NEW YORK—NCUA will receive $78 million from Ally Financial under a settlement of claims the credit union regulator filed over mortgage-backed securities the former GMAC subprime loan subsidiary known as Residential Capital, or ResCap, sold to three corporate credit union failures.
Ally announced last week that it reached a deal to resolve a lawsuit by the Federal Housing Finance Agency over $6 billion in MBS ResCap sold to Fannie Mae and Freddie Mac, as well as separate claims from the Federal Deposit Insurance Corp. and others, including NCUA.
Documents filed in connection with the lender's reorganization under Chapter 11 bankruptcy, which is scheduled for a hearing Nov. 19, detail the $78 million settlement with NCUA over $590 million of faulty MBS ResCap sold to U.S. Central FCU, WesCorp FCU and Southwest Corporate FCU. "Resolution of (NCUA's) claims is an important step towards (bankruptcy) Plan confirmation, and the occurrence of the effective date of the Plan is a condition of the Settlement," the documents stated.
"There is an agreement before the judge in which the claims we would be allowed would be $78 million," John Fairbanks, chief spokesman for NCUA, told Credit Union Journal. He emphasized the payment will only be made after the bankruptcy court approves the plan and a distribution of assets, which will likely take some time.
The latest deal makes a total of five entered into by NCUA over the sale of MBS to the failed corporates, with other settlements expected to be announced in the coming weeks. NCUA has already received $145 million from Bank of America; $145 million from Deutsche Bank Securities; $20.5 million from Citigroup and $5.25 million from HSBC under settlements of corporate claims. "These settlements are key steps in Ally addressing its remaining legacy mortgage risks," Michael Carpenter, CEO of Ally, said in the statement.
NCUA is also litigating corporate credit union claims against JP Morgan Chase, Goldman Sachs, Barclays Capital, UBS Securities, Credit Suisse Securities and Royal Bank of Scotland.
The credit union regulator claims that the underwriters of the MBS ignored their own standards in packaging subprime loans into securities that went sour soon after their sale to investors, contributing to the collapse of the wholesale credit unions, which pooled billions of dollars in investments from regular, or natural person credit unions.
The failure of the five corporates, including Members United Corporate FCU and Constitution Corporate FCU, are projected to cost NCUA $16 billion to resolve, which is being passed on to the nation's 6,800 credit unions in annual assessments. The ResCap recovery and the others will be used to offset those costs.
In settlement documents filed with the U.S. Bankruptcy Court, NCUA and Ally agreed that litigating these claims would have required years of costly litigation. "The Debtors and the Creditors' Committee believe that avoiding protracted litigation over the NCUAB's claims benefits the estates and their creditors. Accordingly, and for the reasons stated below, the Debtors respectfully request that the Court approve the Settlement Agreement," the settlement said.
