ResCap May Be Sailing Towards Bankruptcy

November 15, 2007 No Comments »

As the lending environment shows no signs of a turnaround, GMAC’s mortgage unit ResCap is rapidly declining in value, to the point where it could fall into default on certain banking agreements.

GMAC has already infused the ailing mortgage unit with $1 billion in capital, but investors are concerned whether ResCap’s owners will come up with more money to save the troubled real estate finance company.

Recent trading in credit default swaps “suggests that investors fear the parent company, and the bankers, may step away from the situation and allow ResCap to default,” Shanley added.

According to a November 8th regulatory filing, ResCap’s agreements under $3.9 billion in bank loans required the company maintain a tangible net worth of at least $5.4 billion as of the end of the third quarter.

The company’s net worth at that time was $6.2 billion, down from $8.4 billion a year earlier, leaving it with an $800 million cushion.

If its value falls below $5.4 billion by December 31st, the unit could violate covenants on portions of its unsecured credit lines, effectively driving the company into bankruptcy.

ResCap had been a well-performing unit for GMAC in 2006, but last years’ profits quickly turned to losses in 2007, forcing GMAC to post the largest loss in its 88-year history this month due to a $2.3 billion loss at the struggling mortgage unit.

Though ResCap has recently scaled back on the origination of subprime loans, the toxic mortgages still account for 62% of its $59 billion loan-held-for-investment portfolio as of the end of the third quarter, another huge red flag.

Last month, ResCap reduced its workforce by 25%, resulting in 3,000 layoffs, including hundreds at its wholesale lending division Homecomings Financial.

On Tuesday, GMAC said it hired Bank of America executive Rob Hull to become its chief financial officer.

Cerberus acquired a 51 percent stake in GMAC in 2006, leaving GM with the other 49 percent.

ResCap includes a variety of brands, including Ditech.com, GMAC Bank, GMAC Mortgage, GMAC-RFC, Homecomings Financial, and others.

Leave A Response