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Federal Reserve Releases Action Plans for Two Loan Servicers

The Federal Reserve Board released a number of documents Thursday afternoon related to enforcement actions against several major mortgage servicers.  Included in the release were action plans for Citigroup and HSBC Finance Corporation to correct deficiencies in residential mortgage loan servicing and foreclosure processing

The action plans are in response to an enforcement action issued by the Federal Reserve last year which specified that the parent companies of mortgages servicers develop and submit plans to improve their procedures, controls, and oversight of foreclosure activities in specified areas.  The Federal Reserve said that today’s release will be the last for documents required by the formal enforcement actions issued in April 2011.  Letters of Engagement and actions plans mandated by a September 2011 enforcement action with Goldman Sachs Group, Inc. and one in April 2012 with Morgan Stanley are not yet finalized and will be released after approval.

The Citibank action plan covers a number of points including corporate governance, revision of its business model and changes in training and administration.  A few things jumped out of the 45 page document.  First, in terms of strengthening its operating model Citi plans to create approximately 880 additional full-time positions for new hires or redeployment of existing Citi personnel.  Approximately 820 of these new positions will be assigned to CitiMortgage which is also establishing new senior management positions including new Chief Administrative Officer, Chief Customer Officer, Mortgage Product Compliance Director and a Head of Mortgage O&T.   The bank is also strengthening its mortgage servicing policies and procedures including those for handling customer complaints and oversight of legal vendors.  HSBC’s action plan deals with the Federal Reserve’s requirement that they establish a single point of contact for borrowers.

Ally Bank released a copy of its engagement letter with PriceWaterhouseCooper, Ltd. (PWC) to serve as its independent consultant to review foreclosures that were in process in 2009 and 2010.  The enforcement actions require the mortgage servicing subsidiaries to provide appropriate remediation to borrowers who suffered financial injury as a result of errors by the servicers and the engagement PWC is part of that process. 

The Federal Reserve also released a supplemental agreement with Ally to address the institutions foreclosure review obligations following the recent bankruptcy filing of ResCap, Ally’s mortgage subsidiary.  The agreement deals mainly with the bank’s obligation to insure payment of PriceWaterhouse and any other consultants hired to conduct the mandated foreclosure review.

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Deal Cut to Sell ResCap out of Bankruptcy Filed Today

Ally Financial, formerly known as GMAC, took its residential lending unit into bankruptcy this morning in federal court in Manhattan.  At the same time, Nationstar Mortgage Holdings has agreed to buy substantially all of the mortgage servicing and related assets from the unit known as ResCap for about $2.4 billion including debt.

According to Reuters, the bankruptcy filing has the support of some of ResCap’s creditors.  The unit has been a drag on Ally’s attempts to recover after the financial crisis during which it accepted $17 billion in federal bailout funds, ceding 74 percent of its stock to the U.S. Treasury.  Ally says it now owes the government about $12 billion and there is speculation that it was government pressure that finally forced Ally to file the court papers.  The bankruptcy and sale will now allow Ally to return to its main auto lending business and put together a plan to pay back Treasury.

ResCap, includes among its assets the company formerly known as Ditech, famous for its TV pitchman who concluded each ad with “Lost another deal to Ditech.”

The deal will give Nationstar first bidding rights in the auction that will be held under bankruptcy court rules and Reuters reports that the deal would be ‘transformative” for the company which would gain more the $370 billion in loans to service while any liabilities would stay with the estate.  The portfolio contains $201 billion in primary residential servicing rights and $173 billion in subservicing contracts as well as $1.8 billion of related servicing advance receivables and certain other complementary assets.

Of the proposed purchase price, about $700 million is for the servicing rights and $180 million for the advances.  Nationstar, whose principal shareholder is Fortress Investment Group will be putting up half of the cash while the remainder is expected to come from Newcastle Investment Corp, a mortgage REIT managed by Fortress.  If Nationstar does not win the auction there is a $72 million break-up fee and reimbursement of up to $10 million in transaction related expenses.  Other bidders are expected, however Nationstar’s positioning and its break-up fee are expected to lead to its success in the auction.

Other banks with troubled mortgage subsidiaries are expected to be watching the ResCap bankruptcy closely as it is a rare example of this type of subsidiary filing in which the holding company has been able to continue operations.

Ally will take a $1.3 billion charge, which covers its $400 million equity investment in ResCap, a $750 million settlement with ResCap to offset any future legal claims against it, and $130 million in reserves for claims related to mortgage-backed securities.

Ally is apparently also seeking buyers for some of its car finance and insurance related assets in Canada, Mexico, Europe, and South America.  Sale of any of these, the aggregate value of which is estimated at about $30 billion, would help it more quickly repay its debt to the Treasury

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Ally’s ResCap Unit Files Chapter 11

In addition to the bankruptcy filing for its mortgage subsidiary unit, Ally said it would pursue the sale of its international operations, including auto-finance businesses and insurance operations.

Ally’s Mortgage Unit Files for Bankruptcy

In addition to the bankruptcy filing for its mortgage subsidiary unit, Ally said it would pursue the sale of its international operations, including auto-finance businesses and insurance operations.