November 5, 2008 / 10:01 PM / 11 years ago

GMAC mortgage lender's future in doubt

NEW YORK (Reuters) - The Residential Capital LLC affiliate of automaker General Motors Corp (GM.N) may soon join the ranks of U.S. mortgage lenders that failed to navigate the deepening housing crisis.

The specter of a ResCap failure grew after parent GMAC LLC on Wednesday said “substantial doubt exists regarding ResCap’s ability to continue as a going concern” absent more support from GMAC, best known for lending to GM customers.

GM owns 49 percent of GMAC, and both are trying to conserve cash as auto sales plummet, vehicle leases lose value, and more borrowers miss payments. Private equity firm Cerberus Capital Management LP CBS.UL owns the rest of GMAC.

GMAC is also trying to become a banking holding company, letting it tap the U.S. Treasury Department’s $700 billion bailout fund, and may refinance much of its debt.

Some analysts said ResCap may not survive beyond early 2009 despite having already slashed risky lending, reduced risk on its balance sheet, and shed some 10,000 jobs over two years.

“It’s not a foregone conclusion that they’re done, but they’re close,” said David Lykken, president of the consulting firm Mortgage Banking Solutions in Austin, Texas, who said he has clients that may want to buy ResCap assets.

A sale of all or part of the unit would be one possibility, but likely only at a distressed price.

“Given market conditions, and given that collateral values are still falling in markets where they lent, I think a bankruptcy is imminent, within the next 60 days,” Lykken said.

Christopher Wolfe, an analyst at Fitch Ratings, added: “If GMAC can’t provide support that ResCap needs, then bankruptcy is an option for ResCap.”

GMAC and Cerberus declined to comment. GM and ResCap did not immediately return requests for comment.

CASH IS KING

ResCap was the nation’s seventh-largest mortgage lender from January to June, the newsletter Inside Mortgage Finance said. But loan volume fell 59 percent in the third quarter to $11.9 billion as ResCap shut dozens of retail mortgage offices, and halted lending outside the United States and Canada.

The lender has lost $9.1 billion in the last two years, and said that as of September 30 it wasn’t receiving interest payments on 21.8 percent of loans, up from 5 percent a year earlier.

“We can only describe credit quality trends as ugly,” CreditSights Inc analyst Richard Hofmann wrote.

“With equity down to $2.3 billion, clearly ResCap cannot survive much longer at its current quarterly loss rate,” he added. “Absent of any government support, we believe GMAC’s statement points toward the filing of ResCap for bankruptcy.”

If ResCap were to fold, it would join hundreds of rivals to stop mortgage lending since the beginning of 2007.

Many have gone bankrupt in that period, including American Home Mortgage Investment Corp AHMIQ.PK, IndyMac Bancorp Inc IDMCQ.PK, New Century Financial Corp and Washington Mutual Inc WAMUQ.PK. Others scrambled to find buyers, including Countrywide Financial Corp and Wachovia Corp WB.N. JPMorgan Chase & Co (JPM.N) bought Washington Mutual’s banking units.

ResCap has about $67 billion of assets, and oversees a $426 billion loan servicing portfolio. It said it expects to employ 3,800 people by year end, down from 14,000 at the end of 2006.

At a time of scarce capital and depressed asset prices, it’s unclear what ResCap is worth, as a whole or in pieces.

A transaction that became a bellwether was Merrill Lynch & Co’s MER.N agreement in July to sell $31 billion of toxic debt to private equity firm Lone Star Funds for 22 cents on the dollar. It also provided 75 percent financing, suggesting that Lone Star had only had 5.5 cents on the dollar at risk.

“Anyone who has cash is the absolute king right now, and it’s a total buyer’s market,” said Thomas Salerno, who heads the financial restructuring department at the law firm Squire, Sanders & Dempsey LLP in Phoenix.

“Everything is valued with a depressed price, but that is where the market is right now,” he said. “You’re going to value ResCap’s portfolio on a loan-by-loan basis, and look at the collateral, and the creditworthiness of the borrowers. It’s all going to be easy to sell, the question is the price.”

NOT YET, NOT YET

Brian Johnson, an analyst at Barclays Capital, wrote that an abandonment of ResCap in early 2009 “may be the price” necessary for GM to obtain government aid to help it merge with rival automaker Chrysler LLC. This, he said, would “support auto lending and hence auto sales and jobs.”

But if housing conditions deteriorate well into 2009, as many expect, ResCap’s business might not yet be at a trough, depressing amounts that even eager suitors might offer.

“My concern is that there is a long, extended bottom,” Lykken said. “One of our hedge fund clients is salivating over this opportunity. There are a lot of people who might be interested in buying. I feel like a guy riding a horse and holding back the reins: ‘Not yet, not yet, not yet, not yet.’”

(For more M&A news and our DealZone blog, go to www.reuters.com/deals)

Reporting by Jonathan Stempel; Editing by Gary Hill

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