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Reeling ResCap Puts Pressure on Builders

Residential Capital, the mortgage-lending division of GMAC that is bleeding away money, has been aggressively unwinding its homebuilder construction loan portfolio, pressuring cash-strapped builders to pay off debt earlier than planned.

The lender, better known as ResCap, is proving to be a big headache for hedge fund Cerberus Capital, which led an investor group that purchased 51% of GMAC in 2006 from General Motors (GM - Get Report). GM still holds the remaining 49% stake.

ResCap, like many mortgage firms, has suffered multiple credit-rating downgrades because of huge losses in its subprime-lending business. The firm recorded a $4.3 billion loss in 2007, sending its parent company in the red by $2.3 billion for the year. S&P recently cut ResCap's credit rating four notches to B, with a negative ratings outlook.

Besides its better-known subprime problems, ResCap has additional issues lurking in its homebuilder lending division. The company was a major supplier of credit facilities and model-home financing to homebuilder joint ventures during the housing boom.

Last year, ResCap hired Navigant Consulting (NCI) as a workout firm for the builder portfolio, and the two parties have sent out technical default notices to certain builders and their joint venture partners in recent months to pressure them to pay back loans, people familiar with the matter say.

In some cases, it's questionable whether these loans were even in technical default, these people say.

Industry sources speculate that Cerberus -- which also is grappling with losses from recently purchased automaker Chrysler -- has led this push. These sources say the giant hedge fund is likely being pressured by its own investors to recoup cash from troubled housing markets so it can redeploy those proceeds into better investments that meet the firm's high hurdle rates.

Steve Bashmakov, a ResCap spokesman, declined to confirm or deny whether ResCap hired Navigant, but he did say that it is "common practice to obtain assistance from third parties." Navigant did not return a call seeking comment.

Models in Trouble

ResCap's residential construction portfolio had loans totaling $2.5 billion of outstanding principal at the end of 2007.

Bashmakov says the firm's homebuilder loan portfolio is in "asset management mode," and ResCap is not looking to expand this business. "We saw less of an opportunity in the market," he says.

The company also has a separate model-home financing division. At the end of 2007, ResCap owned 2,400 model homes under lease with a net book value of $734 million.

ResCap partnered with most of the major public homebuilder companies in supplying them with sale-leaseback financing of model homes. The lender likely has been burned on many of these deals since they were non-recourse and housing prices have plummeted.

During the housing boom, builders developing new communities would sell model homes to ResCap for a discount to appraised value. ResCap would receive lease payments and the eventual upside from the sale of that home.

The problem is that these sale-leasebacks were nonrecourse -- meaning that if the homebuilder wanted to walk away from completing the community, ResCap was left with the home and nothing else. Additionally, most of these sale-leasebacks came in the hottest markets of the country, where home prices are now rapidly decreasing, according to sources familiar with the arrangements.

Given the lack of recourse on the model home rise, last summer ResCap began pushing back at builders on its residential-construction loan side. These loans are not always recourse, but builders may still have equity left in some land and home communities that they want to protect, people familiar with the matter say.
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