Countrywide, a Wall Street darling, takes steps to keep favored status.

As interest rates retreat from highs reached earlier this summer, shares of mortgage lender Countrywide Financial Corp. and its competitors have surged on expectations of a rush of new mortgage applications.

Since Aug. 20, shares in Calabasas-based Countrywide have risen 26 percent to close at $82 on Oct. 2. In the past year, they are up 70 percent, as the nation's largest independent mortgage lender cashed in on the biggest refinance boom in U.S. history.

Analysts are still high on Countrywide, which has delivered double-digit share-price increases over a span of decades. Away from Wall Street, however, the signals are less optimistic. The company is laying off hundreds of employees as the mortgage market cools considerably.

Meanwhile, insiders unloaded $19.3 million worth of Countrywide stock in the third quarter, according to market research firm Thomson Financial, after selling $40.9 million in stock in the second quarter.

"They are the most active of their peers for insider selling in the mortgage banking group," said Kevin Schwenger, an insider-trading analyst with Thomson Financial. Stanford Kurland, Countrywide's chief operating officer, sold 91,000 shares for $6.3 million in early September, while Thomas Boone, a senior managing director, sold 113,000 shares worth $8 million.

A Countrywide spokeswoman said Kurland and other top executives were not available last week to comment lot this story.

Seasonal business

For years, Countrywide and other lenders have relied on a temporary and contract workforce to smooth out the ebb-and-flow of the cyclical mortgage market.

The company, with 35,700 employees, shed 565 mortgage production employees in August, and it has handed out more pink slips in September, say local mortgage brokers and former employees.

Some analysts credit Countrywide for acting quickly to eliminate paychecks that are no longer productive.

"There's overcapacity in the business and those who are going to survive are the quickest to pull the trigger," said Paul Miller, an analyst at Friedman Billings Ramsey. Miller believes Countrywide's stock, trading at a 52-week high of $82 a share, still has legs. "I think the people who were laid off were not surprised," he said.

Angelo Mozilo, Countrywide's flamboyant chairman, chief executive and president, has pinned the company's future success on a macro-hedge strategy that he has been selling to Wall Street for years.

But his strategy has been untested so far.

"The market remains skeptical of our ability to go through this refi boom and how we're going to look coming out the other side," he said in an interview in late September with National Mortgage News.

To ensure a smooth landing when interest rams rise, Countrywide has tried to develop an in-house hedge: It expects significant revenue from servicing its huge portfolio of loans, while capturing recurring revenue by diversifying into other products.

The company specifically targeted adjustable rate mortgages for new home purchases as the type of product that will continue to sell while interest rates rise.

To enact its macro-hedge strategy, Countrywide in the last few years has purchased a bank, a securities firm and two insurance companies.

Those businesses are expected to offset declines in Countrywide's mortgage pipeline, which fell 30 percent in September to $54 billion, after dropping 17 percent in August to $70 billion.

Countrywide controls 13 percent of the mortgage market.

"In the last two refinancing booms, Countrywide's earnings plummeted, but they aren't the same company now that they were then," Miller said.

Adjustable rates 

Nevertheless, Countrywide's stock has been so closely tied to interest rates in the past that its stock chart is an inverse mirror to the 10year Treasury note's yield.

"As mortgage rates went up, their stock price went down," said David Soleymani, managing director of mortgage broker First Capital Corp. in Santa Monica and a former real estate lawyer for Skadden Arps Slate Meagher & Flom LLP.

Mortgage lenders are counting on moderate interest rate increases and a strong new purchase market and to cushion the inevitable end of the refinance boom.

They got some help in recent weeks when signs of a less-than-robust economic recovery sent the yield on the benchmark 10-year Treasury note below 4 percent on Sept. 30 for the first time in more than two months.

Countrywide also plans a massive marketing campaign to sell adjustable rate mortgages as interest rates rise, Soleymani said. He doesn't think it will work.

"They are going to mirror what rates do because nothing can replace that income from originations," he said. "People don't refinance into adjustable rate mortgages so who are they going to be selling those adjustables to?"

Typically, the purchase market is never as strong as a robust refinance market.

The Mortgage Bankers Association of America recently revised its forecast for mortgage originations downward to $1.5 trillion in 2004, from a previous estimate of $1.9 trillion, due to a more rapid drop-off in refinancings. In 2004, refinancings will add up to only $430 billion versus a previous estimate of $833 billion, the group predicts.

"Countrywide has internal hedges set up to guard against turnover and refi risk," said Soleymani, a star broker who sold $1 billion in loans last year. "But on the origination side, which is the bulk of their revenue, they're going to get hammered. The whole industry is in for a big wake-up call."