A federal judge approved Residential Capital LLC's settlement
with the Federal Housing Finance Agency resolving billions of
dollars in claims tied to mortgage-backed securities sold to
mortgage finance firms Fannie Mae and Freddie Mac during the
financial crisis.
Judge Martin Glenn of the U.S. Bankruptcy Court in New York on
Tuesday signed off on ResCap's settlement with FHFA, the government
overseer of Fannie and Freddie. The agreement is an ancillary pact
tied to a settlement the housing regulator struck last month with
ResCap's parent, the government-backed auto lender Ally Financial
Inc.
Under the deal, FHFA will receive a $1.2 billion claim against
ResCap's bankruptcy estate and will retain some of its
mortgage-related claims against Ally.
Under ResCap's restructuring plan, most unsecured creditors
would receive around 35 cents on the dollar, though specific
recoveries depend upon whether ResCap or one of its affiliates
actually owes the money. FHFA will also receive $24 million in cash
when the subprime mortgage lender exits bankruptcy.
The housing-finance regulator sued Ally and 17 other banks in
2011 alleging they sold shoddy mortgage securities to Freddie Mac
and Fannie Mae leading up to the financial crisis.
Freddie Mac, which bought $6 billion worth of mortgage-backed
securities from ResCap between 2005 and 2007, suffered big losses
when home prices dropped and the mortgage buyers' losses mounted.
The U.S. government seized Freddie and its bigger sister, Fannie
Mae, in September 2008 to stop the bleeding.
Instead of placing Fannie and Freddie in Chapter 11, where the
companies would be subject to the shifting claims of deep-pocketed
creditors, the government appointed FHFA to restructure the
mortgage companies through conservatorship, a process similar to
bankruptcy intended to avoid large-scale collapse.
Approval of the settlement comes as Judge Glenn considers
ResCap's plan to reorganize--and eventually to liquidate--its
remaining assets. The Chapter 11 plan is based on a deal that
granted Ally a release from litigation in exchange for a $2.1
billion payment to ResCap's bankruptcy estate.
ResCap, once one of the country's largest subprime mortgage
lenders, filed for Chapter 11 protection in May 2012 as litigation
over soured mortgage securities mounted and bond payments
loomed.
Such issues had been a drag on the financial health of Ally,
stalling the Detroit-based auto lender's efforts to pay back a
$17.2 billion bailout it received from the U.S. government during
the financial crisis. Ally, formerly General Motors' main financing
arm and once known as GMAC, has since repaid about $12.3 billion of
that amount.
(Dow Jones Daily Bankruptcy Review covers news about distressed
companies and those under bankruptcy protection. Go to
http://dbr.dowjones.com.)
Andrew Johnson contributed to this article.
Write to Patrick Fitzgerald at patrick.fitzgerald@wsj.com.
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