13,807			—
	Interests retained in securitization—non credit-sensitive:
		Mortgage-backed pass-through securities					36,741			24,393			12,348			—			—			—
		Prime interest-only and principal-only securities					247,368			218,223			—			—			—			29,145
		Prepayment penalty bonds					6,175			405			—			—			—			5,770
			Total interests retained in securitization—non credit-sensitive				290,284			243,021			12,348			—			—			34,915
	Interests retained in securitization—credit-sensitive:
		Mortgage-backed pass-through securities					144			—			—			—			144			—
		Prime residual securities					9,514			—			—			—			—			9,514
		Prime home equity retained interests					70,528			—			—			—			—			70,528
		Prime home equity interest-only securities					8,826			—			—			—			—			8,826
		Nonprime interest-only securities					21,755			6,158			—			—			—			15,597
		Nonprime residuals and other related securities					19,051			—			—			—			—			19,051
			Total interests retained in securitization—credit-sensitive				129,818			6,158			—			—			144			123,516
	Total securities accounted for as available-for-sale					$	17,288,400		$	16,897,449		$	189,909		$	28,660		$	13,951		$	158,431
Financial instruments with changes in unrealized gains and losses recognized in earnings in the period of change:
	Securities accounted for as trading:
		Interests retained in securitization—non credit-sensitive:
			Mortgage-backed pass-through securities			$	351,972		$	260,755		$	55,875		$	23,246		$	12,096		$	—
			Prime interest-only and principal-only securities				664,053			664,053			—			—			—			—
			Prepayment penalty bonds				63,777			—			—			—			950			62,827
				Total interests retained in securitization—non credit-sensitive			1,079,802			924,808			55,875			23,246			13,046			62,827
		Interests retained in securitization—credit-sensitive:
			Mortgage-backed pass-through securities				12,371			—			—			—			10,268			2,103
			Prime residual securities				19,379			—			—			—			—			19,379
			Prime home equity retained interests				155,080			—			—			—			—			155,080
			Nonprime residuals and other related securities				166,443			—			—			—			—			166,443
				Total interests retained in securitization—credit-sensitive			353,273			—			—			—			10,268			343,005
		Municipal bonds					361,166			115,244			198,155			39,929			7,838			—
		Other					74,849			4,072			15,065			39,191			16,521			—
	Total securities accounted for as trading						1,869,090			1,044,124			269,095			102,366			47,673			405,832
			Total investments in other financial instruments			$	19,157,490		$	17,941,573		$	459,004		$	131,026		$	61,624		$	564,263

---

(1)

Hedging and mortgage pipeline derivative financial instruments are not included in this table as derivatives are contracts between Countrywide and a counterparty. Such contracts are not rated by the rating agencies. Countrywide manages its derivatives counterparty risk by entering into derivatives only with creditworthy counterparties and limiting its exposure to individual counterparties.

(2)

These securities are generally not rated due to their illiquidity and the absence of significant trading activity.

28

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

        At March 31, 2008, the Company had pledged $0.08 billion of MBS to secure securities sold under agreements to repurchase, which the counterparty had the contractual right to re-pledge. At March 31, 2008, the Company had also pledged $0.06 billion of MBS to secure its derivative instrument liabilities and $0.03 billion of MBS to secure a borrowing facility with the FRB.

        At December 31, 2007, the Company had pledged $0.08 billion of MBS to secure securities sold under agreements to repurchase, which the counterparty had the contractual right to re-pledge. At December 31, 2007, the Company had also pledged $0.01 billion of MBS to secure margin calls on derivative instruments and $1.6 billion of MBS to secure a borrowing facility with the FRB.

        At March 31, 2008 and December 31, 2007, the Company had pledged $13.8 billion and $13.4 billion of MBS to enable future borrowings with the FHLB.

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

29

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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

        Countrywide's Investment Management Committee ("IMC"), a subcommittee of its Asset/Liability Committee, assesses securities classified as available-for-sale for other-than-temporary impairment on a quarterly basis. This assessment evaluates whether the Company intends to and is able to recover the amortized cost of the securities when taking into account the Company's present investment objectives and liquidity requirements and whether the creditworthiness of the issuer calls the realization of contractual cash flows into question.

        During the quarter ended March 31, 2008, the IMC determined that it was no longer reasonably assured that the decline in value would be recovered during the holding period for certain obligations of U.S. Government sponsored enterprises. Such securities had a carrying value of $97.0 million when this determination was made. As a result of this determination, unrealized losses recorded in accumulated other comprehensive income totaling $31.1 million were transferred to earnings during the quarter ended March 31, 2008. No such losses were recorded during the quarter ended March 31, 2007.

30

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

        Gross gains and losses realized on the sales of available-for-sale securities (excluding recognition of other than temporary impairment) were as follows:

31

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Note 11—Mortgage Servicing Rights, at Estimated Fair Value

        The activity in MSRs was as follows:

---

(1)

Principally reflects changes in discount rates and prepayment speed assumptions, primarily due to changes in interest rates.

(2)

Represents changes due to realization of expected cash flows.

Note 12—Other Assets

        Other assets include the following:

32

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

        The Company had pledged $0.01 billion of receivables from sale of securities to secure securities sold under agreements to repurchase at March 31, 2008 and December 31, 2007.

Note 13—Deposit Liabilities

        Deposit liabilities include the following:

---

(1)

These accounts represent the portion of the investor custodial accounts administered by Countrywide that have been placed on deposit with Countrywide Bank, FSB ("Countrywide Bank" or the "Bank").

33

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

        Substantially all of the time deposits outstanding were interest-bearing. The contractual maturities of those deposits as of March 31, 2008, are shown in the following table:

Note 14—Securities Sold Under Agreements to Repurchase

        The Company routinely enters into short-term financing arrangements to sell securities under agreements to repurchase ("repurchase agreements"). The repurchase agreements are collateralized by mortgage loans and securities. All securities underlying repurchase agreements are held in safekeeping by broker-dealers or banks. All agreements are to repurchase the same or substantially identical securities.

        At March 31, 2008, repurchase agreements were secured by $0.01 billion of mortgage loans held for sale, $14.3 billion of trading securities, $32.9 billion of securities purchased under agreements to resell and securities borrowed, $1.2 billion in loans held for investment, $0.1 billion in investments in other financial instruments and $0.01 billion of other assets. At March 31, 2008, $24.9 billion of the pledged securities purchased under agreements to resell and securities borrowed related to amounts offset against securities sold under agreements to repurchase pursuant to master netting agreements.

        At December 31, 2007, repurchase agreements were secured by $0.01 billion of mortgage loans held for sale, $15.4 billion of trading securities, $14.3 billion of securities purchased under agreements to resell and securities borrowed, $1.3 billion in loans held for investment, $0.1 billion in investments in other financial instruments and $0.01 billion of other assets. At December 31, 2007, $9.0 billion of the pledged securities purchased under agreements to resell and securities borrowed related to amounts offset against securities sold under agreements to repurchase pursuant to master netting agreements.

34

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Note 15—Notes Payable

        The following table summarizes notes payable:

Secured Revolving Lines of Credit

        The Company formed a special purpose entity (Park Monaco) to finance inventory with funding provided by a group of bank-sponsored conduits that were financed through the issuance of asset-backed commercial paper. The entity incurred interest based on prevailing money market rates approximating the cost of asset-backed commercial paper.

        At March 31, 2008, the entity had aggregate commitments from the banks that sponsor the conduits totaling $10.4 billion and had $0.3 billion of outstanding borrowings, secured by $0.1 billion of mortgage loans held for sale and $0.4 billion of loans held for investment. For the quarter ended March 31, 2008, the average borrowings under this facility totaled $0.9 billion and the weighted-average interest rate was 4.54%. At March 31, 2008, the weighted-average interest rate was 3.36%. For the quarter ended March 31, 2007, the average borrowings under this facility totaled $0.7 billion and the weighted-average interest rate was 5.33%. At March 31, 2007, the weighted-average interest rate was 5.34%.

        As detailed in Note 26— Subsequent Events , in connection with a ratings downgrade by Standard & Poor's on May 2, 2008, the Company repaid the outstanding balance of $244 million and on May 9, 2008, the Company terminated the facility.

        During 2007, the Company had a $4.0 billion master trust facility, to finance Countrywide Warehouse Lending ("CWL") receivables backed by mortgage loans through the sale of such receivables to a multi-asset conduit finance company financed by issuing extendable maturity asset-backed commercial paper. At March 31, 2007, the Company had pledged $1.3 billion in loans held for

35

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

investment to secure this facility. For the quarter ended March 31, 2007, the average borrowings under this facility totaled $1.2 billion and the weighted-average interest rate was 5.39%. At March 31, 2007, the weighted-average interest rate was 5.38%. This facility was terminated during 2007.

Unsecured Revolving Lines of Credit and Unsecured Bank Loan

        As of March 31, 2008, the Company had unsecured credit agreements (revolving credit facilities) with a group of commercial banks permitting the Company to borrow an aggregate maximum total amount of $11.5 billion. In August 2007, the Company borrowed $11.5 billion from these revolving credit facilities, of which $0.7 billion was converted to an unsecured term bank loan with a one-year maturity in November 2007. For the quarter ended March 31, 2008, the average outstanding borrowings under the remaining revolving credit facilities totaled $10.8 billion and the weighted-average interest rate was 3.76%. At March 31, 2008, the weighted-average interest rate was 2.88%. No amount was outstanding under this facility at March 31, 2007. For the quarter ended March 31, 2008, the average outstanding borrowings under the unsecured bank loan totaled $0.7 billion and the average interest rate was 4.33%. At March 31, 2008, the interest rate was 3.42%.

Backup Credit Facilities

        As of March 31, 2008, the Company had pledged $8.8 billion and $0.03 billion of mortgage loans held for investment and MBS, respectively, to secure an unused borrowing facility with the FRB.

Federal Home Loan Bank Advances

        During the quarter ended March 31, 2008, the Company obtained $0.5 billion of advances from the FHLB, all of which are fixed-rate. At March 31, 2008, the Company had pledged $57.5 billion and $13.8 billion respectively, of mortgage loans and investments in other financial instruments to secure its outstanding FHLB advances and enable future advances.

        At December 31, 2007, the Company had pledged $62.6 billion and $13.4 billion, respectively, of mortgage loans and investments in other financial instruments to secure its outstanding FHLB advances and enable future advances.

Medium-Term Notes

        During the quarter ended March 31, 2008, the Company did not issue any medium-term notes and redeemed $1.7 billion of maturing medium-term notes.

        As of March 31, 2008, $4.0 billion of foreign currency-denominated medium-term notes were outstanding. Such notes are denominated in Euros, Pounds Sterling, Australian Dollars, Canadian Dollars, and Swiss Francs. These notes have been effectively converted to U.S. dollar-denominated debt through currency swaps.

Asset-Backed Secured Financings

        The Company records certain mortgage loan securitization transactions as secured borrowings when they do not meet the accounting requirements for sales treatment. The transactions accounted for as secured borrowings totaled $1.7 billion and $3.8 billion at March 31, 2008 and December 31, 2007, respectively. At March 31, 2008 and December 31, 2007, the Company had pledged mortgage loans held for sale with unpaid principal balances totaling $2.6 billion and $4.4 billion, respectively, to secure these borrowings.

36

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

        In its market-making and trading activities, Countrywide Securities Corporation ("CSC") reacquires securities with embedded derivatives created in Countrywide loan sales activities. After reacquiring certain of those securities during 2007, the market for non-agency MBS was disrupted. Management subsequently concluded that certain securities it owned on both March 31, 2008 and December 31, 2007 no longer would be held only temporarily. When the Company holds beneficial interests in its securitizations that include embedded derivatives, the applicable accounting standards require that the transactions be re-characterized as financing transactions. As a result, liabilities of $3.1 billion and $5.6 billion and related Mortgage Loans Held in SPEs in loans held for investment were included on the Company's balance sheet at March 31, 2008 and December 31, 2007, respectively.

Junior Subordinated Debentures

        As more fully discussed in Note 15— Notes Payable included in the consolidated financial statements of the 2007 Annual Report, the Company has issued junior subordinated debentures to non-consolidated subsidiary trusts. The trusts finance their holdings of the junior subordinated debentures by issuing Company-guaranteed capital securities.

        The Company guarantees the indebtedness of Countrywide Home Loans ("CHL") to one of its subsidiary trusts, Countrywide Capital III, which is excluded from the Company's consolidated financial statements. Following is summarized information for that trust:

37

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Subordinated Debt

        The Company has outstanding $1.0 billion of 6.25% fixed rate unsecured subordinated notes maturing in May 2016. The notes rank subordinate and junior to all of the Company's senior indebtedness, and rank senior to the Company's junior subordinated debentures underlying the Company's trust preferred securities.

Maturities of Notes Payable

        Maturities of notes payable are as follows:

Note 16—Regulatory and Agency Capital Requirements

        Countrywide Bank is regulated by the Office of Thrift Supervision ("OTS") and is therefore subject to OTS capital requirements. At March 31, 2008 and December 31, 2007, the Bank's regulatory capital ratios and amounts and minimum required capital ratios to maintain a "well capitalized" status were as follows:

---

(1)

Minimum required to qualify as "well capitalized."

        Management intends to maintain capital at levels that are higher than those required to be considered "well capitalized."

38

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

        The Bank is required by OTS regulations to maintain tangible capital of at least 1.5% of assets. However, the Bank is also required to maintain a tangible equity ratio of at least 2% to avoid being classified as "critically undercapitalized." Critically undercapitalized institutions are subject to the prompt corrective action provisions of the Financial Institution Reform Recovery and Enforcement Act of 1989. The Bank's tangible capital ratio was 7.7% and 8.0% at March 31, 2008 and December 31, 2007, respectively.

        The OTS has prescribed that the Company and its affiliates are not authorized to receive, and the Bank is not authorized to pay the Company or its affiliates, capital distributions without receipt of prior written OTS non-objection.

        The Company is also subject to U.S. Department of Housing and Urban Development, Fannie Mae, Freddie Mac and Government National Mortgage Association ("Ginnie Mae") net worth requirements. Management believes the Company is in compliance with those requirements.

Note 17—Supplemental Cash Flow Information

        The following table presents supplemental cash flow information:

39

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Note 18—Net Interest Income

        The following table summarizes net interest income:

Note 19—Restructuring Charges

        During the third quarter of 2007, the Company initiated a program to reduce costs and improve operating efficiencies in response to lower mortgage market origination volumes and other market conditions. As part of this plan, the Company expects to incur lease and other contract termination costs. Management recorded restructuring charges totaling $144.6 million in 2007 and recorded an additional $14.6 million in the first quarter of 2008. Specific actions taken in 2007 included reducing the workforce by approximately 11,000 and the closure of 259 branches. These reductions occurred in most geographic locations and levels of the organization. The restructuring charges were recorded in the "Other" segment. During the first quarter of 2008, the specific actions included reducing the workforce by approximately 1,500.

        The following table summarizes the restructuring liability balance, recorded in accounts payable and accrued liabilities at March 31, 2008, and related activity during the quarter ended March 31, 2008:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Note 20—Pension Plans

        The Company provides retirement benefits to its employees using a variety of plans. For employees hired prior to January 1, 2006, the Company has a defined benefit pension plan (the "Pension Plan"). For employees hired after December 31, 2005, the Company makes supplemental contributions to employee 401(k) Plan accounts.

        Net periodic benefit cost for the pension plan during the quarters ended March 31, 2008 and 2007, includes the following components:

Note 21—Segments and Related Information

        The Company has five business segments: Mortgage Banking, Banking, Capital Markets, Insurance and Global Operations.

        The Mortgage Banking Segment is comprised of three sectors: Loan Production, Loan Servicing and Loan Closing Services.

        The Loan Production Sector originates prime and nonprime loans for sale or securitization through a variety of channels on a national scale. Historically, mortgage banking loan production has occurred in CHL. Over the past several years, the Company has been transitioning this production to its bank subsidiary, Countrywide Bank. Effective January 1, 2008, the Company's production channels have moved into the Bank, completing the migration of substantially all of Countrywide's loan production activities from CHL to the Bank. During the quarter ended March 31, 2008, over 96% of Countrywide's mortgage loan production occurred in Countrywide Bank. The mortgage loan production, the related balance sheet and the income relating to the holding and sale of these loans is included in the Mortgage Banking Segment regardless of whether the activity occurred in CHL or Countrywide Bank.

        The Loan Production Sector is comprised of three lending channels:

•

Retail Channel sources mortgage loans primarily from consumers through the Company's retail branch network and call centers, as well as through real estate agents and homebuilders



•

Wholesale Lending Channel sources mortgage loans primarily from mortgage brokers



•

Correspondent Lending Channel purchases mortgage loans from other mortgage lenders, including financial institutions, commercial banks, savings and loan associations, home builders and credit unions.

41

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

        The Loan Servicing Sector includes investments in MSRs, retained interests including senior and mezzanine mortgage-backed securities which remain unsold from prior securitizations, the Mortgage Banking investment loan portfolio as well as the Company's loan servicing operations and subservicing for other domestic financial institutions. Subsequent to sale, adjustments to the liability for representations and warranties are included in this sector. The Loan Closing Services Sector is comprised of the LandSafe companies, which provide credit reports, appraisals, title reports and flood determinations to the Company's Loan Production Sector, as well as to third parties.

        The Banking Segment includes Banking Operations—primarily the investment and fee-based activities of Countrywide Bank—together with the activities of Countrywide Warehouse Lending and certain loans held for investment and owned by Countrywide Home Loans. Banking Operations invests in mortgage loans sourced from the Loan Production Sector and mortgage loans and high-quality MBS purchased from non-affiliated entities. Countrywide Warehouse Lending provides third-party mortgage lenders with temporary financing secured by mortgage loans.

        The Capital Markets Segment includes the operations of Countrywide Securities Corporation, a registered broker-dealer specializing in the mortgage securities market. It also includes the operations of Countrywide Asset Management Corporation, Countrywide Commercial Real Estate Finance Inc., Countrywide Servicing Exchange, Countrywide Alternative Investments Inc., CSC Futures Inc., Countrywide Capital Markets Asia (H.K.) Limited, CAA Management Inc., Countrywide Sunfish Management LLC and Countrywide Derivative Products, Inc.

        The Insurance Segment includes Balboa Insurance Group, a national provider of property, casualty, life, disability and credit insurance; Balboa Reinsurance Company, a primary mortgage reinsurance company; and Countrywide Insurance Services, a national insurance agency offering a specialized menu of insurance products directly to consumers.

        The Global Operations Segment includes Countrywide International Technology Holdings Limited, a licensor of loan origination processing, servicing and residential real estate value assessment technology; CFC India Private Limited, a provider of call center, data processing and information technology related services; and CFC International (Processing Services), Limited, located in Costa Rica, a provider of call center and data processing services.

        Segment selection was based upon internal organizational structures, and the process by which these operations are managed and evaluated, including how resources are allocated to the operations. Certain amounts reflected in the prior period have been adjusted to conform to the current period presentation.

        Intersegment transactions are generally recorded on an arms-length basis. However, prior to October 2007, the fulfillment fees paid by Banking Operations to the Production Sector for origination costs incurred on mortgage loans funded by Banking Operations were generally determined on an incremental cost basis, which may be less than the fees that Banking Operations would pay to a third party.

42

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

        Financial highlights by operating segments are as follows:

			Quarter Ended March 31, 2008
			Mortgage Banking
			Loan Production			Loan Servicing			Closing Services			Total			Banking			Capital Markets			Insurance			Global Operations			Other			Total Consolidated
			(in thousands)
Revenues:
	External		$	1,113,338		$	(593,148	)	$	97,227		$	617,417		$	(566,273	)	$	81,913		$	556,862		$	12,426		$	(23,471	)	$	678,874
	Intersegment			(9,020	)		113,222			(534	)		103,668			(84,058	)		(468	)		(2,115	)		28,915			(45,942	)		—
Total Revenues			$	1,104,318		$	(479,926	)	$	96,693		$	721,085		$	(650,331	)	$	81,445		$	554,747		$	41,341		$	(69,413	)	$	678,874
Pre-tax Earnings (Loss)			$	232,375		$	(817,546	)	$	33,175		$	(551,996	)	$	(960,371	)	$	997		$	35,501		$	10,979		$	(27,337	)	$	(1,492,227	)
Total Assets at Period End			$	18,427,197		$	36,425,382		$	397,343		$	55,249,922		$	111,615,901		$	25,776,161		$	4,093,209		$	245,789		$	2,036,811		$	199,017,793

			Quarter Ended March 31, 2007
			Mortgage Banking
			Loan Production			Loan Servicing			Closing Services			Total			Banking			Capital Markets			Insurance			Global Operations			Other			Total Consolidated
			(in thousands)
Revenues:
	External		$	1,053,528		$	(128,543	)	$	85,476		$	1,010,461		$	619,448		$	227,791		$	371,166		$	3,878		$	173,032		$	2,405,776
	Intersegment			110,615			247,499			—			358,114			(190,187	)		32,865			(1,450	)		16,572			(215,914	)		—
Total Revenues			$	1,164,143		$	118,956		$	85,476		$	1,368,575		$	429,261		$	260,656		$	369,716		$	20,450		$	(42,882	)	$	2,405,776
Pre-tax Earnings (Loss)			$	170,654		$	(100,306	)	$	29,956		$	100,304		$	288,094		$	132,208		$	179,658		$	4,006		$	(3,475	)	$	700,795
Total Assets at Period End			$	34,161,804		$	29,537,903		$	311,151		$	64,010,858		$	88,462,739		$	57,068,471		$	3,091,622		$	219,200		$	(5,669,572	)	$	207,183,318

        Included in the columns above labeled "Other" are the holding company activities including restructuring charges of $14.6 million during the quarter ended March 31, 2008 and certain reclassifications to conform management reporting to the consolidated financial statements.

43

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Note 22—Summarized Financial Information

        Summarized financial information for Countrywide Financial Corporation (parent only) and subsidiaries is as follows:

				March 31, 2008
				Countrywide Financial Corporation (Parent Only)			Countrywide Home Loans, Inc. (Consolidated)			Other Subsidiaries			Eliminations			Consolidated
				(in thousands)
Balance Sheets:
	Mortgage loans held for sale			$	—		$	2,658,085		$	13,002,308		$	(7,003	)	$	15,653,390
	Trading securities, at estimated fair value				—			129,338			17,442,955			(112,222	)		17,460,071
	Securities purchased under agreements to resell, securities borrowed and federal funds sold				—			250,000			9,120,377			(1,584,031	)		7,786,346
	Loans held for investment, net				446,381			15,770,452			79,063,695			(16,028	)		95,264,500
	Investments in other financial instruments, at estimated fair value				562,055			1,141,487			19,222,125			(22,130	)		20,903,537
	Mortgage servicing rights, at estimated fair value				—			16,113,875			1,040,699			—			17,154,574
	Investments in subsidiaries				15,439,938			—			6,438			(15,446,376	)		—
	Other assets				27,844,245			26,509,058			15,772,843			(45,330,771	)		24,795,375
		Total assets		$	44,292,619		$	62,572,295		$	154,671,440		$	(62,518,561	)	$	199,017,793
	Deposit liabilities			$	—		$	—		$	64,265,467		$	(972,075	)	$	63,293,392
	Securities sold under agreements to repurchase				300,000			1,181,145			17,980,791			(1,599,046	)		17,862,890
	Notes payable				17,708,981			25,789,362			46,047,998			(1,894,910	)		87,651,431
	Other liabilities				13,128,582			32,126,281			14,385,599			(42,585,438	)		17,055,024
	Equity				13,155,056			3,475,507			11,991,585			(15,467,092	)		13,155,056
		Total liabilities and equity		$	44,292,619		$	62,572,295		$	154,671,440		$	(62,518,561	)	$	199,017,793
				Quarter Ended March 31, 2008
				Countrywide Financial Corporation (Parent Only)			Countrywide Home Loans, Inc. (Consolidated)			Other Subsidiaries			Eliminations			Consolidated
				(in thousands)
Statements of Operations:
	Revenues			$	17,455		$	319,811		$	657,695		$	(316,087	)	$	678,874
	Expenses				1,933			521,840			1,925,621			(278,293	)		2,171,101
	(Benefit) provision for income taxes				5,775			(77,822	)		(511,947	)		(15,180	)		(599,174	)
	Equity in net loss of subsidiaries				(902,800	)		—			—			902,800			—
		Net loss		$	(893,053	)	$	(124,207	)	$	(755,979	)	$	880,186		$	(893,053	)

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

				December 31, 2007
				Countrywide Financial Corporation (Parent Only)			Countrywide Home Loans, Inc. (Consolidated)			Other Subsidiaries			Eliminations			Consolidated
				(in thousands)
Balance Sheets:
	Mortgage loans held for sale			$	67		$	5,439,813		$	6,208,511		$	32,883		$	11,681,274
	Trading securities, at estimated fair value				—			233,046			21,299,559			(189,998	)		21,342,607
	Securities purchased under agreements to resell, securities borrowed and federal funds sold				—			1,250,000			12,126,762			(3,735,883	)		9,640,879
	Loans held for investment, net				582,760			18,362,522			79,071,775			(16,344	)		98,000,713
	Investments in other financial instruments, at estimated fair value				549,221			2,949,971			22,318,467			—			25,817,659
	Mortgage servicing rights, at estimated fair value				—			18,573,055			385,125			—			18,958,180
	Investments in subsidiaries				16,953,677			—			6,265			(16,959,942	)		—
	Other assets				27,019,705			22,861,754			14,145,494			(41,101,341	)		22,925,612
		Total assets		$	45,105,430		$	69,670,161		$	155,561,958		$	(61,970,625	)	$	208,366,924
	Deposit liabilities			$	—		$	—		$	61,184,312		$	(983,713	)	$	60,200,599
	Securities sold under agreements to repurchase				440,000			2,228,004			19,307,168			(3,757,010	)		18,218,162
	Notes payable				19,156,790			31,619,553			48,452,915			(2,001,845	)		97,227,413
	Other liabilities				10,852,769			32,243,730			13,238,393			(38,270,013	)		18,064,879
	Equity				14,655,871			3,578,874			13,379,170			(16,958,044	)		14,655,871
		Total liabilities and equity		$	45,105,430		$	69,670,161		$	155,561,958		$	(61,970,625	)	$	208,366,924
				Quarter Ended March 31, 2007
				Countrywide Financial Corporation (Parent Only)			Countrywide Home Loans, Inc. (Consolidated)			Other Subsidiaries			Eliminations			Consolidated
				(in thousands)
Statements of Operations:
	Revenues			$	(24,149	)	$	1,306,184		$	1,383,318		$	(259,577	)	$	2,405,776
	Expenses				1,700			1,245,369			715,445			(257,533	)		1,704,981
	(Benefit) provision for income taxes				(10,047	)		28,733			248,982			(854	)		266,814
	Equity in net earnings of subsidiaries				449,783			—			—			(449,783	)		—
		Net earnings		$	433,981		$	32,082		$	418,891		$	(450,973	)	$	433,981

Note 23—Borrower and Investor Custodial Accounts

        As of March 31, 2008 and December 31, 2007, the Company managed $21.6 billion and $19.2 billion, respectively, of borrower and investor custodial cash accounts. These custodial accounts relate to the Company's mortgage servicing activities. Of these amounts, $12.8 billion and $12.6 billion,

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COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

respectively, were deposited at the Bank, and included in the Company's deposit liabilities as custodial deposit accounts. The remaining balances were deposited with other depository institutions and are not recorded on the Company's balance sheets.

Note 24—Loan Commitments

        The following table summarizes the Company's outstanding contractual loan commitments for the periods indicated:

Note 25—Legal Proceedings

        Countrywide and certain subsidiaries are defendants in various legal proceedings involving matters generally incidental to their businesses.

        In addition, lawsuits alleging claims for derivative relief on behalf of the Company and securities, retirement plan, and other class action suits have recently been brought against Countrywide, and certain of its current and former officers, directors and retirement plan administrators in either federal district court or state superior court in Los Angeles, California or federal district court or state court in Delaware. Among other things, these lawsuits allege breach of state law fiduciary duties and violation of the federal securities laws and the Employee Retirement Income Security Act of 1974 ("ERISA"). These cases allege, among other things, that Countrywide did not disclose complete and accurate information about its mortgage lending practices and financial condition. The shareholder derivative cases are brought on Countrywide's behalf and do not seek recovery of damages from the Company. The shareholder derivative claims filed in Los Angeles superior court have been stayed in favor of the derivative litigation pending in Los Angeles federal court. Motions to dismiss the federal derivative litigation are pending, as are motions to dismiss the Delaware federal court derivative litigation and to transfer that litigation to Los Angeles federal court. The federal court has declined to grant defendants' motions to dismiss the ERISA class action claims, and the Court has certified a class of participants in the Company's retirement plan. The Company and the other defendants are seeking leave to appeal the dismissal and certification rulings immediately to the federal Court of Appeals for the Ninth Circuit.

        Various class action lawsuits relating to Countrywide's proposed merger with Bank of America have been filed in the state courts of California and Delaware and in federal district court in Los Angeles, California on behalf of a proposed class of Countrywide shareholders against the Company, its directors and Bank of America. These lawsuits allege that the Company's directors breached their fiduciary duties to the Company's shareholders by entering into the merger agreement with Bank of America and also allege that Bank of America aided and abetted those alleged breaches. The merger-related claims filed in the California courts have been stayed in favor of the merger-related litigation

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

pending in Delaware, in which the plaintiffs have filed a motion to preliminarily enjoin the closing of the transaction.

        Although management believes it has meritorious defenses to each of these actions and intends to defend them vigorously, it is difficult to predict the resulting outcome of these proceedings, particularly where investigations and proceedings are in early stages. Given the inherent difficulty in predicting the outcome of legal proceedings, management cannot estimate losses or ranges of losses for legal proceedings where there is only a reasonable possibility that a loss may be incurred, such as those discussed in the two immediately preceding paragraphs. The Company provides for potential losses that may arise out of legal proceedings to the extent such losses are deemed probable and can be estimated. Although the ultimate outcome of the Company's legal proceedings discussed above cannot be ascertained at this time, management believes that any resulting liability will not materially affect its consolidated financial position; such resolution, however, could be material to its operating results for a particular future period depending upon the outcome of the proceedings and the operating results for a particular period. This assessment is based, in part, on the existence of insurance coverage.

        From time to time we are subject to investigations and reviews in the ordinary course of business involving various regulatory agencies, including the SEC and various state attorneys general, and in connection therewith such regulatory agencies request materials from us pertaining to our business operations and other matters. It is the Company's policy to fully cooperate with its regulators and, where appropriate, to take remedial action. Certain news reports beginning in March 2008, indicated that numerous industry participants, including the Company, were subject to an investigation by the Federal Bureau of Investigation ("FBI") in connection with mortgage business practices. The Department of Justice has stated to the Company that the FBI cannot confirm or deny whether it is conducting an investigation of it.

Note 26—Subsequent Events

        On May 2, 2008, Standard and Poor's lowered its rating of CFC and CHL from BBB+ to BB+, a non-investment grade rating. Standard and Poor's also lowered its rating of the Bank from A- to BBB. The Rating Outlook for all three entities was changed from Credit Watch Positive to Credit Watch Developing. Standard and Poor's ratings actions were in connection with the disclosure by Bank of America related to their expected treatment of CFC's debt following the planned merger. The immediate impact of this downgrade is that the $10.4 billion Park Monaco secured revolving credit facility is no longer available as a source of contingent liquidity. The Company repaid the outstanding balance of $244 million on May 2, 2008, and terminated the facility on May 9, 2008.

        On April 7, 2008 the Company received a refund of $728.4 million of federal income taxes that it had previously paid for the tax years ended December 31, 2005 and 2006. The refund resulted from carrying back the federal tax loss for the year ended December 31, 2007.

        On April 29, 2008, the Company announced that its Board of Directors declared dividends of $1,812.50 per share on its Series B preferred stock and $0.15 per common share. The preferred stock dividend is payable on May 15, 2008, and the common stock dividend is payable on June 2, 2008 to shareholders of record on May 14, 2008.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Note 27—Recently Issued Accounting Pronouncements

        In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), Business Combinations, ("SFAS 141(R)"). SFAS 141(R) expanded the scope of SFAS 141 to all business combinations which previously applied only to business combinations for which control was obtained by transferring consideration. Under SFAS 141(R), the acquisition date is the date at which control is obtained, requiring the acquirer to recognize and measure the fair value of the acquiree as a whole, and the assets acquired and liabilities assumed at their full fair value as of the date of control, regardless of the percentage ownership in the acquiree. The Company has determined that it will adopt SFAS 141(R) on its effective date of January 1, 2009 and the financial impact, if any, upon adoption has not yet been determined.

        In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interest in Consolidated Financial Statements, and amendment of ARB No. 51, ("SFAS 160"). SFAS 160 amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as a separate component of equity in the consolidated financial statements and requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Under SFAS 160, expanded disclosures are required to identify and distinguish between the interests of the parent's owners and the interests of the noncontrolling owners of a subsidiary. The Company has determined that it will adopt SFAS 160 on its effective date of January 1, 2009 and the financial impact, if any, upon adoption has not yet been determined.

        In February 2008, the FASB issued FASB Staff Position No. FSP 140-3, Accounting for Transfers of Financial Assets and Repurchasing Transactions, ("FSP 140-3"). FSP 140-3 addresses accounting for repurchase agreements related to previously transferred financial assets when the repurchase arrangement is between the same parties as the original transfer. This FSP presumes that an initial transfer of a financial asset and a repurchase agreement are considered part of the same arrangement under Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities ("SFAS 140"). However, if certain criteria are met, the initial transfer and repurchase financing shall not be evaluated as a linked transaction and instead should be evaluated separately under SFAS 140. This FSP is effective for financial statements issued for fiscal years beginning after November 15, 2008 and shall be applied prospectively to initial transfers and repurchase financings for which the initial transfer is executed on or after the beginning of the fiscal year this FSP is initially applied. The Company has not yet determined the financial impact, if any, upon adoption.

        In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities, an Amendment to FASB Statement No. 133, ("SFAS 161"). SFAS 161 was issued to improve transparency of a company's derivative instruments and hedging activities by requiring qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosure about credit-risk related features in derivative agreements. This Statement also requires that the overall objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. SFAS 161 is effective prospectively for financial statements beginning after November 15, 2008.

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Item 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations

        As used in this Report, references to "we," "our," "the Company" or "Countrywide" refer to Countrywide Financial Corporation and its consolidated subsidiaries unless otherwise indicated. This discussion includes forward-looking statements which are subject to certain risks and uncertainties as discussed in the section Factors That May Affect Our Future Results of this Report.

Overview

        This section gives an overview of critical items that are discussed in more detail throughout Management's Discussion and Analysis of Financial Condition and Results of Operations.

Results of Operations

        Following is a summary of our results of operations for the quarters ended March 31, 2008 and 2007:

        The results for the quarter ended March 31, 2008 resulted from high credit-related costs during the quarter. Increased credit-related charges were driven by increased levels of mortgage delinquencies, defaults and loss severities, as well as downward revisions in expectations of home prices relative to prior quarters. These credit charges were recorded with respect to the following assets and liabilities:

		Quarter Ended March 31, 2008
		Mortgage Banking
											Capital Markets
		Production			Servicing			Banking						Insurance			Total
		(in thousands)
Provision for credit losses		$	—		$	212,943		$	1,315,860		$	—		$	—		$	1,528,803
Provision for losses on representation and warranty claims			51,725			404,173			—			989			—			456,887
Impairment of credit-sensitive retained interests			—			441,287			—			—			—			441,287
Provision for mortgage reinsurance claims			—			—			—			—			235,937			235,937
Impairment of mortgage-backed securities			—			202,135			—			—			—			202,135
Inventory adjustments			187,756			—			—			—			—			187,756
		$	239,481		$	1,260,538		$	1,315,860		$	989		$	235,937		$	3,052,805

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        Also affecting the results of the quarter was the secondary market disruption that began in the third quarter of 2007 and has continued through the date of the filing of this Report. The market disruption has affected the type and volume of loans produced and loans and securities sold in our Mortgage Banking and Capital Markets Segments.

        We discuss our results of operations in detail in the following section, Results of Operations Comparison—Quarters Ended March 31, 2008 and 2007 .

Credit

        During the quarter ended March 31, 2008, our portfolio of loans held for investment and other credit-sensitive assets were affected by the deteriorating real estate market and economic conditions that have not abated through the date of filing of this Report. We expect credit quality to continue to deteriorate in the near term, which will continue to cause us to record significant provisions for credit losses and charge-offs relating to these assets.

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        Following is a summary of key credit quality and performance indicators at and for the period ended March 31:

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(1)

Excludes both loans held in SPEs where the beneficial interest holder of the securitized asset retains the credit risk relating to the loans and the allowance for loan losses.

(2)

Excludes $2,471.4 million and $1,233.0 million, at March 31, 2008 and 2007, respectively, of loans that we have the option (but not the obligation) to repurchase but have not exercised that option. These loans are required to be included on our balance sheet. Also excluded are nonaccrual loans

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held for sale that are carried on the consolidated balance sheet at the lower of cost or estimated fair value and government guaranteed loans held for investment, as follows:

(3)

The provision for credit losses is comprised of:

Liquidity and Capital

        During the second half of 2007, our access to capital was severely challenged when the non-agency segments of the secondary mortgage market and the commercial paper, medium-term notes and repurchase agreements segments of the public corporate debt markets were severely restricted by illiquidity, particularly for mortgage companies and other financial institutions. These conditions have not abated through the date of this Report.

        In response to the disruption in the second half of 2007, we accelerated the integration of our mortgage banking activities into our bank subsidiary which has access to stable, non-capital markets based funding; significantly changed our underwriting standards to focus the majority of our loan production on loans that are available for direct sale or securitization into programs sponsored by the government-sponsored agencies; issued $2.0 billion of 7.25% convertible cumulative preferred stock; borrowed $11.5 billion from our unsecured revolving credit facilities; and modified our funding structure to that of a thrift holding company. Because of the adjustments we made to our operations, as of March 31, 2008, we maintained excess borrowing capacity totaling $27.7 billion from sources we judge to be reliable. On a pro forma basis giving effect to the ratings action taken by Standard & Poor's on May 2, 2008, discussed below, excess borrowing capacity would have been $17.3 billion as of March 31, 2008.

        On May 2, 2008, Standard & Poor's announced a downgrade of the debt ratings for all Countrywide entities (CFC, CHL and Countrywide Bank), including downgrades of CFC and CHL's long-term ratings from BBB+ to BB+, a non-investment grade rating. The downgrades were in connection with the disclosure by Bank of America related to their expected treatment of CFC's debt following the planned merger. After the Standard & Poor's rating action, Moody's issued a comment reaffirming Countrywide's ratings and its Review for Upgrade status and on May 5, 2008, Fitch Ratings changed its ratings outlook for Countrywide from Rating Watch Positive to Rating Watch Evolving, also due to this disclosure.

        Because of Standard & Poor's downgrade of our debt ratings below investment grade, one of our on-balance sheet financing facilities, Park Monaco, with a capacity of $10.4 billion will no longer be

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available to us. The primary purpose of this facility was to provide contingent liquidity. We repaid $244 million outstanding under Park Monaco and we terminated this facility on May 9, 2008. Our liquidity planning provides for several contingencies, including the loss of availability of Park Monaco.

Merger with Bank of America Corporation

        As more fully detailed in a Current Report on Form 8-K filed with the Securities and Exchange Commission on January 17, 2008, and the Registration Statement on Form S-4 of Bank of America filed on February 12, 2008, as amended by Amendment No. 1 filed on March 27, 2008 and Amendment No. 2 filed on April 30, 2008, we have entered into a Merger Agreement with Bank of America. The Merger Agreement provides for Countrywide to merge with and into a wholly-owned merger subsidiary of Bank of America ("Merger Sub"), with Merger Sub continuing as the surviving company.

        The terms of the Merger Agreement provide for the conversion of each share of Countrywide common stock into 0.1822 of a share of Bank of America common stock. Consummation of the Merger, which is currently anticipated to occur in the third quarter of 2008, is subject to certain conditions, including, among others, Countrywide stockholder and regulatory approvals.

        The Merger Agreement contains certain termination rights for Countrywide and Bank of America, as the case may be, applicable upon the occurrence of certain events specified in the Merger Agreement. The Merger Agreement provides that, in the event of the termination of the Merger Agreement under specified circumstances, Countrywide may be required to pay Bank of America a termination fee equal to $160 million.

        The Merger Agreement provides for both Countrywide and Bank of America to conduct their respective businesses in the ordinary course until the Merger is completed and not to take certain actions during the period from the date of the Merger Agreement until the date of completion of the Merger.

Critical Accounting Policies

        The accounting policies with the greatest impact on our financial condition and results of operations that require the most judgment, and which are most likely to result in materially different amounts being recorded under different conditions or using different assumptions, pertain to our measurement of provisions and reserves associated with credit risk inherent in our operations; our mortgage loan sale and securitization activities, including valuation of loans pending sale; our investments in MSRs and retained interests and our use of derivatives to manage interest rate risk, including the valuation of interest rate lock commitments. A discussion of the critical accounting policies related to these activities is included in our 2007 Annual Report.

        Effective January 1, 2008, we adopted SEC Staff Accounting Bulletin No. 109 ("SAB 109"). SAB 109 supersedes Staff Accounting Bulletin No. 105 ("SAB 105"), Application of Accounting Principles to Loan Commitments . SAB 109 changed the requirements of SAB 105 to require that the expected net future cash flows related to the servicing of a loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. The guidance is effective on a prospective basis to derivative loan commitments issued or modified after December 31, 2007. The effect of this guidance on Countrywide is for us to recognize higher estimated fair values of our interest rate lock commitments when the commitments are made, effectively changing the timing of revenue recognition to the time a derivative loan commitment is issued. Before adoption of SAB 109, revenue was recognized upon transfer of the loans in transactions that met the accounting requirements for sale accounting. The effect of adoption of SAB 109 was to increase gain on sale of loans and securities by $357.7 million. This amount represents the revenue recognized at the time the loan commitment was issued that is included in the value of our interest rate lock commitments or Mortgage Loan Inventory at March 31, 2008.

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        For loan commitments issued after December 31, 2007, the Company estimates the fair value of an IRLC based on the estimated fair value of the underlying mortgage loan less the commitment price adjusted for the probability that the mortgage loan will fund within the terms of the IRLC. The Company generally estimates the fair value of the underlying loan based on quoted market prices for securities backed by similar types of loans together with estimated servicing value adjusted for the estimated costs and profit margin associated with securitization. The estimated probability of mortgage loan funding is based on the Company's historical experience and is adjusted to reflect the risk of variability in such probability using an option pricing model. If quoted market prices for relevant securities are not available, fair value is estimated based on other relevant factors, including dealer price quotations, prices available for similar securities, and valuation models intended to approximate the amounts that would be received from a third party.

        As detailed in Item 7— Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies of our 2007 Annual Report, many of our key accounting policies rely on estimates of value. The estimates for those items identified in that Section of the 2007 Annual Report all fall in Level 3 of the fair value hierarchy. Accordingly, many of our estimates of the fair value amounts included in our financial statements depend on significant assumptions that are difficult to observe or derive from marketplace data.

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        Changes in significant assumptions underlying our estimates can have a significant effect on the values we have recorded. Following is an illustration of the effect of a change in key assumptions—where applicable to the specific instrument types—on our estimates of value of these items as of March 31, 2008:

									Investments in Other Financial Instruments
			Mortgage Loans Held for Sale			Trading Securities			Investment Securities			Retained Interests			IRLCs, Net			Mortgage Servicing Rights
			(in thousands)
Assets:
Level 3 balances at March 31, 2008:			$	2,411,044		$	1,346,992		$	14,658,098		$	1,853,177		$	216,105		$	17,154,574
Weighted-average rate(1) or OAS:
	Effect of 20% adverse change		$	(113,940	)	$	(53,962	)	$	(376,329	)	$	(124,863	)		—		$	(603,465	)
	Effect of 20% favorable change		$	132,713		$	82,956		$	398,038		$	157,388			—		$	660,554
Weighted-average prepayment speed:
	Effect of 20% adverse change			—		$	(84,316	)	$	(270,620	)	$	(119,908	)		—		$	(1,629,408	)
	Effect of 20% favorable change			—		$	106,419		$	179,329		$	158,144			—		$	2,065,131
Weighted-average net lifetime credit losses:
	Effect of 20% adverse change			—			—			—		$	(138,698	)		—		$	(73,489	)
	Effect of 20% favorable change			—			—			—		$	249,697			—		$	60,127
Weighted-average funding ratio:
	Effect of 20% adverse change			—			—			—			—		$	(43,221	)		—
	Effect of 20% favorable change			—			—			—			—		$	43,221			—

			Asset-backed Secured Financings
			(in thousands)
Liabilities:
Level 3 balances at March 31, 2008:			$	1,692,472
Weighted-average rate(1)
	Effect of 20% adverse change		$	(69,825	)
	Effect of 20% favorable change		$	64,098

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(1)

Includes discount rate or Market Spread.

        The sensitivities shown are solely for illustrative purposes and should be used with caution. This information is furnished to provide the reader with a basis for assessing the sensitivity of the values presented to changes in key assumptions. Certain key assumptions are common to several of the financial statement items that are measured at their estimated fair value. While the qualitative nature of the assumption may be the same, the assumptions vary by specific instrument and do not necessarily change at the same rate. A 20% change in an assumption for one of the financial statement items does not necessarily imply that assumption would also change in the same direction or by the same amount for other items. As the figures indicate, changes in fair value based on a given percentage variation in individual assumptions generally cannot be extrapolated. In the preceding table, the effect of a variation in a particular assumption on the fair value of the item is calculated without changing any other assumption. In reality, changes in one factor may coincide with changes in another, which could compound or counteract the sensitivities.

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Results of Operations Comparison—Quarters Ended March 31, 2008 and 2007

Consolidated Results of Operations

        We recorded a net loss for the quarter ended March 31, 2008 of $893.1 million, as compared to net earnings of $434.0 million in the year-ago period. Our diluted loss per share was $1.60 compared to diluted earnings per share of $0.72 in the year-ago period.

        Pre-tax (loss) earnings by segment are summarized below:

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(1)

Includes restructuring charges of $14.6 million during the quarter ended March 31, 2008. The pre-tax (loss) earnings of each segment includes intercompany transactions, which are eliminated in the "other" category.

        The Mortgage Banking Segment incurred a pre-tax loss of $552.0 million, a decline of $652.3 million from the year-ago period. This change was largely attributable to increases in credit-related charges of $852.2 million in the Loan Servicing Sector combined with reduced loan sales in the Loan Production Sector, partially offset by a $357.7 million positive impact on gain on sale due to the adoption of the SEC's Staff Accounting Bulletin No. 109 in the first quarter of 2008.

        The Banking Segment incurred a pre-tax loss of $960.4 million in the first quarter of 2008, a $1,248.5 million decline from the year-ago period, largely due to an increase in the provision for credit losses of $1,186.1 million.

        The Capital Markets Segment was negatively affected by the continued disruption in the capital markets and declines in the value of non-agency securities and loans. As a result, the Capital Markets Segment reported pre-tax earnings of $1.0 million during the quarter ended March 31, 2008, a decline of $131.2 million from the year-ago period.

        The Insurance Segment was negatively affected by an increase in the provision for mortgage reinsurance claims arising from a worsening housing market and resulting higher actual and projected default rates. For the quarter ended March 31, 2008, the provision for mortgage reinsurance claims was $235.9 million, an increase of $295.8 million from the year-ago quarter. Partially offsetting this decline is increased profitability in Balboa Life and Casualty of $124.8 million from the first quarter of 2007 to the first quarter of 2008.

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Operating Segment Results

        Total loan production by segment and product, net of intercompany sales, is summarized below:

        Our total loan production was $73.1 billion during the quarter ended March 31, 2008, as compared to $117.0 billion in the year-ago period. Loan production decreased due to an estimated 31% decline in the total mortgage market from the year-ago period and a decrease in our market share from 15.4% to 14.0% (based on our internal market estimates), primarily in our Wholesale Lending Channel and Correspondent Lending Channel. The mortgage market declined from the year-ago period largely as a result of an industry-wide tightening of underwriting and loan program guidelines made in response to increased marketplace concerns about mortgage loan performance, and as a result of a weakening housing market. The tightening of underwriting and loan program guidelines included reductions in the availability of reduced documentation loans and loans on investor-owned properties and a reduction in the maximum loan-to-value or combined loan-to-value ratios. We discontinued production of Nonprime Mortgage loans in late 2007.

        The following table summarizes loan production by purpose and by interest rate type:

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Mortgage Banking Segment

        The Mortgage Banking Segment includes the Loan Production, Loan Servicing and Loan Closing Services Sectors.

Loan Production Sector

        The Loan Production Sector sources mortgage loans through our three production channels—the Retail Channel (Consumer Markets and Full Spectrum Lending), Wholesale Lending Channel and Correspondent Lending Channel of Countrywide Bank, FSB ("Countrywide Bank" or the "Bank"). As a result of the market disruption that began in late 2007, we decided to accelerate our plans to migrate virtually all of our loan production from CHL into the Bank, which has greater access to sources of liquidity. Effective January 1, 2008, our production channels had moved into the Bank. During the quarter ended March 31, 2008, 96% of the loans funded in the Mortgage Banking Segment were funded through the Bank compared to 37% during the year-ago period. The mortgage loan production, the related balance sheet and the income relating to the holding and sale of these loans are included in our Mortgage Banking Segment regardless of whether the activity occurred in CHL or Countrywide Bank.

        The following table summarizes Mortgage Banking loan production by channel, by mortgage loan type, by purpose and by interest rate type:

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        The pre-tax earnings of the Loan Production Sector are summarized below:

        Revenues decreased from the year-ago period driven primarily by a $47.2 billion decrease in the volume of loans sold, partially offset by an increase in margins on Prime Mortgage Loans caused in part by the change in accounting for loan origination costs and fees discussed below. In the quarter ended March 31, 2008, $61.4 billion of mortgage loans, or 91% of Mortgage Banking loan production, was sold compared to $108.6 billion, or 98% of Mortgage Banking loan production in the quarter ended March 31, 2007. In addition, the Company's adoption of SAB 109 aided profitability in the quarter ended March 31, 2008 by $357.7 million. The adoption of this guidance results in revenue being recorded upon initial recognition of derivative interest rate lock commitments. In prior periods, revenue was recorded at the time of the sale of loans.

        Expenses decreased from the prior year driven primarily by a reduction in variable compensation expenses that resulted from the decline in the volume of loans produced, partially offset by a reduction in the amount of origination expenses deferred. Effective January 1, 2008, we adopted SFAS 159 and elected to account for the majority of our loans held for sale at estimated fair value. Because of this election, origination costs and fees are recorded in earnings as incurred instead of being deferred. Significant adjustments have been made to our infrastructure and staffing levels as appropriate for a smaller origination market.

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        Following is a summary of our loan origination channels' sales organizations:

        The following table summarizes the number of people included in the Loan Production Sector workforce:

Loan Servicing Sector

        The results of our Loan Servicing Sector include fees and other income earned and expenses incurred for servicing loans for others; the financial performance of our investments in MSRs, retained interests, the Mortgage Banking Segment's portfolio of loans held for investment and the risk management activities related to these assets; and profits from our subservicing activities. The long-term performance of this sector is affected primarily by the level and direction of interest rates, the level of projected and actual prepayments in our servicing portfolio, projected and actual credit losses, our operational effectiveness and our ability to manage interest-rate and credit-spread risk.

        Our servicing portfolio grew to $1.5 trillion at March 31, 2008, a 10% increase from the year-ago period. At the same time, the overall weighted-average note rate of loans in our servicing portfolio remained unchanged at 6.5%.

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        The following table summarizes the pre-tax results of operations for the Loan Servicing Sector:

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(1)

Includes other non credit-sensitive retained interests, predominately interest-only securities.

(2)

For 2008, consists of Servicing Hedge gains of $2.0 billion and an inter-sector Position allocation of $340.5 million.

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(3)

These securities were retained in securitizations as a result of the market disruption in 2007. They are backed by Nonprime, Home Equity and non-conforming prime loans.

(4)

Annualized.

        The Loan Servicing Sector pre-tax loss was $817.5 million during the quarter ended March 31, 2008 compared to a loss of $100.3 million in the year-ago period. The decline in profitability is due primarily to higher credit charges in the quarter ended March 31, 2008 driven by increased levels of mortgage delinquencies, defaults and loss severity levels, as well as downward revisions in expectations of future home prices compared to prior quarters. A decrease in income from escrow balances caused by lower earnings rates due to lower short-term interest rates in the 2008 quarter also contributed to the increase in the pre-tax loss. These declines were partially offset by improvement in the MSR valuation changes, net of the Servicing Hedge. The decline in interest rates during the current period resulted in a decline in the value of the MSRs and gains in the Servicing Hedge. However, the MSR valuation was positively impacted by slower current and expected prepayment speeds resulting from the market disruption in late 2007. These factors produced a gain of $108.8 million in valuation changes, net of the Servicing Hedge in the current period compared to an expense of $170.3 million in the year-ago period.

Loan Closing Services Sector

        This sector is comprised of the LandSafe companies, which provide credit reports, flood determinations, appraisals and title reports primarily to the Loan Production Sector and to third parties as well.

        The LandSafe companies produced $33.2 million in pre-tax earnings during the quarter ended March 31, 2008, representing an increase of $3.2 million, or 11%, from the year-ago period.

        During the quarter ended March 31, 2008, Fannie Mae and Freddie Mac announced a change in their policies governing acceptable appraisal practices for loans they purchase from mortgage lenders. The revised standards, which are effective for loans originated beginning on January 1, 2009, will prohibit Countrywide from using in-house appraisal staff from conducting initial appraisals and prohibit use by the Company of appraisal management companies it owns or controls. The effect of this policy will preclude LandSafe from providing appraisal services in support of the Company's loan production activities. Currently, approximately 44% of LandSafe's revenues come from property appraisals made in support of loan originations. While we have not developed specific plans on adapting our operations to these new policies, we have concluded that this change in the policies of the GSEs will not have a significant effect on our consolidated results of operations.

Banking Segment

        The Banking Segment includes Banking Operations—primarily the investment and fee-based activities of Countrywide Bank—along with the activities of Countrywide Warehouse Lending ("CWL"). Banking Operations invests in mortgage loans sourced from the Loan Production Sector, and to a lesser extent, loans and mortgage-backed securities purchased from nonaffiliates. CWL provides other mortgage lenders with temporary financing secured by mortgage loans. The Banking Segment incurred a pre-tax loss of $960.4 million during the quarter ended March 31, 2008, compared to pre-tax earnings of $288.1 million during the year-ago period.

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        Following is the composition of pre-tax results:

        The revenues and expenses of Banking Operations are summarized in the following table:

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(1)

Includes provision for loan losses and provision for losses on unfunded loan commitments.

(2)

Non-interest expense, including mortgage insurance expense but excluding allocated corporate expenses, divided by the sum of net interest income plus non-interest income. The Banking Operations' efficiency ratio reflects the expense structure resulting from its relationship with Countrywide Home Loans, which has diminished with the incorporation of the production channels into the Bank effective January 1, 2008.

        Banking Operations incurred a pre-tax loss of $925.2 million during the quarter ended March 31, 2008, a decrease of $1,219.3 million from pre-tax earnings of $294.1 million for the year-ago period. This decrease resulted primarily from a higher provision for credit losses and an increase in non-interest expense, partially offset by an increase in net interest income. The Banking Operations' provision for credit losses increased by $1.2 billion during the quarter ended March 31, 2008 compared to the year-ago period. The increase in the provision for credit losses was primarily due to increased losses inherent in the loan portfolio, resulting from increased levels of mortgage delinquencies, defaults and loss severities along with downward revisions in expectations of home prices relative to prior quarters. The provision for credit losses and the related allowance for credit losses is affected by many factors, including economic conditions (for example, housing prices, interest rates and unemployment rates), borrower credit profiles, delinquency and loan seasoning and prepayments. Non-interest expense increased $134.9 million, primarily due to increases in loan fulfillment costs charged to Banking Operations and to losses on foreclosed real estate.

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        The components of net interest income of Banking Operations are summarized below:

				Quarters Ended March 31,
				2008								2007
				Average Balance			Interest Income/ Expense			Annualized Yield/ Rate		Average Balance			Interest Income/ Expense			Annualized Yield/ Rate
				(dollar amounts in thousands)
Interest-earning assets:
	Loans(1)			$	87,649,542		$	1,487,213		6.79	%	$	70,874,082		$	1,265,364		7.16	%
	Securities available for sale(2)				17,035,693			239,485		5.62	%		7,574,841			101,450		5.36	%
	Short-term investments				4,947,850			46,690		3.80	%		53,410			913		6.93	%
	FHLB securities and FRB stock				2,137,638			31,885		6.00	%		1,409,383			20,536		5.90	%
		Total earning assets			111,770,723			1,805,273		6.47	%		79,911,716			1,388,263		6.97	%
	Allowance for loan losses				(1,602,168	)							(245,454	)
	Other assets				3,029,683								3,207,537
		Total assets		$	113,198,238							$	82,873,799
Interest-bearing liabilities:
	Money market deposits and savings accounts			$	13,367,321			133,583		4.02	%	$	10,676,624			136,174		5.17	%
	Company-administered custodial deposits(3)				10,979,981			90,496		3.31	%		15,588,390			198,412		5.16	%
	Time deposits				37,228,475			471,218		5.09	%		29,328,133			369,146		5.10	%
		Total interest-bearing deposits.			61,575,777			695,297		4.54	%		55,593,147			703,732		5.13	%
	Borrowings				38,870,090			476,521		4.93	%		17,681,984			187,791		4.31	%
		Total interest-bearing liabilities			100,445,867			1,171,818		4.69	%		73,275,131			891,523		4.93	%
Non interest-bearing liabilities and equity:
	Checking accounts				3,479,228								1,769,720
	Other liabilities				876,225								2,856,520
	Shareholder's equity				8,396,918								4,972,428
		Total non interest-bearing liabilities and equity			12,752,371								9,598,668
		Total liabilities and shareholder's equity		$	113,198,238							$	82,873,799
Net interest income							$	633,455							$	496,740
Net interest spread(4)										1.78	%							2.04	%
Net interest margin(5)										2.25	%							2.45	%

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(1)

Average balances include nonaccrual loans.

(2)

Average balances and yields for securities available for sale are based on average amortized cost computed on the settlement date basis.

(3)

Represents an intercompany rate paid to the Loan Servicing Sector.

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(4)

Calculated as yield on total average interest-earning assets less rate on total average interest-bearing liabilities.

(5)

Calculated as net interest income divided by total average interest-earning assets.

        The dollar amounts of interest income and interest expense vary depending upon changes in interest rates and upon the relative volumes of our various interest-earning assets and interest-bearing liabilities. Changes attributable to (i) changes in volume (changes in average outstanding balances multiplied by the prior period's average interest rate), (ii) changes in rate (changes in average interest rate multiplied by the prior period's volume) and (iii) changes in rate/volume (changes in rate multiplied by the change in volume)—which were allocated proportionately to the changes in volume and the changes in rate and included in the relevant column below—are as follows:

        The increase in net interest income was primarily due to a $31.9 billion, or 40% increase in average interest-earning assets offset by a 20 basis point decrease in net interest margin. The decrease in the net interest margin was primarily a result of the negative effect on our yields from interest reversals on nonaccrual loans combined with relative increases in the rates offered on deposit accounts.

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        Banking Operations balance sheets are as follows:

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(1)

Includes inter-company deposits.

(2)

Calculated as the yield on total interest-earning assets less the cost of total interest-bearing liabilities.

        The Banking Segment also includes the operations of CWL. CWL's pre-tax results declined by $11.4 million during the quarter ended March 31, 2008 in comparison to the year-ago period. This decline was largely due to a 67% decrease in average mortgage warehouse advances, which resulted primarily from a decrease in overall market funding activity, product restrictions and a reduction in the number of mortgage lending customers. Warehouse lending advances were $1.1 billion at March 31, 2008 and had an average yield of 4.8% during the quarter ended March 31, 2008.

Capital Markets Segment

        Our Capital Markets Segment recorded pre-tax earnings of $1.0 million during the quarter ended March 31, 2008, a decrease of $131.2 million from the year-ago period.

        The market dislocation that began in the third quarter of 2007 and has persisted through the date of this Report caused significant disruption to the activities of our Capital Markets Segment. Specifically, the markets in which this segment operates became illiquid and the availability of financing

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for certain of the segment's activities was severely reduced. As a result, we curtailed Capital Markets business activities.

        The following table shows revenues, expenses and pre-tax earnings of the Capital Markets Segment:

        During the quarter ended March 31, 2008, conduit revenues decreased compared to the year-ago period due to a reduction in volume of loans sold. Conduit revenues were aided in the first quarter of 2008 by income in the amount of $37.9 million, which partially reversed losses recorded in the latter part of 2007 on previously securitized loans that qualified for sale accounting in the current quarter.

        During the quarter ended March 31, 2008, the commercial real estate finance activities of the Capital Markets Segment generated revenues totaling $41.5 million compared to $48.2 million in the year-ago period. The decrease in revenue was due primarily to a decrease in the volume of loans sold partially offset by hedging gains, including $33.9 million of credit default swap gains. From late 2007 our commercial real estate lending activities were substantially curtailed because of the loss of available outside financing and disruptions in the securities market for commercial mortgage-backed securities.

        During the quarter ended March 31, 2008, both our securities trading and underwriting revenues were negatively impacted by the continued disruption in the capital markets and declines in the value of non-agency securities and loans resulting from credit spread widening partially offset by gains on credit default swaps related to our trading portfolio.

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        The following table shows the composition of Countrywide Securities Corporation ("CSC") securities trading volume, which includes intersegment trades with the Mortgage Banking Segment, by instrument:

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(1)

Approximately 10% and 14% of the segment's non-U.S. Treasury securities trading volume was with CFC affiliates during the quarter ended March 31, 2008 and 2007, respectively.

Insurance Segment

        The Insurance Segment's pre-tax earnings decreased by $144.2 million over the year-ago period to $35.5 million during the quarter ended March 31, 2008. The following table shows pre-tax earnings by component:

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(1)

Includes the Balboa Insurance Group and Countrywide Insurance Services.

        The following table shows net insurance premiums earned:

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        The following table shows insurance claim expenses:

        Our mortgage reinsurance business's pre-tax loss totaled $136.1 million, a decline in results of $267.3 million from the year-ago period, driven by a $295.8 million increase in mortgage reinsurance claims provision during the quarter ended March 31, 2008, as compared to the year-ago period. The increase in the provision for mortgage reinsurance claims is due to increased projection for future claims payments, driven primarily by a worsening housing market and resulting higher actual and projected default rates. The year-ago period included a $74.0 million reversal of loss reserves related to the 2003 books of business, on which negligible remaining loss exposure was deemed to exist in the first quarter of 2007.

        During the first quarter of 2008, Freddie Mac announced a temporary change to its private mortgage insurer requirements. Effective for loans funded on or after June 1, 2008, Freddie Mac-approved private mortgage insurers may not cede new risk if the gross risk or gross premium ceded to captive mortgage companies, such as Balboa Reinsurance Company, is greater than 25%. Because the companies for which Balboa Reinsurance Company provides reinsured mortgage insurance are all Freddie Mac-approved private mortgage insurers, this temporary policy change will have a direct impact on all of our reinsurance business.

        Presently, private mortgage insurers cede on average 38% of their premiums to us. Therefore, while Freddie Mac's temporary policy change is in effect, Countrywide will not be able to underwrite the same level of risk or realize the same level of premium revenue on new business as it has in the past. The effect of this temporary change on the profitability of our reinsurance business has not yet been determined and will depend, in part, on the agreements we negotiate with the private mortgage insurance companies whose risk we reinsure during the coming months.

        Our Life and Casualty insurance business produced pre-tax earnings of $181.4 million, an increase of $124.8 million, from the year-ago period. The increase in earnings was primarily driven by a $127.9 million, or 47%, increase in net earned premiums during the quarter ended March 31, 2008 in comparison to the year-ago period while insurance claims expense only increased slightly. The increase in net earned premiums was primarily attributable to growth in lender-placed insurance. The small increase in insurance claim expenses was the result of growth in premiums partially offset by an improvement in claims loss experience and a decrease in catastrophe losses.

Global Operations Segment

        Global Operation's pre-tax earnings totaled $11.0 million during the quarter ended March 31, 2008, an increase of $7.0 million from the year-ago period. The increase in earnings was primarily due to continued offshore expansion efforts in India and the UK.

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Detailed Line Item Discussion of Consolidated Revenue and Expense Items

Gain on Sale of Loans and Securities

        Gain on sale of loans and securities is summarized below:

---

(1)

Includes loans sourced from the Mortgage Banking Segment.

(2)

Gain on sale as a percentage of loans sold.

Mortgage Banking Segment

        Mortgage Banking gain on sale decreased in the quarter ended March 31, 2008 as compared to the quarter ended March 31, 2007, due primarily to lower sales and a higher provision expense applicable to estimated future representations and warranty claims.

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Loan Production Sector

        Gain on sale of Prime Mortgage Loans increased in the quarter ended March 31, 2008 as compared to the quarter ended March 31, 2007, due primarily to the Company's adoption of SAB 109, which aided profitability in the quarter ended March 31, 2008 by $357.7 million. The adoption of this guidance results in revenue being recorded upon initial recognition of derivative interest rate lock commitments. Prior to adoption, revenue was recorded when the loans were sold. In addition, our election to account for the majority of our loans held for sale at estimated fair value effective January 1, 2008 positively impacted prime gain on sale margins. Because of this election, origination costs and fees are recorded in earnings as incurred instead of being deferred, which resulted in increased prime gain on sale margins of approximately $104 million. This amount is offset by higher production expenses. Increased gain on sale margins on Prime Mortgage Loans also contributed to the increase in gain on sale of Prime Mortgage Loans. These positive factors were partially offset by a 35% decline in the volume of loans sold.

        Loss on sale of Nonprime Mortgage Loans increased in the quarter ended March 31, 2008 as compared to the year-ago period due primarily to a decline in the volume of nonprime loans produced and sold because we discontinued production of Nonprime Mortgage Loans in late 2007. The loss in the quarter ended March 31, 2008 consisted primarily of valuation adjustments on nonprime loans held for sale due to lessened liquidity for non-agency loans and credit spread widening. These loans included $1.9 billion of loans that have previously been securitized but which did not qualify as sales in accordance with SFAS 140.

        Gain on sale of Prime Home Equity Loans decreased in the quarter ended March 31, 2008 as compared to the year-ago period due primarily to a decrease in sales of such loans.

Loan Servicing Sector

        We estimate our liability for representations and warranties at the time of sale and update our estimates quarterly. At the time of sale, the liability incurred adjusts our gain on sale. Subsequent to sale, adjustments to our liability for representations and warranties are included in our Loan Servicing Sector. The expense applicable to estimated future representations and warranty claims increased to $456.4 million in the quarter ended March 31, 2008 from $41.7 million in the year-ago period. Of these amounts, $404.2 million and $31.3 million for the current quarter and the year-ago quarter, respectively, were adjustments made subsequent to sale and are included in the Loan Servicing Sector loss on sale of loans. The increase was primarily driven by worsening trends and expectations for delinquencies and home prices and the related increase in the projection of future defaults to which representation and warranty claims are correlated.

Capital Markets Segment

        During the quarter ended March 31, 2008, conduit gain on sale decreased compared to the year-ago period due to a reduction in the volume of loans. Gain on sale was aided by income in the amount of $37.9 million, which partially reversed losses recorded in 2007 on previously securitized loans that qualified for sales accounting under SFAS 140 in the first quarter of 2008.

        During the quarter ended March 31, 2008, both our securities trading and underwriting revenues were negatively impacted by the continued disruption in the capital markets and declines in the value of non-agency securities and loans resulting from credit spread widening.

        During the quarter ended March 31, 2008, commercial real estate gain on sale was aided by $33.9 million gains on credit default swaps.

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Inter-sector Hedge Allocation

        As discussed in the section of this Report entitled Management's Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures About Market Risk , during the quarter ended March 31, 2008 we managed in aggregate the changes in value of our Mortgage Banking assets arising from Market Spread risk, while maintaining separate portfolios of financial instruments to manage the interest rate risk inherent in our production and servicing assets. Accordingly, changes in the value of sector assets and the related hedge instruments (collectively the "Position") arising from changes in Market Spreads were allocated between Loan Production and Loan Servicing sectors. In the quarter ended March 31, 2008, Market Spreads declines in the value of the Loan Production Sector Position of $340.5 million were allocated to the Loan Servicing Sector.

Net Interest Income and Provision for Loan Losses

        Net interest income is summarized below:

        The increase in net interest income from the Banking Segment was attributable to growth in average interest-earning assets partially offset by a decrease in the net interest margin. Average interest-earning assets in the Banking Segment increased to $112.5 billion during the quarter ended March 31, 2008, an increase of $28.9 billion, or 35%, over the year-ago period. Net interest margin in the Banking Segment decreased to 2.24% during the quarter ended March 31, 2008, from 2.42% during the year-ago period primarily as a result of increasing levels of non accrual loans along with relative increases in deposit rates offered.

        The decrease in net interest income from the Mortgage Banking Segment loans and securities reflects a decrease in the balance of average interest-earning assets resulting from lower mortgage loan production, partially offset by an increase in net interest margin from the year-ago period. The Mortgage Banking Segment loan and securities inventory is financed in part with borrowings tied to short-term indices. During the current quarter the difference between long-term and short-term interest rates was more favorable than in the year-ago period, causing the increase in net interest margin.

        In the Loan Servicing Sector, interest income on custodial balances decreased from the prior year due to a reduction in the earnings rate along with a reduction in average balances, partially offset by a decrease in interest expense on paid-off loans resulting from a decrease in payoffs. Interest income on custodial balances is reduced by the interest we are required to pass through to security holders on

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paid-off loans, which was $67.5 million and $88.2 million during the quarters ended March 31, 2008 and 2007, respectively.

        Interest expense, net, included in the Loan Servicing Sector decreased primarily due to an increase in total Loan Servicing Sector assets partially offset by a reduction in rates and increased interest income on a larger mortgage loan investment portfolio in the Mortgage Banking Segment.

        The increase in net interest income from the Capital Markets Segment securities inventory is attributable to an increase in the net interest margin from 0.14% during the quarter ended March 31, 2007 to 0.62% during the quarter ended March 31, 2008, partially offset by a 43% decrease in the average inventory of securities held. Capital Markets' revenues from its securities trading activities consist of gain on sale and interest income. In a steep yield curve environment, net interest income will comprise a larger percentage of total securities trading revenue. As the yield curve flattens and inverts, the mix of revenues will shift toward gain on sale of securities. During the first quarter of 2008, the yield curve steepened, which resulted in a shift in trading revenues from gain on sale to interest income, which caused the increase in the net interest margin earned on the securities portfolio.

        The increase in the provision for loan losses was primarily due to increased losses inherent in the loan portfolio, resulting from increased levels of mortgage delinquencies, defaults and loss severities, as well as downward revisions in expectations of home prices relative to prior quarters.

Loan Servicing Fees and Other Income from MSRs and Retained Interests

        Loan servicing fees and other income from MSRs and retained interests are summarized below:

---

(1)

Includes contractually specified servicing fees.

        The increase in servicing fees, net of guarantee fees, was principally due to a 13% increase in the average servicing portfolio, partially offset by a decrease in the overall annualized net service fee earned from 0.336% of the average portfolio balance during the quarter ended March 31, 2007 to 0.328% during the quarter ended March 31, 2008.

        The decrease in income from retained interests was due primarily to a 21% decrease in the average investment in these assets from the quarter ended March 31, 2007 to the current quarter, combined with a reduction in the average yield on such instruments from 17% during the year-ago period to 15% during the current quarter. Income from retained interests excludes any impairment charges or recoveries, which are included in impairment of retained interests in the consolidated statement of operations. These investments include interest-only, principal-only, certain mortgage pass-through and residual securities that arise from the securitization of mortgage loans, primarily Nonprime Mortgage and Prime Home Equity Loans.

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Realization of Expected Cash Flows from Mortgage Servicing Rights

        The change in fair value of MSRs that is included in operations during the quarters ended March 31, 2008 and 2007 consists of two primary components—a reduction in fair value due to the realization of expected cash flows from the MSRs and a change in fair value resulting from changes in interest rates and other market factors. The realization of expected cash flows from MSRs resulted in a value reduction of $753.6 million and $799.9 million during the quarters ended March 31, 2008 and 2007, respectively. This amount declined because of a decrease in the prepayment rate of loans in our MSR portfolio due to a worsening housing market and lesser credit availability in the mortgage market.

Change in Fair Value of Mortgage Servicing Rights

        We recorded a decrease in the fair value of the MSRs in the quarter ended March 31, 2008 of $1,460.7 million, primarily as a result of decreasing mortgage rates which increased expected future prepayment speeds of our agency servicing portfolio. The impact of decreasing interest rates on expected future prepayments in other products was moderated by lower levels of housing turnover and lesser refinance activity due to weakening housing market conditions, reduced secondary market liquidity and significant tightening of available credit. We recorded an increase in the fair value of the MSRs in the quarter ended March 31, 2007 of $54.2 million, primarily as a result of the effect of a steepening yield curve during the quarter which lowered expected future prepayment speeds.

Impairment of Retained Interests

        Impairment of retained interests is summarized below:

        In the quarter ended March 31, 2008, we recognized impairment of credit-sensitive retained interests of $441.3 million, including $347.1 million related to subordinated interests on Prime Home Equity securitizations and $66.5 million related to Nonprime and related residual interests. The impairment on Prime Home Equity securitizations consists of impairment of retained interests of $192.7 million and impairment losses of $154.4 million related to estimated future draw obligations on the securitizations that have entered or are probable to enter rapid amortization status. These impairment charges were primarily the result of the effect of increased estimates for future losses on the loans underlying these securities driven by weakening housing market conditions and significant tightening of available credit. The loss estimate, as measured by gross undiscounted losses embedded in the valuation of subordinated interests as a percentage of the unpaid principal balance of the loans underlying such interests, increased from 4.1% in the quarter ended March 31, 2007 to 14.4% in the quarter ended March 31, 2008.

        During the quarter ended March 31, 2007, impairment of credit-sensitive retained interests was due to increased loss estimates and higher investor yield requirements.

        In the quarter ended March 31, 2008, impairment of the non credit-sensitive retained interests was related to interest-only securities together with senior and mezzanine securities that we began retaining as a result of the market disruption during 2007. The impairment in the current quarter is due mainly

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to a decrease in the value of senior and mezzanine securities resulting from higher investor yield requirements for such securities combined with a reduction in the value of interest-only securities caused by increased prepayment speeds as a result of declining interest rates.

        During the quarter ended March 31, 2007, impairment of non credit-sensitive retained interests was due primarily to a decline in the value of interest-only securities resulting from increased market yield requirements.

Servicing Hedge Gains/Losses

        The Servicing Hedge is designed to supplement the macro hedge and to offset a portion of the change in value of MSRs and retained interests recorded in the current quarter. The values of the derivatives and securities that are the primary components of the Servicing Hedge are tied to long-term mortgage, swap and Treasury rates. Overall, these rates decreased and volatility of these rates increased during the current period and as a result, the Servicing Hedge produced a gain of $2,004.4 million, including $423.4 million of time value decay of the options included in the Servicing Hedge (our "hedge cost").

        During the quarter ended March 31, 2007, rates decreased slightly. In addition, we supplemented the Servicing Hedge with credit default swaps to moderate a negative impact on earnings caused by credit spread-driven declines in fair value of our retained interests during the early part of 2007. During this period, credit spreads widened, resulting in a gain related to the credit default swaps. During the quarter ended March 31, 2007, the Servicing Hedge incurred a loss of $113.7 million, including $114.3 million of hedge cost and a $57.2 million gain related to credit default swaps.

        In a stable interest rate environment, we expect to incur no significant declines in value of MSRs other than recovery of our investment through the realization of cash flows. However, we expect to incur hedge cost. The level of Servicing Hedge gains or losses in any period depends on various factors such as the size and composition of the hedge, the shape of the yield curve and the level of implied interest rate volatility.

Net Insurance Premiums Earned

        The $154.7 million increase in net insurance premiums earned was primarily attributable to growth in lender-placed policies.

Other Revenue

        Other revenue consists of the following:

---

(1)

Includes restructuring charges of $2.2 million related to fixed assets during the quarter ended March 31, 2008.

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Compensation Expenses

        Compensation expenses decreased $21.4 million, or 2%, during the quarter ended March 31, 2008 as compared to the year-ago period as summarized below:

---

(1)

Includes restructuring charges of $3.3 million during the quarter ended March 31, 2008.

        Average workforce by segment is summarized below:

        Compensation expense reductions occurred in the Mortgage Banking and Capital Markets Segments, as well as in Corporate Administration.

•

In the Mortgage Banking Segment, compensation expenses decreased $144.8 million, or 17%, before deferral of loan origination costs. The decrease came from the Loan Production Sector, where compensation expenses decreased $182.8 million, or 26%, because of a 39% reduction in loan production partially offset by the change in channel mix toward retail lending which requires more Countrywide labor costs than Wholesale Lending or Correspondent Lending channels. This decrease was partially offset by an increase of $30.8 million in the Loan Servicing Sector due to costs incurred to address rising delinquencies.



•

In the Capital Markets Segment, compensation expense decreased by $38.6 million mainly due to a decrease in incentive compensation resulting from a decrease in this Segment's revenues.



•

In Corporate Administration, compensation expense reductions primarily related to reductions in stock-based compensation and pension expenses as well as to reduced staffing levels.

        Effective January 1, 2008, we adopted SFAS 159 and have elected to account for most of our mortgage loans originated or purchased for sale at their estimated fair value. Because of this election, fees and costs are recorded in earnings as incurred instead of being deferred. Accordingly, the deferral of loan origination costs declined by 86% from the prior period.

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Occupancy and Other Office Expenses

        Occupancy and other office expenses are summarized below:

---

(1)

Includes restructuring charges of $9.1 million during the quarter ended March 31, 2008.

        During the quarter ended March 31, 2008, occupancy and other office expenses decreased by 8%, or $21.4 million, reflecting our activities to adjust our operations to the expected near-term mortgage market.

Insurance Claim Expenses

        Insurance claim expenses were $355.7 million during the quarter ended March 31, 2008 as compared to $57.3 million during the year-ago period. The increase in insurance claim expenses was primarily the result of a $295.8 million increase in the provision for mortgage reinsurance claims arising from an increase in the projection for future claims payments caused by a worsening housing market and resulting higher actual and projected default rates. The year-ago period included a $74.0 million reversal of loss reserves related to the 2003 books of business, on which negligible remaining loss exposure was deemed to exist in the first quarter of 2007.

Advertising and Promotion Expenses

        Advertising and promotion expenses increased 5% from the year-ago period, as a result of the increasing competition for lending business as mortgage market volumes decline.

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Other Operating Expenses

        Other operating expenses are summarized below:

        Losses on servicing-related advances increased $49.3 million due to increases in the level of defaulted loans in the servicing portfolio.

Liquidity and Capital Resources

        We meet our financing requirements using a combination of debt and equity capital. Our short-term financing needs arise primarily from our holding of mortgage loans pending sale, the trading activities of our broker-dealer and our warehouse lending business. Our long-term financing needs arise primarily from our investments in our mortgage loan portfolio, MSRs and retained interests and the financial instruments acquired to manage the interest rate risk associated with those investments. The structure and mix of our debt and equity capital are driven by our strategic objectives, regulatory and credit rating agency requirements and capital markets conditions. These factors affect the type of financing we are able to obtain and the size of our operations.

        Our primary sources of debt include deposits taken by our Bank, FHLB advances, the public corporate debt markets, unsecured bank lines, repurchase agreements and the secondary mortgage market. Our primary source of equity capital is retained earnings. From time to time, we may issue common or preferred stock, subordinated debt or other securities that receive equity-like treatment by the credit rating agencies as a means of increasing our capital base and supporting our operations. To this end, in the third quarter of 2007 we issued 20,000 shares of 7.25% Series B non-voting convertible preferred stock for an aggregate price of $2.0 billion. The preferred stock ranks senior to our common stock with respect to payment of dividends and distribution upon liquidation. We also have $2.3 billion outstanding in junior subordinated debentures that receive varying degrees of "equity treatment" from rating agencies, bank lenders and regulators. In addition, at March 31, 2008, we had a $5.5 billion deferred tax liability related to our MSRs that would offset a portion of any realized loss in the value of our MSRs, and which is generally offset against our MSRs in determining our capital requirements.

        In response to severe disruption in the secondary mortgage market and short- and long-term and unsecured debt markets that began in the second half of 2007, we took the following actions to enhance our liquidity and capital position:

•

Accelerated the integration of our mortgage banking activities into our bank subsidiary which has access to more stable, non-capital markets based funding

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•

Significantly changed our underwriting standards to focus the majority of our loan production on loans that are available for direct sale to or securitization into programs of the government-sponsored entities



•

Modified our funding structure by significantly reducing our reliance on the public debt and non-agency secondary mortgage markets and instead relied on our reliable contingent liquidity sources to fund our business, including drawing the full $11.5 billion amount of our committed revolving credit facilities established to provide liquidity in the event of a disruption in the commercial paper market.

        Because of these changes, our funding structure has evolved such that it more closely resembles that of a thrift holding company rather than that of a finance company with a banking subsidiary.

        Fitch Ratings took negative ratings actions on CFC during the quarter. Fitch downgraded the long-term debt ratings of all three rated entities (CFC, CHL and the Bank) to BBB-, the lowest investment-grade rating, on concerns related to increased credit deterioration across the mortgage industry. These actions did not have a material effect on our liquidity position. On May 5, 2008, Fitch Ratings changed the Rating Outlook status of all of our ratings from Rating Watch Positive to Rating Watch Evolving due to the disclosure by Bank of America that there is no assurance that all of CFC's debt will be redeemed, assumed or guaranteed after their planned acquisition of Countrywide.

        On May 2, 2008, Standard and Poor's Ratings Service (S&P) lowered its rating of CFC and CHL from BBB+ to BB+, a non-investment grade rating. S&P also lowered its rating of the Bank from A- to BBB. The Rating Outlook for all three entities was changed from Credit Watch Positive to Credit Watch Developing. As with Fitch Ratings, S&P's ratings actions were in connection with the disclosure by Bank of America related to their expected treatment of CFC's debt following the planned merger.

        Following are our credit ratings as determined by the nationally recognized statistical rating organizations ("credit rating agencies") as of May 5, 2008:

		Countrywide Financial Corporation						Countrywide Home Loans						Countrywide Bank
Credit Rating Agency		Short- Term		Long- Term		Rating Outlook		Short- Term		Long- Term		Rating Outlook		Short- Term		Long- Term		Rating Outlook
Standard & Poor's		B		BB+		Credit Watch Developing		B		BB+		Credit Watch Developing		A-2		BBB		Credit Watch Developing
Moody's Investors Service		P3		Baa3		Under Review for Possible Upgrade		P3		Baa3		Under Review for Possible Upgrade		P2		Baa1		Under Review for Possible Upgrade
Fitch		F3		BBB-		Rating Watch Evolving		F3		BBB-		Rating Watch Evolving		F3		BBB-		Rating Watch Evolving

        As a result of S&P's rating action on CFC and CHL's debt, we no longer have access to our $10.4 billion secured revolving line of credit (Park Monaco). We terminated this facility on May 9, 2008. Furthermore, CFC's current credit ratings make it unlikely that we can access the unsecured public corporate debt markets at attractive rates when the current disruption abates. Consequently, our relative cost of financing could rise significantly and we could find ourselves at a competitive disadvantage in pursuing some of our capital-intensive activities, such as our ongoing investment in our portfolio of mortgage loans held for investment, MSRs and retained interests. Investment grade ratings are also important to counterparties with which we engage in normal-course trading and financing activities and to the GSEs. There has been minimal action taken to date by these constituents; however, the ultimate reaction of such constituents has yet to be determined.

        Despite the reductions in CFC and CHL's ratings, the Bank still maintains investment grade credit ratings from all three rating agencies and as such, has not lost access to any of its direct sources of

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liquidity including deposits and FHLB advances. To date, S&P's actions have not had a material impact on our ability to retain escrow and commercial deposits. However, given the recent timing of the downgrade, we may not have experienced the full impact of its impact on our operations.

        Countrywide Bank is regulated by the Office of Thrift Supervision ("OTS") and is therefore subject to OTS capital requirements. At March 31, 2008, the Bank's regulatory capital ratios and amounts and minimum required capital ratios for the Bank to maintain a "well capitalized" status are as follows:

---

(1)

Minimum required to qualify as "well capitalized." Management intends to maintain capital at levels that are higher than those required to be considered "well capitalized."

        Countrywide Bank is required by OTS regulations to maintain tangible capital of at least 1.5% of assets. However, the Bank is also required to maintain a tangible equity ratio of at least 2% to avoid being classified as "critically undercapitalized." Critically undercapitalized institutions are subject to the prompt corrective action provisions of the Financial Institution Reform Recovery and Enforcement Act of 1989. The Bank's tangible capital ratio was 7.7% and 8.0% at March 31, 2008 and December 31, 2007, respectively.

        The OTS has prescribed that the Company and its affiliates are not authorized to receive, and the Bank is not authorized to pay the Company or its affiliates, capital distributions without receipt of prior written OTS non-objection.

        The Company is also subject to U.S. Department of Housing and Urban Development, Fannie Mae, Freddie Mac and Government National Mortgage Association ("Ginnie Mae") net worth requirements. Management believes the Company is in compliance with those requirements.

        While current market conditions present challenges to us, the funding structure that we have migrated toward has allowed us to change our sources of funding away from those that have higher refinancing risk toward more stable and reliable sources such as deposits and FHLB advances. We classify a facility as reliable when the facility is provided by a government-sponsored enterprise or when it is contractually committed to us and we have paid a commitment fee in exchange for the facility. These sources include committed secured and unsecured revolving credit facilities provided by highly rated banks. At March 31, 2008, we estimate that we have reliable sources of liquidity available totaling $27.7 billion. However, on a pro forma basis giving effect to the ratings action taken by Standard & Poor's on May 2, 2008, excess borrowing capacity would have been $17.3 billion as of March 31, 2008.

Cash Flow

Quarter Ended March 31, 2008 compared to Quarter Ended March 31, 2007

        Cash provided by operating activities was $0.3 billion for the quarter ended March 31, 2008, compared to cash used by operating activities of $1.5 billion for the year-ago period. Cash provided by operating activities includes the proceeds from the sales and principal repayments of such mortgages and the cash used for the origination and purchase of mortgage loans held for sale. We generally retain servicing rights and may retain other interests when these loans are sold. The recognition of the amounts retained is a non-cash investing activity. See Note 17 —Supplemental Cash Flow Information in

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the financial statement section of this Report. In the quarter ended March 31, 2008, funds used to originate and purchase mortgage loans exceeded proceeds from the sales of mortgage loans by $2.8 billion. In the year-ago period, funds used to originate and purchase mortgage loans exceeded proceeds from the sales and principal repayments of mortgage loans by $2.4 billion. Cash provided by operations was primarily due to a decrease in trading securities of $3.9 billion, partially offset by an increase in trading securities sold, not yet purchased.

        Net cash provided by investing activities was $2.7 billion for the quarter ended March 31, 2008, compared to cash used by investing activities of $5.5 billion for the year-ago period. The increase in net cash provided by investing activities was attributable to a $12.5 billion increase in net proceeds from investments in other financial instruments combined with a $3.4 billion decrease in securities purchased under agreements to resell, securities borrowed, and federal funds sold, partially offset by an increase of $4.9 billion in loans held for investment compared to a decrease of $3.5 billion in the year-ago period.

        Net cash used by financing activities for the quarter ended March 31, 2008 totaled $2.7 billion, compared to net cash provided by financing activities of $6.8 billion for the year-ago period. In the quarter ended March 31, 2008, there was a $10.3 billion decrease in cash provided by short-term borrowings, including securities sold under agreements to repurchase. Partially offsetting this decrease, deposit liabilities increased $3.1 billion during the quarter ended March 31, 2008, compared to an increase of $1.9 billion in the year-ago period.

Credit Risk Management

        A significant risk for the Company is credit risk, which is the risk that a borrower will not repay the loan's balance as agreed and the risk that the proceeds from liquidation of the collateral securing the loan will not be adequate to repay the loan's balance. We also have credit risk that a counterparty will not perform in accordance with contractual terms and we will not realize uncollateralized gains that have been recorded. Credit risk arises in many of our business activities including lending activities, mortgage banking, securities trading activities and interest rate risk management activities. We balance the level of credit risk against our expected returns in determining the level of credit risk we retain.

Lending Activities—Sale of Loans

        A significant amount of the mortgage loans that we originate or purchase in our Mortgage Banking and Capital Markets Segments are sold into the secondary mortgage markets primarily in the form of securities, and to a lesser extent as whole loans. When we sell or securitize our loans we retain varying degrees of credit risk from the continuing investments and/or obligations we retain either in the form of credit-enhancing subordinated interests, corporate guarantees or representations and warranties issued when we sell or securitize loans and through the structure of certain of our securitizations.

        Our Prime Mortgage Loans generally are sold on a non-recourse basis, while Prime Home Equity and Nonprime Mortgage Loans generally were sold with limited recourse for credit losses. Almost all of our loan sale transactions retain credit risk in the form of the representations and warranties we provide and that are customary for loan sales transactions.

Subordinated Interests

        Our exposure to credit losses related to subordinated interests is limited to the assets' carrying values plus the value of additional draws we may be required to subordinate if a rapid amortization

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event occurs in a securitization. We carry subordinated interests at their estimated fair values. The carrying values of our subordinated interests are as follows:

---

(1)

Included with mortgage-backed pass-through securities.

        The carrying values of our subordinated interests take into account our estimates of losses to be absorbed by the subordinated interests.

        The losses absorbed by our subordinated interests are summarized as follows:

        We estimate our liability for impairment losses related to our future draw obligations and update our estimate quarterly. Our provision for estimated losses arising from future draw obligations is recorded as a component of impairment of retained interests. The accrued liability for impairment related to future expected funding obligations under a rapid amortization event was $797.6 million as of March 31, 2008.

        As of March 31 2008, 11 of 57 outstanding home equity line of credit ("HELOC") securitizations, representing 39.2% of the unpaid principal balance of our HELOC securitizations, were subject to rapid amortization events and 11 of 57 outstanding HELOC securitizations, representing 32.0% of the unpaid principal balance of our HELOC securitizations were probable to become subject to rapid amortization events. We evaluate all of our HELOC securitizations for their potential to experience a rapid amortization event by estimating the amount and timing of future losses on the underlying loans and the excess spread available to cover such losses and by evaluating any estimated shortfalls in relation to contractually defined triggers. The available credit lines for the securitizations subject to or probable to be subject to a rapid amortization event were approximately $2.2 billion at March 31, 2008. Substantially all of the remaining borrower draw periods for such securitizations ranged from 21 months to 50 months with a weighted average remaining borrower draw period of 37 months.

        Due to the borrower's ability to pay down and redraw balances in HELOC loans, a maximum funding obligation related to rapid amortization events cannot be defined. The charges we will ultimately record as a result of the rapid amortization events are dependent on the performance of the loans in the securitizations that are in rapid amortization; the amount of subsequent draws made by borrowers on such loans; and the timing of such losses, borrower draws, principal repayments and other cash flows related to the securitizations. To mitigate the amount of additional draws we are required to fund as the result of rapid amortization and, more broadly, as the result of the credit performance of

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all the HELOC loans we service, we have undertaken a review and analysis of the HELOC loans in our servicing portfolio. This analysis may result in us taking actions that are provided for in the borrowers' line of credit agreements, including suspending borrowers' access to existing lines of credit when their loans enter a specified delinquency status or when their property values decline below a specified threshold; and not renewing lines of credit. In addition, we are evaluating other courses of action available to us under the terms of the HELOC securitization agreements, including repurchasing certain delinquent loans and soliciting certain borrowers to refinance their loans.

        The following is a summary of changes in the liability:

Representations and Warranties

        When we sell a loan, we make various representations and warranties relating to, among other things, the following:

•

our ownership of the loan



•

the validity of the lien securing the loan



•

the absence of delinquent taxes or liens against the property securing the loan



•

the effectiveness of title insurance on the property securing the loan



•

the process used in selecting the loans for inclusion in a transaction



•

the loan's compliance with any applicable loan criteria (e.g., loan balance limits, property type, delinquency status) established by the buyer



•

the loan's compliance with applicable local, state and federal laws.

        The specific representations and warranties made by us depend on the nature of the transaction and the requirements of the buyer. Market conditions and credit-rating agency requirements may also affect representations and warranties and the other provisions we may agree to in loan sales. For example, in some transactions, such as sales of nonprime and prime home equity loans, we may agree to repurchase a loan if a payment default occurs within a specified period of time (e.g., 30 days) after sale.

        In the event of a breach of our representations and warranties, we may be required to either repurchase the mortgage loans with the identified defects or indemnify the investor or insurer. In such cases, we bear any subsequent credit loss on the mortgage loans. Our representations and warranties are generally not subject to stated limits. However, our contractual liability arises only when the representations and warranties are breached and generally only when a loss results from the breach. We attempt to limit our risk of incurring these losses by structuring our operations to ensure consistent production of quality mortgages and servicing those mortgages at levels that meet secondary mortgage market standards. We make significant investments in personnel and technology to ensure the quality of our mortgage loan production.

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        We estimate our liability for representations and warranties when we sell loans and update our estimate quarterly. Our provision for estimated losses arising from loan sales is recorded as an adjustment to gain on sale of loans and securities. Following is a summary of the activity in our liability for representations and warranties for the periods presented:

Corporate Guarantees

        Our corporate guarantees are contracts written to protect purchasers of our loans from credit losses up to a specified amount. We estimate the losses to be absorbed by the guarantees when we sell loans with guarantees and update our estimates every quarter. We record our provision for losses arising from the guarantees as a component of gain on sale of loans and securities. Following is a summary of the activity in our liability for corporate guarantees for the periods presented:

Portfolio Lending Activities

        In our Banking Segment, our portfolio of loans held for investment generally includes mortgage loans originated or purchased for investment purposes, mortgage loans transferred from our held for sale portfolio as a result of the market disruption that began in the third quarter of 2007 and mortgage loan warehouse lending advances. The loans were transferred from our held for sale portfolio at the lower of cost or estimated fair value at the date of transfer.

        In our Mortgage Banking Segment, loans held for investment include mortgage loans repurchased due to breaches of representations and warranties; government-guaranteed or insured loans repurchased from Ginnie Mae securitizations in place of continuing to advance delinquent principal and interest installments to security holders; and loans transferred from loans held for sale at the lower of cost or estimated fair value.

        At the time of all transfers from mortgage loans held for sale to mortgage loans held for investment, management made the decision to hold those loans for the foreseeable future, which has been defined as the next twelve months from the time of transfer, and made an assessment that the Company had the ability to hold them for that time. This decision and assessment was made individually with respect to each transfer from mortgage loans held for sale to mortgage loans held for investment, including such transfers made in the fourth quarter of 2007. Management intends to

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maintain the same decision and assessment process with respect to future transfers from mortgage loans held for sale to mortgage loans held for investment.

Mortgage Loans Held for Investment in Banking Operations

        Our portfolio of mortgage loans held in our Banking Operations consists primarily of Prime Mortgage and Prime Home Equity Loans, with unpaid principal balances that amounted to $87.2 billion at March 31, 2008.

        Our primary credit risk management tool for our portfolio of loans held for investment is the origination and purchase of loans underwritten to achieve high credit quality and collateral support. We assess a loan's quality by considering the borrower's credit profile and the value of collateral securing the loan. Where a proposed first mortgage loan's loan-to-value ratio is higher than a specified level, which is usually 80% for conventional loans, we generally require the borrower to supplement the collateral with primary mortgage insurance.

        We actively monitor our portfolio of loans held for investment and work with borrowers who contact us or who become delinquent on their loans in order to minimize credit losses. We use several tools to establish communication with and assist borrowers in curing defaults on our loans, including frequent outreach efforts throughout the collection process using tools such as brochures, housing fairs, counseling letters and DVD mailings. Our objective in the loss mitigation process is to develop payment plans or workout options that have both the highest probability of successful resolution and minimal risk of loss to Countrywide. We have also developed loan modification programs designed to assist borrowers with refinancing their ARM and pay option ARM loans before their loans reset.

        We have taken steps in recent years to reduce the credit risk in our investment loan portfolio by acquiring supplemental mortgage insurance coverage. As of March 31, 2008, $21.4 billion of Banking Operations' residential loan portfolio was covered by supplemental mortgage insurance purchased on specified pools of loans, of which $14.6 billion represents first loss coverage. The maximum loss coverage available under these policies on a combined basis is $1.4 billion. While these policies generally provide for first loss coverage, some policies require premium adjustments if claims exceed specified levels. Furthermore, coverage limits vary by policy, with some policies having limits at the pool level, and others at the loan level. The effect of this insurance on our estimate of credit losses is to reduce our provision for loan losses for the quarter ended March 31, 2008, by $56.7 million through the recognition of amounts recoverable from pool mortgage insurance. Our estimate of the effect of mortgage insurance on the loan loss provision contemplates the effect of claim disputes.

        We purchase credit enhancement from those mortgage insurance providers that have an AA- rating or equivalent from the credit rating agencies. This requirement is consistent with the eligibility requirements of the government-sponsored enterprises for mortgage insurers. We continue to monitor the respective capital positions of our mortgage insurance providers to assess their claims paying ability. While the mortgage insurance industry has experienced recent adverse financial results, resulting in ratings downgrades, with the likelihood of further deterioration over the near term, we have concluded that their claims paying ability is not impaired. In the future, we will adjust our provisions for loan losses and the mortgage insurance recoverable asset if we conclude that this capacity is impaired.

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        Following is a summary of our Banking Operations' residential mortgage loans, together with applicable mortgage insurance, by original combined loan-to-value ratio at March 31, 2008:

		March 31, 2008
Original Combined Loan-to-Value:		Unpaid Principal Balance "UPB"(1)			UPB with Lender Purchased Mortgage Insurance(2)			UPB with Borrower Purchased Mortgage Insurance
		(in thousands)
< 50%		$	3,569,671		$	263,179		$	—
50.01 - 60.00%			3,702,431			590,730			—
60.01 - 70.00%			9,567,419			2,116,849			—
70.01 - 80.00%			26,157,866			7,711,636			—
80.01 - 90.00%			25,792,196			7,388,394			2,299,174
90.01 - 100.00%			18,253,583			3,280,831			1,368,441
>100.00%			159,731			12,117			19,562
		$	87,202,897		$	21,363,736		$	3,687,177

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(1)

Excludes commercial real estate loans.

(2)

These amounts may include loans with borrower paid mortgage insurance.

        While new originations of these products have been substantially curtailed, Banking Operations holds a substantial investment in pay option ARM and payment advantage ARM loans.

        Following is a summary of pay option ARM loans held for investment by Banking Operations:

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(1)

The ratio of the amount of the loan that is secured by the property to the lower of the original appraised value or purchase price of the property.

(2)

The ratio of the amount of all loans secured by the property to the lower of the original appraised value or purchase price of the property.

(3)

Based upon unpaid principal balance.

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        The Company routinely forecasts its exposure to payment recast on negatively amortizing loans. The following assumptions were used to forecast this exposure as of March 31, 2008:

1)

18% Constant Prepayment Rate;



2)

Use of forward interest rate curves to estimate interest rates in future periods; and



3)

Loans that do not pay off completely are assumed to negatively amortize 100% of the time.

        Using these assumptions as of March 31, 2008, pay option loans that are expected to reset are shown in the following table:

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(1)

We do not maintain the loan level detail necessary to project payoff dates and balances for loans serviced by others.

        The information in the table above is limited in that it was performed at a particular point in time and is subject to the accuracy of various assumptions used, including prepayment speeds, interest rates and the percentage of loans that negatively amortize.

        Banking Operations' nonperforming assets (comprised of non-accrual loans and foreclosed assets) and troubled debt restructurings and the allowances for credit losses related to the Banking Operations' investment loan portfolio are summarized as follows:

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(1)

Third party credit enhancements include borrower-paid mortgage insurance and pool insurance acquired by Banking Operations.

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        The following table shows Banking Operations charge-offs, net of recoveries, by product:

        The increase in our nonperforming assets and charge-offs from the year-ago period was driven by the impact of a weakening housing market and significant tightening of available credit resulting from the market disruption that began in the third quarter of 2007 on delinquency and default trends as well as portfolio seasoning. We expect the level of nonperforming assets and credit losses to increase, both in absolute terms and as a percentage of our loan portfolio as current weakness in the housing market develops and as our loan portfolio continues to season.

Mortgage Warehouse Lending Advances

        We hold a portfolio of commercial loans made to other mortgage lenders to finance their inventories pending sale to Countrywide and other lenders. Our portfolio of mortgage loan warehouse advances totaled $1.1 billion and the average loan balance was $10.1 million at March 31, 2008. These loans are underwritten by assessing the creditworthiness of the warehouse lending borrowers. This includes reviewing both borrower-provided financial information and publicly available credit rating information and press coverage, as well as understanding the borrowers' operational controls and product risk and assessments of collateral.

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        We monitor the length of time that advances are outstanding against specific residential loans and may require the borrower to pay off aged advances. We also monitor the fair value of our collateral to ensure that the level of collateral posted is adequate to repay our advance in the event of default by our borrower and we require our warehouse lending borrowers to post specified levels of cash collateral to supplement the mortgage loan collateral. We also regularly review updated financial information of borrowers, including pipeline and hedging positions. We recorded negligible charge-offs related to this activity during the quarters ended March 31, 2008 and the year-ago period. Our advance rates and the collateral we advance funds against are limited to that which we can sell into the presently disrupted secondary market.

Other Mortgage Loans Held for Investment

        The following table shows the unpaid balance of other mortgage loans held for investment:

        Our portfolio of other mortgage loans held for investment is in our Mortgage Banking Segment and includes loans we have repurchased—either to remedy a violation of a representation or warranty made in a loan sale, to minimize the cost of servicing a severely delinquent loan insured or partially guaranteed by the FHA or VA or in connection with a clean-up call (a clean-up call represents the repurchase of mortgage loans when the remaining outstanding balance of the mortgage loans falls to a level where the cost of servicing the loans becomes burdensome in relation to the benefits of servicing).

        As discussed in the preceding section— Lending Activities — Sale of Loans — Representations and Warranties —we make provisions for losses that may arise from breaches of representations and warranties when we record the sale of loans and we adjust our estimates for losses quarterly. We record repurchased loans at their estimated fair value when they are repurchased and any resulting loss is charged against the liability.

        We may determine that a portion of the loans that we originate or purchase for sale will not be sold because of a defect, which may include a document deficiency, changes in secondary market conditions or deterioration of the credit status of the loan while it was held for sale. Such loans are transferred to our portfolio of loans held for investment at the lower of cost or estimated fair value on an individual loan basis and any loss is recorded as a component of gain on sale of loans and securities in current period earnings. Subsequent losses that may result from deteriorations in the credit quality of the loans that have been transferred to the investment portfolio are included in our provision for loan losses.

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        Our non-Banking Operations' nonperforming assets and troubled debt restructurings including mortgage warehouse lending advances, Mortgage Banking loans held for investment and foreclosed assets, and the related allowance for credit losses are summarized as follows:

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(1)

Excludes $2,471.4 million and $2,171.1 million, at March 31, 2008 and December 31, 2007, respectively, of loans that we have the option (but not the obligation) to repurchase and we have not exercised such option. These loans are required to be reflected in our balance sheet regardless of our intention to exercise the option to repurchase the loans.

(2)

Excludes government-guaranteed mortgage loans held for investment totaling $340.4 million and $397.6 million at March 31, 2008 and December 31, 2007, respectively.

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(3)

Generally these loans have been repurchased and recorded at fair value or transferred to loans held for investment at the lower of cost or estimated fair value. Fair value estimates incorporate the impaired status at the date of repurchase of the loans. Losses related to subsequent deterioration in the credit quality of the loans are recorded in the allowance for loan losses.

(4)

Comprised of warehouse lending advances secured by mortgage loans.

(5)

The allowance for loan losses excludes any reduction to the cost basis of loans recorded to reflect estimated fair value at repurchase or transfer to held for investment.

        The increase in our nonperforming assets and charge-offs from March 31, 2007 was driven by the impact of the weakening housing market and significant tightening of available credit on delinquencies and default trends as well as portfolio seasoning.

Allowance for Loan Losses

        Following is a summary of our consolidated allowance for loan losses by activity for the periods presented:

        The increase in the allowance and provision for loan losses was due to increased losses inherent in the loan portfolio resulting from increased level of mortgage delinquencies, defaults and loss severities, as well as downward revisions in expectations of home prices relative to prior quarters.

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        Following is a summary of annual charge-offs and recoveries for the years ended December 31, 2007, 2006, 2005, 2004 and 2003.

		Years Ended December 31,
		2007			2006			2005(1)			2004(1)			2003(1)
		(in thousands)
Charge-offs		$	725,097		$	161,807		$	30,607		$	40,557		$	14,860
Recoveries			(21,717	)		(4,966	)		(5,434	)		(15,379	)		(3,056	)
Balance, end of period		$	703,380		$	156,841		$	25,173		$	25,178		$	11,804

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(1)

While the net charge-offs for each year reflect the amount of loans charged off after recoveries, the separate amounts of charge-offs and recoveries for the years ended December 31, 2005, 2004 and 2003 may contain equal and offsetting misclassifications resulting from utilization at that time of systems and procedures designed for loan servicing rather than loan portfolio management.

Mortgage Loans Held for Sale

        At March 31, 2008, mortgage loans held for sale amounted to $15.7 billion. While loans are in inventory, we bear credit risk after taking into consideration primary mortgage insurance (which is generally required for conventional first mortgage loans with a loan-to-value ratio greater than 80%), FHA insurance or VA guarantees.

        Loans held for sale that have been placed on nonaccrual status include distressed loans that are generally purchased at a discount as part of the conduit activities of the Capital Markets Segment and loans whose credit quality has deteriorated during the time that they have been held for sale. Nonaccrual loans held for sale totaled $375.3 million and $206.7 million at March 31, 2008 and December 31, 2007, respectively. Effective for loan originations beginning on January 1, 2008, most of our new loan production is carried at the loans' estimated fair values which take into account marketplace perceptions of the loan's credit risk. The remaining mortgage loans held for sale are carried at the lower of cost or estimated fair value in the aggregate, which takes into account a reduction in value for impaired loans.

Mortgage Reinsurance

        We provide mortgage reinsurance on certain mortgage loans included in our servicing portfolio through contracts with several primary mortgage insurance companies. Under these contracts, we provide aggregate excess loss coverage in a mezzanine layer in exchange for a portion of the pool's mortgage insurance premium. As of March 31, 2008, approximately $134.4 billion of mortgage loans in our servicing portfolio are covered by such mortgage reinsurance contracts. The reinsurance contracts place limits on our maximum exposure to losses. At March 31, 2008, the maximum aggregate losses under the reinsurance contracts were limited to $1,143.0 million. We are required to pledge securities to cover this potential liability. The accumulated liability recorded for estimated reinsurance totaled $384.7 million and $148.8 million at March 31, 2008 and December 31, 2007, respectively. As of March 31, 2008, the liability for reinsurance claims includes case reserves totaling $103.1 million relating to certain of the pools of loans we have reinsured.

Securities Trading and Derivatives Counterparty Credit Risk

        We have exposure to credit loss in the event of contractual non-performance by our trading counterparties and counterparties to the over-the-counter derivative financial instruments that we use in our interest rate risk management activities. We manage this credit risk by selecting only counterparties we believe to be financially strong, spreading the credit risk among many such counterparties, by placing contractual limits on the amount of unsecured credit extended to any single counterparty and by entering into netting agreements with the counterparties, as appropriate.

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        The aggregate amount of counterparty credit exposure after consideration of relevant netting agreements, before and after collateral held by us, are as follows:

        For the quarters ended March 31, 2008 and 2007 we incurred no credit losses due to non-performance of any of our counterparties.

Quantitative and Qualitative Disclosures About Market Risk

        A significant market risk facing the Company is interest rate risk, which includes the risk that changes in interest rates will result in 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. Interest rate risk includes both changes in "risk-free" rates (usually the U.S. Treasury rate for an asset of the same duration) and changes in the premiums to risk-free rates of return required by investors, which may be the result of liquidity and/or investor perceptions of risk ("Market Spread"). The overall objective of our interest rate risk management activities is to reduce the variability of earnings caused by changes in interest rates. Our Corporate Asset/Liability Management Committee, which is comprised of several of the Company's senior financial executives, is responsible for management of this risk.

        We manage interest rate risk with derivative financial instruments and by the structure of the Company's 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 or purchase loans (also referred to as interest rate lock commitments or "IRLCs"), mortgage loans held by the Company pending sale ("Mortgage Loan Inventory"), MSRs, retained interests, trading securities and a portion of its debt.



•

Structurally, the Company manages interest rate risk in its Mortgage Banking Segment through the natural counterbalance of its loan production and servicing businesses while using portfolios of financial instruments, including derivatives, to separately moderate interest rate driven changes in value of the Loan Production and Loan Servicing sector assets. However, the market disruption that began in the latter part of 2007 has impacted the availability and the cost of derivative financial instruments used to mitigate Market Risk driven changes in the value of our Mortgage Banking assets. Although portfolios of financial instruments were maintained to manage the interest rate risk inherent in Loan Production and Loan Servicing assets during the quarter ended March 31, 2008, management managed, in aggregate, changes in value of the Mortgage Banking Segment assets arising from Market Risk by relying more on the opposing Market Spread risk of Loan Production and Loan Servicing assets. Specifically, as Market Spreads widen the value of our IRLCs and mortgage loan inventory generally decrease while the value of our MSRs increase. Accordingly, Market Spread related changes in the value of the Position were allocated between the Loan Production and Loan Servicing Sectors in the quarter ended March 31, 2008.



•

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.

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Impact of Changes in Interest Rates on the Net Value of the Company's Interest Rate-Sensitive Financial Instruments

        We perform various sensitivity analyses that quantify the net financial impact of changes in interest rates on our interest rate-sensitive assets, liabilities and commitments. These analyses incorporate assumed changes in the interest rate environment, including selected hypothetical, instantaneous parallel shifts in the yield curve.

        We employ various commonly used modeling techniques to value our financial instruments in connection with these sensitivity analyses. For mortgage loans, MBS, MBS forward contracts, collateralized mortgage obligations, interest-only securities and MSRs, we use option-adjusted spread models. The primary assumptions used in these models for the purpose of these sensitivity analyses are the prepayment speeds, risk-adjusted return requirements and implied market volatility of interest rates. For options and interest rate floors, we use an option-pricing model. The primary assumption used in this model is implied market volatility of interest rates. For retained interests, with the exception of interest-only securities, we use a zero volatility discounted cash flow model. The primary assumptions used in these models are prepayment rates, discount rates and credit losses.

        The following table summarizes the estimated change in fair value of our interest-rate-sensitive assets, liabilities and commitments as of March 31, 2008, given several hypothetical, (instantaneous) parallel shifts in the yield curve:

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        The following table summarizes the estimated change in fair value of the Company's interest-rate-sensitive assets, liabilities and commitments as of December 31, 2007, given selected hypothetical (instantaneous) parallel shifts in the yield curve:

        These sensitivity analyses are limited in that they were performed at a particular point in time; are based on the hedge position in place at that particular point in time; only contemplate certain movements in interest rates; do not incorporate changes in interest rate volatility or changes in the relationship of one interest rate index to another; are subject to the accuracy of various assumptions used, including prepayment forecasts and discount rates; and do not incorporate other factors that would impact the Company's overall financial performance in such scenarios, most significantly the impact of changes in loan production earnings that result from changes in interest rates. Not all of the changes in fair value would affect current period earnings. For example, changes in fair value of securities accounted for as available-for-sale are recognized as a component of shareholders' equity, net of income taxes, and our debt is generally carried at its unpaid balances net of issuance discount or premium. Absent hedge accounting, changes in the market value of our debt are generally not recorded in current-period earnings. For these reasons, the preceding estimates should not be viewed as an earnings forecast.

Market Risk—Foreign Currency Risk

        To diversify our funding sources on a global basis, we issue a portion of our medium-term notes denominated in foreign currencies. We manage the associated foreign currency risk through cross-currency swap transactions. The terms of the cross-currency swaps have the effect of converting all foreign currency-denominated medium-term notes into U.S. dollar-denominated obligations, thereby eliminating the associated foreign currency risk. As a result, potential changes in the exchange rates of foreign currencies denominating such medium-term notes are not expected to have a financial impact on future earnings, fair values or cash flows.

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Loan Servicing

        The following table sets forth certain information regarding our servicing portfolio of single-family mortgage loans, including loans held for sale, loans held for investment and loans serviced under subservicing agreements, for the periods indicated:

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(1)

Excludes purchases from third parties in which servicing rights were not acquired.

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(1)

Expressed as a percentage of the total number of loans serviced, excluding subserviced loans and loans purchased at a discount due to their collection status.

        We attribute the overall increase in delinquencies in our servicing portfolio from March 31, 2007 to March 31, 2008, to increased production of loans in recent years with higher loan-to-value ratios and reduced documentation requirements, combined with a weakening housing market and significant tightening of available credit and to portfolio seasoning. This impact most significant on nonprime delinquency rates. We believe the delinquency rates in our servicing portfolio are consistent with rates for similar mortgage loan portfolios in the industry.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Off-Balance Sheet Arrangements and Guarantees

        In the ordinary course of our business we engage in financial transactions that are not reflected on our balance sheet. (See Note 2 —Summary of Significant Accounting Policies in our 2007 Annual Report for a description of our consolidation policy.) Such transactions are structured to manage our interest rate, credit or liquidity risks, to diversify funding sources or to optimize our capital.

        Most of our off-balance sheet arrangements relate to the securitization of mortgage loans. Our mortgage loan securitizations are normally structured as sales and involve the transfer of mortgage loans to qualifying special-purpose entities that are not subject to consolidation. In a securitization, an entity transferring the assets is able to sell those assets for cash. Special-purpose entities used in such

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securitizations obtain cash by issuing securities representing beneficial interests in the transferred assets to investors. In a securitization, we customarily provide representations and warranties with respect to, and we generally retain the right to service, the transferred mortgage loans.

        We also generally have the right to repurchase mortgage loans from the special-purpose entity pursuant to a clean-up call, which is exercised when the costs exceed the benefits of servicing the remaining loans.

        Our Prime Mortgage Loans generally are securitized on a non-recourse basis, while Prime Home Equity and Nonprime Mortgage Loans generally were securitized with limited recourse for credit losses. During the quarter ended March 31, 2008, we did not securitize any Nonprime Mortgage or Prime Home Equity Loans. Our exposure to credit losses related to our limited recourse securitization activities is limited to the carrying value of our subordinated interests, to losses that may arise from rapid amortization events that cause subsequent draws that we are contractually required to advance to be subordinated to all other interests in these securitizations and to the contractual limit of reimbursable losses under our corporate guarantees less the recorded liability for such guarantees.

        Under the terms of our HELOC securitizations, we make advances to borrowers when they request a subsequent draw on their line of credit and we are reimbursed for those advances from the cash flows in the securitization. This reimbursement normally occurs within a short period after the advance. However, in the event that loan losses requiring draws on monoline insurer's policies (which protect the bondholders in the securitization) exceed a specified threshold or duration, reimbursement of our advances for subsequent draws occurs only after other parties in the securitization (including the senior bondholders and the monoline insurer) have received all of the cash flows to which they are entitled. This status, known as a rapid amortization event, has the effect of extending the time period for which our advances are outstanding, and may result in Countrywide not receiving reimbursement for all of the funds advanced.

        During the fourth quarter of 2007, our off-balance sheet obligations relating to rapid amortization events contained in our home equity line-of-credit securitizations were triggered as a result of actual and probable future losses relating to loans underlying these securitizations exceeding specified thresholds or durations. Normally, a rapid amortization event is not expected to occur and is deemed remote. However, sudden deterioration in the housing market experienced in late 2007 resulted in it becoming probable that a rapid amortization event would occur. Because of these events, we recorded impairment losses of $704.1 million in 2007 related to estimated future draw obligations on the home equity securitizations that have entered or are probable to enter rapid amortization status. During the quarter ended March 31, 2008, our expectation of loans losses relating to loans underlying these securitizations increased resulting from higher level of mortgage delinquencies and defaults, as well as downward revisions in expected home prices relative to prior quarters and a change in the estimate of interest earned on the additional balances. As a result, we recorded impairment losses of $154.4 million in the quarter ended March 31, 2008.

        As of March 31, 2008, 11 of 57 outstanding HELOC securitizations, representing 39.2% of the unpaid principal balance of our HELOC securitizations, were subject to rapid amortization events and 11 of 57 outstanding HELOC securitizations, representing 32.0% of the unpaid principal balance of our HELOC securitizations, were probable to become subject to rapid amortization events. We evaluate all of our HELOC securitizations for their potential to experience a rapid amortization event by estimating the amount and timing of future losses on the underlying loans and the excess spread available to cover such losses and by evaluating any estimated shortfalls in relation to contractually defined triggers. The available credit lines for the securitizations subject to or probable to be subject to a rapid amortization event are approximately $2.2 billion at March 31, 2008. Substantially all of the remaining borrower draw periods for such securitizations ranged from 21 months to 50 months with a weighted average remaining borrower draw period of 37 months.

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        Due to the borrower's ability to pay down and redraw balances in HELOC loans, a maximum funding obligation related to rapid amortization events cannot be defined. The charges we will ultimately record as a result of the rapid amortization events are dependent on the performance of the loans in the securitizations that are in rapid amortization; the amount of subsequent draws made by borrowers on such loans; and the timing of such losses, borrower draws, principal repayments and other cash flows related to the securitizations. To mitigate the amount of additional draws we are required to fund as the result of rapid amortization and, more broadly, as the result of the credit performance of all the HELOC loans we service, we have undertaken a review and analysis of the HELOC loans in our servicing portfolio. This analysis may result in us taking actions that are provided for in the borrowers' line of credit agreements, including suspending borrowers' access to existing lines of credit when their loans enter a specified delinquency status or when their property values decline below a specified threshold; and not renewing lines of credit. In addition, we are evaluating other courses of action available to us under the terms of the HELOC securitization agreements, including repurchasing certain delinquent loans and soliciting certain borrowers to refinance their loans.

        For a further discussion of our exposure to credit risk, see the section in this Report entitled Management's Discussion and Analysis of Financial Condition and Results of Operations—Credit Risk Management .

        We do not believe there are any other off-balance sheet arrangements that have had, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

        Our material contractual obligations were summarized and included in our 2007 Annual Report. There have been no material changes outside the ordinary course of our business in the contractual obligations as summarized in our 2007 Annual Report during the three months ended March 31, 2008.

Prospective Trends

Outlook

        We believe the current environment will provide significant continuing challenges for the financial services sector, including Countrywide. Specifically, in the near term, we have experienced and are likely to continue to experience:

•

Continued pressure on housing values and mortgage origination volumes



•

Increasing delinquencies and foreclosures



•

Continued disruptions in the secondary mortgage and debt capital markets and



•

More restrictive legislative and regulatory environments.

        As a result of these conditions, we are experiencing, among other things, the following:

•

Higher credit losses on delinquent loans and subordinated interests



•

Reduced access to secondary mortgage and debt capital markets



•

Increased cost of debt



•

Lower loan production volumes.

        In response to the current environment, Countrywide has discontinued Nonprime Mortgage lending, has made changes to tighten the underwriting guidelines for loan products offered and has adjusted loan pricing to reflect market conditions. The tightening of underwriting guidelines included reductions in the availability of reduced documentation loans and loans on investor-owned properties and in the maximum loan-to-value or combined loan-to-value ratio. The impact of these changes was

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most significant to Prime Home Equity and non-conforming prime loans. Further reductions in the Company's funding volume could result.

        As a result of spread widening and lessened liquidity for non-agency fixed-rate mortgages during the first quarter of 2008, management has determined that any production of such loans will be originated solely for the Company's investment portfolio.

        As long as these conditions persist, we expect our earnings and returns to be below our long-term target levels.

        Our outlook is subject to risks and uncertainties as discussed in the section " Factors That May Affect Our Future Results ."

Merger with Bank of America Corporation

        As detailed in a Current Report on Form 8-K filed with the Securities and Exchange Commission on January 17, 2008, and the Registration Statement on Form S-4 of Bank of America Corporation ("Bank of America") filed on February 12, 2008, as amended by Amendment No. 1 filed on March 27, 2008 and Amendment No. 2 filed on April 30, 2008, Countrywide entered into an agreement and plan of merger (the "Merger Agreement") with Bank of America. The Merger Agreement provides for Countrywide to merge (the "Merger") with and into a wholly-owned merger subsidiary of Bank of America ("Merger Sub"), with Merger Sub continuing as the surviving company.

        The terms of the Merger Agreement provide for the conversion of each share of Countrywide common stock into 0.1822 of a share of Bank of America common stock. Consummation of the Merger, which is currently anticipated to occur in the third quarter of 2008, is subject to certain conditions, including, among others, Countrywide stockholder and regulatory approvals.

        The Merger Agreement contains certain termination rights for Countrywide and Bank of America, applicable upon the occurrence of certain events specified in the Merger Agreement. The Merger Agreement provides that, in the event of the termination of the Merger Agreement under specified circumstances, Countrywide may be required to pay Bank of America a termination fee equal to $160 million.

        The Merger Agreement provides for both Countrywide and Bank of America to conduct their respective businesses in the ordinary course until the Merger is completed and not to take certain actions during the period from the date of the Merger Agreement until the date of completion of the Merger.

United States Mortgage Market

        The U.S. housing market is undergoing a significant contraction and lenders and investors have tightened their credit standards. Therefore, mortgage origination volumes are likely to continue decreasing and growth in total mortgage indebtedness is likely to slow in the short term.

        Over time, the level of complexity in the mortgage lending business has increased significantly due to several factors:

•

The continuing evolution of the secondary mortgage market and demand by borrowers have resulted in a proliferation of mortgage products



•

Greater regulation imposed on the industry has resulted in increased costs and the need for higher levels of specialization



•

Interest rate volatility has increased in recent years. At the same time, homeowners' propensity to refinance their mortgages has increased as the refinance process has become more efficient and cost effective. The combined result has been large swings in the volume of mortgage loans

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originated from year to year. These volume swings have placed significant operational and financial pressures on mortgage lenders.

        To compete effectively in this environment, mortgage lenders must have a very high level of operational, technological and managerial expertise. In addition, the residential mortgage business has become more capital-intensive and therefore access to capital at a competitive cost is critical. As a result of reduced access to capital, general housing trends, rising delinquencies and defaults and other factors, many mortgage lenders have recently experienced severe financial difficulty, with many exiting the business or filing for bankruptcy protection.

        Today, large and sophisticated financial institutions dominate the residential mortgage industry. These industry leaders are primarily commercial banks operating through their mortgage banking subsidiaries. According to the trade publication Inside Mortgage Finance , the top five originators produced 56% of all loans originated during the first three months of the calendar year 2008 as compared to 57% during the three months ended December 31, 2007. (Reprinted with the permission of IMF Copyrighted. All rights reserved by IMF.)

        The loan volume for the top five originators, according to Inside Mortgage Finance , is as follows: (Reprinted with the permission of IMF Copyrighted. All rights reserved by IMF.)

        We believe the consolidation trend in the mortgage industry will continue. Compared to Countrywide, the other industry leaders are less reliant on the secondary mortgage market as an outlet for mortgages, due to their greater portfolio lending capacity. This has placed us at a competitive disadvantage in the current disruption of the secondary mortgage market, which has removed a competitive outlet for our loans. We responded by shifting our production and related financing to our Bank and by focusing on agency-eligible loan production.

Housing Values

        Housing values affect us in several ways. Declines in housing values affect us by negatively impacting the demand for mortgage financing, increasing risk of default by mortgagors and increasing risk of loss on defaulted loans. These factors are somewhat offset by reduced prepayments in our loan servicing portfolio.

        Recently, we have seen broad-based declines in housing values. We expect housing values to continue to decrease during the near term which may increase our credit loss experience and which has affected our willingness to offer certain mortgage loan products, both of these factors have and may continue to impact our earnings.

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Secondary Mortgage Market Investor Demand

        Changes in investor demand for mortgage loans can have a significant impact on our ability to access the secondary mortgage market as a competitive outlet. In the first quarter of 2008, we saw a continuation of the illiquidity in the secondary mortgage market and a continuation of downgrades by certain credit rating agencies of large numbers of mortgage-backed securities. These factors have combined to severely decrease demand for and profitability of a large portion of the products we have historically produced. In response to these developments we have tightened our underwriting and program guidelines and substantially limited our production of non agency-eligible loans to our investment portfolio.

Impact of Declines in Credit Performance

        With the current contraction in the U.S. housing market and the resulting declining housing prices, along with worsening economic conditions, we expect elevated credit losses in the near term. Since 2007, we have observed a marked decline in credit performance (as adjusted for age) for recent vintages, especially those loans with higher risk characteristics, including reduced documentation, higher loan-to-value ratios or low credit scores. Deterioration in the credit performance of these loans has resulted in materially increased credit losses, impairment of our related credit-subordinated interests, recognition of losses from rapid amortization events, higher claims under our representations and warranties and elimination of demand for our mortgage-backed securities and the availability of credit enhancements for the loans and securities we sell and invest in. We expect these factors to continue and for future earnings to be impacted.

Funding Liquidity

        We have contingency planning protocols for funding liquidity that were designed to encompass a wide variety of market conditions. We place major emphasis on the adequacy, reliability and diversity of our funding sources.

        In 2007, funding liquidity in the financial services sector was constrained primarily due to changes in secondary mortgage market investor demand. These conditions worsened throughout the year and expanded to include the debt markets we have traditionally relied upon to meet our short-term funding needs.

        As discussed in the section Liquidity and Capital Resources , we have adjusted our operations and financing sources to address the current market conditions, including accessing other pre-existing funding liquidity sources, procuring new sources and the integration of our Mortgage Banking Operations into the Bank. While we believe we currently have adequate funding liquidity, the effect of future developments on the Company may require us to make additional operational adjustments and/or procure additional sources of financing.

Regulatory Trends

        The regulatory environments in which we operate have an impact on the activities in which we may engage, how the activities may be carried out and the profitability of those activities. Therefore, changes to laws, regulations or regulatory policies can affect whether and to what extent we are able to operate profitably.

        Proposed local, state and federal legislation and regulations targeted at predatory lending could have the unintended consequence of raising the cost or otherwise reducing the availability of mortgage credit for those potential borrowers with less than prime-quality credit histories. Over the longer term, such legislation and regulations will influence the terms and underwriting of products that will be offered to nonprime loan applicants. There may be future local, state and federal legislation that

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restricts our ability to communicate with and solicit business from current and prospective customers in such a way that we are not able to originate new loans or sell other products at acceptable profit margins.

        On February 13, 2008, the Economic Stimulus Act of 2008 was signed into law. The law provides for, among other things, temporary increases in the loan limits for the FHA's Single-Family Program and the conforming loan limits for loans eligible for purchase by Fannie Mae and Freddie Mac. The limits are raised to as high as $729,750 from the current $362,790 for the FHA Single Family program and $417,000 for Fannie Mae and Freddie Mac. The temporary increase applies to loans originated between July 1, 2007 and December 31, 2008.

        Implementation of the law will require Fannie Mae and Freddie Mac to develop the internal systems necessary to handle regional loan limits and develop underwriting, pricing and securitization standards for these loans and obtain regulatory approval from the Office of Federal Housing Enterprises Oversight. The Office of Federal Housing Enterprises Oversight has estimated that its approval process could take from one to three months. The effect of the law on our loan production has not yet been determined and will depend, in part, on the regional loan limits and related loan underwriting guidelines and pricing.

        From time to time we are subject to investigations and reviews in the ordinary course of business involving various regulatory agencies, including the SEC and various state attorneys general, and in connection therewith such regulatory agencies request materials from us pertaining to our business operations and other matters. It is the Company's policy to fully cooperate with its regulators and, where appropriate, to take remedial action. Certain news reports beginning in March 2008, indicated that numerous industry participants, including the Company, were subject to an investigation by the FBI in connection with mortgage business practices. The Department of Justice has stated to the Company that it cannot confirm or deny whether the FBI is conducting an investigation of it.

        For a further discussion of proposed federal and state laws and regulations, see Regulations—Proposed Federal and State Laws and Regulations in Part I, Item 1— Business in our 2007 Annual Report.

Accounting Developments

        In December of 2007, The American Securitization Forum ("ASF") issued the Streamlined Foreclosure and Loss Avoidance Framework for Securitized Adjustable Rate Mortgage Loans (the "ASF Framework"). The ASF Framework was developed to address large numbers of subprime loans that are at risk of default when the loans reset from their initial fixed interest rates to variable rates during the coming 18 months. The objective of the framework is to provide uniform guidelines for evaluating large numbers of loans for refinancing in an efficient manner while complying with the relevant tax regulations and off-balance sheet accounting standards for loan securitizations. The ASF Framework was developed with the participation of representatives of the mortgage securitization industry and the U.S. Government to provide streamlined borrower evaluation procedures in the evaluation of loan modification options for borrowers with subprime adjustable-rate loans meeting certain criteria. Specifically, the ASF Framework targets loans:

•

originated between January 1, 2005 and July 31, 2007



•

with initial fixed interest rate periods of 36 months or less and



•

that are scheduled for their first interest rate reset between January 1, 2008 and July 31, 2010.

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        The ASF Framework requires the loan servicer to categorize the targeted loans into one of three segments and address the borrowers according to the assigned segment:

•

Segment 1 loans: the borrower is likely to be able to refinance into any available mortgage product—the borrowers should refinance their loans into the available products if they are unwilling or unable to meet the reset payment



•

Segment 2 loans: the loan is current but the borrower is unlikely to be able to refinance into any readily available mortgage industry product—these borrowers should be evaluated for streamlined (or "fast track") evaluation and modification



•

Segment 3 loans: the loan is not current—the servicer should determine the appropriate loss mitigation strategy—other than a streamlined modification—that maximizes the recoveries to the securitization trust that holds the loan. Loss mitigation strategies may include loan modification, forbearance, short sale or foreclosure.

        The ASF Framework specifies criteria that borrowers who are evaluated for streamlined modification must meet to qualify for a fast track modification, including property occupancy, credit score and an expected payment change threshold when the interest rate resets. Segment 2 borrowers who meet the specified criteria are identified for fast track loan modifications.

        On January 8, 2008, the SEC's Office of the Chief Accountant issued a letter addressing the accounting issues relating to the ASF Framework. The letter concluded that the SEC would not object to continuing off-balance sheet accounting treatment for Segment 2 loans modified pursuant to the ASF Framework. The SEC's Office of the Chief Accountant also asked the FASB to address the issues related to the sales accounting guidance in the applicable accounting literature.

        We are evaluating the ASF Framework but have not yet modified a significant volume of loans using the ASF Framework. At March 31, 2008, we serviced subprime ARM loans originated between January 1, 2005 through July 31, 2007 totaling $19.0 billion that were included in securitization transactions.

        For those current loans that are accounted for off-balance sheet that are modified, but not as part of the ASF Framework above, the servicer must perform on an individual basis, an analysis of the borrower and the loan to demonstrate it is probable that the borrower will not meet the repayment obligation in the near term. Such analysis shall provide sufficient evidence to demonstrate that the loan is in imminent or reasonably foreseeable default. The SEC's Office of the Chief Accountant issued a letter in July 2007 stating that it would not object to continuing off-balance sheet accounting treatment for these loans.

Factors That May Affect Our Future Results

        We make forward-looking statements in this Report and in other reports we file with the SEC and in press releases. Our management may make forward-looking statements orally in a public forum to analysts, investors, the media and others. Generally, forward-looking statements include:

•

Projections of our revenues, income, earnings per share, capital structure or other financial items



•

Descriptions of our plans or objectives for future operations, products or services



•

Forecasts of our future economic performance, interest rates, profit margins and our share of future markets



•

Descriptions of assumptions underlying or relating to any of the foregoing.

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        Readers are cautioned not to place undue reliance on forward-looking statements. Forward-looking statements speak only as of the date they are made. We do not undertake to update them to reflect changes that occur after the date they are made.

        Forward-looking statements give management's expectation about the future and are not guarantees. Words like "believe," "expect," "anticipate," "promise," "plan" and other expressions or words of similar meanings, as well as future or conditional verbs such as "will," "would," "should," "could" or "may" are generally intended to identify forward-looking statements. There are a number of factors, many of which are beyond our control, that could cause actual results to differ significantly from historical results or those anticipated include, but are not limited to the following:

•

Changes in general business, economic, market and political conditions from those expected



•

Increased credit exposure resulting from our decision to retain more loans in our portfolio of loans held for investment than we have historically



•

A continued decline in U.S. housing prices or in activity in the U.S. housing market



•

Increased delinquency rates of borrowers



•

Increased cost of debt or loss of access to corporate debt markets, which may be caused by, for example, by further decline in credit ratings



•

Dependence on Fannie Mae and Freddie Mac relationships



•

The level and volatility of interest rates



•

The level of competition in each of our business segments



•

Negative public opinion or media reports that could damage our reputation



•

A reduction in the availability of secondary markets for our mortgage loan products



•

Incomplete or inaccurate information provided by customers and counterparties, or adverse changes in the financial condition of our customers and counterparties



•

Operational risks



•

The fact that our accounting policies and methods are fundamental to how we report our financial condition and results of operations, and they may require management to make estimates about matters that are inherently uncertain



•

Changes in U.S. GAAP or in the legal, regulatory and legislative environments in the markets in which the Company operates



•

Failure to attract and retain a highly skilled workforce



•

Unforeseen cash or capital requirements



•

A reduction in government support of homeownership



•

Willingness of counterparties to conduct business with us



•

The ability of management to effectively implement the Company's strategies and business plans



•

The occurrence of natural disasters or other events or circumstances that could impact our operations or could impact the level of claims in the Insurance Segment.

        Other risk factors are described elsewhere herein as well as in other reports and documents that we file with or furnish to the SEC including the 2007 Annual Report. Other factors that could also cause results to differ from our expectations may not be described in any such report or document.

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Each of these factors could by itself, or together with one or more other factors, adversely affect our business, results of operations and/or financial condition.

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

        In response to this Item, the information set forth on pages 93 to 95 of this Form 10-Q is incorporated herein by reference.

Item 4.     Controls and Procedures

Disclosure Controls and Procedures

        Our management has conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), as of the end of the period covered by this Report as required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Report.

Changes to Internal Control over Financial Reporting

        There has been no change in our internal control over financial reporting during the quarter ended March 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting except as follows. Effective January 1, 2008, the Company implemented an internally developed loan inventory software application. This application serves as the Company's primary loan accounting subledger; tracking and recording loans from the date we make a commitment to the borrower up to and including settlement, payoff or transfers to foreclosed real estate. The application also provides support for portions of the Company's financial reporting disclosures. Management believes that the loan inventory software application enhances the Company's internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds

        The following table shows repurchases by the Company of its common stock for each calendar month during the quarter ended March 31, 2008:

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(1)

This column includes the withholding of a portion of restricted shares and stock appreciation rights to cover taxes on vested restricted shares and exercised stock appreciation rights.

(2)

In November 2006, the Board of Directors authorized a share repurchase program of up to $2.5 billion. In connection with this program, the Company repurchased 60,143,388 shares of its common stock for $2.4 billion.

Item 6.     Exhibits

(a)

Exhibits

See Index of Exhibits on page 109.

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SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		COUNTRYWIDE FINANCIAL CORPORATION (Registrant)
Dated: May 12, 2008		By:	/s/   DAVID SAMBOL        David Sambol President, Chief Operating Officer and Director
Dated: May 12, 2008		By:	/s/   ERIC P. SIERACKI        Eric P. Sieracki Executive Managing Director and Chief Financial Officer

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COUNTRYWIDE FINANCIAL CORPORATION

FORM 10-Q
March 31, 2008

INDEX OF EXHIBITS

Exhibit No.		Description
+10.113*		Letter Agreement dated January 25, 2008 between Angelo R. Mozilo and Countrywide Financial Corporation (the " Company ") (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed with the SEC on January 30, 2008).
+10.114*		The Company's 401(k) Savings and Investment Plan, as amended and restated effective January 1, 2007 (incorporated by reference to Exhibit 4.1 to the Company's Form S-8 filed with the SEC on March 24, 2008).
+10.115*		First Amendment dated March 28, 2008 to Employment Agreement dated as of January 1, 2007 between David Sambol and the Company (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed with the SEC on April 3, 2008).
+10.116		Form of 2006 Equity Incentive Plan Restricted Stock Unit Award Agreement for Senior Managing Director Cash-Settled Awards.
+10.117		Form of 2006 Equity Incentive Plan Restricted Stock Unit Award Agreement for Non-Senior Managing Director Cash-Settled Awards.
12.1		Computation of the Ratio of Earnings to Fixed Charges.
31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.
32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.

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*

Incorporated by reference

+

Constitutes a management contract or compensatory plan or arrangement

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