As all the major national banks have repaid the TARP funds, it could be easy to assume that the financial crisis is over and we’re on the front porch of normalcy – but, don’t be so fast. The recession and financial crisis in general continues to effect financial institutions, including those on the periphery of banking.
This morning, the Wall Street Journal reported that GMAC Financial Services is close to getting about $3.5 billion in added aid from the U.S. government, on top of the $12.5 billion already received since December 2008. An announcement is expected within days, and will likely coincide with GMAC disclosing a plan to absorb losses related to its mortgage operations. Earlier this week we learned that Fannie Mae and Freddie Mac were receiving a virtual blank check for loan losses, so tying this together gives clear indication that the Treasury Department, and the Obama administration is acutely concerned regarding the state of mortgages.
The mortgage relief act has yet to provide much relief, and until that flow is stemmed, consumers will likely display less confidence and spending. Consumers and investors need to see positive results usually before a stable rebound, and today’s actions may help accomplish that goal. One person told the Journal that this measure has been developed to return the company to profitability in the first quarter of 2010, which could prove to be very important as we head into a mid term election.
This capital will likely allow GMAC to avert placing Residential Capital LLC, its ailing mortgage unit, into bankruptcy. GMAC spokeswoman Gina Proia commented “As we have previously stated, GMAC has been conducting a strategic review of its business and evaluating options to address the challenges at ResCap and the mortgage operations. Critical objectives in the process would be to take actions that position GMAC for improved financial performance and to repay the U.S. government.”
GMAC Financial Services is one of the largest mortgage lenders in the country, but also offers many other products and services. Unlike Countrywide, there is no bank waiting in the wings to buy them. In order to succeed at this stage, the firm needs to reverse the tides of loan losses and decrease delinquencies across its portfolios. This cash infusion may help to do just that, if it is used to write off or write down such loans, the remaining portfolio should be strong enough to return the firm to profitability.
