If $1.5 billion in equity investments in real estate held by Residential Capital LLC turn sour, the owners of the unit could send it into bankruptcy, according to an analyst report.
A third quarter update filed with the Securities and Exchange Commission last week by the Minneapolis-based lender discussed its exposure to homebuilders and land investments, Kathleen Shanley, an analyst for GimmeCredit, wrote in her report yesterday, The Last Shoe to Drop.
“ResCap is already reeling from massive losses in its subprime and warehouse lending portfolios, and now a large spike in watch list loans in the business capital group suggests another round of losses may be waiting on deck,” Shanley said.
Earlier this month, ResCap reported a third quarter loss of $2.3 billion, far worse than the $254 million profit reported in the second quarter. The results dragged down parent GMAC Financial Services’ net income to a loss of $1.6 billion. The losses occurred as ResCap’s quarterly originations of $20 billion tumbled from $27 billion during the second quarter and $44 billion a year earlier.
Last week, GMAC LLC and its subsidiaries saw long-term issuer default ratings placed on Rating Watch Negative by Fitch Ratings, reflecting the ongoing pressures at ResCap.
Shanley noted that Friday’s SEC filing indicated ResCap’s business capital group is exposed to equity investments in homebuilder ventures and lots. The lender reportedly suggested that in a court of law, loans from the capital group could be considered to be part of its equity investment.
“ResCap also warns that the value of its investment in model homes leased to builders, and in lots contracted under option to builders, may be ‘impaired at any time’ if builders elect to terminate their leases and/or purchase options,” the analyst said.
The lender had $1.5 billion in residential real estate investments as of Sept. 30, including nearly 3,300 model homes for $1.0 billion and over 8,500 lots for $0.5 billion, GimmeCredit said. Builders can reportedly walk away from the properties, “leaving ResCap stuck with overvalued land.”
“Despite GMAC’s support to date, GM/Cerberus may elect to put ResCap into bankruptcy given its exposure to homebuilders, and recoveries given default may be even lower than implied by current distressed levels,” Shanley concluded. “We maintain our sell opinion.”
ResCap did not immediately respond to a request for a statement.