My New Blog

When It's OK to Walk Away From Your Home

Millions of Americans are now deeply underwater on their mortgage. If you're among them, you need to stop living in a dream world and give serious thought to walking away from the debt.

No, you shouldn't feel bad about it, and you shouldn't feel guilty. The lenders would do the same to you—in a heartbeat. You need to put yourself and your family's finances first.

How widespread is this? More than 11 million families are in "negative equity"—that is, they owe more on their home than it is worth—according to a report out this week by FirstAmerican Core Logic, a real-estate data firm. That's a quarter of all families with mortgages. And for more than five million of those borrowers, the crisis is extreme: They are more than 25% underwater—the equivalent of having a $100,000 loan on a property now worth just $75,000 or less. That's true for a fifth of mortgage holders in California, nearly a third in Florida and an incredible 50% in Nevada.

Are you in this situation? Are you still battling to pay the bills each month, even when it may make little financial sense to do so?

It's time for some tough talk.

Stop trying to chase your lost equity. That money is gone. Don't think like the gambler who blows more and more cash trying to win back his losses. That's how a lot of people turn a small loss into a big one.

And do the math. Even if you hope the real estate market is near the bottom—it's possible, but by no means certain—it may still take years to see any meaningful recovery. If you are 25% underwater, your home will have to rise by 33% just to get you back to even.

Is that likely? And over what time period? Even if home prices rose by 5% a year from here, that would still take six years. And during that time you could instead be building fresh savings elsewhere.

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Bloomberg News

A real-estate agent moves a torn "Lender Foreclosure" sign outside a foreclosed home in Reno, Nev., last Monday.

If you are reluctant to give up on "your" home, realize that it isn't "yours." If you are in negative equity, it's the bank's home. You're just renting it. And right now you may be paying way above market rates. You need to be ruthless about your cash flow.

Are you worried about the legal consequences of walking away? Certainly, you should check with a lawyer before doing anything, but the consequences will probably be more limited than you think.

In "non-recourse" states, the mortgage lender may have no right to come after you for any shortfall. They may have no option but to take the home, sell it and eat the loss. According to a survey last year by the Federal Reserve Bank of Richmond, such states include negative-equity hot spots California and Arizona. Even in "recourse" states, lenders may have limited ability to come after you. Often they'd have to jump a lot of legal hurdles, and it's just not worth it for them. They're swamped with cases anyway.

"In my experience, right now they're not really going after anyone," says Richard Nemeth, a bankruptcy attorney in Cleveland. "They just don't have the resources."

If you've taken smart steps to protect your money, you may be safer still. For example, money held in a 401(k), Individual Retirement Account or pension plan is sheltered from creditors.

Sure, a strategic foreclosure may hurt your credit score. But if you're in financial difficulties, it's probably already suffered. And your credit score is not the only thing in life that matters.

Still, when it comes to the idea of walking away from debts, many people are held back by a sense of morality. They feel it's wrong to abandon their obligations. They don't want to be a deadbeat.

Your instincts, while honorable, are leading you astray.

The economy is fundamentally amoral.

Sometimes I think middle-class Americans are the only people who haven't worked this out yet. They're operating with a gallant but completely out-of-date plan of attack—like an old-fashioned cavalry with plumed hats and shining swords charging against machine guns.

Do you think your lenders would be shy about squeezing you for an extra nickel if they thought they could get away with it?

They knew what they were doing when they wrote your loan. Many were guilty of malpractice, but they pocketed good money and they've gotten away with it. And if they thought your loan was "risk free," how come they were charging you so much more than the interest on Treasury bonds?

If you're only a small amount underwater on your mortgage, it's probably the case that you're going to be better off staying put. But if you are deeply underwater, it's a different matter.

Whether we like it or not, walking away from debts is as American as apple pie. Companies file for bankruptcy all the time, and their lenders eat the losses. Executives and investors pocketed millions from the likes of Washington Mutual, Lehman Brothers and Bear Stearns when the going was good. They didn't have to give back one cent of that money when the companies went into bankruptcy.

Limited liability, after all, is one of the main reasons every business from your local dry-cleaner to a major multinational gets incorporated in the first place. They're not shy about protecting themselves if things go wrong. You shouldn't be either

By Eric Martin

Oct. 3 (Bloomberg) -- U.S. stocks slid, capping the worst week for the Standard & Poor's 500 Index since the 2001 terrorist attacks, on concern the $700 billion bank bailout isn't enough to unlock credit markets and prevent a recession.

JPMorgan Chase & Co., Discover Financial Services and Lennar Corp. fell more than 7 percent as a the biggest loss of jobs in five years overshadowed congressional approval of the plan to buy banks' troubled assets. Citigroup Inc. dropped 18 percent, its steepest plunge since 1988, after Wachovia Corp. agreed to be acquired by Wells Fargo & Co., snubbing a deal to sell its banking operations to Citigroup.

The S&P 500 declined 15.05 points, or 1.4 percent, to 1,099.23. The Dow Jones Industrial Average lost 157.47 points, or 1.5 percent, to 10,325.38. The Nasdaq Composite Index slipped 29.33, or 1.5 percent, to 1,947.39. More than three stocks decreased for each that rose on the New York Stock Exchange.

``Once you get over one hurdle, you start looking at the next hurdle, and the next one is the weakness in the U.S.,'' said John Davidson, president of PartnerRe Asset Management in Greenwich, Connecticut, which invests more than $12 billion. ```There's doubt that we'll avoid a recession.''

The S&P 500 lost 9.4 percent over the last five days, dragging the gauge to an almost four-year low. The benchmark index for U.S. stocks tumbled 4 percent yesterday as reports on jobless claims and factory orders reignited concern the economy is sinking into a recession. The Dow lost 7.3 percent in the week and the Nasdaq tumbled 10.8 percent, sending both to the lowest levels since 2005.

Libor Record

JPMorgan slid $3.95 to $45.90. CB Richard Ellis slumped 12 percent to $9.45. Lennar fell $1.81 to $12.08.

Financial shares in the S&P 500 declined 4 percent as a group after some money-market rates jumped to records. The London interbank offered rate, or Libor, that banks charge each other for three-month loans in euros increased to 5.33 percent, an all-time high, the British Bankers' Association said. The rate for dollars climbed to 4.33 percent, the highest since January. The Libor-OIS spread, a gauge of cash scarcity among banks, widened to a record and Asian bank rates climbed to the highest levels in at least nine months.

Discover Financial Services, the fourth-largest U.S. credit-card company, slid $1.89, or 15 percent, to $11.07. MBIA Inc., the world's largest bond insurer, tumbled $1.15, or 10 percent, to $10.35.

Bailout Passes

The House of Representatives voted in favor of the bailout this afternoon after it was refashioned to entice enough votes for passage. President George W. Bush signed it into law shortly afterward. The House's rejection of the original bill on Sept. 29 sent the Dow average down more than 777 points, its biggest point drop ever.

The bailout comes after global banks racked up almost $590 billion in credit losses and asset writedowns stemming from the worst housing slump since the Great Depression.

The measure authorizes the government to buy troubled assets from financial institutions reeling from record home foreclosures. The bill contains $149 billion in tax breaks and affirms regulators' power to suspend asset-valuing rules that companies blame for fueling the crisis.

``This is not a panacea,'' Warren Buffett, the second- richest American and chairman of Berkshire Hathaway Inc., told financial news network CNBC in an interview. ``This does not solve all our problems. It just would have been a total disaster if it hadn't passed.''

Citigroup Plunges

Citigroup plunged $4.15 to $18.35. Wells Fargo offered $15 billion for Wachovia, setting up a contest with Citigroup for control of the embattled North Carolina lender. Citigroup demanded Wells Fargo abandon the takeover, claiming it breaches an exclusive deal reached earlier this week in which the New York-based lender agreed to buy Wachovia's banking operations for $2.16 billion with government help.

Wells Fargo's $15 billion offer values the Charlotte, North Carolina-based bank at $7 a share and includes the whole company, without any aid from the U.S., the banks said. Citigroup's bid worked out to about $1 share, left out the securities brokerage and Evergreen mutual-fund units and was tied to help from the Federal Deposit Insurance Corp.

Wachovia had the steepest climb in the S&P 500, rallying 58 percent to $6.21. Wells Fargo lost 60 cents to $34.56. Buying Wachovia would have made Citigroup the third-biggest U.S. bank network and cement its status as the nation's largest lender by assets.

JPMorgan, Bank of America

JPMorgan Chase had the second biggest drop in the Dow average after Citigroup, losing $3.95, or 7.9 percent, to $45.90. JPMorgan and Washington Mutual Inc., the bankrupt holding company of the lender JPMorgan is acquiring, agreed to delay any attempt to withdraw a disputed $5 billion in cash from WaMu.

In a separate bankruptcy case, Lehman Brothers Holdings Inc. creditors said they ``believe'' that JPMorgan, the investment bank's main lender and clearing agent, caused the liquidity crisis that led to Lehman's collapse.

Bank of America Corp., the second-biggest U.S. bank, declined $1.89, or 5.2 percent, to $34.48.

Some banks rallied after the bailout plan was passed.

National City, Ohio's biggest bank and the subject of takeover speculation earlier this week, gained 12 percent to $3.51. Sovereign, the second-largest U.S. savings and loan, increased 59 cents to $5.84.

Today's employment reports spurred speculation the Federal Reserve may be forced to cut interest rates to boost economic growth. Fed Funds futures trading on the Chicago Board of Trade showed a 76 percent chance the central bank will reduce its target rate for overnight bank loans by a half-percentage point to 1.5 percent by its Oct. 29 meeting and 24 percent odds of a 0.75 percentage-point cut.

`Part of the Solution'

``We wouldn't be surprised to see the Fed cut rates 50 points even before the next scheduled meeting,'' James Shugg, a senior economist at Westpac Banking Corp. in London, said in an interview on Bloomberg Television. ``It actually helps boost, to some extent, bank profitability. An interest-rate cut is an important part of the solution to the current serious problems confronting the U.S. economy.''

Payrolls fell by 159,000 in September, the biggest decrease in five years, the Labor Department said. The jobless rate, the last one reported before the presidential election, remained at 6.1 percent.

Global Slump

Equities retreated from Sao Paulo to London to Tokyo this week, sending the MSCI All-Country World Index to an 9.1 percent decline, as an increase in bank failures exacerbated the credit freeze that pushed up borrowing costs for companies and consumers around the globe.

The S&P 500, down 25 percent this year, still trades for almost 21 times profit from the past 12 months. Only four of 48 developed and emerging nations tracked by MSCI Inc. -- Switzerland, Jordan, Colombia and Morocco -- have a higher price-to-earnings ratio, according to data compiled by Bloomberg yesterday.

Europe's Dow Jones Stoxx 600 Index trades at about 11 times earnings, near the lowest since at least 2002.

General Growth Properties Inc. gained $2.08, or 27 percent, to $9.67. The Chicago-based mall owner whose shares slumped 48 percent yesterday fired its chief financial officer and suspended dividend payments to weather the seizure in financial markets.

The Russell 2000 Index, whose companies have a median market value of $457.3 million, dropped 12 percent this week, the most since the September 2001 terrorist attacks.

-- Editors: Michael Regan, Chris Nagi

By Eric Martin

Oct. 3 (Bloomberg) -- U.S. stocks slid, capping the worst week for the Standard & Poor's 500 Index since the 2001 terrorist attacks, on concern the $700 billion bank bailout isn't enough to unlock credit markets and prevent a recession.

JPMorgan Chase & Co., Discover Financial Services and Lennar Corp. fell more than 7 percent as a the biggest loss of jobs in five years overshadowed congressional approval of the plan to buy banks' troubled assets. Citigroup Inc. dropped 18 percent, its steepest plunge since 1988, after Wachovia Corp. agreed to be acquired by Wells Fargo & Co., snubbing a deal to sell its banking operations to Citigroup.

The S&P 500 declined 15.05 points, or 1.4 percent, to 1,099.23. The Dow Jones Industrial Average lost 157.47 points, or 1.5 percent, to 10,325.38. The Nasdaq Composite Index slipped 29.33, or 1.5 percent, to 1,947.39. More than three stocks decreased for each that rose on the New York Stock Exchange.

``Once you get over one hurdle, you start looking at the next hurdle, and the next one is the weakness in the U.S.,'' said John Davidson, president of PartnerRe Asset Management in Greenwich, Connecticut, which invests more than $12 billion. ```There's doubt that we'll avoid a recession.''

The S&P 500 lost 9.4 percent over the last five days, dragging the gauge to an almost four-year low. The benchmark index for U.S. stocks tumbled 4 percent yesterday as reports on jobless claims and factory orders reignited concern the economy is sinking into a recession. The Dow lost 7.3 percent in the week and the Nasdaq tumbled 10.8 percent, sending both to the lowest levels since 2005.

Libor Record

JPMorgan slid $3.95 to $45.90. CB Richard Ellis slumped 12 percent to $9.45. Lennar fell $1.81 to $12.08.

Financial shares in the S&P 500 declined 4 percent as a group after some money-market rates jumped to records. The London interbank offered rate, or Libor, that banks charge each other for three-month loans in euros increased to 5.33 percent, an all-time high, the British Bankers' Association said. The rate for dollars climbed to 4.33 percent, the highest since January. The Libor-OIS spread, a gauge of cash scarcity among banks, widened to a record and Asian bank rates climbed to the highest levels in at least nine months.

Discover Financial Services, the fourth-largest U.S. credit-card company, slid $1.89, or 15 percent, to $11.07. MBIA Inc., the world's largest bond insurer, tumbled $1.15, or 10 percent, to $10.35.

Bailout Passes

The House of Representatives voted in favor of the bailout this afternoon after it was refashioned to entice enough votes for passage. President George W. Bush signed it into law shortly afterward. The House's rejection of the original bill on Sept. 29 sent the Dow average down more than 777 points, its biggest point drop ever.

The bailout comes after global banks racked up almost $590 billion in credit losses and asset writedowns stemming from the worst housing slump since the Great Depression.

The measure authorizes the government to buy troubled assets from financial institutions reeling from record home foreclosures. The bill contains $149 billion in tax breaks and affirms regulators' power to suspend asset-valuing rules that companies blame for fueling the crisis.

``This is not a panacea,'' Warren Buffett, the second- richest American and chairman of Berkshire Hathaway Inc., told financial news network CNBC in an interview. ``This does not solve all our problems. It just would have been a total disaster if it hadn't passed.''

Citigroup Plunges

Citigroup plunged $4.15 to $18.35. Wells Fargo offered $15 billion for Wachovia, setting up a contest with Citigroup for control of the embattled North Carolina lender. Citigroup demanded Wells Fargo abandon the takeover, claiming it breaches an exclusive deal reached earlier this week in which the New York-based lender agreed to buy Wachovia's banking operations for $2.16 billion with government help.

Wells Fargo's $15 billion offer values the Charlotte, North Carolina-based bank at $7 a share and includes the whole company, without any aid from the U.S., the banks said. Citigroup's bid worked out to about $1 share, left out the securities brokerage and Evergreen mutual-fund units and was tied to help from the Federal Deposit Insurance Corp.

Wachovia had the steepest climb in the S&P 500, rallying 58 percent to $6.21. Wells Fargo lost 60 cents to $34.56. Buying Wachovia would have made Citigroup the third-biggest U.S. bank network and cement its status as the nation's largest lender by assets.

JPMorgan, Bank of America

JPMorgan Chase had the second biggest drop in the Dow average after Citigroup, losing $3.95, or 7.9 percent, to $45.90. JPMorgan and Washington Mutual Inc., the bankrupt holding company of the lender JPMorgan is acquiring, agreed to delay any attempt to withdraw a disputed $5 billion in cash from WaMu.

In a separate bankruptcy case, Lehman Brothers Holdings Inc. creditors said they ``believe'' that JPMorgan, the investment bank's main lender and clearing agent, caused the liquidity crisis that led to Lehman's collapse.

Bank of America Corp., the second-biggest U.S. bank, declined $1.89, or 5.2 percent, to $34.48.

Some banks rallied after the bailout plan was passed.

National City, Ohio's biggest bank and the subject of takeover speculation earlier this week, gained 12 percent to $3.51. Sovereign, the second-largest U.S. savings and loan, increased 59 cents to $5.84.

Today's employment reports spurred speculation the Federal Reserve may be forced to cut interest rates to boost economic growth. Fed Funds futures trading on the Chicago Board of Trade showed a 76 percent chance the central bank will reduce its target rate for overnight bank loans by a half-percentage point to 1.5 percent by its Oct. 29 meeting and 24 percent odds of a 0.75 percentage-point cut.

`Part of the Solution'

``We wouldn't be surprised to see the Fed cut rates 50 points even before the next scheduled meeting,'' James Shugg, a senior economist at Westpac Banking Corp. in London, said in an interview on Bloomberg Television. ``It actually helps boost, to some extent, bank profitability. An interest-rate cut is an important part of the solution to the current serious problems confronting the U.S. economy.''

Payrolls fell by 159,000 in September, the biggest decrease in five years, the Labor Department said. The jobless rate, the last one reported before the presidential election, remained at 6.1 percent.

Global Slump

Equities retreated from Sao Paulo to London to Tokyo this week, sending the MSCI All-Country World Index to an 9.1 percent decline, as an increase in bank failures exacerbated the credit freeze that pushed up borrowing costs for companies and consumers around the globe.

The S&P 500, down 25 percent this year, still trades for almost 21 times profit from the past 12 months. Only four of 48 developed and emerging nations tracked by MSCI Inc. -- Switzerland, Jordan, Colombia and Morocco -- have a higher price-to-earnings ratio, according to data compiled by Bloomberg yesterday.

Europe's Dow Jones Stoxx 600 Index trades at about 11 times earnings, near the lowest since at least 2002.

General Growth Properties Inc. gained $2.08, or 27 percent, to $9.67. The Chicago-based mall owner whose shares slumped 48 percent yesterday fired its chief financial officer and suspended dividend payments to weather the seizure in financial markets.

The Russell 2000 Index, whose companies have a median market value of $457.3 million, dropped 12 percent this week, the most since the September 2001 terrorist attacks.

-- Editors: Michael Regan, Chris Nagi

Residential Capital, LLC* - Subsidiary of GMAC

007-01-16

stories: bloomberg.com, story, yahoo.com

Update - 2008-09-08: The Mortgage Lender Implode-O-Meter has received credible information that GMAC may file for bankruptcy as early as Wednesday, September 10, 2008. We do know they are scrambling to move/sell assets prior to this tentative filing date, and we are attempting to confirm the information received.

GMAC's Gina Proia in Media Relations got back to us and suggests "There is no basis for this type of speculation." A full statement of denial is here.

Described on their web site as GMAC Financial Services, GMAC "operates in approximately 40 countries in automotive finance, real estate finance, insurance and commercial finance businesses."

On Nov. 30, 2006, GM sold a 51 percent controlling interest in GMAC to a consortium of investors led by Cerberus Capital Management, L.P., a private investment firm, and included Citigroup Inc., Aozora Bank Ltd. and a subsidiary of The PNC Financial Services Group, Inc.

According to Bloomberg, Aozora Bank Ltd., the Japanese lender controlled by Cerberus Capital Management LP, fell to a record low in Tokyo trading after a report said it may post a loss for the fiscal first half ending Sept. 30.

"Aozora plans to take a writedown of 17.8 billion yen this year on an investment in GMAC after the partly owned finance unit of General Motors Corp. recorded a $2.5 billion loss in the second quarter."

Stuart Hoffman, chief economist at PNC Financial Services Group (commenting on the Freddie/Fannie bailout), expects "the economy will flatline" which does not boost the overall outlook for investments like their part in GMAC.

Exactly which GMAC units are involved has yet to be ascertained. Stay tuned.

Update - 2008-09-02: A reliable source told us GMAC Mortgage would be shutting down its Retail origination platform, letting go "LO's, RM's, DM's, assistants, and the like." We were given to understand one region had well in excess of 400 loan officers, and while the tipster was unsure how many regional offices were left, the number of employees affected would reportedly "be in the thousands... all retail branches." Today, the official announcement came out, and GMAC Mortgage retail is not the only part of ResCap that's being impacted. From an internal memo sent to all employees by ResCap Chairman and CEO Tom Marano:

In order to address these and other developments in the credit markets, we are taking action today to streamline and sharpen the focus of ResCap's operations. These changes are painful. However, I firmly believe that they are necessary to reposition ResCap as a more cost-efficient and effective company.

These actions will help us to significantly reduce our operating costs by year end. Achieving these numbers will regrettably impact approximately 5,000 associates in ResCap and in the corporate functional groups that support ResCap's businesses.

A separate announcement also went out to brokers. All 200 GMAC Mortgage retail offices are being closed, and the Homecomings Wholesale Channel will cease loan originations through brokers. Additional consolidation will occur in Information Technology, Risk, Finance, Human Resources, Legal and Procurement. Noted in the announcement:

"Business Capital Group (BCG), which provides capital solutions to builders and developers, is substantially contracting the scope of its operations due to the ongoing decline in credit conditions and reduced consumer demand in the housing markets."

Speaking with a recently displaced employee, we were told Ditech's direct (phone/internet) lending platform would be the only retail origination operation remaining under the ResCap umbrella of companies. GMAC Bank's Correspondent and Wholesale Lending divisions continue to do business in the secondary market, but have drastically cut back product & program offerings over the past months and now offer strictly Agency and FHA/VA loans. This will be applied to all of ResCap's origination channels, as the memo states:

"Going forward, this means that we will only originate loans that are:

- Supported by Government Sponsored Enterprise programs such as Fannie Mae, Freddie Mac and Ginnie Mae, or which can be sold to another guaranteed investor partner; and

- Originated through the following ResCap channels: GMAC Bank correspondents, including support for lenders with warehouse lines of credit; GMAC Mortgage direct; ditech call centers; and the GMAC Mortgage Charlotte, N.C., call center."

Bloomberg and MarketWatch are reporting the layoffs amount to nearly 60% of ResCap staff, and all 200 GMAC Mortgage retail offices will be closed. ResCap will realize charges of $90 to $120 million related to the initial 3,000 job cuts, with more projected in the future for the remaining 2,000. See the topic in our Discussion Forum for additional detail and commentary specific to Homecomings Financial.

Update - 2008-08-22: In a revised announcement posted on their web site today, GMAC Bank's Correspondent Funding corrected their previous suspension of Jumbo products to specify it was just 40/30 balloon jumbo products that were being eliminated.

Update - 2008-08-21: We continue to hear about more contractions at GMAC Bank. Writing about their Correspondent lending division a tipster said, "GMAC is dropping nearly all of it's programs, and killing deals right and left for no apparent reason. It's a pretty good bet they will cease operations in the next couple of weeks." GMAC announced all Jumbo products were being suspended effective today. Another tipster sent this news:

"GMAC-RESCAP, LLC mortgage Recruiters were notified early today by company management that the entire recruitment team is to be laid off effective 9/1 or 9/2. They were not given specific reasons for the layoff, only that it would happen on 9/1 or 9/2. This affects their entire remaining national team of 8 Recruiters. Also, David Ahlers, the company's top HR manager, has left the company. The company has been reduced to 3 operating divisions (from 6)and there is a total hiring FREEZE on ALL positions company wide. Some key, long time GMAC-RESCAP retail lending managers have also left the company."

Update - 2008-08-12: Tips are coming in today that GMAC has announced their exit from Home Equity lending. "GMAC Mortgage just announced they are closing their Troy MI processing center and cutting the regions down to 3. They also are suspending the entire Home Equity loans," one tipster wrote. "I believe they announced it by a conference call."

Another source confirmed the above information, and indicated there was a memo that had been sent to employees. We are trying to obtain a copy.

In their 2008-08-08 10Q filing for the second quarter of 2008, Rescap reported a $1.9 billion loss, including $233.3 million in net charge-offs:

"In our domestic mortgage business, we have shifted the bulk of our loan production to prime mortgage products that conform to the requirements of government-sponsored enterprises. In our international business, we generally restrict originations to those products and markets for which liquidity remains available, and we have suspended new loan originations in the United Kingdom, Europe and Australia."

Update - 2008-08-06: Tips coming in have alerted us that the Bellevue, WA office of Homecomings has now received notice of its shutdown. One tipster said, "mgmt had a conference call yesterday at 4pm and then stayed in the conf room til late - they had a meeting today telling them all."

We called the office and confirmed the announcement. Approximately 80 employees were affected.

Update - 2008-07-29: In an announcement sent to brokers (view pdf), Homecomings said they were discontinuing home equity lending entirely. Loans in the pipeline must be locked by 2008-07-31. This includes both closed-end seconds and home equity lines of credit.

Update - 2008-06-20: Homecomings is hunkering down with branch consolidations and lay offs. From a 2008-06-17 memo sent to employees:

After thorough research and consideration, we have determined that it will be necessary to consolidate the Cherry Hill, Petaluma, and Charlotte facilities by moving selected operations to our Dallas, Ft. Washington, and Minneapolis locations. The Cherry Hill facility will close on October 4, 2008 and the Petaluma facility will close on October 31, 2008. Charlotte will close on September 5, 2008.

Approximately 337 associates in Cherry Hill, 62 associates in Petaluma, and 71 associates in Charlotte will be impacted by these changes. Ninety-six positions will be eliminated and 374 associates will be offered positions at alternative sites.

A tipster told us there remain about 80 people in the Bellevue office. "Account managers laid off... is about 8," the source wrote. "There will be more to come in this branch in the next 30 days if it [stays] open at all."

Meanwhile, GMAC & Rescap stay atop the news, and the downgrades continue. Reuter's reports Rescap now accounts for 85% of GMAC's net worth.

"ResCap and GMAC earlier this month completed a $60 billion refinancing to buy time to turn around the struggling lender, which is paying a steep price for its risky bets on residential mortgage loans."

The refinancing included additional capital infusions from GMAC and Cerberus of $1.4 billion dollars, as reported when the deal was completed on 2008-06-04.

Update - 2008-06-03: Rescap's floundering becomes markedly more desperate. Today in Yahoo Business:

Residential Capital LLC, the mortgage lending unit of GMAC LLC, said Tuesday it needs more than three times more cash to stay in business than it estimated just weeks ago.

ResCap estimates it now needs about $2 billion in cash by the end of June to meet liquidity demands, according to a regulatory filing with the Securities and Exchange Commission. It previously estimated it needed just $600 million by the end of the month.

Update - 2008-05-06: Rescap has inched steadily closer to bankruptcy since our last update, as recent news suggests. Bloomberg reports today that GMAC "may keep the mortgage unit afloat long enough to find a buyer or break it up."

Yesterday, Rescap announced an offering to exchange $14 billion of notes to extend maturies between 2010 and 2015 for "as little as 80 cents on the dollar," Bloomberg reported. "To finance the debt restructuring, ResCap is seeking a new $3.5 billion credit line from its parent GMAC," the article notes.

Rescap admits even this may not be enough in it's Q1 8-K filing with the SEC:

"There is a significant risk that we will not be able to meet our debt service obligations, be unable to meet certain financial covenants in our credit facilities, and be in a negative liquidity position in June 2008."

Rescap (Residential Capital, LLC) is a wholly owned subsidiary of GMAC, LLC (which is owned by General Motors Corp. and Cerberus Capital Management L.P.). Rescap subsidiaries at risk of BK or being dumped include Ditech, GMAC Bank, GMAC Mortgage, and Homecomings Financial.

Update - 2008-04-24: In news we posted today, HousingWire reports Rescap "had borrowed $468 million ... against a $750 million credit facility" newly established with GMAC on 2008-04-18. Also of concern: $875 million in revolving credit and a $1.75 billion dollar loan, set to mature in June and July respectively.

On 2008-04-07 TheStreet reported that GMAC "bought ResCap debt with a face value of $1.2 billion in the open market for just $607 million" and "investors are questioning how long the company will continue to invest in ResCap to keep the second largest independent mortgage lender out of bankruptcy."

Update - 2008-02-22: In an article out today, S&P downgrades will put more pressure on GMAC to inject more money, or bail out:

"NEW YORK, Feb 22 (Reuters) - GMAC LLC and its Residential Capital LLC mortgage unit were cut several notches deeper into junk status by Standard & Poor's, which said mounting mortgage losses might require new capital injections from General Motors Corp (GM.N: Quote, Profile, Research) and Cerberus Capital Management LP [CBS.UL].

S&P on Friday downgraded GMAC three notches to "B-plus," its fourth-highest junk grade, from "BB-plus," and cut ResCap four notches to "B" from "BB-plus." Its rating outlook is negative, suggesting further downward pressure."

Update - 2007-11-23: Rescap appears to be heading closer to the Imploded list per an article November 20, 2007:

"NEW YORK (Reuters) - Bond investors are betting that finance company GMAC, and its major backer Cerberus Capital LP (CBS.UL: Quote, Profile, Research), will not provide further capital injections for GMAC's unit Residential Capital (ResCap), the second-largest independent U.S. mortgage lender.

Bonds of ResCap already trade at levels reflecting bankruptcy fears, and investors say ResCap would need at least another $1 billion capital injection from GMAC or Cerberus in the next month to avoid violating loan agreements with debt investors."

Click here to read the entire article.

Update (2007-10-26): Homecomings Financial is an indirect wholly owned subsidiary of GMAC LLC.

According to a Manager who is being laid off this week, Homecomings is closing all offices this year and will maintain one office in each of North Carolina, Texas, and Washington.

A Mortgage Broker in California received this from their AE:

"Homecomings Financial is going through a company wide restructuring due to the current market conditions. Unfortunately, we had to layoff 3,000 people today, which is 25% of our workforce. Our Newport Beach office will be closing as of December 31st, 2008 and migrating with the Bellevue, Washington office. In addition, in saddens me to say that every AE that has been with the company for less than 12 months has been layed off, which includes me..."

Another reader reports the following, which 'appears' to be an internal memo:

"Effective immediately, Homecomings Financial will be sharing customer information with its affiliate, GMAC Bank, which will evaluate qualified loan transactions for purchase. Before GMAC Bank can consider a loan for approval, Homecomings Financial must first obtain a complete and signed GMAC Bank Opt In Agreement from all borrowers listed on a loan application in order for the application to be reviewed, processed and underwritten by GMAC Bank. Homecomings Financial will return any loan applications that do not have a complete and signed GMAC Bank Opt In Agreement, which permits Homecomings Financial to share personal information with GMAC Bank. Brokers can obtain the GMAC Bank Opt In Agreement on our web site at www.hfwholesale.com. Nothing contained herein shall be considered a commitment to lend on the part of GMAC Bank. Homecomings Financial and GMAC Bank are Equal Housing Lenders. GMAC Bank is a Member FDIC."

Original Article (2007-01-16):

Will cut around 1,000 jobs.

Causing headaches for GM; even though they sold GMAC in Nov 2006:

GM, which announced Thursday that it wouldn't report its results as scheduled tomorrow because of accounting problems and the need to finalize GMAC numbers, sold 51% of GMAC for $14 billion to Cerberus Capital Management. The deal closed Nov. 30, and accountants for GM and Cerberus have since been poring over the books to make sure the $14.4 billion tangible net book value ascribed to GMAC at the time is reliable. If the value is higher or lower, GM or Cerberus may need to pay out certain settlements.

...

Lehman Brothers auto analyst Brian Johnson said in a note Friday that complications related to estimating the value of GMAC's [Residential Capital, LLC] mortgage unit could cost the auto maker $300 million to $400 million in cash charges in the first half. [Residential Capital, LLC] has long been viewed as the crown jewel in the GMAC portfolio, but it has fallen under industrywide pressure that has hurt many traditionally strong lenders and may have diminished [Residential Capital, LLC]'s value.

A Lehman update has subsequently put the estimate of the write-downs and other related expenses at $950 million.

I guess GM was too slow.

*Note: Not to be confused with Residential Capital, LP, another Lender

GMAC to Cut 5,000 Jobs
At Ailing Mortgage Business

GMAC Financial Services and its Residential Capital LLC unit plan to close all 200 GMAC Mortgage retail offices and reduce ResCap's work force by 60% to streamline operations, reduce costs and refocus resources on strategic lending and servicing.

ResCap, one of the nation's largest subprime-mortgage lenders, has been struggling 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 the firm, including job cuts and an overhaul of the business model. But the losses have continued to mount.

GMAC said Wednesday it is evaluating options for the GMAC Home Services Business and the noncore servicing business. That, when combined with ceasing originations through the Homecomings wholesale broker channel and curtailing business lending and international business activities, will reduce the ResCap work force by about 5,000 employees, including a range of administrative and managerial positions. About 3,000 will receive notification this month, with the majority of the rest expected by year-end.

"While these actions are extremely difficult, they are necessary to position ResCap to withstand this challenging environment," said ResCap Chairman and Chief Executive Tom Marano. "Conditions in the mortgage and credit markets have not abated and, therefore, we need to respond aggressively by further reducing both operating costs and business risk."

ResCap expects to record charges of $90 million to $120 million for the work force reductions and streamlining initiatives. The majority of the charges should occur in the third quarter, and further potential charges haven't yet been determined.

ResCap said it will continue to originate loans in the U.S. and internationally where there is a secondary market to sell the loans. The company said its commitment to servicing loans is unchanged, and it will continue to expand its servicing platform.

In July, GMAC, which is 51%-owned by private-equity firm Cerberus Capital Management LP, reported it swung to a second-quarter net loss as it took at $716 billion write-down and recorded more losses from ResCap. ResCap's net loss ballooned to $1.86 billion from $254 million on asset sales. The company noted at the time that its U.S. residential-finance business "is beginning to stabilize" as ResCap cuts its balance sheet.

GMAC is being pressured by falling used-vehicle prices and the ongoing credit crunch, resulting in the firm announcing it would no longer offer subsidized leases in Canada. The company was expected announce curtailments to U.S. leasing offers as well

The Fannie & Freddie Question

WASHINGTON -- In Henry M. Paulson's first month as Treasury secretary, two deputies flagged Fannie Mae and Freddie Mac as significant risks to the economy. He didn't share their level of concern. When he was at Goldman Sachs, he told the aides, the mortgage giants weren't on the list of things that kept him up at night.

Two years later, they're at the top of his list. Mr. Paulson is embroiled in emergency planning on ways to shore up the companies to avert a destabilizing jolt to the U.S. economy and the world's financial system.

Central bankers, Wall Streeters and members of Congress are waiting for what Mr. Paulson might do. He initially said he had no plans to use his authority -- won from Congress in July -- to inject funds into Fannie and Freddie. But he is meeting daily with his domestic finance staff as they hash out how to intervene if necessary. Scenarios range from buying preferred shares in the companies to various structures for lending.

Mr. Paulson is weighing whether to treat both mortgage companies equally, whether to leave management in place, and the effect on common and preferred shareholders, which include many pension funds. Among the concerns he's wrestling with: A large capital injection would essentially amount to a federal takeover of the companies, including responsibility for guaranteeing trillions of dollars worth of home mortgages.

Mr. Paulson didn't come to the Treasury to be an interventionist. He is a Wall Street pragmatist, a former deal maker whose focus isn't on ideology but on practical fixes and getting things done. It's a measure of the depth of the credit crisis that after joining a laissez-faire Republican administration, Mr. Paulson has helped engineer a transformation of the relationship between the federal government and financial markets.

In March, he joined Federal Reserve Chairman Ben Bernanke in forcing Bear Stearns Cos. into the hands of J.P. Morgan Chase & Co. Earlier, Mr. Paulson jawboned lenders into freezing interest rates for some stressed home buyers. His Treasury also took greater responsibility for financing student loans, and he has called for sweeping regulatory changes to give the Fed more power to police banks and Wall Street.

Fannie and Freddie are his biggest test. The companies are crucial to the housing market, owning or guaranteeing nearly half of U.S. mortgages outstanding -- some $5.2 trillion -- and buying most of the new ones being made. A federal intervention in these giants would be one of the largest and most complex in history.

Fannie and Freddie have said they exceed their regulatory capital requirements and don't need help from Treasury. While Mr. Paulson has authority to invest or take an equity stake in the firms, the companies would have to agree to either move.

Mr. Paulson's request for this authority in mid-July was meant to calm the financial markets. But some suggest it further exacerbated problems at Fannie and Freddie, by making investors unsure what the Treasury might do and how this would affect their investments. Some say the uncertainty is complicating the companies' already-difficult task of raising capital by selling common or preferred shares, though they continue to be able to fund themselves through the debt markets.

Mr. Paulson's efforts have drawn the ire of some fellow Republicans, including some in the White House. They say federal backstops only encourage the private sector to repeat its mistakes, and they lament the potential cost of bailouts to taxpayers.

"Wall Street has always had a tendency to seek government help when it benefited them," says Rep. Spencer Bachus, an Alabama Republican. "The whole philosophy of 'the government doesn't need to be in the markets' seems to change when companies start losing money."

Mr. Paulson says he sought authority to aid Fannie and Freddie to stabilize markets, "not because of wanting any favors for anyone on Wall Street." He adds: "This was not an easy thing to do emotionally. It's not something I came to Washington wanting to do."

Mr. Paulson, 62, arrived in July 2006 eager to tackle issues like Social Security, finishing global trade talks and pressing China to modify certain economic policies. He had spent 32 years on Wall Street, most recently as chief executive of Goldman Sachs Group Inc., where he was known as an aggressive deal maker. With a fortune estimated at $500 million, Mr. Paulson isn't ostentatious or even especially polished. He can stammer at times, or absent-mindedly rub his belly or head while talking.

His style is to dive into data and details. Just hours after issuing marching orders, he may phone to check on progress. In the Bush administration, his aggressive approach quickly earned him a reputation and a nickname, "Hurricane Hank."

But he wanted no part of a long-running argument over Fannie and Freddie. Critics said they were too big, posing a risk to the economy if they failed, and unfairly got to raise money cheaply because of an implied federal guarantee. Administration hard-liners wanted to shrink the pair and toughen regulation, such as by making them raise their relatively low ratios of capital to liabilities. But many in Congress, beneficiaries of the companies' lavish campaign giving, favored a softer approach.

Mr. Paulson wasn't happy to be dragged into what he called this "holy war." In September 2006, an assistant Treasury secretary told reporters the department was considering ways to rein in Fannie and Freddie if Congress didn't. Massachusetts Rep. Barney Frank called to blast Mr. Paulson, saying the statement jeopardized progress Congress had made on the issue.

Mr. Paulson ordered his deputies into his office and began furiously stamping on a marble coffee table, according to several people who were in the room. He yelled that he needed to establish a good relationship with Mr. Frank, then ranking Democrat (and now chairman) at the House Financial Services Committee. In subsequent months, Mr. Paulson got the White House to drop its demands for shrinking the companies and focus on toughening oversight, a step he agreed was needed.

Polling the Experts

In mid-2007, with defaults up and the market for mortgage securities faltering, Mr. Paulson's concerns about housing grew. He asked Robert Steel, then a Treasury undersecretary (and now Wachovia Corp.'s CEO), to canvass experts. Among those called was Lewis Ranieri, who years ago helped pioneer the repackaging of home loans into securities. Treasury officials gathered around a speakerphone as Mr. Ranieri told them the mortgage situation was "a bit more troubling" than most people realized, says a person familiar with the call.

Mr. Paulson began convening Sunday sessions at his home to focus on housing. As he sat on a couch, often nursing a Diet Coke, staff members arrayed in a semicircle on high-back chairs pitched ideas. They told him there were no easy public-policy options -- that the private sector needed to help financially stressed home buyers.

After Labor Day 2007, Mr. Paulson had his staff get officials of the biggest mortgage players in for meetings. At sessions with lenders, mortgage servicers and nonprofits that counsel troubled borrowers, Mr. Paulson said that foreclosure was in nobody's interest, and industry coordination was vital. Within weeks, he had his senior adviser, Neel Kashkari, now an assistant secretary, inform companies in the mortgage industry he wanted them to form an alliance to work case-by-case with stressed homeowners. On Oct. 10, the Treasury unveiled the alliance, called Hope Now.

In November, with the number of borrowers behind on their payments rising, Mr. Paulson shifted gears. At the Treasury's urging, companies in the alliance agreed to freeze interest rates temporarily on certain troubled loans.

Mr. Paulson demanded monthly updates on foreclosures prevented and loans modified. Some of what he wanted wasn't available, irritating him. He wanted company-specific data, but companies demanded the data be lumped together because they were rivals.

At times, told that a company was rumored to be shirking, Mr. Paulson demanded that an assistant get its CEO on the phone. Staff members persuaded him not to make such calls, arguing that doing so could fracture Hope Now.

Mr. Paulson attended housing town-hall meetings around the country, where he often heard from people fearing for their homes. "Hank came back from that tour and said things are worse than I thought they were," says Rep. Frank.

Prices of homes kept sliding, and inventories rising. Investors were shunning securities based on mortgages, having seen some collapse despite top safety ratings. That made Fannie and Freddie even more important, as places where lenders could still sell loans. Without the two government-sponsored enterprises, lending would dry up. But now, they, like banks that invested in mortgage securities, had started reporting sizable losses. Mr. Paulson began suggesting that Fannie and Freddie raise additional capital.

The Bear Stearns Case

Any illusions the government wouldn't have to get deeply involved in the credit crisis ended in March when Messrs. Paulson and Bernanke arranged for the takeover of Bear Stearns, fearing the uncertain ways a collapse might ripple through markets. But Mr. Paulson, worried the sale to J.P. Morgan Chase would look like a bailout, insisted on a low sale price so Bear Stearns shareholders wouldn't benefit.

Then in June, as home prices showed new declines, investors whipsawed the stocks of Fannie and Freddie. Mr. Paulson heard from his counterparts abroad and from central banks, big holders of Fannie and Freddie debt, wondering what was going on.

He urged his staff to think through what Treasury could do. While some contingency planning existed, staffers began compiling a firmer list of options, from lending the companies money to nationalizing and then reselling them in pieces. Mr. Paulson rejected the nationalization idea, partly because it would make the U.S. responsible for the companies' $1.6 trillion of debt as well as for all the mortgages they guarantee. It became clear the favored route was lending to them or buying equity in them.

Pressure rose on July 7, when a Lehman Brothers analyst speculated an accounting change could force the mortgage giants to raise tens of billions of dollars of new capital. The stocks went into a freefall. Mr. Paulson believed an accounting change wouldn't change the companies' capital situation, but he saw that confidence in them was waning.

On July 10, he decided to call Alan Greenspan for his view. At first, the Treasury couldn't find the former Fed chief's home number. Once Mr. Paulson got through, he and several of staff members hunched over a speakerphone, struggling to hear Mr. Greenspan's soft voice. They discussed the housing slump's impact on financial firms and whether they had the capital to weather it. (Mr. Greenspan has since said the administration should have recommended the mortgage giants be nationalized, recapitalized, split up and eventually sold to private investors.)

Time to Move

By Friday, July 11, Fannie's and Freddie's stocks were down so much Mr. Paulson decided he must act. "Friday morning it was just clear to me that we didn't want to stress the system, as fragile as it was," he says. At 7:15 a.m. he briefed President George W. Bush. He began calling members of Congress, asking them to approve a request he would soon make to let the government either invest in Fannie and Freddie or greatly expand their line of credit with the Treasury.

That weekend, as staffers worked out details of the proposal, they camped at the Treasury building, eating sandwiches from the Corner Bakery, the only nearby place open. An agitated Mr. Paulson began circling his staff's offices with questions. Would the markets be reassured? Would the proposal be done in time for the opening of Asian financial markets?

He queried staff members so frequently that before long they had nothing new to tell him. Finally, his chief of staff suggested Mr. Paulson return to his office, telling him that "you need to leave us alone so we can do our jobs," according to people familiar with the discussion.

At one point, Mr. Paulson went for a short bike ride to let off steam. As the deadline neared to get the plan in place before Asian markets opened, Mr. Paulson, at his staff's urging, went home to shave and change out of his jeans. At 6 p.m. he appeared on the Treasury's steps, calling for authority that would involve the federal government more deeply than ever before in the nation's financial markets.

Chevy Chase Bank - Wholesale - Wholesale

2008-01-14

NEW! Comment on this article

Reported incidents of mortgage fraud jumped 42% nationwide, with Florida reporting the highest number of cases, according to industry data released Monday.

Properties in the Sunshine State accounted for nearly a quarter of all mortgage fraud incidents, the Mortgage Asset Research Institute said. California was ranked second, followed by a three-way tie for third place among Illinois, Maryland and Michigan.

The report is based on data submitted by MARI subscribers about loans that were originated in the first quarter of this year and have since been classified as fraudulent. The most common mortgage-fraud cases included misrepresenting income, employment history, and debt and assets. Maryland, for example, had an unusually high percentage -- 69% -- of its cases involve tax-return and financial-statement misrepresentation.

Mortgage fraud has represented about $1 billion in losses over the past decade, the Mortgage Bankers Association has said.

The increase in reported incidents comes as lenders raise credit standards to curb rising foreclosures. Amid the wreckage of the housing slump and mortgage crisis, many banks have been criticized for their offering up of mortgages without asking for thorough documentation. Critics charge the industry with being too lax in qualifying risky borrowers during the boom, which fueled an overheated housing market.

"Tightening credit standards by itself doesn't eliminate fraud," especially in markets that typically attract a lot of speculators like Florida and California, said Merle Sharick, vice president and national manager of business development for MARI