GMAC Financial Services, the consumer lender now majority owned by the government, said Tuesday it expects to report a loss of about $5 billion in the fourth quarter thanks to deep writedowns on underperforming mortgage loans it plans to sell.
The main driver of the anticipated loss is a $3.8 billion writedown taken as GMAC prepares to sell parts of a troubled mortgage arm that CEO Michael Carpenter called "a millstone around the company's neck."
GMAC received a $3.8 billion federal bailout last week — the third round of aid that now totals $16.3 billion. With the additional funds, the government's stake in GMAC stands at 56 percent, up from 35 percent. That could go to nearly 80 percent if the government opts to convert more of its stake to common equity.
It was only the latest helping hand the Obama administration has extended to GMAC, whose survival it sees as crucial to the rescue of automakers General Motors and Chrysler. The company provides wholesale financing to thousands of GM and Chrysler dealers, allowing them to stock their showroom floors with vehicles.
In addition to the three rounds of financing, regulators have reluctantly allowed GMAC subsidiary Ally Bank to offer high interest rates that make its deposit base more volatile. And the company waited far longer than its larger competitors to acknowledge that its mortgage assets had lost much of their value.
"This was overdue, and I'm surprised they didn't do it until now," said Guy Cecala, publisher of Inside Mortgage Finance.
He explained that most banks now value mortgage assets at what they are expected to fetch on the market. By classifying its mortgage securities as "held for investment," GMAC was able to postpone the inevitable writedowns.
GMAC's fast disposal of its latest bailout is a sign the bank is not nearly ready to survive without government support, Cecala said.
"The real question is, is this the last capital infusion they'll need," he said. "I haven't seen any evidence that it is."
CEO Carpenter said writing down the value of the mortgage assets would minimize the potential impact on GMAC's overall balance sheet of ResCap, the struggling mortgage operation. That would improve GMAC's position as an auto lender and strengthen the company's capital base.
The actions give GMAC more flexibility as it explores what to do with ResCap, Carpenter said.
"We can take our time and be opportunistic as we explore those alternatives," he said.
Asked to elaborate about the potential alternatives for ResCap, Carpenter called it "a relatively blank sheet of paper. We will almost certainly sell some of the mortgage assets. We will look at strategic alternatives for various other businesses and activities and we'll see what happens."
GMAC also provided details on an additional $3.3 billion in a recently disclosed mortgage-related write-downs for its mortgage division.
Options for ResCap include selling the unit, selling off its bad assets but keeping the subsidiary or putting it into bankruptcy.
The assets were marked down steeply enough that there should be buyers for them, said Tom Marano, head of GMAC's mortgage operations. However, that could change if the housing market does not recover, Marano said.
For now, "we do believe we can sell these assets in the markets," he said.
GMAC's core auto lending business has shown signs of improvement, posting a profit of $395 million during the third quarter. Its online consumer banking unit, Ally Bank, has helped bring in billions of dollars in new deposits by offering relatively high interest rates and accounts for about 29 percent of GMAC's assets.
But GMAC reported a third-quarter loss of $767 million and ResCap lost $747 million during that period as homeowners continued to default on their mortgages in large numbers.
GMAC took over older bad loans from Ally Bank, then transferred them to ResCap for possible sale. Both Ally Bank and ResCap received cash, debt forgiveness and other new capital from GMAC.
GMAC was granted bank holding company status a year ago, allowing it to borrow funds from the Federal Reserve and receive a portion of the government's bailout fund. It later failed the government's stress test, largely because of ResCap's big losses.
That triggered a Treasury Department requirement that it raise $11.5 billion in additional capital this year. When GMAC failed to do so, additional government aid became necessary.
GMAC was the only bank that failed the stress test and was unable to raise the needed cash privately.
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