ResCap Weighs on GMAC, Even as Domestic Mortgage Business Improves
Ailing mortgage lender Residential Capital LLC continued to weigh on GMAC Financial Services during the first three months of 2008, dragging the former General Motors financial division to a $589 million loss for the first quarter. The Q1 loss compared to a $724 million loss in the fourth quarter, and a $305 million loss in the year-ago period. As with previous quarters, ResCap was the source of nearly all of the company's red ink, with the troubled mortgage lender posting a $859 million loss during Q1. ResCap lost $924 million during the fourth quarter, and $910 million one year ago. Despite continued losses, there were signs that the mortgage business -- at least domestically -- was on the rebound. Calling the mortgage business "improved," CEO Alvaro de Molina said more work remained ahead. "Continued volatility in the capital and credit markets put pressure on first quarter results," said GMAC Chief Executive Officer Alvaro de Molina. "While the actions we have taken to date to reduce risk, reduce leverage and streamline the cost structure have produced results, there is still more to do to stabilize ResCap and position the overall company for profitable growth." Part of that positioning effort involved lending ResCap $468 million to keep it afloat as recently as April 18, according to earlier coverage on HW. Troubles emerge outside the U.S. While ResCap continued to falter during Q1, GMAC said that its U.S. mortgage finance business was improved during the quarter and that a "significant deterioration in international operations" offset any improvements state-side. ResCap's U.S. residential finance business posted prime conforming loan production of $15.4 billion in the first quarter of 2008, up more than 60 percent compared to $9.6 billion in the year-ago period; the servicing portfolio posted "strong results," and operating expense targets were achieved as well, GMAC said. Government mortgage production -- primarily FHA -- also saw originations increase to $2 billion from $600 million one year earlier, underscoring the new-found popularity of FHA-insured mortgages during the current industry downturn. Despite growth domestically, GMAC said "the international mortgage business experienced a significant decline in the first quarter." The numbers give that sentiment some context, as international mortgage production fell by more than 50 percent, and ResCap booked a huge loss on the sale of mortgage loans internationally at $682.5 million. Non-performing assets continued to soar during the quarter (although GMAC doesn't break out domestic versus international mortgage performance in its quarterly reports). ResCap saw NPAs reach an eye-popping $7.4 billion during the first quarter, which was -- surprisingly enough -- a decrease from one year earlier, when NPAs registered an even bigger $10.7 billion. Nonaccrual loans represented roughly 85 percent of NPAs at the end of the first quarter, GMAC said. Against this multi-billion dollar NPA/non-accrual backdrop, ResCap provisioned $299.3 million during the first quarter for credit losses, bringing the total loan loss allowance to $888.6 million. Last year, the loan loss allowance stood at $2.2 billion. "[C]hallenging market conditions are likely to persist and have not shown signs of moderation," the company said in a press statement, suggesting the financial services giant would not return to profitability until 2009.