Ally aims to end mortgage woes with ResCap filing

Mon May 14, 2012 3:16pm EDT

An Ally Financial sign is seen on a building in Charlotte, North Carolina May 1, 2012. REUTERS/Chris Keane

An Ally Financial sign is seen on a building in Charlotte, North Carolina May 1, 2012.

Credit: Reuters/Chris Keane

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(Reuters) - Ally Financial Inc's mortgage unit filed for bankruptcy protection on Monday, and the former in-house financing arm for General Motors Co also said it will sell some international operations to help set it on a path to repaying $12 billion in U.S. government bailout money.

The bankruptcy, which still needs court approval, came early Monday as ResCap faced looming bond payments and a possible loss of financing from its parent, which is eager to shed mortgage liabilities that have left it limping in the wake of the financial crisis.

At the same time, Nationstar Mortgage Holdings Inc, which is majority-owned by Fortress Investment Group LLC, struck a deal to buy substantially all the mortgage-servicing and related assets from ResCap for about $2.4 billion, including debt.

The deal will make Nationstar the opening bidder in a court-supervised auction.

Ally has been besieged in the past few years by losses at ResCap, once a major subprime lender and profit engine. The company has considered bankruptcy for ResCap and other ways to shed the unit since at least 2009, but has never pulled the trigger.

The bankruptcy declaration is intended to help Ally focus on its main auto lending and Internet banking businesses and put together a plan to pay back U.S. taxpayers.

"The single most important thing we can do for the U.S. taxpayer is to not put billions of dollars into this business on a going-forward basis," Ally CEO Michael Carpenter said in an interview.

ResCap plans to sell its remaining mortgage loans and other assets for $1.6 billion to Ally, unless another bidder steps up. ResCap, which will continue operating in bankruptcy, then plans to wind down.

Nationstar would emerge as a top U.S. mortgage servicer if its bid is successful. The purchase would give it more than $370 billion in new loans to service, while any liabilities would stay with the ResCap bankruptcy estate.

BAILOUTS

The U.S. Treasury Department injected $17 billion into Ally through multiple bailouts during the financial crisis and now owns nearly 74 percent of the company. Ally still owes the government about $12 billion, counting dividend payments by the lender and sale of some securities by the Treasury.

The bankruptcy comes as pressure increases on Ally to repay that money and problems at ResCap become increasingly unmanageable. The Obama administration is trying to recoup money from crisis-era bailouts before the presidential election in November and does not want Ally to become a black mark on the auto industry restructuring.

Timothy Massad, assistant U.S. Treasury secretary for financial stability, called the bankruptcy filing unfortunate but necessary.

"We believe that this action puts taxpayers in a stronger position to continue recovering their investment in Ally Financial," he said.

ResCap is a rare example of a subsidiary of a bank holding company filing for bankruptcy. It could serve as a road map for Bank of America Corp as it grapples with its struggling Countrywide mortgage business, one bankruptcy expert said.

"If it works, it's possible this is the beginning of the end of this part of the whole mortgage mess," said Stephen Lubben, a law professor at Seton Hall University School of Law.

BOARD APPROVES FILING

ResCap's board approved the filing in a meeting that started around 6 p.m. Sunday, but negotiations with creditors and investors extended into Monday morning, a person familiar with the situation said.

Ally will take a $1.3 billion charge, which covers its $400 million equity investment in ResCap, a $750 million settlement with ResCap and $130 million in reserves for claims related to mortgage-backed securities.

In return, Ally receives legal releases to claims over mortgage-backed securities with ResCap and third-party litigants. Ally said ResCap has also obtained support for its restructuring from certain noteholders.

In addition, some investors in residential mortgage-backed securities (RMBS) issued by ResCap will support the reorganization. ResCap and 17 institutional investors reached a proposed settlement in which ResCap will grant an $8.7 billion claim to 392 RMBS trusts issued from 2004 to 2008, the law firm for the investors said in a statement.

Ally will also seek "strategic alternatives" for its auto, insurance and banking businesses in Canada, Europe, Britain, Mexico and South America. These operations have about $30 billion in assets.

Carpenter said after these divestitures, ResCap will likely have paid back about two-thirds of the bailout money. He expects ResCap to emerge from bankruptcy by year's end, with the divestitures complete or far along.

RESCAP DEAL

Ally is the fifth-largest mortgage servicer in the United States and the country's 10th-largest originator of home loans, according to the latest data from Inside Mortgage Finance.

ResCap has 2.4 million customers and 3,600 employees.

Of Nationstar's total purchase, the equity portion is expected to be $880 million, consisting of about $700 million for the servicing rights and $180 million for the advances.

About half the equity is coming from Nationstar and the rest from Newcastle Investment Corp, a mortgage REIT managed by Fortress, and other Fortress funds. There is a $72 million breakup fee and reimbursement of up to $10 million of transaction-related expenses if Nationstar does not win the auction.

The transaction is expected to close by year end.

Wesley Edens, co-founder of Fortress, said he expected other bidders in the auction but that Nationstar is well-positioned.

Barclays Plc is arranging a $1.45 billion debtor-in-possession financing for operations during the bankruptcy.

Ally does not have publicly traded shares, but has stockholders. Besides the Treasury, a trust for GM holds 9.9 percent and private equity firm Cerberus Capital Management owns 8.7 percent.

(Reporting by Rick Rothacker in Charlotte, N.C., and Paritosh Bansal in New York; Additional reporting by Caroline Humer and Ben Klayman; Editing by Maureen Bavdek and Matthew Lewis)

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Comments (5)
Harry079 wrote:
“Ally hopes to end mortgage woes with ResCap bankruptcy”

I pray to St. Jude everyday and I have received hope and succor from the Patron Saint of Hopeless and Desperate cases.

May 14, 2012 11:53am EDT  --  Report as abuse
Harry079 wrote:
Saying this prayer everyday he helped me in my situation.

Oh glorious apostle St. Jude, faithful servant and friend of Jesus, the name of the traitor who delivered thy beloved Master into the hands of His enemies has caused thee to be forgotten by many, but the Church honors and invokes thee universally as the patron of hopeless cases–of things despaired of. Pray for me who am so miserable; make use, I implore thee, of that particular privilege accorded thee of bringing visible and speedy help where help is almost despaired of. Come to my assistance in this great need, that I may receive the consolations and succor of heaven in all my necessities, tribulations and sufferings, particularly (mention your request), and that I may bless God with thee and all the elect throughout eternity. I promise thee, O blessed St. Jude, to be ever mindful of this great favor, and I will never cease to honor thee as my special and powerful patron, and to do all in my power to encourage devotion to thee. Amen

:0)

May 14, 2012 11:57am EDT  --  Report as abuse
You know our country is at or near rock bottom when praying becomes the only practical and reasonable thing to do when dealing with the banks!

The mortgage mess is sOOOOOOOOOOOOOOOOOO fubared that GMAC is set to be this years hot potato and I suspect, been operating as a zombie waiting to explode right around this summers election season. It is the gift that will keep on giving. As Greece is to Europe, GMAC/Ally will be to Wall Street.

Two issues: 1.) Anyone thinking that Ally will get off scott free ala Mozilla/Countrywide may accomplish just that. But the baseline repayment of the subprime mortgages and derivatives markets no longer have a place to turn this time. So off to the courts we will all merrily go. The losses, whatever they will be, have already been priced into the market where there will a few big winners and a majority that will take it in the shorts. 2.) Blame the commercials! Any grown man dissing kids and communicating through a Ken doll makes great entertainment but is lousy PR for a financial institution. Add the ‘dicey-ness’ of ‘no place’ to go, and even Ally will fail in a few years. Face Facts GMAC. There is no Santa Claus!!!! The business plan was a failure but it was worth the shot. GMAC got a free ride but was never one of the good ‘ol boys and was destined for failure at some point. Banks will always be a bricks and mortar business unless the whole of humanity ‘gives up’ on trust and comfort. People are funny about money. With Ally, they did not have the regular costs of owning and operating buildings, but they had the phone companies subsidizing their access. Newsflash! Phone access is not cheap.

Sadly, even this cause is too much for Saint Jude. What if Congress held an overnight candle vigil and worldwide St. Jude prayer-athon :0)? Tithing may be the answer!

May 14, 2012 12:41pm EDT  --  Report as abuse
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