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Home Loans Weigh Down GMAC 2Q Profits

July 30, 2007

New York — GMAC’s subprime mortgage losses at its home lending unit played a major role the company’s 63-percent drop in second quarter profits, reported Reuters on Monday.

Results, however, improved from the first quarter after the company — once controlled by General Motors Corp. — reduced lending risk. GMAC bond prices rose, as did shares of GM, which retains a 49 percent stake in GMAC.

Earnings at GMAC fell to $293 million from $787 million a year earlier, but showed improvement from the first quarter's $305 million loss. Revenue fell 20 percent from a year earlier to $4.02 billion.

Results included a $254 million loss at Residential Capital LLC, or ResCap, compared with a year-earlier $548 million profit, amid what GMAC called "severe illiquidity" in subprime mortgages.

The loss, however, was 72 percent smaller than the first quarter's $910 million. Profit at the rest of GMAC more than doubled to $547 million, as earnings from auto finance nearly tripled and from insurance rose 64 percent.

"I'm actually pretty pleased," said Pete Hastings, a fixed-income analyst at Morgan Keegan & Co. in Memphis, Tennessee, who favors shorter-maturity GMAC debt. "They've done a terrific job reducing exposure to subprime."

Like many lenders, ResCap has struggled as falling home prices and rising interest rates have made it tougher for many homeowners to keep up with their mortgage payments.

ResCap slashed second-quarter U.S. nonprime mortgage production to $700 million from $6 billion a year earlier. It also kept fewer riskier loans on its balance sheet.

GMAC Chief Executive Eric Feldstein nevertheless projected that "widespread weakness" in housing and mortgages will persist this year. He said ResCap will cut subprime mortgage exposure and "right-size" its cost base as loan volumes fall.

GM in November sold a 51 percent stake in GMAC to a group led by private equity firm Cerberus Capital Management.

Analysts expect GM on Tuesday to swing to a second-quarter profit, helped by a better product mix and growth in emerging markets. Still, subprime weakness "will penalize GM," said Standard & Poor's equity analyst Efraim Levy.

GM injected $1 billion into ResCap earlier this year to shore up its finances. As of June 30, ResCap had $7.5 billion of equity, up from $7.2 billion in the prior quarter.

On a conference call, GMAC Chief Financial Officer Sanjiv Khattri said that while mortgage market conditions are "quite severe," ResCap should have sufficient liquidity and capital to operate through the downturn.

GMAC said it ended June with $17.5 billion of cash and marketable securities, up from $12.8 billion in March.

GMAC's 8 percent bonds maturing in 2031 rose about 3.5 cents on the dollar to 92 cents, with a yield of 8.80 percent, according to Trace, a bond pricing service of the Financial Industry Regulatory Authority. Long-maturity U.S. Treasury bonds yielded close to 5 percent.

ResCap's 6.5 percent notes maturing in 2013 rose about 4.5 cents to 90.5 cents, yielding 8.64 percent, Trace said.

Shares of GM rose $1.34, or 4.3 percent, to $32.44 in late afternoon trading on the New York Stock Exchange.

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