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IN THE NEWS Ally's Mortgage Unit Files for Bankruptcy; New Strategies Announced Ally Financial announced May 14 that its mortgage arm, Residential Capital (ResCap), filed for Chapter 11 bankruptcy protection. Ally says the move will allow the company to get out from under the millions of dollars in loan repurchase requests and securities lawsuits that target ResCap and refocus on its auto lending and online banking business. Such a strategy better positions the bank to pay back remaining bailout funds still owed to Treasury. Residential Capital has bled billions since the onset of the housing and financial crises. In addition to the money it pumped into the nation's banks, Treasury began injecting funds into the U.S. auto industry in 2009 to head off any additional shocks to the financial system. Treasury signed over $17 billion to Ally to allow the bank to continue providing financing to General Motors and Chrysler, giving the government a 74 percent ownership stake in the company. Ally's had a slow go at repaying the bailout money, but with the ResCap hole plugged and the bank's announcement that it will also sell off some of its international operations in the coming months, Ally is looking to at last cut ties with the U.S. government. So far, about $5.5 billion of taxpayer funds has been returned, leaving the bank with a remaining balance of around $12 billion. In a statement, Ally said it expects to repay at least another third of the bailout money by the end of this year. "While it is unfortunate that a Chapter 11 filing became necessary for ResCap, we believe that this action puts taxpayers in a stronger position to continue recovering their investment in Ally Financial," wrote Timothy G. Massad, Treasury assistant secretary, in a department blog shortly after Ally's announcement. Massad noted in his post that independent estimates have found the auto industry rescue saved more than one million jobs. The Detroit-based Ally bank expects to record a charge of about $1.3 billion in the second quarter of 2012, mainly due to a $400 million equity investment in ResCap, $750 million in cash contributions, and $130 million related to the establishment of a mortgage repurchase reserve. 98 Nationstar announced the same day that it signed a definitive agreement to acquire about $374 billion in mortgage servicing assets from ResCap, including $201 billion in primary residential mortgage servicing rights and $173 billion in subservicing contracts. Nationstar, which is majority-owned by Fortress Investment Group, stated that the acquisition will make it the nation's largest non-bank residential mortgage loan servicer. Nationstar's bid—$2.4 billion—is subject to higher offers during the bidding process and court approval. Should it go through as planned, it will add more than $370 billion in residential mortgage loans to Nationstar's servicing portfolio. Executives with Ally took to the phones the day after the bankruptcy filing to explain to investors the reasoning behind the decision and clarify Ally's focus and strategy going forward— residential mortgage loans are out and auto finance is back at the center of the company's business. Ally says it will still subservice loans via ResCap while it serves as counterparty to Fannie Mae and Freddie Mac. Ally CEO Michael Carpenter explained that in addition to ResCap's planned sale of mortgage servicing assets to Nationstar, the mortgage unit has a fairly substantial-sized loan portfolio, which it intends to sell back to its parent company for $1.6 billion, although that transaction, too, will be open to other bidders and subject to approval. While ResCap has faced a barrage of repurchase demands and litigation threats from unhappy investors, the law firm of Talcott Franklin P.C. says the best option for investors in ResCap residential mortgage-backed securities (RMBS) is to back the bankruptcy plan and enter into a settlement agreement with the struggling mortgage house. "For investors in ResCap-sponsored RMBS, the alternatives to the settlement agreement are unattractive," Paul Snyder, the trial lawyer leading the ResCap initiative for Talcott Franklin P.C., said in a publicly issued statement. "The [bankruptcy] plan seeks to preserve the continuity of cash flow distribution to the RMBS investors. We intend to support the plan and will now work to instruct the trustees on our participating clients' trusts to support the plan." A separate group of 17 institutional investors have already reached an agreement with ResCap, in which the company will grant an $8.7 billion claim to 392 RMBS trusts issued from 2004 to 2008. ResCap cited assets of $15.7 billion and liabilities totaling $15.3 billion at the time of its bankruptcy filing, according to court documents. The World Wide Web is a busy place. DSNews.com cuts through the noise. The information you need, Loud and Clear. Call 214.525.6700 or visit DSNews.com.