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