Shares in Countrywide Financial, America's biggest independent mortgage bank, took a knock today after it revealed first quarter profits had fallen a worse-than-expected 37 per cent.

The bank, which is one of the biggest creditors to bankrupt subprime lender New Century, whose collapse last month stoked worldwide fears over the strength of America's property market and economy has had to set aside cash for growing bad debts among its borrowers

First quarter net income was just $434 million against $683.5 million a year ago.

Revenue shrank 15 per cent to $2.41 billion, compared to the consensus forecast of analysts of €2.58 billion.

Countrywide's shares fell 76c or 2 per cent, to $36.96 in early trade on the New York Stock Exchange.

Chief Executive Angelo Mozilo said the collapse of the subprime mortgage sector - which includes loans to people with poor credit records - had hit profits. "Earnings were impacted by charges relating to our subprime activities as well as increases to our loss reserves stemming from higher delinquencies and softer housing markets."

Bad debt cost Countrywide $132 million, or 14 cents per share, during the quarter, the company said. Countrywide set aside $81 million to cover expected losses from unpaid loans and recorded a $119 million accounting charge because its stake in prime-quality home equity loans lost value.

These were offset by extra money from reserves in the company’s insurance segment.

But Countrywide said that while “turbulent mortgage conditions had an adverse impact” on the first quarter, the mortgage bank is optimistic about its long-term prospects.

Meanwhile credit rating agency Moody's warned that the US housing downturn was increasingly spreading to builders and that "the housing market was unlikely to show any signs of stabilization until 2008 at the earliest."

"Homebuilders are continuing to cope with stubbornly high inventories amid continued decimation of earnings," said its Senior Credit Officer Joseph Snider. "This underscores a potentially serious problem and signals that their current ratings may be too high," said Snider.

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