GE Warns It Might Put Subprime Lending Unit Into Bankruptcy Filing

By Katy Stech Ferek and Thomas Gryta 

General Electric Co. warned it might put its dormant subprime mortgage business, long-plagued by legal trouble, into bankruptcy protection.

A bankruptcy filing could be a way for the lender, WMC Mortgage, to deal with potential courtroom losses and other future liabilities, the company said late Tuesday in a filing with the Securities and Exchange Commission.

A GE spokeswoman declined to comment beyond the filing.

GE recently set aside a $1.5 billion reserve related to a Justice Department investigation into the WMC Mortgage business, which stopped nearly all new loan originations in 2007.

WMC Mortgage was a large mortgage lender to people with low credit scores before the financial crisis. GE Capital Corp., the company's finance unit, bought the subprime lender in 2004 and sold the operation's assets in 2007 after racking up about $1 billion in losses in that year alone. Even though WMC Mortgage's assets were sold, it is still part of GE Capital.

Putting WMC Mortgage into bankruptcy protection would make GE the latest major corporation to use the chapter 11 process to deal with years-old mortgage problems in court. Ally Financial Inc., General Motors Co.'s ex-financing arm, put its mortgage business into bankruptcy in 2012 as a way to get out from under billions of dollars in lawsuits. The WMC Mortgage bankruptcy warning in GE's filing was earlier reported by CNN.

It is unclear how much exposure GE could shed by putting WMC Mortgage into bankruptcy. The process could accelerate settlements that GE agrees to fund. At a minimum, the filing would temporarily stop litigation against the unit as it looks to cap its exposure.

In the SEC filing, GE officials said they are having trouble estimating the exact loss the company could face from the Justice Department investigation and several lawsuits involving the subprime business. In February, GE disclosed that government officials are likely to claim the business violated federal lending laws in 2006 and 2007.

One case against WMC Mortgage involving $800 million in loans went to trial earlier this year in federal court in New Haven, Conn. Testimony included examples of individual applicants applying for multiple loans within weeks of each other, while showing drastically higher income or misrepresenting other information on documents. Closing arguments are scheduled for June.

Major banks such as Citigroup Inc. and Morgan Stanley have paid billions in dollars in penalties to resolve allegations that they understated the risk of mortgages bundled into securities that fueled the housing bubble in the last decade and exacerbated the subsequent collapse.

The total claims GE faces tied to the mortgage-related lawsuits is $3.4 billion, according to regulatory filings. The company already had set aside a reserve for the lawsuits, standing at $342 million at the end of March, but said in Tuesday's filing it could face as much as $500 million in additional losses.

Write to Katy Stech Ferek at [e-mail] and Thomas Gryta at [e-mail]

(END) Dow Jones Newswires

May 03, 2018 17:05 ET (21:05 GMT)

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