May 7th, 2008
Gmac Posts $589 Million Loss On Home Lending Woes
GMAC LLC, the auto and home lender that General Motors Corp. sold to a private equity group, posted a $589 million loss in the first quarter and said it may not make a profit until next year.
The Detroit-based company, which reported a $305 million loss a year earlier, said in a statement that the latest results included a loss of $859 million at its Residential Capital LLC mortgage unit. ResCap recorded a $910 million loss a year earlier. GMAC’s auto-finance business earned $258 million, compared with a $398 million profit last year.
“Everyone knows the problems in the mortgage market and nothing will be resolved soon,” Mirko Mikelic, a money manager at Fifth Third Asset Management in Grand Rapids, Michigan, said in an interview today. Fifth Third manages $22 billion. “Their ability to tap the debt market for additional financing is likely to be real expensive.”
GMAC named Alvaro de Molina, the former head of investment banking at Bank of America Corp., as chief executive officer in March to help the lender rebound from a $2.3 billion loss last year. The company’s profitability this year hinges on demand for its holdings of securities backed by home loans, de Molina said on March 18. GMAC may have to write down the value of the securities, depressing earnings, he said.
“There is still more to do to stabilize ResCap and position the overall company for profitable growth,” de Molina said in today’s statement. Should market conditions remain difficult, “the timeline for GMAC achieving profitability could extend beyond 2008,” the company said.
Refinancing
GMAC reiterated its support for ResCap as long “as it doesn’t imperil the broader franchise,” Chief Financial Officer Robert Hull said on a conference call today. “We haven’t come to that point.”
GMAC is talking with its banks about a broad refinancing to cover both GMAC and ResCap, Hull said.
“We see great value at ResCap,” he said. “We have assets at ResCap we’d like to liquidate, but we aren’t going to do it at fire-sale prices.”
GMAC and ResCap expect to have bank-loan refinancing plans completed by June, Chief Risk Officer Sam Ramsey said on a conference call. GMAC has a $3 billion unsecured credit line and a $12 billion secured loan that mature in June, while ResCap has an $875 million line also due that month, and a $1.75 billion loan due in July, according to a Feb. 27 regulatory filing.
`Need More Time’
In a refinancing of its bank credit line, GMAC will probably pay higher interest rates in return for gaining time and flexibility, Kevin Starke, an analyst at CRT Capital Group LLC in Stamford, Connecticut, said in an interview. “Their cost of funds would go up and their net interest margin would go down,” he said. “They need more time on the ResCap side.”
Falling home prices and record U.S. foreclosures forced ResCap to cut 5,000 jobs, or a third of its staff, in 2007. The company’s U.S. home-loan business improved in the first quarter from a year earlier as lending to borrowers with the best credit increased 60 percent to $15.4 billion, GMAC said.
The U.S. gains were offset by weaker conditions overseas, GMAC said, prompting the company to reduce its business in the United Kingdom and suspend all mortgage lending in Europe. It’s cutting 280 more jobs in the U.K. to reduce costs, GMAC said.
GM sold 51 percent of GMAC for $7.4 billion in 2006 to a group of investors headed by Cerberus Capital Management LP as part of a plan to protect GMAC from the automaker’s declining credit outlook. Since then, Moody’s has cut GMAC’s debt rating four times because of ResCap’s losses on loans to subprime borrowers.
Injecting Capital
GM, which retained 49 percent, later injected $1 billion into GMAC to make up for earlier writedowns of mortgage assets at ResCap. GMAC, which on April 23 named former Bear Stearns Cos. mortgage chief Thomas Marano as ResCap’s non-executive chairman, pumped another $1 billion into ResCap in the third quarter of 2007 to help the lender meet minimum net worth limits set by bankers.
GMAC said home loans that aren’t collectible rose to 1.07 percent of outstanding loans, compared with 0.22 percent in the previous quarter. The company wasn’t receiving interest on 7.2 percent of home loans as of March 31, up from 7.1 percent in the previous quarter.
The company’s rate of uncollectible auto loans rose to 1.34 percent from 1.06 percent in the previous quarter with the value of used cars declining consistently over the past six months, said William Muir, who heads the unit. GMAC has tightened standards for auto loans and boosted collections, he said.
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