Ally Financial to pay $52 million in ResCap toxic mortgage bond settlement

Marketed subprime RMBS deals knowing quality of mortgages

Ally Financial will pay $52 million to settle allegations that one of its subsidiaries, Residential Capital (also called ResCap), knowingly marketed mortgage bonds despite the fact that the underlying mortgages were toxic, the U.S. Attorney’s Office announced Monday.

The settlement stems from 10 subprime residential mortgage-backed securities issued in 2006 and 2007.

According to the U.S. Attorney’s Office, Ally Financial’s registered broker-dealer, Ally Securities served as the lead underwriter on the subprime residential mortgage-backed securities.

The 10 subprime RMBS offerings in question were issued in the RASC-EMX series between 2006 and 2007.

According to the U.S. Attorney’s Office, Ally Securities devoted a “specialized marketing effort” to create the RASC-EMX brand, securing investors for the RMBS offerings, and directed third-party due diligence on samples of the underlying mortgage loans pools to test whether the loans complied with disclosures made to investors in the public offering documents.

But as lead underwriter, Ally Securities apparently recognized in 2006 and 2007 that there was a “consistent trend of deterioration” in the quality of the mortgage loans pools in the RASC-EMX securities.

That deterioration stemmed from deficiencies in the subprime mortgage loan underwriting guidelines and diligence applied to the collateral prior to securitization.

All the RASC-EMX Securities sustained losses as a result of underlying mortgage loans falling delinquent, the U.S. Attorney’s Office stated.

“These securities were marketed to investors with the knowledge that a significant percentage of the pooled subprime mortgages were toxic, meaning that they were underwritten to risky guidelines likely to result in the loans falling delinquent,” said United States Attorney Eileen Decker.

“Nevertheless, Ally Securities continued to market the RMBS, and investors lost millions of dollars as the value of the securities plummeted,” Decker added. “Today's settlement demonstrates that financial institutions are responsible, and therefore will be held accountable, for products they sell to the public."

Under the terms of the settlement agreement, Ally Securities, formerly known as Residential Funding Securities, will immediately discontinue operations and be de-registered as a broker-dealer as an acknowledgment of the improper conduct, the U.S. Attorney’s Office said.

In a statement, Ally Financial said that it is “pleased to have comprehensively resolved all outstanding investigations and potential claims by the U.S. Department of Justice related to residential mortgage-backed securities issued by the company's former mortgage subsidiary Residential Capital and its subsidiaries (ResCap RMBS).”

Ally said that it fully reserved the settlement amount in the third quarter, and said that Ally Securities has not been a “strategically significant part of the company for some time” and will have “no impact” on the company’s ongoing operations.

“Ally remains focused on its go-forward strategic plan to build on its strengths in digital financial services, further grow its customer and deposit bases and continue to deliver strong earnings growth,” the company said in a statement. “The company is pleased to have this remaining legacy mortgage matter put to rest after several years.”

The U.S. Attorney’s Office said that the settlement “expressly preserves” the government’s ability to bring criminal charges against Ally, and does not release any individuals from potential criminal or civil liability.

Under the settlement agreement, Ally is required to pay the entirety of the $52 million settlement in the coming weeks, the U.S. Attorney’s Office said.

“Ally received substantial TARP bailout funds. With this agreement, Ally acknowledges that the underwriting and diligence process was deficient in connection with the securitization of 40,000 toxic subprime mortgage loans by its subsidiaries – exactly the type of abuse that contributed to the financial crisis,” said Christy Goldsmith Romero, the Special Inspector General for the Troubled Asset Relief Program. “SIGTARP is committed to working with our law enforcement partners to protect taxpayers and hold those responsible for the financial crisis accountable.”

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