Bank of America’s proposed $8.5 billion settlement with investors in Countrywide mortgage-backed securities gets all the attention, most recently in a column Sunday by Gretchen Morgenson of The New York Times, who cited new claims that echo old allegations of banks shortchanging MBS noteholders through modification of underlying investor-owned loans. Meanwhile, though, a similar global MBS deal between institutional investors and Residential Capital, the now bankrupt former mortgage lending arm of Ally Financial, has garnered much less outside attention, even though it permits MBS holders to assert an $8.7 billion claim in the bankruptcy, without opposition from ResCap. Friday was the deadline for objections in ResCap’s Chapter 11 to MBS investors’ $8.7 billion allowed claim. And the details that emerged in filings by ResCap bondholders, unsecured creditors and bond insurers that oppose the $8.7 billion deal add up to as compelling a story as the BofA saga, when it comes to assigning blame for and assessing victims of the mortgage crisis.
According to the new filings (especially those of the trustee for senior unsecured ResCap notes, the ad hoc committee of junior unsecured noteholders and the unsecured creditors committee), ResCap’s $8.7 billion allowed-claim settlement with MBS investors was engineered by Ally, which wanted to minimize its own liability to its mortgage unit. The filings point to emails and other evidence suggesting that Ally’s chief in-house litigation counsel, Timothy Devine, led negotiations with Kathy Patrick of Gibbs & Bruns, who represents the big institutional investor group that first notified ResCap of alleged breaches of its representations and warranties on underlying mortgages back in October 2011. (That group, like the BofA investor group, includes BlackRock and Pimco.)
The objectors claim that as ResCap approached Chapter 11, Ally executives estimated that Ally’s exposure to its ailing mortgage subsidiary could be as high as $2 billion. To minimize its own contribution to the ResCap estate, objectors assert, Ally supposedly agreed to back an unreasonably large estimate of ResCap’s put-back liability to MBS noteholders in exchange for support from MBS investors, who are ResCap’s primary creditors, for a $750 million settlement between Ally and ResCap. The supposed quid pro quo between Ally and the MBS investors group was a win for both of them but, objectors contend, only at the expense of monolines and ResCap’s other creditors. They argue that an $8.7 billion allowed claim for MBS investors would give holders of mortgage-backed notes an inflated share of the ResCap estate.
The new objections also assert that ResCap’s board hurriedly approved the $8.7 billion deal in May 2012 without really understanding its terms. In particular, the filings suggest that the board misunderstood, or was misinformed about, whether the settlement included MBS investors’ securities claims (it didn’t) and whether it resolved claims by monolines, a significant point considering that MBIA alone has asserted $2 billion in claims against ResCap. The board isn’t alone in its supposed confusion over how the settlement treats bond insurer claims against ResCap; MBIA’s objection says that point is “debatable.”
Filings by MBIA and its fellow bond insurer, Financial Guaranty, raise an interesting point, arguing that the investor group represented by Gibbs & Bruns (as well as a separate ResCap MBS investors group that is represented by Talcott Franklin and also supports the $8.7 billion allowed-claim settlement) doesn’t have standing to settle with ResCap, since put-back claims belong to MBS trustees, not investors. MBIA, Financial and Assured Guaranty also assert that bond insurers have stronger put-back claims than investors, since they can cite insurance law as well as contracts. MBS investors shouldn’t be permitted to resolve monoline claims as if they were the same as investor demands, the bond insurers argue.