GMAC May Sell NPLs

Washington-More than anything else, Tom Marano has a reputation for being one of the mortgage industry's premier loan traders. But is the chief of GMAC's mortgage operations ready to begin unloading the company's mortgage toxins in the secondary market or will he (like many other sellers) hold out for higher prices?

So far, Mr. Marano isn't letting on, but one thing seems certain - as the head of Residential Capital Corp. he is cleaning up the lender's balance sheet for an eventual sale. As one investment banker noted: "It's pretty clear at this point that the only thing that GMAC wants to finance is cars."

A hedge fund manager who recently talked to GMAC about buying its nonperforming loans portrayed the situation as thus: "If they admit to everyone they want to sell their nonperformers that puts them at a disadvantage. But they have a price in mind - they're just not telling us what it is yet."

Preferably, ResCap would like to unload as many of its nonperforming loans (and ABS) as possible prior to offering the company to a buyer, a move that would create a "clean" bank.

In a recent conference call Mr. Marano unveiled some of his plans but was a little light on specifics. This much is clear: GMAC Financial Services (the parent company which is 56% owned by the Treasury) has recapitalized ResCap, writing down the value of its mortgages to 41% of their original loan balance. "The values we have put on these assets would be sellable in the market," said Mr. Marano.

GMAC also has walled off ResCap from Ally Bank, transferring $3.6 billion of Ally's delinquent mortgages to ResCap. On the same conference call, GMAC chief executive Michael Carpenter said he wants to "minimize" to his company any future impact from ResCap, which posted $3.9 billion in losses during the first three quarters of 2009, including a $747 million loss in the third quarter.

However, Mr. Carpenter will not admit that ResCap is ready for the auction block even though most of the mortgage industry believes it already is. Still, he admitted that there are "potentially different strategic alternatives" for ResCap's mortgage assets and servicing business. (One rumor buyer is believed to be Warren Buffett's Berkshire Hathaway.)

"We are not in a hurry to do anything," Mr. Carpenter told analysts and reporters. Meanwhile, GMAC is taking a $3.8 billion pretax charge on ResCap, and expects the entire company will report a $5 billion loss for the fourth quarter.

GMAC recently received a new $3.8 billion capital infusion from Treasury. The fresh cash allowed the company to take a $3.3 billion writedown on ResCap and Ally Bank's riskiest mortgage assets. GMAC then took $3.6 billion of Ally Bank's delinquent alt-A and second liens, wrote them down to $1.5 billion and transferred them to ResCap. Many of these loans are concentrated in Arizona, California and Michigan.

"We basically carved the delinquent loans out of Ally Bank and contributed them to ResCap," GMAC's chief financial officer said on the conference call. This transfer leaves Ally Bank with a mortgage delinquency rate of "4% or less," the CFO said.

At ResCap, GMAC marked down $5.6 billion in mortgages and home equity lines of credit to $2.3 billion. GMAC also made a $2.7 billion capital contribution to ResCap in the form of Ally mortgage loans, debt forgiveness and cash.

This restructuring leaves ResCap with $20 billion in mortgage assets, servicing rights and real estate-owned. According to the Quarterly Data Report, ResCap ranks fifth among all residential servicers with $380 billion in servicing rights. ResCap also has a small lending operation that originated $2.15 billion in domestic mortgages in the third quarter through Ditech and call centers. Ally Bank engages in correspondent lending and originated $13.2 billion in mortgages in the third quarter.

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