By Joseph Checkler
NEW YORK--A judge signed off Friday on Residential Capital LLC's
deal with the Federal Reserve Board to set aside $230 million for
borrowers who may have had their homes improperly foreclosed
upon.
The deal, approved by Judge Martin Glenn of U.S. Bankruptcy
Court in Manhattan, replaces a costly and drawn-out review process
that sent millions to the professionals investigating the
foreclosed loans and little or nothing to most borrowers who may
have been wronged.
"This settlement puts more money in the pockets of more
borrowers," said Morrison & Foerster LLP's Lorenzo Marinuzzi, a
ResCap lawyer.
Mr. Marinuzzi said in court that the review, which stemmed from
an April 2011 decree from federal banking regulators for several
top mortgage servicers to hire independent consultants to look for
improper foreclosures, had become the costliest piece of ResCap's
already expensive bankruptcy. In court papers last month, ResCap
said the review was costing $300,000 a day and could reach $459
million. While professionals still will be needed, the cost will go
down substantially.
Originally, the company had estimated it would pay about $50
million for the foreclosures, to which Judge Glenn said at a March
hearing, "It's costing you $350 million to figure out who
you...might pay $50 million to. That makes no sense."
The $230 million, which is separate from another fund that also
will put money in borrowers' pockets, will be distributed among
about 232,000 borrowers, regardless of whether they were improperly
foreclosed upon. If they are found to have been harmed, they will
get more in accordance with a so-called "waterfall" payment
system.
"This settlement was a long time coming," Mr. Marinuzzi said in
court.
Not all borrowers were supportive of the settlement. Frank Reed,
a borrower representing himself, argued that a review should
continue so those who were improperly foreclosed upon could get
what they are owed.
"The payments are nominal for those who are harmed," said Mr.
Reed, who said he has a secured claim in ResCap's bankruptcy that
wouldn't be affected by this settlement.
The judge overruled Mr. Reed, who didn't wait around for the
decision. Judge Glenn said he favored getting money to borrowers
quickly, rather than continuing the costly review.
Consumer groups long have criticized the review program forced
on the mortgage servicers, arguing it padded the pockets of
consultants rather than assisting homeowners.
In January, the Fed and the Office of the Comptroller of the
Currency reached settlements with 13 of the mortgage servicers that
replaced the foreclosure-review program.
These servicers, including Bank of America Corp. (BAC), J.P.
Morgan Chase & Co. (JPM) and Wells Fargo & Co. (WFS),
agreed to pay $3.6 billion in cash to nearly 4.2 million homeowners
and provide $5.7 billion in other relief, such as loan assistance
to borrowers.
ResCap in February asked Judge Glenn if it could get out of the
program without facing punishment from the Fed, a request that is
now moot with the approved settlement.
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 government
controlled parent Ally Financial Inc., 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.
ResCap filed its Chapter 11 reorganization plan earlier this
month. The proposal is based on a crucial settlement among the
company, government-controlled parent Ally Financial and the
creditors committee, that calls for Ally to pay $2.1 billion to
settle creditor claims. In return, Ally is off the hook from
further liabilities. After the sales of two huge chunks of assets
earlier this year, that settlement loomed as one of the largest
issues in ResCap's 14-month-old bankruptcy.
Creditors will vote on the proposal, which calls for unsecured
claims to be paid 36 cents on the dollar, if Judge Glenn approves
the plain-language version of the plan at an Aug. 21 hearing.
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.
--Andrew R. Johnson contributed to this article.
Write to Joseph Checkler at joseph.checkler@wsj.com
(Dow Jones Daily Bankruptcy Review covers news about distressed
companies and those under bankruptcy protection. Go to
http://dbr.dowjones.com)