GM Lending Arm Pumped Up

GM spokeswoman Toni Simonetti says that GMAC's mortgage earnings were not overly dependent on one-time gains: "GMAC's performance is quite extraordinary, given the more difficult environment in which it operates."

There was a big, but expected, drop-off in earnings from GMAC's auto-financing and leasing division. Net income there in the first quarter fell to $248 million from $442 million in the year-earlier period.

Despite this drop, GM's auto sales were far more dependent on GMAC financing. In the first quarter, 54% of retail sales were funded by GMAC, compared with 41% in the year-earlier period. That shows that if GM had to cut back on auto financing due to fears over leverage, auto sales would drop off sharply.

Also scary was the large jump in the proportion of retail leases. These jumped to 20% of retail sales in the first quarter, compared with 14% in the year-earlier period. That 20% figure is well above 2004 levels and thus suggests that leasing is back as a way to shift units at GM. If so, GMAC may once again become exposed to the risk that the value of leased autos will be lower than predicted when the cars are returned.

At $95 million, GMAC's insurance earnings were marginally up from the first-quarter 2004 figure of $91 million.

Great Leap Forward?

However, it was the mortgage operations that raised most eyebrows. Bizarrely, mortgage earnings soared 67% to $385 million in the first quarter from $231 million in the year-ago period.

Given that there's been a slight cooling in the mortgage market over the past 12 months, the giant leap in earnings had analysts looking for reasons other than GM's explanation, which was that it made more mortgage loans and picked up market share.

GMAC observers wondered whether any outsized gains took place to produce the blowout number. When asked on the earnings conference call Tuesday to what extent gains from selling mortgages contributed to the mortgage unit's performance, GMAC CFO Sanjiv Khattri said: "I don't think I want to disclose the number," but did add that "It was a very nice piece of change."