Wednesday, April 20, 2005

GMAC Profits Get "Write-Up", Liquidity Squeezed

The situation at General Motors' mortgage arm is worse than expected, as questions over the profits are raised. "Bizarrely, mortgage earnings soared 67% to $385 million in the first quarter from $231 million in the year-ago period."

"GMAC CFO Sanjiv Khattri acknowledged that mortgage earnings had benefited from a write-up in the value of so-called mortgage servicing rights, which are balance sheet items that represent the expected earnings from administering payments on mortgages. The MSRs tend to get marked up when interest rates rise. And if there was a big jump in the value of these in the first quarter, it could easily be reversed this quarter. When asked to what extent gains from selling mortgages contributed to the mortgage unit's performance, Khattri said: 'I don't think I want to disclose the number.' "

It should be pointed out that the MSR gain is a non-cash item. "GMAC paid an average of 4.3% interest, up from 3.6% a year ago, on the billions of dollars it must borrow. If its credit ratings should sink below investment grade, GMAC's unsecured bonds would become off-limits to many institutional investors, making it even harder for GMAC to borrow money affordably."

"Yes, these are rough waters,' concedes GMAC Chairman Eric Feldstein, 45, who is scrambling to come up with new strategies to preserve GMAC's liquidity."

2 Comments:

At 12:32 PM, Blogger John Law said...

(Yes, these are rough waters,' concedes GMAC Chairman Eric Feldstein, 45, who is scrambling to come up with new strategies to preserve GMAC's liquidity." )

hahah, and this is the part the generates the PROFITS.

 
At 9:24 PM, Anonymous Anonymous said...

You just knew this was going to happen.

This is still a quiet story because bond yields have been low (4.25% @10 year) lately, which still doesn't make sense. The Fed rate is at 2.75% and we all admit that inflation is present and yet a 10 year bond yields 4.25% ! Talk about a conundrum !

All I can say is wait until bond yield go to 5, 6, 7 and 10% and then we will see how profitable GMAC is. I'll bet any money that is why GM is trying to unload GMAC now rather than later. Think about it: GM has lots of cash in the bank. Why do they want to unload their only PROFITABLE division ? Because it is a ticking time bomb !

I'll bet GM gets triply hit when interest rates go up:

a) GMAC becomes less profitable
b) their debt servicing becomes more expensive
c) their sales drop off because consumers won't take on debt.

WOW... no problems here ;)

 

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