Jan. 30 (Bloomberg) -- Countrywide Financial Corp., the biggest U.S. mortgage lender, said fourth-quarter profit fell 2.7 percent and forecast that weaker home sales will limit this year's earnings.

Net income declined to $621.6 million, or $1.01 a share, from $638.9 million, or $1.03, a year earlier. The Calabasas, California-based company forecast 2007 earnings of $3.80 to $4.80 a share, compared with $4.30 for all of 2006. Estimates for next year from 17 analysts surveyed by Bloomberg ranged from $4.15 to $5.14 and averaged $4.77.

Countrywide made 9 percent fewer mortgages during the quarter as applications tied to home purchases dropped industrywide to a three-year low. Chief Executive Officer Angelo Mozilo cut more than 900 jobs to help trim costs by $500 million a year. Now the company is talking with Bank of America Corp. about a joint venture, a person with knowledge of the matter said last week. Mozilo declined today to comment on an alliance or on speculation the talks might lead to a takeover.

``We've got another 8, 9, 10 or 12 months of headwinds,'' Mozilo told investors on a conference call today. The 2007 forecast represents ``our best assessment of where we are in terms of delinquencies, credit quality, foreclosures and price appreciation. These things take time to run their course.''

Analysts predicted the company would earn $1.04 a share in the fourth quarter, according to the Bloomberg survey.

For all of 2006, profit improved 5.8 percent to a record $2.67 billion as revenue rose 14 percent to $11.4 billion.

Wide Guidance

``This management team has a history of providing pretty wide guidance at the start of the year, and they'll narrow that up as the year progresses,'' said Blake Howells, an analyst at Becker Capital Management Inc. in Portland, Oregon, which owns Countrywide shares. ``It's going to be a difficult environment for them the next couple of quarters.''

Profit from servicing loans plunged to $9 million from $306 million a year earlier. The company revalued its mortgage servicing rights -- the fees it expects to collect in the future for billing and collection of mortgage payments -- resulting in a $215 million cut.

The company said in preliminary monthly reports it funded about $122 billion of mortgages during the three-month span, 9 percent less than a year earlier. Sales of previously owned homes fell 0.8 percent in December, capping their biggest annual slump since 1989, according to the National Association of Realtors.

`Hard Landing'

Mozilo said in today's statement that 2007 will likely be the ``trough'' of the housing cycle and predicted improvement in 2008. In October, he said the housing market ``already had a hard landing'' and that it will likely ``tread water'' in 2007 as lenders close or combine, lessening competition.

Profit from mortgage banking climbed to $453 million from $434 million a year earlier. Countrywide earned $1.26 billion from selling loans to investors, 44 percent more than a year earlier. The company's profit margin from selling sub-prime loans -- mortgages made to borrowers with blemished credit records -- more than doubled.

That figure ``really jumped out at us,'' said Fred Cannon, an analyst at Keefe Bruyette & Woods who rates Countrywide shares ``underperform.'' ``That's a bit of a surprise because at other companies we've seen some weakness in that margin.''

Countrywide almost tripled the amount set aside for future loan losses from a year earlier to $70.8 million. Late payments from borrowers rose to 5.02 percent of loans held in the company's servicing portfolio at year-end, from 4.61 percent a year earlier.

Bank of America

Countrywide's stock jumped as much as 12 percent on Jan. 26 after the Financial Times reported that the negotiations with Bank of America about an alliance might involve a takeover bid. Talks are at an early stage and may not produce an agreement of any kind, a person with knowledge of the discussions said.

Mozilo said today during a conference call he wouldn't respond to ``market rumors'' or whether his company would be better off on its own.

``It would be inappropriate for me to comment on it,'' Mozilo said when asked whether he wanted Countrywide to stay independent. ``What we do each day is to work as hard as we can to enhance shareholder value,'' and that focus goes into ``every plan we put in place,'' he said.

Expansion Blocked

Bank of America is considering ways to expand that don't involve buying a rival bank because federal rules won't allow an acquisition that boosts its share of U.S. deposits past 10 percent. The Charlotte, North Carolina-based bank now controls about 9 percent. Scott Silvestri, a Bank of America spokesman, declined to comment today.

Piper Jaffray & Co. analyst Robert Napoli wrote in a research note today that it ``makes a lot of sense'' that the two are talking and he didn't rule out the possibility of a merger.

``Countrywide has always held the premise that any M&A would have to leave Countrywide management in charge of the mortgage business for the acquiring entity,'' Napoli wrote. ``Bank of America likely fits that requirement.''

Efforts by banks to boost their mortgage business as a way to sell more products have ``not been very successful,'' Mozilo said in response to a question during the conference call about competition. ``There are a couple of banks that do it well, but most don't and most won't.''

Friedman, Billings Ramsey Inc. analyst Paul Miller cut his rating today on Countrywide shares to ``market perform'' from ``outperform.'' He said the shares were benefiting from reports on the Bank of America talks and are ``fairly valued given a tough market environment.''

Countrywide shares rose 15 cents to $43.53 at 4:01 p.m. in New York Stock Exchange composite trading. They gained 24 percent last year, trailing the 16 percent increase in the Russell 1000 Financial Services Index. This year, the shares have advanced 2.5 percent.

To contact the reporter on this story: Will Edwards in Charlotte, North Carolina, at wiedwards@bloomberg.net.

Last Updated: January 30, 2007 16:37 EST