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Bankruptcy of Ally Mortgage Unit Raises Questions About Foreclosure Fraud Settlement

Ally Bank, formerly known as GMAC Mortgage, the nation’s fifth-largest mortgage servicer, put its mortgage subsidiary Residential Capital into bankruptcy. This is part of a continuing effort on the part of Ally, which is still majority-owned by the US government, to escape its mortgage liabilities. But what does it mean for the foreclosure fraud settlement, to which Ally is a signatory?

Previously, Ally planned to repay its loan from the government with an initial public offering, but that talk has ended. Now, the ResCap bankruptcy appears to be the means to pay off the government while jettisoning major liabilities with the mortgage unit. And it could spawn a copycat in the form of Bank of America, which has considered using bankruptcy for Countrywide.

In this agreement, Ally sold off its servicing arm to Fortress Investment Group, an investment management firm, for $2.5 billion. Presumably, they will still honor the signed agreement with 49 state Attorneys General and the federal government while they complete the sale and the bankruptcy process. Barclays Bank will finance the servicer during the bankruptcy, according to the Financial Times. Ally will kick in $750 million in cash for creditors of ResCap.

But when you have a separate management group, with its own group of lawyers and specialists, running the servicer, and when you have a bankruptcy process expected to last the rest of the year, it’s worth questioning whether the settlement will be affected by this. The investors will have to get in line for payments. Why should we expect the homeowners to get loan modifications or principal reductions?

Nationstar, the nation’s largest non-bank mortgage servicer, who is majority-owned by Fortress, will in all likelihood wind up with the loans in the purchase (there’s actually a court-managed auction for ResCap, but the expectation is that this opening bid will win out). After the purchase, Nationstar would have $370 billion in loans to service. Nationstar also originates mortgages and manages loans in foreclosure, attempting to become a fully integrated mortgage company. Here are just a few consumer complaints about Nationstar.

They’ll now have oversight responsibility for one part of the mortgage settlement. And if they don’t, if those liabilities stay with the hollowed-out shell of the ResCap bankruptcy estate, who exactly will handle the modifications?

Ally gets to shirk off their mortgage problems, leaving them with a profitable retail banking and car loan portfolio. If only the same can be said for homeowners with former GMAC Mortgage loans.

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David Dayen

David Dayen