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ResCap Tumbles

ResCap Tumbles$31.1 billion Q1 production

May 2, 2007


Nonprime fundings continued to tumble at Residential Capital LLC — which saw nearly $1 billion in quarterly losses. Following word of the loss, ratings agencies immediately lowered their outlook for the lender.

Mortgage loan production was $31.1 billion during the first quarter, parent GMAC Financial Services reported today. Volume tumbled from $41.2 billion the prior quarter and was also down from a revised $36.1 billion a year earlier.

Nonprime fundings of $3.3 billion were less than half the level in the fourth quarter and off nearly two-thirds from a year earlier, the statement said. The decrease reportedly reflects a tightening of underwriting guidelines to reduce nonprime exposure.

“We have significantly restricted origination of those products with limited market liquidity and with higher early payment default characteristics,” GMAC Chief Executive Officer Eric Feldstein said in the announcement.

The press release indicated first quarter prime production of $27.8 fell from $34.3 billion the prior period but was nearly unchanged from the first quarter 2006.

The net loss for ResCap during the most recent quarter was $910 million compared to a $651 million loss in the fourth quarter.

GMAC noted it injected $500 million of equity into ResCap during the first quarter.

“This large first quarter loss reflects difficult market conditions and limited liquidity for nonprime mortgages held for sale, which were sold or marked at significantly lower market values,” the statement said. “An increase in reserves related to both higher delinquency and greater loss severity in the nonprime held for investment loan portfolio” additionally hurt results.

“We are right-sizing the structural cost base in line with lower industry volume and narrower profit margins,” Feldstein added.

But concerns over ResCap’s ability to execute its turnaround plan led Moody’s Investors Service to revise its ratings outlook of the lender’s Baa3 senior debt to negative from stable, the agency announced today. Moody’s noted the possibility of rising credit difficulties in its Alt-A and A- exposure.

In addition, a boost in early payment default reserves has Moody’s nervous.

Fitch Ratings announced it revised its rating outlook for ResCap to negative from stable, noting that higher delinquencies and depressed asset valuations still linger.

Sam Garcia worked in mortgage lending for twenty years prior to becoming publisher of


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