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 joseph.checkler@wsj.com
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