Ally Financial Resolves Legacy Mortgage Claims With DOJ

With an aim to move past the legacy legal matters, Ally Financial Inc. (NYSE:ALLY) has agreed to resolve all the outstanding claims and probes by the U.S. Department of Justice (DOJ) pertaining to sale of residential mortgage backed securities (RMBS). The company will be paying $52 million to settle allegations of misrepresentation of underlying securities by its former mortgage subsidiary Residential Capital, LLC and its subsidiaries (ResCap RMBS).

This resolves allegations of violations of the Financial Institutions Reform Recovery and Enforcement Act (FIRREA) of 1989 and the False Claims Act. Notably, Ally Financials fully cooperated with the DOJ in settling the issue.

Misrepresentation on the Quality of Underlying Loans

Ally Financial was accused of acting improperly with regard to 10 sub-prime RMBS during 2006 and 2007. Notably, Ally Securities, LLC, (earlier known as Residential Funding Securities LLC), was the lead underwriter on these RMBS issued in the RASC-EMX series.

Despite recognizing continued deterioration in the quality of the mortgages underlying the RASC-EMX securities, Ally Securities continued to market these as safe investments. Therefore, investors lost millions of dollars as value of these securities plunged.

U.S. Attorney Eileen M. Decker said, “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. Nevertheless, Ally Securities continued to market the RMBS, and investors lost millions of dollars as the value of the securities plummeted.”

No Material Impact on the Financials

The settlement will have no financial impact on the company’s results as it has fully reserved the amount in the third quarter. As part of the settlement deal, Ally Financial will be withdrawing the broker-dealer registration of Ally Securities. This will also have no material effect on the company’s operations as the unit was not strategically important.

Notably, the settlement deal reserves the government’s ability to bring criminal charges against Ally Financial.

Leslie P. DeMarco – Special Agent in Charge of the Federal Housing Finance Agency-Office of Inspector General’s Western Region – said, “The sale of toxic mortgage backed securities crushed the housing market and the economy, leading to years of uncertainty and hardship for many. Today Ally Securities is being held accountable for the role it played. As we move forward, FHFA-OIG will continue to hold entities responsible and work toward building a healthier housing market.”

Many big banks, including JPMorgan Chase & Co. (NYSE:JPM) , Bank of America (NYSE:BAC) Corporation (NYSE:C) and Citigroup Inc. (NYSE:C) have faced similar allegations. These banks were involved in almost similar settlements to resolve lawsuits and investigations, thereby hurting their financials substantially.

Currently, Ally Financial carries a Zacks Rank #4 (Sell).

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