Countrywide reported second quarter earnings today, showing a 33 percent drop in second quarter income versus year-ago levels. Second quarter earnings came in at $485 million, down from $722 million in the year-ago period, driven largely by loan loss provisions ($417 million) and impairment charges ($292.9 million). At least that explains Mozilo’s market comments earlier last week. From the press release issued today:

“Countrywide’s results for the second quarter of 2007 reflected strength in our core loan production business, but were adversely impacted by continued weakness in the housing market,” said Angelo R. Mozilo, Chairman and Chief Executive Officer. “During the quarter, softening home prices continued to affect many areas of the country and delinquencies and defaults continued to rise across all mortgage product categories as a result. Due to these adverse conditions, the Company incurred increased credit-related costs in the quarter, primarily related to its investments in prime home equity loans.”

What’s extremely interesting here is the disclosure of poor performance in prime home equity loans — the first time I think a major lender has publicly acknowledged that the extended slump in housing is reaching into some part of the prime lending sector. From MarketWatch, a comment echoing what’s likely on everyone’s mind: “The story here is credit deterioration,” Goldman Sachs analysts said in a research report Tuesday. “Countrywide continues to suffer by its disproportionate mortgage portfolio exposure to pay-option ARMs, prime home equity loans, and California,” they said. In spite of the losses, Countrywide’s commitment to future growth seems strong: the poor quarterly results came in spite of the third-best quarter for mortgage fundings at the company, which said it funded $133 billion in mortgages during the quarter. Delinquencies continue to rise Earlier I had speculated that Countrywide’s subprime portfolio was seeing 25 percent deliquencies — and I was actually pretty close to being correct: Countrywide reported that subprime delinquencies stood at a stunning 23.71 percent at the end of the second quarter, up from 19.62 percent one quarter earlier. Ninety-plus day delinquencies stood at nearly 10 percent of the subprime portfolio. (Wow.) Underscoring problems in the prime home equity segment, Countrywide reported a 4.56 percent deliquency rate, up 21 percent from a quarter ago and 158 percent from year-ago levels. The stock was down more than 11 percent to $30.19 per share on the NYSE when this post was published, but Mozilo wasn’t pulling any punches about where he sees the market headed:

Mozilo said he expects the slowdown in the housing market to run until at least 2009. “I say 2009 because my experience is that it just takes a long time to change, to turn a battleship around,” he said. He added, “based upon what I have seen in the past and the size of this market — is that it’s going to take 2007, the balance of this year, to get this thing to look like it is slowing down; 2008 to get it to slow down and stop; and 2009 to head in the other direction.”