Residential Capital LLC is feeling the heat as its unsecured creditors said they want to investigate deals that the now-bankrupt mortgage company made to help its parent, Ally Financial Inc. Is it necessary, though?
The request, it’s been reported, is being cited as “need to know” and routine due diligence. The concerns, though, are that efforts to sell close to $4 billion in assets could be jeopardized. In an increasingly careful financial sector, for any company to overlook even the minor details can result in delays or even a loss of a deal. For the parties to be cautious is simply a wise move in a new environment.
Other concerns are that it could further delay efforts to win court approval that would block Ally from various legal claims. Residential Capital’s, or ResCap’s, proposed plan of reorganization is built on granting Ally what’s known as third-party releases for potentially billions of dollars worth of legal claims related to mortgage loans and mortgage-backed securities, said the unsecured creditors committee in court papers that were filed in recent days.
In the court filing, attorneys wrote,
No plan of reorganization can be confirmed until the fairness of these transactions and the conduct of the interested parties is thoroughly examined.
They reiterated approval of the plan would require complete support of any unsecured creditors who are holding claims.
As part of ResCap’s bankruptcy filing, which was officially entered into on May 14, a sell off of many of its assets to Fortress Investment Group must move forward. Meanwhile, Ally has given its stamp of approval for the bankruptcy as an alternative method of handling various mortgage backed securities. Susan Fitzpatrick, an official spokesperson for ResCap released a presser via email. It read, in part,
ResCap intends to cooperate fully with any court-approved investigation.
In the past, ResCap proposed that the lawsuits might be better handled by abandoning them and then ensuring they’re a part of the sale of mortgage loans and any other necessary financial assets. In one of those proposals, Ally agreed to pay $750 million to ResCap to settle any claims against the parent, along with taking on as much as $1.6 billion of securities if others don’t. Finally, there’s a clause that would provide $150 million to help finance ResCap’s operations during bankruptcy, according to a company statement.
With the exception of one, all thirty three large and unsecured claims were related to active or potential mortgage-securities litigation. ResCap declined providing value for any of the claims and in fact, disputes each of them. This will likely be hashed out rather quickly as it could cause significant problems if it’s delayed to any degree.
The Buffet Factor
It’s believed Warren Buffet will bid on the loan portfolio as part of any bankruptcy auction. Another potential bidder could be Nationstar Mortgage.
With massive layoffs in recent years – up to 30%, the announcement earlier this month comes as no surprise to some. Still, when contrasted with other economic fears, its effects mustn’t be discounted.
On the ResCap website, the company states it, along with its subsidiaries such as GMAC Mortgage, will continue with “business as usual during our Chapter 11 restructuring”. All other requests are being forwarded to the legal team representing the company.
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