GMAC Financial Services, partly owned by automaker General Motors Corp. (GM), said Wednesday that it would close all of its 200 retail mortgage offices and lay off about 5,000 employees at its mortgage lending division, Residential Capital LLC. The move is an attempt by the company to prune its mortgage business amid the continuing downturn in the U.S. housing market. The company said it will incur a charge due to the restructuring, with the majority of the charge expected to be reflected in the third quarter.
GMAC said it has approved a plan for the closure of all 200 GMAC Mortgage retail offices, ceasing originations through the Homecomings wholesale broker channel, further curtailing business lending and international business activities, and right-sizing functional staff support. The company is also evaluating strategic alternatives for the GMAC Home services business and the non-core servicing business.
The company said that its subsidiary Residential Capital LLC, or ResCap, has enacted a plan to significantly streamline its operation, reduce cost, adjust its lending footprint and refocus its resources on strategic lending and servicing. ResCap will continue to originate loans in the U.S. and internationally where there is a secondary market to sell the loans.
GMAC noted that the collective actions would reduce the ResCap workforce by about 5,000 employees, or 60%, and will include a range of administrative and managerial positions.
About 3,000 employees will receive notification this month, while the majority of the remaining 2,000 reductions are expected to occur by the end of the year. The company said that eligible employees affected by the workforce reduction would be provided severance packages and outplacement assistance.
Accordingly, ResCap will incur a charge in a range of $90 million-$120 million that will reflect the 3,000 workforce reductions and related operational streamlining initiatives. Potential charges related to the remaining 2,000 workforce reductions have not yet been determined.
The charge will include costs related to severance and other employee-related costs of about $50 million-$60 million and facility closure costs of about $40 million-$60 million. GMAC noted that the majority of the charge is expected to be reflected in the third quarter and result in future cash expenditures of about $55 million. Tom Marano, Chairman and Chief Executive Officer of ResCap, said, "While these actions are extremely difficult, they are necessary to position ResCap to withstand this challenging environment. Conditions in the mortgage and credit markets have not abated and, therefore, we need to respond aggressively by further reducing both operating costs and business risk."
GMAC is restructuring its ResCap mortgage business after it lost $4.3 billion in fiscal year 2007. In June, GMAC arranged a $60 billion refinancing to keep ResCap from bankruptcy. ResCap is one of the largest sub-prime lenders in the US and has struggled to cope with write-downs and provisions due to customer defaults.
GMAC is 51% controlled by Cerberus Capital Management LP, while the rest is controlled by General Motors. For the recent second quarter, GMAC reported a net loss of $2.5 billion compared to net income of $293 million in the prior-year quarter. Results for the latest quarter include a $716 million impairment of vehicle operating lease assets in the automotive finance business due to declining vehicle sales and lower used vehicle prices for certain segments, in addition to significant losses at ResCap related to asset sales, valuation adjustments, and loan loss provisions. ResCap's net loss for the latest quarter was $1.86 billion.
GM closed Wednesday's regular trading session at $11.27, up $0.62 or 5.82% on a volume of 39.23 million shares. The stock has been trading in a range of $8.81-$43.20 in the past 52 weeks.
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