Ally Bank Mortgage Unit Files for Bankruptcy

Residential Capital, a mortgage subsidiary of Ally Financial Inc. filed for Chapter 11 bankruptcy on Monday. “By severing itself from ResCap, Ally hopes to focus its efforts on its core auto-lending and online-banking businesses,” The Wall Street Journal reports. Ally is the former in-house financing arm for General Motors Co. ResCap has been a drain on Ally's finances for several years as the number of mortgage defaults soared during the housing crisis. Ally has faced billions of dollars in lawsuits over mortgage securities that have turned sour and the bank has been trying to break ties from ResCap. But some analysts say the companies are too intertwined and it will be difficult to separate the two, despite the bankruptcy filing by ResCap. The Associated Press reports that ResCap’s mortgage unit remains very reliant on Ally for funding "and there can be no assurance that Ally or its affiliates will continue such actions," according to the bankruptcy filing. Ally officials say they will cover about $1.3 billion related to ResCap’s bankruptcy. ResCap is expected to emerge from bankruptcy quickly and by the end of the year, already reaching agreements with creditors, company officials note. Ally is 74 percent owned by the U.S. government and still owes the government nearly $12 billion. Through the ResCap bankruptcy filing and Ally’s possible sale of some of its international operations, the government says it hopes it will get the remainder of the bailout money Ally owes repaid faster. Source: “ResCap Files for Protection Under Chapter 11,” The Wall Street Journal (May 14, 2012) and “Ally Financial's ResCap Mortgage Unit Files for Bankruptcy,” Associated Press (May 14, 2012)