Mortgage bankers are making money hand-over-fist on their new originations these days, and profit margins continue to be fat thanks to a low cost of funds and the ability to heap on all sorts of fees.
Just how good are things in the industry? Answer: Commercial banks are opting to hold jumbo loans in portfolio because they deem these mortgages (where 20% minimum equity is the norm) so safe that there’s no way a default will occur.
And as one mortgage advisor told me recently, “I’ve never seen so many profitable lenders before in my life.” He’s been in the business for 30 years.
So, it stands to reason that the time may be right for the U.S. government to finally sell its stake in Ally Financial, the bank holding company formerly known as GMAC Financial Services. Right?
Well, not exactly. The government would love to unload Ally Financial — which also houses Residential Capital Corp. (ResCap), the nation’s fourth largest servicer and fifth largest funder — but there’s just one little problem: there’s no serious bidders, at least not at a price where Uncle Sam would be made whole on its $17 billion investment in the company.
At last check, the U.S. Treasury owned 56.3% of Ally, a financial services conglomerate with $177 billion of assets as of June 30. (Ally’s second largest shareholder is hedge fund giant Cerberus Capital which probably rues the day back in 2006 when it bought a 51% stake in GMACFS for $14 billion.)
According to a recent Securities and Exchange Commission (SEC) filing by Ally, the company has $156 billion in liabilities and $20.7 billion of equity, which (sort of) looks good on paper.
But what exactly is Ally Financial? It’s a bank holding company that houses not only ResCap (formerly known as GMAC Mortgage), but an auto financier whose car lending business wouldn’t exist without General Motors and Chrysler. (And that business wouldn’t exist without Uncle Sam.)
Its banking business is all call center and Internet based with $34 billion in deposits on its books, $10 billion of it “hot money” in the form of brokered funds. Commercial banks that compete against Ally for customers are none to pleased to see its constant advertisements on cable TV and Yahoo Finance, feeling the company has an unfair advantage of borrowing at the government rate.
In all fairness to Ally, it appears the company has turned the corner on its profitability. It earned $565 million in the second quarter, including a $230 million profit from ResCap. For the sake of the U.S. taxpayer, hopefully its days of red ink are far behind it.
But that doesn’t mean the Treasury Department can sell its stake in Ally outright or get rid of the company via an initial public offering.
It’s interesting to note that when Ally released second-quarter earnings back in August, company CEO Michael A. Carpenter spent the first two pages of the press release bragging about Ally’s auto finance business, making ResCap look like an unwanted child.
It’s no secret in the industry that Carpenter is none-too-fond of the mortgage business and would like nothing better than to sell ResCap off prior to an Ally Financial IPO. Goldman Sachs, Ally’s investment banker, has tired to sell ResCap and/or some of its assets but the company (perhaps, intelligently) refuses to engage in any fire sales.
The way things look now, ResCap will continue to be part of Ally and unloaded in the event of an Ally IPO. “Ally’s primary focus is to repay the U.S. government’s investment in full over time and we believe that we are on the right trajectory,” said company spokesman James Olecki. “During the second-quarter conference call we indicated that an IPO could be part of that plan as early as next year.”
Still, it remains to be seen whether a sale of Ally (in total or in pieces) is in the cards even by early next year. Recent press reports portrayed ResCap as managing its foreclosure pipeline in a manner that could bring down the wrath of Congress and several state attorney generals.
ResCap/GMAC even admitted that certain foreclosure-related documents (in certain states) were not verified or signed in the presence of a witness.
Its foreclosure problem represents thousands of loans, not hundreds. The new publicity is hardly good news for a company trying to prove that it has a future in residential finance. It might be argued that at this juncture, ResCap is unsaleable.