Judge Approves ResCap Settlement

A federal judge approved Residential Capital LLC's settlement with the Federal Housing Finance Agency resolving billions of dollars in claims tied to mortgage-backed securities sold to mortgage finance firms Fannie Mae and Freddie Mac during the financial crisis.

Judge Martin Glenn of the U.S. Bankruptcy Court in New York on Tuesday signed off on ResCap's settlement with FHFA, the government overseer of Fannie and Freddie. The agreement is an ancillary pact tied to a settlement the housing regulator struck last month with ResCap's parent, the government-backed auto lender Ally Financial Inc.

Under the deal, FHFA will receive a $1.2 billion claim against ResCap's bankruptcy estate and will retain some of its mortgage-related claims against Ally.

Under ResCap's restructuring plan, most unsecured creditors would receive around 35 cents on the dollar, though specific recoveries depend upon whether ResCap or one of its affiliates actually owes the money. FHFA will also receive $24 million in cash when the subprime mortgage lender exits bankruptcy.

The housing-finance regulator sued Ally and 17 other banks in 2011 alleging they sold shoddy mortgage securities to Freddie Mac and Fannie Mae leading up to the financial crisis.

Freddie Mac, which bought $6 billion worth of mortgage-backed securities from ResCap between 2005 and 2007, suffered big losses when home prices dropped and the mortgage buyers' losses mounted. The U.S. government seized Freddie and its bigger sister, Fannie Mae, in September 2008 to stop the bleeding.

Instead of placing Fannie and Freddie in Chapter 11, where the companies would be subject to the shifting claims of deep-pocketed creditors, the government appointed FHFA to restructure the mortgage companies through conservatorship, a process similar to bankruptcy intended to avoid large-scale collapse.

Approval of the settlement comes as Judge Glenn considers ResCap's plan to reorganize--and eventually to liquidate--its remaining assets. The Chapter 11 plan is based on a deal that granted Ally a release from litigation in exchange for a $2.1 billion payment to ResCap's bankruptcy estate.

ResCap, once one of the country's largest subprime mortgage lenders, filed for Chapter 11 protection in May 2012 as litigation over soured mortgage securities mounted and bond payments loomed.

Such issues had been a drag on the financial health of Ally, stalling the Detroit-based auto lender's efforts to pay back a $17.2 billion bailout it received from the U.S. government during the financial crisis. Ally, formerly General Motors' main financing arm and once known as GMAC, has since repaid about $12.3 billion of that amount.

(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection. Go to http://dbr.dowjones.com.)

Andrew Johnson contributed to this article.

Write to Patrick Fitzgerald at [e-mail].

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