At the moment it filed for Chapter 11 bankruptcy protection on
Monday morning, Residential Capital, the mortgage arm of Ally
Financial, had outstanding 392 mortgage-backed securities
offerings, with an original principal balance of $221 billion.
Bond insurers MBIA, Assured Guaranty, and Financial Guaranty
have all sued ResCap for breaching its representations and
warranties on the mortgages underlying those notes, but private
investors have only brought securities claims, which will be
stayed under normal bankruptcy procedure.
Does that mean investors' reps and warranties claims,
otherwise known as put-backs, have been extinguished by ResCap's
filing? To the contrary: As ResCap prepared to enter Chapter 11,
its lawyers at Morrison & Foerster, as well as Ally counsel from
Kirkland & Ellis, were busy negotiating a deal with a group of
17 institutional investors in ResCap mortgage-backed trusts. The
investors, who are represented by Gibbs & Bruns and Ropes &
Gray, secured a settlement that grants ResCap MBS holders an
$8.7 billion allowed claim to cover ResCap's reps and warranties
breaches. In exchange, the institutional investors filed an
agreement to support the fallen mortgage company's plan of
reorganization. (It's available as Exhibit 10 to ResCap's
first-day pleadings.)
The deal doesn't mean that MBS investors are first in line
to collect from ResCap's estate, or, for that matter, that
they'll collect the entire $8.7 billion. The settlement simply
means that ResCap and Ally will not contest the put-back claim.
The MBS investors are unsecured creditors in the bankruptcy,
which means they're behind ResCap's secured creditors. One of
the secured creditors is Ally, which has already agreed to
release its claims and put $750 million into ResCap's estate,
resolving any successor liability claims the private MBS
investors might have asserted against Ally. The other secured
creditors are bondholders with about $2.1 billion in ResCap
debt. (Holders of about 37 percent of those notes also reached a
pre-filing agreement with ResCap.)
But the $8.7 billion allowed claim will likely give MBS
investors the biggest stake in the ResCap estate, guaranteeing
them a major piece of what's left for unsecured creditors
(including, in addition to MBS holders, certain ResCap
debtholders). The eventual size of the estate isn't yet known;
Fortress's Nationstar Mortgage has proposed a stalking-horse bid
of $2.4 billion for ResCap's mortgage servicing business and
Ally has agreed to buy other assets for $1.6 billion.
The $8.7 billion allowed claim settlement must still be
approved by the four MBS trustees that oversee ResCap
mortgage-backed trusts: Bank of New York Mellon, U.S. Bank,
Deutsche Bank, and Wells Fargo. The 17 investors who negotiated
the deal hold or manage $13 billion in ResCap MBS and have 25
percent voting rights in 290 of the 392 trusts in the deal, but
their counsel at Gibbs & Bruns has argued in the proposed $8.5
billion Countrywide MBS settlement that trustees have the
independent power to decide when to settle put-back claims on
behalf of the trusts they oversee. It would be surprising if the
ResCap trustees didn't line up behind the settlement, which puts
an undisputed value on claims the MBS investors haven't even
publicly asserted.
The settlement must ultimately be approved by the bankruptcy
court, which is where things could get interesting with the bond
insurers that have already brought suits against ResCap. The
investors' settlement actually could resolve their claims as
noteholders; when bond insurers pay MBS policyholder claims,
they frequently take over the mortgage-backed certificates. The
investor settlement would put monolines at or near the top of
the waterfall for the estate's payments to MBS noteholders. But
the insurers have also asserted insurance-law indemnity claims,
which aren't addressed in the proposed put-back settlement. On
those claims, the monolines are unsecured creditors, like MBS
investors, but without an allowed claim. U.S. Bankruptcy Judge
Martin Glenn of Manhattan will have to figure out how to handle
that potential problem.
If you're wondering, in particular, how the ResCap
bankruptcy affects MBIA (as many folks at Monday's "not-trial trial" challenging MBIA's restructuring were), take a look at
the company's May 10 filing with the Securities and Exchange
Commission. MBIA has booked $3.2 billion in receivables from
reps and warranties litigation. Some of it, as MBIA
acknowledges, is claims against ResCap. And though MBIA's filing
said it was anticipating ResCap's bankruptcy and "has not
recognized" recoveries against issuers without sufficient
capital to meet their obligations, it also said it may have to
"substantially reduce" its expected recovery from ResCap.
(Reporting by Alison Frankel)
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