Ally Financial Inc (ALLY) 2007 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the GMAC 2007 first quarter financial results conference call. I'll be your conference coordinator for today. At this time all participants are in a listen-only mode. We will conduct a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference call is being recorded and a taped replay will be made available from 6:30 p.m. EDT until midnight May 4th, 2007.

I would now like to turn the program over to your host for today's conference call,Susan Shank, Director GMAC Investor Relations. Please proceed.

Thank you. Good afternoon. As the operator mentioned, I'm Susan Shank, Director of Investor Relations. We want to thank you for joining us as we review GMAC 2007 first quarter results today. I'd like to direct your attention to the legend regarding forward-looking statements and risk factors on the second page of our chart set. The content of our conference call will be governed by this language. In addition, to comply with the SEC's Reg G we have provided supplemental charts at the end of the deck that we'll be speaking to today to reconcile data between some managerial financial results and our GAAP results that will be included in GMAC's 10-Q when we file that. I'd also like to highlight that we're broadcasting live via the internet and that the financial press is participating. This afternoon, Sanjiv Khattri, Executive Vice President and CFO will cover the 2007 first quarter earnings release, but before we get to that, I'd like to make some additional introductions. First of all, we're very pleased to have with us Jim Jones who is the incoming CEO of our ResCap unit, effective June 1st. We're particularly pleased to welcome Jim Jones given his extensive mortgage industry experience. In addition we have a number of other executives available to assist in answering your questions. David Walker our Group VP of Global Borrowing,, Linda Zukauckas, VP and Corporate Controller, Mark Newman, VP and CFO of our North American auto operations, Bill Solomon, Group Vice President and General Counsel, Ken Fishbach, the Managing Director of ResCap Investor Relations. They'll all be available to answer questions during the question and answer portion. We'll begin with the presentation and then we will have a question and answer period for investors and analysts. After that we will invite the financial press to participate. Now, I'd like to turn the call over to Sanjiv Khattri.

Thank you, Susan. Good afternoon, good evening, and good morning to everybody. I know people are calling in from all over the world. I appreciate you making the time and obviously for your long-term support to GMAC. On chart 3 now on an overall highlight performance, GMAC reported a net loss of $305 million compared to a net income of $495 for Q1. This was a disappointing quarter. It was a tale of two companies, the performance in auto finance and insurance and other was more than overcome by the weakness in our US residential mortgage business. Basically mortgage it was like the perfect storm., continued weakness in home price appreciation, weakness in credit performance, and poor liquidity in certain asset classes within the mortgage space resulted in us reporting this significant loss. The prevailing market environment remains quite difficult and we will obviously have to work through that and we have already taken specific actions to do so.

Very strong performance in auto finance, very pleased with the level of new volume and used volume with in fact 25% in used volume year-over-year. Insurance reported yet another strong earnings with very robust underwriting results both core earnings and reported earnings were at very high levels. And most importantly both GMAC and ResCap maintained very strong liquidity and capital position. Cash and marketable securities were at $12.8 billion at the end of the quarter. We also received in the month of March a billion dollars of common equity injected by GM based on the final settlements of the transaction with the consortium led by Cerberus on November 30th. Net net, good performance by auto finance and insurance and poor performance in the mortgage sector.

Moving to page 4, give you some specific numbers. Overall I mentioned to you the tale of two companies. If you look the a the performance of auto finance and insurance and other, we had a preliminary net income of $605 million, that is more than double the $294 million of net income we had in the same period a year ago. However, that was more than offset with the $910 million loss in ResCap Q1 bringing our total to a loss of $305 million. Within auto finance was quite pleased overall. Had some good performance in margins, good whole loan gains. Some mark to market profits and some open derivatives we had favorable tax experience and overall cost of borrowing net margin improved in the business. Offsetting that was some lower volume due to lease carve-out as you may recall lower GM volume and more whole loans. Net net, still a very good performance in auto finance within North America.

International very pleased with the growth there both in gross revenue and asset levels. And while we see some margin pressure and some credit pressure, net net international actually had a very good quarter. Quite pleased. Insurance, as I mentioned earlier, favorable loss performance and revenue's flat despite lower GM volume. That's actually pretty good. Other was basically primarily consists of our asset base lending business, commercial finance. And if you recall, last year we had to write off some good will, restructure the business, put in some new management. I'm very pleased how that is turning around. We are very committed to the business and under the leadership of Bill Hall, some good things going on. Very pleased with our world class factoring platform, accounts receivable platform and such a finance business is also doing quite well. Backlog is very interesting right now. We had a good quarter.

And Capmark, if you recall, we sold 79% interest in Capmark last year around this time. And they had a very good quarter also, net net that was driving the performance in other, which was a favorable $87 million for quarter-over-quarter. ResCap lost $910 million compared to a gain of $201 million a year ago, down over a $1.1 billion. And I will spend a lot of time going through what happened there.

Page 5, one of the things I did want to flag to you that as part of this transaction if you recall, most of our US operations were converted into an LLC format except the insurance business. As a result tax expense was kind of quirky of in Q1 and I wanted to take you through. Highlighted in this chart is our pretax earnings for all the four major reporting segments and tax expense of $150 million in Q1 even though on a pretax basis we lost money. And the reason for that is our tax paying entities actually made money in Q1 both insurance and international operations made money their tax rate about in the 25% zip code. And that's what affected the overall -- so I thought I'd be transparent to you in this regard so you understand. This will flush out and as all the businesses start making money, you'll see our effective tax rate actually go down because most of our US income will be reported on a pretax basis.

Now, focusing on ResCap next few slides, I will spend some time going through the ResCap issues and obviously happy to take your questions also. On page 6 now, and life in GMAC, a tale of two companies ResCap and the rest of GMAC. Within ResCap also in a way of tale of two companies. If you look at that performance in the prime US business, you look at our performance in international, you look at our performance in the building capital business. Quite pleased considering all the pressures there very pleased with that performance but all of that was more than offset with our performance in non-prime and where we took all the losses. If you recall, last quarter we broke out our business into moving, storage, lending, and I wanted to use the same criteria. Within the moving business, which is basically our synchronization both agency and non-agency, conforming and nonconforming. We took some significant hits there, significant reduction in liquidity, especially in the month of March for what are considered higher risk loans. And also big weakness in asset valuations which all had to be marked to market. The valuation for delinquent loans and overall valuation in the subprime space was very weak and that was the major reason driving our poor performance in the moving part of our US business. Storage, which is basically servicing and held for investment loan portfolio. Servicing did quite well, in fact MSR valuations were up and our MSR income was up year-over-year. However, overall HFI was weak as our nonprime portfolio continues to run off. And that was again driven by basicly severity and credit issues. We are seeing much higher loss rates. And we have a bunch of ARM resets coming up over the next nine months. And based on our latest analysis, we expect there to be some pressure, which is already recognized in our numbers at the end of March. If you recall, continuing to see some weakness, especially in our nonprime client base. Most of our borrowing, lending there is asset backed, but we saw a weakness in the collateral supporting the lending so we had to take significantly more provisions there.

I will be talking a bit now about warehouse and some of the aggressive steps we've taken to address that issue going forward. Within business capital, we actually had a very good solid earnings quarter. However, we are starting to see some weakness in certain home builders. The quality of our collateral is very good so I'm not that concerned. We are starting to see some weakness within our customers.

International, of course, a very bright spot in our performance. Some very good growth, some good strong performance, and we also were opportunistically be able to review some risk exposure we had there. Net net, overall dominated by the weakness in the US RFG business segment offset by some good performance both in building and our international business.

On page 7, I wanted to break out for you, talk about ResCap nonprime loan risk. And I wanted to show you what category of balance sheet you're talking about, the nonprime risk is different. We've shown you sort of the four major buckets where we do have some nonprime exposure. Within our servicing portfolio of over $450 billion about 16% of that is nonprime. The biggest factor there if that asset gets impaired, we have no credit or interest rate exposure. We may have some servicing cost exposure if that asset is not performing well.

Our warehouse lending business, we have about $6.5 billion, outstanding at the end of the fourth quarter. About 18% of that is related to nonprime. And that's actually down 50% from three months ago. So we are aggressively playing down and rolling out that exposure. Within our held for sale, which was at a balance of $22 billion outstanding at quarter end, about 23% of that was nonprime, and even that is down over 40%, down to $5 billion now. This is where all the mark to market pressure that we had to book in Q1 because of the things I just discussed. And then within our held for investment, which is where we have the biggest nonprime exposure, over 70% of the book is nonprime. And even there, we were very much on track in terms of runoff, down 9% since quarter end and down close to 20% from a year ago. I think as you look at our performance, it's important for you to understand what area of the business you're looking at. The size of nonprime is different in each class. And its impact is different. That's why I thought you would find this data useful.

Moving to page 8. I want you to also show managing our held for sale portfolio. Very well, did about $30 billion of sales in Q1. One of the things I wanted to flag, if you look at the pie chart on the right side of page 8 is a diverse range of sources that we have to access funding. Clearly, of course, very close relationship with agencies in Washington and 33% of our distribution goes through them. Good private, nonagency whole loan. And then about $16 billion of the distribution was either full securitizations or ABS structures. Only $3.3 billion of this $16 billion we actually retained some residual risk. All the others were able to sell all of the traunchs. We include about $110 million or so of exposure of the $3.3 billion. Quite pleased with the performance as I said while there was some liquidity, we were still getting some weak valuation for certain asset classes. Continued to diversity, continued to have a leadership position in distribution of some of these assets.

Moving now to page 9. If you recall, we had talked at both our investor event that we were expecting a runoff of about $20 billion reduction in our nonprime portfolio in 2007. We are very much on track in first quarter, run off was about $4.5 billion and about 50% of the total run off represented '05 and '06 vintage. You heard me say before that the '06 vintage is the one that we are most concerned about and 20% of our runoff was relating to 2006. We expect to be -- we are on target to achieve the $20 billion runoff, we had about $45 billion at the end of Q1. And based on our latest calculations, we generate about $1 billion net of cash after paying off the securitization loans. This process is proceeding quite well. Wanted to show you some transparent data on how credit was doing in the held for investment portfolio. And consistent with my discussion earlier about was happening to home price appreciation and frequency and credit, some of the key metrics have worsened in Q1 even from weaker positions at the end of the year. Our nonaccrual loans as a percentage of our standing balances is up to 11.9% in Q1, our outstanding balance at the end of Q1 for all of HFI was about $65 billion, of which $45 was nonprime. And so we are up to about 12%. Again, really hurting from both the frequency is up because of home price appreciation because of the inability of lenders to get refinancing due to their own credit issues. Allowance for loan losses was also up again, up to 2.54%. Charge offs were actually flat from last quarter, but up from a year ago. Now, important to mention one point for you that most of this portfolio is actually securitized. Within the securitized portfolio, our net exposure is actually only $1.2 billion. And this is down from $1.6 billion a quarter ago. So obviously, we are tracking -- and as our run rate and our production rate and nonprime goes down, I expect this number to continue to go down. So important to keep in mind as you evaluate the performance of this part of our balance sheet.

Moving to page 11, a couple of quick comments on our lending receivables, which is primarily our warehouse lending business. And actually weakness of our client base saw some pickup in our nonaccrual loans went up to 10.94 % the last two quarters are sort of unprecedented if you compare over time how credit has performed in this space. Our allowance was up 4.06% at the end of the quarter, up from 2.66% at the end of the year. We have about $6.5 billion of warehouse receivables in this total balance of $12.9. The remaining is our building capital group business. And within that, only about 15% of that lending is supported by nonprime collateral. We were at $2.5 billion of nonprime at the end of the year, but we are down by 50% now to $1.2 billion. It's working out well. Also taking some real actions to manage this a bit more aggressively. We have some real long-term relationships. We are getting a bit more focused and aggressive on how we manage our collateral. We have executed now significant number of substantial margin calls. We are reducing advance rates in certain cases. And we have taken instances of freezing several lines to the extent that facts support that. So we have much more proactively managing and we are already seeing some benefit from that, especially as to what newco exposure we take on in this part of the business.

Moving to page 12 and a quick slide on our business capital operations. Earnings were flat in that business despite weakness in the home building space. Obviously, residential impact is starting to affect builders and starting to affect people related to the building business. But we have a very diversified presence. Our exposure is geographically diverse, our product range is very diverse, and we have very good relationship with borrowers and all of that helped us to have a good quarter. As I said earlier, some weakness in certain of our positions. So we have raised the bar in terms of the standard we have for new transactions. We are looking for a greater proportion of secured borrowing. And we are also looking at ways by which we can continue to support our loyal customer base, but still de-risk certain aspects of the balance sheet in whole or in part in making some good progress. It's important to remind you that our business capital is a world class franchise. Over the last 4 years, our revenues have gone up four times. It's a world class management team led by Greg Shutz And that business continues to perform well. We have some very long-term mutually beneficial relationship with our clients. Also, it's a more diverse business outside this building. We have a very good profitable health capital business and resort finance business and all of them put together gives me comfort on how this business is going to track over the next several quarters.

Page 13, a quick update on how the international piece of ResCap is doing year-over-year. Year-over-year improvement was primarily driven by this one-time sale in the US. We got a very good bid on our residual interest in the UK because it was good value to us. We decided to sell. We also did a very successful $7 billion UK whole loan transaction. Production was more or less flat, but overall feel good about how some of the growth we are looking at. We did our fist residual sale in Latin America. We still continue to perform very well on the production side in UK. And we are basically taking our show on the road. Things that we've learned to do well in the US, learned to do well in the UK. and Canada and Mexico we are taking forward. A management team led by Chris Nordine looking at India now, looking at certain other markets, about to start doing something in Brazil, Chile. So feel good about this business which has also grown about three times in the last four years and this should be a good foundation for us as we turn around our US mortgage business.

Page 14, wanted to just talk about what are some of the actions we are taking in terms of underwriting and servicing as a result of what happened to us in the last six months of the business. First of all, we've significantly tightened our underwriting standards for consumer loans in number of areas, nonprime (inaudible), second leads in home equity loan, things like very low tolerance for low dock loans, low tolerance for high LTVs. So making a much more narrow scope and focusing both on what the credit exposure is, also what the offsetting liquidity of the loans are before we underwrite them. We refocus our warehouse lending business that I mentioned earlier. Stricter adherence to both margin and document requirements in warehouse lending. You're also taking within the rules of the securitized structure under which our debt is there. We're also looking at how we can better do mitigation strategies to reduce both the frequency and severity. Try to work it out before it goes bad. The world class servicing platform that we have is pushing, looking at things like modification, reformat, foreclosure, short sales. Taking whatever steps we can take proactively so we can reduce both the frequency and severity of loss in what truly is a challenging space right now. we've also enhanced our enterprise risk management within ResCap. Really revamped management Jim Jones has brought in a world class consumer to actually look at how we do (inaudible) within the US. And I expect that to bear fruit. We've also improved our capability to do a workout and implemented more rigorous and more frequent collateral valuation process. These are all specific actions we have taken to bolster our US underwriting and servicing and I expect that to start paying off very soon.

On page 15, a quick update on both the liquidity situation and the capital situation at ResCap. Obviously fundamentally important. We believe that one of the things that brings us apart from some of the other businesses that have had trouble in nonprime is our strong balance sheet and liquidity and the strong support that ResCap enjoys both from GMAC and form the Cerebrus-led consortium in General Motors. The winners, the losers are going to be figured out. All the winners are going to have liquidity and capital. And we feel very good about our ranked position. ResCap was actually up from year-end. It was $2 billion at year end, $2.6 billion at the end of Q1. We also ended up the quarter with $7.2 billion of equity. In April GMAC injected another $500 million so it put a total of $1 billion equity into ResCap. So ResCap equity is actually higher than it was at the end of 2006. We also have a very well-structured debt maturity structure. We only have $1.3 billion of debt maturing. We executed $2.2 billion of new funding of funding in Q1 including $1 billion brand new facility. And we anticipate continued good access to capital markets. This is something which is fundamentally important for us and something that we will be very vigilant about as we look at our performance over the next several quarters.

Now, before I move to auto finance, a couple of comments on what the outlook is like in 2007. Clearly, of course, Q1's performance was driven by the weakness in the US nonprime market and that our good performance in our international business and our building business was not enough to offset this disappointing US mortgage performance. It was an unacceptable quarter. We have taken some specific steps to fix it. And I'm hopeful that these multiple actions we are taking will first of all review the underlying risk we have in our balance sheet but will also improve our controls. Important to remember when you think of ResCap, ResCap is a very diverse company with various sources of income, revenue sources, and as we run through this risk we have in our current portfolio that will start to show up.

We have put in place a new management team with significant mortgage experience. Susan talked about Jim Jones coming in as the new CFO. Craig Chapman who is going to run our US business - very qualified mortgage expert long-term lending expert; Luke Hayden is running our capital markets, John Gray has brought in new to work in our B to C consumer business.; Ed [Kalush] is going to rum our portfolio business; and then Jim Redmond, we already talked about. Feel really good about some of the new people we brought in to supplement already some very good people we had left to help us navigate these interesting waters. Current capitalization and liquidity as I show to you earlier remain very ample. And as pressures continue, we will have the liquidity in the case pressures continue to manage that cycle. That's going to be something of paramount importance. And I think the diverse earnings base, strong international, strong building business, and great origination platform even in this tough quarter we originated over $35 billion of new production in ResCap will help us establish our long-term earnings potential. So disappointing quarter, but taking some very strong steps to mitigate the performance going forward.

On page 17 to talk about our global auto finance business. It was a very good quarter. Very pleased with our performance overall in that quarter. We reported net income of $396 million, that's up from $186 million in Q1. Both IO and NAO international operations in North America had good quarters. Origination I'm going to show you some data, but we kept up volume despite weakness in GM retail volume. And that was particularly good. Credit losses, again credit performance remains very much at a historical low level. So we managed that well and our superior servicing is paying off. lease residuals performed very well versus 2006 reflecting high sales volume and a stable used car market. In the supplemental chart, we've actually got a chart that shows how. I think you'll be pleased how our remarketing effort is working out. And margin improved. While there's some weakness in certain parts of international, they were more than offset by improving margins in NAO. Quite pleased overall with quarter at global auto finance.

Moving to page 18. If I look at originations, we were up at about $14 billion for the quarter, which was up from a year ago, primarily driven by used cars, new cars were more or less flat, which is particularly good if you think about the fact that GM retail volumes were low, but used cars were up 25% unit and 40% on a dollar basis. This whole focus of leveraging the platform that we have on GM, starting to see some good benefits. We financed 624,000 vehicles in Q1 of 2007 giving us a leadership position in this space. Good market share also of GM sales globally both in the US and globally.

Moving to page 19, as I talked earlier on consumer credit quality very much remain near historical low levels. Some ups and downs, but over time as you compare both our credit losses, our delinquencies both on a service and managed basis, we're very much within historical levels. This is something we take very seriously. We're very proud of the servicing we have. Semperion, our US servicing arm is world class. And that has paid off as we have navigated. I've been getting a lot of questions on the fact that the nonprime weakness within mortgage is that spilling over into our nonprime portfolio in auto.

And moving to page 20, the short answer is no. Look at our historical experience nonprime auto basically moves on interest rates and unemployment. And you will agree why certain things within the house market, both in terms of volume, size of the market and home price appreciation have been negative for interest rates and unemployment have been quite flat to benign. And that has helped us in the nonprime auto space too. Our exposure to this space is also limited, to talk the ResCap language, within the held for investment portfolio. About 15% of our service portfolio is nonprime. And this is using a definition of about 620 CB score as a basis. We have, of course, our own proprietary methodology of how we calculated, but using, we have about 15% of the portfolio nonprime. While delinquencies are a bit up in '06 and early '07 compared to '05, but if you compare them over historical time and compare them with expectations what is happening, it's actually played out very well. Obviously, we take this very seriously. I have to clarify that the factors that affect nonprime auto are very different from nonprime mortgage. We obviously do not have products like floating rate or ARM reset for POA negative amortization type products in auto. Autos are depreciating assets And as a result of that, this whole loan to value question is very well reflected and aggressively managed. We had very consistent underwriting and credit scoring criteria. This whole concept of loan documentation, loans are sort of unheard. Finally, each underwriting is directly done by us. We are not buying somebody else's loans in the nonprime space. So feel very comfortable with nonprimaries and performances worked out well.

Now, changing gears, a couple of quick slides on our insurance business had a very good quarter again. I'm on page 21 now. Premium was actually flat. In fact, it was exactly the same, $1.07 billion, from a year ago. However, if you look, we have to break it up a bit. Our growth for each business actually had growth year-over-year. International continues to grow. And I'll talk a bit about growth later on. But clearly pleased by that growth. That was offset by a brutal pricing competition in the US personal auto insurance space right now. In order not to sacrifice profitability we have to walk away from certain business. And then we are seeing the impact of lower GM retail volume and the 5-year extended warranty that GM has now put forward that hurt us a bit for this contract. But still a flat revenue, which is good. Underwriting was very good combination ratio of 91% puts us in the top quartile in terms of performance. And good investment income also. You may recall late last year we recalibrated our investment portfolio and reduced our equity exposure from 30% to less than 10%. We finished the investment quarter with investment portfolio of $6.7 billion and $100 million of under unrealized cap gain. So overall, good performance in insurance.

Moving to page 22. Last quarter we talked about the concept of core earnings and in order to really see how insurance was performing, important to look at core earnings as a basis which basically is net of capital gains or any interest expense interest income from cash. So core earnings is how the actual underwriting is performing. And we were up year-over-year, $25 million up, $143 million in Q1 '07 versus $118 in Q1 '06. So pleased where the insurance business is headed and how we are managing and servicing our exposure there.

A quick slide on global liquidity, something which is of fundamental performance both at the ResCap and GMAC level. GMAC finished the quarter with cash at about $12.8 billion., $174 billion of available liquidity on a global basis for GMAC. So obviously very strong liquidity position. Cash was down primarily due to significant debt maturity. About $12 billion debt matured in the US in Q1. And that brought the cash down. We will obviously go back and replenish this cash at the right opportunity at the right time. This is within the normal range of cash we want and sort of just $14 billion in Q3. $18 billion in Q1, year end $12 billion within the range of the possibilities we'd like. We've also successfully completed in March a $6 billion bridge funding facility for our US wholesale business, clearly a landmark transaction, very important for us. And important for the agencies. That was on top of the $1 billion transaction we did with using the same structure and feel very pleased with that. And as I mentioned earlier to you, we did get $1 billion of equity from GM as part of the sale transaction. Over the next several quarters, we are going to balance prudent liquidity management with the reduction in cost of borrowing while we are very interested in reducing our cost of borrowing and reducing the opportunity cost of excess cash. We will balance that in a very prudent manner with all the risks that we may face in the mortgage space or other factors. Something we take very seriously personally and will continue to track very carefully.

Page 24, quick update on GM exposure. GM exposure continues to be very low, especially compared to the highs of September 30th, 2005. Our unsecured exposure was about $1.2 billion at the end of the quarter, $1.9 billion of secured exposure. This is something we monitor very continuously and something that we plan to continue to be very transparent with you in terms of how that's performing.

A quick slide on 25 while I spent the majority of my time talking about ResCap and what happened. I do want to flag to you we are continuing to focus and spend significant energy on growing. We have significant, very successful long-term relationships through GM. And we are trying to leverage those to facilitate growth in both our wholesale and retail business, do more of GM business, do more used business with the same dealers we have successfully done wholesale and new. And sort of take the show on the road. Things we did very well with General Motors, try to do them well with others, whether that's diversifying in the US with other relationships or whether that's growing internationally. And we feel very good right now. Some of the steps we've taken both in the auto wholeasle space, the consumer new financing and used space and auto insurance products. That we have a good package now that should be attractive to independent dealerships. That's something we're spending a lot of energy on. Our President, Bill Muir, is very focused on and helping us diversify while continuing to support GM in a very strong way.

Also, overseas continues to be a key area things we have done well in the US take that show on the road. We're already in 40 countries, but we've got significant growth opportunities and plans for all of our segments within insurance. We're looking at small acquisitions. We're looking at small opportunistic organic opportunity growth. We just got our rep office license in China. In real estate financing I already talked about this earlier, we are now finalizing, looking at opportunities in India, Brazil and Chile, and within auto finance we continue to lead the market in China without anyone being close, about to approach $1 billion outstandins in China. We are just about to enter Russia where we will have a significant position of GM wholesale and go after retail after that in India and Brazil. So this whole issue, also focusing and growing our full service leasing business in auto finance. So this whole growth, we will continue to focus on it even as we turn around our US mortgage business.

So to summarize on page 26 before we take questions. Q1 2007 was a disappointing quarter for us. The disappointment and the weak performance was driven largely by our US operations within ResCap due to falling nonprime mortgage asset values. So clearly, that was something that dominated the performance and our solid performance both in insurance and auto finance was not enough to offset the loss. Despite operating challenges, both ResCap and GMAC maintain very strong liquidity positions, something we'll continue to be very prudent, strong cash balances, a lot of committed facilities, good capital base, and continue to have multiple avenues to tap the unsecured markets at the right time. We do expect some pressures in near term in the US market as I mentioned to you earlier. We do expect some pressure even though we expect considerable improvement in our performance going forward in the second quarter, even though our US residential mortgage will lose money, but at a much reduced level. We would be considerably improved in this regard. Longer term our diversity of liquidity will support earnings growth. We are well positioned, we are a diverse company with multiple events within the financial services business. And that positions, as well not only to withstand near term challenges, but also to pursue long-term possibilities. And as I showed earlier, we are very much on track with growth strategy. So enough of charts now, I think we should take questions. Susan, back to you.

Thank you very much, Sanjiv. Will you let the callers know how they can queue up for questions?

Thank you. (OPERATOR INSTRUCTIONS) And the first question comes from the line of Eric Selle with JP Morgan. Please proceed.

Eric, are you there?

Can you guys hear me?

How you doing?

Great. Looking at page 7 of your exposure in ResCap to nonprime, I was wondering if you could go through this -- and I appreciate the detail here -- but if you could go another layer deeper and give us -- Carving out of what the exposure is here, what would be the first loss exposure in all of these four different pieces? How would that be reduced on all four of these pieces? Just trying to get your ultimate exposure to subprime?

Okay. So I think we can maybe offline give you try to answer your question, but again it depends on the type of exposure you're looking at, Eric. If you look at within the held for investment, the stuff that we have about over $1 billion of exposure there. But it's zero in the loan servicing portfolio. In the (inaudible) lending, It's a lot more because we have the whole loan most of it on our books. Some of it has been financed, some of it we're funding with unsecured. And held for sale, until we sell the stuff we have exposure, but once we whole loaned it, we have no exposure at all. Really it depends on what asset class you're looking at. Does that answer your question?

Needless to say it's a lot lower than if you take the percentage times the total.

That's a good point. And within the HFI investments, we are down to $1.2 billion only in securitization. This is something we are mindful of. And it's important to dig the second layer to really understand what our true exposure is.

Okay. And secondly, looking at ResCap, when do you guys expect that to get to break even? And what do we have to see on the economic scope to get there?

I think it's -- we've sort of took the position when we launched ourselves after the sale that we would not be giving specific guidance. Unfortunately I can't answer your question. But this is obviously number one focus for us. My focus, Eric's focus, and Jim and his whole team. We expect a significant, considerable improvement in ResCap earnings in the second quarter. The losses in our ResCap US mortgage business expected to be at much lower level. I think beyond that, I would -- I think that's sort of enough. You will see regular updates from us as appropriate. We cannot (inaudible) soon enough.

Okay. And just one final question on slide 17, you guys talk about higher release residuals. Is that a function of how well GM's products are performing out there? They're obviously moving away from rental and moving away from incentives. Is that the function of that? Or is it the overall used car market?

I think it was both. GM. I'm sure you were tracking, GM's fleet volume is significantly down, especially (inaudible) And that's the short cycle stuff that hurts used cars. That's performed very well. Overall if you look at the (inaudible) index, that's actually performed very well also overall. I also don't want to miss the opportunity to plug our own remarketing capability. You look at smart option, which is a world class wholesale distribution internet based. And that also helps us a lot. So it's a (inaudible) factor, less fleet by GM. better used car market, and more proprietary distribution by GMAC that's helping this.

Thanks a lot for your time.

Thank you, Eric. Thank you for the support.

Your next question is from the line of Doug Karson with Bank of America.

Slide 18 you talk about used vehicle originations and looks like $2.1 billion, which is a big number, bigger than I expected. How much of that contributed to the $396 million net income?

Actually, not much. If you look at how and we have our controller here with us, but the way the accounting works is you actually put the loan on your books and you track income over the life of the loan. So that does not affect -- you earn money from that loan over the life of the loan. So that's not specifically helping. I think if you step back. We had a good year, volume was held up quite well despite weakness in GM retail sales and good loss performance, good cost performance, we had some good (inaudible) . Overall I would still like our US balance sheet to be bigger. Our asset values we have to recover from some of the hits we took in Q4 of last year in terms of asset value. Overall the fundamentals of the business are good. And I'm particularly pleased with how much traction the team is getting, starting to get,, it is still early days and it will take several quarters for this to play out. But quite pleased how the revenue initiative and diversification is going forward. Quite pleased with

Now that it's been I guess a quarter or two where you've started to separate from GM, where have you targeted the biggest opportunity for non-GM business?

Multiple levels, right? You look at used as sort of the first bucket. The second bucket is new non-GM new. The third bucket is sort of what I call wholesale GM. Mark, do you want to talk about the opportunity?

I think first of all, we're very excited to have the opportunity, Doug, to pursue diversified business. And our sales team is very active both in terms of leveraging the GM relationships for used business that historically we've not had a big interest in. And secondly, in leveraging relationships for dealers that have affiliation with GM that have non-GM franchises so we've been very active in pursuing that. In terms of pursuing relationships in the independent space, you really have to establish yourself first in the retail space. And that's where our efforts are primarily these days. And once you have developed a presence in the retail space, you can actually take on both new and used wholesale business in the independent space. So that's kind of our game plan. And we're just ramping up our sales force at the moment. We're very pleased with the response to GM's presence in these markets here to date.

Thanks, Mark.

Great, thanks, guys. That's it for me.

Thanks, Doug, for your support.

And your next question is from the line of James Leda with Merrill Lynch.

Good afternoon.

Good afternoon, Jim, how you doing?

Okay, how are you guys?

Good.

Good. Just a quick follow-up. You talk about the 2Q losses being significantly less in the US. Will they be more than offset by international operations in 2Q? Or is it a little too early to tell?

I think it's a little too early to tell. I also don't want to get into that thing of giving you guidance. We are going to make considerable improvement. I've took you through some of the specific actions we've already taken and actions we're going to take this underwriting, flushing out of the stuff we bought in '06. A lot of the problems we had in Q1, related to stuff we produced a year ago. So we are going to flush that out and see how the chips fall. If I again look at GMAC as a tale of two companies, and in ResCap, a tale of two companies, a lot of things are working out well. And we now need to focus on the stuff that's not working well and put a lot of energy into it. And I'm hopeful the results will show. I cannot give you specific numbers, Jim.

Okay. On slide 9, you talk about the runoff. And rightfully you point out you're about a quarter of the way to the $20 billion target for the full year. My question is can you talk to us a little bit more about the, how that portfolio ran off and give us a better flavor for was -- it is it low-hanging fruit or is this kind of a linear situation where we can expect that you are fully on track to run off something in the area code of $20 billion for the year?

Well, first of all, most of it was real runoff, the charge off was only about less than $200 million of that. It was all real run off that generated cash for our (inaudible). But maybe, why don't we use this opportunity for you to hear from Jim Jones. I don't know if you wanted to add anything there.

I would just say that felt good with regard to the liquidation, particularly on the more recent vintages of '05 and '06 being roughly proportional to what the total portfolio was. We're not seeing a whole lot of distortions at this point. And relatively comfortable with that.

Okay. And one last quick one. Is there any discussions about additional equity contributions from any of the owners at this point? Basically is the contribution that was made subsequent to November 30th, is that all that's on the table for now?

Well, again, that's a decision for the GMAC board and the shareholders. But as a CFO, I think I can safely say I'm comfortable with our capital position right now. If you look at both the GMAC level and the ResCap level, we have adequate capital for the assets we're supporting. That's something we track very carefully. We look at it on an economic capital basis and a book basis also. And I'm quite satisfied with where we are. We also have significant liquidity on hand and access to liquidity on hand. Clearly this is something I know our shareholders are focused on, the board is focused on. There are no plans at all, we are satisfied with both the equity balance at the ResCap level and the GMAC level.

Okay. Great. Thank you very much.

Thanks a lot, Jim.

And your next question comes from the line of Ian Jaffe with Bear Stearns.

Hi, how are you doing?

Thank you, can you hear me?

Yes, I can hear you very good.

Hi, Sanjiv. It'd be really great if at least on the ResCap side if you could provide more detail in the releases. Obviously there's some key drivers. Big loss on the gain on sale line provision line. But things like securities losses, i.e. off balance sheet securitization residual write downs, things like net servicing would be really helpful as we attempt to assess the quarter completely.

We will look into that. And we are obviously trying to improve our communication on a daily -- on a regular basis. The Q will come out next week. You'll get a lot of data from that. You had 11 (inaudible) out of 26 this time. My goal is to have very few (inaudible) very soon because we'll be making money and I won't have to explain anything. But there are some specific input you have. We'll talk to you offline, and we are very interested in continuing to improve the quality of our disclosure.

Okay. Thanks.

Thanks.

And your next question is from the line of Brian Jacoby with Goldman Sachs.

Hey, guys, how are you?

Hi, Brian, how are you doing?

Good. Can you give us what consolidated book equity was at the end of the quarter?

I can. Book equity at the GMAC level was a total of $17.3 billion, that includes $2.2 billion of our perpetual preferred.

2.2. Okay. And then --

2.2 of perpetual for a total equity of 17.3.

Okay and then on the funding strategy going forward, in the past you've said you'd like to re-access the unsecured markets when you're happy with spread levels and so forth. Can you give us an update just on what you're thinking now with respect to whole loans, ABS, unsecured market. I would think right now you're still probably not going to be heavily involved in the unsecured market maybe you could just touch base a little bit on the whole loan market has been pretty deep. Is that still the case? Maybe just any update on funding strategy going forward.

Whole loan remains very deep. The sources remain very diverse. We want to borrow money when it's there and when we like the price and when we need it. Why don't I ask David Walker if he wants to add anything.

Hi, Brian. Capital markets are in decent shape. It's obviously been a volatile period over the last couple of months in some of the markets. Spreads have widened out from the best level we saw in January. Treasuries have rallied significantly at points in time and the cost of debt hasn't gone up as dramatically. We continue to look at opportunities in all of the asset backed and unsecured markets. We did a retail transaction last week in auto ABS that priced very well. We did a deal in Canada, as well in just the last week. We continue to look at the unsecured markets both domestically and internationally. We had very successful deals for ResCap and GMAC in December. And when the opportunities are there, we'll come back. We've certainly seen more recently banks continuing to call up and have proposals ideas on accessing the market. And so we continue to look at the market and certainly in this calendar year, we expect to be active in all of the world's markets when the opportunities are there.

And if you look, Brian, if you look at the total sources we have and the type of sources we have. It's a multiple of what we need. So we continue to be opportunistic.

Okay. And one last quick one just on the auto loan side. Clearly, sales industry sales are starting to slow a bit. What are you guys doing different? Are you doing anything different in terms of different types of loans? At one point we saw 7-year loans a couple years back. Not a whole lot of that going on right now. But is there any meaningful changes that you guys are offering in terms of loan packages on the retail side that --

Not really. If you look overall, sometimes we still are heavily dependent as you know on GM (inaudible) in North America where about 80% of our volume came through (inaudible) , even though that's decreasing as a percentage as we grow our diversified revenue. There's nothing fundamentally different happening. Our average (inaudible) is 56 months, used to be 59 months a year ago. One thing that has become clear in the last two years is that 72 month paper actually performs quite well. If you remember that one time there was discussion, how much worse, and it is slightly worse, but not significantly worse than 60-month paper. And I think there's nothing fundamentally different happens. Whenever GM does a special sale, the quality of paper actually improves. But I don't know -- definitely none of the exotic products you saw on the markets. We are still very old-fashioned loan to value guys. I don't know, Mark, whether you wanted to add

Sanjiv, first of all, we continue to work very closely with GM in terms of their retail strategy. And actually GM's actually retail volume is flat in the US year-over-year. They really cut back on their daily rent and their fleet business. And so we are working very closely with them on a number of initiatives as they mentioned on their sales call yesterday, they've actually started to look at their share of so-called out of equity buyers. And so they've asked us to work with them on that strategy. I would say generally speaking, they have -- GM has been very disciplined here in North America on their incentives, which shows up in the public data. And we continue to work closely with them. Leasing is down so far this year. And so we will continue to work with GM very closely going forward in terms of their retail strategy. But as Sanjiv said, I don't expect anything as novel as you might have seen in the mortgage space.

Okay, thanks.

Your next question is from the line of Jonathan Steinmetz with Morgan Stanley.

Yeah, thanks, good afternoon, everyone.

I guess we let the auto analysts talk to us also.

I guess, you got to watch out for the company you keep.

Good to hear from you Jonathan.

So a few questions on the auto side. I noticed in the release you mentioned the auto side benefited from some gains on the whole loan sales and also a hedge gain, which I think would be this SFAS133. Could you quantify both of those gains and maybe talk about the magnitude to put that in perspective?

if memory serves me right $3.5 billion of whole loans, went very well. Basically with interest rates where they are, and the yield curve where it is, and the loan originated late last year prior to that, that's the major reason why we had gain. We also eked out a small origination profit, 133, a big chunk of our smart notes portfolio unhedged because we could not get 133 treatment on it. And the way that worked out that actually played out in our favor. The 133 for '06 was about $50 million plus or so. Whole loans was -- '07, excuse me, not '06. '07 was plus 50. And whole loans was -- I think what $50 million also if memory serves me right. I don't want to give specific numbers, Jonathan.

You're saying ballpark if I add the two would be about 100 million of benefits so to speak?

Plus minus, yeah.

Follow-up on Brian's question a little bit. I guess there was some discussion at the end of April that I guess with GM that you may reach fairly deep in terms of credit quality in the last week to finance GM buyers. Can you just comment on that? And when you do have those periods and you talk about a few each year, What percent of the business becomes nonprime so to speak during those periods?

First of all, incentives have not changed at all. We're very vigilant about that and there has not been any quote unquote relaxation. You look at the President Day sales we had, remember the big 72-hour sale last year?

Sure.

The average quality of our paper actually improves. We're able to attract "S" and "A" what we call prime quality consumers who would typically pay in cash, they take advantage of low APR or zero APR financing. So we've been able to benefit from that. For average paper., even though we may have bought some paper deep, our average strength of our paper is actually better than it would be under the normal course. So I would sort of reassure you that every time GM does a special, we actually do better.

And that would have been true let's say in the last week of April the average paper would have been better?

Yes, exactly, we have not seen the results yet, but GM (inaudible) trucks and the average -- I expect our average paper. But I've not seen the results. But I would be shocked if the quality was not better. Mark would you agree with that?

I would agree with that in general. And I think specifically, I think mentioned on the sales call yesterday at GM was relatively a short duration program. And volumes were pretty small relative to this effect on our overall portfolio. We have seen credit bureau scores remain very flat. And in fact, any time GM does a large subvention, as Sanjiv alluded to, it tends to lift the overall credit scores of our business.

And of course, Jonathan, you know this better than I do, as long as you price for the loan properly and you service it, you do well. Let the truth be told, we actually do quite well on some of the "C" and "D" paper we buy because we price it well and service it very carefully.

All right. Thank you very much.

Thanks, Jonathan.

And your next question is from the line of Cabir Caprihan with JP Morgan.

Hey, guys.

How where you doing?

I'm doing well. Some questions on ResCap. If you could just talk a little bit on the gain on sale of loans. It was negative 3.41 for the quarter. Can you give us a sense of what was the margin on the prime side? And on the write downs that you on the subprime. And I'm assuming of the 29.9 billion that you sold in the quarter I backed into about 7.7 being subprime. If I'm off, I'd love to know how.

I don't have the exact numbers handy. I'll sort of move it to Jim Jones, but prime made money and nonprime lost money.

I'm trying to get a sense of how much you lost in subprime.

But Jim, you want to take a shot at that?

We don't have that. I don't have that immediately available to me. I can tell you that prime margins were in fact positive. The subprime was negative in terms of the production activity. But the biggest source of the issue was in the HFS marks on held inventory.

So what's happening, is all the delicate loans are taking a hit. So though we haven't sold them and in many cases we're keeping the residual on our books because we don't like the pricing, but because these are held to sale, we have to mark them down. And you saw an asset that goes -- going down in value getting bids in the 70s, previously you were getting bids in the high 80s to mid 80s. That's really affected, if memory serves me right, about $300 million was related just to that sort of activity.

In the sale, if subprime went down $3 billion, was that a markdown or was that actual sales?

That was actual sales. But the overall write down of value was both on what we sold, whether we made a gain or loss. The current value of the (inaudible).

If you can tell me how you chose between what you sell and what you keep in the Held for Sale. Is it the same amount of makes. If the market doesn't bounce back going forward do you expect to recapture some of the hits you've already taken or do we see more hits going forward.

We've got world class capital market. You are making decisions all the time on what to hold and what to sell. Jim has been very strict about what we are underwriting going forward. And you're right, if there's some stuff left on our books and if it goes up in value we'll write it up and if it goes down, we'll have to write it down further. That's a very dynamic decision your team was making.

That is. But I would not expect, quite frankly, the recovery to be as robust on that even in stronger pricing because the majority of the marks were associated with loans that had gone delinquent. And I don't think it's a reasonable assumption that the recovery would be as quick in terms of the valuation nor the return to a current status for the loan.

Okay. All right.

I apologize, this is the price of being in Manhattan. There is some police activity behind us.

Behind me, as well.

We've not done anything wrong here.

That's fine. Just one more question on the lending receivable portfolio.

Yes.

Your nonaccruals didn't jump up that much. I back into a rise of 30 million, I think, but your provisions were up about 120. Is that because the things that were nonaccrual, especially last quarter, you already marked down on that?

Exactly that. underlying collateral weakened. So underlying collateral build that collateral getting both on the held for sale investment and also on credit performance led us to write down the value of underlying collateral. Our expected loss went up and that's why we took the provision. Chargeoff was not that high. Chargeoff was only $48 million.

Right. So I guess my -- I guess -- if I back into what you wrote down. You wrote down by maybe another 7-8% of what it was. That's where it was?

Probably.

All right. Thank you.

Thanks a lot.

And your next question is from the line of Robert Berry with Goldman Sachs.

Hi, guys. Good afternoon, good, how are you?

Thank you, we're good.

Just wanted to follow-up on an earlier question as to the sustainability you see of the delta we saw in the auto finance profitability this quarter. Sounds like part of it might be more a temporary and the rest maybe half of it relates to just some of the other things you mentioned like growing share away from GM?

I think it's fair to say that like in any other quarter you take your lumps and you get your ups. I still feel good about the overall business. We have to get the earning asset level up. We are not satisfied with the total amount of earning asset on the books. We need to continue to improve that. But some of the fundamentals that we do control, we are seeing good margins are improving our earning rate is going higher than our borrowing rate. That's something very sustainable. Our underwriting and our servicing continues to be very stellar. We are focusing significant operating expense. And as Mark pointed out so eloquently, the progress we are making on diversifying will also stabilize which will make less dependent on one OEM sales So those are repetitive, but we will continue to have mark to market gains on our (inaudible) And whole loans is a key part of our funding strategy, but depending on where interest rates are at that time and what's hedged or unhedged will dictate what actual gain we recognize. But whole loans are a very key part of our capital mitigation strategy and a key part of our funding strategy. So those you will continue to see play out.

When you talked about some of the opportunities to grow the business in used or no-GM new, et cetera. Can you give us just some sense of the rate of growth we might be able to see in the?

I think it's early days Let's get some more traction and we will start talking more about it. You are using the national brand and we are using our historically long relations with the GM dealers to grow this in the US. And we are very pleased with early results of the number of new dealers and the amount of non-GM, we did 22,000 non-GM in Q1. So I'm quite pleased with that. But I think we should let things get some traction before we share who are we getting and what we are getting.

Finally, a reference made earlier to negative equity levels. Can you give us some color on how those are tracking, what kind of levels of negative equity you're seeing now and how that's changed over the past?

I think you're referring to some comment maybe yesterday about negative equity and GM cars. I don't -- I don't know Mark whether you have any data. We track it, but I don't have the data handy.

Neither do I. I think the specific comment on the GM sales call was that GM believes that their share of the negative equity buyer is lower on average than the other OEMs. And so some of the programs they directed lately is really geared at improving their penetration in that market.

Okay. You have that data, though, it's something that maybe I could follow-up with you on?

Either us or GM. We'll get back to you.

Between Randy and us, we'll see who has the data.

Okay. Thank you.

Thanks a lot, Robert.

At this time we would like to invite members of the press to join the queue, as well.

[OPERATOR INSTRUCTIONS]

At this time we would also encourage the analysts to continue asking questions if they have them, as well.

I think we have someone lined up.

And your next question is from the line of Kristin [Galanech] with Marathon Asset Management.. Please proceed.

Hi, this is actually Ethan [Aerbach] on for Kristin. The first question you mentioned you had $1.2 billion in first loss exposure and held for investment book to subprime. Could you quantify how much exposure you have to other traunches of securitizations relating to subprime?

I think $1.2 billion represents all of HFI not just subprime. And I don't have the details on the prime. It's much smaller, most of it is whole loan and --

Right. I was referring, I believe you mean by first loss you mean the residuals.

Yes.

You also a whole lot of double Bs and triple Bs?

Not that much. We do own some triple Bs, not that much double Bs. Historically we sold it, if we don't like the price we keep it and sell it when we do like the price. I don't believe we are a huge holder of triple Bs. As an example of the securitizations we did in Q1, we only held $100 million of triple Bs all the other triple Bs we sold.

You mentioned most of the write downs are in your held for sale portfolio. However, I noticed most of your subprime actually is in your held for investment portfolio. Could you walk through what the criteria are for when you decide to write things down either in your held for sale or held for investment portfolio?

I'll let Linda Zukauckas talk to some of the triggers that do it. But I think just to correct you, we did take a very chunky provision in HFI also. So we did write down the asset in terms of expected loan losses in HFI, not just HFS. Maybe, Linda, you want to quickly what are the triggers.

For held for sale, there will be a valuation adjustment. However on the HFI portfolio, those are unbooked loans so there's no write down. Instead it's a provisioning process that's based on triggers such as the delinquencies, basically the underlying credit quality of the portfolio. And it's an incurred loss model. And so we look at it each month, each quarter and set aside the provisions based on what we see as the performance characteristics in the portfolio.

But you are only -- you're only taking write downs in the loans that are 60 plus days delinquent?

We take -- we record provisions, increase the reserves based on losses that we believe have incurred in the portfolio. And we look at various performance characteristics in setting that.

(inaudible)

And another question is when you guys are originating subprime right now, what price are you able to sell those loans in the market?

Jim? Want to help us with this?

Well, I think that the issue with subprime origination is you've seen significant reduction in terms of liquidity in the marketplace. So that's been sort of a volatile answer over the course of the first quarter. We obviously, in a number of cases, originated on a negative spread basis from the time that we locked the loan until we actually delivered a loan, where we had financial hedges in place, but the credit exposure still caused the asset to be negative origination cost to yield.

I guess my question is, is that state currently in effect where you're essentially your costs originate is higher than any profit you might make on the loan?

It's not for the very recent originations. But I would tell you that our volume of origination has also diminished dramatically through this period as a result of the underwriting changes that we've made. And so the overall financial effect would be diminished, frankly, more by the volume than it would be by the spread affect.

Production was what,Jim, if I remember correctly, subprime was $ 2 billion. Was it $9 billion a year ago?

Yes, total nonprime was the vast majority of which was subprime. And the run rate diminished throughout the quarter.

I'm curious then why you needed the equity injection in April? Whether that was rating agency driven or was there some other deterioration going on after quarter end?

The decision to (inaudible) was a decision taken at the GMAC board level, it was not driven any way at all by the (inaudible) agencies. We looked at the (inaudible) capital position. We wanted to make clear to the market that we wanted to make sure ResCap had adequate capital, adequate liquidity. That drove our decision that we wanted to quote unquote make whole. If you also recall and I know that dollars are fungible, dollars are (inaudible) of cost, I want to remind you we got $1 billion from GM of equity. And based on the needs we had, we thought that money was best served inside ResCap. And so we put in 500 March and another 500 in April.

Okay. Great. Thank you.

I also wanted to make one clarification. I may have misspoken a bit slightly, so it's important to clarify. The $1.2 billion represents in nonprime residual interests.Overall, if we look at our retail interest on our balance sheet we have about $2.1 billion of that. And that's traditional synchronization of different asset classes. That number was $1.7 billion in Q4. The area we are most focussed on is of course the nonprime, some IOs, some POs, some mortgage balance securities. So the total number is $2.1 billion, $1.2 is the nonprime piece and .9 is less of an issue and the .9 has also not seen the degradation in value. Sorry about the confusion earlier. Hopefully this satisfies your question.

I understand there's been some turbulence in the second lien market, as well. Can you discuss whether you've taken any impairments on the second lien loans on your book and also what you view as the market price for those loans at this time?

We have taken impairments on second lien products. Those have primarily been in nonprime again. But somewhat also in the prime category. The volume obviously there is much smaller though than with regard to the first lien position. So the financial effect is less. In terms of current production, we have handled the seconds in much the same fashion that we have with regard to the first. And we have changed our underwriting with regard to that product. We have faded our bid on that. We are doing less volume.

I guess specifically, I looked, I think recently you had about $10 billion held for sale and held for investment. How much of a write down have you already taken on those? Either a write down or a provision?

I don't know. We don't have a breakdown, I think that we could lay our hands on immediately with regard to the difference between the seconds and the firsts. We've quite frankly looked at that more with regard to nonprime classification verses prime. And we would have included most of these seconds with our nonprime evaluation.

Aren't most of the seconds on prime loan?

The HFI that we've got is primarily on prime.

We've got some (inaudible), but very little nonprime --

That we're holding, yes. That's a very small portfolio.

Right. Okay. Thank you.

Thank you, Ethan.

And your next question is from the line of David Andrews with Pimco.

Yes, good afternoon.

Afternoon, David, how are you? How is California?

No sirens out here. The -- my question is really about the second quarter guidance you've given in terms of the ResCap losses getting better or less bad. And if I look at your business in terms of what you hold for investment and what you hold for sale in trying to add to either provisions on held for investment or taking mark to markets on held for sale as an attempt to sort of clean up what you have on the books relative to second bucket of having volumes in the subprime market being about as I understand about a third of what they have been previously. My guess would be on both sides you're generating washes. And what I'm trying to better understand is in your guidance for second quarter and going forward, where do you see the big improvement within those three buckets?

Well, it's a lot of things. First of all, we have to remember that as we scale back volume in the size of the market has gone down. We are now going to take specific actions to reduce our operating cost. We need to match our operating cost to both the lower profitability of certain asset classes and also the fact that the overall size of the market is down. So over time while that cost up front a bit of money over time, that'll pay off. Secondly, as Jim pointed out, some of the new stuff we are buying, we are pricing more prudently and pricing more with the market. So when we sell that stuff, we should eke out some profit. The fact that a lot of the recent stuff that got sold was actually sold at below hundred rather than above hundred. And the whole HFI portfolio continues to play out. We are looking at ARM resets and what that impacted. But that's going to be a variable over the next several months. And then you have to see how the overall market liquidity turns to the marketplace and it's a lot of waiting on the sidelines. But when it comes, that could be both beneficial or negative. Anything to add?

Yeah, I think I might -- I might indicate that in my mind HFI is likely to behave more proportional to the liquidation in the portfolio. whereas the gain on sale and the HFS are going to be much more the results of the actions we've taken to reduce the volume in those categories.

So, how do I interpret all that in terms of which you think is going to be the driver for improvement in the second quarter? Sounds like you're saying --

Well, I think both categories are going to improve. But HFI, it's going to largely be a function of the smaller portfolio than we've got as a result of the runoff in the first quarter. So you can kind of look at that on a proportional basis. With regard to the current HFS activities, we simply have less volume, we have less originations. And so whether it's negative spread or mark, I would expect those to diminish rather quickly.

I see. Still though expecting to be in the red, though for the quarter, right?

As I said, very considerable improvement in our earnings. And but with losses in the US market, much less, but still losses.

Got it. Thank you.

Thank you, David.

Your next question is from the line of Mark Alter with Credit Suisse.

Hi, good afternoon.

Mark, how are you?

Fine, thanks. Can you just go into the -- I'm sorry if I missed this, but the taxes again. Does the -- you actually paid more taxes in all of last year. What entities are paying taxes? And do the shareholders get to capture those in their own returns? Or do they just get net income and that's it under the LLC structure?

Well, let me a step back and clarify for everyone. For example, in the US business in auto or in ResCap, if we make pre-tax $100 million, our after tax is exactly the same. Similarly we lose $100 million in that space, our after tax is the same, we get no tax credit. Q1 was quite quirky because insurance as you know did very well international, both in mortgage and insurance and in auto did very well. All the areas we made money did not have had to have tax expenses to it. Where as in the US, our auto finance business and other of commercial finance business did very well. But our US mortgage business lost a lot of money and we had no tax shelter for that. That's why you still have a debit in taxes larger than a credit for Q1. In terms of how it plays out, it really depends on the tax position of our shareholder. I'd rather not comment on that. But obviously the shareholder is responsible for taxes on income on LLC income, which is pretax, depending on his or her own tax position, and for after tax able to offset it with tax credits. This will continue to be an issue as we play out. And the sooner we return to profitability overall US, you will see that our tax rate will be much more normal. For the tax paying entities and close to zero we have some state and property taxes we have to pay, but outside of that, it's close to zero on our US income.

So the flow through really is the pretax to the shareholders?

For the LLC income, yes.

Okay. Thank you.

Thank you, Mark.

And your next question is from the line of Joe Dona with Alliance

Yes, hi. Let me just first echo Ian's comments that it's very difficult to really make sense of what's going on with this disclosure you have here. I realize it's only a week away for the Q, but it's hard to have a call and figure what is going on. What were the total charge offs for the company for the quarter net chargeoffs?

The total provisions for the company were --

Chargeoffs.

Chargeoffs. I can give it to you, it will be disclosed in the Q. Go business by business, what the chargeoffs were, but the total numbers are disclosed in the Q.

I've got to wait for that? Okay. And do you have total NPA-- I see the nonaccruals. But the total NPAs in the mortgage business?

I don't have that data handy. We can Ken we will come back to you and get it to you offline. I don't have that data handy.

I think you answered this a little bit, but just to kind of rephrase it. On the marks, just the marks that you have for your HFS, now, those are -- were those marks as of quarter end? So the question is, how reflective are those marks of the current environment? Again, to restate that question. So have you had any way to sort of confirm those marks are pretty darn close that you took at the end of the quarter?

Obviously our results are verified by not only our external auditors, but also by the audit committee. As you know things like mark to market even though the books are closed, they are technically open until we actually issue our Q. At this time we are very comfortable with the marks. There'll be no incremental impairments from quarter end. They do represent our best estimate of value at quarter end. But the results are preliminary until the Q comes out. That's sort of how GAAP is. Obviously the audit committee has to be comfortable with the valuation before they sign off on it. And at this time they are.

So the Q could be reflective of current market environment, not just --

Depends on asset by asset what the events are, and GAAP is very technical in many ways and it really depends. For the specific asset category you talked about, yes, that is broadly true.

Okay. And on the nonaccrual side, how do you feel about the trajectory there heading into this quarter?

Still obviously we can, with all these ARM resets -- there's always more exposure. But I don't know, Jim how are you feeling about nonaccrual levels right now, both HFI and lending?

We have sort of two effects going on, once which is the reduced size of the portfolio. The other of which is the seasoning of the portfolio and the seasonality of the portfolio.

Sure.

So if you wanted to look at absolute numbers, my expectation was that that would benefit from the size of the runoff. If you want to look at ratios, however, this portfolio continues to get older and is likely to experience continued increase from a ratio standpoint.

Not so much concerned about the ratio, like you said. But as far as new generation of NPAs, that's really the question, just on the existing stuff, how much -- what's the delta, rate of change of that thing heading into this quarter?

If you look, the real pickup was between Q3 and Q4. That's where we saw the real bust, November was a pretty tough month in the space. March was also tough, but March was tough in terms of liquidity in the capital market, not necessarily the rate of new nonaccrual months. The next nine months, the whole market is going to get a lot and we'll see how it all plays out. We are comfortable with where we are. From a GAAP compliant basis, we've done as much as we could, very much within GAAP. We have looked at each asset class and accrued for it appropriately, without being aggressive or conservative, we've tried to do our best to do it fair. But if market conditions change, either for the better or for worse, we'll have to adjust accordingly. I can't -- I can't specifically forecast what will happen.

All right. Thank you.

Thank you, Joe.

Technically, we originally said we would end the call at 5:00. We're going to extend it a little bit longer and take a few more questions.

Thank you, Susan.

Your next question is from Ryan O'Connell of Citigroup. Please proceed.

Sanjiv, or Jim, maybe, If you could maybe just put a little bit more color on the prime mortgage business. I realize the Q comes out next week, but you've said that prime margins were positive, but are they improving? Could you give us some sense where the prime business is moving directionally now in terms of margin profit?

Prime margins are doing okay. Nobody's satisfied with the prime margins. A lot of capacity's chasing the prime market right now because they're walking away from nonprime. I don't know, Jim, whether you want to specifically talk about how you feel about it?

I would say that the prime margins have been compressed, but that's not unusual in the first quarter of the year where volumes are down and there's typically aggressive pricing in response to that. I guess we've seen some compression there, but it continues to be positive and I would not be surprised to see it return somewhat here in the second quarter.

Okay. Next, if we could just talk a bit about the alt-A portfolio, is asset quality there holding pretty steady or otherwise?

Yeah. The alt-A portfolio for us, at least, has continued to perform pretty well at this point. We are not seeing the indications of contagion exposure, if you will, from the subprime marketplace.

Different people define Alt-A a bit differently. Our Alt A is very, very prime and it's performing quite well. I think there is some weakness in trading volumes. So if you look at the liquidity in the marketplace spreads out a bit wider, but actual credit performance of the portfolio, as Jim pointed out, is pretty good.

Okay, thanks. Maybe if I could request on disclosure, I know it's sort of been talked about a lot, but just when you put out the Q, as you all know, we obviously compare you with Countrywide and WaMu and companies like that and they have rather explicitly said how much they've written down their residuals. In your case, obviously, there's a big runoff factor. We understand the complexity, but I think it would help all of us in the analytical community if we could get some sort of statement, if we leave out the runoff, what the actual percentage write-downs in the residuals was. If I could pass on that request.

Your request is being written down by our Controller and Chief Accounting Officer. We'll see what we can do.

I'm excited, Sanjiv, thank you.

Your next question is from the line of Kris Grimm from Greenwich Capital.

Sorry for butchering the name of your distinguished employers. How are you? Chris?

Hi, this is John. Kriss had to step off.

It's all right, John. Sorry to keep you waiting for your question, but I'm sorry to have so many questions.

I understand. One thing I wanted to ask you is a little bit about what's going on with the rating agencies and what your strategy is with respect to that. You've had a couple of negative outlooks now and a downgrade. At least for Moody's and S&P, at the BBB minus level. How are you looking at that if the market stays relatively weak into the next quarter, despite your rather more bullish comments, what's the strategy for dealing with that?

I want to make clear, the bullishness of my comments are related to how we are handling the issues and how proactively we are trying to mitigate our risk, and the changes are made. The comments were also bullish in respect to our capital and liquidity. I don't want to for a second suggest that I see the U.S. real estate market turning around in a hurry. I think as Jim pointed out for certain classes, it's going to be slow. The thing we're going to do a lot better, John, is how we manage that risk and how we work that risk and how we price and get a return on that risk. That, I'm bullish about.

With respect to the rating agencies, something you need to ask them. We feel we have a close relationship with them. We bring them up to speed with what's going on and get back and forth. And we were obviously disappointed with some of the actions, but we respect their decision and we are mindful we need to improve our operating performance. We are mindful we need to restore our business back to profitability and we are mindful we need to do that. There will continue to be a question mark. The investment grade rating is very important to us, which is why you're seeing us take some very proactive steps to maintain that. While we are disappointed with some of the actions well, still encouraged that the agency got a couple of good stable out there and the agency understands that the underlying franchise is stable and covers many companies, not just nonprime here in the U.S.

If additional equity becomes a criteria for maintaining ratings, is that something that you think -- I know you can't speak for the board at this point, but do you think that's something that the owners and GMAC would support?

The board and the owners will take whatever reasonable efforts need to be done to maintain the earnings. It is my understanding that the challenge we have right now is not liquidity, it's not capital, it's operating performance. But if capital ever becomes a factor, and within reason, I can't imagine that the board would do something that could threaten ResCap's investment grade ratings.

Final question. A little bit following up on what Dave Andrews was talking about and sort of probing the thought about looking at next quarter and seeing a little bit better performance out of the residential mortgage, at least from an asset quality standpoint. What is your -- I know you just said your outlook for the mortgage market is relatively cautious as well, but I'm trying to gel that with the idea losses in the residential mortgage business may be substantially less in the second quarter. Where we're seeing a situation that despite runoff, you have the -- basically an increasing trend, particularly for '06 vintage helped your investment loans.

Let's see how it all plays out. We are feeling good. As Jim pointed out, certain classes will take longer to recover than others. We will still see some challenges as to margin pressure, our cost structure is still not in line with the current market reality, and that's going to take some effort and cost to remedy. So there are some headwinds. But I also think some of the risk mitigation we are doing, look at warehouse lending, how we are performing there, we are proactively managing that. We have very strict underwriting in terms of new stuff we are buying and we believe we have prudently taken adequate allowances. I don't know, Jim, what makes you believe we'll do better in Q2 versus Q1?

I think there's just sort of two effects that you think about. One of which is we've got a material diminution in terms of the overall size of the balances that are sitting in the HFS to begin with. Second of all, quite frankly, it's probably much more unlikely that the marks -- the pricing on the marks would fade from par to 75 -- are they more likely -- are they less likely to fade from 75 to 50?

Okay. All right. Thank you.

Thank you, John.

We have time for one more question. Operator, would you please line up the last question?

The final question comes from the line of [Nick Altner] with Wellington Management. Please proceed.

Hi there. The subprime gain of sale margins, I think we've seen turn negative in some larger players as well. I'm not all that concerned about that. My question was, we saw some players in the market, be they brokers or other originators hedging through various derivative ABX and so forth. I'm wondering if that's something that's been done by ResCap, given you pulled back from the market late last year, I'm wondering why that was not done, if it was not, in fact?

We have not done any -- our hedging primarily is relating to FX and interest rates. Obviously, we manage our MSR position very proactively. We have not at this time done any ABX hedging?

And why not?

Something we look at within the guidelines we have, in terms of what we can put the capital at risk. Traditionally, we have not hedged credit in the marketplace. Something we'll look at and see whether it's appropriate for us to do it. We'll look at it.

Obviously, in retrospect, we wish we had.

Exactly.

Thank you.

Thank you, Nick. Good. All right. Well, thank you, operator, and thank you, everyone, for listening. We appreciate your continued support. We just wanted to notify you those those GMAC and ResCap will be presenting in ASA Conference in Boston in a week and a half. That presentation will be Webcast and we invite you to listen into that. Details on that and other upcoming events can be found on our Web site for GMAC. www.GMACFS.com, and for ResCap, www.rescapholdings.com. In addition, we plan to continue to hold quarterly earnings calls similar to this one. Details for those can also be found on our Web site. Please register on our Web site to receive e-mail notifications of these and other events. Further, our 10-Qs when filed, will be posted to those same Web sites and they will be available very shortly. Thank you, again. I'll turn it back to you.

This concludes the GMAC 2007 first quarter earnings conference call. Thank you for your participation today. You may now disconnect.