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Confusion surrounds ResCap’s destiny

What’s going on across the Pond

Recently when I wrote a news blurb about US mortgage giant Residential Capital Corporation losing $4bn in Q4 2009 Jeannine Bruin, a spokeswoman for parent company GMAC, took umbrage at some of my editorialising.

In my story I merely noted what I thought was obvious – that not only did ResCap, as it is commonly known, have yet another lousy trading quarter but that it was on the auction block.

Apparently, my auction block comment rattled Bruin. The PR lady rattled off an email to me saying that “the company has not said that the ResCap business is up for sale”.

OK, fair enough, I thought. Then again, on several occasions GMAC has stated

publicly that it is exploring what it calls strategic alternatives with regard to ResCap. To most of us, a strategic alternative means one thing and one thing only – it’s up for sale.

In fact, just two months ago rumours were rampant that uber-value investor Warren Buffett’s Berkshire Hathaway was sniffing around ResCap and possibly the whole of GMAC. But we’ve not heard a word about this since – all’s quiet on the western finance front.

ResCap and GMAC have an interesting history to say the least. Four short years ago pre-bankruptcy General Motors sold its controlling interest in GMAC Financial Services to hedge fund giant Cerberus Capital for an eye-popping $14bn.

GMAC-FS’ two biggest assets included its home mortgage division GMAC Mortgage and its auto finance unit. After the sale to Cerberus the carmaker retained a 49% stake in the firm.

Sources tell me GMAC’s new management team would like nothing more than to jettison ResCap

For several decades GMAC Mortgage, which now goes by the ResCap moniker slapped on it by Cerberus – could do no wrong. It made money hand over fist and fed steady profits to its parent.

It even avoided the first sub-prime debacle back in the 1990s and emerged a stronger and more dominant player.

Year after year the company earned hundreds of millions of dollars on A-paper lending and ranked in the top 10 originators and servicers in the country. It eventually became a widely respected franchise and its future looked bright until the new sub-prime crisis – involving precisely no credit checks for loan consumers – reared its ugly head and the housing bubble popped in a big way. Cerberus’ timing could not have been worse.

Meanwhile, GMAC’s other mortgage affiliate RFC went hog wild in both sub-prime and second lien lending. GMAC and RFC had both been aggressive in these sectors anyway but after the Cerberus deal they became even more so. Hedge funds aren’t generally known for being slow-growing wallflowers, especially not Cerberus which for many years could do no wrong.

Today, GMAC and ResCap are 56% owned by the US government thanks to the Treasury pumping $15bn in capital and loan commitments into the companies, keeping creditors at bay. Cerberus’ stake is down to 15% and its chance of ever recouping its original $14bn investment is slim to none. I’m betting on none.

Still, ResCap continues onwards and upwards thanks to Uncle Sam. It originates and services home mortgages and now ranks in the top five in both business categories.

In case you’re wondering why the government rescued these companies the answer is obvious – they were too big to fail, but in an unusual way. It’s likely that other mortgage giants and several opportunistic mid-tier banks could have stepped in and filled ResCap’s void in the home origination and servicing businesses but the truth is the auto finance unit was integral to President Barack Obama’s plan to rescue the car sector in the US. GMAC funds not only consumers but thousands of car dealerships – a business many commercial lenders are wary of.

Sources tell me that GMAC’s new management team, specifically chief executive officer and Citigroup veteran Michael Carpenter, is none too keen on mortgages and would like nothing more than to jettison ResCap. Yes, it’s for sale but none of the firms that rank ahead of it – Bank of America, Wells Fargo and JPMorgan Chase – want to buy it.

All three of these giants have big mortgage franchises of their own and wouldn’t stand to gain much unless they were essentially given ResCap for free, which is unlikely.

Meanwhile, mid-sized up-and-comers such as Branch Banking & Trust, US Bancorp and SunTrust like the mortgage business just fine but, like the big boys, have no desire to double down unless the price is right.

Of course, it’s always possible that GMAC will come clean and admit that ResCap is for sale. Let me repeat that – ResCap is for sale but nobody wants to buy it at the price GMAC is asking.

So what is that price? Well, sellers never disclose such information publicly. Instead they tell everyone that they are exploring strategic alternatives. Confused? Welcome to the club.

Paul Muolo is executive editor of National Mortgage News

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