NEW YORK (Reuters) - Ally Financial Inc’s mortgage unit on Monday filed for bankruptcy and the auto lender said it will sell some international operations to help set it on a path to repaying $12 billion (7 billion pounds) in bailout money.
Ally’s mortgage unit, called Residential Capital, or ResCap, filed for bankruptcy protection in federal court in Manhattan under a plan that has the support of some of its creditors, although it was still expected to be a drawn-out and litigious process.
At the same time, Nationstar Mortgage Holdings NSM.N, which is majority owned by Fortress Investment Group FIG.N, 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 an auction that will be held under bankruptcy court rules.
“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.
Ally, the former lending arm of General Motors Co (GM.N), has been besieged in the past few years by losses at ResCap, which was once a major subprime lender and profit engine. The company has considered bankruptcy and other ways to shed ResCap since at least 2009, but has never pulled the trigger.
A bankruptcy of ResCap now will help Ally, formerly known as GMAC, focus on its main auto lending business and put together a plan to pay back U.S. taxpayers.
The U.S. Treasury Department injected $17 billion into the lender 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 filing comes as pressure increases on Ally to repay that money and problems at ResCap become increasingly unmanageable. The Obama administration is trying to show recoveries from crisis-era bailouts before the presidential election in November, and government officials are loath to let Ally become a black mark on the auto industry restructuring.
In filing for bankruptcy, ResCap would also become a rare example of a subsidiary of a bank holding company to do so. As a result, other banks with intractable mortgage problems, such as Bank of America Corp (BAC.N), will be closely watching how the company deals with regulators and creditors and manages the bankruptcy process.
ResCap and its advisers believe it may be one of the first times that a financial services company with retail operations such as a bank has filed for bankruptcy and been able to continue operating.
Timothy Massad, assistant Treasury secretary for financial stability, in a statement on Monday 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.
GM spokesman James Cain said: “We don’t expect any impact on our business.”
ResCap’s board approved the filing about 6 p.m. EDT on Sunday. Ally approved a settlement and support agreement with ResCap in a meeting that started around 1 p.m.
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 gets legal releases to claims over mortgage-backed securities with ResCap and third-party litigants, Carpenter said.
In a news release, Ally said ResCap has also obtained support for its restructuring from the ad hoc steering committee representing ResCap’s junior secured notes, as well as other certain note holders. In addition, some institutional investors in residential mortgage-backed securities issued by ResCap have agreed to support ResCap’s reorganization.
To speed up its repayment to taxpayers, 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, he said.
Ally expects potential legal challenges from the ResCap bankruptcy but is confident that the two entities are separate, Carpenter said.
The move allows ResCap to shed liabilities, while continuing to operate as a mortgage servicer, said ResCap CEO Tom Marano
During the bankruptcy, ResCap will continue to work to help borrowers who are struggling to make payments and to refinance customers with high interest rates. The company will also honour agreements with federal and state officials as part of a $25 billion settlement reached this year over foreclosure abuses.
ResCap has 2.4 million customers, Marano said. It has 3,600 employees and will operate separately from Nationstar for the foreseeable future, he said.
“We’re going to be one of the only large-scale servicers and originators that has managed to put the housing crisis behind it.”
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.
The deal would be transformative for Nationstar. It would gain more than $370 billion in loans to service, while any liabilities would stay with the estate.
The bid is for $374 billion in mortgage servicing assets, including $201 billion in primary residential mortgage servicing rights and $173 billion in subservicing contracts, as measured by unpaid principal balances as of February 29. It would also buy about $1.8 billion of related servicing advance receivables and certain other complementary assets.
Of the total purchase, the equity check 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 NCT.N, a mortgage REIT managed by Fortress, and other Fortress funds. There is a $72 million break-up 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 before the end of the year.
Wesley Edens, co-founder of Fortress, said in an interview he expected other bidders to show up in the bankruptcy court auction but believed they had an advantage, given that Nationstar is a strategic bidder and they have a breakup fee.
Barclays Plc (BARC.L) on its own is arranging a $1.45 billion debtor-in-possession financing for operations during the bankruptcy. Ally also agreed to bid $1.6 billion for a ResCap loan portfolio.
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 CBS.UL owns 8.7 percent.
Reporting By Rick Rothacker in Charlotte, North Carolina and Paritosh Bansal in New York; Additional reporting by Ben Klayman; Editing by Maureen Bavdek