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GMAC, the former finance subsidiary of

General Motors

(GM) - Get Free Report

, paid down $1.2 billion in debt at troubled mortgage business Residential Capital in an attempt by the company's private-equity owners to salvage their investment.

The company, which is now majority-owned by private-equity firm Cerberus Capital Management, bought ResCap debt with a face value of $1.2 billion in the open market for just $607 million, according to a recent filing with the

Securities & Exchange Commission

. The price reflects widespread uncertainty about ResCap's prospects for survival amid the U.S. housing downturn and credit crisis.

Amid speculation that GMAC's first-quarter earnings will show widening credit troubles at its auto finance unit, investors are questioning how long the company will continue to invest in ResCap to keep the second largest independent mortgage lender out of bankruptcy.

"It doesn't make sense for GMAC to squander cash by buying back ResCap debt if it intends to put ResCap into bankruptcy in the next few months, so we think ResCap debt maturing in May and June now faces better odds of being paid out at par," said Gimme Credit analyst Kathleen Shanley in a note to clients.

In return for its investment, GMAC received 607,192 shares of newly issued preferred stock in ResCap that could give it claim to dividend payments in the future if the mortgage company's fortunes improve. Currently, ResCap does not pay dividends.

GMAC also received $340 million of ResCap notes with a market value of $266 million, which it can exchange for additional ResCap preferred shares by May 31.

"For the first quarter, ResCap will be able to boost its capital by the $607 million, and record a gain of nearly $600 million on the extinguishment of debt," Shanley said. "This should be enough to keep ResCap momentarily in the good graces of its bankers, even if it records a loss for the quarter."

The deal amounts to some creative financing maneuvers by Cerberus, which acquired a 51% stake in GMAC from GM in 2006. At that time, GMAC was the chief engine of profitability at GM, and ResCap was considered the company's crown jewel. Now, ResCap is reeling from heavy losses as mortgage foreclosures spike across the nation, amid the largest national price declines in residential real estate on record since the Great Depression.

In addition to the company's private-equity owners, ResCap's woes are weighing on GM. The automaker still owns 49% of the finance company, as it wrestles with market share losses in North America to low-cost, foreign-based competitors as well as a consumer spending slowdown in the U.S.

In February, GMAC said it's slashing the number of offices it has serving auto dealers in North America to five from 20 this year and it cut 930 workers to reduce costs. It also replaced CEO Eric Feldstein with Alvaro De Moline, a former executive at

Bank of America

( BOA).

Shares of GM were recently up 67 cents, or 3.3%, to $21.25.