Ally Financial Inc (ALLY) 2007 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the GMAC 2007 second quarter financial results conference call. I will be your operator for today. At this time, all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS) As a reminder, this conference call is being recorded and a taped replay will be made available from 5:30 p.m. eastern standard time, July 30th, 2007 until midnight, August 3rd, 2007. I would now like to turn the program over to your host for today's conference call, Susan Shank, Director of Investor Relations. Please proceed.

Thank you very much. Good afternoon. As was announced, I'm Susan Shank, the Director of Investor Relations for GMAC. We want to thank you all for joining our call today to review GMAC's 2007 second quarter results. I'd like to direct your attention to the legend regarding forward-looking statements and risk factors in the presentation deck that was posted on our website. That's on the second page of the chart set. The content of our call today will be governed by this language. I'll also mention that to comply with SEC's Reg G, we've provided some supplemental charts at the end of the deck that provide reconciling data between managerial financial results we discuss today and the GAAP results that will be in GMAC's 10-Q when it's filed. Lastly, I'd like to let everyone know that the call is being broadcast live via the internet and the financial press is participating.

This afternoon, Sanjiv Khattri, Executive Vice President and CFO, will cover our second quarter results for 2007. After the presentation, we will have 30 minutes for questions for investors and analysts followed by another 30 minutes for questions from the press. And then to help Sanjiv with that question-and-answer period, we do have several other executives available. With us today are Jim Jones, Executive Vice President and CEO of ResCap, David Walker, Group Vice President, Global Borrowing, Linda Zukauckas, Vice President, Corporate Controller and Chief Accounting Officer, Mark Newman, VP and CFO of our North American Operations, Bill Casey, Treasurer of ResCap and Ken Fischbach, Managing Director of ResCap Investor Relations. And now I'd like to turn the call over to Sanjiv.

Thank you, Susan. Welcome, everybody to the GMAC second quarter earnings update. We appreciate everybody making time to join us today. As we released an hour ago, GMAC has a preliminary net income of $293 million for Q2 2007 that compares to a $787 million gain a year ago. This is an improvement of close to $600 million from a year ago. In fact, if you exclude ResCap -- from a quarter ago, excuse me. If you exclude ResCap, Q2 net income more than doubled year-over-year. So a very good performance and this whole story of a tale of two companies continuing. Of course, we are very pleased with the continued performance improvement that ResCap despite what our significant headwinds in the U.S. residential mortgage market. We had talked at the last earnings call about taking significant steps to reduce our nonprime exposure and our nonprime production and some of that is starting to bear fruit. We also continue to see improvement in our servicing income and loading our structural cost base to better align it with what's happening in the marketplace.

Auto Finance has also been very robust, seeing some improvements in margins. I'll show you some data on that. And then particularly pleased with how volume is ticking along, especially in what we call the diverse category of revenue. Strong underwriting results were the foundation of our strong performance at insurance in the quarter. And continue to see some good both servicing and underwriting performance in our extended warranty business insurance. Finally, we ended the quarter with a very strong liquidity position, over $17 billion of cash and cash equivalents at the GMAC level, so continue to maintain liquidity in what are very volatile capital markets positions. If we could move you to page four and some specific numbers for you. Global auto finance we are going to be reporting net income $382 million and that's double from the $137 million we achieved at this period a year ago and very comparable to the level of already very strong level in Q1 of '07. And if you see, we saw some uptick in global auto finance, in net revenue, good margin performance, good credit performance, nice performance on lease gains and a good handle on expenses. Basically all the stars were aligned in this part of the business. And we benefited from that by reporting a net income of $382 million.

Insurance, $131 million pickup, as I said earlier. Good underwriting performance. Earned revenue up year-over-year even though we are still seeing a flat written premium. And I'll talk to that when we specifically go through insurance. Other, which in our case basically is our 20% investment in Capmark, our old commercial mortgage operations and our investment, our ownership of our asset-based lending business commercial finance is also up year-over-year. Basically commercial finance was starting to see some really good traction. The turn around from our perspective is totally complete. Credit is performing well. Costs are very good handle on costs. And we are starting to see some pickup in margin. And you add all that up and feeling good about where that business is heading.

Net net, before ResCap, net net income of $547 million, which is $308 million up from the same period a year ago. At ResCap, we will be reporting a loss of $254 million. While that's down $800 million from this period last year, it's actually up significantly from the loss of $910 million that we reported in Q1. Last year at this time if you recall, we had a special unusual gain of $259 million, one-time, relating to the sale of our regional builder building business. But even adjusting for that, we are down year-over-year. But we have started to see some improvements. If I compare the year-over-year, clearly all the margins are tied, Canada's performing worse. Again gain on sale is worse. But quarter over quarter, and I'll spend some time on it when we specifically focus on ResCap, we are starting to see some performance uptick. Having said that, the head winds still remain very severe in the U.S. mortgage business.

Net net gain net income of $293 million, which is compares to net income of $787 million in Q2, but a big improvement of over $600 million -- close to $600 million from our position in Q1. Chart 5, a quick update on our pretax income. If you recall last quarter, we also showed you this data to highlight the fact that most of our U.S. operations now are LLC. So they report on a reported basis on a pretax basis and that is warping some of the tax impact. On a pretax basis, the improvement in the operations, excluding ResCap, was even more dramatic because we obviously do not pay any taxes in the U.S. now that we are an LLC. Our overall tax rate was in the 25% range. And this number will lower as ResCap performance improves, because right now we're not getting any tax shield for ResCap earnings. Page six, now spending, the next few slides, if I could specifically on ResCap performance. As I said earlier, ResCap is going to report a net loss of $254 million in Q2. That's a decrease of $800 million, but an improvement of over $650 million from a quarter ago.

And if I break it up into buckets, still unacceptable performance at U.S. residential business. This is our U.S. prime nonprime servicing business out of the U.S. Still unacceptable performance. And credit continues to weaken. Overall market remains very volatile. Now we have taken some specific actions both to improve our exposure and also to reduce our production in this tough category. The reason our performance has improved is because we've had some traction in that regard. We actually had a decent gain on sale this quarter and overall our overall exposure ongoing is significantly down. But as a result, our market share is down, our margins are still very tight, and the overall outlook on that space still remains very tough. Within the business and warehouse lending, I would say we had a decent quarter. We have significantly reduced our warehouse exposure in nonprime. It's down to a negligible amount now and business lending remains stable despite some headwinds in the building space. As you all know, the weakness in the consumer real estate business has spilt over to weakness with builders and we saw the impact of some of that. But credit remains very manageable and we are very aggressively managing our position in this regard. And actually if I step back, we're quite satisfied with our performance in this regard.

International business keeps on humming along. Some good growth prospects. We saw some uptick in both Europe and Latin America. U.K. starting to slow down a bit, but we are offsetting that by tightening our underwriting standards. And Then because of the way we manage our residual position there, I feel pretty good about our downside management in the U.K. And then capital liquidity, which is always important for a finance company, but very important right now in light of what's happening in the capital markets. Both our capital and liquidities even stronger than it was at the end of Q1 and will remain a key priority as we head into the second half of the year. If I could take you to page seven, this is a high level snapshot of the different ways that ResCap is affected in the nonprime space. Again I'll talk to each of these charts circled in detail.

But I wanted to give you a high level snapshot because when people talk about ResCap having nonprime exposure, it really depends on what bucket of the balance sheet you're referring to and what the impact is of nonprime in that bucket. And if you see and you remember, I showed this exact chart a quarter ago. There's significant improvement in our overall nonprime position quarter over quarter Our servicing book has gone up actually to $460 billion and about 14% of that is nonprime versus 16% a quarter ago.. Of course in this the primary impact of any credit problems is more than servicing costs rather than in credit losses per se. Warehouse lending receivables, significant shrinking of the business down to a $3.9 billion outstanding balance verses $6.5 billion a quarter ago. And our nonprime is down to 8%, it used to be more like 18% a quarter ago. I'll take you through. We've taken some real steps to manage that issue.

Held for sale down used to be $22 billion, down to close to $20 billion right now and our nonprime is down to 21%. More importantly, we continue to make good progress in our getting rid of what I call the '06 old vintage stuff. And we've made some big improvement there. At HFI, which is the biggest chunk where we are affecting by nonprime, we're down to 71% from 73% and I'll give you some data on runoff, but broadly speaking, we are satisfied with the nonprime runoff that we are experiencing in the HFI category of our balance sheet. So this was global data on page seven. Next few slides, I'd like to take you through some specific U.S. data, which is where, as you know, most of the pressures are that we faced in Q4, Q1, Q2 of this year. Quick status of HFS, our overall production was about $27 billion for the quarter. And on a global basis, for ResCap that was about -- our sales were in the $26 billion range. So more or less matching, sales were close to originations. Earlier some of you may have seen a slide that shows sales and originations matching to 27.2. They should really leave 25.8. So the story is totally comparable.

And we decreased our nonprime held for sale down to $1.9 billion, which is a $1.2 billion improvement. And as you can see, our production was very much, very little production of nonprime, only 3% of our total production related to nonprime. And this is consistent with some of the specific steps we've taken to manage our underwriting volume and to manage how we are managing our exposure going forward and focusing on assets that we have a much better shot at being able to securitize and fund. In terms of our distribution, again, very diverse sources of distribution, which is a key strength of ResCap, even in these tough environments continue to be able to generate a significant amount of conforming loans that are going straight to the agencies. Good nonagency whole loan activity, about 10% of our volume into nonagency whole loans. Of course, all the stuff that went to the agency was also whole loans of 46% and then 41% went to nonpublic securitizations. This is the space where I think the market has really become very tough recently. July, frankly has been pretty brutal in this space. But, again, we had good performance in Q2, and we are setting ourselves up that we are trying to control our originations so that we can also distribute better in Q3.

At the end of (inaudible), we had about a $4.1 billion carryover in terms of our inventory in the U.S. from Q1 in so feel good about what we are bringing over in terms of nonprice. HFI, very briefly on page nine. HFI declined also by $2.4 billion. That was made up of a decline of nonprime of 3.1. Prime actually went up. As we continue to grow the bank, which is not only a good source in which we want to store our assets, obviously a much cheaper source in light of the benefits we enjoy through the bank. That actually went up 0.7. So net net impact was 2.4 in HFI in Q2. We had a runoff for the year of about $3.1 billion. If you remember, last year, last quarter we talked about a $20 billion run off rate. If you look at what's happening to prepayments and what's happening to the general state of the market and what's happening to home price appreciation. Our current estimate runoff is closer to $16 billion of nonprime. We have about $4 billion or so last quarter and $3.1 billion this quarter. So we feel good about the $15 billion number.

The good news is over 60% of that runoff is related to '05-'06 vintage. And as you know, part of the '05 vintage was an issue. And of course, '06 was a significant issue. This chart highlights to you both where we are in terms of within nonprime vintage by year to highlight to you what years we have the most exposure. And then of course a good break down of HFI in terms of prime, nonprime, to prime second lien, etcetera. So good data for you to see where our soft buttons. Clearly this area getting a lot of attention and we've taken some very specific actions under the leadership of Jim Jones to see how he manages runoff and how we will service this portfolio. And while most of this assets are securitized, so our downside is protected. Still very important how we track this will be a key determinate in terms of what sort of what margins and profits we are able to generate over the next several quarters.

On page ten, a couple of quick comments on both servicing and warehouse lending. As I said earlier, our overall warehouse lending book is down to close to $4 billion. Nonprime is only $0.3 billion of that. If you recall, it was in excess of $1 billion a quarter ago. Most of that, unfortunately, has gone out as a result of chargeoffs. But we also had some successful workouts. And we are basically really focusing that business not to strategic relationships where we can have several touch points. We just don't want to be a pure lender. Jim has really tried to focus the business into customers with whom we have a much more comprehensive relationship. And we feel that will be the way to go in the future. We've also tightened our over credit management in terms of how, what type of assets we fund in terms of the warehouse and what type of assets we buy in a flow agreement.

Servicing continues to hum along, very great business. We have our portfolio up to $425 million in the U.S. That's up 11% from a year ago. We are now ranked number 6 in the U.S. on servicing. Feel very good. We have also successfully merged our nonprime and our prime servicing books into one portfolio under the leadership [Tony Denzie]. That process is working very well. We were announced as the number one sub servicer in the U.S., with over $60 billion in assets now. And this business generated in excess of $450 million of net income in Q2. So very important part of our strategy in which we are seeing some good success.

Page 11. Some quick comments on our business lending business and international, business lending is what's profitable in Q2 despite significant weakness in the U.S. housing affecting the whole building business. As you know within business lending, we have a very good resort finance and health care business and they were able to offset the pressures that weaknesses we are facing in residential construction. This business led by [Greg Schultz], we are sort of managing the macro environment quite well. It's a difficult environment, though. Because certainly you have the lot option housing and sort of equity income from our residential investments. Overall model homes gains, we are seeing some meaningful weakness. But we are managing that and I feel pretty good about how we've managed our collateral in this space.

International under the leadership of Chris is humming along. Some really good growth. We're seeing some nice strength in continental Europe. Latin America is humming along very well. Australia, we are starting to see the benefits of some early investments we have made. We're also looking at some new acquisitions, new growth opportunities in India and other parts of Latin America. U.K. market is, while still favorable, is seeing increasing competition and tighter margins. We have been very tough about not compromising our own underwriting standards. So we may give up some volume as a result. But I feel that's the right thing to do. And you may recall in Q1 of '07, we did sell a majority of our residual positions. So our downside in this market is significantly capped. Net net, we still feel very good about where our international business is headed.

On page 12, now to show you some credit statistics with respect to overall ResCap HFI and consistent with the comment I made earlier about they're being weakness, both as a result -- both frequency and severity there is weakness. Home price appreciation as you may know is sort of weak across the country. And that has affected our severity. Inventories are up in the whole REO area and that has affected our severity. But also frequency's up. And as you can see, we have about over 14% of our loans at the ResCap level are now designated as nonaccrual and we are seeing weakness in 30-day 60-day 90-day. Now we are working through this of course and our downside is, of course, capped because of our securitizations in this asset, but obviously this is one of the the major drivers affecting not only us, but affecting the whole marketplace. Chargeoffs are also up as a result of the weakness in nonaccrual and delinquency. And that's consistently filing. Our provisions are actually up even though we've had runoff. Our overall coverage ratios are actually up, we thought that was prudent thing to do. So our coverage ratios are up to 2.7% from 2.5% a quarter ago.

Just to remind you, we've taken you through that in investor events. Our net exposure on the securitizations that we have in this space is down to $1 billion. That number 6 months ago used to be $1.5 billion. As we see the rundown happen in the whole nonprime space, we are able to cap our downside and I expect that $1 billion number to continue to go down in terms of our securitized portion of our HFI book. Page 13 -- a quick comment on lending receivables. This is both our business lending business and our warehouse lending business. And nonaccrual loans are down as I talked earlier. We basically had a bunch of chargeoffs and a bunch of workouts. And as a result of that, the absolute size of the portfolio is down. But also, the percentage of nonaccrual loans is down. We did add some reserves in the construction lending business, a couple of key accounts. We are working with them, but we wanted to be prudent and we did take some provisions against those positions. But overall, as I said, our number of loans are down.

Chargeoffs are up, of course, because this was a quarter where we have some meaningful cleanout. Chargeoffs, in fact, in warehouse lending were close to $300 million for the quarter. Coverage ratio is down as a result of costs because some of the worst performing assets are off the books now. So we feel very comfortable with our coverage ratio in terms of allowance as a percentage of unpaid principal balance. It's still very healthy at 2.5%. So overall. A quick comment on liquidity before I talk about what the outlook is for the rest of the year. Liquidity is something we're taking very seriously in this (inaudible) space. If you recall a year ago, year and a half ago, $1 billion at the ResCap level was considered excess. Cash is now in excess of $3.5 billion. At the end of Q2, cash and cash equivalents are $3.7 billion. That's up over $1 billion from even March 31st. Overall liquidities in excess of $105 billion.

I should elaborate, though, that the unused conduit capacity includes $25 billion of a mint program that we are going to eliminate because we already put mint one in there. The right way to look at it is that overall available liquidity is slightly up. We did very opportunistically and huge kudos to David Walker and Bill Casey and their team. Very good timing in terms of $4 billion of unsecured debt was issued in Q2, which provides a good cash cushion. And we ended also the quarter with $7.5 billion of equity, which is higher than what we had at the end of Q1. If you remember, when I talked about earnings last time, I flagged the $500 million of equity injected that GMAC injected into ResCap in April, bringing the total amount of equities in '07 at $1 billion. So ResCap has a stronger liquidity position. ResCap has a stronger equity position. And we are quite comfortable with the level of liquidity. I should also flag that in this quarter, we were able to create $2.1 billion more of new committed facilities. These were increases to our current facilities -- '07/'06 current facilities. And we are quite pleased with the continued access we enjoy in the markets. So something we take very seriously.

In terms of outlook. I'm on page 15 now. While Q2 results were still weak and unacceptable, we did show a marked improvement compared to Q1 under the leadership of our CEO Jim Jones. We took multiple actions to mitigate the risks that have begun to show results. I feel good about where business lending is. It's stable and we're managing the situation quite carefully, if you look at the macro environment. And of course, international continues to grow. So we are taking -- we took some actions and we were glad to see that we had some results. Having said that, of course, losing $250 million is unacceptable performance. The current capitalization and liquidity conditions remain quite adequate and ample from our perspective, even though the overall market is quite weak and volatile.

We expect continuous improvements in ResCap's earning performance in the second half of the year. However, the conditions and the market is quite severe. Therefore if the pressures continue, we expect ResCap's current liquidity and capital position to be sufficient to operate through the cycle. So we're not taking anything for granted in light of what frankly are very tough conditions in July. Over the medium term do I look at the franchise that ResCap has, both the geographic franchise and the U.S. franchise in terms of its origination capacities, product innovation and its servicing platforms. Feel very good about the earnings potential and growth and our ability to benefit from opportunities that this market disruption is already causing and will continue to cause for the near term. I feel pretty good about our ability to exploit that.

With that, why don't I turn our attention to auto finance. Page 16. Auto finance had a very good quarter, as I said in my earlier summary. Across the board, I like to use the color, red, yellow, green. Lots of green now on page 16. If you look at overall volume, we kept up, despite GM having some headwind with respect to their own retail volume, we actually managed to keep our volume up quite good both in the new and used category. Particularly, used are up 50% year over year. So starting to see some traction in what we call diversified revenues and early days, of course, but feeling good about where that's headed. Credit continues to perform well. I'll show you some data on that in a second. Lease residuals performing quite well. Good discipline by GM in terms of short cycle volumes. Of course, our own superior smart auction technology in sum total resulted in overall used car volumes if you look at the Manhattan index. That's also up year-over-year. Net net performance have been quite good.

And also starting to see turn around in Canada where if you recall last year there was a lot of weakness in lease residuals Overall margins are up, we are seeing some weakness in certain parts of international. But that's more than offset by growing margins in the U.S. Overall net income of $382 million, which is more than double of the $137 million that we made in this space a year ago. So feeling good about overall where that business is headed. Page 17. Some data on volume. Overall year-over-year volumes were up, volumes were also up from a quarter ago. Used cars volumes are up 50% and we are starting so see some modest growth both in non-GM, some modest growth in new volume and also within in GM. Overall, we underwrote 545,000 new units and 129,000 used units.

I want to also flag that we successfully enrolled in the last 6 months of the year close to 2,400 diversified dealers to participate in the retail brands under the national branch. So again, very early days, but some of the strategies that you heard Eric talk about and you heard me represent at previous investor events, we are starting to see some traction in terms of at least getting the relationships locked up and now of course we have to deliver on actual volume. Chart 18, some quick stats on credit. These are global, so they cover both North America and international. As you can see, delinquencies are mostly flat year-over-year. As I said earlier, some uptick in severity that is affecting absolute losses. But overall if you look, frequency is pretty flat. And overall feel pretty good about how credit is performing. I get asked many times about auto credit in the nonprime space or the subprime space. And I want to just mention one. We're not seeing some of the same affects that we are seeing in the real estate market. Nonprime is affected a lot by unemployment and interest rates. Both are actually in a very manageable state. In fact, both are performing very well.

And overall the whole underwriting performance, the whole loan to value equation, the whole depreciation of the asset is very different. And we feel quite comfortable with our exposure in that space. And frankly, with NAO that remains one of our most profitable pieces of the business. Changing gears now on page 19. A quick update on insurance. Written revenue flat. We've had now a couple of quarters of flat revenue in terms of written revenue. Earned premiums is up actually year-over-year. Very soft personal auto insurance market. I'm sure you are seeing that in other companies that you cover. We also had one-time loss in GMAC Re account that affected our written premiums for Q2. Those are offsetting. But they are more than offset over time by some of the strategic moves made in the international space and some of the strategies we are putting in place in terms of diversifying our extended service business away from service business..

Underwriting results for a great combined ratio of 90%. Very good underwriting, very good servicing of cost. The fact that the weather has been good. We have not had that many major hailstorms and no major hurricanes to note. And obviously, that positively plays into our underwriting results. And business investment portfolio, if you recall, in Q4 last year, we right-sized our portfolio to having 10% of equity was 30%. And that process is working out very well. So overall net income of $131 million. That compares to a net income of $80 million last year at this time and very comparable to strong Q1. Both Q1 and Q2 were in fact record quarters for insurance, really feel good about how offset. Page 20 is some data on core earnings as you will see in Q3, for example, we had last year we had a lot of capital gain. We wanted to strip that out and show you what our core earnings performance is overall and even on a core earnings performance core earnings before interest expense and before capital gains. $124 million in Q2 compared to $85 million a year ago. So good performance. And I said earlier, earned premium is up. Feel good.

Also we completed an acquisition in the U.K. that would pay -- really increase our presence in the U.K. And we continue to look at strategic bolt-on acquisitions and are consistent with our four lines of business that we have in the insurance space. Now, changing gears a bit, talking a bit about liquidity, our favorite subject these days in the marketplace. On page 21. GMAC finished the quarter with much stronger liquidity, better (inaudible) than a quarter ago. Cash was at close to slightly less than $13 billion a quarter. We finished it at 17.5 for Q1, for the end of Q2, $8.5 billion of unsecured and executed by David and his team. 4.4 and the GMAC level. 4 at that ResCap level. Over $13 million of whole loans and secured funding. On top of that, we renewed $20 billion of credit lines. So Q2 was a banner year -- quarter in terms of building liquidity. And kudos to David and his team, over $40 billion of liquidity locked up in Q2 and already timely.

Want to quickly mention the GMAC bank lines. Sort of what I call sources of last report. We were successfully able to lower the fees and translate them into drawable lines. So you should view them as dry powder. You heard me talk about retail dry powder. And I would view the $6 billion of lines as also dry powder. As we continue this turmoil in the marketplace, the capital markets are under some turmoil volatility right now. We have weakness in the U.S. real estate market and we have the upcoming labor negotiations at the GM level. So we will continue to balance prudent the liquidity with the focus on cost reduction. So this is going to be a priority of ours till we see better macro environments in terms of our ability. Over time, of course, we would like to reduce our cash, but we're not going to do that until we see a significant improvement in these macro environments.

Quick comment on page 22. Our exposure to GM, obviously tracked that very vigilantly, no change. Staying quite flat all in the categories that we would expect in the $1 billion range. And both exposure to both service affiliates and GM affiliates gets a lot of attention at the GMAC board level. Very comfortable how that's tracking. Page 29, a quick update on growth initiatives. If you've seen me talk about that over time. How do we leverage the things that we do well with GM? Obviously maintaining our relationship with GM and GM dealers is a priority number one. We have we are a very mutually beneficial relationship with GM. We believe we are a very good supplier to them and, of course, they are a fantastic customer of ours. So that is obviously a big commitment to grow. But we are what Eric, our CEO likes to say, take the show on the road. And we are starting to see some good traction in terms of taking the show on the road. Ultimately the results will come, but early the results are very positive.

I mentioned to you already, 2,400 diversified dealers that we have signed up now to participate in our retail programs under the national brand. 50% growth in used both through GMAC, Novell and the national brand. We completed a $2 million milestone for smart auction. I still remember how long it took us to get to $1 million. But the journey from $1 million to $2 million has been very fast and we are expanding our footprint there in terms of the sort of products and the sort of customer base we have in smart auction. We feel that could be a very nice fee income source for us in the next foreseeable future. And then we have successfully built a sales team to market vehicle service contact beyond the GM network. And again, that's been set up now and over the next several quarters, hopefully we'll see some results.

International remains very important. Some of the things we've done well in the U.S. we need to take the show on the road overseas. China continues to be a great success story. Our balance sheet is now in excess of close to $1.2 billion. We obviously have a huge significant leadership position in the Chinese market. I briefly mentioned the acquisition of our U.S. small bolt-on acquisition for auto insurance in the U.K. Provident. We completed that in June. That could generate in excess of $300 million of written premiums on a run rate basis starting '08. We also agreed to acquire a small Canadian mortgage operation, as we diversify our global footprint in terms of mortgage. And then obviously Latin America we continue to benefit both Mexico, Brazil, Ecuador, obviously have to be vigilant about the downside risk. But in terms of our gross margins and absolute earnings, that's continuing to payoff very well. So feeling good about where we are on growth, but obviously a lot more work to do and a lot more results to show in this regard.

So if I summarize before we open it up for questions. And before I do that, I did want to flag that there's a bunch of supplemental charts in our deck that may be of use to you, including condensed P&Ls for insurance, auto finance, mortgage, and also some other data you may find useful. And of course, in our earnings release, we have internal data and financial highlights that may be useful to you as you try to assess the quality of our performance. So if I summarize the quarter, it was a solid performance in light of very tough environment. Losses at ResCap more than offset -- were more than offset by strong performances in both auto, finance, other, and insurance. We did successfully reduce our exposure to nonprime in the U.S. and also on managing our production well. And also did a decent job of managing capital markets volatility in the mortgage space even though as I said that remains a big challenge. We do see continued risk in this space as a result of that both at the GMAC and ResCap level. We are maintaining very strong liquidity and very strong capital position and we have significant success in this regard in Q2 and that remains a key priority going forward.

Significant challenges remain for the rest of the year but we are beginning to see favorable impact of the actions we've taken to mitigate risks. We expect continued improvement in ResCap's earnings in the second half of the year, we expect solid performance both from auto finance and insurance, although at a more moderate rate of growth than we had in the first half of the year. But very, very solid performance expected there. Longer term, of course our business diversity, our range of products, our origination platform, our strong liquidity means that not only can we withstand these challenges, but it's a great foundation for a very successful earnings growth. Net, net, disappointed with the loss at ResCap, but feel good about some of the actions we are taking. Prepare for what is turning out to be a tough Q3. But overall feel good about how the overall business has performed. As I said earlier, it's a tale of two companies, insurance and auto finance tracking very well. But starting to get a handle on the mortgage space. With that, why don't I hand it back to Susan?

Thank you, Sanjiv. We are now ready to take questions from the investment community. Will you please let our callers know how they can queue up to ask a question?

(OPERATOR INSTRUCTIONS) And the first question comes from the line of Douglas Carson with Banc of America Securities. Please proceed.

Thanks, guys. Quick question on originations. It looks like the used vehicles are up 50%, Manheim's up about 1 or 2. That seems like a lot of units. Was that above your internal target? And is there any risk if we move that number up throughout the year that we're kind of overloading on the used vehicle?

Good to have you on the call. I think that I'll have Mark also jump in as appropriate. But I think the answer is no. If you look historically, GMAC has been actually a very good used player. We understand how this collateral behaves, we understand how the value degradation happens, both in Nuvell and at the core GMAC business. We know this business very well. We were just underinvesting in this business because we had shortage of capital. And now that we have capital, we are focusing on it. We think there's some good money to be made. And I don't know, Mark, you want to reinsure investors about how prudently you're managing the down side risk?

Sanjiv, I'd just say two things. One is our overall penetration in the used market remains very small. So we're not -- I would say unduly exposed here from a penetration. And actually, we would ascertain that there's quite a bit of growth left here with very good credits in the market. Secondly, we had looked at our credit scoring models for the used business. And while we made our conscious decision in terms of lowering some of the thresholds to do a more broad-based used business, I would say it's pretty marginal change in our underwriting. And actually our results year-to-date show that this asset is very well-behaved. So I would say to the contrary, we actually think there's a lot more growth here. It was just basically a very underserved market with most of this volume actually coming through our GM dealer channel.

And then separately, it looks like U.S. nonprime HFS is I think down about $1.9 billion. Do you have a target you could share by year end where you think that will be? And separately, there is clear a lot fear of the market regarding subprime and ResCap and you illustrate that ResCap has a lot of liquidity on slide 14. But can you maybe opine on GMAC's appetite to inject more equity if needed into ResCap if things were to happen took a surprise downturn maybe in the second half.

Let me answer a couple of them and then I'll -- we have Jim Jones here the CEO in charge and I'll ask him to comment about how he sees the sector over the next six months. I'll answer your last question first. As you know, the GMAC board and the shareholders of ResCap and GMAC did not hesitate to inject $1 billion of equity when it was appropriate. I can't opine on whether they would be willing to put more, this is a decision that the board of GMAC and the shareholders of GMAC would have to make. All I can assure you, that if you look at the strategic plan of GMAC, a strong ResCap with an investment grade rating is a key part of our plan and a key part of our value creation. I feel that if you look at the actions we have taken, they speak higher than any sort of blind commitment. So I feel pretty good about all the steps we have taken to not only bolster the liquidity, but also bolster the equity. We don't give specific targets with respect to where we see, how much nonprime HFS. One thing I can tell you, we are doing our best and that's easier said than done. In terms of whatever we originate, we are trying to manage that in terms of our ability to sell that or securitize that. Jim, is there something you would like to add or elaborate.

The only thing that I would add is that we're being very attentive to what the market conditions are and obviously taking steps to put ourselves into a position where I think it's far less likely that a capital requirement would be necessary.

Okay. Thanks a lot, guys.

Thanks, Doug.

Our next question comes from the line of James Leda with Merrill Lynch. Please proceed.

Good afternoon, can you hear me?

We can hear you very well, Jim. Thanks for being on the call.

Great, thanks for taking my question. One housekeeping one quickly. Other than the $500 million contribution that we all knew about this quarter, were there any other contributions?

No, Jim. Year-to-date, we have injected $1 billion, $500 million came in Q1 and $500 million came in April. Dollars are of course fungible, but I did want to flag to you that, as part of the sales transaction, General Motors injected $1 billion into GMAC. Just share that with you.

And there were no other injections from GM into GMAC?

No, and in fact, we are happily paying preferred dividends. And no, there were no injections from either GM or the Cerberus led consortium.

Okay. My question really revolves around the held for investment portfolio and the change in target that you have for the runoff. Started the year probably a bit light relative to the original target that you had set. And then obviously things decelerated in the second quarter. What is the risk to reaching that $15 billion runoff by the end of the year? And do you view that as a high confidence target? Or is that something that you're still going to have to work very hard to achieve?

I'll let Jim elaborate but we've done models every month. We look at what's happened to prepayment, macro interest rates, market environment, home price appreciation, and remember, this is all based on prepayment or refinancings as the market calls them. At this time, that's the best number we've got. I don't know, Jim, whether you wanted to elaborate on probability and things like that.

Yes, one of the things we're doing is we're intentionally slowing down the prepayment speed by using modifications. And with very much the intent to slow down chargeoffs at the same time. Part of this, we have provoked ourselves through actions that we're taking in order to work with our borrowers in order to continue to make these earning assets as opposed to just precipitously resolving it.

Okay. The other question I wanted to ask is with regard to what you guys are seeing on the prime portfolio. It wasn't called out specifically in the release. And I know in the past, you've said that the losses have been contained to the nonprime portions of the portfolio. Is that still an accurate statement?

Yes, it is. Obviously even within the prime, though, there is severity issues. So the severity across the sector. But in frequency, I think that's broadly a fair comment.

I'd say that the one exception attendant to that is probably second mortgages where we've seen a significant weakening in the second category. I think in that one it's more of a frequency issue. We were already pretty deep on the severity side.

I think the slide presentation doesn't call out what percentage of the held for investment portfolio is second lein.

Actually it does show it out. If you look at page nine.

Page nine.

About 11% of the portfolio in the U.S.

There it is.

You see that?

Yes. And I think that's consistent with where it's been the last couple of quarters if I remember correctly.

Frequency's up in that space. And again, it goes back to collateral degradation, home price appreciation where it is creating some loan-to-value challenges.

Okay. All right. Thanks. Tough conditions. That's a good quarter. Thank you.

Thank you, James.

Our next question comes from the line of Chet Luy with Barclays. Please proceed.

Hi, good afternoon, everyone.

Good afternoon, Chet.

Just a few questions. First, has there been some thought with regards to merging GMAC and Chrysler financial operations? Or even just GMAC servicing Chrysler financial assets given potentially significant labor cost synergies from this arrangement?

Chet, that's a very speculative question. All I can say as a matter of record, is that GMAC has had no involvement at all in the Chrysler financial issue. This is obviously a transaction that is still is being in the process of being closed between Cerberus and consortium and Daimler-Chrysler. So it would be inappropriate for me to speculate on what could be the future. We obviously work very close Cerberus and its associated companies. But beyond that, this is all an issue of time. I don't know what I could say more than that at this time.

Right. Can you talk just broadly about potential benefits from merging both operations?

I would again be speculating. We obviously that business is a competitor of ours in some ways. Some ways it doesn't compete with us. I would be speculating in terms of what the benefits are. Right now we have a very clear strategic plan in which we are providing GM good service and we are diversifying our revenues within the auto finance space. We feel good about how we're doing that. And we've got our head down, got a lot to do. We need to decrease our cost of borrowings, we need to diversify our revenue, continue to grow our GM share. In terms of what other opportunities are out there, I would be speculating at this time.

Second question, can you update us on the proportion of subprime auto loans verses the total auto loans in your book?

I think there's not been much changes. In the U.S. it's about 15% of the portfolio, something in that zip code. Not been a significant change. One of the things we've done a good job and I'm not trying to be critical of the mortgage sector because frankly, we were active participant. The underwriting standards have stayed consistent. They've not been seasonal. They've not been up and down. More or less the overall underwriting standards have remained quite consistent. And you're seeing that accordingly play out. So there's not been any meaningful change.

And industry wide, are you seeing a decline in subprime auto loans? And is this impacting auto sales somewhat?

There are different reasons given for what's happening in auto sales. That's probably a great question for Mr. Ballew tomorrow at the GM earnings. I would be speculating what are some of the factors. Things like gas prices, things like unemployment, things like real estate weakness. But I would be speculating what the factors are. We have at our level have not seen any direct correlation. But we don't track it the way the OEMs track it.

And my last question has to do with ResCap. What was the dollar amount of modifications done in the first quarter and the second quarter?

I don't have the number handy. But I don't know I want to talk to what we're doing there, actually.

Great. Thank you.

Thank you, Chet.

Our next question comes from the line of John with Bank of America Securities. Please proceed.

Yes, hi, guys. Thanks for taking my call. Quick question. Can you expand just a little bit more on what you're seeing in the home equity space? One of your competitors came out with commentary last week that seemed pretty negative. Just trying to get a sense of how that may affect your outlook for improved results in the second half of the year.

Jim, you want to take that?

I think that in the -- there's two different issues here. One of which is home equity loans. And the other in which are home equity lines. I think in particular it's the lines that have been more at issue with regard to declining home price appreciation. And so they have turned out to be particularly difficult and particularly difficult at higher advance sizes or higher line sizes associated with them. I think we were pretty early on with regard to recognizing the severity that we were seeing with regard to these loans. The issue for us now is the frequency. And we're trying to be particularly attentive in terms of management of these going forward.

Okay. And then just one quick follow-up. At the end of first quarter, I think your off balance sheet subprime residual was about $258 million. Where did that trend in the quarter?

I think the number got lower. I don't have the exact number, but it's lower than that.

It's marginally lower.

It's marginally lower.

Okay. That's great. Thank you.

Thanks, John.

Our next question comes from the line of Chris Ceraso with Credit Suisse. Please proceed.

Okay, thanks, hi Sanjiv.

I didn't realize that we had auto guys on the call too.

Yes, we're everywhere.

Good to hear from you, Chris.

Just a couple of quick ones. First, what do you think the chances that there are still surprises in the loss frequency and severity in the held for investment business? Or is it a function of there's a lot that's going to roll off so that kind of caps your exposure there?

I have to be candid with you. The market is still very tough. I think for anyone to suggest that we could say fairly that we are -- we can say that several frequency or delinquencies will not go up. Market is still very tough. Having said that, I have to say, sitting as the CFO, I look at what we are writing now. I feel a lot better at the underwriting the way we are writing it now and what we are taking on the books. So that gives me a lot of comfort. But, I think, Chris, the market is still pretty tough. I don't know, Jim, whether you want to add anything.

We don't see a whole lot of good macro economic indicators in terms of absorption of new housing sales or time on market or home price appreciation indicators that would cause us to feel more comfortable. And certainly liquidity in the market continues to be very much an issue in terms of dependability. So I think that we will control the things that we can control. The things that demonstrate risk or exposure to us, we're going to continue on a campaign to contain our exposure.

So the comments about performance in ResCap improving in the second half, that's more about what you're writing now and acknowledging, though, that there's still some risk with the existing book that's on the balance sheet.

Well, it's obviously with a set of expectations in terms of the performance of the assets that are there. We have pretty good view in terms of what they are. The issue becomes one, though, as to whether or not there will be surprises sometime in the latter part of the year with regard to -- could we have an employment issue at some point in time? I suppose that's possible. And that would clearly be adverse. And home price appreciation is negative to the extent that that turn more precipitously downward, that would also be troublesome for us. But those are not our expectations in terms of building our forecast. Our forecast is built off of what we're experiencing in the market today.

Okay.

We are managing our research very proactively. Jim mentioned the whole concept of modifications on our current portfolio. We are managing costs very aggressively. We are managing what we are underwriting aggressively. We are trying to sort of box and balance our HFS exposure. So we are taking all the actions that you would expect us to take, which is leading us to make the comment we made about second half being better.

Okay. Can you give us a couple of metrics around the credit performance in the commercial mortgage business? I think you mentioned that was getting worse.

The commercial mortgage business, I don't know which one you're referring to. In terms of Capmark, in which we have a 20% investment, that business is actually doing quite well. I think you're referring to to business lending. And within business lending, if you look at our overall provisions and our coverage, we are obviously year-over-year we are significantly up. I don't have any specific data to share with you. But if I look at our overall provisions, we added a bunch of provisions in Q2 and overall there are two or three accounts about which we feel pretty nervous. And so we are tracking that proactively. The business is still profitable. Overall a huge majority of our portfolio is overperforming. And of course the resort business and the healthcare business is performing very well. Net net, I think we expect positive profitability from that business for the second half of the year. But there is some weakness, no question, in certain markets and certain builders.

And then just lastly real quick, you mentioned a year ago you had the gain on the sale of the home builder in the ResCap numbers. Were there any similar types of gains in this year's numbers?

No. That was a one-time gain. $259 million after tax, but there's nothing like that in this quarter.

I appreciate it, thanks.

Thanks a lot, Chris.

Your next question comes from the line of Sam Crawford with Stone Harbor. Please proceed.

Thank you for taking my question. Two on ResCap please. The first is, again about resets. If you were to take the portfolio at the end of 2006 as it existed at that time and you looked forward to the loans subject to a reset in 2007 and then subsequently at 2008. What portion now have either been modified or refinanced out of harm's way?

In the peak of the ARM resets, Sam, are going to be in the second half of the year. November is the peak Jim is telling me. A big number, resets, not only for us but for the whole market because the corresponding period was when there was a spurt in the market with a lot of what we'll call ARM teaser rates that the markets saw. We have had limited experience with our resets right now. But I have to say it's very early days, but we seem to be coping with that quite well. Jim, is that fair to say?

We're continuing to see a material number of early payoffs that are associated with this. So part of it is a forecast that's associated with these continuing. Part of it is also our loan modifications. You asked what percentage. I don't have a percentage in front of me at the moment. But it's still a minority of the loans that we have addressed. We are still tracking them to see exactly what the performance will be post modification under these market conditions. We've certainly done modifications before, but these are clearly a different set of circumstances that we're conducting these in today's marketplace. So we're going to continue down the programs in terms of trying to work with these borrowers and find acceptable solutions to it. But we have a long ways still to go.

yes.

I appreciate the comment. But would it be possible to get something a little more specific. At least in terms of are you now one-third of the way through the 2007 problem? One-half of the way through the 2007 problem? Where do you stand?

We are less than one-third with the way through to be honest with you. The whole market has got a huge bubble of ARM resets coming up in the second half of the year. And Chris talked about one of the things that could go -- how the whole market handles ARM resets, not just how ResCap handles it. But how the whole market handles ARM resets will be a driver for overall performance of the real estate market in the second half of the year.

Thank you very much. The other question is perhaps easier to come to terms with. It's just simply, where do you find your cost to originate is now in prime?

Well, it's unacceptably high because of our volume reductions. And so, we don't have the same level of base to spread it across. That's, in fact, very much a part of our expectations in terms of right-sizing.

That's the cost comment I made earlier, Sam.

All right. Thank you very much.

Thank you, Sam.

Our next question comes from the line of Robert Barry. Please proceed.

Hi, guys, good afternoon.

Hi, how are you doing?

Most of my questions have been answered. But I did want to clarify the outlook. First in terms of ResCap, do you think it's possible that we'll see break even at ResCap in the next quarter or two?

I think it's -- we don't like to give guidance. We don't have specific guidance. I think under the leadership of Jim Jones we've taken some specific steps to restore our overall performance. We are taking actions. We do expect continued improvement in our performance, despite what are very challenging improvements. And see how it all plays out. I'd rather not give any specifics of targets there. And more importantly from your perspective, Robert, should real estate market pressures continue, we expect ResCap's current liquidity and capital position to be sufficient to operate through the cycle.

Okay. And also just to clarify the outlook on auto finance and insurance. When you talked about them continuing to grow at a more moderate pace, were you referring to you continue to expect a year-over-year growth or sequential growth?

Well, year-over-year growth. There's a lot of seasonality in our earnings and many times as you know especially in auto finance, it's sometimes a function of what's happening at the OEM level because we still are a significant amount of our volume in that regard comes through the GM channel. All I was suggesting was while I'd love for us to deliver double earnings every quarter from a year ago, I'm just being realistic, that if you look at the underlying fundamentals that even Bill can't do that. So that was -- I was just managing it. I do expect 2007 to be a very good year for both insurance and auto finance barring some weather catastrophe. I Feel good about how the business is going , and more importantly, Robert, from your perspective, feel good about some of the seeds we are sewing with respect to growth, which will actually take several years to pay off because obviously what you do now you harvest over the next

Yep, okay. Very good. Fair enough just wanted to clarify.

Thank you, Robert.

I think we will at this point ask the press to queue. We still have a number of questions from the financial analysts. But the press are invited to queue, at this time, as well.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of Ian Jaffe with Bear Stearns. Please proceed.

Hi, thank you.

How are you.

Just a point of clarification on financial reporting. You did provide the appendix, page 25 for ResCap. And you talk about total financing revenue. Are we to assume that any lower of cost or market adjustments on any of your mortgages, subprime in particular are made through that line item?

Linda?

No, the line item that would be impacted is on net gains on sales of loans. That's where the valuation come through.

So the line right after net loan servicing comes next gains on sale of loan.

Okay. I'm a little confused then just because if you compare the '06 numbers, you're looking at total financing revenue and interest expense. I have it originally reported, not to get too detailed, too in the weeds, but 452 net interest income. And that number 1.8 minus 1.55 is considerably less than 452.

I don't know where you're getting that from. Why don't we work with you offline. Ken will get with you and we'll try to reconcile this for you. Obviously it's pretty straightforward. But why don't we take you through that offline. Ken can get with you.

That's fine. Just one other point of clarification. I don't know if you guys want to report it this way. Also not be a nitpicker, but you might want to annualize the net chargeoffs to lending receivables as well as the mortgage loans held for investment. That's kind of an industry-standard.

Well, we'll considered that also. If we think that's appropriate, we'll embrace that. We appreciate your help.

Okay. Thanks a lot.

Thanks, a lot, Ian. Look forward to seeing you again.

Our next question comes from the line of Ryan O'Connell with CitiGroup.

Okay, thanks very much. I have really two questions, Sanjiv, I guess. First of all, could you give us just a short update on ResCap's ALT-A exposure?

If you look at the chart, I'll refer you back to again chart number -- again depending on which page you're looking at, you look at chart number nine. A lot of the prime nonperforming and prime second lien is the ALT-A exposure. And Jim, did you want to spend a couple of minutes on how that's performing in terms of the actual credit? I know there are some headwinds in capital markets, both in terms of advance rates, but if you want to talk to that at all, Jim?

The fundamental performance of these assets has not seemingly materially changed all that much. So we continue to be pretty happy in terms of how they've performed at this point. Alt-A is a material part of our business.

Okay. That's helpful. Thanks. Also, I just wanted to clarify something on page 12. And that is the bullet point that says on the securitized domestic HFI portfolio your net exposure is limited to 1 billion first loss position. And I've really got two clarifications on that. One, am I correct in assuming what you mean there is just your residual exposure on the on balance sheet securitizations?

That's correct. That number used to be $1.5 billion at year end.

Right.

As the runoff happens, that number gets lower and lower.

Thanks that's helpful. And then in terms -- because I know that ResCap also holds directly some mortgages. And I realize you haven't put out the precise Q2 numbers yet, but just ballpark. If we talk about what's going on in Q1, your total held for sale, let's call that $64 billion and securitized was about $49 billion and $50 billion. So the balance was about $15 billion, something like that. Is it fair to us to assume that just as you've got about 70% nonprime overall, that about 70% of what you actually own directly is nonprime. Is that fair?

I don't think so. In fact, most of our held for investment, most of it is prime because it's sitting in the bank.

Okay.

A big piece of our held for investment is in the bank.

If you're interested, I presume you can pull up the data on the bank and you can see it right there.

It's public data.

Okay so most of the balance then is prime, actually?

Not most of it, but a meaningful amount of it is prime. And of course, there are some too is of the asset that cannot be securitized. So that is obviously a mixed breed, that could be delicate loans. That could be (inaudible). I mean it could be a different buckets of loans for which the liquidity is not apparent as it is for most. So, it's a mixed bag. But if anything, it actually has a prime bias to it rather than nonprime bias to it.

Okay. Thanks. That's very helpful.

Thank you, Ryan.

Our next question comes from the line of [Gary Herbert] with Morgan Stanley investments. Please proceed.

Thank you. Can you hear me?

Yes, we can hear you very well. Thanks for being on the call.

It's a ResCap question, actually it's well-timed because it's a bit of a follow-up to the prior question.

You have to ask at least one insurance question. They are the ones who had the best quarter.

All right. I'll ask next quarter. I promise. What I'm trying to get my arms around is how much subprime exposure is left on the ResCap balance sheet ex collateral pledged against secured financing? So, I guess the concept is is what's subprime to support or how much of it is subprime on the asset side to support the unsecured bondholders?

Well, if you look at, I think the best way to do that is if you go to chart nine -- chart,excuse me chart seven and it shows where each of the buckets, there is not all the warehouse lending stuff is securitized, not all the HFI is securitized. And not all the HFS. So you're right in saying that each of it has some separate component that is being funded with unsecured. I think if I step back and Bill Casey and the team look at structural subordination and look at unencumbered assets, that the quality of assets -- and that issue has held up. There's some weakness, of course because the overall current quality of the balance sheet has weakened. But overall, I think if I look at coverage and I look at structural subordination, it's very much still in excess of one and quite comfortable with levels. So that's all really I can share at this time, overall. Because of the fact that assets are funded with unsecure to date and they entered into a conduit and they are funded by secure the next day. But currently, they may come out because they're being prepared for HFS. So it's difficult for me to give you a crisp number. Because depending on where that asset is in its evolution, it could be sitting in a conduit, it could be sitting in an HFI ready to be sold or it could have just been originated and could be sitting totally unsold. It's sort of a moving asset if you know what I mean.

That's fair. We're just trying to ballpark it. So maybe when Q comes out, we can get details.

You should be able to. The primary heart of the business is a moving business. So ultimately, except for certain assets on which we like the return, the goal is to move the asset.

Okay, understood. And one last question, it also is a follow-up to the last one. Is the residuals/retained interest, however you want to characterize it, there's an on balance sheet and an off balance sheet component. How have they been holding up? And how would you mark them on a mark-to-market basis?

The stuff is off balance sheet. It's being marked mark-to-market. The $250 million that we referred to is obviously being marked to market every month because that's a residual interest. The HFI, suitably adjusted, being marked verses what's happening to fast five and what's happened to the loan results. I think there are certain securitizations that have gone underwater where the actual losses on those are in excess of what was our first loss position. But a huge majority of them are very much within the total residual interest. And that's reflected in the total level of provisions that we have, which is well short of the total residual level.

But we're marking these based both on our own internal valuations and we're getting third-party indications every quarter.

Yes, actually that's a very good point. For all stuff that's residual interest of off balance sheet and our HFS, we are actually doing a lot of third-party working because frankly in certain cases the market is so volatile, you have to get a couple of bids to get a good handle on where to market.

That's my question. And finally with respect to these conduits, is there any -- would there be any issues with these conduits given market volatility?

Well, we have different kinds of conduits. Some are uncommitted. Some are committed. There are certain standards we have. And obviously, the reason we have so many is we want to be able to hit different sources as we need be. But I don't know, Bill Casey, if you want to speak to this at all, if there's any specific changes in Q2 that would lead you to believe that the conduits are likely to be worse than before. Anything special ?

Not at all. And I think the markets are -- we're funding even shorter dated, that's for the HFS where the market's tending to shorten up the maturities. But there's plenty of liquidity there for us and all the different conduits that we have available to us.

Thanks very much. And thanks for the earnings.

Thanks a lot, Gary. We want more.

All right.

And next question comes from the line of [David Knudsen] with Legal and General. Please proceed.

Hi, you made a comment about how the severities are holding steady while the frequencies have peaked. Is it in the same kind of general credit quality group that you're seeing the severities peak? Or is it in a different credit quality or geographic focus? And also, how fast are the delinquencies moving through the system? This kind of goes to some earlier questions regarding the loan modifications. Are you seeing the loan go delinquent to foreclosure to a rate that's faster than it would have been perhaps a year or two ago?

First of all, my comment with regard to frequency and severity was limited to seconds or home equity assets. With regard to first mortgages, the severity is, in fact, continuing to increase. That is different in terms of different geographies in terms of the specific impact associated with that. But most assuredly, pursors are still having increases in severity. The second thing -- I'm sorry the second part of your question, again?

It was more in terms -- If there's any kind of group if it's kind of been in an area whether it's geographic or whatever you want to define it as, that you were seeing problems in the past quarters. Is it still within that or spread to different regions or areas or FICO groups or?

Is it more broad-based? Yes, it is more broad-based, but the effects are very differential. And so, certainly there are different geographies that are performing worse than others. There's certainly differences in terms of price levels with regards to the collateral that we're talking about. We continue to see, though, the weakest performance with regard to layered risk and markets that are having most difficulty with regard to inventory absorption. Pretty standard, I think in terms of what that looks like. As far as the velocity is concerned in terms of houses or the foreclosure process, I don't think that that's materially changed. We still see situations where by and large people that are getting severely delinquent are having a very difficult time recovering from that. And there are not a lot of options available in the marketplace in terms of the idea of selling the home and being able to correct it that way. So it's a difficult process right now. And we certainly expect it to continue to be a material issue, given the condition of the marketplace and, again in terms of absorption and with regard to these ARM resets and that potential exposure for increased foreclosures.

One last question. It's in regards to the rating. You mentioned I think earlier in the call that you're -- I think the question was in regards to the capital commitment of some of the owners and how the perception is that the desire is to maintain a very solid capital company. In so far as the rating agencies are concerned, you talked that you expect the second half to better your undertaking efforts to get efforts to get there. Do you see from their perspective, do they see a period that will normalize for ResCap's business model in the near future? Or is it just controlling issues for the rest of the year? Or will it actually normalize and get back into an environment where liquidity will be better and capital costs will be lower?

This is question, obviously for the four agencies to respond to. But I think if I step back, you actually hit the nail on head. We have to be able to differentiate what is happening immediatly and the ability of our franchise to withstand that versus the medium-term long-term value of the franchise and its capability. And while I think today's conditions are brutal and they are reflected in the results we've reported, I think if you look the a the medium-term franchise value and medium-term capability, you reach different conclusions. In the meantime, both the management at ResCap and the shareholders of ResCap have been very focussed to make sure ResCap has enough capital and enough liquidity to withstand the near-term challenges. So in terms exactly what criteria, whether they would look at the franchise through the cycle or whether they will be affected by the losses of the day. That's a question for the agencies and they have had different criteria during different times. What I can assure you is that we take the liquidity and equity position very seriously. As we work these risks, we are making sure we do not damage the franchise value of the enterprise, because we feel good about some of it capabilities. And we are hopeful that as the market does stabilize, we will be well-positioned to exploit those capabilities.

Thank you.

Thank you, David.

Our next question comes from the line of Brian Johnson with Lehman Brothers. Please proceed.

Yes, if I look between 1Q and 2Q, what stood out was the difference in gain on sale. Can you describe, kind of A, break that into the markdown of the book you started the quarters with and how that changed. And B, what changed in origination in terms of risk management? Was it just the cutting back on subprime origination in order not to have a repeat of what we saw in 1Q?

Good to hear from you Brian. I think first of all, I don't want to give out specific data, but obviously you hit the nail on the head. The biggest change if you look at what happened Q4 versus Q1 versus Q2, is what we call low comp of adjustment was much less. Some of those assets had already been written on a lot, and frankly we were doing what I call a lot more book value trades. So the trades that were happening were being done actually at the value at which you had them on the books. So even though low comp was negative for Q2, again, so we did write off more in Q2, it was a significantly less than Q1. Secondly, I think we saw some margin pick up in certain asset classes. And that was very encouraging. Now some of that has to do with the fact that the asset that we bought in the first place was also bought in these current conditions in '07 early '07, late '06, and the margins reflected the underlying principle at which we bought the asset. But the margins were better and low comp was much less. That's the main driver in terms of the gain for sale improvement that we saw quarter-over-quarter.

Okay. And second, kind of strategically, how do you see getting back over break even. Not guidance, but just strategically, if you do, in fact, pull back from nonprime originations.

We're not holding back from nonprime. And I'd like Jim to also -- and Jim is also putting in place a lot of strategic plans that help us. But we are not walking -- all we are doing is we are doing a better job of trying to originate stuff that we can monetize. I don't know, Jim whether you want to elaborate here.

I think part of our expectation is that there will be a nonprime marketplace in the future here. It will be smaller, most assuredly, than where it peaked out. And hopefully it'll perform a lot better as a result of that. But there's going to be a market. In the meantime, we're having a very difficult time, I think in general getting investors comfortable with a new set of underwriting criteria that's going to perform over a period. We've got a very unusual set of circumstances with regard to negative home price appreciation indices. And so, we're quite frankly being very careful with regard to our participation at this point. So we are continuing to origination nonprime assets. We are doing so at a very small rate, largely just keep the machinery open. We will pick our moments. And we will participate where we think it's profitable going forward.

Okay. Thanks.

Thanks, Brian.

Our next question comes from the line of Satish Pulle with Merrill Lynch. Please proceed.

Hi, thanks for taking my question. I had a very quick question about loan modifications and especially a potential reliance on them in the second half of this year. Obviously the older history with loan modification happened (inaudible). Do you see loan modifications being quite an important part of how you manage potential delinquencies in the second half? Or do you see that as quite a small proportion?

I think it will be helpful. It is not a singular solution to the portfolio. And so we will engage, as we have been, in a number of different solutions everything from loan modifications to deeds in lieu of short sales and anything else that we think will give us the best economic performance possible. But loan modifications certainly will be a key element. But it is not a singular solution.

Anything else?

Thank you.

Thank you.

Our next question comes from the line of Louise Pitt with Goldman Sachs.

Hi, guys. Thanks very much for taking so many calls, questions. I just have a couple this afternoon. First of all, I just would like to see if you could give us some idea of how much home price deterioration and declines that you'll factor into the outlook for the second half being better?

Well, we don't like to give specific numbers, but is it fair to say, Jim that for a majority of markets we are predicting some flat to negative in the country for the very near term?

Yes, we're forecasting down.

Yes, if you look at the data on economy.com, you look at our field data, I think it's hard to come to any different conclusion. The big question, is when does the market turn around? And that's the tough question to answer. When do you see this trend turning? Over time, it's impossible not to be bullish about real estate prices if you look at the overall fundamentals of demographics and you look at what's happening overall. But I think the question is when does the tide turn? And frankly over the next six months, at least if not more, it's hard to see anything other than a flat to negative outlook in home price appreciation.

Yes, I guess my comment would be that I'm surprised that you would even have a flat outlook there. I guess our internal forecast is for significant deterioration in home price appreciation and actually negative. I guess I'm just struggling with how you're forecasting significantly better performance for the second half with a flat to moderately negative.

It's not flat, it is down. And it is down for both purposes of production assumptions and with regard to our provision estimates.

Our severity forecast reflects negative and obviously our pricing -- underwriting pricing reflects negative.

Okay.

There are small markets there where it's still flat. But overall trend is pretty bearish.

Okay. Perfect. That leads me to my second question. You said you were number 6 in servicing in the second quarter. I was just wondering if you would give us an indication your market shares and origination and whether where you could expect those to be by year end.

Well, our market share is down. We with our eyes opened sacrificed -- numbers are still very preliminary at quarter's closing. But we expect to be in zip code of about 4% for the quarter, which is down, of course. But overall, we are still very much a top 10 player. And we plan to stay that way. And if you look at our distribution capability, we believe that in terms of capability, we are still one of the best in the country. I like the franchise, but I think we're not going to write bad paper, that's very clear.

Yes. As you see the market for nonconforming and nonprime diminish much more than with regard to conforming activity. We clearly moved from an area where we had a higher penetration into a remaining competitive market where we had lower penetration. So there is a mix issue going on here for us that causes us to have an overall lower market share.

Okay. Great. Thanks. And then a quick one. In terms of taxes at ResCap, the 204 negative pretax loss versus the 254 net loss, can you comment a little bit on what you're expecting for taxes? I know you said as an LLC there really shouldn't be any, but I'm just wondering how that 50 million --

ResCap is, in this sense, getting the worst of both worlds. ResCap based taxes at the bank, which is profitable. ResCap based taxes internationally, which is also profitable. But ResCap does not get a tax credit for its core operations in the U.S., which is unfortunately negative. So there's no offset to the credit and loss of debit. So it will remain quirky. The only way to fix it is to make money. That's the only way to get that on track. In the meantime, it will remain quirky. And we plan to be very transparent with you with the pretax data, so that you can sort of help model yourself. But it's the price you pay when you lose money in a certain business. And obviously unacceptable.

Okay then very, very quickly. Your second half outlook, I'm trying to get quarter-by-quarter. Is your second half outlook for significant improvements relative to the net first quarter numbers? So the 254 plus the 910?

We want steady improvement. We -- I said that 250, while that's a phenomenonal over 650 million in improvement from Q1, it's still a loss and that's unacceptable. So we do not accept it. I don't want to give specific forecasts. We are working very hard. Jim took you through some key strategies that he set in place for the second half of the year. And let's see how they all play out.

Okay. That's great. Thanks a lot, guys.

Thank you.

And the final question comes from the line of Mark Alther with Credit Suisse. Please proceed.

Oh, thanks, guys. Just snuck in here. Could you give us the actual level of mortgage loan chargeoffs in the quarter?

I think we gave you a macro number if you go to chart --

You mean that percentage?

You see the total details in the 10-Q. But let me see if I can help you in the meantime. Overall chargeoffs, don't we disclose that in the -- I think it's close to $500 million, but I don't want to guess the number. We can get that to you, Mark.

That's sort of a lead-in to the actual reserve. Is the approach to reserves now, after the first quarter, to just sort of try and match what you're seeing in the actual chargeoffs? And as delinquencies turn into losses, that'll go up?

Mark, I wish it were as simple as that. It's actually pretty complex. If you look -- again, you have to look at different buckets of exposure. You look at warehouse lending where we had a lot of workouts and we actually walked away from a bunch of exposure so we had to take significant chargeoffs. There the amount of chargeoffs were significantly in excess of the provision that we took that quarter. In fact, even in excess of the reserve we have left. In the case of the HFI portfolio, it's all realtime. You'll see what's happening in that portfolio, how it's behaving from a delicacy point of view. You look at -- you make some HP assumption, you make some prepayment assumptions. You put that all up and smoke comes out, you get a new number, you look at it. You sense check it, you compare it to what's happening in the rest of the market. And then you compare that reserve to the reserve you've got currently. And that's a very dynamic process. A lot of energy goes into it. And because it's such a meaningful driver of profitability, it gets a lot of attention of the people who check our books. So it's not at all like you're cruising suddenly and there could be a shock that could force you to have to take bigger provisions and there could be some pleasant surprises that would force you to unwind some of the reserves you've taken earlier. It's a very dynamic process. And to reassure you, Mark, that's also how it works in the auto book. Of course, there the credit performance turns our a lot more stable, but the same type of rigor and discipline goes into those reserves also, those buckets also.

Okay. And then a couple of -- two quick ones. The GM dealers that you're signing up, where were they before? Excuse me, the non-GM dealers that you're signing up, how were they financed before?

They were all different. Some of them were being financed by the OEMs, capital finance companies, some of them were being financed by other commercial banks. There is no sort of specific backer. We welcome the attention of all the dealers. We have no bias at all, as long as they qualify with our underwriting standards. A lot our early leads are coming from the fact that over 50% of our U.S. dealer bodies with whom we have a relationship have non-GM franchises. So a lot of our early leads are coming from there. But we are also using the national brand trying to do what I cold calling. So there's no specific pattern that I would suggest. It's all over of all the OEMs who had some success with. And we still have a long way to go, Mark, in this.

Okay. To tie that into ResCap. I know you can't say exactly what the rating agencies are going to do and we've got to talk to them. But there may be no level of capital at some point, if things get worse, that will help ResCap. And GMAC doing so much better now that they're away from General Motors. From a strategy standpoint and downgrades would be a big setback to the GMAC auto and insurance operations. Is there a thought that GMAC and the owners would not allow ResCap to harm GMAC's progress and ability to finance more cheaply as a way to help General Motors to sell more cars?

There are a lot of ifs and but there in your comment if I could say, Mark. It really depends what's going on. I mean I have to step back. First of all, the agency will do what they will do. Our job is to run this business, both in terms of managing its short-term liquidity capital profitability but also to build a value over time, which we believe is very aligned with what the shareholders want and the bond holders want. Our interests are very aligned, because all of us want a stronger company with diverse revenue and sort of good balance sheet. We have to do that and part of that is the diversified model. I think I would be totally speculating if one could slow down the other. I actually feel very good about our ability to support our growth both at the GMAC level and the ResCap level. And I believe -- and this is a question you should ask GM, but I believe our strategic support of the GM business has only gone up, not gone down since the sale happened. It's a huge priority for us. And we are focussed on delivering high-quality service to GM and its dealers. And nothing that's happening at ResCap is as likely to compromise that.

So can I ask just quickly, would GMAC allow its rating to go down because of ResCap?

In the end, I don't know. You are suggesting that we have a lot more clout with the agencies than we have. Our job is to run the business properly. These are two balance sheets. Obviously GMAC has 100% ownership of ResCap. And we have to see how it all plays out. But right now, last time I checked, ResCap was investment grade rated and GMAC was on the cusp of being investment-grade rated. So we are actually in two different zones right now. I would be speculating about the give and take. Our focus is to run the business as profitably, prudently. We feel good about ResCap's stand alone position and we feel good about GMAC's stand alone position.

Are we concerned about the challenges we have in the mortgage space? Most definitely. That's a tough environment. We are taking actions, we are pleased by the improvements we made in Q2. But I would be flippant if I did not say that we were not concerned about the second half of the year. We are very concerned. We will do everything and the shareholders will help us, the board will help us to do the right things. But right now we are not having to make those choices. So it's sort of a moot issue.

Thank you.

Thanks a lot, Mark.

This concludes the question-and-answer portion for today's call. I will now turn the call over to Susan Shank for closing remarks.

Thank you very much, Tanya. We want to thank all of you for listening and a quick reminder that, as Sanjiv mentioned, there was one revision to the charts. If your deck does not say revised on the front cover, please go to our website and download the final version. Thanks once again for all of you for listening and thanks for your continued support of GMAC and ResCap. Thank you, operator.

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