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By Aparajita Saha-Bubna

Of DOW JONES NEWSWIRES

GMAC LLC swung to a loss for the fourth consecutive quarter as slumping resale values of used cars and souring mortgage investments took their toll.

The finance arm of General Motors Corp. (GM) said it would slash its loss- making auto-leasing business by at least half. Officials also said the company would continue to support its ailing mortgage unit responsible for the bulk of GMAC's losses.

GMAC said Thursday it had a net loss of $2.48 billion in the second quarter, compared with a profit of $293 million during the same period a year ago. Losses of $717 million stemming from auto leases and $1.86 billion of red ink at Residential Capital LLC, or ResCap, were the main culprits.

The dismal performance of the auto-leasing segment doesn't bode well for GM, which has a 49% stake in the finance unit after a consortium led by private- equity firm Cerberus Capital Management LP, parent of Chrysler LLC, bought 51% of GMAC in 2006 for about $14 billion.

Not only will the auto maker bear half of the $717 million in second-quarter leasing losses, it also paid out $1.9 billion in leasing-related charges. The losses will burden GM at a time it is already weighed down by restructuring costs fueled by weak sales. The auto maker will post its second-quarter results Friday.

GMAC's credit ratings, along with those of GM, were cut Thursday by Standard & Poor's to B- from B, six notches below investment-grade. The ratings company, in an identical move, also lowered the credit standing of Ford Motor Co. (F) and Chrysler LLC and their financing arms.

SUVs, Trucks Weigh On Results

"Used vehicle balances significantly impacted the portfolio," said Robert Hull, GMAC's chief financial officer, during a conference call Thursday to discuss the company's second-quarter earnings.

"At this point, we took all the impairments we felt were appropriate," said a company official during the call.

GMAC's $30-billion lease portfolio includes about $18 billion on trucks and sport-utility vehicles.

Leasing has been a key tool used by auto makers to offer lower monthly payments on vehicles customers couldn't otherwise afford. In most cases, when a lease is up, the customer returns the vehicle to the auto-finance company, which then resells it. The decline in value of the larger vehicles has spelled losses at these companies at the time of resale, and resulted in a fall in the value of their existing portfolio of lease agreements.

For instance, in June, GMAC recovered only 75% of the expected returns from its SUV leases. Earlier this week, GMAC said it will no longer offer subsidized leases in Canada.

New auto-financing deals at GMAC dropped 11% due to tepid demand from car buyers, while loan charge-offs or losses jumped to 1.68% from 1.03%. The company's credit-loss provision surged 79% to $771 million.

Gina Proia, a GMAC spokeswoman, said GM dealers were informed Thursday of various initiatives that would "improve returns on the auto-lending business." These include increasing rates charged on borrowings related to auto lending and elimination of the SmartBuy program. This program, consisting of loans to car buyers with balloon payments at the end, currently makes up about $5 billion of GMAC's portfolio.

As mentioned earlier this week, the plan also includes GMAC scaling back on its auto-leasing business for GM vehicles. Leasing comprises 18% of GMAC's auto- finance portfolio for GM vehicles. Starting Friday, the goal will be to cut this by half. The other initiatives have different timelines.

"We are taking this opportunity to adjust business to the current environment, " said Proia. "These are not easy steps to take but are prudent measures. Our goal is to structure the business for longer-term health."

ResCap Still Struggles

ResCap's net loss swelled to $1.86 billion from $254 million as it sold off souring mortgages at hefty discounts and set aside funds for potential losses. Even when losses on those asset sales are stripped out, the pretax loss is still a large $900 million, according to Moody's Investors Service analyst Craig Emrick.

ResCap, one of the nation's largest subprime-mortgage lenders, has struggled to turn around its fortunes as GMAC and its owners deliberate the home lender's future. ResCap lost $4.3 billion in 2007, and GMAC spent much of the year restructuring ResCap's operations, including job cuts and an overhaul of the business model. But the losses have continued to mount.

The troubled GMAC unit said Thursday it was pulling back from its international operations in the latest step to pare its business down to only the safest possible form of lending: prime conforming U.S. loans.

GMAC's Hull said ResCap may not be profitable before 2009.

"It's not clear to me when they (ResCap) are going to be profitable," said Moody's Emrick. He noted that, in the first quarter, 12.2% of home mortgage loans held by ResCap were non-performing, that is, have a higher likelihood of defaulting. In contrast, the percentage of non-performing home loans held by 80 banks that Moody's rates was 2.05% during the same period.

The mortgage unit completed an ambitious refinancing in the quarter and now has $275 million of debt maturing in 2008 and $618 million in 2009. If that refinancing hadn't been successful, ResCap would have had to pay back $4 billion of debt in 2008 and $2.5 billion of debt next year, a burden that might have hindered its ability to operate. ResCap now has $3.65 billion of debt due in 2010.

GMAC has continued its support for ResCap by facilitating this debt refinancing and extending credit to the mortgage operator in return for its higher-quality collateral.

"At this point in time we're committed to supporting ResCap," GMAC's Hull during the call, in response to a question about whether ResCap would remain a core business for GMAC.

GM shares closed Thursday at $11.07, down 2.9%. GMAC's 8% notes due 2031 traded lower at 57.50 cents on the dollar.

-By Aparajita Saha-Bubna, Dow Jones Newswires; 201-938-2137; aparajita.saha- bubna@dowjones.com

(Kevin Kingsbury, Lauren Pollock and Cynthia Koons contributed to this report.)

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  07-31-08 1659ET
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