Subprime Mortgages Take Another Victim

Ally Financial’s (NYSE:ALLY-B) mortgage arm, Residential Capital LLC, has filed for Chapter 11 bankruptcy protection.

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The loss-making company, which missed a payment of interest amounting to $20 million on April 17, listed assets of $15.7 billion and liabilities of $15.3 billion in its bankruptcy petition. Most of these assets are proposed to be sold to Fortress Investment Group LLC (NYSE:FIG). ResCap was once the largest subprime mortgage originator, with assets of over $130 billion in 2006.

“The action by ResCap will enable Ally to achieve a permanent solution to its legacy mortgage risks and put these issues behind us,” Ally Chief Executive Officer Michael A. Carpenter said today in a statement.

Ally proposes to pay $750 million to ResCap to settle claims against itself and agreed to buy $1.6 billion of securities in the event they do not sell, and provide $150 million as sustenance financing during bankruptcy. Another $1.45 billion would be provided by Barclays Plc (NYSE:BCS).

Ally is trying meanwhile to repay a government bailout, and in this context, the bankruptcy puts taxpayers “in a stronger position to continue recovering their investment in Ally,” U.S. Treasury Department Assistant Secretary Timothy Massad said in a statement after the filing. ResCap “has continued to struggle with losses from its old loans,” while Ally also has a profitable auto-financing business and a growing retail banking arm, he said.

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