GMAC Financial Services, the financing arm of General Motors, reported a loss of $1.6 billion for the third quarter, a steep increase to its $173 million loss in the same period last year.
The company said its Residential Capital LLC unit posted a net loss of $2.3 billion during the quarter, due to “unprecedented disruptions in the mortgage financing markets and adverse trends in home price appreciation.”
“The third quarter financial performance of ResCap is a major disappointment,” said GMAC Chief Executive Officer Eric Feldstein.
“We are moving aggressively to restructure our real estate finance business as weakness in the housing market and mortgage industry continues to prevail.”
The loss marked a significant reversal of fortune for the mortgage finance unit which posted net income of $83 million during the third quarter of 2006, forcing the company to make changes.
“We have significantly reduced our exposure to nonprime and non-conforming loans this year, but the company will selectively originate higher-margin non-conforming product as secondary market distribution becomes available,” said Feldstein.
“Meanwhile, ResCap continues to avail itself of its relationship with GMAC Bank to help support its current mortgage loan production. Accordingly, ResCap remains committed to offering a broad and competitive menu of high quality products to its customers.”
During the third quarter, GMAC infused $1 billion of equity into ResCap to boost the company’s liquidity base, which stood at $6.2 billion as of September 30.
The third quarter loss includes a number of non-cash items, including higher credit provisions, mark-to-market trade adjustments, lower margins on the sale of mortgages, decreased loan production, and a $455 million goodwill impairment charge related to the ResCap unit.
Excluding goodwill impairment charges, GMAC posted a third quarter operating loss of $1.1 billion, compared to operating income of $522 million in the third quarter of a year earlier.
ResCap includes a number of real estate finance companies, including GMAC Mortgage, GMAC-RFC, Ditech.com, and wholesale mortgage lender Homecomings Financial, and others.
Just two weeks ago, GMAC announced sweeping layoffs in its ResCap unit, resulting in job cuts for 25 percent of staff, or 3,000 jobs, with restructuring costs ranging from $90 to $110 million.
“Successful execution of these plans will be essential to restoring the mortgage business to profitability,” Feldstein continued. “This is a top priority for GMAC.”
Homecomings Financial, the wholesale mortgage division of ResCap was believed to have been hit hard, with an expected loss of 207 Account Executive positions and 284 total jobs within the company.
GMAC posted a $293 million second-quarter profit and a $305 million first-quarter loss.
GMAC and ResCap were also downgraded by Moody’s, lowering ResCap’s debt rating two notches to “Ba3,” its third-highest junk grade, from “Ba1,” and GMAC one notch to “Ba2” from “Ba1.”