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."