February 6, 2008

GMAC Financial swings to loss on ResCap

NEW YORK - GMAC LLC said Tuesday it lost $724 million in the final quarter of 2007 as the housing slump and disruptions in the credit and capital markets battered the lender's home mortgage division.

The Detroit-based lender got in the mortgage business in 1985 after decades of originating only car loans for parent company General Motors Corp. Trouble in GMAC's mortgage business, Residential Capital LLC, first surfaced in the latter half of 2006 when growing numbers of people began defaulting on home loans.

The automaker owns 49 percent of GMAC after selling the remainder of the business in that year to an investment group led by Cerberus Capital Management LP for $14 billion.

The company said its mortgage business Residential Capital, or ResCap, lost $921 million during the quarter, marking its fifth straight quarterly loss. Losses skyrocketed from write-downs on credit residuals and mortgage-backed securities, restructuring charges and higher funding costs.

Investors have avoided securities backed by home loans because of a surge in mortgage defaults and foreclosures. Declining home values have prevented many borrowers from refinancing into more manageable loans.

GMAC is reviewing its options for the residential lending unit but declined to comment on specific plans Tuesday.

The lender has taken "aggressive actions" to stem the unit's drag and forecasts a return to profitability in 2008.

"We still believe that ResCap is an integral part of our overall strategy at GMAC," said GMAC Chief Financial Officer Robert Hull. "We're committed to ResCap. We've invested billions of dollars in 2007 in multiple forms. I think we have resilient support and we have demonstrated that."

GMAC bought $740 million of the division's debt in the fourth quarter to keep the unit from violating minimum net worth covenants and said it may buy more.

While the move offset ResCap's fourth-quarter losses by $521 million, Moody's Investor Services slashed the "junk" status credit ratings of both on Tuesday.

Moody's said it's concerned that more funding from GMAC could strain the lender's capital and liquidity positions. On the flip side, GMAC's support may diminish if the mortgage lender continues to lose money, putting ResCap's minimum net worth at risk.

"Given GMAC's strategic importance to General Motors, we think that GMAC's owners will not risk the firm's viability in its efforts to stabilize ResCap," said Moody's analyst Mark Wasden. "Beyond this horizon, we believe further support from GMAC to be less certain, as continued underperformance on the part of ResCap could signal a failure of the firm to regain solid footing."

To mitigate losses, ResCap has sharply curbed loan production and tightened lending standards. Currently, it's originating mostly prime mortgages that can be sold in the secondary market. ResCap also cut its work force last year by 35 percent, or 5,000 employees.

ResCap continues to drag down GMAC's results, however. Last year, GMAC lost $2.33 billion, including a $4.35 billion ResCap loss that more than offset profits elsewhere.

GMAC's auto lending division earned $137 million during the quarter and $1.49 billion in 2007. However, GMAC noted a small uptick in auto loan delinquencies, mostly in its nonprime portfolio in areas hardest hit by falling home prices, Hull said.

The delinquency rate remains within historical averages, but the company "remains concerned about the outlook of consumer credit," he said.

GMAC's insurance division posted earnings of $68 million in the fourth quarter and $459 million for the year. The company attributed the division's underperformance compared to the previous year to the rebalancing of its investment portfolio.

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