Ally Financial Inc. (ALLY), once one of the largest U.S. home lenders, has closed the book on the mortgage business that drove the company to the brink of collapse.
Ally no longer offers or services home loans and the pipeline of pending mortgages stands at zero, according to a presentation released yesterday by the Detroit-based auto financer. The company has paid a settlement reached last month with U.S. regulators tied to its residential lending, and that’s the last of any significant costs, Jeff Brown, senior executive vice president for finance, told investors on a conference call.
Mortgages are in Ally’s “rearview mirror,” Chief Executive Officer Michael Carpenter said on the call, ending an almost 30-year foray that led to more than $10 billion in losses and a $17.2 billion U.S. bailout. Under his predecessors, brands such as GMAC Mortgage and online lender Ditech propelled the firm into the top ranks of subprime lenders in 2006, just as the housing bubble began to pop.
“It turned out to be a debacle,” said Thomas Lawler, who spent 22 years at Fannie Mae and is now an independent consultant. “Why would something originally designed as a financing subsidiary morph itself into a gargantuan mortgage player? That’s a good question.”
The bailout left taxpayers with a 74 percent stake and Carpenter with the task of rebuilding the firm, originally known as GMAC when it was the in-house financing arm of General Motors Corp. Burdened by mortgages made to borrowers with shoddy credit, Ally began reporting losses in 2007 that reached $10.3 billion in 2009. With the company on the verge of failure, the U.S. engineered a bailout to ensure money kept flowing to the auto industry and preserved jobs.
Since taking over in late 2009, Carpenter has refocused the company on its auto-lending roots by ushering the Residential Capital mortgage unit into bankruptcy, selling assets and settling claims with federal agencies over faulty mortgages sold to U.S.-backed firms such as Fannie Mae and Freddie Mac.
“Back in ’09, in all honesty, it was initially survival,” he said yesterday.
By early 2011, Carpenter said Ally was healthy enough to float an initial stock offering whose proceeds could be used to buy out the U.S. stake and pay back taxpayers. Plans were filed in March 2011, only to stall as he wrangled with ResCap creditors over how much financial responsibility Ally should bear for the unit’s collapse.
The bank ultimately agreed this year to contribute $2.1 billion in return for immunity from current and future lawsuits tied to mortgage-backed bonds that went bad.
ResCap has been settling disputes with creditors as it prepares for a hearing this month when the New York-based firm will ask U.S. Bankruptcy Judge Martin Glenn to approve a plan to distribute billions of dollars to creditors. If that happens, Ally will officially be done with the unit Carpenter, 66, once called a “millstone around the company’s neck.”
“They effectively exited mortgages a while ago, but as soon as the judge approves ResCap it will officially be in the rearview mirror,” Jesse Rosenthal, an analyst at New York-based CreditSights Inc., said in a telephone interview. “It’s symbolically significant.”
GM created Ally in 1919 to make it easier for customers to buy vehicles. The unit expanded into home lending in 1985, and from 2002 to 2005, the automaker made more money from auto loans and mortgages than from building cars and trucks. GM sold 51 percent of the firm in 2006 to Cerberus Capital Management LP, a private-equity firm. The holding was later diluted by the U.S. bailout.
At the height of the housing boom in 2006, ResCap ranked 12th among U.S. subprime lenders with more than $21 billion of mortgages and third in Alt-A lending -- a category which typically demanded little documentation from borrowers -- with $44 billion, according to trade publication Inside Mortgage Finance. The year before, ResCap made $25 billion in subprime loans.
While Carpenter and Brown assured investors yesterday that the mortgage issues are behind it, the company’s subsequent filing with the U.S. Securities and Exchange Commission hedged those comments with regard to ResCap’s bankruptcy plan.
“The failure of the plan to become effective could result in, among other consequences, the pursuit of an alternative form of reorganization or liquidation, which may be less favorable to” the company, according to the filing.
Third-quarter profit declined 76 percent to $91 million, the bank said yesterday in a statement. Income from continuing operations in the automotive finance segment was $339 million, little changed from a year earlier. Insurance income rose to $83 million from $13 million and the mortgage segment swung to a loss of $5 million from last year’s $331 million profit.
In August, Ally said it was raising $1 billion in a private placement to take the next step to repaying the government. Once the transaction closes, expected this month, the company will have repaid $12.3 billion to the U.S. Treasury Department by its own calculations, according to yesterday’s statement.
Carpenter turned to the pending IPO in yesterday’s conference call, calling the market for public offerings strong. He also said it might be possible for private investors to buy out the Treasury’s stake.
“The analysis on Ally going forward will switch to ‘how does Treasury get out,’” Rosenthal said. “The narrative has changed.”
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