Berkshire Hathaway offers to buy ResCap unit
By Josh Funk, APOMAHA, Nebraska--Warren Buffett's Berkshire Hathaway Inc. is offering to buy the mortgage division and loan portfolio of Residential Capital LLC, which filed for bankruptcy protection in May.
June 14, 2012, 12:14 am TWN
Residential Capital, also known as ResCap, is a subsidiary of Ally Financial Inc., the former auto lending arm of General Motors. ResCap was hobbled by payments on debt taken out to finance soured home mortgages.
Berkshire didn't spell out why it is interested in ResCap's assets in the court filing in which it outlined why its offer is better than competing bids.
But the conglomerate based in Omaha, Nebraska, already has significant interests in the insurance business along with a variety of other companies ranging from railroads to newspapers and clothiers.
Buffett has said that he believes the U.S. housing market will recover because more families continue to be formed, but he's not predicting when residential construction will rebound.
This investment could be related to Buffett's long-term optimism about the housing market, but it could also simply be a bid to pick up assets that are selling for less than they are worth.
Berkshire officials did not respond to a message.
Jeff Matthews, a shareholder who wrote “Secrets in Plain Sight: Business & Investing Secrets of Warren Buffett,” said he doesn't think Buffett is thinking of jumping into the mortgage lending business.
“He clearly thinks he's buying an under-valued asset,” Matthews said.
Berkshire already holds roughly US$2.8 billion in mortgage-backed securities purchased for about US$2.5 billion for its investment portfolio. Berkshire also owns manufactured home builder Clayton Homes, which runs its own lending unit, so it has some experience with mortgages.
Ally, which is 74 percent owned by the U.S. government, makes loans to GM and Chrysler customers and finances dealer inventories. The government first bailed out the company, then known as GMAC Inc., in late 2008 as part of the Bush administration's aid to the auto industry. The Obama administration provided additional funding in May and December 2009.
ResCap had been a drain on Ally's finances for years, struggling to make payments on its heavy debt ever since the bottom fell out of the U.S. housing market in 2007. In regulatory filings before the bankruptcy, Ally said that deterioration in the U.S. housing market had led to fewer sources of money for ResCap, which was highly leveraged due to mortgage defaults.