Countrywide Financial Corp., the largest U.S. mortgage lender, on Tuesday said quarterly profit slid 33 percent and slashed its full-year earnings outlook, hurt by rising defaults as the housing market slumps.

Shares of Countrywide fell as much as 8.7 percent to their lowest level since November 2005.

Second-quarter net income for the Calabasas, California-based company fell to $485.1 million, or 81 cents per share, from $722.2 million, or $1.15, a year earlier. Revenue fell 15 percent to $2.55 billion.

Analysts on average expected profit of 93 cents per share on revenue of $2.9 billion, according to Reuters Estimates. Countrywide's quarterly profit decline was its third straight.

The numbers are pretty sobering, said Stuart Plesser, a Standard & Poor's analyst who estimated profit at 69 cents per share excluding a one-time tax rate change. The issue is not whether Countrywide survives the housing tailspin, which it should, but when the housing market starts to show some strength. It won't be in 2007.

Countrywide cut its full-year earnings forecast to a range of $2.70 to $3.30 per share from the $3.50 to $4.30 it forecast in April, and the $3.80 to $4.80 it forecast in January. Analysts on average expected $3.65. Profit was $4.30 per share in 2006.

We expect difficult housing and mortgage market conditions to persist this year, Chief Executive Angelo Mozilo said in a statement. Softening home prices continued to affect many areas of the country and delinquencies and defaults continued to rise across all mortgage product categories.

Countrywide set aside $292.9 million for credit losses, up nearly fivefold from $61.9 million a year earlier.

Credit looks worrisome, wrote Morgan Stanley analyst Kenneth Posner. The company's balance sheet is stronger than the market thinks, (but) credit performance has surfaced as a bigger risk factor than we expected.

Another company tied to housing, building materials maker USG Corp, said the industry is entering the second year of what will likely be a multiyear downturn.

Countrywide shares fell $2.69, or 7.9 percent, to $31.37 in morning trading on the New York Stock Exchange, after earlier falling to $31.11. They traded as low as $30.50 in November 2005.

MORTGAGE BANKING

Pretax profit from mortgage banking fell 49 percent to $319.6 million as revenue slid 18 percent, though earnings roughly tripled from the first quarter.

Results reflected a $388 million writedown in the value of prime home equity-backed loan assets on its balance sheet, and a $25 million writedown for subprime assets.

Mortgage loan production rose 19 percent to $123.1 billion, of which just 4 percent was subprime, Countrywide said.

The company has tightened its lending guidelines, and like many rivals has stopped making some of the more exotic subprime loans that have triggered greater-than-expected defaults.

In banking, pretax profit fell to $128.9 million from $324.6 million, as credit losses rose more than sixfold. Pretax profit also fell 31 percent in capital markets, while it rose 11 percent in insurance.

Through Monday, Countrywide shares had fallen 20 percent this year, compared with a 13 percent decline in the KBW Mortgage Finance Index.

(Additional reporting by Michael Erman and Al Yoon)

California Morgan Stanley