ResCap Plummets to Loss in Challenging 4th Quarter

GMAC Financial Services saw its earnings slip to $2.1 billion last year, down 7% from 2005, and the company blamed weak performance at its residential mortgage business for the decline.

Residential Capital, GMAC's real estate finance and securitization unit, suffered from a declining U.S. housing market, the company said. ResCap lost $651 million in the fourth quarter of last year, amid reports that parent GMAC Financial Services CEO Eric Feldstein said that a flat yield curve, higher interest rates and a sharp downturn in U.S. mortgage markets combined to create a difficult environment last year.

"The sharp downturn in the U.S. mortgage market in the fourth quarter posed enormous challenges for the industry as a whole - origination volume was down, margins narrowed, delinquencies rose and pressure on home prices intensified," Mr. Feldstein said in a news release. "At ResCap, losses were incurred in its core U.S. mortgage business in the wake of this difficult industry environment. Nonetheless, ResCap's geographical and product diversity helped the company maintain a profitable bottom line overall for the year, in response to continued weakness in the mortgage market as it relates to the company's existing nonprime mortgage exposure."

He said the company's domestic prime origination and servicing operations continue to perform profitably.

ResCap produced $161.6 billion of home loans in 2006 and the company said 19% of its loan production consisted of nonprime loans last year. In the fourth quarter, nonprime loans accounted for 17% of total loan production, the company said. By dollar volume, fourth-quarter nonprime loan production was down 43% from the same period in 2005.

ResCap's GMAC-RFC unit was ranked as the nation's 10th largest subprime producer in the fourth quarter of 2006, according to MSN's Quarterly Data Report.

ResCap's operating earnings totaled $182 million in 2006 despite the fourth-quarter $651 million loss. ResCap said the fourth-quarter loss reflected higher reserves due to rising delinquencies and loss severity in its nonprime portfolio.

In full-year 2005, ResCap earned just over $1 billion.

ResCap said that the pressure on home prices and consumer credit "severely depressed" the value of its large portfolio of domestic nonprime mortgage assets. The company said it achieved record earnings in its ResCap International Business Group, however.

The results come amid reports that General Motors may have to essentially refund nearly $1 billion of the sales price to Cerberus, the private equity firm that acquired a controlling stake in GMAC Financial Services in November of last year, according to an analysis by Lehman Brothers. That estimated $900 million to $945 million payment from GM to Cerberus is based on terms of the deal that require GMAC to have a tangible net book value of $14.4 billion, the initial sales price for Cerberus's 51% stake in the firm.

GMAC Financial Services' full-year results benefited from a one-time tax benefit of $791 million resulting from the conversion of GMAC to a limited liability company in connection with the sale of a majority interest to private equity firm Cerberus. The company also took an impairment charge of $695 million related to its commercial finance business.

Nonetheless, Mr. Feldstein said that the diversity of the company's earnings base benefited the company. He credited record earnings in the insurance business and strong profitability from automotive finance for insulating GMAC Financial Services from further damage.

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