ResCap Settles Class Action Suit With 'High Cost' Borrowers

   By Joseph Checkler 
 

Residential Capital LLC has reached a deal with borrowers to settle a class-action lawsuit over so-called high-cost mortgage loans.

In a Wednesday filing with U.S. Bankruptcy Court in Manhattan, ResCap said it will create a fund with no less than $57.6 million, which will go to the borrowers on 44,535 second mortgage loans.

The borrowers, who were suing ResCap over what they said was $1.87 billion in damages, will receive an allowed claim of $300 million in ResCap's bankruptcy case. While ResCap currently estimates that at least $27 million will be paid to the borrowers, the fund created will be for more than double that, just in case.

The deal, lawyers for ResCap and the borrowers said in their filing, was "achieved in conjunction with the mediation process overseen by Judge [James] Peck," who also helped ResCap creditors and its parent reach the historic settlement that should lead to the mortgage servicer's emergence from Chapter 11.

The settlement works out to at least $606 per loan, although the amount recovered should vary wildly and the total amount could increase. A formula based on estimates of fees and interest paid by the borrowers will determine their recovery. Those whose loans closed before May 1, 2000, will get 18.5% less.

But the borrowers who are part of the class action could get much more, thanks to $300 million in insurance coverage that has been assigned to them as part of the settlement. If the borrowers are able to prove the insurers are on the hook for that money, they could "have an opportunity to realize a substantial recovery on the allowed claim," according to the filing.

The settlement has a two-pronged approval process: Judge Martin Glenn will consider whether to preliminarily sign off on the deal at an Aug. 21 hearing, at which he will also decide whether to send ResCap's reorganization plan to creditors for a vote. A separate approval will be required later.

ResCap filed its plan to reorganize--and ultimately liquidate--in early July. The proposal is based on a crucial settlement among the company, government-controlled parent Ally Financial Inc. and the creditors committee that calls for Ally to pay $2.1 billion to settle creditor claims. In return, Ally is off the hook for further liabilities.

ResCap, once the country's fifth-largest mortgage servicer and 10th-largest mortgage lender, filed for Chapter 11 protection in May 2012 as litigation over soured mortgage securities mounted and bond payments loomed. The move was intended to help Ally, which isn't part of the bankruptcy, to sever itself from those issues so it can focus on repaying the bailout it received during the financial crisis.

During its bankruptcy, ResCap struck deals to sell mortgage-servicing platforms and loan portfolios as a part of bankruptcy auctions that generated $4.5 billion in proceeds.

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

Write to Joseph Checkler at [e-mail]

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