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Ally Financial Swings to Profit on Gains From Mortgages

Nov. 2 (Bloomberg) -- Ally Financial Inc., the auto lender that got a $17.2 billion government bailout, reported a $384 million third-quarter profit, reversing a loss from a year earlier on a gain from mortgage operations.

Earnings compared with a loss of $898 million in the second quarter and a loss of $210 million a year earlier, the Detroit-based company said today in a statement. Profit declined in auto lending and insurance.

Chief Executive Officer Michael A. Carpenter is selling assets as he seeks to repay taxpayers for a U.S. rescue during the credit crisis, and he said today that multiple bidders have responded. Carpenter, 65, is narrowing the focus of the firm, formerly known as GMAC Inc., to auto lending and U.S. banking.

“The steps we are taking, coupled with the strength of the underlying auto finance and direct banking franchises, will support Ally’s plan to repay the remaining U.S. Treasury investment and thrive going forward,” Carpenter said in the statement.

Pretax income at the North American auto finance business fell 7.4 percent to $510 million and tumbled 70 percent to $33 million at the insurance unit, according to the firm’s website.

Ally’s mortgage operations posted pretax income of $354 million, compared with $13 million a year earlier, the company said. The results exclude the performance of Residential Capital LLC, the subprime mortgage company that filed for bankruptcy in May. ResCap raised $4.5 billion last month through auctions of a servicing and origination business, and a loan portfolio.

Managing Foreclosures

As part of the bankruptcy, Ally paid $750 million to ResCap to stop potential claims from residential mortgage-backed security investors who would try to argue Ally should help pay losses tied to the mortgage unit. It was not “an admission of guilt” and if creditors put up a fight or go after Ally, the company will reconsider the payment, Carpenter said today.

“That $750 million payment was not in recognition of any liability on Ally’s behalf,” Carpenter said on a conference call with analysts. “It was simply to facilitate a smooth and speedy resolution. If that does not come to pass, now that the estate’s assets have been sold, Ally will not feel obligated to that, to make that payment.”

Disputes Remain

Jesse Rosenthal, an analyst in New York at CreditSights Inc., said Carpenter’s comments show that there may still be some disagreement between the company and creditors, including holders of residential mortgage-backed securities, and that a resolution of ResCap probably will linger well into 2013. Ally shelved plans to repay taxpayers with an initial public offering until ResCap’s fate is decided.

“We also raised the question of whether or not the $750 million contribution was sufficient to get the RMBS holders on board with the proposed package,” Rosenthal wrote in an e-mail. “We’ve said pretty much from the beginning that while the ResCap filing was a net positive, unresolved issues remained.”

Ally is responding to document requests from the Securities and Exchange Commission related to mortgages, according to the lender’s quarterly filing today.

The requests pertain to “various aspects of the process surrounding securitizations of residential mortgages,” the company said in the filing. “This could result in actions against us.”

Managing Foreclosures

Profit at the mortgage unit was driven in part by hedging activities tied to mortgage servicing, which won’t persist, the firm said. Ally said last month it may sell this business, which involves billing, collections and managing foreclosures.

Revenue rose “due to very strong performance in mortgage servicing and specifically with our MSR hedge results,” Jeff Brown, an Ally senior executive vice president, said on the call, referring to mortgage-servicing rights. “Obviously with the strategic actions we announced regarding the MSR, this is not something we would expect to repeat going forward.”

Carpenter agreed to sell a Canadian unit to Royal Bank of Canada last month in a cash deal providing $4.1 billion in proceeds to Ally. The firm also agreed to sell its Mexican insurance business to Ace Ltd. for $865 million. Ally expects to “identify plans” this month for other international operations, including auto finance businesses in Europe and Latin America, according to the statement.

To contact the reporters on this story: Donal Griffin in New York at dgriffin10@bloomberg.net; Dakin Campbell in San Francisco at dcampbell27@bloomberg.net.

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

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