GMAC Financial Services released second-quarter earnings today, reporting a 63 percent drop in profit due largely to continuing woes at its Residential Capital LLC unit. The company reported quarterly earnings of $293 million, compared with earnings of $787 million a year earlier. In spite of the continued housing pinch, it's clear that ResCap has righted the ship somewhat:
ResCap incurred a loss of $254 million during the quarter, sharply better than a loss of $910 million in the first quarter. A year ago, the unit posted a profit of $548 million, buoyed by a $259 million gain on an equity investment sale. Amid a slower housing market, an increased number of defaults on high-risk or subprime loans have hurt ResCap, traditionally thought of as the jewel of the GMAC portfolio. At the end of the second quarter, ResCap's U.S. nonprime held-for-sale portfolio was reduced to $1.9 billion from $3.1 billion at March month-end and from $5.4 billion at year-end 2006. The nonprime component of ResCap's U.S. held-for-investment portfolio declined by $3.1 billion in the second quarter. Nonprime exposure in warehouse lending was reduced to $331 million, down from about $1 billion at March month-end. ResCap also significantly curtailed its nonprime loan origination activities with second quarter production of about $700 million, down from $3.3 billion in the prior quarter. At the same time, U.S. prime loan production in the second quarter amounted to $26.5 billion, just shy of the prior quarter's volume, while its U.S. servicing portfolio increased marginally during the period to $425 billion.
It's pretty simple math: don't originate as many subprime loans, reduce the subprime loans you do hold on your books, reduce your warehouse credit exposure to subprime, and the financial fallout becomes much less painful -- at least in terms of absolute dollars. Update: Answering inevitable questions about ResCap's liquidity, GMAC CFO Sanjiv Khattri said the company believes its mortgage operation has "sufficient" liquidity to continue operations.