The Wall Street Journal-20080206-GMAC Reports Loss Amid Housing Ills- Auto-Lending Business Also Cause for Concern As Delinquencies Rise

Return to: The_Wall_Street_Journal-20080206

GMAC Reports Loss Amid Housing Ills; Auto-Lending Business Also Cause for Concern As Delinquencies Rise

Full Text (671  words)

GMAC LLC reported a $724 million fourth-quarter net loss as a result of ailing housing markets, and its results fanned concerns that its auto-lending business could be facing pressure.

The results prompted Moody's Investors Service to downgrade its rating on both GMAC and its Residential Capital mortgage business, known as ResCap. The firm cited continued worries that GMAC may have to make a tough choice: to inject more capital into its ResCap unit and risk its own financial position, or let ResCap fend for itself.

GMAC said it expects to return to profitability in 2008, and executives said yesterday it will support ResCap only as long as it doesn't impair the rest of GMAC. Spokeswoman Gina Proia called the ratings cut "disappointing," and said that "we've taken significant actions to position the business for better performance in 2008."

ResCap made healthy profits writing subprime loans in recent years and selling them to investors with an appetite for risk. But it was caught holding many of those loans on its own books when the housing market weakened, and it has since taken big losses as the value of those loans plummeted.

The financial-services company's red ink will hurt results at private-equity firm Cerberus Capital Management LP, its majority owner, and at former parent General Motors Corp., which still owns a 49% stake. For the year, GMAC had a loss of $2.33 billion, compared with a $2.13 billion profit in 2006. It earned $1.02 billion in the 2006 fourth quarter. Cerberus doesn't publicly disclose financial results, and GM is expected to book a loss in the $350 million to $400 million range on its GMAC investment when it reports fourth-quarter results next week. Yesterday, Morgan Stanley cut its GM and GMAC earnings estimates for the fourth quarter and for next year.

GMAC yesterday showed signs that the credit crunch and economic concerns are spreading beyond its mortgage business. In the fourth quarter, GMAC said, auto-loan delinquencies, as measured by people 30 days past due, crept up to 2.77% in North America from 2.62% a year earlier. While a slight increase, BNP Paribas automotive-trading specialist Brad Rubin said the number could grow as the economy weakens. "I'm more concerned about the first quarter and second quarter," he said, referring to delinquencies. "I'd be surprised if we don't see more significant growth in delinquencies by the end of the first half of this year."

ResCap's 7 3/8 % bonds due June 30, 2010, fell 3.25 points, or 3.25 cents on the dollar, to 63.75 yesterday, according to MarketAxess, a bond-trading platform.

Moody's said ResCap and its parent company may not have the same priorities. At ResCap, the emphasis is on reshaping a broken lending model and having enough capital to survive. At GMAC, the onus is on shoring up its core auto-lending arm.

If it pours more capital into ResCap, GMAC risks lessening the liquidity cushion it may need if the auto-lending business struggles. That business made $137 million in the fourth quarter, down from $593 million in the year-earlier period.

GMAC has about $22.7 billion in cash, and last year funneled about $2.7 billion into ResCap. GMAC Chief Financial Officer Robert Hull said the firm is considering a slate of options for ResCap, including a sale of some assets, but he said that "we still believe ResCap is a viable component to our overall strategy at GMAC."

At GM, the health of the auto-lending business remains a concern. GMAC has long provided cheap financing to GM consumers and dealers, allowing GM to lure buyers with bargain-basement loans, and to keep inventory flowing to its dealer lots.

Meanwhile, Cerberus might be more patient and inclined to help ResCap in hopes of an eventual mortgage rebound, said Moody's analyst Mark Wasden.

"While market conditions remain uncertain, GMAC is taking aggressive actions across its businesses to mitigate future risk, cut cost and position the company for growth," a GM spokeswoman said. A Cerberus spokesman couldn't be reached.

---

Aparajita Saha-Bubna and Liz Rappaport contributed to this article.