by Calculated Risk on 3/01/2007 05:34:00 PM

From AP: GMAC's Subprime Mortgages a Threat to GM

The cratering of the subprime mortgage industry could present more than just a pothole for General Motors Corp.

The world's largest auto maker disclosed Thursday that it will need more time to file its 2006 annual report with the Securities and Exchange Commission, marking the second year in a row the company has postponed the key filing.

Many analysts attribute this year's delay to a substantial hit the Detroit-based automaker might take from the exposure its part-owned finance unit _ GMAC Financial Services _ has to the business of making mortgage loans to people with weak credit or heavy debt burdens.
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Lehman Brothers analyst Brian Johnson estimated that loan-loss provisions and writedowns of mortgage securities at ResCap could cost GM $900 million to $950 million in cash charges in the first half of this year.

Among the areas of concern to analysts and investors: At the end of the third quarter, ResCap, long viewed as the crown jewel in GMAC's businesses, held $57 billion of subprime mortgages for investment, or 77 percent of its total loans held for investment. Its exposure to "residual interest" in mortgage securities _ the high-yielding slices that suffer some of the first losses if loan defaults are higher than expected _ was $1.4 billion as of Sept. 30. Meanwhile, ResCap is one of the biggest providers of short-term "warehouse" funding to smaller mortgage lenders.

"While warehouse lending is typically secured, the recent rash of bankruptcies among smaller lenders increases the risk the company will have loss exposure with this product," said analyst Kathleen Shanley at GimmeCredit, which says investors should sell their ResCap bonds.