Bankrupt Residential Capital LLC should be barred from selling its mortgage servicing unit to Ocwen Financial Corp. unless Ocwen agrees to honor ResCap's portion of a $25 billion legal settlement with the U.S. and 49 states, government lawyers said in court papers.

Ocwen and its partner in the proposed $3 billion purchase must take over ResCap's part in the settlement, which ended a lawsuit against banks accused of helping cause the housing crisis, the U.S. Justice Department said in an objection filed today.

Fulfilling the non-monetary part of the settlement "is critical to protecting homeowners and deterring future mortgage loan servicing and foreclosure abuses and fraud," Assistant U.S. Attorney Joseph N. Cordaro said in court papers filed in U.S. Bankruptcy Court in Manhattan.

ResCap filed for bankruptcy in May with plans to sell its servicing unit, the fifth-biggest in the U.S. ResCap is a unit of Ally, a Detroit-based auto lender that is majority-owned by U.S. taxpayers. Ocwen and Walter Investment Management Corp. won an auction for the unit last month with a bid worth about $3 billion.

Ally also objected to the sale, saying Ocwen should be required to fulfill ResCap's obligations under the settlement.

Susan Fitzpatrick, ResCap's communications director, didn't immediately return a call for comment on the objections.

The case is In re Residential Capital LLC, 12-12020, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

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