ResCap Bankruptcy Possible

Prime production jumped from half of 2007’s $93.9 billion in total business to 72 percent in 2008. Government share shot up to nearly one-quarter from barely 4 percent in 2007. But prime nonconforming share fell to 3 percent from 30 percent, while the share of prime second liens dropped to 2 percent from 11 percent.

In 2006, prime nonconforming accounted for 37 percent of the $161.6 billion originated, while nonprime share was 19 percent and second-lien share was 15 percent.

ResCap generated nearly two-thirds of its production last year from correspondent lenders and secondary market purchases, rising from 54 percent in 2007. Retail originations represented one-quarter of 2008’s business, about the same as in the prior year. Mortgage brokers originated 11 percent of ResCap’s production last year, falling from 22 percent in 2007.

Warehouse line-of-credit commitments were $2.4 billion as of Dec. 31, 2008. Outstanding advances were around $1.4 billion. In addition $0.1 billion in advances on other receivables were also outstanding.

ResCap has been shrinking the size of its warehouse business, which is primarily run through GMAC Bank.

In addition to government mortgages, ResCap provides warehouse financing for prime jumbo mortgages, prime second-liens and prime-conforming loans. It purchased around 21 percent of the loans that it provided warehouse financing for last year.

Losses at ResCap increased to $5.6 billion during 2008 from $4.3 billion a year earlier. Liquidity pressures are expected to continue through at least the first quarter, and the company will probably be unable to meet its debt-service obligations during the near term, according to the filing.

The lender has just $0.5 billion available to cover its operating expenses and upcoming liabilities. Servicing advances are expected to drain much needed cash as delinquency increases.

ResCap will attempt to maintain its required tangible net worth by selling off assets — some at losses that will negatively impact its overall profitability and financial condition. Even if it successfully unloads assets, interest-rate gyrations and margin calls could prevent ResCap from meeting its short-term obligations.

GMAC said it would have much at stake in a ResCap bankruptcy, with around $4.1 billion in secured financing arrangements and approximately $500 million of ResCap notes. A bankruptcy would slow repayments and leave it as an unsecured creditor.

“It is possible that other ResCap creditors would seek to recharacterize our loans to ResCap as equity contributions or to seek equitable subordination of our claims so that the claims of other creditors would have priority over our claims,” the filing said. “As a holder of unsecured notes, we would not receive any distributions for the benefit of creditors in a ResCap bankruptcy before secured creditors are repaid.”

GMAC noted that it might be better off providing debtor-in-possession financing in a bankruptcy. It would likely write down $3.1 billion in equity investments, though.

An analyst discussed the possibility of a possible ResCap bankruptcy in late 2007 before the credit crisis exploded.

GMAC also said in the filing that a lawsuit filed in 2005 against it, parent GM and GM executives and directors by investors who purchased GM securities between Feb. 25, 2002, and Nov. 9, 2005, was still pending as of Dec. 31, 2008. The class action, filed in U.S. District Court for the Southern District of New York, alleges that GM overstated its cash flow. GM is indemnifying GMAC in connection with these cases.

Folksam Asset Management v. General Motors, et al. (Galliani, et al. v. General Motors, et al. consolidated in this suit in October 2006)
Sept.19, 2005 (U.S. District Court for the Southern District of New York)