UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)
þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2005
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	13-2641992
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
4500 Park Granada, Calabasas, California (Address of principal executive offices)	91302 (Zip Code)

(Registrant’s telephone number, including area code)

(818) 225-3000

      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 þ          No o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).     Yes þ          No o

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

Class	Outstanding at August 2, 2005
Common Stock $.05 par value	594,603,777

COUNTRYWIDE FINANCIAL CORPORATION

FORM 10-Q

June 30, 2005

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION			2
Item 1.	Financial Statements:
	Consolidated Balance Sheets — June 30, 2005 and December 31, 2004		2
	Consolidated Statements of Earnings — Three and Six Months Ended June 30, 2005 and 2004		3
	Consolidated Statement of Changes in Shareholders’ Equity — Six Months Ended June 30, 2005 and 2004		4
	Consolidated Statements of Cash Flows — Six Months Ended June 30, 2005 and 2004		5
	Notes to Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
	Overview		30
	Results of Operations Comparison — Quarters Ended June 30, 2005 and 2004		32
	Results of Operations Comparison — Six Months Ended June 30, 2005 and 2004		48
	Quantitative and Qualitative Disclosure About Market Risk		63
	Credit Risk		65
	Loan Servicing		68
	Liquidity and Capital Resources		69
	Off-Balance Sheet Arrangements and Aggregate Contractual Obligations		69
	Prospective Trends		70
	Regulatory Trends		71
	Recently Issued Accounting Standards		72
	Factors That May Affect Our Future Results		72
Item 3.	Quantitative and Qualitative Disclosure About Market Risk		73
Item 4.	Controls and Procedures		73
PART II. OTHER INFORMATION			74
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		74
Item 4.	Submission of Matters to a Vote of Security Holders		74
Item 6.	Exhibits		75
Exhibit 10.101
Exhibit 10.102
Exhibit 10.103
Exhibit 10.104
Exhibit 12.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		June 30,		December 31,
		2005		2004
		(Unaudited)
		(In thousands, except share data)
ASSETS
Cash		$	916,571	$	751,237
Mortgage loans and mortgage-backed securities held for sale			30,179,419		37,350,149
Trading securities owned, at market value			13,169,526		10,558,387
Trading securities pledged as collateral, at market value			1,369,509		1,303,007
Securities purchased under agreements to resell and securities borrowed			21,751,208		13,231,448
Loans held for investment, net			62,528,327		39,661,191
Investments in other financial instruments			11,927,779		10,091,057
Mortgage servicing rights, net			9,367,666		8,729,929
Premises and equipment, net			1,155,712		985,350
Other assets			6,252,104		5,833,950
	Total assets	$	158,617,821	$	128,495,705
LIABILITIES
Notes payable		$	63,957,263	$	66,613,671
Securities sold under agreements to repurchase and federal funds purchased			39,540,571		20,465,123
Deposit liabilities			30,613,784		20,013,208
Accounts payable and accrued liabilities			9,573,861		8,507,384
Income taxes payable			3,276,708		2,586,243
	Total liabilities		146,962,187		118,185,629
Commitments and contingencies			—		—
SHAREHOLDERS’ EQUITY
Preferred stock — authorized, 1,500,000 shares of $0.05 par value; none issued and outstanding			—		—
Common stock — authorized, 1,000,000,000 shares of $0.05 par value; issued, 593,157,719 shares and 581,706,836 shares at June 30, 2005 and December 31, 2004, respectively; outstanding, 593,030,375 shares and 581,648,881 shares at June 30, 2005 and December 31, 2004, respectively			29,658		29,085
Additional paid-in capital			2,806,092		2,570,402
Accumulated other comprehensive income			142,964		118,943
Retained earnings			8,676,920		7,591,646
	Total shareholders’ equity		11,655,634		10,310,076
	Total liabilities and shareholders’ equity	$	158,617,821	$	128,495,705

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

2

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

			Three Months Ended						Six Months Ended
			June 30,						June 30,
			2005			2004			2005			2004
			(In thousands, except per share data)
Revenues
	Gain on sale of loans and securities		$	1,145,409		$	1,418,869		$	2,507,160		$	2,538,890
	Interest income			1,761,784			1,074,326			3,242,565			2,124,076
	Interest expense			(1,229,234	)		(575,778	)		(2,225,171	)		(1,093,333	)
		Net interest income		532,550			498,548			1,017,394			1,030,743
	Provision for loan losses			(17,101	)		(19,747	)		(36,723	)		(40,528	)
		Net interest income after provision for loan losses		515,449			478,801			980,671			990,215
	Loan servicing fees and other income from retained interests			1,019,149			802,632			1,991,507			1,559,413
	Amortization of mortgage servicing rights			(482,373	)		(569,977	)		(954,560	)		(983,659	)
	(Impairment) recovery of retained interests			(1,378,969	)		1,179,127			(1,063,605	)		183,482
	Servicing hedge gains (losses)			1,147,158			(1,149,451	)		594,866			(476,655	)
		Net loan servicing fees and other income from retained interests		304,965			262,331			568,208			282,581
	Net insurance premiums earned			215,478			187,252			414,996			382,635
	Commissions and other revenue			126,642			127,493			241,793			245,643
		Total revenues		2,307,943			2,474,746			4,712,828			4,439,964
Expenses
	Compensation			850,143			770,090			1,636,622			1,450,754
	Occupancy and other office			225,137			150,848			413,793			298,873
	Insurance claims			88,786			83,752			164,721			168,427
	Advertising and promotion			53,615			41,658			108,794			73,795
	Other operating			155,381			143,922			305,020			280,956
		Total expenses		1,373,062			1,190,270			2,628,950			2,272,805
Earnings before income taxes				934,881			1,284,476			2,083,878			2,167,159
	Provision for income taxes			368,423			497,997			828,568			837,491
		NET EARNINGS	$	566,458		$	786,479		$	1,255,310		$	1,329,668
Earnings per share
	Basic		$	0.96		$	1.41		$	2.14		$	2.38
	Diluted		$	0.92		$	1.29		$	2.05		$	2.19

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

3

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

											Accumulated
								Additional			Other
				Number of		Common		Paid-in-			Comprehensive			Retained
				Shares		Stock		Capital			Income (Loss)			Earnings			Total
				(In thousands, except share data)
Balance at December 31, 2003					184,479,342	$	9,225	$	2,307,531		$	164,526		$	5,603,434		$	8,084,716
Comprehensive income:
	Net earnings for the period				—		—		—			—			1,329,668			1,329,668
	Other comprehensive income (loss), net of tax:
		Net unrealized losses from available-for-sale securities			—		—		—			(114,117	)		—			(114,117	)
		Net unrealized gains from cash flow hedging instruments			—		—		—			12,560			—			12,560
		Net change in foreign currency translation adjustment			—		—		—			3,408			—			3,408
			Total comprehensive income															1,231,519
3-for-2 stock split, effected April 12, 2004					92,915,124		4,646		(4,646	)		—			—			—
Stock options exercised					3,209,785		160		69,991			—			—			70,151
Tax benefit of stock options exercised					—		—		55,115			—			—			55,115
Issuance of common stock, net of treasury stock					386,372		20		11,921			—			—			11,941
Contribution of common stock to 401(k) Plan					203,542		10		13,763			—			—			13,773
Cash dividends paid — $0.30 per common share (before giving effect to stock splits)					—		—		—			—			(83,345	)		(83,345	)
Balance at June 30, 2004					281,194,165	$	14,061	$	2,453,675		$	66,377		$	6,849,757		$	9,383,870
Balance at December 31, 2004					581,648,881	$	29,085	$	2,570,402		$	118,943		$	7,591,646		$	10,310,076
Comprehensive income:
	Net earnings for the period				—		—		—			—			1,255,310			1,255,310
	Other comprehensive income (loss), net of tax:
		Net unrealized gains from available-for-sale securities			—		—		—			36,738			—			36,738
		Net unrealized gains from cash flow hedging instruments			—		—		—			2,824			—			2,824
		Net change in foreign currency translation adjustment			—		—		—			(15,541	)		—			(15,541	)
			Total comprehensive income															1,279,331
Stock options exercised					8,522,379		430		102,522			—			—			102,952
Tax benefit of stock options exercised					—		—		74,312			—			—			74,312
Issuance of common stock, net of treasury stock					1,584,289		79		39,046			—			—			39,125
Issuance of common stock for conversion of convertible debt					803,461		40		2,065			—			—			2,105
Tax benefit of interest on conversion of convertible debt					—		—		1,939			—			—			1,939
Contribution of common stock to 401(k) Plan					471,365		24		15,806			—			—			15,830
Cash dividends paid — $0.29 per common share					—		—		—			—			(170,036	)		(170,036	)
Balance at June 30, 2005					593,030,375	$	29,658	$	2,806,092		$	142,964		$	8,676,920		$	11,655,634

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

4

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

						Six Months Ended
						June 30,
						2005			2004
						(In thousands)
Cash flows from operating activities:
	Net earnings					$	1,255,310		$	1,329,668
		Adjustments to reconcile net earnings to net cash provided by operating activities:
			Gain on sale of available-for-sale securities				(10,865	)		(176,457	)
			Accretion of discount on notes payable				449			868
			Provision for loan losses				36,723			40,528
			Accretion of discount on other retained interests				(194,797	)		(171,108	)
			Amortization of mortgage servicing rights				954,560			983,659
			Impairment (recovery) of mortgage servicing rights				335,476			(455,321	)
			Change in fair value of mortgage servicing rights attributable to hedged risk				493,430			—
			Impairment of other retained interests				173,341			271,839
			Depreciation and other amortization				125,968			71,033
			Provision for deferred income taxes				535,751			421,966
			Tax benefit of stock options exercised				74,312			55,115
			Loans and mortgage-backed securities held for sale:
				Origination and purchase			(188,906,332	)		(154,898,000	)
				Sale and principal repayments			185,513,763			154,769,352
					Increase in mortgage loans and mortgage-backed securities held for sale		(3,392,569	)		(128,648	)
			(Increase) decrease in trading securities				(2,677,641	)		302,787
			(Increase) decrease in investments in other financial instruments				(712,838	)		924,719
			Increase in other assets				(446,178	)		(1,081,022	)
			Increase in accounts payable and accrued liabilities				1,082,307			2,107,151
			Increase (decrease) in income taxes payable				141,045			(36,032	)
				Net cash (used) provided by operating activities			(2,226,216	)		4,460,745
Cash flows from investing activities:
	Increase in securities purchased under agreements to resell and securities borrowed						(8,519,760	)		(5,686,278	)
	Additions to loans held for investment, net						(22,903,859	)		(7,567,070	)
	Additions to investments in other financial instruments						(4,695,821	)		(4,610,023	)
	Proceeds from sale and repayment of investments in other financial instruments						3,246,182			9,097,329
	Additions to mortgage servicing rights						(2,421,203	)		(2,007,348	)
	Purchase of premises and equipment, net						(268,306	)		(178,298	)
		Net cash used by investing activities					(35,562,767	)		(10,951,688	)
Cash flows from financing activities:
	Net increase in short-term borrowings						1,449,310			2,975,485
	Issuance of long-term debt						12,254,530			7,570,883
	Repayment of long-term debt						(5,397,588	)		(3,770,241	)
	Net increase (decrease) in securities sold under agreements to repurchase and federal funds purchased						19,075,448			(6,392,941	)
	Net increase in deposit liabilities						10,600,576			6,142,609
	Issuance of common stock						142,077			82,092
	Payment of dividends						(170,036	)		(83,345	)
		Net cash provided by financing activities					37,954,317			6,524,542
Net increase in cash							165,334			33,599
Cash at beginning of period							751,237			626,183
		Cash at end of period				$	916,571		$	659,782

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

5

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 — Basis of Presentation

      Countrywide Financial Corporation (“Countrywide”) is a holding company which, through its principal subsidiary, Countrywide Home Loans, Inc. (“CHL”) and other subsidiaries (collectively, the “Company”), is a diversified financial services company engaged primarily in mortgage banking, banking and other mortgage finance-related businesses. The Company’s business activities fall into the following general categories: residential mortgage banking, retail banking and mortgage warehouse lending, dealing in securities, insurance underwriting and operating an agency, and international mortgage loan processing and subservicing.

      The accompanying consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles for interim financial information and with the 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 generally accepted accounting principles for complete financial statements.

      In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that materially affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.

      In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. For further information, including a description of the Company’s significant accounting policies, refer to the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2004 (the “2004 Annual Report”) for the Company.

      On April 12, 2004, the Company completed a 3-for-2 stock split effected as a stock dividend. On August 30, 2004, the Company completed a 2-for-1 stock split effected as a stock dividend. As more fully discussed in Note 2 to the 2004 Annual Report, in the fourth quarter of 2004, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share,” (“EITF 04-8”). EITF 04-8 requires the Company to include the assumed conversion of its convertible debentures in diluted earnings per share (if dilutive), regardless of whether the market conditions have been met. Countrywide’s Liquid Yield Option Notes and Convertible Securities meet the criteria of EITF 04-8. All references in the accompanying consolidated balance sheets, consolidated statements of earnings and notes to consolidated financial statements to the number of common shares and earnings per share amounts have been restated to reflect these stock splits and the implementation of EITF 04-8.

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

Note 2 — Earnings Per Share

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

6

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

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

		Three Months Ended June 30,
		2005						2004
		Net				Per-Share		Net				Per-Share
		Earnings		Shares		Amount		Earnings		Shares		Amount
		(In thousands, except per share data)
Net earnings and basic earnings per share		$	566,458		588,538	$	0.96	$	786,479		559,766	$	1.41
Effect of dilutive securities:
	Convertible debentures		83		2,140				788		16,675
	Dilutive stock options		—		24,310				—		34,896
Diluted earnings and earnings per share		$	566,541		614,988	$	0.92	$	787,267		611,337	$	1.29

		Six Months Ended June 30,
		2005						2004
		Net				Per-Share		Net				Per-Share
		Earnings		Shares		Amount		Earnings		Shares		Amount
		(In thousands, except per share data)
Net earnings and basic earnings per share		$	1,255,310		585,884	$	2.14	$	1,329,668		557,866	$	2.38
Effect of dilutive securities:
	Convertible debentures		191		2,430				1,578		15,906
	Dilutive stock options		—		25,153				—		35,234
Diluted earnings and earnings per share		$	1,255,501		613,467	$	2.05	$	1,331,246		609,006	$	2.19

      During the three months ended June 30, 2005 and 2004, stock options to purchase 25,500 shares and 11,819,996 shares, respectively, were outstanding but not included in the computation of earnings per share because they were anti-dilutive. During the six months ended June 30, 2005 and 2004, stock options to purchase 30,300 shares and 11,838,496 shares, respectively, were outstanding but not included in the computation of earnings per share because they were anti-dilutive.

Stock-Based Compensation

      The Company generally grants stock options for a fixed number of shares with an exercise price equal to the fair value of the shares at the date of grant to eligible employees. The Company recognizes compensation expense related to its stock option plans only to the extent that the fair value of the shares at the grant date exceeds the exercise price.

      The Company recognizes compensation expense relating to its restricted stock grants based on the fair value of the shares awarded as of the date of the award. Compensation expense for restricted stock grants, including those awarded to retirement-eligible employees, is recognized over the shares’ nominal vesting period.

      As more fully discussed in Note 22 — “Recently Issued Accounting Standards,” the Company will adopt Statement of Financial Accounting Standards No. 123R, “Share-Based Payment,” (“SFAS 123R”) beginning in 2006. As a result of adopting SFAS 123R, the Company will charge to expense the value of employee

7

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

stock options as well as restricted stock and any other stock-based compensation. The Company will also be required, for awards made beginning on the adoption of SFAS 123R, to immediately expense awards made to retirement-eligible employees and will be required to amortize grants to other employees over the lesser of the nominal vesting period or the period until the grantee becomes retirement-eligible. Amounts to be charged to earnings include the unamortized grants made before the effective date plus the value of any grants awarded after December 31, 2005. Management has not yet determined the effect of implementation of SFAS 123R or whether the statement will be implemented prospectively or retrospectively.

      Had the estimated fair value of the options granted been included in compensation expense, the Company’s net earnings and earnings per share would have been as follows:

			Three Months Ended						Six Months Ended
			June 30,						June 30,
			2005			2004			2005			2004
			(In thousands, except per share data)
Net Earnings:
	As reported		$	566,458		$	786,479		$	1,255,310		$	1,329,668
		Add: Stock-based compensation included in net earnings, net of taxes		133			491			2,036			965
		Deduct: Stock-based employee compensation, net of taxes		(67,070	)		(11,824	)		(80,213	)		(17,014	)
	Pro forma		$	499,521		$	775,146		$	1,177,133		$	1,313,619
Basic Earnings Per Share:
	As reported		$	0.96		$	1.41		$	2.14		$	2.38
	Pro forma		$	0.85		$	1.38		$	2.01		$	2.35
Diluted Earnings Per Share:
	As reported		$	0.92		$	1.29		$	2.05		$	2.19
	Pro forma		$	0.81		$	1.27		$	1.92		$	2.16

      The fair value of each option grant is estimated on the date of grant using a Black-Scholes-Merton option-pricing model that has been modified to consider cash dividends to be paid. Beginning in the second quarter of 2005, the Company further enhanced its expected life assumptions used in the Black-Scholes-Merton model relating to the Company’s employee turnover and exercise experience. For purposes of this pro-forma disclosure, the fair value of each option grant is amortized to periodic compensation expense over the options’ vesting period.

      On April 1, 2005, the Company granted 13.3 million stock options to eligible employees. These options fully vested and became exercisable on May 1, 2005. As a result of the vesting period, the expense of the entire stock option grant is included in the stock-based compensation pro-forma disclosure above. Upon adoption of SFAS 123R there will be no compensation expense related to these stock options.

      The weighted-average assumptions used to value the option grants and the resulting average estimated values were as follows:

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2005			2004			2005			2004
Weighted Average Assumptions:
	Dividend yield		1.70	%		0.85	%		1.70	%		0.85	%
	Expected volatility		32.50	%		36.04	%		32.50	%		36.02	%
	Risk-free interest rate		4.15	%		2.90	%		4.15	%		2.90	%
	Expected life (in years)		3.13			5.59			3.14			5.59
Per-share fair value of options		$	6.95		$	11.09		$	6.95		$	11.09
Weighted-average exercise price		$	32.60		$	31.87		$	32.61		$	31.84

8

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Note 3 — Supplemental Cash Flow Information

      The following table presents supplemental cash flow information:

		Six Months Ended
		June 30,
		2005			2004
		(In thousands)
Cash used to pay interest		$	2,254,456		$	1,078,684
Cash used to pay income taxes			88,152			405,509
Non-cash investing and finance activities:
	Securitization of interest-only strips		—			56,038
	Unrealized gain (loss) on available-for-sale securities, foreign currency translation adjustments and cash flow hedges, net of tax		24,021			(98,149	)
	Net decrease in fair value of medium-term notes		397,705			38,132
	Contribution of common stock to 401(k) plan		15,830			13,773
	(Decrease) increase in Mortgage Loans Held in SPEs and asset-backed secured financings		(10,563,299	)		8,027,814
	Issuance of common stock for conversion of convertible debt		2,105			—
	Tax effect of interest on conversion of convertible debt		1,939			—

Note 4 — Mortgage Loans Held for Sale

      The Company’s broker-dealer subsidiary, Countrywide Securities Corporation (“CSC”), may reacquire beneficial interests previously sold to outside third parties in the Company’s securitization transactions. In the event that such securities include protection by a derivative financial instrument held by a special purpose entity (“SPE”), that SPE no longer meets the conditions as a qualifying special purpose entity (“QSPE”) under Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,” (“SFAS 140”). As a result, the related mortgage loans held for sale and asset-backed secured financings are included on the Company’s consolidated balance sheets and are initially recorded at fair value. Such mortgage loans, net of related retained interests (“Mortgage Loans Held in SPEs”) are included with mortgage loans and mortgage-backed securities held for sale on the Company’s consolidated balance sheet.

      Mortgage loans held for sale include the following:

		June 30,		December 31,
		2005		2004
		(In thousands)
Prime		$	20,984,409	$	15,561,822
Nonprime			4,616,004		9,878,661
Prime home equity			4,107,481		1,046,075
Commercial real estate			471,525		300,292
	Mortgage loans originated or purchased for resale		30,179,419		26,786,850
Mortgage Loans Held in SPEs			—		10,563,299
		$	30,179,419	$	37,350,149

9

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

      At June 30, 2005, the Company had pledged $1.6 billion of mortgage loans originated or purchased for resale as collateral for asset-backed secured financings, and $9.3 billion in mortgage loan inventory to secure asset-backed commercial paper.

Note 5 — Trading Securities

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

		June 30,		December 31,
		2005		2004
		(In thousands)
Mortgage pass-through securities:
	Fixed-rate	$	7,603,214	$	6,768,864
	Adjustable-rate		980,771		717,194
			8,583,985		7,486,058
Collateralized mortgage obligations			2,528,128		2,067,066
U.S. Treasury securities			2,025,123		971,438
Obligations of U.S. Government-sponsored enterprises			619,198		560,163
Interest-only stripped securities			366,309		318,110
Asset-backed securities			285,579		340,684
Mark-to-market on TBA securities			90,450		58,676
Negotiable certificates of deposit			35,521		30,871
Corporate debt securities			—		21,659
Other			4,742		6,669
		$	14,539,035	$	11,861,394

      As of June 30, 2005, $11.4 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 $1.4 billion.

Note 6 — Securities Purchased Under Agreements to Resell and Securities Borrowed

      As of June 30, 2005, the Company had accepted collateral with a fair value of $29.5 billion that it had the contractual ability to sell or re-pledge, including $7.7 billion related to amounts offset against securities purchased under agreements to resell under master netting arrangements. As of June 30, 2005, the Company had re-pledged $26.0 billion of such collateral for financing purposes.

      As of December 31, 2004, the Company had accepted collateral with a fair value of $22.2 billion that it had the contractual ability to sell or re-pledge, including $8.2 billion related to amounts offset against securities purchased under agreements to resell under master netting arrangements. As of December 31, 2004, the Company had re-pledged $18.7 billion of such collateral for financing purposes.

10

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Note 7 — Mortgage Servicing Rights

      The activity in Mortgage Servicing Rights (“MSRs”) is as follows:

		Six Months Ended
		June 30,
		2005			2004
		(In thousands)
Mortgage Servicing Rights
	Balance at beginning of period	$	9,820,511		$	8,065,174
	Additions		2,421,203			2,007,348
	Securitization of MSRs		—			(56,038	)
	Amortization		(954,560	)		(983,659	)
	Change in fair value attributable to hedged risk		(493,430	)		—
	Application of valuation allowance to write down impaired MSRs		(39,860	)		(360,774	)
	Balance before valuation allowance at end of period		10,753,864			8,672,051
Valuation Allowance for Impairment of Mortgage Servicing Rights
	Balance at beginning of period		(1,090,582	)		(1,201,549	)
	(Additions) recoveries		(335,476	)		455,321
	Application of valuation allowance to write down impaired MSRs		39,860			360,774
	Balance at end of period		(1,386,198	)		(385,454	)
Mortgage Servicing Rights, net		$	9,367,666		$	8,286,597

      The estimated fair values of mortgage servicing rights were $9.4 billion and $8.9 billion as of June 30, 2005 and December 31, 2004, respectively.

      The following table summarizes the Company’s estimate of amortization of its existing MSRs for the five-year period ending June 30, 2010. This projection was developed using the assumptions made by management in its June 30, 2005 valuation of MSRs. The assumptions underlying the following estimate will be affected as market conditions, portfolio composition and behavior change, causing both actual and projected amortization levels to vary over time. Therefore, the following estimates will change in a manner and amount not presently determinable by management.

		Estimated MSR
Year Ending June 30,		Amortization
		(In thousands)
2006		$	2,257,628
2007			1,744,111
2008			1,355,649
2009			1,060,098
2010			833,908
	Five-year total	$	7,251,394

11

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Note 8 — Investments in Other Financial Instruments

      Investments in other financial instruments include the following:

				June 30,		December 31,
				2005		2004
				(In thousands)
Available-for-sale securities:
	Mortgage-backed securities			$	7,241,213	$	6,009,819
	Municipal bonds				318,484		208,239
	Obligations of U.S. Government-sponsored enterprises				302,986		279,991
	U.S. Treasury securities				101,058		66,030
	Other				2,344		3,685
		Subtotal			7,966,085		6,567,764
	Other interests retained in securitization classified as available-for-sale securities:
		Nonconforming interest-only and principal-only securities			242,838		191,502
		Nonprime residual securities			242,461		237,695
		Prime home equity line of credit transferor’s interest			235,097		273,639
		Prime home equity residual securities			159,824		275,598
		Prepayment penalty bonds			101,642		61,483
		Prime home equity interest-only securities			20,691		27,950
		Nonprime interest-only securities			20,309		84,834
		Nonconforming residual securities			5,840		11,462
		Subordinated mortgage-backed pass-through securities			2,278		2,306
			Total other interests retained in securitization classified as available-for-sale securities		1,030,980		1,166,469
			Total available-for-sale securities		8,997,065		7,734,233
Other interests retained in securitization classified as trading securities:
	Prime home equity residual securities				510,547		533,554
	Nonprime residual securities				420,920		187,926
	Prime home equity line of credit transferor’s interest				178,242		—
	Nonconforming residual securities				16,574		20,555
		Total other interests retained in securitization classified as trading securities			1,126,283		742,035
Hedging instruments:
	Servicing				1,569,387		1,024,977
	Debt				235,044		589,812
		Total investments in other financial instruments		$	11,927,779	$	10,091,057

      At June 30, 2005, the Company had pledged $5.8 billion of mortgage-backed securities to secure securities sold under agreements to repurchase, which the counterparty had the contractual right to re-pledge.

12

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

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

	June 30, 2005
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In thousands)
Mortgage-backed securities	$	7,260,591	$	12,475	$	(31,853	)	$	7,241,213
Municipal bonds		316,682		3,561		(1,759	)		318,484
Obligations of U.S. Government-sponsored enterprises		305,915		60		(2,989	)		302,986
U.S. Treasury securities		99,501		1,962		(405	)		101,058
Other interests retained in securitization		851,342		180,339		(701	)		1,030,980
Other		2,344		—		—			2,344
	$	8,836,375	$	198,397	$	(37,707	)	$	8,997,065

	December 31, 2004
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In thousands)
Mortgage-backed securities	$	6,034,293	$	6,347	$	(30,821	)	$	6,009,819
Municipal bonds		205,726		2,669		(156	)		208,239
Obligations of U.S. Government-sponsored enterprises		281,430		233		(1,672	)		279,991
U.S. Treasury securities		63,977		2,237		(184	)		66,030
Other interests retained in securitization		1,045,011		123,766		(2,308	)		1,166,469
Other		4,370		15		(700	)		3,685
	$	7,634,807	$	135,267	$	(35,841	)	$	7,734,233

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

	June 30, 2005
	Less Than 12 Months					12 Months or More					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
	(In thousands)
Mortgage-backed securities	$	4,012,301	$	(17,346	)	$	1,098,529	$	(14,507	)	$	5,110,830	$	(31,853	)
Municipal bonds		100,354		(1,759	)		—		—			100,354		(1,759	)
Obligations of U.S. Government-sponsored enterprises		130,103		(837	)		128,303		(2,152	)		258,406		(2,989	)
U.S. Treasury securities		36,823		(82	)		27,163		(323	)		63,986		(405	)
Other interests retained in securitization		15,859		(513	)		6,806		(188	)		22,665		(701	)
Other		—		—			—		—			—		—
Total impaired securities	$	4,295,440	$	(20,537	)	$	1,260,801	$	(17,170	)	$	5,556,241	$	(37,707	)

13

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

	December 31, 2004
	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
	(In thousands)
Mortgage-backed securities	$	3,656,167	$	(18,725	)	$	823,916	$	(12,096	)	$	4,480,083	$	(30,821	)
U.S. Treasury securities		27,288		(184	)		—		—			27,288		(184	)
Obligations of U.S. Government-sponsored enterprises		185,983		(1,283	)		28,648		(389	)		214,631		(1,672	)
Municipal bonds		65,587		(156	)		—		—			65,587		(156	)
Other interests retained in securitization		27,970		(1,753	)		5,256		(555	)		33,226		(2,308	)
Other		3,620		(700	)		—		—			3,620		(700	)
Total impaired securities	$	3,966,615	$	(22,801	)	$	857,820	$	(13,040	)	$	4,824,435	$	(35,841	)

      The impairment reflected in these securities is a result of a change in market interest rates and management believes that such impairment is not indicative of the Company’s ability to recover the securities’ fair value in the reasonably foreseeable future. Accordingly, other-than-temporary impairment related to these securities has not been recognized as of June 30, 2005 or December 31, 2004.

      Gross gains and losses realized on the sales of available-for-sale securities are as follows:

			Six Months Ended
			June 30,
			2005			2004
			(In thousands)
Mortgage-backed securities:
	Gross realized gains		$	31		$	6,748
	Gross realized losses			(116	)		(946	)
		Net		(85	)		5,802
Home equity asset-backed senior securities:
	Gross realized gains			—			137,215
	Gross realized losses			—			—
		Net		—			137,215
Obligations of U.S. Government-sponsored enterprises:
	Gross realized gains			13			309
	Gross realized losses			—			—
		Net		13			309
Municipal bonds:
	Gross realized gains			—			—
	Gross realized losses			(100	)		—
		Net		(100	)		—

14

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

			Six Months Ended
			June 30,
			2005			2004
			(In thousands)
U.S. Treasury securities:
	Gross realized gains			—			33,359
	Gross realized losses			—			(224	)
		Net		—			33,135
Other interests retained in securitization:
	Gross realized gains			9,837			—
	Gross realized losses			(53	)		—
		Net		9,784			—
Other:
	Gross realized gains			1,253			11
	Gross realized losses			—			(15	)
		Net		1,253			(4	)
Total gains and losses on available-for-sale securities:
	Gross realized gains			11,134			177,642
	Gross realized losses			(269	)		(1,185	)
		Net	$	10,865		$	176,457

Note 9 — Loans Held for Investment

      Loans held for investment include the following:

			June 30,			December 31,
			2005			2004
			(In thousands)
Mortgage loans:
	Prime		$	40,071,009		$	22,588,351
	Prime home equity			15,890,115			11,435,792
	Nonprime			235,838			171,592
		Total mortgage loans		56,196,962			34,195,735
Warehouse lending advances secured by mortgage loans				4,372,064			3,681,830
Defaulted FHA-insured and VA-guaranteed mortgage loans repurchased from securities				1,282,079			1,518,642
				61,851,105			39,396,207
Purchase premium/discount and deferred loan origination costs				833,184			390,030
Allowance for loan losses				(155,962	)		(125,046	)
		Loans held for investment, net	$	62,528,327		$	39,661,191

      At June 30, 2005, mortgage loans held for investment totaling $36.8 billion were pledged to secure Federal Home Loan Bank advances.

15

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

      At June 30, 2005, the Company had accepted collateral of $4.7 billion securing warehouse-lending advances that it had the contractual ability to re-pledge. As of June 30, 2005, no such mortgage loan collateral had been re-pledged.

      Changes in the allowance for loan losses were as follows:

	Six Months Ended
	June 30,
	2005			2004
	(In thousands)
Balance, beginning of the period	$	125,046		$	78,449
Provision for loan losses		36,723			40,528
Net charge-offs		(5,807	)		(13,138	)
Balance, end of the period	$	155,962		$	105,839

Note 10 — Other Assets

      Other assets include the following:

	June 30,		December 31,
	2005		2004
	(In thousands)
Investments in Federal Reserve Bank and Federal Home Loan Bank stock	$	1,196,024	$	795,894
Reimbursable servicing advances		938,694		1,355,584
Interest receivable		668,707		426,962
Receivables from custodial accounts		649,808		391,898
Securities broker-dealer receivables		443,619		818,299
Capitalized software, net		317,745		286,504
Federal funds sold		257,000		225,000
Derivative margin accounts		243,845		99,795
Cash surrender value of assets held in trust for deferred compensation plan		211,510		184,569
Prepaid expenses		196,180		212,310
Restricted cash		182,460		200,142
Receivables from sale of securities		167,447		143,874
Other assets		779,065		693,119
	$	6,252,104	$	5,833,950

      At June 30, 2005, the Company had pledged $277 million of other assets to secure securities sold under agreements to repurchase.

16

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Note 11 — Notes Payable

      Notes payable consists of the following:

		June 30,		December 31,
		2005		2004
		(In thousands)
Federal Home Loan Bank advances		$	23,825,000	$	15,475,000
Medium-term notes:
	Fixed rate		12,641,709		13,519,494
	Floating rate		10,854,690		11,846,268
			23,496,399		25,365,762
Asset-backed commercial paper			8,563,720		7,372,138
Unsecured commercial paper			5,524,431		—
Asset-backed secured financings			1,220,667		17,258,543
Junior subordinated debentures			1,028,079		1,028,013
Convertible securities			43,955		65,026
LYONs convertible debentures			10,576		12,626
Other			244,436		36,563
		$	63,957,263	$	66,613,671

Federal Home Loan Bank Advances

      During the six months ended June 30, 2005, the Company obtained $8.6 billion of advances from the Federal Home Loan Bank (“FHLB”). Of these advances, $2.8 billion were fixed-rate and $5.8 billion were adjustable-rate. At June 30, 2005, the Company had pledged $36.8 billion of mortgage loans to secure its outstanding FHLB advances.

Medium-Term Notes

      During the six months ended June 30, 2005, the Company issued the following medium-term notes:

	Outstanding Balance
							Interest Rate				Maturity Date
	Floating-		Fixed-
	Rate		Rate		Total		From		To		From		To
	(In thousands)
CHL Series M	$	585,000	$	—	$	585,000		3.27%		3.27%		January, 2006		January, 2006
CFC Series A		2,320,000		541,430		2,861,430		3.29%		5.25%		March, 2006		May, 2020
CHL Euro		183,100		—		183,100		3.37%		3.45%		May, 2006		November, 2006
Total	$	3,088,100	$	541,430	$	3,629,530

      Of the $3.1 billion of floating-rate medium-term notes issued by the Company during the six months ended June 30, 2005, none were effectively converted to fixed-rate debt using interest rate swap contracts. Of the $0.54 billion of fixed-rate medium-term notes issued by the Company during the same period, $0.04 billion were effectively converted to floating rate debt using interest rate swaps.

      During the six months ended June 30, 2005, the Company redeemed $5.1 billion of maturing medium-term notes.

17

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

      As of June 30, 2005, $3.6 billion of foreign currency-denominated medium-term notes were outstanding. Such notes are denominated in Japanese Yen, Pounds Sterling, Canadian Dollars, Australian Dollars and Euros. These notes have been effectively converted to U.S. dollars through currency swaps.

Asset-Backed Commercial Paper

      The Company has formed three special purpose entities to finance certain of its mortgage loan inventory.

      Two of these entities issue commercial paper in the form of short-term secured liquidity notes (“SLNs”) with initial maturities of up to 180 days. The SLNs bear interest at prevailing money market rates approximating LIBOR. The SLN programs’ capacities, based on aggregate commitments from underlying credit enhancers, totaled $30.9 billion at June 30, 2005. For the six months ended June 30, 2005, the average borrowings under these facilities totaled $16.9 billion, and the weighted-average interest rate borne by the SLNs was 2.87%. At June 30, 2005, the weighted-average interest rate borne by the SLNs was 3.27%, and the Company had pledged $9.3 billion in mortgage loan inventory to secure the SLNs.

      The third special purpose entity is funded with financing provided by a group of bank-sponsored conduits that are financed through the issuance of asset-backed commercial paper. The entity incurs an interest charge based on prevailing money market rates approximating the cost of asset-backed commercial paper. For the six months ended June 30, 2005, average borrowings under the facility totaled $0.2 billion. At June 30, 2005, the entity had aggregate commitments from the bank-sponsored conduits totaling $8.4 billion, and had no outstanding borrowings.

Asset-Backed Secured Financings

      As of June 30, 2005, the Company has recorded certain securitization transactions as secured borrowings because they do not qualify for sales treatment under SFAS 140 as a result of the retention of securities that include protection by a derivative. These secured borrowings amounted to $1.2 billion at June 30, 2005 and are secured by the related mortgage loans totaling $1.6 billion.

      In addition, CSC may reacquire beneficial interests previously sold to outside third parties in the Company’s securitization transactions. In the event that such securities include protection by a derivative financial instrument held by a SPE, that SPE no longer meets the conditions as a QSPE under SFAS 140. As a result, the mortgage loans held for sale and asset-backed secured financings are included on the Company’s consolidated balance sheets and are initially recorded at fair value. Once the securities that include protection by a derivative financial instrument are sold, typically in less than 90 days, the conditions necessary for QSPE status under SFAS 140 are again met and the related assets and liabilities are removed from the Company’s consolidated balance sheet. At June 30, 2005, no such asset-backed secured financings had been recorded.

Junior Subordinated Debentures

      As more fully discussed in Note 16 — “Notes Payable,” included in the consolidated financial statements of the 2004 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.

18

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

      The Company guarantees CHL’s indebtedness to two of the subsidiary trusts, Countrywide Capital I and Countrywide Capital III, which are excluded from the Company’s consolidated financial statements. Following is summarized information for those trusts:

			June 30, 2005
			Countrywide		Countrywide
			Capital I		Capital III
			(In thousands)
Balance Sheet:
	Junior subordinated debentures receivable		$	307,368	$	205,247
	Other assets			1,031		16,792
		Total assets	$	308,399	$	222,039
	Notes payable		$	9,222	$	6,171
	Other liabilities			1,031		16,792
	Company-guaranteed mandatorily redeemable capital trust pass-through securities			298,146		199,076
	Shareholder’s equity			—		—
		Total liabilities and shareholder’s equity	$	308,399	$	222,039

			Six Months Ended
			June 30, 2005
			Countrywide			Countrywide
			Capital I			Capital III
			(In thousands)
Statement of Earnings:
	Revenues		$	12,416		$	8,321
	Expenses			(12,416	)		(8,321	)
	Provision for income taxes			—			—
		Net earnings	$	—		$	—

			December 31, 2004
			Countrywide		Countrywide
			Capital I		Capital III
			(In thousands)
Balance Sheet:
	Junior subordinated debentures receivable		$	307,323	$	205,226
	Other assets			1,031		691
		Total assets	$	308,354	$	205,917
	Notes payable		$	9,220	$	6,171
	Other liabilities			1,031		691
	Company-guaranteed mandatorily redeemable capital trust pass-through securities			298,103		199,055
	Shareholder’s equity			—		—
		Total liabilities and shareholder’s equity	$	308,354	$	205,917

19

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

			Six Months Ended
			June 30, 2004
			Countrywide			Countrywide
			Capital I			Capital III
			(In thousands)
Statement of Earnings:
	Revenues		$	12,416		$	8,321
	Expenses			(12,416	)		(8,321	)
	Provision for income taxes			—			—
		Net earnings	$	—		$	—

Note 12 — Deposits

      The following table summarizes deposit balances:

	June 30,		December 31,
	2005		2004
	(In thousands)
Time deposits	$	16,752,236	$	10,369,763
Company-controlled custodial deposit accounts		11,141,070		7,900,900
Interest-bearing checking accounts		2,524,589		1,673,517
Non-interest-bearing checking accounts		194,763		66,983
Savings accounts		1,126		2,045
	$	30,613,784	$	20,013,208

Note 13 — Securities Sold Under Agreements to Repurchase and Federal Funds Purchased

      The Company routinely enters 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 June 30, 2005, repurchase agreements were secured by $11.4 billion of trading securities, $26.0 billion of securities purchased under agreements to resell and securities borrowed, $5.8 billion in investments in other financial instruments, and $0.3 billion of other assets. As of June 30, 2005, $7.7 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.

Note 14 — Derivative Instruments and Risk Management Activities

      The primary market risk facing the Company is interest rate risk. From an enterprise perspective, the Company manages interest rate risk through the natural counterbalance of its loan production and servicing businesses. The Company also uses derivatives and other financial instruments to manage the interest rate risk related specifically to its interest rate lock commitments, mortgage loan inventory and MBS held for sale, MSRs and other retained interests, trading securities, and its long-term debt. The primary objective of the Company’s interest rate risk management activities is to reduce the variability of earnings caused by changes in interest rates.

      The Company uses a variety of derivative financial instruments to manage interest rate risk. These instruments include MBS mandatory forward sale and purchase commitments, options to sell or buy MBS,

20

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Treasury and Eurodollar rate futures and options thereon, interest rate floors, interest rate caps, capped swaps, swaptions, interest rate swaps and mortgage forward rate agreements. These instruments involve, to varying degrees, elements of interest rate and credit risk.

      The Company manages foreign currency exchange rate risk, which arises from the issuance of foreign currency-denominated debt, with foreign currency swaps.

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

      The Company is exposed to interest rate risk from the time an interest rate lock commitment (“IRLC”) is made to a mortgage applicant (or financial intermediary) to the time the related mortgage loan is sold. During this period, the Company is exposed to losses if mortgage interest rates rise, because the value of the IRLC or mortgage loan declines. To manage this interest rate risk, the Company utilizes derivatives, primarily forward sales of MBS and options to buy and sell MBS, as well as options on Treasury futures contracts. Certain of these instruments qualify as fair value hedges of mortgage loans under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (“SFAS 133”).

      During the six months ended June 30, 2005, the risk management activities connected with 83% of the fixed-rate mortgage inventory and 37% of the adjustable-rate mortgage inventory were accounted for as fair value hedges. The Company recognized pre-tax losses of $21.2 million and $84.6 million, representing the ineffective portion of such fair value hedges of its mortgage inventory, for the six months ended June 30, 2005 and 2004, respectively. These amounts, along with the change in the fair value of the derivative instruments that were not designated as hedge instruments, are included in gain on sale of loans and securities in the consolidated statements of earnings.

      IRLCs are derivative instruments and are recorded at fair value with changes in fair value recognized in current period earnings (as a component of gain on sale of loans and securities). Because IRLCs are derivatives under SFAS 133, the risk management activities related to the IRLCs do not qualify for hedge accounting under SFAS 133. The freestanding derivative instruments that are used to manage the interest rate risk associated with the IRLCs are carried at fair value with changes in fair value recorded as a component of gain on sale of loans in the consolidated statements of earnings.

Risk Management Activities Related to Mortgage Servicing Rights and Other Retained Interests

      MSRs and other retained interests, specifically interest-only securities and residual securities, are generally subject to a loss in value, or impairment, when mortgage interest rates decline. To moderate the effect of impairment on earnings, the Company maintains a portfolio of financial instruments, including derivatives, which generally increase in aggregate value when interest rates decline. This portfolio of financial instruments is collectively referred to as the “Servicing Hedge.”

      During the three months ended June 30, 2005, a portion of the Servicing Hedge qualified as a fair value hedge under SFAS 133. The portion of the Servicing Hedge that qualified as a fair value hedge covered approximately 29% of the risk associated with a change in fair value of the MSRs attributable to changes in interest rates of up to 50 basis points. At no other time during the six months ended June 30, 2005 and 2004 has any portion of the Servicing Hedge qualified as a hedge under SFAS 133.

      Application of fair value hedge accounting under SFAS 133 results in the cost basis of the MSRs being adjusted for the change in fair value of the MSRs attributable to the hedged risk, with a corresponding amount included as a component of impairment or recovery of retained interests in the statement of earnings. The change in the fair value of the derivatives is included as a component of servicing hedge gains or losses in the statement of earnings. For the six months ended June 30, 2005, the Company recognized a loss of

21

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

$11.6 million in earnings, which represents the amount of hedge ineffectiveness for the portion of the Servicing Hedge that qualified as a fair value hedge under SFAS 133. There was no portion of the related hedge instruments’ gain or loss that was excluded from the assessment of hedge effectiveness.

      The financial instruments that currently comprise the Servicing Hedge include options on interest rate futures, interest rate swaps, interest rate caps, interest rate swaptions, interest rate futures and mortgage forward rate agreements.

      Mortgage forward rate agreements represent mutual agreements to exchange a single cash flow at a forward settlement date, based on the basis point difference between the forward fixed-rate and a floating-rate set equal to the 30-day forward current coupon mortgage rate, known as the CMM index, on the settlement date. For use in the Servicing Hedge, the Company generally receives the fixed-rate and pays the floating-rate. Such agreements increase in value as the spread between the current coupon mortgage rate and the swap curves tightens, or when interest rates decline.

      With respect to the options on interest rate swaps and futures and interest rate caps, the Company is not exposed to loss beyond its initial outlay to acquire the hedge instruments and any unrealized gains recognized to date.

      With respect to the interest rate swaps outstanding as of June 30, 2005, the Company estimates that its maximum exposure to loss over the various contractual terms is $206 million.

      With respect to the mortgage forward rate agreements outstanding as of June 30, 2005, the Company estimates that its maximum exposure to loss over the various contractual terms is $423 million.

      Although these estimates could be exceeded, the Company derives its estimates of loss exposure based upon observed volatilities in the interest rate options market. Using the currently observed volatilities, management estimates, to a 95% confidence level, the maximum potential rate changes over a one-year time horizon. Management then estimates the Company’s exposure to loss based on the estimated maximum adverse rate change as of the measurement date.

      The following table summarizes the notional amounts of derivative contracts included in the Servicing Hedge:

	Balance,							Balance,
	December 31,				Dispositions/			June 30,
	2004		Additions		Expirations			2005
	(In millions)
Long call options on interest rate futures	$	15,250	$	29,700	$	(39,950	)	$	5,000
Long put options on interest rate futures		2,000		—		(2,000	)		—
Long treasury futures		2,850		150		(3,000	)		—
Interest rate caps		300		1,164		(1,164	)		300
Interest rate swaptions		41,250		40,675		(43,700	)		38,225
Interest rate floors		1,000		—		(1,000	)		—
Interest rate swaps		—		57,950		(30,250	)		27,700
Mortgage forward rate agreements		—		49,550		(12,500	)		37,050

Risk Management Activities Related to Issuance of Long-Term Debt

      The Company enters into interest rate swap contracts which enable it to convert a portion of its fixed-rate, long-term debt to U.S. dollar LIBOR-based floating-rate debt and to enable the Company to convert a portion of its foreign currency-denominated fixed and floating-rate, long-term debt to U.S. dollar LIBOR-based floating-rate debt. These transactions are designated as fair value hedges under SFAS 133. For the six

22

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

months ended June 30, 2005, the Company recognized a pre-tax gain of $0.4 million, representing the ineffective portion of such fair value hedges of debt. For the six months ended June 30, 2004, the Company also recognized a pre-tax gain of $0.4 million, representing the ineffective portion of such fair value hedges of debt. These amounts are included in interest expense in the consolidated statements of earnings.

      The Company enters into interest rate swap contracts which enable it to convert a portion of its floating-rate, long-term debt to fixed-rate, long-term debt and to convert a portion of its foreign currency-denominated fixed-rate, long-term debt to U.S. dollar fixed-rate debt. These transactions are designated as cash flow hedges. For the six months ended June 30, 2005, the Company recognized no pre-tax gain or loss on the ineffective portion of cash flow hedges. For the six months ended June 30, 2004, the Company recognized a pre-tax gain of $0.01 million, representing the ineffective portion of such cash flow hedges. As of June 30, 2005, deferred net gains or losses on derivative instruments included in other comprehensive income that are expected to be reclassified to earnings during the next 12 months are not material.

Risk Management Activities Related to Deposit Liabilities

      The Company acquires interest rate swap contracts that have the effect of converting a portion of its fixed-rate deposit liabilities to variable-rate deposit liabilities. Effective January 1, 2005, these transactions were designated as fair value hedges under SFAS 133. For the six months ended June 30, 2005, the Company recognized a pre-tax loss of $1.7 million representing the ineffective portion of such fair value hedges. This amount is included in interest expense in the consolidated statement of earnings.

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 the risk of price changes in this portfolio arising from changes in interest rates during the period it holds the securities. To manage this risk, the Company utilizes derivative financial instruments. These instruments include MBS mandatory forward sale and purchase commitments as well as short sales of cash market U.S. Treasury securities, futures contracts, interest rate swap contracts and swaptions. All such derivatives are accounted for as freestanding and as such are carried at fair value with changes in fair value recorded in current period earnings as a component of gain on sale of loans and securities.

Note 15 — Regulatory and Agency Capital Requirements

      The Company is a bank holding company as a result of the acquisition of Treasury Bank (the “Bank”). Both the Company and the Bank are subject to regulatory capital requirements imposed by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). 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, which are lower than those of the Federal Reserve.

      Regulatory capital is assessed for adequacy by three measures: Tier 1 Leverage Capital, Tier 1 Risk-Based Capital and Total Risk-Based Capital. Tier 1 Leverage Capital includes common shareholders’ equity; preferred stock and capital securities that meet certain guidelines detailed in the capital regulations, less goodwill; the portion of MSRs not includable in regulatory capital (MSRs includable in regulatory capital are limited to the lesser of the carrying value of MSRs, 100% of Tier 1 capital, or 90% of the fair value of the MSRs, net of associated deferred taxes) and other adjustments. Tier 1 Leverage Capital is measured with respect to average assets during the quarter. The Company and the Bank are required to have a Tier 1 Leverage Capital ratio of 4.0% to be considered adequately capitalized and 5.0% to be considered well capitalized.

23

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

      The Tier 1 Risk-Based Capital ratio is calculated as a percent of risk-weighted assets at the end of the quarter. The Company and the Bank are required to have a Tier 1 Risk-Based Capital ratio of 4.0% to be considered adequately capitalized and 6.0% to be considered well capitalized.

      Total Risk-Based Capital includes preferred stock and capital securities excluded from Tier 1 Capital, mandatory convertible debt and subordinated debt that meets certain regulatory criteria. The Total Risk-Based Capital ratio is calculated as a percent of risk-weighted assets at the end of the quarter. The Company and the Bank are required to have a Total Risk-Based Capital ratio of 8.0% to be considered adequately capitalized and 10.0% to be considered well capitalized.

      At June 30, 2005 and December 31, 2004, the Company and the Bank’s regulatory capital ratios and amounts, and minimum required capital ratios for the Company and the Bank to maintain a “well capitalized” status were as follows:

		June 30, 2005
					Countrywide Financial
					Corporation					Treasury Bank
		Minimum
		Required(1)			Ratio			Amount		Ratio			Amount
		(Dollar amounts in thousands)
Tier 1 Leverage Capital			5.0	%		7.2	%	$	11,498,160		6.9	%	$	4,010,472
Risk-Based Capital:
	Tier 1		6.0	%		10.4	%	$	11,498,160		9.9	%	$	4,010,472
	Total		10.0	%		11.0	%	$	12,129,225		10.1	%	$	4,084,639

(1)  Minimum required to qualify as “well capitalized.”

		December 31, 2004
					Countrywide Financial
					Corporation					Treasury Bank
		Minimum
		Required(1)			Ratio			Amount		Ratio			Amount
		(Dollar amounts in thousands)
Tier 1 Leverage Capital			5.0	%		7.9	%	$	10,332,383		7.8	%	$	2,939,144
Risk-Based Capital:
	Tier 1		6.0	%		11.1	%	$	10,332,383		11.8	%	$	2,939,144
	Total		10.0	%		11.7	%	$	10,928,223		12.0	%	$	2,988,116

(1)  Minimum required to qualify as “well capitalized.”

Note 16 — 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 distinct sectors: Loan Production, Loan Servicing and Loan Closing Services.

      The Loan Production Sector originates prime and nonprime loans through a variety of channels on a national scale. The Loan Production Sector is comprised of four lending divisions: the Consumer Markets Lending Division, the Full Spectrum Lending Division, the Wholesale Lending Division, and the Correspondent Lending Division. The Consumer Markets and Full Spectrum Lending Divisions source mortgage loans directly from consumers through the Company’s retail branch network, as well as through real estate agents

24

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

and homebuilders. The Wholesale Lending Division sources mortgage loans primarily from mortgage brokers. The Correspondent Lending Division acquires mortgage loans from other financial institutions.

      The Loan Servicing Sector includes investments in MSRs and other retained interests, as well as the Company’s loan servicing operations and subservicing for other domestic financial institutions. 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’s operations are comprised of Treasury Bank and Countrywide Warehouse Lending. Treasury Bank invests primarily in mortgage loans sourced from the Loan Production Sector. Countrywide Warehouse Lending provides to third-party mortgage lenders temporary financing secured by mortgage loans.

      The Capital Markets Segment primarily includes the operations of Countrywide Securities Corporation, a registered broker-dealer specializing in the mortgage securities market. In addition, it includes the operations of Countrywide Asset Management Corporation, Countrywide Commercial Real Estate Finance Corporation, Countrywide Servicing Exchange and CCM International Ltd.

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

      The Global Operations Segment includes Global Home Loans Limited, a provider of loan origination processing and loan subservicing in the United Kingdom; UKValuation Limited, a provider of property valuation services in the UK; Countrywide International Technology Holdings Limited, a licensor of loan origination processing, servicing and residential real estate value assessment technology; and CFC India Private Limited, a provider of call center, data processing and information technology related services.

      In general, intercompany transactions are recorded on an arms-length basis. However, the fulfillment fees paid by Treasury Bank to the Production Sector for origination costs incurred on mortgage loans funded by Treasury Bank are determined on an incremental cost basis, which is less than the fees that Treasury Bank would pay to a third party.

25

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

      Included in the tables below labeled “Other” are the holding company activities and certain reclassifications to conform management reporting to the consolidated financial statements:

		Quarter Ended June 30, 2005
		Mortgage Banking
		Loan		Loan		Closing		Total					Capital				Global					Total
		Production		Servicing		Services		Mortgage		Banking			Markets		Insurance		Operations		Other			Consolidated
		(In thousands)
Revenues:
	External	$	1,219,873	$	191,536	$	69,233	$	1,480,642	$	408,967		$	147,844	$	248,972	$	56,203	$	(34,685	)	$	2,307,943
	Intersegment		17,372		83,870		—		101,242		(63,941	)		30,270		—		—		(67,571	)		—
Total Revenues		$	1,237,245	$	275,406	$	69,233	$	1,581,884	$	345,026		$	178,114	$	248,972	$	56,203	$	(102,256	)	$	2,307,943
Pre-tax Earnings		$	409,135	$	89,103	$	28,211	$	526,449	$	251,161		$	104,851	$	57,708	$	5,321	$	(10,609	)	$	934,881
Total Assets		$	26,303,000	$	16,307,000	$	64,000	$	42,674,000	$	69,712,000		$	43,541,000	$	2,028,000	$	263,000	$	400,000		$	158,618,000

		Quarter Ended June 30, 2004
		Mortgage Banking
		Loan			Loan		Closing		Total						Capital				Global					Total
		Production			Servicing		Services		Mortgage			Banking			Markets		Insurance		Operations		Other			Consolidated
		(In thousands)
Revenues:
	External	$	1,730,377		$	141,099	$	55,086	$	1,926,562		$	175,653		$	120,875	$	213,575	$	53,603	$	(15,522	)	$	2,474,746
	Intersegment		(36,417	)		28,268		—		(8,149	)		(6,962	)		40,810		—		—		(25,699	)		—
Total Revenues		$	1,693,960		$	169,367	$	55,086	$	1,918,413		$	168,691		$	161,685	$	213,575	$	53,603	$	(41,221	)	$	2,474,746
Pre-tax Earnings		$	969,825		$	25,193	$	23,069	$	1,018,087		$	119,083		$	89,631	$	48,537	$	9,683	$	(545	)	$	1,284,476
Total Assets		$	39,306,000		$	13,411,000	$	64,000	$	52,781,000		$	30,376,000		$	30,913,000	$	1,665,000	$	229,000	$	247,000		$	116,211,000

		Six Months Ended June 30, 2005
		Mortgage Banking
		Loan		Loan		Closing		Total					Capital				Global					Total
		Production		Servicing		Services		Mortgage		Banking			Markets		Insurance		Operations		Other			Consolidated
		(In thousands)
Revenues:
	External	$	2,687,834	$	320,784	$	129,825	$	3,138,443	$	742,620		$	317,270	$	472,441	$	111,317	$	(69,263	)	$	4,712,828
	Intersegment		957		144,107		—		145,064		(101,296	)		64,753		—		—		(108,521	)		—
Total Revenues		$	2,688,791	$	464,891	$	129,825	$	3,283,507	$	641,324		$	382,023	$	472,441	$	111,317	$	(177,784	)	$	4,712,828
Pre-tax Earnings		$	1,143,792	$	106,292	$	47,996	$	1,298,080	$	467,101		$	226,898	$	112,285	$	9,360	$	(29,846	)	$	2,083,878
Total Assets		$	26,303,000	$	16,307,000	$	64,000	$	42,674,000	$	69,712,000		$	43,541,000	$	2,028,000	$	263,000	$	400,000		$	158,618,000

		Six Months Ended June 30, 2004
		Mortgage Banking
		Loan			Loan			Closing		Total						Capital				Global					Total
		Production			Servicing			Services		Mortgage			Banking			Markets		Insurance		Operations		Other			Consolidated
		(In thousands)
Revenues:
	External	$	3,097,295		$	101,269		$	104,466	$	3,303,030		$	318,949		$	300,267	$	436,040	$	111,415	$	(29,737	)	$	4,439,964
	Intersegment		(82,469	)		50,789			—		(31,680	)		(9,328	)		84,814		—		—		(43,806	)		—
Total Revenues		$	3,014,826		$	152,058		$	104,466	$	3,271,350		$	309,621		$	385,081	$	436,040	$	111,415	$	(73,543	)	$	4,439,964
Pre-tax Earnings		$	1,670,435		$	(133,026	)	$	41,601	$	1,579,010		$	224,691		$	242,782	$	100,532	$	21,414	$	(1,270	)	$	2,167,159
Total Assets		$	39,306,000		$	13,411,000		$	64,000	$	52,781,000		$	30,376,000		$	30,913,000	$	1,665,000	$	229,000	$	247,000		$	116,211,000

26

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Note 17 — Summarized Financial Information

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

			June 30, 2005
			Countrywide
			Financial		Countrywide
			Corporation		Home		Other
			(Parent Only)		Loans, Inc.		Subsidiaries		Eliminations			Consolidated
			(In thousands)
Balance Sheets:
	Mortgage loans and mortgage- backed securities held for sale		$	—	$	29,471,476	$	684,687	$	23,256		$	30,179,419
	Trading securities			—		366,309		14,585,388		(412,662	)		14,539,035
	Securities purchased under agreements to resell and securities borrowed			—		—		26,378,449		(4,627,241	)		21,751,208
	Loans held for investment, net			—		5,956,860		56,575,429		(3,962	)		62,528,327
	Investments in other financial instruments			—		2,836,067		9,091,712		—			11,927,779
	Mortgage servicing rights, net			—		9,367,666		—		—			9,367,666
	Other assets			21,066,565		5,551,261		12,897,300		(31,190,739	)		8,324,387
		Total assets	$	21,066,565	$	53,549,639	$	120,212,965	$	(36,211,348	)	$	158,617,821
	Notes payable		$	9,192,018	$	35,174,652	$	31,794,911	$	(12,204,318	)	$	63,957,263
	Securities sold under agreements to repurchase			—		125		44,159,037		(4,618,591	)		39,540,571
	Deposit liabilities			—		—		30,610,641		3,143			30,613,784
	Other liabilities			218,913		14,318,104		6,315,762		(8,002,210	)		12,850,569
	Equity			11,655,634		4,056,758		7,332,614		(11,389,372	)		11,655,634
		Total liabilities and equity	$	21,066,565	$	53,549,639	$	120,212,965	$	(36,211,348	)	$	158,617,821

			Six Months Ended June 30, 2005
			Countrywide
			Financial			Countrywide
			Corporation			Home		Other
			(Parent Only)			Loans, Inc.		Subsidiaries		Eliminations			Consolidated
			(In thousands)
Statements of Earnings
	Revenues		$	3,752		$	3,161,922	$	1,770,439	$	(223,285	)	$	4,712,828
	Expenses			12,830			1,890,920		929,999		(204,799	)		2,628,950
	Provision for income taxes			(4,002	)		514,525		325,575		(7,530	)		828,568
	Equity in net earnings of subsidiaries			1,260,386			—		—		(1,260,386	)		—
		Net earnings	$	1,255,310		$	756,477	$	514,865	$	(1,271,342	)	$	1,255,310

27

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

			December 31, 2004
			Countrywide
			Financial		Countrywide
			Corporation		Home		Other
			(Parent Only)		Loans, Inc.		Subsidiaries		Eliminations			Consolidated
			(In thousands)
Balance Sheets:
	Mortgage loans and mortgage- backed securities held for sale		$	—	$	36,937,845	$	412,304	$	—		$	37,350,149
	Trading securities			—		318,110		11,543,284		—			11,861,394
	Securities purchased under agreements to resell and securities borrowed			—		2,550,127		13,354,254		(2,672,933	)		13,231,448
	Loans held for investment, net			—		5,431,321		34,230,360		(490	)		39,661,191
	Investments in other financial instruments			—		2,301,416		7,789,641		—			10,091,057
	Mortgage servicing rights, net			—		8,729,929		—		—			8,729,929
	Other assets			11,308,342		4,759,535		10,452,379		(18,949,719	)		7,570,537
		Total assets	$	11,308,342	$	61,028,283	$	77,782,222	$	(21,623,142	)	$	128,495,705
	Notes payable		$	829,030	$	51,532,883	$	22,856,613	$	(8,604,855	)	$	66,613,671
	Securities sold under agreements to repurchase			—		—		23,137,028		(2,671,905	)		20,465,123
	Deposit liabilities			—		—		20,013,208		—			20,013,208
	Other liabilities			169,236		5,451,663		5,736,987		(264,259	)		11,093,627
	Equity			10,310,076		4,043,737		6,038,386		(10,082,123	)		10,310,076
		Total liabilities and equity	$	11,308,342	$	61,028,283	$	77,782,222	$	(21,623,142	)	$	128,495,705

			Six Months Ended June 30, 2004
			Countrywide
			Financial			Countrywide
			Corporation			Home		Other
			(Parent Only)			Loans, Inc.		Subsidiaries		Eliminations			Consolidated
			(In thousands)
Statements of Earnings:
	Revenues		$	6,024		$	2,573,733	$	2,003,597	$	(143,390	)	$	4,439,964
	Expenses			6,521			1,356,518		1,052,762		(142,996	)		2,272,805
	Provision for income taxes			(193	)		476,088		361,748		(152	)		837,491
	Equity in net earnings of subsidiaries			1,329,972			—		—		(1,329,972	)		—
		Net earnings	$	1,329,668		$	741,127	$	589,087	$	(1,330,214	)	$	1,329,668

28

COUNTRYWIDE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Note 18 — Legal Proceedings

      Countrywide and certain subsidiaries are defendants in various legal proceedings involving matters generally incidental to their businesses. Although it is difficult to predict the ultimate outcome of these proceedings, management believes, based on discussions with counsel, that any ultimate liability will not materially affect the consolidated financial position or results of operations of the Company.

Note 19 — Borrower and Investor Custodial Accounts

      As of June 30, 2005 and December 31, 2004, the Company managed $24.6 billion and $20.6 billion, respectively, of off-balance sheet borrower and investor custodial cash accounts as well as related liabilities to those borrowers and investors. Of these amounts, $11.1 billion and $7.9 billion, respectively, were deposited at the Bank and were included in the Company’s deposit liabilities, with the remaining balances held by other depository institutions. These custodial accounts arise in connection with the Company’s mortgage servicing activities.

Note 20 — Loan Commitments

      As of June 30, 2005 and December 31, 2004, the Company had undisbursed home equity lines of credit commitments of $6.5 billion and $5.4 billion, respectively, as well as undisbursed construction loan commitments of $1.3 billion and $936.9 million, respectively. As of June 30, 2005, outstanding commitments to fund mortgage loans totaled $49.5 billion.

Note 21 — Subsequent Events

      On July 25, 2005, the Board of Directors declared a dividend of $0.15 per common share payable August 31, 2005, to shareholders of record on August 15, 2005.

Note 22 — Recently Issued Accounting Standards

      In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (“SFAS 123R”), an amendment of FASB Statement No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation.” This Statement requires companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. SFAS 123R requires measurement of fair value of employee stock options using an option pricing model that takes into account the awarded options’ unique characteristics. SFAS 123R requires charging the recognized cost to expense over the period the employee provides services to earn the award, generally its vesting period. In April of 2005, the Securities and Exchange Commission revised the required adoption date of SFAS 123R. As a result of this change, the Company is required to adopt SFAS 123R effective January 1, 2006. Management has not yet determined the effect of implementation of SFAS 123R or whether the Statement will be implemented prospectively or retrospectively.

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

Overview

      Countrywide is a diversified financial services company engaged primarily in mortgage banking, banking and other mortgage finance-related businesses. Our goal is to continue as a leader in the mortgage banking business and to use this position to capitalize on meaningful opportunities to leverage our core mortgage banking business and to provide sources of earnings that tend to be sustainable in various interest rate environments. We manage our businesses through five business segments — Mortgage Banking, Banking, Capital Markets, Insurance and Global Operations.

Second Quarter Results

      Our consolidated net earnings for the second quarter of 2005 were $566.5 million, a decline of 28 percent from 2004’s second quarter net earnings of $786.5 million. This decline occurred despite loan production increasing by $21.4 billion, or 21%, over the second quarter of last year. The primary reason for this was a decrease in production margins partially offset by improved performance in our Banking Segment and other factors.

Mortgage Market

      The mortgage banking business continues to be the primary source of our revenues and earnings. As a result, the dominant external influence on our operating results is the aggregate demand for mortgage loans in the U.S., which is affected by such factors as prevailing mortgage interest rates and the strength of the U.S. housing market.

      In 2004, total U.S. residential mortgage production totaled approximately $2.6 trillion, a 32% decline from 2003’s record-setting market. For 2005, third party forecasters predict total U.S. mortgage production to be between $2.5 trillion and $2.8 trillion. For the quarter and six months ended June 30, 2005, total U.S. residential mortgage production was estimated at $779 billion and $1,376 billion, respectively, compared to $802 billion and $1,364 billion for the quarter and six months ended June 30, 2004, respectively. (Source: Mortgage Bankers Association). We increased our market share to 15.5% for the current quarter from 12.5% in the year ago period.

Loan Production

      Our total loan production volume increased during the second quarter because of increased market share. Notably, the composition of our loan production has changed from last year as a result of homeowner preference for adjustable-rate mortgages. In the current period, our adjustable-rate loan production, including pay-option loans, has increased in prominence and now exceed our fixed-rate loan production. Pay-option loans have increased from approximately 3% of our loan production during the quarter ended June 30, 2004, to approximately 21% of our production during the quarter ended June 30, 2005. These loans — which provide borrowers with the option to make fully-amortizing, interest-only, or “negative-amortizing” payments — provide our Production Sector with greater pricing margins and our Servicing Sector with increased servicing complexity during their option period. In addition, they provide our Banking Segment with lower initial net interest income during the period of the reduced introductory interest rate on these loans. Approximately 74% of the pay-option loans produced in the current quarter was originated for sale without recourse. The remainder of these loans was retained in the Bank’s portfolio of loans held for investment.

      When the monthly payments for pay-option loans eventually increase, borrowers may be less likely to pay the increased amounts and, therefore, more likely to default on the loan, than a borrower using a normal amortizing loan. Our exposure to this higher credit risk is increased by any negative amortization that has accrued with respect to such loan. In other words, because of the lower initial amortization requirements of these loans, pay-option loans may increase the credit risk inherent in our loans held for investment. We also face increased operational risk in our loan servicing activities relating to these loans.

      Production Sector margins decreased from 93 basis points for loans produced in the first quarter of 2005 to 40 basis points in the second quarter as a result of various factors. These include lower pricing margins in prime and nonprime loans; a shift in channel mix toward the lower margin correspondent channel; and the decision to increase loan retention during the second quarter. Also, while the pipeline hedge performed to

30

expectations in the second quarter, margins declined because hedging outperformance in the first quarter was not repeated.

Retention Strategy

      While we plan to grow our investment in mortgage loans at Treasury Bank irrespective of the mortgage market, we continually evaluate the benefits of selling or retaining loans. Sales of loans generate current period gains on sale, while the retention of loans is designed to provide a stream of net interest income over the life of such loans as well as a greater base of future earnings. In making the determination of whether to sell or retain loans, we consider, among other factors, earnings growth, current market and economic conditions and capital availability. Our decisions in this regard will result in changes, which may be significant, in loan retention levels and the size of our loan portfolio, as well as current period earnings and Production sector margins.

Interest Rate Risk and Credit Risk

      The principal market risk we face is interest rate risk — the risk that the value of our assets or liabilities or our net interest income will change due to changes in interest rates. Market risk is most directly reflected in the value of our interest rate lock commitments, inventory of loans held for sale, trading securities, investment in other financial instruments and mortgage servicing rights. We manage market risk primarily through the natural counterbalance of our loan production operations and our investment in MSRs, as well as with various financial instruments including derivatives. The primary objective of our interest rate risk management activities is to reduce the variability of earnings caused by changes in interest rates.

      We also face credit risk, primarily related to our residential mortgage production activities in both the Mortgage Banking and Banking Segments. Credit risk is the potential for financial loss resulting from the failure of a borrower or an institution to honor its contractual obligations to us. Credit risk most directly affects our other financial instruments that are credit subordinated to other securities and our mortgage loans held for investment. We manage mortgage credit risk principally by selling most of the mortgage loans that we produce, limiting credit recourse to Countrywide in those transactions, and by retaining high credit quality mortgages in our loan portfolio.

Liquidity

      Our liquidity and financing requirements are significant. We meet these requirements in a variety of ways, including use of the public corporate debt and equity markets, mortgage- and asset-backed securities markets, and, increasingly, through the financing activities of our Bank. The objective of our liquidity management is to ensure that adequate, diverse and reliable sources of cash are available to meet our funding needs on a cost-effective basis. Our ability to raise financing at the level and cost required to compete effectively is dependent on maintaining our high credit standing.

Competition

      The mortgage industry has undergone rapid consolidation in recent years, and we expect this trend to continue in the future. Today the industry is dominated by large, sophisticated financial institutions. To compete effectively in the future, we will be required to maintain a high level of operational, technological and managerial expertise, as well as an ability to attract capital at a competitive cost. We believe that we will benefit from industry consolidation through increased market share while rational price competition is maintained.

      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.

Critical Accounting Policies

      The accounting policies with the greatest impact on our financial condition and results of operations, and which require the most judgment, pertain to our mortgage securitization activities, our investments in MSRs and other retained interests, and our use of derivatives to manage interest rate risk. Our critical accounting policies involve the following three areas: 1) accounting for gains on sales of loans and securities; 2) accounting for

31

MSRs and other retained interests, including valuation of these retained interests; and 3) accounting for derivatives and our related interest rate risk management activities.

      On April 1, 2005, we implemented hedge accounting for a portion of our interest rate risk management activities related to our MSRs in accordance with Statement of Financial Accounting Standards No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). See Note 14 — “Derivative Instruments and Risk Management Activities” for a description of our accounting for the portion of our interest rate risk management activities related to our retained interests that qualify as a hedge under SFAS 133.

Stock Split Effected as Stock Dividends and Earnings per Share Calculations

      In April 2004 and August 2004, respectively, we completed a 3-for-2 and a 2-for-1 stock split both of which were effected as stock dividends. In the fourth quarter of 2004, the Emerging Issues Task Force reached a consensus on Issue No. 04-8, which required the Company to include the assumed conversion of its convertible debentures in diluted earnings per share. All references in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to the number of common shares and earnings per share amounts have been adjusted accordingly.

Results of Operations Comparison — Quarters Ended June 30, 2005 and 2004

Consolidated Earnings Performance

      Our diluted earnings per share for the quarter ended June 30, 2005 were $0.92, a 29% decrease from diluted earnings per share for the quarter ended June 30, 2004. Net earnings were $566.5 million for the quarter ended June 30, 2005, a 28% decrease from the year-ago period.

      The decrease in our earnings resulted primarily from a decline in the profitability of our Mortgage Banking Segment. The Mortgage Banking Segment produced pre-tax earnings of $526.4 million for the quarter ended June 30, 2005, a decrease of 48% from the same period last year. The decrease in the profitability of our Mortgage Banking Segment was due primarily to a decrease in production margins. This decline was partially offset by increased profitability in the Banking Segment, which produced pre-tax earnings of $251.2 million, an increase of 111% from the year-ago period. The increase in profitability of our Banking Segment was primarily due to a 129% increase in average interest-earning assets at Treasury Bank from the year-ago period.

Operating Segment Results

      Pre-tax earnings by segment are summarized below:

			Quarter Ended
			June 30,
			2005			2004
			(In thousands)
Mortgage Banking:
	Loan Production		$	409,135		$	969,825
	Loan Servicing			89,103			25,193
	Loan Closing Services			28,211			23,069
		Total Mortgage Banking		526,449			1,018,087
Banking				251,161			119,083
Capital Markets				104,851			89,631
Insurance				57,708			48,537
Global Operations				5,321			9,683
Other				(10,609	)		(545	)
	Pre-tax earnings		$	934,881		$	1,284,476

32

      The pre-tax earnings of each segment include intercompany transactions, which are eliminated in the “other” category above.

      Mortgage loan production by segment and product is summarized below:

			Quarter Ended
			June 30,
			2005		2004
			(In millions)
Segment:
	Mortgage Banking		$	101,154	$	88,490
	Banking — Treasury Bank			16,067		6,574
	Capital Markets:
		Conduit acquisitions		3,126		4,599
		Commercial real estate		732		—
			$	121,079	$	99,663
Product:
	Prime Mortgage		$	98,852	$	82,808
	Prime Home Equity			11,059		7,301
	Nonprime Mortgage			10,436		9,554
	Commercial real estate			732		—
			$	121,079	$	99,663

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

		Quarter Ended
		June 30,
		2005		2004
		(In millions)
Purpose:
	Purchase	$	61,104	$	45,949
	Non-purchase		59,975		53,714
		$	121,079	$	99,663
Interest Rate Type:
	Adjustable Rate	$	67,295	$	48,743
	Fixed Rate		53,784		50,920
		$	121,079	$	99,663

Mortgage Banking Segment

      The Mortgage Banking Segment includes the Loan Production, Loan Servicing and Loan Closing Services Sectors. The Loan Production and Loan Closing Services Sectors generally perform at their best when mortgage interest rates are relatively low and loan origination volume is high. Conversely, the Loan Servicing Sector generally performs well when mortgage interest rates are relatively high and loan prepayments are low. The natural counterbalance of these sectors reduces the impact of changes in mortgage interest rates on our earnings.

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Loan Production Sector

      The Loan Production Sector produces mortgage loans through the four production divisions of Countrywide Home Loans (“CHL”) — Consumer Markets, Wholesale Lending, Correspondent Lending and Full Spectrum Lending.

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

		Quarter Ended June 30,
		2005					2004
				Percentage of					Percentage of
				Loan					Loan
				Production					Production
		Amount		Volume			Amount		Volume
		(Dollar amounts in thousands)
Revenues:
	Prime Mortgage	$	801,046				$	993,339
	Nonprime Mortgage		270,022					462,885
	Prime Home Equity		166,177					237,736
	Total revenues		1,237,245		1.22	%		1,693,960		1.91	%
Expenses:
	Compensation expenses		508,423		0.50	%		467,176		0.53	%
	Other operating expenses		231,549		0.23	%		159,086		0.18	%
	Allocated corporate expenses		88,138		0.09	%		97,873		0.10	%
	Total expenses		828,110		0.82	%		724,135		0.81	%
	Pre-tax earnings	$	409,135		0.40	%	$	969,825		1.10	%

      Revenues decreased from the year-ago period due primarily to decreased margins on both Prime and Nonprime Mortgage Loans caused by increasing price competition for these products. The effect of the decrease in margins from loan sales was partially offset by a 14% increase in the volume of Prime Mortgage Loan sales and a mix of products toward higher margin adjustable-rate loans. In the quarter ended June 30, 2005, $99.4 billion of mortgage loans, or 98% of loan production, was sold compared to $89.4 billion of mortgage loans, or 101% of loan production, in the quarter ended June 30, 2004.

      Expenses increased from the year-ago period, primarily due to increased compensation and occupancy costs incurred to accommodate growth in loan production. However, high levels of productivity helped maintain expenses expressed as a percentage of production consistent with the prior year. We continued to expand our loan production operations in the quarter ended June 30, 2005 to continue support of our long-term objective of market share growth.

      Market demand for residential mortgages in the quarter ended June 30, 2005 was relatively constant compared to the same period last year. However, our production increased in the current quarter compared to the year ago period due to an increase in our market share. Our mortgage loan production market share was 15.5% in the quarter ended June 30, 2005, up from 12.5% in the quarter ended June 30, 2004. (Source of Mortgage Market: Mortgage Bankers Association).

      Mortgage Banking loan production volume for the quarter ended June 30, 2005 increased 14% from the year-ago period. The increase was due to a rise in purchase and non-purchase loan production of 24% and 6%, respectively, resulting from an increase in market share. The increase in purchase loans is significant because this component of the mortgage market has historically offered relatively stable growth, averaging 11% per year over the last 10 years. The non-purchase, or refinance, component of the mortgage market is highly volatile because it is driven almost exclusively by prevailing mortgage interest rates.

34

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

		Quarter Ended
		June 30,
		2005		2004
		(In millions)
Purpose:
	Purchase	$	51,057	$	41,176
	Non-purchase		50,097		47,314
		$	101,154	$	88,490
Interest Rate Type:
	Adjustable Rate	$	50,701	$	40,517
	Fixed Rate		50,453		47,973
		$	101,154	$	88,490

      In the quarter ended June 30, 2005, 50% of our loan production was adjustable-rate in comparison to 46% in the year-ago period. The increase in adjustable-rate production reflects the continued shift in homeowner preferences toward adjustable-rate mortgages including attractive product alternatives such as hybrid adjustable-rate mortgages that provide a relatively low fixed rate for the first three to ten years of the mortgage and pay-option adjustable-rate mortgages.

      The volume of Nonprime Mortgage and Prime Home Equity Loans produced (which is included in our total volume of loans produced) increased 24% during the quarter ended June 30, 2005 compared to the year-ago period. Details are shown in the following table:

	Quarter Ended
	June 30,
	2005			2004
	(Dollar amounts in
	millions)
Nonprime Mortgage Loans	$	9,670		$	8,132
Prime Home Equity Loans		6,875			5,239
	$	16,545		$	13,371
Percent of total Mortgage Banking loan production		16.4	%		15.1	%

      Nonprime Mortgage and Prime Home Equity Loans generally provide higher profit margins, and the demand for such loans is believed to be less interest rate sensitive than the demand for Prime Mortgage Loans. Consequently, we believe these loans will be a significant component of the Loan Production Sector’s future profitability, especially if mortgage interest rates rise.

      During the quarter ended June 30, 2005, the Loan Production Sector operated at approximately 118% of planned operational capacity, compared to 114% during the year-ago period. The primary capacity constraint in our loan origination activities is the number of loan operations personnel we have on staff. Therefore, we measure planned capacity with reference to the number of our loan operations personnel multiplied by the number of loans we expect each loan operations staff person to process under normal conditions. Management adjusts staffing levels to account for changes in the current and projected near-term mortgage market. We plan to continue building our sales staff as a primary means to increase our market share, particularly for purchase loans.

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

			Workforce at
			June 30,
			2005		2004
Sales				14,425		11,034
Operations:
	Regular employees			8,716		7,930
	Temporary staff			1,784		1,077
				10,500		9,007
Production technology				1,092		991
Administration and support				2,465		2,003
		Total Loan Production Sector workforce		28,482		23,035

      The following table shows total Mortgage Banking loan production volume by division:

	Quarter Ended
	June 30,
	2005		2004
	(In millions)
Correspondent Lending	$	45,119	$	37,908
Consumer Markets		30,509		27,099
Wholesale Lending		19,613		19,848
Full Spectrum Lending		5,913		3,635
	$	101,154	$	88,490

      The Consumer Markets Division has expanded its commissioned sales force, which emphasizes purchase loan production, to 5,388 at June 30, 2005, an increase of 1,126, or 26%, over the year-ago period. This Division’s branch network has grown to 616 branch offices at June 30, 2005, an increase of 104 offices from June 30, 2004.

      The commissioned sales force contributed $13.3 billion in purchase originations during the quarter ended June 30, 2005, a 33% increase over the year-ago period. The purchase production generated by the commissioned sales force represented 77% of the Consumer Markets Division’s purchase production for the quarter ended June 30, 2005.

      The Wholesale Lending and Full Spectrum Lending Divisions also continued to increase their sales forces as a means to increase market share. At June 30, 2005, the sales force in the Wholesale Lending Division numbered 1,162, an increase of 23% compared to June 30, 2004. The Full Spectrum Lending Division expanded its sales force by 1,072 or 37%, compared to June 30, 2004, and has expanded its branch network to 179 branch offices at June 30, 2005, an increase of 45 offices over the year-ago period.

Loan Servicing Sector

      The Loan Servicing Sector includes a significant processing operation, consisting of approximately 7,000 employees who service our 6.8 million mortgage loans. Also included in the Loan Servicing Sector’s results is the performance of our investments in MSRs and other retained interests and associated risk management activities, as well as profits from subservicing activities in the United States. The long-term performance of this sector is affected primarily by the level of interest rates and the corresponding effect on the level of projected and actual prepayments in our servicing portfolio.

36

      The following table summarizes the results for the Loan Servicing Sector:

		Quarter Ended June 30,
		2005						2004
					Percentage of						Percentage of
					Average						Average
					Servicing						Servicing
		Amount			Portfolio(1)			Amount			Portfolio(1)
		(Dollar amounts in thousands)
Servicing fees, net of guarantee fees		$	761,269			0.333	%	$	566,389			0.325	%
Miscellaneous fees			117,215			0.051	%		114,629			0.066	%
Income from other retained interests			108,140			0.047	%		115,536			0.066	%
Escrow balance income (expense)			77,259			0.034	%		(40,912	)		(0.023	)%
Amortization of mortgage servicing rights			(482,373	)		(0.211	)%		(569,977	)		(0.327	)%
(Impairment) recovery of retained interests			(1,378,821	)		(0.602	)%		1,179,127			0.677	%
Servicing hedge gains (losses)			1,147,158			0.501	%		(1,149,451	)		(0.660	)%
	Total servicing revenues		349,847			0.153	%		215,341			0.124	%
Operating expenses			161,255			0.070	%		108,155			0.062	%
Allocated corporate expenses			15,006			0.007	%		19,109			0.011	%
	Total servicing expenses		176,261			0.077	%		127,264			0.073	%
Interest expense			84,483			0.037	%		62,884			0.037	%
Pre-tax earnings		$	89,103			0.039	%	$	25,193			0.014	%
Average servicing portfolio		$	915,582,000					$	696,618,000

(1)  Annualized

      Our servicing portfolio grew to $964.4 billion at June 30, 2005, a 33% increase from June 30, 2004. At the same time, the overall weighted-average note rate of loans in our servicing portfolio remained at 5.9%.

      Pre-tax earnings in the Loan Servicing Sector were $89.1 million during the quarter ended June 30, 2005, an improvement of $63.9 million from the year-ago period. Pre-tax earnings in the Loan Servicing Sector increased primarily due to a $194.9 million increase in the net servicing fees that resulted from a 31% increase in the size of the average servicing portfolio. In addition, escrow balance benefit improved $118 million due to an increase in short-term interest rates. Offsetting these increases was an increase in amortization and impairment net of Servicing Hedge, which rose by $173.7 million to $714.0 million during the current period.

      Mortgage interest rates declined during the quarter ended June 30, 2005 which resulted in a higher projected prepayment rate at the end of the period than at the beginning. This in turn resulted in impairment being recorded in the current period. In contrast, interest rates rose during the quarter ended June 30, 2004, which resulted in a lower projected prepayment rate at the end of the period than at the beginning and recovery of previously recorded impairment during the year-ago period. The amortization and impairment of retained interests was $1,861.2 million during the quarter ended June 30, 2005 compared to recovery of previous impairment, net of amortization, of $609.2 million during the quarter ended June 30, 2004.

      The Servicing Hedge is designed to offset the impairment of MSRs and other retained interests. The values of the derivatives that constitute the primary components of the Servicing Hedge are tied to long-term Treasury, mortgage and swap rate indices. The decrease in these rates during the quarter ended June 30, 2005 offset by time value decay of $149 million on the options included in the Servicing Hedge resulted in a Servicing Hedge gain of $1,147.2 million. During the quarter ended June 30, 2004, the Servicing Hedge generated a loss of $1,149.5 million resulting from an increase in long-term Treasury and swap rates combined with option time value decay of $88 million. In a stable interest rate environment, we expect to incur no significant impairment charges; however, we expect to incur losses related to the Servicing Hedge driven

37

primarily by time value decay on options used in the hedge. The level of Servicing Hedge 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.

Loan Closing Services Sector

      This sector is comprised of the LandSafe companies, which provide credit reports, flood determinations, appraisals, property valuation services and title reports primarily to the Loan Production Sector but increasingly to third parties as well. Our integration of these previously outsourced services has provided not only incremental profits but also higher overall levels of service and quality control.

      The LandSafe companies produced $28.2 million in pre-tax earnings, representing an increase of 22% from the year-ago period. The increase in LandSafe’s pre-tax earnings was primarily due to the increase in our loan origination activity.

Banking Segment

      Our banking strategy includes holding loans in portfolio that historically we would have immediately sold into the secondary mortgage market. Management believes this strategy will increase earnings, as well as provide a stream of earnings over the long term. In the short term, reported consolidated profits will be impacted by the reduction in gains that would have been recognizable had the loans been sold.

      The Banking Segment achieved pre-tax earnings of $251.2 million during the quarter ended June 30, 2005, as compared to $119.1 million for the year-ago period. Following is the composition of pre-tax earnings by company:

		Quarter Ended
		June 30,
		2005			2004
		(In thousands)
Treasury Bank (“Bank”)		$	238,195		$	107,260
Countrywide Warehouse Lending (“CWL”)			20,965			17,415
Allocated corporate expenses			(7,999	)		(5,592	)
	Pre-tax earnings	$	251,161		$	119,083

      The Bank’s revenues and expenses are summarized in the following table:

		Quarter Ended
		June 30,
		2005			2004
		(Dollar amounts in
		thousands)
Interest income		$	735,025		$	268,285
Interest expense			433,683			130,478
	Net interest income		301,342			137,807
Provision for loan losses			(20,265	)		(8,930	)
	Net interest income after provision for loan losses		281,077			128,877
Non-interest income			37,393			15,829
Non-interest expense			(80,275	)		(37,446	)
	Pre-tax earnings	$	238,195		$	107,260
Efficiency ratio(1)			22	%		22	%
After-tax return on average assets			0.99	%		1.04	%

(1)  Non-interest expense reduced by mortgage insurance divided by the sum of net interest income plus non-interest income.

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      The increase in net interest income is primarily due to a $32.7 billion, or 129%, increase in average interest-earning assets, as summarized below:

				Quarter Ended June 30,
				2005						2004
				Average				Yield/		Average				Yield/
				Balance		Amount		Cost		Balance		Amount		Cost
				(Dollar amounts in thousands)
Net interest income:
	Yield on interest-earning assets:
		Mortgage loans held for investment		$	49,526,239	$	644,818		5.22%	$	21,022,824	$	235,214		4.50%
		Securities available for sale			6,819,820		74,830		4.40%		2,783,892		25,887		3.74%
		Other			1,689,683		15,377		3.65%		1,504,851		7,184		1.92%
			Total yield on interest-earning assets		58,035,742		735,025		5.08%		25,311,567		268,285		4.27%
	Cost of interest-bearing liabilities:
		Deposits			28,075,568		222,825		3.18%		14,165,149		62,690		1.78%
		FHLB advances			20,456,319		169,847		3.33%		9,127,706		67,630		2.98%
		Other			5,289,171		41,011		3.11%		59,821		158		1.06%
			Total cost of interest-bearing liabilities	$	53,821,058		433,683		3.23%	$	23,352,676		130,478		2.25%
Net interest income						$	301,342					$	137,807
Net interest margin(1)									2.08%						2.20%

(1)  Calculated as net interest income divided by interest-earning assets.

      Treasury Bank increased its investment in pay-option ARM loans during 2005. These loans have interest rates that adjust monthly and contain features that allow the borrower to defer making the full interest payment for at least the first year of the loan’s life. Thereafter, minimum monthly payments increase by no more than 7¹/2% per year unless the unpaid balance increases to 115% of the original loan amount, at which time a new monthly payment amount adequate to repay the loan over its remaining contractual life is established. To ensure a borrower makes adequate payments to repay a loan, the fully amortizing loan payment amount is recalculated every five years. Our underwriting standards for these loans include a requirement that the borrower meet secondary market debt service ratio tests based on the borrower making the fully amortizing loan payment assuming the note rate is fully indexed. (A fully indexed note rate equals the sum of the index rate plus the margin applicable to the loan.) Our underwriting standards conform to those required to make the pay-option loans salable into the secondary market at the date of funding.

      Following is a summary of pay-option loans held by Treasury Bank:

		June 30,		December 31,
		2005		2004
		(In thousands)
Total pay-option loan portfolio		$	15,010,822	$	4,477,247
Pay-option loans with accumulated negative amortization:
	Principal	$	2,871,464	$	32,818
	Accumulated negative amortization	$	5,915	$	29

      The provision for loan losses increased during the quarter ended June 30, 2005 compared to the quarter ended June 30, 2004 due to the increase in mortgage loans held for investment. We expect our provision for loan losses and the related allowance for loan losses to increase as a percentage of our portfolio of loans held

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for investment as our portfolio continues to season. The impact of the increase in the allowance for loan losses is partially mitigated by the addition of new loans to our portfolio.

      The composition of the Bank’s balance sheets was as follows:

			June 30,						December 31,
			2005						2004
			Amount			Rate			Amount			Rate
			(Dollar amounts in millions)
Assets
	Cash		$	239			1.16	%	$	140			1.35	%
	Short-term investments			257			3.32	%		225			2.16	%
	Mortgage loans held for investment, net			56,610			5.20	%		34,230			5.11	%
	Available-for-sale securities			6,545			4.58	%		5,246			4.34	%
	FHLB & FRB stock			1,195			4.62	%		795			3.96	%
	Other assets			614			—			328			—
		Total assets	$	65,460			5.07	%	$	40,964			4.97	%
Liabilities and Equity
	Deposits:
		Company-controlled escrow deposit accounts	$	11,141			3.24	%	$	7,901			2.19	%
		Customer		19,470			3.43	%		12,112			3.01	%
	FHLB advances			23,825			3.32	%		15,475			2.97	%
	Other borrowings			6,402			3.25	%		1,811			2.37	%
	Other liabilities			622			—			740			—
				61,460			3.30	%		38,039			2.79	%
	Shareholder’s equity			4,000						2,925
		Total liabilities and equity	$	65,460					$	40,964
Non-accrual loans			$	41.1					$	21.8
Capital ratios:
	Tier 1 Leverage			6.9	%					7.8	%
	Tier 1 Risk-based capital			9.9	%					11.8	%
	Total Risk-based capital			10.1	%					12.0	%

      The Banking Segment also includes the operation of CWL. CWL’s pre-tax earnings increased by $3.6 million during the quarter ended June 30, 2005 in comparison to the year-ago period, primarily due to a 41% increase in average mortgage warehouse advances, partially offset by a decrease in the net interest margin due to increasing competition in the warehouse lending market. The increase in warehouse mortgage advances was due primarily to increased activity with Mortgage Sector customers.

Capital Markets Segment

      Our Capital Markets Segment achieved pre-tax earnings of $104.9 million for the quarter ended June 30, 2005, an increase of $15.2 million, or 17%, from the year-ago period. Total revenues were $178.1 million, an increase of $16.4 million, or 10%, compared to the year-ago period. The Capital Markets Segment has expanded its staffing and infrastructure to invest in the development of new lines of business such as U.S. Treasury securities trading, commercial real estate finance and broker-dealer operations in Japan, the expense of which was partially offset by reduced overall compensation expense.

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

			Quarter Ended
			June 30,
			2005		2004
			(In thousands)
Revenues:
	Conduit		$	72,361	$	69,577
	Underwriting			56,713		65,680
	Securities trading			24,353		26,886
	Commercial real estate			9,584		15
	Brokering			9,037		3,182
	Other			6,066		(3,655	)
		Total revenues		178,114		161,685
Expenses:
	Operating expenses			69,617		69,569
	Allocated corporate expenses			3,646		2,485
		Total expenses		73,263		72,054
Pre-tax earnings			$	104,851	$	89,631

      During the quarter ended June 30, 2005, the Capital Markets Segment generated revenues totaling $72.4 million from its conduit activities, which includes managing the acquisition and sale or securitization of whole loans on behalf of CHL. Conduit revenues for the quarter ended June 30, 2005 increased 4% in comparison to the year-ago period, primarily because of an increase in the conduit loans sold.

      Underwriting revenues decreased $9.0 million over the year-ago period because of decreased underwriting of CHL securitizations by Capital Markets.

      Securities trading revenues declined 9% due to a decline in mortgage securities trading margins and volume. Trading volumes decreased 13% from the year-ago period excluding U.S. Treasury securities. Including U.S. Treasury securities, the total securities volume traded increased 1% over the year-ago period.

      During the quarter ended June 30, 2005, the Capital Markets Segment generated revenues totaling $9.6 million from sales of commercial real estate loans.

      The following table shows the composition of CSC securities trading volume, which includes intersegment trades with the mortgage banking operations, by instrument:

		Quarter Ended
		June 30,
		2005		2004
		(In millions)
Mortgage-backed securities		$	467,375	$	526,677
Asset-backed securities			35,535		43,324
Government agency debt			6,278		21,803
Other			8,876		2,531
	Subtotal(1)		518,064		594,335
U.S. Treasury securities			369,430		287,242
	Total securities trading volume	$	887,494	$	881,577

(1)  Approximately 17% and 16% of the segment’s non-U.S. Treasury securities trading volume was with CHL during the quarter ended June 30, 2005 and 2004, respectively.

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Insurance Segment

      The Insurance Segment’s pre-tax earnings increased 19% over the year-ago period, to $57.7 million. The following table shows pre-tax earnings by business line:

		Quarter Ended
		June 30,
		2005			2004
		(In thousands)
Balboa Reinsurance Company		$	36,940		$	31,194
Balboa Life and Casualty Operations(1)			25,490			23,565
Allocated corporate expenses			(4,722	)		(6,222	)
	Pre-tax earnings	$	57,708		$	48,537

(1)  Includes the Balboa Life and Casualty Group and the Countrywide Insurance Services Group.

      The following table shows net insurance premiums earned:

		Quarter Ended
		June 30,
		2005		2004
		(In thousands)
Balboa Reinsurance Company		$	43,149	$	38,565
Balboa Life and Casualty Operations			172,329		148,687
	Total net insurance premiums earned	$	215,478	$	187,252

      The following table shows insurance claim expenses:

		Quarter Ended June 30,
		2005					2004
				As Percentage					As Percentage
				of Net					of Net
				Earned					Earned
		Amount		Premiums			Amount		Premiums
		(Dollar amounts in thousands)
Balboa Reinsurance Company		$	12,874		30	%	$	10,581		27	%
Balboa Life and Casualty Operations			75,912		44	%		73,171		49	%
	Total insurance claim expenses	$	88,786				$	83,752

      Our mortgage reinsurance business produced $36.9 million in pre-tax earnings, an increase of 18% over the year-ago period, driven primarily by growth of 4% in the mortgage loans included in our loan servicing portfolio that are covered by reinsurance contracts along with a reduced provision for insured losses, which reflects reduced loss expectations relating to reinsured risk.

      Our Life and Casualty insurance business produced pre-tax earnings of $25.5 million, an increase of $1.9 million from the year-ago period. The increase in earnings was driven by a $23.6 million, or 15.9% increase in net earned premiums during the quarter ended June 30, 2005 in comparison to the year-ago period, along with a $9.8 million gain on sale of securities offset by an increase in operating expenses in comparison to the year-ago period. The increase in net earned premiums was primarily attributable to an increase in voluntary homeowners and auto insurance.

      Our Life and Casualty insurance operations manage insurance risk by reinsuring portions of their insured risk. Balboa seeks to earn profits by capitalizing on Countrywide’s customer base and institutional relationships, as well as through operating efficiencies and sound underwriting.

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Global Operations Segment

      Global Operations pre-tax earnings totaled $5.3 million, a decrease of $4.4 million from the year-ago period. The decrease in earnings was due to a 39% decline in the number of new mortgage loans processed.

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:

			Quarter Ended June 30,
			2005								2004
					Gain on Sale								Gain on Sale
								As Percentage								As Percentage
			Loans Sold		Amount			of Loans Sold			Loans Sold		Amount			of Loans Sold
			(Dollar amounts in thousands)
Mortgage Banking:
	Prime Mortgage Loans		$	84,935,552	$	673,853			0.79	%	$	74,516,530	$	790,150			1.06	%
	Nonprime Mortgage Loans			11,490,764		218,243			1.90	%		8,784,216		409,109			4.66	%
	Prime Home Equity Loans			3,019,619		121,523			4.02	%		6,109,663		150,698			2.47	%
		Production Sector		99,445,935		1,013,619			1.02	%		89,410,409		1,349,957			1.51	%
	Reperforming loans			224,414		7,337			3.27	%		582,839		18,574			3.19	%
			$	99,670,349		1,020,956					$	89,993,248		1,368,531
Capital Markets:
	Conduit activities		$	15,659,113		62,205			0.40	%	$	10,225,728		56,407			0.55	%
	Underwriting			N/A		46,265			N/A			N/A		49,818			N/A
	Commercial real estate		$	485,565		9,905			2.04	%		N/A		—			N/A
	Securities trading and other			N/A		(12,828	)		N/A			N/A		(62,590	)		N/A
						105,547								43,635
Other				N/A		18,906			N/A			N/A		6,703			N/A
					$	1,145,409							$	1,418,869

      Gain on sale of Prime Mortgage Loans decreased in the quarter ended June 30, 2005 as compared to the quarter ended June 30, 2004 due primarily to lower margins resulting from increased pricing competition. The decline in margins was partially offset by increased sales of Prime Mortgage Loans combined with a shift in mix of Prime Mortgage Loans sold towards higher margin adjustable-rate products.

      Gain on sale of Nonprime Mortgage Loans decreased in the quarter ended June 30, 2005 as compared to the quarter ended June 30, 2004 due primarily to lower margins resulting from increased pricing competition, partially offset by increased sales of Nonprime Mortgage Loans.

      Gain on sale of Prime Home Equity Loans decreased in the quarter ended June 30, 2005 as compared to the year-ago period due primarily to reduced sales of such loans.

      Reperforming loans are reinstated loans that had previously defaulted and were repurchased from mortgage securities we issued. The note rate on these loans is typically higher than the currently offered mortgage interest rates, and therefore, the margin on these loans is typically higher than margins on Prime Mortgage Loans.

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      The increase in Capital Markets’ gain on sale related to its conduit and commercial real estate activities was due to increased sales of such loans. Capital Markets’ revenues from its trading activities consist of gain on sale of loans and securities and interest income. In a steep yield curve environment, trading revenues derive largely or entirely from net interest income earned during the securities’ holding period. As the yield curve flattens, the mix of revenues will generally shift toward gain on sale of securities. During the quarter ended June 30, 2005 the yield curve was flatter than in the year-ago period, which resulted in a shift in trading revenues from interest income to gain on sale. The increase in the gain on sale of the trading securities was more than offset by a decline in net interest income due to the overall decline in trading margins.

      In general, gain on sale of loans and securities is affected by numerous factors, including the volume, mix and timing of loans sold, production channel mix, the level of price competition, the slope of the yield curve, and the effectiveness of our associated interest rate risk management activities.

Net Interest Income

      Net interest income is summarized below:

			Quarter Ended
			June 30,
			2005			2004
			(In thousands)
Net interest income (expense):
	Banking Segment loans and securities		$	309,376		$	154,636
	Mortgage Banking Segment loans and securities			155,688			324,643
	Servicing Sector interest expense			(100,692	)		(80,512	)
	Interest income (expense) on custodial balances			77,259			(40,912	)
	Reperforming loans			19,638			32,346
	Capital Markets Segment securities portfolio			56,710			97,180
	Other			14,571			11,167
		Net interest income		532,550			498,548
	Provision for loan losses related to loans held for investment			(17,101	)		(19,747	)
		Net interest income after provision for loan losses	$	515,449		$	478,801

      The increase in net interest income from the Banking Segment was primarily attributable to growth in the average investment in mortgage loans in the Bank and CWL. Average assets in the Banking Segment increased to $63.0 billion during the quarter ended June 30, 2005, an increase of $34.0 billion, or 117% over the year-ago period. Partially offsetting this increase, the net interest margin decreased to 2.02% during the quarter ended June 30, 2005 from 2.13% during the year-ago period.

      The decrease in net interest income from Mortgage Banking Segment loans and securities reflects a decrease in the average holding period of inventory of mortgage loans during the quarter ended June 30, 2005 as compared to the year-ago period, which resulted in lower average inventory balances. Average inventory decreased primarily due to the sale of Prime Home Equity Loans that had been held as investments in the year-ago period. The Mortgage Banking Segment loan and securities inventory is primarily financed with borrowings tied to short-term indices. Short-term interest rates rose while long-term mortgage interest rates declined between the year-ago period and the quarter ended June 30, 2005, reducing the net interest margin. In addition, the mix of loans produced shifted towards adjustable-rate mortgage loans, which typically carry lower initial interest rates than fixed-rate mortgage loans.

      Interest expense allocated to the Loan Servicing Sector increased primarily due to a higher cost of funds driven by an increase in interest rates combined with an increase in total Servicing Sector assets.

      Net interest income from custodial balances increased in the current period due to an increase in the earnings rate on the custodial balances from 0.92% during the quarter ended June 30, 2004 to 2.86% during

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the quarter ended June 30, 2005, resulting from an increase in short-term interest rates, and to an increase in average custodial balances of $1.9 billion or 10% over the year-ago period. We are required to pass through monthly interest to security holders on paid-off loans at the underlying security rates, which were substantially higher than the short-term rates earned by us on the payoff float. The amount of such interest passed through to the security holders was $75.7 million and $86.0 million in the quarters ended June 30, 2005 and 2004, respectively.

      The decrease in interest income related to reperforming loans is a result of a decrease in the average balance of such loans held.

      The decrease in net interest income from the Capital Markets securities portfolio is attributable to a decrease in the net interest margin from 0.94% in the quarter ended June 30, 2004 to 0.46% in the quarter ended June 30, 2005, partially offset by an increase of 19% in the average inventory of securities held. The decrease in the net interest margin earned on the securities portfolio is primarily due to a larger increase in short-term financing rates versus the increase in rates in the longer-term securities held by the Capital Markets Segment. The decline in net interest income was partially offset by an increase in gain on sale.

Loan Servicing Fees and Other Income from Retained Interests

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

		Quarter Ended
		June 30,
		2005		2004
		(In thousands)
Servicing fees, net of guarantee fees		$	761,269	$	566,389
Income from other retained interests			108,140		115,536
Late charges			55,851		41,939
Prepayment penalties			46,610		37,386
Global Operations Segment subservicing fees			27,203		26,287
Ancillary fees			20,076		15,095
	Total loan servicing fees and other income from retained interests	$	1,019,149	$	802,632

      The increase in servicing fees, net of guarantee fees, was principally due to a 31% increase in the average servicing portfolio, plus an increase in the overall annualized net service fee earned from 0.325% of the average portfolio balance during the quarter ended June 30, 2004 to 0.333% during the quarter ended June 30, 2005.

      The decrease in income from other retained interests was due primarily to a decrease in the yield on these investments from 27% in the quarter ended June 30, 2004 to 23% in the quarter ended June 30, 2005, partially offset by an increase in the average investment in these assets. The yield excludes any impairment charges. Such charges are included in recovery (impairment) of retained interests in the consolidated statement of earnings. These investments include interest-only and principal-only securities as well as residual interests that arise from the securitization of mortgage loans, particularly Nonprime Mortgage and Prime Home Equity Loans.

Amortization of Mortgage Servicing Rights

      We recorded amortization of MSRs of $482.4 million, or an annual rate of 18.6%, during the quarter ended June 30, 2005 as compared to $570.0 million, or an annual rate of 26.9%, during the quarter ended June 30, 2004. The amortization rate of MSRs is dependent on the forecasted prepayment speeds at the beginning of the period. Mortgage rates at the beginning of the current quarter were higher than the year-ago period, and as a result, the forecasted prepayment speeds were lower in the current quarter. This resulted in a lower amortization rate in the quarter ended June 30, 2005 than in the year-ago period. Partially offsetting the lower amortization rate was the higher MSR asset balance.

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(Impairment) Recovery of Retained Interests and Servicing Hedge Gains (Losses)

      (Impairment) recovery of retained interests and Servicing Hedge gains (losses) are detailed below:

				Quarter Ended
				June 30,
				2005			2004
				(In thousands)
(Impairment) recovery of retained interests:
	MSRs:
		(Impairment) recovery		$	(787,910	)	$	1,357,551
		Reduction of MSR cost basis through application of hedge accounting:
			Change in fair value attributable to hedged risk		(493,430	)		—
		Total (impairment) recovery of MSRs			(1,281,340	)		1,357,551
	Other retained interests				(97,629	)		(178,424	)
				$	(1,378,969	)	$	1,179,127
Servicing Hedge gains (losses) recorded in earnings				$	1,147,158		$	(1,149,451	)

      MSR impairment during the quarter ended June 30, 2005 resulted from a decrease in the estimated fair value of MSRs, primarily driven by the decrease in mortgage interest rates during the period. Recovery of previously recorded MSR impairment in the quarter ended June 30, 2004 resulted generally from an increase in the MSR’s estimated fair value, driven by an increase in mortgage interest rates during that period. In the quarter ended June 30, 2005, we recognized impairment of other retained interests, primarily because of the effect of declining interest rates on the value of our retained interests.

      Long-term Treasury and swap rates decreased during the quarter ended June 30, 2005. The decrease resulted in a Servicing Hedge gain which was offset by the time value decay of $149 million on the options included in the Servicing Hedge. This resulted in a gain of $1,147.2 million in the quarter ended June 30, 2005. During the quarter ended June 30, 2004, the Servicing Hedge generated a loss of $1,149.5 million. This loss resulted from an increase in long-term Treasury and swap rates during the quarter ended June 30, 2004, combined with option time value decay of $88 million.

Net Insurance Premiums Earned

      The increase in net insurance premiums earned of $28.2 million is due to an increase in premiums earned on the voluntary homeowners and auto lines of business and an increase in reinsurance premiums earned.

Commissions and Other Income

      Commissions and other income consisted of the following:

		Quarter Ended
		June 30,
		2005		2004
		(In thousands)
Appraisal fees, net		$	26,192	$	18,439
Credit report fees, net			20,495		17,371
Global Operations Segment processing fees			15,415		18,219
Title services			11,094		11,961
Insurance agency commissions			6,787		16,037
Other			46,659		45,466
	Total commissions and other income	$	126,642	$	127,493

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Compensation Expenses

      Compensation expenses are summarized below:

		Quarter Ended
		June 30,
		2005			2004
		(In thousands)
Base salaries		$	474,988		$	386,138
Incentive bonus and commissions			483,651			421,138
Payroll taxes and benefits			138,517			122,156
Deferral of loan origination costs			(247,013	)		(159,342	)
	Total compensation expenses	$	850,143		$	770,090

      Compensation expenses increased $80.1 million, or 10%, during the quarter ended June 30, 2005 as compared to the year-ago period. In the Loan Production Sector, compensation expenses, prior to the deferral of loan origination costs increased $107.8 million, or 17%, because of a 22% increase in average staff. In the Loan Servicing Sector, compensation expense rose $14.1 million, or 21%, to accommodate a 23% increase in the number of loans serviced. Compensation expenses increased in most other business segments and corporate areas, reflecting growth in the Company.

      Average workforce by segment is summarized below:

	Quarter Ended
	June 30,
	2005		2004
Mortgage Banking		35,325		29,110
Banking		1,663		949
Capital Markets		603		516
Insurance		2,008		1,819
Global Operations		2,477		2,074
Corporate Administration		4,225		3,660
Average workforce, including temporary staff		46,301		38,128

      Incremental direct costs associated with the origination of loans are deferred when incurred. Subsequent treatment of these costs is based on whether the loans are held for sale or held for investment. If the related loan is sold, the costs deferred are included as a component of gain on sale; if the loan is held for investment, the costs are amortized to interest income over the life of the loan.

Occupancy and Other Office Expenses

      Occupancy and other office expenses are summarized below:

		Quarter Ended
		June 30,
		2005		2004
		(In thousands)
Depreciation expense		$	64,419	$	26,871
Office and equipment rentals			44,076		36,343
Utilities			34,452		29,703
Postage and courier service			23,993		23,138
Office supplies			18,115		14,211
Dues and subscriptions			11,324		10,027
Repairs and maintenance			10,421		11,069
Other			18,337		(514	)
	Total occupancy and other office expenses	$	225,137	$	150,848

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      Occupancy and other office expenses for the quarter ended June 30, 2005 increased by $74.3 million primarily to accommodate a 21% increase in the average headcount.

Insurance Claim Expenses

      Insurance claim expenses were $88.8 million for the quarter ended June 30, 2005 as compared to $83.8 million for the year-ago period. The increase in insurance claim expenses was due mainly to growth in our insured risk.

Advertising and Promotion Expenses

      Advertising and promotion expenses increased 29% from the quarter ended June 30, 2004, because of a shift in the mortgage loan production market towards purchase activity. These expenses are customarily lower when low interest rates drive increased consumer demand for mortgages.

Other Operating Expenses

      Other operating expenses are summarized below:

		Quarter Ended
		June 30,
		2005			2004
		(In thousands)
Insurance commission expense		$	36,699		$	30,453
Legal, consulting, accounting and auditing fees			25,977			23,935
Travel and entertainment			24,366			19,274
Losses on servicing-related advances			23,528			10,068
Software amortization and impairment			15,558			9,559
Taxes and licenses			11,369			8,568
Insurance			11,101			14,834
Other			45,043			45,411
Deferral of loan origination costs			(38,260	)		(18,180	)
	Total other operating expenses	$	155,381		$	143,922

Results of Operations Comparison — Six Months Ended June 30, 2005 and 2004

Consolidated Earnings Performance

      Our diluted earnings per share for the six months ended June 30, 2005 were $2.05, a 6% decrease from diluted earnings per share for the six months ended June 30, 2004. Net earnings were $1,255.3 million for the six months ended June 30, 2005, a 6% decrease from the year-ago period.

      The decrease in our earnings was primarily the result of a decrease in the profitability of our Mortgage Banking Segment. The Mortgage Banking Segment produced pre-tax earnings of $1,298.1 million for the six months ended June 30, 2005, a decrease of 18% from the same period last year. The decrease in the profitability of our Mortgage Banking Segment was due to reduced production margins, partially offset by improved profitability in loan servicing. Loan servicing earnings increased primarily from increased revenues resulting from a 31% increase in the size of the Company’s average loan servicing portfolio. The growth in the Banking Segment, which produced pre-tax earnings of $467.1 million, an increase of 108% from the year-ago period, partially offset the decline in Mortgage Banking earnings. The increase in profitability of our Banking Segment was primarily due to a 123% increase in average interest-earning assets at Treasury Bank from the year-ago period.

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Operating Segment Results

      Pre-tax earnings by segment are summarized below:

			Six Months Ended
			June 30,
			2005			2004
			(In thousands)
Mortgage Banking:
	Loan Production		$	1,143,792		$	1,670,435
	Loan Servicing			106,292			(133,026	)
	Loan Closing Services			47,996			41,601
		Total Mortgage Banking		1,298,080			1,579,010
	Banking			467,101			224,691
	Capital Markets			226,898			242,782
	Insurance			112,285			100,532
	Global Operations			9,360			21,414
	Other			(29,846	)		(1,270	)
		Pre-tax earnings	$	2,083,878		$	2,167,159

      The pre-tax earnings of each segment include intercompany transactions, which are eliminated in the “other” category above.

      Mortgage loan production by segment and product is summarized below:

			Six Months Ended
			June 30,
			2005		2004
			(In millions)
Segment:
	Mortgage Banking		$	179,903	$	155,974
	Banking — Treasury Bank			24,588		11,970
	Capital Markets:
		Conduit acquisitions		7,316		7,923
		Commercial real estate		1,296		—
			$	213,103	$	175,867
Product:
	Prime Mortgage		$	171,729	$	146,831
	Nonprime Mortgage			20,256		16,446
	Prime Home Equity			19,822		12,590
	Commercial real estate			1,296		—
			$	213,103	$	175,867

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

		Six Months Ended
		June 30,
		2005		2004
		(In millions)
Purpose:
	Purchase	$	102,652	$	77,576
	Non-purchase		110,451		98,291
		$	213,103	$	175,867
Interest Rate Type:
	Adjustable Rate	$	115,997	$	82,386
	Fixed Rate		97,106		93,481
		$	213,103	$	175,867

Mortgage Banking Segment

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

Loan Production Sector

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

		Six Months Ended June 30,
		2005					2004
				Percentage of					Percentage of
				Loan					Loan
				Production					Production
		Amount		Volume			Amount		Volume
		(Dollar amounts in thousands)
Revenues:
	Prime Mortgage	$	1,674,276				$	1,748,931
	Nonprime Mortgage		665,028					806,254
	Prime Home Equity		349,487					459,641
	Total revenues		2,688,791		1.49	%		3,014,826		1.93	%
Expenses:
	Compensation expenses		929,015		0.52	%		836,956		0.53	%
	Other operating expenses		441,473		0.24	%		310,464		0.20	%
	Allocated corporate expenses		174,511		0.09	%		196,971		0.13	%
	Total expenses		1,544,999		0.85	%		1,344,391		0.86	%
	Pre-tax earnings	$	1,143,792		0.64	%	$	1,670,435		1.07	%

      Revenues decreased over the year-ago period due primarily to decreased revenues on Prime and Nonprime Mortgage Loans due to increased pricing competition. The effect of decreased revenue from loan sales was partially offset by an 11% increase in loan sales volume and by a shift in mix of Prime Mortgage Loan sales toward higher margin adjustable-rate loans. In the six months ended June 30, 2005, $174.9 billion of mortgage loans, or 97% of loan production, was sold compared to $157.2 billion of mortgage loans, or 101% of loan production, in the six months ended June 30, 2004, which contributed to the decline in revenues as a percentage of mortgage loan production in the current six months.

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      The amount of expenses increased from the year-ago period, primarily due to an increase in compensation and occupancy costs, reflecting our continuing investment in growth of production capacity, along with increased advertising expenses during the current six months. The increase in sales and marketing costs was related to increased purchase production in the six months ended June 30, 2005. High levels of productivity helped maintain expenses expressed as a percentage of production consistent with the prior year. We continued to expand our loan production operations in the six months ended June 30, 2005 to continue support of our long-term objective of market share growth.

      Market demand for residential mortgages in the six months ended June 30, 2005 was relatively constant compared to the year-ago period. However, our production increased in the current period compared to the same period a year ago due to an increase in our market share. Our mortgage loan production market share was 15.5% in the six months ended June 30, 2005, up from 12.9% in the six months ended June 30, 2004 (Source of Mortgage Market: Mortgage Bankers Association).

      Mortgage Banking loan production volume for the six months ended June 30, 2005 increased 15% from the year-ago period. The increase was due to a rise in purchase and non-purchase loan production of 26% and 7%, respectively, reflecting an increase in market share.

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

		Six Months Ended
		June 30,
		2005		2004
		(In millions)
Purpose:
	Non-purchase	$	93,432	$	87,184
	Purchase		86,471		68,790
		$	179,903	$	155,974
Interest Rate Type:
	Fixed rate	$	90,650	$	88,804
	Adjustable rate		89,253		67,170
		$	179,903	$	155,974

      In the six months ended June 30, 2005, 50% of our loan production was adjustable-rate in comparison to 43% in the year-ago period.

      The volume of Mortgage Banking Nonprime Mortgage and Prime Home Equity Loans produced (which is included in our total volume of loans produced) increased 35% during the six months ended June 30, 2005 compared to the year-ago period. Details are shown in the following table:

	Six Months Ended
	June 30,
	2005			2004
	(Dollar amounts in
	millions)
Nonprime Mortgage Loans	$	17,857		$	14,180
Prime Home Equity Loans		13,494			8,968
	$	31,351		$	23,148
Percent of total Mortgage Banking loan production		17.4	%		14.8	%

      During the six months ended June 30, 2005 and 2004, the Loan Production Sector operated at approximately 110% of planned operational capacity.

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      The following table shows total Mortgage Banking loan production volume by division:

	Six Months Ended
	June 30,
	2005		2004
	(In millions)
Correspondent Lending	$	78,426	$	66,695
Consumer Markets		54,206		47,334
Wholesale Lending		36,970		35,486
Full Spectrum Lending		10,301		6,459
	$	179,903	$	155,974

Loan Servicing Sector

      The following table summarizes the results for the Loan Servicing Sector:

		Six Months Ended June 30,
		2005						2004
					Percentage of						Percentage of
					Average						Average
					Servicing						Servicing
		Amount			Portfolio(1)			Amount			Portfolio(1)
		(Dollar amounts in thousands)
Servicing fees, net of guarantee fees		$	1,481,586			0.334	%	$	1,124,352			0.332	%
Miscellaneous fees			230,498			0.052	%		293,924			0.087	%
Income from other retained interests			226,476			0.051	%		189,194			0.056	%
Escrow balance income (expense)			107,788			0.024	%		(79,964	)		(0.024	)%
Amortization of mortgage servicing rights			(954,560	)		(0.215	)%		(983,659	)		(0.290	)%
(Impairment) recovery of retained interests			(1,065,000	)		(0.240	)%		183,482			0.054	%
Servicing hedge gains (losses)			594,866			0.134	%		(476,655	)		(0.141	)%
	Total servicing revenues		621,654			0.140	%		250,674			0.074	%
Operating expenses			309,427			0.070	%		211,706			0.063	%
Allocated corporate expenses			29,215			0.006	%		37,354			0.011	%
	Total servicing expenses		338,642			0.076	%		249,060			0.074	%
Interest expense			176,720			0.040	%		134,640			0.039	%
Pre-tax earnings (loss)		$	106,292			0.024	%	$	(133,026	)		(0.039	)%
Average servicing portfolio		$	887,742,000					$	677,247,000

(1)  Annualized

      Our servicing portfolio grew to $964.4 billion at June 30, 2005, a 33% increase from June 30, 2004. At the same time, the overall weighted-average note rate of loans in our servicing portfolio remained constant at 5.9%.

      Pre-tax earnings in the Loan Servicing Sector were $106.3 million during the six months ended June 30, 2005, an improvement of $239.3 million from the year-ago period. Pre-tax earnings in the Loan Servicing Sector increased primarily due to a $357.2 million increase in the net servicing fees, which was caused by a 31% increase in the average servicing portfolio. In addition, escrow balance benefit improved $188 million due to an increase in short-term interest rates. Partially offsetting these increases was an increase in amortization and impairment, net of Servicing Hedge, of $147.9 million to $1,424.7 million during the current period.

      Mortgage interest rates declined during the six months ended June 30, 2005 which resulted in a higher projected prepayment rate at the end of the period than at the beginning. This in turn resulted in impairment

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being recorded in the current period. In contrast, interest rates rose during the six months ended June 30, 2004, which resulted in a lower projected prepayment rate at the end of the period than at the beginning and recovery of previously recorded impairment during the year-ago period. The amortization and impairment of retained interests was $2,019.6 million, during the six months ended June 30, 2005 compared to recovery of previous impairment, net of amortization, of $800.2 million during the six months ended June 30, 2004.

      The Servicing Hedge is designed to offset the impairment of MSRs and other retained interests. The values of the derivatives that constitute the primary components of the Servicing Hedge are tied to long-term Treasury, mortgage and swap rate indices. The decrease in these rates during the six months ended June 30, 2005, offset by the time value decay of $268 million on the options included in the Servicing Hedge, resulted in a Servicing Hedge gain of $594.9 million. During the six months ended June 30, 2004, the Servicing Hedge generated a loss of $476.7 million resulting from an increase in long-term Treasury and swap rates combined with option time value decay of $207 million.

Loan Closing Services Sector

      The LandSafe companies produced $48.0 million in pre-tax earnings, representing an increase of 15% from the year-ago period. The increase in LandSafe’s pre-tax earnings was primarily due to the increase in our loan origination activity.

Banking Segment

      The Banking Segment achieved pre-tax earnings of $467.1 million during the six months ended June 30, 2005, as compared to $224.7 million for the year-ago period. Following is the composition of pre-tax earnings by company:

		Six Months Ended
		June 30,
		2005			2004
		(In thousands)
Treasury Bank (“Bank”)		$	444,068		$	202,296
Countrywide Warehouse Lending (“CWL”)			38,257			33,040
Allocated corporate expenses			(15,224	)		(10,645	)
	Pre-tax earnings	$	467,101		$	224,691

      The Bank’s revenues and expenses are summarized in the following table:

		Six Months Ended
		June 30,
		2005			2004
		(Dollar amounts in
		thousands)
Interest income		$	1,285,299		$	496,301
Interest expense			733,954			240,498
	Net interest income		551,345			255,803
Provision for loan losses			(26,671	)		(17,338	)
	Net interest income after provision for loan losses		524,674			238,465
Non-interest income			67,629			32,040
Non-interest expense			(148,235	)		(68,209	)
	Pre-tax earnings	$	444,068		$	202,296
Efficiency ratio(1)			22	%		21	%
After-tax return on average assets			1.04	%		1.06	%

(1)  Non-interest expense reduced by mortgage insurance divided by the sum of net interest income plus non-interest income.

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      The increase in net interest income is primarily due to a $28.3 billion or 123% increase in average interest-earning assets, as summarized below:

				Six Months Ended June 30,
				2005							2004
				Average				Yield/			Average				Yield/
				Balance		Amount		Cost			Balance		Amount		Cost
				(Dollar amounts in thousands)
Net interest income:
	Yield on interest-earning assets:
		Mortgage loans held for investment		$	43,423,406	$	1,121,865		5.21	%	$	18,749,210	$	422,349		4.53	%
		Securities available for sale			6,431,016		135,557		4.25	%		3,127,951		61,595		3.96	%
		Other			1,565,406		27,877		3.59	%		1,212,185		12,357		2.05	%
			Total yield on interest-earning assets		51,419,828		1,285,299		5.04	%		23,089,346		496,301		4.32	%
	Cost of interest-bearing liabilities:
		Deposits			24,966,130		377,014		3.05	%		12,098,584		107,089		1.78	%
		FHLB advances			18,633,055		301,515		3.26	%		8,494,418		128,832		3.05	%
		Other			3,781,700		55,425		2.96	%		836,754		4,577		1.10	%
			Total cost of interest-bearing liabilities	$	47,380,885		733,954		3.12	%	$	21,429,756		240,498		2.26	%
Net interest income						$	551,345						$	255,803
Net interest margin(1)									2.16	%						2.24	%

(1)  Calculated as net interest income divided by average interest-earning assets.

      The provision for loan losses increased during the six months ended June 30, 2005 compared to the six months ended June 30, 2004 due to the increase in mortgage loans held for investment. We expect our provision for loan losses and the related allowance for loan losses to increase as a percentage of our portfolio of loans held for investment as our portfolio continues to season. The impact of the increase in the allowance for loan losses will be partially mitigated by the addition of new loans to our portfolio.

      The Banking Segment also includes the operation of CWL. CWL’s pre-tax earnings increased by $5.2 million during the six months ended June 30, 2005 in comparison to the year-ago period, primarily due to a 46% increase in average mortgage warehouse advances, which resulted primarily from an overall increase in activity with Mortgage Banking Segment customers.

Capital Markets Segment

      Our Capital Markets Segment achieved pre-tax earnings of $226.9 million for the six months ended June 30, 2005, a decrease of $15.9 million, or 7%, from the year-ago period. Total revenues were $382.0 million, a decrease of $3.1 million, or 1%, compared to the year-ago period. During the six months ended June 30, 2005, market conditions caused by rising short-term interest rates and a flattening of the yield curve have resulted in lower revenue. Partially offsetting this decline, Capital Markets benefited from its commercial real estate activities, which generated revenues totaling $38.6 million from commercial loans in the current period. The Capital Markets Segment has expanded its capacity to invest in the development of new lines of business such as U.S. Treasury securities trading, commercial real estate finance and broker-dealer operations in Japan, which largely contributed to an increase in expenses of $12.8 million, or 9%, compared to the year-ago period.

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

			Six Months Ended
			June 30,
			2005		2004
			(In thousands)
Revenues:
	Conduit		$	168,349	$	176,910
	Underwriting			108,270		128,942
	Securities trading			43,767		76,024
	Commercial real estate			38,591		15
	Brokering			15,246		7,214
	Other			7,800		(4,024	)
		Total revenues		382,023		385,081
Expenses:
	Operating expenses			147,353		137,504
	Allocated corporate expenses			7,772		4,795
		Total expenses		155,125		142,299
Pre-tax earnings			$	226,898	$	242,782

      During the six months ended June 30, 2005, the Capital Markets Segment generated revenues totaling $168.3 million from its conduit activities, which includes managing the acquisition and sale or securitization of whole loans on behalf of CHL. Conduit revenues for the six months ended June 30, 2005 decreased 5% in comparison to the year-ago period, primarily because of a decrease in the margins.

      Underwriting revenues decreased $20.7 million over the year-ago period because of decreased underwriting of CHL securitizations by Capital Markets.

      Securities trading revenues declined 42% due to a decline in conforming mortgage securities trading margins and volume. Trading volumes declined 14% from the year-ago period excluding U.S. Treasury securities. Including U.S. Treasury securities, the total securities volume traded increased 9% over the year-ago period.

      During the six months ended June 30, 2005, the Capital Markets Segment generated revenues totaling $38.6 million from sales of commercial real estate loans.

      The following table shows the composition of CSC securities trading volume, which includes intersegment trades with the mortgage banking operations, by instrument:

		Six Months Ended
		June 30,
		2005		2004
		(In millions)
Mortgage-backed securities		$	887,736	$	1,025,828
Asset-backed securities			69,900		80,931
Government agency debt			15,136		40,346
Other			19,410		9,430
	Subtotal(1)		992,182		1,156,535
U.S. Treasury securities			723,933		415,481
	Total securities trading volume	$	1,716,115	$	1,572,016

(1)  Approximately 17% and 14% of the segment’s non-U.S. Treasury securities trading volume was with CHL during the six months ended June 30, 2005 and 2004, respectively.

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Insurance Segment

      The Insurance Segment’s pre-tax earnings increased 12% over the year-ago period, to $112.3 million. The following table shows pre-tax earnings by business line:

		Six Months Ended
		June 30,
		2005			2004
		(In thousands)
Balboa Reinsurance Company		$	80,060		$	64,135
Balboa Life and Casualty Operations(1)			42,807			48,493
Allocated corporate expenses			(10,582	)		(12,096	)
	Pre-tax earnings	$	112,285		$	100,532

(1)  Includes the Balboa Life and Casualty Group and the Countrywide Insurance Services Group.

      The following table shows net insurance premiums earned:

		Six Months Ended
		June 30,
		2005		2004
		(In thousands)
Balboa Reinsurance Company		$	86,844	$	75,814
Balboa Life and Casualty Operations			328,152		306,821
	Total net insurance premiums earned	$	414,996	$	382,635

      The following table shows insurance claim expenses:

		Six Months Ended June 30,
		2005					2004
				As Percentage					As Percentage
				of Net					of Net
				Earned					Earned
		Amount		Premiums			Amount		Premiums
		(Dollar amounts in thousands)
Balboa Reinsurance Company		$	19,796		23	%	$	18,585		25	%
Balboa Life and Casualty Operations			144,925		44	%		149,842		49	%
	Total insurance claim expenses	$	164,721				$	168,427

      Our mortgage reinsurance business produced $80.1 million in pre-tax earnings, an increase of 25% over the year-ago period, driven primarily by growth of 4% in the mortgage loans included in our loan servicing portfolio that are covered by reinsurance contracts along with a reduced provision for insured losses as a percentage of premium revenue, which reflects reduced loss expectations relating to reinsured risk.

      Our Life and Casualty insurance business produced pre-tax earnings of $42.8 million, a decrease of $5.7 million from the year-ago period. The decline in earnings was driven by an increase in operating expenses, partially offset by a $21.3 million, or 7%, increase in net earned premiums during the six months ended June 30, 2005 in comparison to the year-ago period. The increase in net earned premiums was primarily attributable to an increase in voluntary homeowners and auto insurance.

Global Operations Segment

      Global Operations pre-tax earnings totaled $9.4 million, a decrease of $12.1 million from the year-ago period. The decrease in earnings was due to a 46% decline in the number of new mortgage loans processed.

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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:

			Six Months Ended June 30,
			2005								2004
					Gain on Sale								Gain on Sale
								As Percentage								As Percentage
			Loans Sold		Amount			of Loans Sold			Loans Sold		Amount			of Loans Sold
								(Dollar amounts in thousands)
Mortgage Banking:
	Prime Mortgage Loans		$	143,856,140	$	1,403,198			0.98	%	$	134,116,657	$	1,340,015			1.00	%
	Nonprime Mortgage Loans			23,977,130		569,735			2.38	%		14,169,676		701,054			4.95	%
	Prime Home Equity Loans			7,045,028		277,916			3.94	%		8,867,161		265,802			3.00	%
		Production Sector		174,878,298		2,250,849			1.29	%		157,153,494		2,306,871			1.47	%
	Reperforming loans			683,662		22,903			3.35	%		2,056,976		100,524			4.89	%
			$	175,561,960		2,273,752					$	159,210,470		2,407,395
Capital Markets:
	Conduit activities		$	24,668,124		143,275			0.58	%	$	20,845,055		153,157			0.73	%
	Underwriting			N/A		85,713			N/A			N/A		95,429			N/A
	Commercial real estate		$	1,131,916		37,600			3.32	%		N/A		—			N/A
	Securities trading and other			N/A		(43,193	)		N/A			N/A		(131,785	)		N/A
						223,395								116,801
Other				N/A		10,013			N/A			N/A		14,694			N/A
					$	2,507,160							$	2,538,890

      Gain on sale of Prime Mortgage Loans increased in the six months ended June 30, 2005 as compared to the six months ended June 30, 2004 due primarily to an increase in the volume of loans sold.

      Gain on sale of Nonprime Mortgage Loans decreased in the six months ended June 30, 2005 as compared to the six months ended June 30, 2004 due primarily to lower margins resulting from increased pricing competition, partially offset by increased sales of Nonprime Mortgage Loans.

      Reperforming loans are reinstated loans that had previously defaulted and were repurchased from mortgage securities we issued. The note rate on these loans is typically higher than the current mortgage rate, and therefore, the margin on these loans is typically higher than margins on Prime Mortgage Loans. A change in Ginnie Mae rules related to the repurchase of defaulted loans from Ginnie Mae securities has reduced the amount of loans available for repurchase, which has contributed to a lower gain on sale related to these items.

      The decrease in Capital Markets’ gain on sale related to its conduit activities was due to a decline in margins partially offset by increased sales of mortgage loans through Capital Markets’ conduit activities. Capital Markets’ revenues from its trading activities consist of gain on sale and interest income. In a steep yield curve environment, trading revenues derive largely or entirely from net interest income earned during the securities’ holding period. As the yield curve flattens, the mix of revenues will naturally shift toward gain on sale of securities. During the six months ended June 30, 2005 the yield curve was flatter than in the year-ago period, which resulted in a shift in trading revenues from interest income to gain on sale. The increase in gain on sale of the trading securities was more than offset by a decline in net interest income due to the overall decline in trading margins.

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Net Interest Income

      Net interest income is summarized below:

			Six Months Ended
			June 30,
			2005			2004
			(In thousands)
Net interest income (expense):
	Banking Segment loans and securities		$	570,587		$	278,954
	Mortgage Banking Segment loans and securities			332,019			689,706
	Servicing Sector interest expense			(196,559	)		(166,416	)
	Interest income (expense) on custodial balances			107,788			(79,964	)
	Reperforming loans			48,163			57,244
	Capital Markets Segment securities portfolio			121,805			228,842
	Other			33,591			22,377
		Net interest income		1,017,394			1,030,743
	Provision for loan losses related to loans held for investment			(36,723	)		(40,528	)
		Net interest income after provision for loan losses	$	980,671		$	990,215

      The increase in net interest income from the Banking Segment was primarily attributable to growth in the average investment in mortgage loans in the Bank and CWL. Average assets in the Banking Segment increased to $55.7 billion during the six months ended June 30, 2005, an increase of $29.4 billion over the year-ago period. The net interest margin decreased to 2.10% during the six months ended June 30, 2005 from 2.18% during the year-ago period.

      The decrease in net interest income from Mortgage Banking loans and securities reflects primarily a flattening of the yield curve during the six months ended June 30, 2005 as compared to the year-ago period. The Mortgage Banking Segment loan and securities inventory is primarily financed with borrowings tied to short-term indices. Short-term interest rates rose while long-term mortgage interest rates declined between the year-ago period and the six months ended June 30, 2005, reducing the net interest income relating to outstanding balances. In addition, the mix of loans produced shifted towards adjustable-rate mortgage loans, which typically earn lower rates than fixed-rate mortgage loans. The decline in net interest margin was not offset by an increase in gain on sale due to price competition.

      Interest expense allocated to the Loan Servicing Sector increased primarily due to an increase in total Servicing Sector assets combined with an increase in cost of funds.

      Net interest income from custodial balances increased in the current period due to an increase in the earnings rate on the custodial balances from 0.88% during the six months ended June 30, 2004 to 2.64% during the six months ended June 30, 2005, resulting from an increase in short-term interest rates, and to an increase in average custodial balances of $2.7 billion or 16% over the year-ago period. We are required to pass through monthly interest to security holders on paid-off loans at the underlying security rates, which were substantially higher than the short-term rates earned by us on the payoff float. The amount of such interest passed through to the security holders was $149.4 million and $154.0 million in the six months ended June 30, 2005 and 2004, respectively.

      The decrease in interest income related to reperforming loans is a result of a decrease in the average balance of such loans held.

      The decrease in net interest income from the Capital Markets securities portfolio is attributable to a decrease in the net interest margin from 1.07% in the six months ended June 30, 2004 to 0.49% in the six months ended June 30, 2005, partially offset by an increase of 17% in the average inventory of securities held. The decrease in net interest margin on the securities portfolio is primarily due to a larger increase in

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short-term financing rates versus the increase in rates in the longer-term securities held by the Capital Markets Segment. The decline in net interest income was partially offset by an increase in gain on sale.

Loan Servicing Fees and Other Income from Retained Interests

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

		Six Months Ended
		June 30,
		2005		2004
		(In thousands)
Servicing fees, net of guarantee fees		$	1,481,586	$	1,124,352
Income from other retained interests			226,476		189,194
Late charges			112,719		85,271
Prepayment penalties			79,513		79,977
Global Operations Segment subservicing fees			55,730		52,977
Ancillary fees			35,483		27,642
	Total loan servicing fees and other income from retained interests	$	1,991,507	$	1,559,413

      The increase in servicing fees, net of guarantee fees, was principally due to a 31% increase in the average servicing portfolio, plus an increase in the overall annualized net service fee earned from 0.332% of the average portfolio balance during the six months ended June 30, 2004 to 0.334% during the six months ended June 30, 2005.

      The increase in income from other retained interests was due primarily to an increase in the average investment in these assets.

Amortization of Mortgage Servicing Rights

      We recorded amortization of MSRs of $954.6 million, or an annual rate of 18.8%, during the six months ended June 30, 2005 as compared to $983.7 million, or an annual rate of 23.4%, during the six months ended June 30, 2004. The amortization rate of MSRs is dependent on the forecasted prepayment speeds at the beginning of the period. Mortgage rates at the beginning of the current period were higher than the year-ago period, and as a result, the forecasted prepayment speeds were lower in the current period. This resulted in a lower amortization rate in the six months ended June 30, 2005 than in the year-ago period. Partially offsetting the lower amortization rate was the higher MSR asset balance.

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(Impairment) Recovery of Retained Interests and Servicing Hedge Gains (Losses)

      (Impairment) recovery of retained interests and Servicing Hedge gains (losses) are detailed below:

				Six Months Ended
				June 30,
				2005			2004
				(In thousands)
(Impairment) recovery of retained interests:
	MSRs:
		(Impairment) recovery		$	(335,476	)	$	455,321
		Reduction of MSR cost basis through application of hedge accounting:
			Change in fair value attributable to hedged risk		(493,430	)		—
		Total (impairment) recovery of MSRs			(828,906	)		455,321
	Other retained interests				(234,699	)		(271,839	)
				$	(1,063,605	)	$	183,482
Servicing Hedge gains (losses) recorded in earnings				$	594,866		$	(476,655	)

      Impairment of MSR during the six months ended June 30, 2005 resulted from a decrease in the estimated fair value of MSRs, resulting primarily from the decrease in mortgage interest rates during the period. Recovery of MSR impairment in the six months ended June 30, 2004 resulted generally from an increase in their estimated fair value, due to an increase in mortgage interest rates during the period. In the six months ended June 30, 2005, we recognized impairment of other retained interests, primarily because of the effect of lower interest rates on actual and anticipated prepayment speeds.

      Rising mortgage interest rates in the future should result in an increase in the estimated fair value of the MSRs and recovery of all or a portion of the impairment valuation allowance, which amounted to $1,386.2 million at June 30, 2005. The MSR amortization rate, which is tied to the expected net cash flows from the MSRs, likewise should reduce as mortgage interest rates rise.

      Long-term Treasury and swap interest rates decreased during the six months ended June 30, 2005. The decrease resulted in a Servicing Hedge gain which was offset by time value decay of $268 million on the options included in the Servicing Hedge. The net result is a gain of $594.9 million in the six months ended June 30, 2005. During the six months ended June 30, 2004, the Servicing Hedge generated a loss of $476.7 million. This loss resulted from an increase in long-term Treasury and swap rates during the six months ended June 30, 2004 along with option time value decay of $207 million.

Net Insurance Premiums Earned

      The increase in net insurance premiums earned of $32.4 million is due to an increase in premiums earned on the voluntary homeowners and auto lines of business and in reinsurance premiums earned.

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Commissions and Other Income

      Commissions and other income consisted of the following:

		Six Months Ended
		June 30,
		2005		2004
		(In thousands)
Appraisal fees, net		$	47,757	$	33,437
Credit report fees, net			39,016		35,252
Global Operations Segment processing fees			28,679		39,509
Title services			22,652		22,754
Insurance agency commissions			11,657		31,973
Other			92,032		82,718
	Total commissions and other income	$	241,793	$	245,643

Compensation Expenses

      Compensation expenses are summarized below:

		Six Months Ended
		June 30,
		2005			2004
		(In thousands)
Base salaries		$	917,886		$	741,747
Incentive bonus and commissions			863,231			742,462
Payroll taxes and benefits			288,055			240,844
Deferral of loan origination costs			(432,550	)		(274,299	)
	Total compensation expenses	$	1,636,622		$	1,450,754

      Compensation expenses increased $185.9 million, or 13%, during the six months ended June 30, 2005 as compared to the year-ago period. In the Loan Production Sector, compensation expenses, prior to the deferral of loan origination costs, increased $226.8 million, or 21%, because of a 25% increase in average staff. In the Loan Servicing Sector, compensation expense rose $25.1 million, or 19%, to accommodate a 23% increase in the number of loans serviced. Compensation expenses increased in most other business segments and corporate areas, reflecting growth in the Company.

      Average workforce by segment is summarized below:

	Six Months Ended
	June 30,
	2005		2004
Mortgage Banking		34,054		27,747
Banking		1,607		887
Capital Markets		591		501
Insurance		1,959		1,792
Global Operations		2,412		2,031
Corporate Administration		4,146		3,557
Average workforce, including temporary staff		44,769		36,515

      Incremental direct costs associated with the origination of loans are deferred when incurred. Subsequent treatment of these costs is based on whether the loans are held for sale or held for investment. If the related loan is sold, the costs deferred are included as a component of gain on sale; if the loan is held for investment, the costs are amortized to interest income over the life of the loan.

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Occupancy and Other Office Expenses

      Occupancy and other office expenses are summarized below:

		Six Months Ended
		June 30,
		2005		2004
		(In thousands)
Depreciation expense		$	97,943	$	52,532
Office and equipment rentals			86,667		70,483
Utilities			69,110		57,316
Postage and courier service			47,530		44,220
Office supplies			34,136		27,604
Dues and subscriptions			23,576		19,235
Repairs and maintenance			22,159		21,933
Other			32,672		5,550
	Total occupancy and other office expenses	$	413,793	$	298,873

      Occupancy and other office expenses for the six months ended June 30, 2005 increased by $114.9 million primarily to accommodate a 23% increase in the average headcount.

Insurance Claim Expenses

      Insurance claim expenses were $164.7 million for the six months ended June 30, 2005 as compared to $168.4 million for the year-ago period. The decrease in insurance claim expenses was due mainly to a decrease in the loss ratio experienced on lender-placed property and voluntary homeowners lines of business.

Advertising and Promotion Expenses

      Advertising and promotion expenses increased 47% from the six months ended June 30, 2004, as a result of a shift in the mortgage loan production market towards purchase activity.

Other Operating Expenses

      Other operating expenses are summarized below:

		Six Months Ended
		June 30,
		2005			2004
		(In thousands)
Insurance commission expense		$	68,269		$	63,364
Legal, consulting, accounting and auditing fees			53,438			43,553
Travel and entertainment			48,124			36,531
Losses on servicing-related advances			44,983			16,363
Software amortization and impairment			28,666			19,299
Insurance			22,750			29,077
Taxes and licenses			21,909			17,061
Other			84,718			88,953
Deferral of loan origination costs			(67,837	)		(33,245	)
	Total other operating expenses	$	305,020		$	280,956

      Losses on servicing-related advances consist primarily of losses arising from unreimbursed servicing advances on defaulted loans and credit losses arising from defaulted VA-guaranteed loans. (See the “Credit Risk Management” section of this Report for a further discussion of credit risk.) The increase in losses on

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servicing-related advances is due to growth in the Company’s loan servicing portfolio along with the Company recognizing recoveries in the six months ended June 30, 2004 that did not recur in the current six months.

Quantitative and Qualitative Disclosures About Market Risk

      The primary market risk we face is interest rate risk. Interest rate risk includes the risk that the value of our assets and liabilities will change due to changes in interest rates. Interest rate risk also includes the risk that the net interest income from our mortgage loan and investment portfolios will change in response to changes in interest rates. From an enterprise perspective, we manage interest rate risk through the natural counterbalance of our loan production and servicing businesses. We also use various financial instruments, including derivatives, to manage the interest rate risk related specifically to the values of our interest rate lock commitments, Mortgage Loan Inventory and MBS held for sale, MSRs and other retained interests, and trading securities, as well as a portion of our debt. The overall objective of our interest rate risk management activities is to reduce the variability of earnings caused by changes in interest rates.

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 and MSRs, option-adjusted spread (“OAS”) models are used. The primary assumptions used in these models for purpose of these sensitivity analyses are the implied market volatility of interest rates and prepayment speeds. For options and interest rate floors, an option-pricing model is used. The primary assumption used in this model is implied market volatility of interest rates. Other retained interests are valued using zero volatility discounted cash flow models. The primary assumptions used in these models are prepayment rates, discount rates and credit losses. All relevant cash flows associated with the financial instruments are incorporated in the various models.

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      Based upon this modeling, the following table summarizes the estimated change in fair value of our interest rate-sensitive assets, liabilities and commitments as of June 30, 2005, given several hypothetical, instantaneous, parallel shifts in the yield curve:

				Change in Fair Value
Change in Interest Rate (Basis Points)				-100			-50			+50			+100
				(In millions)
MSRs and other financial instruments:
	MSR and other retained interests			$	(2,764	)	$	(1,360	)	$	1,195		$	2,216
	Impact of Servicing Hedge:
		Mortgage-based			318			159			(158	)		(316	)
		Swap-based			2,406			1,082			(733	)		(1,108	)
		Treasury-based			303			129			(28	)		(30	)
			MSRs and other retained interests, net		263			10			276			762
	Committed Pipeline				274			190			(337	)		(763	)
	Mortgage Loan Inventory				781			477			(679	)		(1,496	)
	Impact of associated derivative instruments:
		Mortgage-based			(1,141	)		(708	)		1,042			2,375
		Treasury-based			303			114			(25	)		(27	)
		Eurodollar-based			(139	)		(80	)		111			239
			Committed Pipeline and Mortgage Loan Inventory, net		78			(7	)		112			328
	Treasury Bank:
		Securities portfolio			82			51			(80	)		(183	)
		Mortgage loans			536			295			(337	)		(703	)
		Deposit liabilities			(241	)		(123	)		126			253
		Federal Home Loan Bank Advances			(348	)		(169	)		161			316
			Treasury Bank, net		29			54			(130	)		(317	)
	Notes payable and capital securities				(753	)		(395	)		392			779
	Impact of associated derivative instruments:
		Swap-based			97			47			(46	)		(91	)
			Notes payable and capital securities, net		(656	)		(348	)		346			688
	Insurance company investment portfolios				44			23			(24	)		(50	)
Net change in fair value related to MSRs and other financial instruments				$	(242	)	$	(268	)	$	580		$	1,411
Net change in fair value related to broker-dealer trading securities				$	(10	)	$	(3	)	$	(7	)	$	(23	)

      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, 2004, given several hypothetical (instantaneous) parallel shifts in the yield curve:

	Change in Fair Value
Change in Interest Rate (Basis Points)	-100			-50			+50			+100
	(In millions)
Net change in fair value related to MSRs and other financial Instruments	$	(285	)	$	(492	)	$	787		$	1,765
Net change in fair value related to broker-dealer trading securities	$	(11	)	$	(3	)	$	(8	)	$	(24	)

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      These sensitivity analyses are limited in that they were performed at a 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. In addition, not all of the changes in fair value would affect current period earnings. For example, MSRs are carried by impairment stratum at the lower of amortized cost or market value. Consequently, absent hedge accounting, any increase in the value of a particular MSR stratum above its amortized cost basis would not be reflected in current-period earnings. The total impairment valuation allowance was $1,386.2 million as of June 30, 2005. On April 1, 2005, we implemented hedge accounting in accordance with SFAS 133 for a portion of our interest rate risk management activities related to our MSRs. In addition, our debt is carried at its unpaid principal balance net of issuance discount or premium; therefore, absent hedge accounting, changes in the market value of our debt are not recorded in current-period earnings. For these reasons, the preceding estimates should not be viewed as an earnings forecast.

Foreign Currency Risk

      In order to diversify our funding sources globally, we occasionally issue medium-term notes denominated in a foreign currency. We manage the foreign currency risk associated with these medium-term notes through cross-currency swap transactions. The terms of the cross-currency swaps effectively convert all foreign currency-denominated medium-term notes into U.S. dollar 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 would not have a net financial impact on future earnings, fair values or cash flows.

Credit Risk

Securitization

      As a mortgage banker, we have historically sold substantially all our mortgage loans shortly after production, generally through securitizations. When we securitize our mortgage loans, we retain limited credit risk. As described in our 2004 Annual Report, the degree to which credit risk on the underlying loans is transferred through the securitization process depends on the structure of the securitization. Our Prime Mortgage Loans generally are securitized on a non-recourse basis, while Prime Home Equity Loans and Nonprime Mortgage Loans generally are securitized with limited recourse for credit losses.

      Our exposure to credit losses related to our limited recourse securitization activities is limited to the carrying value of our subordinated interests and to the contractual limit of reimbursable losses under our corporate guarantees less the recorded liability for such guarantees. These amounts at June 30, 2005 are as follows:

		June 30,
		2005
		(In thousands)
Subordinated Interests:
	Prime home equity residual securities	$	670,371
	Nonprime residual securities		663,381
	Prime home equity transferor’s interests		413,339
	Nonconforming residual securities		22,414
	Subordinated mortgage-backed pass-through securities		2,278
		$	1,771,783
Corporate guarantees in excess of recorded liability		$	418,515

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      The carrying value of the residual securities is net of expected future credit losses. The total credit losses incurred for the periods indicated related to all of our mortgage securitization activities are summarized as follows:

	Six Months Ended
	June 30,
	2005		2004
	(In thousands)
Repurchased or indemnified loans	$	19,734	$	21,545
Nonprime securitizations with retained residual interest		29,990		31,976
Prime home equity securitizations with retained residual interest		12,807		12,613
Nonprime securitizations with corporate guarantee		7,567		11,090
VA losses in excess of VA guarantee		1,131		755
Prime home equity securitizations with corporate guarantee		6,180		5,612
	$	77,409	$	83,591

Portfolio Lending Activities

      We have a portfolio of mortgage loans held for investment, consisting primarily of Prime Mortgage and Prime Home Equity Loans, which totaled $56.0 billion at June 30, 2005. This portfolio is held primarily in our Bank. Many Prime Home Equity Loans held in the Bank with combined loan-to-value ratios equal to or above 90% are covered by a pool insurance policy that provides partial protection against credit losses. Otherwise, we generally retain full credit exposure on these loans.

      We also provide short-term secured mortgage-loan warehouse advances to various lending institutions, which totaled $4.4 billion at June 30, 2005. We incurred no credit losses related to this activity in the six months ended June 30, 2005.

      Nonaccrual loans and foreclosed assets at period end are summarized as follows:

			June 30,
			2005
			(In thousands)
Nonaccrual loans(1):
	Mortgage loans:
		Nonprime	$	296,016
		Prime		250,039
		Prime home equity		17,165
				563,220
	Warehouse lending advances			—
	Defaulted FHA-insured and VA-guaranteed mortgage loans repurchased from securities			600,940
		Total nonaccrual loans		1,164,160
	Foreclosed assets			59,976
		Total nonaccrual loans and foreclosed assets	$	1,224,136
Nonaccrual loans as a percentage of loans held for investment:
	Total			1.9	%
	Excluding loans FHA-insured and VA-guaranteed loans			0.9	%
Allowance for loan losses			$	155,962
Allowance for loan losses as a percentage of nonaccrual loans
	Total			13.4	%
	Excluding loans FHA-insured and VA-guaranteed loans			27.7	%
Allowance for loan losses as a percentage of loans held for investment				0.3	%

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(1)  This amount excludes $186.7 million of government-insured loans eligible for repurchase from Ginnie Mae securities issued by us due to the loans’ severe delinquency. Our servicing agreement with Ginnie Mae allows us to repurchase loans that are delinquent more than 90 days instead of continuing to advance the delinquent interest to the security holders. This amount is included in loans held for investment as Countrywide has the option of repurchasing the loans from the securities and is required to include such loans on its balance sheets. However, we do not include these loans in our nonaccrual balances because we have not exercised the option to repurchase the loans.

      The allowance for loan losses increased by 25% from $125.0 million at December 31, 2004, to $156.0 million at June 30, 2005, primarily due to growth in loans held for investment at Treasury Bank. We expect our allowance for loan losses and the related provision for loan losses to increase as a percentage of our portfolio of loans held for investment as our portfolio of loans held for investment continues to season. As our portfolio continues to grow, the impact of seasoning on the allowance as a percentage of loans held for investment will be partially offset by new loans.

Mortgage Reinsurance

      We provide mortgage reinsurance on mortgage loans included in our servicing portfolio through contracts with several primary mortgage insurance companies. Under these contracts, we absorb mortgage insurance losses in excess of a specified percentage of the principal balance of a given pool of loans, subject to a cap, in exchange for a portion of the pools’ mortgage insurance premium. As of June 30, 2005, approximately $72.1 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 June 30, 2005, the maximum aggregate losses under the reinsurance contracts were $487.3 million. We are required to pledge securities to cover this potential liability. For the six months ended June 30, 2005, we did not experience any losses under our reinsurance contracts.

Mortgage Loans Held for Sale

      At June 30, 2005, mortgage loans held for sale amounted to $30.2 billion. While the loans are in inventory, we bear credit risk after taking into consideration primary mortgage insurance (which is generally required for conventional loans with a loan-to-value ratio greater than 80%), FHA insurance or VA guarantees. Historically, credit losses related to loans held for sale have not been significant due to the short period of time that loans are held prior to sale.

Counterparty Credit Risk

      We have exposure to credit loss in the event of contractual non-performance by our trading counterparties and counterparties to our various over-the-counter derivative financial instruments. We manage this credit risk by selecting only well-established, financially strong counterparties, spreading the credit risk among many such counterparties, and by placing contractual limits on the amount of unsecured credit extended to any single counterparty.

      The aggregate amount of counterparty credit exposure after consideration of relevant netting agreements at June 30, 2005, before and after collateral held by us, was as follows:

	June 30,
	2005
	(In millions)
Aggregate credit exposure before collateral held	$	1,884
Less: collateral held		(1,398	)
Net aggregate unsecured credit exposure	$	486

      For the six months ended June 30, 2005, we incurred no credit losses due to non-performance of any of our counterparties.

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Loan Servicing

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

			Six Months Ended
			June 30,
			2005			2004
			(In millions)
Beginning owned portfolio			$	821,475		$	630,451
Add: Loan production				211,807			175,867
		Purchased MSRs		33,501			13,497
Less: Runoff(1)				(130,045	)		(109,615	)
Ending owned portfolio				936,738			710,200
Subservicing portfolio				27,706			16,027
	Total servicing portfolio		$	964,444		$	726,227
MSR portfolio			$	849,079		$	655,527
Mortgage loans owned				87,659			54,673
Subservicing portfolio				27,706			16,027
	Total servicing portfolio		$	964,444		$	726,227

			June 30,
			2005			2004
			(Dollar amounts in
			millions)
Composition of owned portfolio at period end:
	Conventional mortgage		$	730,509		$	569,625
	Nonprime Mortgage			104,135			52,496
	Prime Home Equity			50,852			32,746
	FHA-insured mortgage			38,288			41,841
	VA-guaranteed mortgage			12,954			13,492
		Total owned portfolio	$	936,738		$	710,200
Delinquent mortgage loans(2):
	30 days			2.16	%		2.14	%
	60 days			0.63	%		0.61	%
	90 days or more			0.72	%		0.73	%
		Total delinquent mortgage loans		3.51	%		3.48	%
Loans pending foreclosure(2)				0.39	%		0.37	%
Delinquent mortgage loans(2):
	Conventional			1.99	%		2.06	%
	Government			11.85	%		12.28	%
	Nonprime Mortgage			10.56	%		10.27	%
	Prime Home Equity			1.02	%		0.61	%
		Total delinquent mortgage loans		3.51	%		3.48	%
Loans pending foreclosure(2):
	Conventional			0.19	%		0.18	%
	Government			0.97	%		1.08	%
	Nonprime Mortgage			1.70	%		1.88	%
	Prime Home Equity			0.04	%		0.03	%
		Total loans pending foreclosure		0.39	%		0.37	%

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(1)	Runoff refers to scheduled principal repayments on loans and unscheduled prepayments (partial prepayments or total prepayments due to refinancing, modification, sale, condemnation or foreclosure).
(2)	Expressed as a percentage of the total number of loans serviced, excluding subserviced loans and loans purchased at a discount due to their non-performing status.

      We attribute the overall increase in delinquencies in our servicing portfolio primarily to the relative overall increase in the number of loans in the nonprime portfolios, which carry higher delinquency rates than the conventional and Prime Home Equity portfolios. We believe the delinquency rates in our servicing portfolio are consistent with industry experience for similar mortgage loan portfolios.

Liquidity and Capital Resources

      We regularly forecast our potential funding needs over three-month and longer horizons, taking into account debt maturities and potential peak balance sheet levels. Available reliable sources of liquidity are appropriately established and sized to meet potential future funding requirements. We currently have $87.0 billion in available sources of short-term liquidity, which represents an increase of $13.8 billion from December 31, 2004. We believe we have adequate financing to meet our current needs.

      At June 30, 2005 and at December 31, 2004, CFC’s regulatory capital ratios were as follows:

					June 30, 2005					December 31, 2004
		Minimum
		Required(1)			Ratio			Amount		Ratio			Amount
					(Dollar amounts in thousands)
Tier 1 Leverage Capital			5.0	%		7.2	%	$	11,498,160		7.9	%	$	10,332,383
Risk-Based Capital
	Tier 1		6.0	%		10.4	%	$	11,498,160		11.1	%	$	10,332,383
	Total		10.0	%		11.0	%	$	12,129,225		11.7	%	$	10,928,223

(1)  Minimum required to qualify as “well capitalized.”

Cash Flow

      Cash flow used by operating activities was $2.2 billion for the six months ended June 30, 2005, compared to net cash provided by operating activities of $4.5 billion for the six months ended June 30, 2004. The decrease in cash flow from operations for the six months ended June 30, 2005 compared to the six months ended June 30, 2004 was primarily due to a $3.3 billion net increase in cash used to fund Mortgage Loan Inventory and a $3.0 billion net increase in cash used to fund investments in trading securities.

      Net cash used by investing activities was $35.6 billion for the six months ended June 30, 2005, compared to $11.0 billion for the six months ended June 30, 2004. The increase in net cash used in investing activities was attributable to a $15.3 billion increase in cash used to fund loans held for investment, combined with a $5.9 billion increase in cash used to fund investments in other financial instruments and a $2.8 billion increase in securities purchased under agreements to resell and securities borrowed.

      Net cash provided by financing activities for the six months ended June 30, 2005 totaled $38.0 billion, compared to $6.5 billion for the six months ended June 30, 2004. The increase in cash provided by financing activities was comprised of a $23.9 billion net increase in short-term borrowings, a $4.5 billion net increase in bank deposit liabilities and a $3.1 billion increase in long-term debt.

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 the 2004 Annual Report for a

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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.

      Substantially all of our off-balance sheet arrangements relate to the securitization of mortgage loans. Our mortgage loan securitizations are normally structured as sales in accordance with SFAS 140, and as such 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 convert those assets into cash. Special-purpose entities used in such securitizations obtain cash to acquire the assets by issuing securities to investors. In a securitization, we customarily provide representations and warranties with respect to the mortgage loans transferred. In addition, 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 if 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.

      Our Prime Mortgage Loans generally are securitized on a non-recourse basis, while Prime Home Equity and Nonprime Loans generally are securitized with limited recourse for credit losses. During the six months ended June 30, 2005, we securitized $26.9 billion in Nonprime Mortgage and Prime Home Equity Loans with limited recourse for credit losses. Our exposure to credit losses related to our limited recourse securitization activities is limited to the carrying value of our subordinated interests and to the contractual limit of reimbursable losses under our corporate guarantees less the recorded liability for such guarantees. 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.”

      We do not believe that any of our off-balance sheet arrangements 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.

Contractual Obligations

      The following table summarizes our significant contractual obligations at June 30, 2005, with the exception of short-term borrowing arrangements and pension and post-retirement benefit plans:

	Less Than						More Than
	1 Year		1-3 Years		3-5 Years		5 Years		Total
	(In thousands)
Obligations:
Notes payable	$	11,210,370	$	24,658,246	$	10,848,013	$	3,152,483	$	49,869,112
Time deposits	$	9,198,942	$	4,103,543	$	2,488,376	$	961,375	$	16,752,236
Operating leases	$	141,182	$	217,283	$	102,415	$	29,910	$	490,790
Purchase obligations	$	138,553	$	19,173	$	3,358	$	757	$	161,841

      As of June 30, 2005, the Company had undisbursed home equity lines of credit and construction loan commitments of $6.5 billion and $1.3 billion, respectively. As of June 30, 2005, outstanding commitments to fund mortgage loans in process totaled $49.5 billion.

      In connection with the Company’s underwriting activities, the Company had commitments to purchase and sell new issues of securities aggregating $86.9 million at June 30, 2005.

Prospective Trends

United States Mortgage Market

      Over the last decade, total mortgage indebtedness in the United States has grown at an average annual rate of 9%. We believe that continued population growth, ongoing developments in the mortgage market and the prospect of relatively low interest rates support similar growth in the market for the foreseeable future. Some of the ongoing developments in the mortgage market that should fuel its growth include government-

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sponsored programs targeted to increase homeownership in low-income and minority communities, the growth of prime home equity lending as a major form of consumer finance, and the increasing efficiency of the secondary mortgage market that lowers the overall cost of homeownership.

      In recent years, 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 the borrowers has 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; and

•  Interest rate volatility has risen over the last decade. 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 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. Primarily because of these factors, the industry has undergone rapid consolidation.

      According to the trade publication Inside Mortgage Finance, the top five originators produced 45% of all loans originated during the first six months of the calendar year 2005, as compared to 44% for the six months ended December 31, 2004. Following is a comparison of loan volume for the top five originators, according to Inside Mortgage Finance:

		Six Months Ended		Six Months Ended
Institution		June 30, 2005		December 31, 2004
		(In billions)
Countrywide		$	212	$	187
Wells Fargo Home Mortgage			150		138
Washington Mutual			118		119
Chase Home Finance			85		92
Bank of America Mortgage			73		68
	Total for Top Five	$	638	$	604

      We believe the consolidation trend will continue, as the aforementioned market forces will continue to drive out weak competitors. We believe Countrywide will benefit from this trend through increased market share. We believe that industry consolidation should lessen irrational price competition, which from time to time has affected the industry.

      Compared to Countrywide, the other industry leaders are less reliant on the secondary mortgage market as an outlet for adjustable-rate mortgages, due to their greater portfolio lending capacity. This could place us at a competitive disadvantage in the future if the demand for adjustable-rate mortgages continues, the secondary mortgage market does not continue to provide a competitive outlet for these loans, or we are unable to sustain an adequate portfolio lending capacity.

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. For example, proposed state and federal legislation targeted at predatory lending could have the unintended consequence of raising the cost or otherwise reducing the availability of mortgage credit for those potential

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borrowers with less than prime-quality credit histories. This could result in a reduction of otherwise legitimate nonprime lending opportunities.

Recently Issued Accounting Standards

      In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (“SFAS 123R”), an amendment of FASB Statement No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation.” This Statement requires companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. SFAS 123R requires measurement of fair value of employee stock options using an option pricing model that takes into account the awarded options’ unique characteristics. SFAS 123R requires charging the recognized cost to expense over the period the employee provides services to earn the award, generally the vesting period for the award. In April of 2005, the Securities and Exchange Commission revised the required adoption date of SFAS 123R. As a result of this change, we are required to adopt SFAS 123R effective January 1, 2006. We have not yet determined the effect of implementation of SFAS 123R or whether the Statement will be implemented prospectively or retrospectively.

Factors That May Affect Our Future Results

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

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

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

•  Forecasts of our future economic performance

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

      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 management’s expectations. Some of these factors are discussed below.

      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.

      Factors that could cause actual results to differ materially 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

•  Our inability to effectively implement our business strategies or manage the volatility inherent in the mortgage banking business

•  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

•  Competition within the financial services industry

•  Significant changes in regulations governing our business or in generally accepted accounting principles

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•  Incomplete or inaccurate information provided by customers and counterparties

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

•  A loss of investment-grade credit ratings, which may result in increased cost of debt or loss of access to corporate debt markets

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

•  A reduction in government support of homeownership

•  A change in our relationship with the housing-related government agencies and government sponsored enterprises

•  Changes in regulations or the occurrence of other events that impact the business, operation or prospects of government sponsored enterprises

•  Ineffectiveness of our hedging activities

•  The level of competition in each of our business segments

•  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 Company’s Annual Report on Form 10-K. Other factors that could also cause results to differ from our expectations may not be described in any such report or document. 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 63 to 65 of this Form 10-Q is incorporated herein by reference.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

      We have 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 quarterly report as required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act. Based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective in ensuring that material information relating to the Company, including our consolidated subsidiaries, is made known to the Chief Executive Officer and Chief Financial Officer by others within those entities during the period in which this quarterly report on Form 10-Q was being prepared.

Internal Control over Financial Reporting

Changes to Internal Control over Financial Reporting

      There has been no change in our internal control over financial reporting during the quarter ended June 30, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, except for the implementation of an Enterprise Resource Planning (ERP) application software system, which includes the following modules affecting internal control over financial reporting: general ledger, accounts payable, accounts receivable and fixed asset modules. Management believes that the ERP software 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 Company repurchases of its common stock for each calendar month during the six months ended June 30, 2005.

						Total Number of		Maximum Number of
						Shares Purchased		Shares That May yet
		Total Number of		Average		as Part of Publicly		be Purchased Under
		Shares		Price Paid		Announced Plan		the Plan or
Calendar Month		Purchased(1)(2)		per Share(2)		or Program(1)		Program(1)
January			8,960	$	36.82		n/a		n/a
February			2,395	$	32.02		n/a		n/a
March			17,098	$	32.57		n/a		n/a
April			39,363	$	33.02		n/a		n/a
May			—	$	—		n/a		n/a
June			449	$	37.17		n/a		n/a
	Total		68,265	$	33.40		n/a		n/a

(1)	The Company has no publicly announced plans or programs to repurchase its stock. The shares indicated in this table represent only the withholding of a portion of restricted shares to cover taxes on vested restricted shares.
(2)	The shares purchased and the price paid per share have not been adjusted for stock splits.

Item 4. Submission of Matters to a Vote of Security Holders

      On June 15, 2005, the Annual Meeting of Stockholders of the Company was held. The agenda items for such meeting are shown below together with the vote of the Company’s Common Stock with respect to such agenda items.

      1. The election of four Class III Directors to serve until the 2008 Annual Meeting of Stockholders.

Class III Nominees	Votes For		Votes Withheld
Angelo R. Mozilo		502,094,682		12,658,148
Stanford L. Kurland		501,836,681		12,916,149
Oscar P. Robertson		492,356,347		22,396,483
Keith P. Russell		488,523,990		26,228,840

      The terms of Kathleen Brown, Jeffrey M. Cunningham, Ben M. Enis, Edwin Heller, Robert T. Parry, Henry G. Cisneros, Robert J. Donato, Michael E. Dougherty, Martin R. Melone and Harley W. Snyder continued after such meeting.

      2. Approval of an amendment and restatement of the Company’s Annual Incentive Plan.

Votes For:	488,480,506
Votes Against:	21,267,142
Abstentions:	5,005,182

      3. Ratification of the appointment of KPMG LLP as the Company’s independent registered public accounting firm.

Votes For:	509,626,639
Votes Against:	874,837
Abstentions:	4,251,354

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Item 6. Exhibits

(a)  Exhibits

See Index of Exhibits on page 77.

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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: August 5, 2005

By:  /s/ Stanford L. Kurland

Stanford L. Kurland

President and Chief Operating Officer

Dated: August 5, 2005

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

JUNE 30, 2005

INDEX OF EXHIBITS

Exhibit
No.			Description
	10	.101	First Amendment to 364-Day Credit Agreement, dated as of May 11, 2005, among CHL, the Company, the lenders identified therein, JPMorgan Chase Bank, N.A., as Managing Administrative Agent, and Bank of America, N.A., as Administrative Agent.
	10	.102	First Amendment, dated as of May 11, 2005 to the Five-Year Credit Agreement, dated as of May 12, 2004, among CHL, the Company, the lenders identified therein, ABN AMRO Bank N.V. and Deutsche Bank Securities Inc., as Documentation Agents, Citicorp USA, Inc., as Syndication Agent, Bank of America, N.A., as Administrative Agent, and JPMorgan Chase Bank, N.A., as Managing Administrative Agent.
	10	.103	Note Deed Poll, dated as of April 29, 2005, by the Company, in favor of each person who is from time to time an Australian dollar denominated Noteholder.
	10	.104	Deed Poll Guaranty and Indemnity, dated as of April 29, 2005, by the Company in favor of each person who is from time to time an Australian dollar denominated Noteholder.
	10	.105*	Form of Medium-Term Notes, Series A (fixed-rate) of CFC (incorporated by reference to Exhibit 4.11 to the registration statement on Form S-3 of the Company and CHL (File Nos. 333-114270, 333-114270-01, 333-114270-02 and 333-114270-03), filed with the SEC on April 7, 2004).
	10	.106*	Form of Medium-Term Notes, Series A (floating-rate) of CFC (incorporated by reference to Exhibit 4.12 to the registration statement on Form S-3 of the Company and CHL (File Nos. 333-114270, 333-114270-01, 333-114270-02 and 333-114270-03), filed with the SEC on April 7, 2004).
	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.

*  Incorporated by reference