GMAC Financial Injects Capital to Support ResCap

GMAC Financial Services lost $305 million in the first quarter, citing a big loss at its Residential Capital unit as the main culprit behind the downturn.

GMAC Financial also said it had to inject $500 million of capital into ResCap, the home loan unit, to bolster its liquidity position during the first quarter.

However, ResCap's $910 million net loss drove the consolidated loss at the parent company. A year earlier, ResCap posted net income of $210 million during the first quarter.

The parent company injected $500 million of equity into ResCap during the first quarter to bolster the company's capital position. GMAC Financial said the infusion was financed as part of the previously announced $1 billion of common equity that GM had to put into GMAC in connection with the final settlement provisions of the GMAC sale transaction.

The company said that because of the sharp downturn in the U.S. mortgage market, ResCap had to unload many of its nonprime assets at a loss or substantially mark down their value. In addition, ResCap had to substantially increase reserves against many nonprime loans on its balance sheet, the company said. The higher reserves were necessary because both default frequency and loss severity have increased in the nonprime mortgage space, the company said.

But ResCap's loan production did not lose ground, with the company producing $27.8 billion of prime credit quality home loans in the first quarter of 2007, up from $27 billion one year earlier. But nonprime home loan volume decreased to $3.3 billion in the first quarter, compared with $9.1 billion in the first quarter of last year.

International mortgage originations climbed 18% to $6.5 billion in the first quarter of this year.

In the company's earnings release, GMAC Financial CEO Eric Feldstein said the ResCap unit undertook measures to mitigate risk, including reducing its nonprime asset portfolio, decreasing its warehouse lending to finance nonprime collateral and curtailing nonprime domestic loan production. He said ResCap specifically restricted origination of products with limited market liquidity and high early payment default rates.

"As a result, ResCap should be far less vulnerable to further adverse developments in the nonprime space," Mr. Feldstein said. "We remain confident in the fundamentals of the ResCap business, its large-scale prime mortgage production channels and its diverse earnings base."

Officially, the company says it expects losses from the ResCap unit to be "much reduced" in the second quarter.

GMAC Financial reported substantial liquidity at the end of the first quarter, with the consolidated company's cash and marketable securities totaling $12.8 billion as of March 31. The total was down from $18.3 billion at the end of 2006, which GMAC Financial attributed to the repayment of significant debt maturities in the first quarter.

The losses at ResCap seeped all the way up to former parent General Motors, which retains a 49% ownership stake after selling a majority stake to a consortium of investors led by Cerberus Capital Management last year.

General Motors said the loss at GMAC more than offset improvement in its core automobile business during the first quarter, causing net income to fall to $62 million from $602 million in the year-earlier period.

Snapshot: factors hurting resCap in 1st qtr.

* Mark down of value on nonprime assets

* Sold subprime assets at loss

* Increased reserve for credit losses

Source: GMAC Financial Services (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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