By Joseph Checkler
Freddie Mac (FMCC) says Residential Capital LLC's $596.5 million
mortgage-backed securities settlement with the Financial Guaranty
Insurance Co. would unfairly harm investors involved in FGIC's
separate rehabilitation proceeding.
In a heavily redacted Thursday filing with U.S. Bankruptcy Court
in Manhattan, lawyers for Freddie Mac said that while it doesn't
have problems with a settlement itself, it does have a problem with
a key provision that could damage its recoveries in FGIC's
rehabilitation program under the control of the state of New
York.
That provision calls for the termination of insurance policies
issued by FGIC that guarantee the principal and interest on certain
ResCap-related mortgage-backed securities, which "will
significantly and negatively impact Freddie Mac's recoveries" in
the New York rehabilitation. Freddie Mac is FGIC's largest security
holder and "one of the largest--if not the largest--investor in
FGIC-wrapped ResCap RMBS," it says in the filing.
ResCap in June cut a deal with FGIC that reduced its $5.55
billion claim to $596.5 million. The agreement also resolved
another $1.3 billon in claims related to trusts insured by FGIC,
the former bond insurance unit of FGIC Corp.
Parent company FGIC Corp. filed for bankruptcy in 2010 and two
years later was placed into the rehabilitation program. Both
ResCap's bankruptcy judge and New York state court must approve the
settlement. Judge Martin Glenn has set aside Aug. 16 and Aug. 19
for a trial on the settlement, setting off voluminous filings by
parties supporting and objecting to the pact.
FGIC and ResCap, Freddie Mac said in its filing, haven't shown
how moving or terminating that insurance would be an economically
sound decision. Freddie Mac also said that FGIC trustees didn't
properly notify investors of their "secret" negotiations with
ResCap on the settlement.
"The trustees did not act in good faith or in the best interest
of Freddie Mac when they agreed to the FGIC Commutation," Freddie
Mac said, referring to the insurance policies. Last month, a group
of hedge funds with FGIC-backed securities also said the deal was
made without investors' best interests in mind.
ResCap and FGIC didn't immediately respond to requests for
comment.
The trustees, which include the Bank of New York Mellon Corp.
(BK), Wells Fargo & Co. (WFS) and U.S. Bancorp (USB), are
specifically asking Judge Glenn for a ruling that they acted in the
best interests of the investors in negotiating the settlement.
Freddie Mac and the hedge funds want to challenge the settlement at
the August trial.
The FGIC fight is set to take place just days before Judge Glenn
is to decide whether to send ResCap's reorganization plan to
creditors for a vote.
ResCap filed the plan in early July. The proposal is based on a
crucial settlement among the company, government-controlled parent
Ally Financial Inc. and ResCap creditors that calls for Ally to pay
$2.1 billion to settle creditor claims. In return, Ally is off the
hook for further liabilities.
ResCap, once the country's fifth-largest mortgage servicer and
10th-largest mortgage lender, filed for Chapter 11 protection in
May 2012 as litigation over soured mortgage securities mounted and
bond payments loomed. The move was intended to help Ally, which
isn't part of the bankruptcy, to sever itself from those issues so
it can focus on repaying the bailout it received during the
financial crisis.
During its bankruptcy, ResCap struck deals to sell
mortgage-servicing platforms and loan portfolios as a part of
bankruptcy auctions that generated $4.5 billion in proceeds.
(Dow Jones Daily Bankruptcy Review covers news about distressed
companies and those under bankruptcy protection. Go to
http://dbr.dowjones.com)
Write to Joseph Checkler at joseph.checkler@wsj.com.
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