ResCap Could Lose Servicing, Seller Contract with Fannie
GMAC Financial Services has suggested in recent weeks that its mortgage lending arm, Residential Capital LLC, faces an increasingly uncertain future as losses mount and potential business partners rethink their relationships with the firm. Underscoring the dire situation facing ResCap at the moment, the company's recently-filed 10-Q with the Securities and Exchange Commission suggests that Fannie Mae (FNM) could pull the plug on its seller/servicer contract with the troubled mortgage operation by early next year. Capital issues are one thing; the inability to sell loans to Fannie Mae, and ostensibly other GSEs, are another and would likely mean certain death in a market where the vast majority of loan production must be sold to Fannie, Freddie Mac (FRE) or Ginnie Mae. ResCap said that its capital levels fell below a contractual net-worth requirement in its agreement with Fannie during Q3, forcing it to post an additional $200 million in collateral and to sell or transfer servicing on $12.7 billion in UPB from its servicing portfolio. The servicing sale, as of yet uncompleted to HousingWire's knowledge, represents roughly 9 percent of Fannie-insured loans serviced by ResCap. In exchange, Fannie has agreed to forbear yanking its contract with ResCap, the ailing lender said, but only through Jan. 31 2009. In the meantime, ResCap needs to find a way to boost its net worth over the $1 billion mark or risk losing the right to service all Fannie-insured or owned loans, as well as seeing a huge pullback in terms of the lender's ability to sell loans to the GSE. ResCap lost $1.9 billion during Q3, forcing GMAC to issue a "going concern" warning about the troubled lender. “Adverse market conditions have made it difficult for ResCap to maintain adequate capital and liquidity levels,” GMAC said in its earnings statement. “As a result, absent economic support from GMAC, substantial doubt exists regarding ResCap’s ability to continue as a going concern." A large part of those market conditions involve servicing advances -- servicers like ResCap must continue to advance principal and interest on loans it services to a trustee when a loan becomes delinquent. The more borrower defaults, and the longer it takes to resolve them, the more capital that is needed to manage an outstanding float on advances. ResCap CEO Tom Marano has been grounded and frank privately regarding the dire situation his firm faces, according to HousingWire sources that have spoken with him in recent weeks. He has reportedly said no servicer, ResCap or otherwise, is structured to manage seven million borrower defaults, and has come out strongly in support of streamlined loan modification criteria. He's also allegedly been behind the scenes of a proposal by the American Securitization Forum that would see servicers purchase delinquent loans directly out of transaction pools and deliver the troubled loans to the government for modification and workouts. ASF deputy executive director pushed the idea on Capitol Hill last week, in a subcommittee hearing within the Committee on Government Oversight and Reform. It's clear that ResCap has little more to lose at this point. In fact, it said that while the $200 million collateral posting requirement thrust upon it by Fannie Mae would hurt its cash position, selling off servicing assets would be a net positive for the operation, since the servicer would no longer need to manage advances. Nonetheless, having Fannie yank the entire contract and servicing would be a very bad outcome, one that would "adversely affect the company's profitability and financial condition," ResCap's filing read. In other words: the fate of Residential Capital may now lie squarely in the hands of the U.S. government, since both GSEs are run in conservatorship by the Federal Housing Financy Agency. Write to Paul Jackson at email@example.com. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.