Near the intersection of Interstate 494 and 35W in Richfield is the home of one of the nation's biggest mortgage lenders: Residential Capital. ResCap for short.
ResCap has been around since the '80s in one form or another, under different ownerships. It doesn't have great name recognition outside the mortgage business. It's the organization, though, behind familiar lenders such as Ditech and GMAC Mortgage.
But ResCap has fallen victim to the mess it helped create in the mortgage market. The company has lost $9 billion in the past two years. And last month, ResCap's parent, GMAC Financial, said there's "substantial doubt" ResCap, with 900 workers in Richfield, can stay in business.
They're specialists in a market that doesn't exist anymore.Guy Cecala, publisher of Inside Mortgage Finance
"The economy, the housing market and the whole overall scenario paints a very bleak picture for ResCap," said David Lykken, president of Mortgage Banking Solutions in Austin, Texas.
Lykken said ResCap was especially burned on loans made for 100 percent --or more-- of a home's value.
There were billions of those 100 percent loan-to-value ratios. It was a predominant product," Lykken said. "But as a result of property values falling, that is what is exacerbating the problem and brings them to this dismal, bleak outlook."
ResCap also made lots of loans to subprime borrowers, borrowers more at risk of defaulting on their mortgages. And it made other types of loans that did not conform to standards set by government-sponsored giants like Fannie Mae and Freddie Mac.
ResCap, like other in the industry, bundled its mortgages and others it bought into securities, and sold them to investors.
From 2003 to 2007, ResCap issued about $600 billion dollars in those kinds of securities. So-called non-comforming loans accounted for about half of what went into them.
David Olson, a founder of Wholesale Access, a mortgage banking research and consulting firm in Maryland, said ResCap was a very successful pioneer in the mortgage securities business.
That was a fabulous unit in Minneapolis. They just had super people," Olson said. "They did great securitizations. They were one of the major powers --if not the major power -- in the secondary market in doing securitizations."
Many ResCap-issued mortgage securities have turned toxic, as borrowers have fallen behind on mortgage payments or stopped paying at all and real estate values have plummeted. Investors don't want to buy any new issues and they've been dumping old ones -- if they can find buyers.
"The market for the type of mortgages that we were doing … has simply evaporated," said Tom Marano, CEO of Residential Capital. He took over this past July.
"The securitization market for all types of mortgages --high quality jumbos all the way to lower quality subprime mortgages has ceased to function," he said.
Marano said even many well-qualified borrowers are having trouble getting loans these days.
"Very good borrowers are no longer able to refinance. The consumer and the servicers are trying to mange their way through this process," Marano said. "And that is one of the biggest challenges facing not only ResCap but all servicers."
With its old business model out of sync with the market, ResCap has to remake itself to survive.
"They're specialists in a market that doesn't exist anymore," said Guy Cecala, publisher of Inside Mortgage Finance.
"They have to think of how they can quickly retool, essentially overnight, and make a go out of it in a new business model," Cecala said.
And that's what ResCap and GMAC are aiming to do. GMAC has applied to become a bank holding company. That would make General Motors' financing arm eligible for aid under the government's $700 billion bank rescue plan. GMAC said the change would shore up its finances and help it continue providing automotive and mortgage financing.
Eventually, Marano expects the nonprime and nonconforming mortgage markets will bounce back. Meanwhile, he is focusing ResCap on growing its loan servicing business and issuing loans that can be sold to entities like Fannie Mae.
But Marano is especially bullish about the prospects for making money by helping lenders rework mortgage loans gone bad. In other words, helping to solve the problems the company helped create.
"The biggest opportunity right now are the programs which will help borrowers who want to stay in their home and get them into a government-backed loan," Marano said.
ResCap said it's been making good progress in developing that business. So far this year, the company said it has helped about 250,000 homeowners avoid foreclosure.
That may provide some reason for ResCap to hope it has a future. But so far it's not enough to assure its survival.
A sampling of ResCap's toxic residential mortgage-backed securities from:
Standard & Poor's Projected Losses for 2005 Vintage U.S. Subprime RMBS Affected by July 23, 2008 Rating Actions
Transaction__________Lifetime loss projection (%)
- RASC Series 2005-KS1 Trust______5.8
- RASC Series 2005-EMX1 Trust_____5.91
- RASC Series 2005-KS2 Trust______6.87
- RASC Series 2005-KS4 Trust______7.34
- RASC Series 2005-KS3 Trust______7.45
- RASC Series 2005-EMX2 Trust_____7.77
- RAMP Series 2005-EFC1 Trust_____9.15
- RASC Series 2005-KS5 Trust_____9.44
- RASC Series 2005-KS6 Trust_____10.32
- RASC Series 2005-KS7 Trust_____12.3
- RAMP Series 2005-EFC2 Trust_____12.33
- RASC Series 2005-KS9 Trust_____12.65
- RAMP Series 2005-EFC3 Trust_____12.87
- RASC Series 2005-KS8 Trust_____13.69
- RASC Series 2005-EMX3 Trust_____15.38
- RAMP Series 2005-EFC4 Trust_____16.52
- RAMP Series 2005-EFC7 Trust_____16.95
- RAMP Series 2005-EFC5 Trust_____17.52
- RASC Series 2005-AHL1Trust_____17.82
- RASC Series 2005-KS 10 Trust_____18.03
- RASC Series 2005-KS12 Trust_____18.22
- RAMP Series 2005-EFC6 Trust_____18.82
- RASC Series 2005-AHL2 Trust_____19.48
- RAMP Series 2005-NC1 Trust_____20.05
- RASC Series 2005-KS11 Trust_____20.21
- RASC Series 2005-EMX4 Trust_____20.39
- RASC Series 2005-AHL3 Trust_____22.19
- RASC Series 2005-EMX5 Trust_____23.01