The loss, GMAC's seventh in the past eight quarters, rose from $2.48 billion a year earlier. Results included a $1.2 billion tax charge caused by converting to a corporation, the Detroit-based company said today in a statement. The auto- finance unit’s loss increased to $727 million from $717 million, while the deficit from mortgage operations shrank to $1.84 billion from $1.9 billion, GMAC said. Excluding one-time charges, GMAC’s quarterly loss was about $400 million.
GMAC said the recession drove up defaults on home and auto loans, and the company will trim operations to save $1 billion annually by 2010. The U.S. took a 35 percent stake earlier this year, enabling GMAC to keep lending to customers of General Motors Corp. and Chrysler Group LLC after the automakers entered bankruptcy. While government incentives boosted car sales and GMAC’s revenue, losses on older loans are hobbling profit.
“On balance, there hasn’t been any sort of dramatic improvement,” said Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania, which upgraded GMAC’s debt six levels to B- in May because of the bailout. “The company lives and dies by its federal government support.” Egan commented before results were released.
Mortgage Asset Sales
GMAC had a $1.6 billion loss from selling international mortgage assets at a discount, and on provisions, impairments and reserves on non-bank mortgage assets in the U.S. The mortgage operations, which include Residential Capital LLC, boosted originations to $18.5 billion from $13.2 billion in the previous period.
The company took a $607 million goodwill impairment on its consumer property and casualty insurance business related to a “strategic review” of the operation, which may include a sale, GMAC said.
GMAC’s worldwide cost of borrowing, which has been above 5 percent since 2005, was helped in the second quarter by a $4.5 billion debt sale backed by the Federal Deposit Insurance Corp. The total cost of borrowing increased to 6.27 percent from 6.21 percent because of other debt expenses.
Bank Status
The company’s 6.625 percent notes maturing in 2012 rose 2 cents, or 2.3 percent, to 91 cents on the dollar yesterday, to yield 10.4 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. They’ve climbed 57 percent since March. GMAC doesn’t have publicly traded stock.
GMAC, which was permitted to become a bank holding company in December, is counting on added deposits at its Ally Bank unit to help fund new loans. The bank’s one-year, 2 percent certificates of deposit, while less than half the 4.05 percent yield a year ago, are among the highest in the country, according to Bankrate.com.
The annual sales pace for U.S. automobiles last month was 11.2 million, the first time this year it’s topped 10 million, according to Autodata Corp. in Woodcliff Lake, New Jersey. The government’s so-called cash-for-clunkers incentive helped GM pare sales declines, bringing more financing business to GMAC.
GMAC may struggle to boost profit amid the highest unemployment in 26 years and near-record home foreclosures.
“Consumer credit will continue to weaken throughout the rest of the year, so that will continue to be a problem,” said Christopher Wolfe, an analyst at Fitch Ratings in New York, before results were released.