ResCap's Future In Doubt, Says GMAC
Residential Capital LLC, the real-estate finance arm of financial giant GMAC Financal Services, may not survive much longer after posting a $1.9 billion loss during the third quarter, according to a statement released by the firm Wednesday. The woes at the mortgage lender pushed GMAC into the red for the fifth straight quarter, with the company reporting a net Q3 loss of $2.5 billion. "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." GMAC has already done the equivalent of bending over backwards to provide that economic support thus far. In the third quarter, GMAC forgave $101.5 million of debt under a mortgage servicing rights credit facility with ResCap, and also forgave $95.3 million of outstanding principal and accrued unpaid interest on ResCap notes held by GMAC. In October, GMAC forgave even more debt to ensure that ResCap remained compliant with tangible net worth covenants. There's only so much that can be done with losses continuing to pile up at the troubled mortgage lender. ResCap took the dramatic steps during Q3 of closing all GMAC Mortgage retail offices, ceasing originations through itsHomecomings wholesale broker channel and putting to a halt all origination activity outside the U.S. (and to most originations within the U.S., too, for that matter). In addition, the ailing company entered into an agreement to sell its GMAC Home Services business to Brookfield Residential Property Services. Prime conforming loan production fell by nearly 50 percent during the quarter, as a result, with $6.8 billion originated in Q3 versus $12.2 billion in the year-ago period. The lone bright spot was a jump in FHA loan production to $4.1 billion, up from $1.4 billion in the third quarter --but such an increase merely reflect market dynamics and a shift in production volume towards government channels, not generation of new business. Overall loan production at ResCap slumped 59 percent to $11.9 billion. The company also sold off a significant chunk of servicing, as its servicing portfolio has shrunk by almost $40 billion in the past year; at the end of the quarter, ResCap's servicing portfolio stood at $426 billion. Non-performing assets (including REO) totaled $8.5 billion, against which the troubled lender had reserved $1.5 billion for losses. For those of you keeping score at home, that's a loss coverage ration of just under 18 percent. ResCap's saving grace may come if GMAC is allowed to become a commercial bank holding company, opening up access to Treasury funding via the TARP program that might provide enough cash to keep the troubled mortgage operation afloat. Officials at GMAC confirmed they were in discussions with federal regulatory authorities on Oct. 30. Write to Paul Jackson at email@example.com.