Sunday, March 04, 2007

If it's not one thing, it's another

Houston Chronicle: GMAC's Subprime Mortgages a Threat to GM

The cratering of the subprime mortgage industry could present more than just a pothole for General Motors Corp.

The world's largest auto maker disclosed Thursday that it will need more time to file its 2006 annual report with the Securities and Exchange Commission, marking the second year in a row the company has postponed the key filing.

Many analysts attribute this year's delay to a substantial hit the Detroit-based automaker might take from the exposure its part-owned finance unit _ GMAC Financial Services _ has to the business of making mortgage loans to people with weak credit or heavy debt burdens.

The entire mortgage industry is feeling the pressure from slowing home sales, intensifying competition and rising past-due loans. Higher delinquencies on subprime mortgages _ in large part due to a sharp deterioration of underwriting standards last year _ have in recent months forced a slew of lenders, big and small, to set aside more capital for potential loan losses.

In many cases, lenders have also been forced to write down the value of their mortgage securities. Many analysts say GMAC's home-lending unit, Residential Capital LLC, known as ResCap, is not immune to the industry stress. The unit is heavily involved in the subprime mortgage business _ making and investing in such loans itself and providing funds to other mortgage originators.

Lehman Brothers analyst Brian Johnson estimated that loan-loss provisions and writedowns of mortgage securities at ResCap could cost GM $900 million to $950 million in cash charges in the first half of this year.

Among the areas of concern to analysts and investors: At the end of the third quarter, ResCap, long viewed as the crown jewel in GMAC's businesses, held $57 billion of subprime mortgages for investment, or 77 percent of its total loans held for investment. Its exposure to "residual interest" in mortgage securities _ the high-yielding slices that suffer some of the first losses if loan defaults are higher than expected _ was $1.4 billion as of Sept. 30. Meanwhile, ResCap is one of the biggest providers of short-term "warehouse" funding to smaller mortgage lenders.
The automaker sold 51 percent of GMAC for $14 billion to Cerberus Capital Management. The deal closed in November, but GM and Cerberus have since been trying to determine whether the value ascribed to GMAC at the time is reliable and if either side needs to pay settlements to adjust the purchase price.

GM continues to own 49 percent of the lending unit and relies on GMAC's health, because the unit backs GM's major incentive programs by offering attractive leasing and financing terms.

GMAC had been one of the bright spots on GM's balance sheets. I wonder how long it will take for Cerebrus to start raving "I was robbed, I was robbed!" in court? GM doesn't need either thing, another cash draining business or a high profile lawsuit. I also wonder how this will affect GMAC's credit rating and access to capital, the improvement of which was the reason for the partial sale.

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