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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Fortress Investment Planning ResCap Acquisition

Bloomberg
News is reporting that Ally Financial is in talks with Fortress Investment
Group
to sell some assets from Ally’s mortgage unit.  According to what Bloomberg calls “three
people with direct knowledge of the matter,” Fortress would buy parts of the
Residential Capital (ResCap) unit, including some of its servicing business as
part of a ResCap bankruptcy filing. 

Ally is facing a number of
financing deadlines in March, and a bankruptcy filing has been expected, but
the pending deal with Fortress may delay the filing.  The company has allegedly been lining up about
$2 billion to fund operations subsequent to the filing.  Bloomberg says that investors holding at least $800 million
in ResCap debt, including Paulson & Co. and Appaloosa Management LP, had
joined together to oppose a bankruptcy filing and have since signed
confidentiality agreements with ResCap to get inside information on the sales
process. Bloomberg said
Fortress may pay more than $1 billion for the deal but it appears that it may
only be bidding on a small portion of the company.

ResCap had assets valued at $16.8
billion
at the end of 2011 including servicing rights valued at $1.2 billion
and is one of the larger servicers of GSE backed mortgages.  Ally Bank, which changed its name from GMAC
in May 2009, has received government bailout funds totaling $17.2 billion. The U.S. Treasury Department holds a
74 percent state in Ally’s common stock and an additional $5.9 billion of
preferred shares that must be converted into common stock by the end of 2016.  Bloomberg quoted Chief Executive Officer
Michael Carpenter as once predicting that an initial public offering could
value the company at $30 billion but then saying last month that the IPO won’t
happen until there’s progress on the mortgage business.  

Fortress is a global investment manager
with approximately $43.7 billion of assets under management.   Its website said it specializes in
asset-based investing in physical and financial assets ranging from real estate
and capital assets to financial assets secured by diversified long-term cash
flows.  Among its assets is ownership of 77 percent of Nationstar Mortgage
Holdings and Fortress could fold the Ally servicing operations into that
company.

Bloomberg, which so far appears
to be the only media outlet reporting the story, said Fortress is being vetted by Fannie
Mae and Freddie Mac to ensure it can handle the servicing volume. Fortress
apparently outbid companies such as Centerbridge Capital Partners LLC to enter
into exclusive talks.

Ally
was one of four companies that failed to pass all of the Federal Reserve’s
stress tests because its common capital ratio fell short of the required
benchmarks in the Fed’s stress scenario.  Selling a portion of the ResCap assets may
make it easier to meet the criteria when it resubmits its plan as it has said
it will do. 

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Ally said to be Shopping Mortgage Unit

One of the financial institutions that are
party to the reported settlement agreement with the attorneys general of the
majority of the states is reportedly on the auction block.  According to Bloomberg News, Ally Financial is
talking with private equity firms about selling its mortgage unit, Residential
Capital LCC
, through a pre-package bankruptcy. 

Any sale of the company would be
complicated by its recent financial history. 
The company was founded as General Motors Acceptance Corporation (GMAC) in
1919 by General Motors as an intermediary to provide financing for the purchase
of its autos.  Over the years it expanded
into other types of lending and into real estate brokerage and adopted the acronym
as its brand name. 

GMAC was hard hit by the housing crash
and was one of the beneficiaries of Toxic Asset Relief Funds (TARP).   In addition to the company’s potential liabilities
– a share of a reported $25 billion to be paid to the states in the above
referenced settlement deal represents merely one of the many suits arising out
of the company’s role in the financial crisis – the U.S. Treasury has a large
stake in the parent company. According to the company’s website, the Treasury owns
73.8 percent; other large stakeholders at less than 10 percent each are GM
Trust, Cerberus and affiliates, and third party investors.  In 2010, reportedly to distance the financial
arm from the auto company, its name was changed to Ally. 

The company reported a fourth quarter
loss on a $270 million charge to cover expected penalties from regulators.

According to Bloomberg, Ally has
contacted Fortress Investment Cerberus Capital Management, Centerbridge
Capital, and Leucadia National Corporation to see if they have any interest in
a purchase.  Bloomberg also said the company is seeking a sale in
order to limit its liability.  The
pre-packaged bankruptcy would allow it to reach agreements with creditors and
stakeholders before filing for court protection.

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