Ally Financial Inc, the U.S. government-owned lender, said its mortgage unit could file for bankruptcy, in the company's most direct statement so far about its plans for the struggling business.
The Ally Chief Executive said its Residential Capital LLC unit has been examining options that range from "staying the course" to bankruptcy. The single most important thing that the companby can do to preserve and enhance shareholder value is to distance Ally from the mortgage business.
Sources have told Reuters that bankruptcy was an option for ResCap, possibly as early as mid-May, but the company had previously only hinted at the possibility. An executive said Ally failed a recent test from regulators for soundness in distressed economic situations, known as the Federal Reserve's "stress test," in large part because of liabilities linked to the mortgage business.
Ally, which was originally the lending arm of General Motors, said it learned on Wednesday that Chrysler Group LLC was not renewing a preferred lending agreement that will now expire next year, but executives downplayed the importance of that loss on the call.
Ally is 73.8 percent owned by the U.S. Treasury after a series of bailouts spurred by its ballooning mortgage losses. The lender hoped to repay taxpayers through an initial public stock offering, but last year it shelved those plans as problems mounted at ResCap and market conditions deteriorated during the European debt crisis.
Sources familiar with the matter said Ally is preparing for a possible bankruptcy filing for ResCap, and that there is pressure to get the filing completed before mid-May, when unsecured notes come due for the unit.
On the conference call Ally's finance and corporate planning executive, said the bank would offer a new capital plan to the Federal Reserve in the next 90 days, after failing the stress test.
Ally has two secured lending facilities with ResCap that had $1.2 billion outstanding at the end of 2011, but the parent company feels confident about getting repaid, Brown said. This month, Ally did not renew a $500 million unsecured credit line with ResCap as part of its efforts to reduce mortgage risk, he said.
HIGHER FIRST-QUARTER PROFIT
Even as executives faced ResCap bankruptcy questions, Ally said on Thursday gains linked to the company's ability to collect mortgage payments from borrowers helped boost first-quarter profits.
Ally reported net income of $310 million for the first quarter, compared with $146 million a year earlier.
Operating earnings from its mortgage business were $191 million, up from $43 million. The improvement resulted from higher values for mortgage servicing rights, as well as additional lending tied to government refinancing programs, the company said.
Accounting charges related to those rights to collect mortgage payments can fluctuate wildly. Ally remains committed to diminishing the importance of the mortgage business to the overall company.
Profits from auto finance, which the company said is key to its future, declined 15 percent to $442 million. The company said lease profit margins in North America were down.
Ally said Chrysler's decision to allow a lending relationship to lapse had been expected and did not preclude the two companies from doing business together in the future.
The pact covered retail auto lending made with manufacturer incentives. That accounted for 5 percent of Ally's $9.7 billion of U.S. consumer loans made in the first quarter, compared to 11 percent for other business done with Chrysler dealers, Ally said.
The agreement with Chrysler, which is majority-owned by Italian automaker Fiat SpA, runs through April 2013. Without Chrysler's notice, it would have been automatically extended through April 2014.
In Chrysler's earnings conference call on Thursday, the Chief Executive said that the automaker plans to talk to a number of financial institutions, including Ally, about future lending agreements.
According to debt analyst Kathleen Shanley of Gimme Credit, the end of the Chrysler agreement will not be material to Ally financially but underscores the intense competition the company faces in auto lending.
The government injected more than $17 billion into Ally, then known as GMAC, in 2008 and 2009. Ally said it has since repaid $5.4 billion.
Ally has made progress in shrinking its portfolio of troubled mortgage loans, reducing total assets to $10.5 billion at the end of March from about $19 billion at the end of 2009. But it still faces a slew of lawsuits and other claims related to mortgage-backed securities sold to investors during the housing boom, making it difficult to quantify potential losses.
Ally in the first quarter moved to resolve one of its mortgage-related problems by joining four other lenders in a $25 billion settlement over foreclosure abuses. As part of the pact, Ally paid $110 million in penalties and agreed to provide $200 million in loan modifications to struggling borrowers. Ally took a $270 million charge for the settlement in the fourth quarter.
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