ResCap Posts $658M Loss; GM to Pay Additional $1B in GMAC Deal

GMAC’s home-lending unit, Residential Capital, LLC, known as ResCap, posted a $651 million operating loss in the fourth quarter of 2006, compared to $118 million in earnings during the prior-year period. GMAC Financial reported its full-year and fourth quarter financials late Tuesday, ahead of an earnings report from former corporate parent General Motors, due Wednesday. In addition to posting a fourth quarter loss due to what the company characterized as a “severe downturn” in housing, GMAC also disclosed that GM will pay an additional $1 billion cash settlement to cover bad loans made to subprime borrowers by its former finance arm as part of a deal to sell a controlling stake in the company. GM sold a 51 percent stake in GMAC to a group led by private equity firm Cerberus Capital Management LP for $14.4 billion late last year. Analysts polled by numerous news outlets have suggested that the cash settlement isn’t likely to affect GM’s earnings, although the Wall Street Journal reported Tuesday that it will cut into the U.S. automaker’s cash cushion as the company seeks to restructure its North American operations. ResCap reported operating earnings of $182 million for the full year 2006, a substantial decrease from earnings of $1.0 billion reported in 2005. GMAC blamed the decrease on a decrease in the value of ResCap’s nonprime U.S. asset portfolio, which more than offset record earnings in its international business segment.

“The sharp downturn in the U.S. mortgage market in the fourth quarter posed enormous challenges for the industry as a whole — origination volume was down, margins narrowed, delinquencies rose and pressure on home prices intensified,” explained GMAC CEO Eric Feldstein. ResCap’s total U.S. loan production in 2006 amounted to $161.6 billion, of which 19 percent was nonprime, GMAC said. For the fourth quarter of 2006, ResCap’s U.S. loan production totaled $41.2 billion, of which 17 percent was nonprime. In spite of significant challenges in the subprime market, ResCap saw its servicing portfolio grow to $448.6 billion, up from $378 billion at the end of 2005. “In response to continued weakness in the mortgage market, ResCap has sharply reduced its production of nonprime mortgages and has stepped up its loss mitigation efforts as it relates to the company’s existing nonprime mortgage exposure,” Feldstein said. “Meanwhile, ResCap’s U.S. prime mortgage lending and servicing operations, as well as its international mortgage business, continue to run profitably.” For more information, visit Full disclosure: The authors owns no shares in any publicly-held company discussed in this news story.

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