DBRS Downgrades ResCap to BBB (low), Trend Now Stable

DBRS has today downgraded all ratings of Residential Capital, LLC (ResCap or the Company including the Long-Term Debt rating to BBB (low) from BBB, and the Short-Term Debt to R-3 from R-2 (middle). The rating trend is now Stable.

This rating action follows ResCap’s announcement that it will be recording a $910 million loss for the first quarter of 2007. ResCap continues to be pressured by the weakness in the U.S. residential mortgage market, which has resulted in ResCap taking additional market value adjustments for loans held for sale. Additionally, the industry-wide weakening of the credit performance of residential loans to sub-prime borrowers has led ResCap to further bolster its loss allowance for its various subprime assets, including loans held for investment and its warehouse receivables. Moreover, the high level of repurchase requests has caused ResCap to further increase its reserves for early payment defaults, all of which have had a significant impact on the Company’s earnings.

DBRS views this loss, which comes on the heels of a loss from operations of $651 million recorded in fourth quarter of 2006, as an indication of an erosion of the Company’s earnings power. Moreover, although the Company is taking measured steps to reduce its sub-prime exposure and reduce expenses in line with lower business volumes, the overhang of the slower housing markets, weak or even negative house price appreciation, the increased interest rate environment and the uncertain direction of the economy will likely continue to pressure ResCap’s earnings as it manages the $47.9 billion of sub-prime loans held for investment and $5 billion of sub-prime loans held for sale. Going forward, DBRS believes that ResCap’s earnings ability will likely be reduced from its levels in much stronger markets. Accordingly, DBRS views the Company earnings profile more commensurate with a low investment-grade company.

Liquidity remains sound. ResCap cash and marketable securities totaled $2.6 billion at March 31, 2007, and the Company has been successful in raising additional liquidity, even for its more distressed assets. Nevertheless, the Company has a notable maturity in the near term, with $1.2 billion of medium-term notes (MTNs) maturing in June 2007. Further, the Company’s 364-day revolver is due for renewal. Given the disruption in the mortgage business, increase risk premiums for sub-prime loans and the weakened Company performance, DBRS expects that the cost of funds will likely increase, further pressuring earnings.

The underlying rating is based on the overall strength of the ResCap franchise and the relatively good performance in its other businesses. The Company’s Business Capital Group (BCG) achieved acceptable returns, but is seeing weakness among certain homebuilders However, BCG does add an additional level of exposure to the residential construction industry, as it lends to regional homebuilders. Generating acceptable performance, the smaller International Business Group provides additional revenue-generating ability and diversification. DBRS believes that these segments add a modest amount of diversification.

Capitalization is acceptable and was bolstered by the $1 billion capital infusion from the Company’s parent, GMAC, LLC. DBRS views parental support as strong, evidenced by the aforementioned capital infusion and the significant resources being dispatched to the Company. DBRS views the change in management and the change in the composition of ownership as a positive, as the Company is taking significant steps in adapting and right-sizing its operations to reflect the current market conditions.

The Stable trend reflects DBRS’s expectation that ResCap will continue to be pressured for the first half of 2007. DBRS expects that as the year progresses, the earnings will likely improve as ResCap’s sub-prime exposure is reduced, the industry fundamentals stabilize and the remediation steps and cost-saving measures are realized. Moreover, the Stable trend incorporates DBRS’s expectation that capitalization and liquidity will remain appropriate. Given the importance of ample liquidity and strong investor confidence for market funded companies, DBRS will continue to closely monitor the Company’s liquidity position. Any erosion in liquidity would put significant downward pressure on the rating.

Note:
All figures are in U.S. dollars unless otherwise noted.