Ally Financial returns to profit, halves mortgage production
Ally Financial returned to a profit in the first quarter, earning $310 million as mortgage production dropped by nearly half from a quarter earlier.
The Detroit bank, roughly 74% of which is owned by the Treasury Department, recorded a $250 million loss in the fourth quarter, attributing it to a $270 million charge for the mortgage settlement between Ally, four other banks and federal and state officials.
Ally’s net income more than doubled from the $146 million it recorded for the first three months of 2011.
Mortgage originations, however, fell drastically from the fourth quarter. Loans totaled $8.6 billion in the first quarter, down from $16.5 billion three months earlier and $11.8 billion in first quarter 2011.
Ally attributed much of that drop to its decision to reduce its correspondent lending at the end of 2011. Direct consumer mortgage lending, a smaller percentage of its total business, actually increased steadily over the past year.
Roughly 85% of originations came from refinancings, the bank said.
The mortgage segment of Ally, which also includes subsidiary Residential Capital, earned $191 million in the first quarter, increasing from $43 million a year earlier and returning from a $258 million loss in the fourth quarter.
Bank executives, during an investors' conference call, said winding down Ally’s mortgage business continues to be a priority as it weighs on the rest of the company. ResCap, the subject of sale and bankruptcy talk, recently missed an interest payment on its debt.
The decision to delay that payment was made by ResCap's board of directors, according to Ally CEO Michael Carpenter, and the subsidiary would have the final say on a bankruptcy filing as well.
"It would be the ResCap board of directors that would make that decision, not Ally," Carpenter said during the conference call.
Carpenter said to expect more on ResCap in the next week or so, but declined to comment on a possible bankruptcy or an initial public offering of Ally common stock. He also did not rule out the mortgage subsidiary "staying the course and fighting the good fight."
"It is the contingent liabilities in the capital structure of ResCap that are dragging the whole company down, and we have to separate ourselves from those issues," Carpenter said. "The question obviously is what's the best way to do that."
Holding onto ResCap would likely cause added volatility for Ally, said Mohak Rao, who heads research on the bank for Fitch Ratings. Rao's team released a report after ResCap missed its debt payment, suggesting that moved the subsidiary closer to bankruptcy.
"What's on everyone's mind is what's going to happen with ResCap," Rao said. "On a longer term basis, if (bankruptcy) is done smoothly, it’s definitely beneficial to Ally."
Ally's penalty from the national foreclosure settlement could have been worse, Carpenter said, but the bank "didn't make a big noise about it for I think obvious reasons." The face-value charge of $310 million equates to 20% of what the bank and ResCap could have paid according to their mortgage market share.
It's due in part, Carpenter said, to Ally's mortgage servicing techniques. The company has modified 29% of its mortgage servicing portfolio, which he said compares to 5% to 7% for other major industry players. Ally also doesn't pursue deficiency judgments or benefit from force-placed insurance, he said.
"In an industry which is obviously challenged from the point of view of its operating standards, we do have a superior record," Carpenter said. "And that, I think, is reflective in the magnitude of the penalty."
The company also commented further on an exclusive contract it has with Chrysler, which the automaker said Wednesday it would not renew through its April 2013 expiration. The bank said the “notification was expected,” and the contract only provides “preferential treatment for the subvented business retail financing business.”
That business accounted for 5% of Ally’s total consumer originations in the first quarter. The two continue to discuss their future relationship, according to the bank.
The company's consumer banking business grew retail deposits 25% from a year earlier to $29.3 billion. Ally's total accounts topped 1 million, a nearly 30% increase.