GMAC has $2.52 billion loss; ResCap unit may fail

NEW YORK (Reuters) - Finance company GMAC LLC lost $2.52 billion in the third quarter, hurt by slumps in the housing and auto markets, and said its Residential Capital LLC mortgage unit may fail.

A view of a five-bedroom and two-bath home in Detroit, Michigan September 23, 2007. REUTERS/Rebecca Cook

GMAC has been in the red for five straight quarters, losing $7.9 billion over that time. ResCap lost $1.91 billion in the third quarter, and has lost $9.1 billion in eight straight quarterly losses.

Despite halting many risky loans and cutting 10,000 jobs over two years, ResCap is struggling to maintain sufficient capital and liquidity. GMAC excused $197 million of its obligations in the third quarter, and more in October.

“Absent economic support from GMAC, substantial doubt exists regarding ResCap’s ability to continue as a going concern,” GMAC said.

Private equity firm Cerberus Capital Management LP CBS.UL owns 51 percent of Detroit-based GMAC, and the automaker General Motors Corp GM.N owns 49 percent.

“If GMAC can’t provide support that ResCap needs, then bankruptcy is an option for ResCap,” said Christopher Wolfe, an analyst at Fitch Ratings. “GMAC is running out of options. There is a limit to how much support GMAC can provide, and we don’t believe it can provide the support it has historically.”

The fates of ResCap and GMAC also depend on a potential merger of GM with Chrysler LLC, also controlled by Cerberus.

GMAC has said it may convert to a bank holding company, letting it tap the U.S. Treasury Department’s $700 billion bailout fund, and may refinance much of its debt. It completed a $60 billion restructuring in June.

The company has been the primary lender to GM customers but has curbed loans to borrowers who do not have good credit. Its auto finance unit lost $294 million in the quarter, hurt by higher North American and Latin American credit losses, while insurance operations earned $97 million.

GMAC’s third-quarter revenue fell 24 percent to $1.72 billion. Its year-earlier loss was $1.6 billion.

ResCap was the seventh-largest U.S. mortgage lender from January to June, the newsletter Inside Mortgage Finance said.

But loan production fell 59 percent in the third quarter to $11.9 billion after ResCap curbed riskier U.S. loans and halted non-U.S. mortgage lending apart from Canadian insured loans. GMAC has also closed 200 retail mortgage offices.

GMAC and Cerberus declined to comment. GM did not respond to a request for comment.


If ResCap fails, it will join the ranks of major mortgage lenders that have fallen victim to the worst U.S. housing crisis in decades. Countrywide Financial Corp and Wachovia Corp WB.N agreed to be acquired, and IndyMac Bancorp Inc IDMCQ.PK and Washington Mutual Inc WAMUQ.PK failed.

“This is the most difficult environment we have ever faced,” forcing “painful choices” to restrict lending, GMAC Chief Financial Officer Robert Hull said on a webcast. He took no questions from analysts, a change from prior practice.

Cutbacks in GMAC’s lending were responsible for about half of GM’s 45 percent plunge in October vehicle sales, the automaker said. “It was like someone turned off the lights,” GM North American sales chief Mark LaNeve said on Monday.

GM burned through $3.6 billion of cash in the second quarter, and analysts said the rate may have since sped up.

Barclays Capital analyst Brian Johnson wrote that GM may abandon ResCap in early 2009 as “the price of government assistance, in order to ensure that government support is issued to support auto lending and hence auto sales and jobs.”

Wolfe, the Fitch analyst, added, “GM needs GMAC to exist, but it doesn’t need ResCap to exist.”

GM shares rose 13 cents to $5.85 in afternoon trading on the New York Stock Exchange.

ResCap debt prices indicate investors believe default is likely. Debt maturing between 2011 and 2015 was quoted Tuesday at 13.5 cents to 20 cents on the dollar, yielding at least 55.7 percent, bond pricing service Trace said.

Additional reporting by Jessica Hall in Philadelphia and Soyoung Kim in Detroit; editing by John Wallace