(Reuters) - A U.S. Bankruptcy Court approved a $596.5 million agreement on Friday between Financial Guaranty Insurance Co and bankrupt Residential Capital LLC, which settles billions of dollars of claims stemming from mortgage-backed securities.
The agreement is another step toward ending the former mortgage lender’s complex bankruptcy, but it was opposed by holders of junior secured notes issued by ResCap.
Opponents argued that Judge Martin Glenn of Manhattan’s bankruptcy court should reject the deal because ResCap allegedly overestimated what it might owe FGIC, a bond insurer. Critics of the deal also said the deal was improperly negotiated, an allegation the judge rejected in his 53-page opinion.
In return for the $596.5 million, FGIC will release its claim that ResCap owed it at least $5.55 billion.
FGIC had claimed that ResCap had misrepresented the home loans contained in the mortgage bonds that FGIC had insured. When the U.S. housing market crashed, many of those home loans defaulted, triggering an insurance payment by FGIC.
The bond insurer was seized in 2009 by its regulator, the Department of Financial Services of the State of New York, which ordered the company to stop making payments on claims. A rehabilitation plan for the insurer became effective last month.
ResCap was once the country’s fifth-largest mortgage servicer. It filed for Chapter 11 bankruptcy last year.
Glenn, the bankruptcy judge, approved in June a $2.1 billion settlement with the company’s former parent, government-owned Ally Financial Inc. The money will help repay ResCap creditors who had alleged that Ally stripped ResCap of its online lender, Ally Bank.
Ally was known as General Motors Acceptance Corp prior to its government bail-out during the financial crisis.
Reporting by Tom Hals in Wilmington, Delaware