In Part 1 of this series, we discussed the circumstances leading to the bankruptcy filing of Residential Capital (ResCap) , a residential mortgage loan originator and a subsidiary of Ally Financial Inc. (formerly GMAC.)
In anticipation of the bankruptcy filing, ResCap’s board had approved the bankruptcy filing and the sale of substantially all of its mortgage servicing and related assets to Fortress Investment Group LLC and Nationstar Mortgage Holdings Inc. for approximately $2.32 billion.
As we noted in Part 1, according to Chairman and CEO of ResCap, Thomas Marano, Fortress and Nationstar will not assume the liabilities that Berkshire had proposed assuming.
However, it does appear that Ally had taken steps to get key creditors on board with this plan. Right before the bankruptcy filing, Ally and ResCap negotiated an $8.7 billion settlement with 17 institutional investors in non-agency mortgage backed securities over alleged violations of representations and warranties. In exchange for such settlement, the institutional investors entered into an agreement to support the company’s filed plan of reorganization.
While the $8.7 billion settlement does not mean those investors will actually recover such amount, or even be first in line (their claim will remain behind secured creditors), the settlement means ResCap and Ally will not challenge the repurchase claims. Additionally, the $8.7 billion settlement will likely be one of the largest claims, ensuring those investors that were a party to the settlement a major piece of whatever is left for the unsecured creditors.
While ResCap is a separate entity and the U.S. government does not hold a debt or equity interest in it, Ally acknowledged that it will have to pay approximately $150 million for the bankruptcy financing and pay $750 million to ResCap to get through a speedy bankruptcy with key creditors. Ally has also agreed to make the first bid on up to $1.6 billion worth of ResCap’s troubled mortgages that will be auctioned.
Additionally, ResCap owes Ally roughly $1.9 billion, with $500 million of that debt being unsecured. Ally has recognized that it may not recover at least the unsecured portion of the debt as a result of the company’s bankruptcy.
It remains to be seen what affect ResCap’s filing for bankruptcy will have on the repurchase claims against ResCap by its investors and other parties. The unpaid principal balance on these loans is estimated currently to be $34 billion, but that number is only likely to increase as additional claimants come forward.
Additionally, despite all attempts by Ally and ResCap to complete this bankruptcy filing quickly and quietly, there will undoubtedly be scrutiny and unhappy creditors throughout the process.
The first bump in the road occurred on June 4, 2012, when Berkshire filed a motion requesting that Bankruptcy Judge Martin Glenn to approve an independent and impartial examiner to investigate potentially improper deals made by ResCap prior to the company filing for bankruptcy, including transactions with its parent, Ally.
Two things are clear: the litigation of the repurchase claims will continue for years with those financial institutions that did not enter into the prepetion settlement with Ally and ResCap. One only has to look at the Lehman Brothers Holdings bankruptcy which occurred 4 years ago. According to a January 2012 bankruptcy court report on the Lehman estate, the residential mortgage repurchase claims represent the largest group of disputed claims in that matter.
Secondly, as in the Lehman bankruptcy, mortgage loan originators/correspondents that sold loans to ResCap under high risk programs offered by ResCap, should expect that ResCap will be commencing actions against them for repurchase of those loans.
Sadly, the housing market will continue to languish as, yet again, years after the fact, another mortgage aggregator will seek to revise the history of the housing bubble and its inevitable burst.
This is part 2 of a 2 Part Series. To Read Part 1, click here.