Ally Financial Inc could sustain losses of between $400 million (245 million pounds) and $1.25 billion in the event of a bankruptcy filing by its troubled Residential Capital LLC mortgage unit, the government-owned auto lender said in a securities filing Friday.
ResCap is "actively considering" a bankruptcy filing, which could cause Ally to incur significant charges, substantial litigation and possible losses on loans to the mortgage unit, according to the filing.
During an earnings conference call on Thursday, Ally CEO Michael Carpenter said ResCap was considering a range of options from staying the course to bankruptcy. Sources have told Reuters that bankruptcy was an option for ResCap, possibly as early as mid-May.
Ally is 73.8 percent owned by the U.S. Treasury after a series of bailouts spurred by its ballooning mortgage losses. The lender hoped to repay taxpayers through an initial public stock offering, but it shelved those plans last year as problems mounted at ResCap and market conditions deteriorated during the European debt crisis.
Ally executives have stressed that ResCap and the parent company are separate entities and that a ResCap bankruptcy decision would be made by the mortgage unit's board, not Ally's.
According to Friday's filing, ResCap may not be able to meet upcoming debt payments. It did not make a $20 million bond payment due April 17 and was in default of certain financial covenants at the end of December due to insufficient capital levels.
"It is possible that further defaults could occur in the future due to insufficient capital or liquidity," the filing said.
The parent company previously extended the maturity of certain intercompany credit facilities with ResCap until May 14, but Ally may not provide future support, the filing said.
Ally has made progress in shrinking its portfolio of troubled mortgage loans, but ResCap still faces a slew of lawsuits and other claims related to mortgage-backed securities sold to investors during the housing boom.
In the filing on Friday, Ally said it estimates ResCap's possible losses from litigation and requests to buy back soured loans from investors range from zero to $4 billion above current reserves. ResCap's ability to pay these losses is "very limited," the filing said.