Another mortgage company in trouble

From Bloomberg:

Nov. 15 (Bloomberg) -- The risk of Residential Capital LLC defaulting on its debt soared on concern the biggest privately held U.S. mortgage lender may violate bank loan agreements, trading in credit-default swaps show.

Traders are speculating that Cerberus Capital Management LP and General Motors Corp. may allow the Minneapolis-based mortgage unit of GMAC LLC to fall into bankruptcy as the U.S. housing slump continues to deepen.

``As we continue to see conditions get worse and worse, the company clearly at some point has to reevaluate,'' Kathleen Shanley, an analyst at Gimme Credit Publications Inc. in Chicago, said in an interview. ``ResCap has an awful lot of secured debt, which raises the issue of `is it worth it.'''

Credit-default swap investors are demanding upfront payments of 37 percent and 500 basis points a year to protect ResCap bonds from default for five years, the highest on record, according to CMA Datavision in London. That compares with 32.5 percent upfront and 500 basis points a year yesterday. The cost rises as investors grow less confident in a company's ability to repay debt.

Credit-default swaps are financial instruments that cover losses on the underlying debt if the borrower fails to meet payments. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

A buyer of contracts for ResCap would pay $3.7 million upfront and $500,000 a year.

As long as new stories about companies in trouble because of the housing slump or the credit crisis keep appearing, things are getting worse rather than better.