Former GMAC puts mortgage unit in bankruptcy | Used Car Loan Blog

By Nathan Bomey, USA TODAY and Detroit Free Press

Ally Financial, the former GMAC, which still owes taxpayers about $12 billion $17.2 billion in loans it got as part of the General Motors and Chrysler bailouts, has nudged its home mortgage subsidiary into bankruptcy court to try end the drag of its toxic mortgage assets on Allys profitable businesses, such as car loans and direct banking (ad above).

The Residential Capital (ResCap) unit filed for Chapter 11 bankruptcy early today and Ally CEO Michael Carpenter said in a statement: The action by ResCap will enable Ally to achieve a permanent solution to its legacy mortgage risks and put these issues behind us. He said the action will help Ally focus on further strengthening its already leading US auto finance and direct banking franchises.

Ally Financial was founded by GM in 1919 as the General Motors Acceptance Corp. (GMAC) to provide auto loans. Over the years, it expanded into insurance, direct banking, mortgages and commercial finance. GM sold 51% to Cerberus Capital Management during financial troubles in 2006. It changed its name to Ally in 2010.

Taking ResCap into bankruptcy carries political implications because its a part of the auto bailout that didnt turn out as planned. The government still owns 74% of Ally, and its repaid only $5.5 billion of $17.2 billion it got in the bailout so it could keep offering car dealer and buyer financing for GM and Chrysler. Ally received more than twice the taxpayer help as Chrysler.

It is clear to me this (bankruptcy filing) is part of a housecleaning exercise, University of Michigan bankruptcy law professor John Pottow said. They want to take Ally public soon, and they think (ResCap would) weigh down on it.

Allys ResCap, along with other mortgage lenders, was aggressive in the subprime market, making risky loans without serious reviews of borrowers credit histories. Like others, it took huge losses when the housing bubble burst.

Adding to Allys ongoing burden, some buyers of ResCaps mortgage-backed securities have sued, demanding that Ally buy back the bad securities. Pottow said a ResCap bankruptcy may not shelter Ally from such suits. Some bankruptcy judges wont let corporate parents escape such challenges when a subsidiary files for bankruptcy.

Ally estimated last month that it could lose between $400 million and $1.25 billion because of its exposure to ResCaps troubles, according to in a Securities and Exchange Commission filing.

Aiding Ally in 2009 was a crucial element in the rescues of GM and Chrysler:

Most dealers and many consumers in the 2009 credit freeze werent able to get financing from other lenders. Although Ally now finances dealers and customers of other automakers, its business with GM and Chrysler dealers is a large portion of its portfolio.

Some 72% of GM dealers in North America financed their inventory through Ally in the first quarter, down from 84% a year ago. There was a similar decline with Chrysler dealers: 60%, down from 68%.

Both GM and Chrysler have built relationships with other financial institutions. Last month, Chrysler said that it would end its exclusive arrangement with Ally that made it the preferred source for Chrysler dealers vehicle financing.

Allys auto-lending operations posted a $2.72 billion profit in 2011. Overall, Ally lost $201 million in 2011, including a $402 million loss tied to ResCap. But in the first quarter, Ally earned $310 million.

Bankruptcy became more likely when ResCap missed an April 17 interest payment of $20 million on unsecured debt. Ally said in an SEC filing that there was substantial doubt about ResCaps viability as a stand-alone business.

Allys legacy mortgage assets ? that is, GMAC mortgages and securities predating 2009 ? totaled $10.9 billion on Dec. 31, according to the companys annual report. The company wiped a total of $22 billion in old mortgage assets from its books in 2009, 2010 and 2011. ResCap stopped originating subprime mortgages in 2007.

Ally Financial now conducts most of its mortgage loan-origination business through its Ally Bank subsidiary, with much of its activity centered on refinancing and loan servicing. Ally is the primary servicer on 2.3 million mortgages with collective unpaid principals totaling about $356 billion, according it a recent SEC filing.

ResCap continues to cost Ally for other reasons. In February, the federal government and 49 states reached a settlement with a group of banks on their defective foreclosure procedures. ResCap paid a $212 million fine as part of that settlement.

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