The struggling mortgage giant, Residential Capital more than halved and its bonds surged on Monday after the company last week benefited from new government funds from its parent company GMAC . A still weak capital position and the risks of further home mortgage loan losses and lessened government support, however, may still weigh on the mortgage company’s debt. GMAC, which converted into a bank holding company last year to benefit from government mortgage refinancing programs, said on Wednesday it would receive another $3.8 billion from the U.S. Treasury, and would inject $2.7 billion into ResCap.
The cost of insuring ResCap’s debt in the credit and home loan default swap market on Monday plunged to a spread equivalent of around 887 basis points, or $887,000 per year for five years to insure $10 million in debt, from more than 2,200 basis points, indicating significantly lower expectations of a default, according to Markit Intraday. ResCap’s 8.375 percent bond due 2010 jumped to 94 cents on the dollar from 61 cents in mid-December, when it was last actively traded, according to MarketAxess. “Treasury pumped in another $3.8 billion into GMAC largely so that GMAC could support ResCap, which is ring-fenced off from GMAC and lacks a compelling ongoing business model,” CreditSights analysts Adam Steer and David Hendler said in a report. “We are at a loss for words over the complete lack of logic behind using tax dollars to support ResCap,” they added.
The continuing support for ResCap is likely to reflect political efforts to improve housing markets by encouraging lenders to offer FHA refinance or loan modification options to homeowners struggling to make payments. “You don’t want to put a mortgage servicing company under because they are important now in the restructuring of mortgage loans … you don’t want that kind of disruption,” said Ricardo Kleinbaum, trading sector specialist at BNP Paribas in New York. The move nonetheless came as a surprise as most had thought government support for GMAC had been targeted at helping shore up mortgage lending to the troubled auto industry
