Buffett’s Berkshire Seeks to Buy ResCap’s Mortgage Unit

Berkshire Hathaway Inc. Chairman Warren Buffett
Warren Buffett, chairman of Berkshire Hathaway Inc. Photographer: Andrew Harrer/Bloomberg

Berkshire Hathaway Inc., the holding company run by billionaire Warren Buffett, offered to buy Residential Capital LLC’s mortgage unit.

Berkshire seeks to replace Fortress Investment Group LLC as the initial bidder at an auction for the bankrupt company’s most-valuable asset.

Berkshire is also willing to become the so-called stalking-horse, or initial, bidder for the part of ResCap’s loan portfolio that Ally Financial Inc. wants to buy. Berkshire said in court papers filed today in U.S. Bankruptcy Court in Manhattan that it will offer better terms than Fortress and Ally.

“Both offers will remain open for the court to approve and the debtors to execute on or before June 19,” Berkshire said. On June 18, U.S. Bankruptcy Court Judge Martin Glenn is scheduled to consider approving auctions for the assets and naming Fortress’ Nationstar Mortgage Holdings Inc. and Ally as the initial bidders.

ResCap filed for bankruptcy May 14 with plans to sell most of its assets to Fortress. Ally, a Detroit-based bank that specializes in car loans, owns ResCap.

Ally supported the bankruptcy filing as a way to resolve legal claims related to mortgage-backed securities. Ally is 74 percent-owned by the U.S. Treasury after receiving a bailout.

Mortgage Unit

Gina Proia, a spokeswoman for Ally, Gordon Runte, a spokesman for Fortress, and Susan Fitzpatrick, a spokeswoman for ResCap, declined to comment on Berkshire’s offer.

Fortress has offered to pay $2.4 billion for ResCap’s mortgage unit, which makes home loans and services them. Berkshire said it would pay the same amount as Fortress while cutting the cost of any breakup fee.

Under a proposed sale agreement with ResCap, Fortress would be the initial bidder at an auction overseen by the bankruptcy court. Should Fortress lose the auction, it would be entitled to a $72 million breakup fee and $10 million in expense reimbursement, according to court records.

Berkshire says it will accept $24 million as a breakup fee and not seek any reimbursement for its expenses. ResCap may save $60 million on the sale, should another bidder win the auction, Berkshire said.

Loan Portfolio

Berkshire offered $1.45 billion for the loan portfolio that Ally is seeking to buy. Ally has offered to pay $1.4 billion for the portfolio as part of a sale that doesn’t resolve certain potential mortgage-related lawsuits. Ally will pay $1.6 billion should the sale close as part of a reorganization plan that resolves the potential lawsuits, according to court documents.

Berkshire sought to buy ResCap from Ally before the government-owned company put the home lender in bankruptcy, three people familiar with the matter said last month.

Berkshire would have paid almost nothing up front for the assets, while taking on potential liabilities such as mounting litigation costs and other claims, the people said. Buffett sought to avoid a ResCap bankruptcy filing because Berkshire had unsecured debt in the mortgage unit, according to the people. Ally turned down the Berkshire proposal after deciding that a bankruptcy filing and sale better protected the company from future liabilities, the people said.

Berkshire holds more than $900 million of ResCap’s junior secured bonds. Berkshire, which owns the bonds directly and through affiliates, bought the debt more than two years ago, Ted Weschler, a company investment manager, said in court papers.

ResCap’s 6.5 percent bonds due next year rose 17 percent to 20.625 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The case is In re Residential Capital LLC, 12-12020, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

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