Wednesday, March 14, 2007

Buy GM cars; the mortgage market needs to be subsidized

by Ken Houghton

Via Calculated Risk:

The next time GM explains that its pensioners need to take a hit, it won't be because car sales have fallen.

It will be because of their subprime mortgage lending:
General Motors Corp. will inject $1 billion into GMAC, its former finance arm said on Tuesday, a capital infusion needed to complete the sale of the automaker's majority stake in the face of escalating defaults in the U.S. mortgage market.

Under terms of its sale to a group led by Cerberus Capital Management, GM had guaranteed a minimum book value of $14.4 billion when the sale closed at the end of November.

It's not that adding equity to ResCap wasn't a good idea:
GMAC's ResCap unit, which specializes in housing finance, reported $48 billion in subprime loans -- about 76 percent of its mortgage portfolio as of year end.

ResCap increased its allowance for loan losses to 2.17 percent at year-end from 1.55 percent a year earlier and reported a spike in nonperforming loans to 10.5 percent of its mortgage portfolio.

but the result is that Private firm is being compensated by public share-, debt-, and lienholders of GM. And the private firm wins twice:
GMAC said it earned $1 billion in the fourth quarter of 2006, compared with $112 million a year earlier. The results included a $791 million tax benefit from its conversion to a limited liability company.

Translation: that's another $791 million that GM pensioners and others will have to pay into the general fund.

In a related matter (from comments at CR), Master Financial Inc. has "cease[d] its wholesale loan origination operation including accepting new applications for mortgage loans and funding loans in its pipeline."

A coworker noted:
Their web site brags about a feature called their “30 second desk.” Maybe some approvals actually needed more than 30 seconds of attention in retrospect.

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