By Andrew R. Johnson
Ally Financial Inc.'s mortgage subsidiary, Residential Capital
LLC, received court approval to set aside $230 million to be
distributed to borrowers who may have been improperly foreclosed
upon under a tentative settlement reached with the Federal
Reserve.
U.S. Bankruptcy Judge Martin Glenn said in an order filed in
court Wednesday that ResCap has permission to execute a term sheet
with the Fed, which would allow the company to end a
foreclosure-review program it says has been draining funds for its
creditors.
The settlement still requires separate court approval.
The Wall Street Journal reported Tuesday that ResCap had reached
a tentative deal with the Fed under which it would set aside at
least $200 million that could be distributed to about 230,000
borrowers.
The deal stems from foreclosure reviews that federal banking
regulators required mortgage servicers to conduct under consent
orders reached in April 2011. Under the orders, the servicers were
required to hire independent consultants to review loan files to
determine if borrowers were improperly foreclosed upon.
But consumer groups criticized the program, arguing it padded
the pockets of consultants rather than assisting homeowners.
In January, the Fed and the Office of the Comptroller of the
Currency reached settlements with 13 of the mortgage servicers that
replaced the foreclosure-review program.
These servicers, including Bank of America Corp. (BAC), J.P.
Morgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC),
agreed to pay $3.6 billion in cash to nearly 4.2 million homeowners
and provide $5.7 billion in other relief, such as loan assistance
to borrowers.
ResCap in February asked the U.S. Bankruptcy Court for a ruling
that it could end its participation in the program without facing
legal action from the Fed. The review process, it said, was
draining $300,000 per day from its bankruptcy estate and
diminishing potential returns for creditors. ResCap estimated the
total cost of the program could reach $459 million.
ResCap's request prompted Ally to fire back at its subsidiary,
saying the mortgage firm shouldn't be allowed to skirt its
responsibilities under the foreclosure-review program. Ally also
argued that it shouldn't be held liable for ResCap's
responsibilities under the program if the mortgage subsidiary
failed to meet its obligations.
ResCap, once the country's fifth-largest mortgage servicer and
10th-largest mortgage lender, conducted the bulk of Ally's mortgage
operations before filing for Chapter 11 bankruptcy in May 2012.
Mounting litigation over soured mortgage securities and looming
bond payments led to ResCap's filing, a move intended to help its
parent company, Ally, sever itself from those issues so it can
repay the $17.2 billion bailout it received during the financial
crisis.
Ally is 74% owned by the U.S. government as a result of the
bailout.
Write to Andrew R. Johnson at andrew.r.johnson@dowjones.com