Fitch Downgrades ResCap's IDR to 'CCC'

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NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has taken the following actions on Residential Capital, LLC (ResCap):

--Long-term Issuer Default Rating (IDR) downgraded to 'CCC' from 'B';

--Short-term IDR downgraded to 'C' from 'B';

--Senior unsecured downgraded to 'C/RR6' from 'CCC/RR6';

--Short-term debt affirmed at 'C'.

The downgrade primarily reflects deterioration in year-to-date operating performance at ResCap, magnified by a $442 million net loss reported in its third fiscal quarter (3Q'11); significant reduction in the tangible net worth covenant cushion; and uncertainty regarding future capital/financial support from its parent Ally Financial Inc. (Ally: long-term IDR 'BB'; Outlook Stable by Fitch). The Ally's ratings are unaffected by this action.

Operating performance for nine months ended Sept. 30, 2011 (9M'11), was severely impacted by a $316 million MSR valuation charge, net of hedge. The company reported a net loss of $442 million in 3Q'11 and $514 million for 9M'11. Fitch expects operating performance to remain pressured in the near term, due to the impact from the continued weakness in the U.S. housing market on ResCap's legacy mortgage portfolio, exposure to repurchase requests and lawsuits filed by monolines and private label investors, and/or potential exposure to foreclosure related issues.

Furthermore, Ally recently announced that it is revamping its mortgage business model due to increased servicing costs, low margins and rigorous MSR implications from pending Basel III regulations, and as a result will be significantly reducing originations in the correspondent mortgage channel, which accounted for a majority portion of ResCap's year-to-date 2011 originations. This action further weakens Fitch's view on ResCap being strategic or core to Ally's business going forward.

While in the past, Ally has provided funding and capital support to ResCap, it is Fitch's opinion that further material support from Ally is less certain, particularly given the significant 3Q'11 net loss reported by ResCap. Nonetheless, this uncertain view of support has informed the differential between Ally's and ResCap's ratings. Furthermore, Ally continues to state in its public filings that there can be no assurances of future capital support to ResCap.

ResCap's tangible net worth worsened to $331 million in 3Q'11, from $772 million in 2Q'11 and $846 million at Dec. 31, 2010 due to the 3Q'11 net loss, and is now very close to its minimum covenant of $250 million, required under its credit facilities and servicing agreement with a GSE. With Fitch's expectation of continued earnings pressure at ResCap, and the uncertainty regarding future capital support from the parent, Fitch believes that if ResCap were to violate this covenant, it would require Ally to either inject capital or consider restructuring/bankruptcy of ResCap. This view is not informed by any specific knowledge of any restructuring/bankruptcy plans.

Fitch believes that a potential restructuring or bankruptcy filing by ResCap would not have any direct implication on Ally, as the two entities are structurally and legally separate. At Sept. 30, 2011 Ally had $1.9 billion in secured credit lines to ResCap, of which $1.2 billion were drawn. Collateral pledged against these credit lines measured $2.8 billion. Both facilities are set to mature in April 2012. Overall, Fitch's current ratings on Ally factor in some level of financial strain from its exposure to ResCap; however, Fitch would revisit Ally's ratings if losses from rep and warranty claims or litigation settlements at ResCap were material, and/or if complications occur in the event of a ResCap restructuring/bankruptcy.

The Recovery Rating of 'RR6' on the senior unsecured debt reflects Fitch's view of poor recovery prospects for unsecured creditors as a significant portion of asset base is currently encumbered to the secured creditors.

ResCap is a wholly owned subsidiary of GMAC Mortgage Group, LLC, which is a wholly owned subsidiary of Ally. Through its core originations and servicing business, ResCap originates, purchases, and services residential mortgage loans. As of Sept. 30, 2011, ResCap had a total servicing book of $389.4 billion, making it the fifth largest servicer in the U.S.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria', dated Aug. 16, 2011;

--'Finance and Leasing Companies Criteria' dated Dec. 30, 2010;

--'Recovery Ratings for Financial Institutions', dated Aug. 16, 2011;

--'Private-Label Representations and Warranties' dated July 27, 2011.

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=649171

Finance and Leasing Companies Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=587245

Recovery Ratings for Financial Institutions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648615

Private-Label Representations and Warranties

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647630

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