GMAC Mortgage/Residential Capital Chapter 11 Bankruptcy
In November 2012, the bankruptcy court approved the sale of Ally’s ResCap mortgage servicing and originations business to Ocwen Loan Servicing LLC. Ocwen is purchasing ResCap’s mortgage servicing rights on $90 billion of mortgages for $585 million.
GMAC Mortgage holds or services many home mortgages in Santa Clara County. We deal with GMAC Mortgage in many Chapter 13 cases we file. So, the thought of GMAC Mortgage, itself, being a bankruptcy debtor seems somewhat ironic – but, it is true.
On May 14, 2012, 51 separate Chapter 11 bankruptcy cases were filed by subsidiaries and related companies commonly known as GMAC Mortgage and ResCap or Residential Capital (we will refer to all of them as “GMAC/ResCap”). Click here for a complete list of these companies and their notice of bankruptcy. The 51 cases are consolidated together for the court’s purposes in the Southern District of New York (New York City).
Protection for Homeowners
Because our clients who have home loans through GMAC/ResCap are – strangely enough – potential creditors in GMAC/ResCap’s Chapter 11 case, our clients would be prevented from taking certain actions in their own Chapter 13 cases against GMAC/ResCap without permission from the New York bankruptcy court. For example, if GMAC/ResCap filed a claim in our client’s Chapter 13 case that contained certain errors, we might file an objection to that claim. We might ask the San Jose bankruptcy judge to grant our client an order denying some or all of GMAC/ResCap’s claim. However, because GMAC/ResCap is a bankruptcy debtor in New York, first we would have to file a motion for relief from the automatic stay that protects GMAC/ResCap, before we filed the objection to claim in the San Jose bankruptcy court.
Being concerned about the chaos that would result in bankruptcy courts around the country from GMAC/ResCap’s Chapter 11 filing, the National Association of Consumer Bankruptcy Attorneys (“NACBA”) filed a motion for relief from the automatic stay in the New York bankruptcy court in early June 2012, on behalf of homeowners in bankruptcy cases nationwide. The New York bankruptcy court, on July 13, 2012, entered a Final Supplemental Order that incorporated many of NACBA’s requests. As a result, homeowners in their own bankruptcy cases can: file motions to wipe out completely unsecured junior mortgages; file objections to claims; file motions to determine the validity, priority, or extent of liens; and assert claims and counterclaims for the purpose of defending against or stopping foreclosures. GMAC/ResCap can ask the New York bankruptcy court to “reimpose the stay” or get back some of its bankruptcy protection regarding these matters, but that is not too likely to occur in most cases.
Ally Financial, Inc. did not file Chapter 11
The parent company, Ally Financial, Inc., itself did not file Chapter 11. Ally Financial, Inc. is a bank holding company, of which the U.S. government owned about 74% as recently as early 2012, due to funds paid into the company through TARP (Troubled Asset Relief Program). The bankruptcy filing by Ally’s subsidiaries was undoubtedly influenced by factors that, in March 2012, led to Ally’s failure to pass the Federal Reserve’s “stress test” – indicating that Ally would be likely to fail, given certain negative, but possible, economic events. Filing Chapter 11 is an attempt to avoid the complexities that would result from the “failure” of a financial institution.
GMAC Mortgage and ResCap as parties to the National Mortgage Settlement
Only a few months prior to the Chapter 11 filing, Ally Financial, Inc., GMAC Mortgage, LLC, and Residential Capital, LLC (for this section only, we will use GMAC/ResCap to mean only GMAC Mortgage, LLC and Residential Capital, LLC), agreed to settle criminal and civil claims of 49 state attorneys general (not Oklahoma) and numerous federal departments and agencies through the National Mortgage Settlement (see separate information on the “NMS”).
Since it did not file a Chapter 11 case, Ally Financial, Inc., is still completely subject to the NMS that it signed in early 2012. However, GMAC/ResCap are among the 51 Chapter 11 debtors in the New York bankruptcy cases. Under normal circumstances, filing a bankruptcy case would likely void a settlement with regard to money obligations. With regard to the NMS requirements that GMAC/ResCap offer loan modifications to its borrowers – the issue is a little less clear. GMAC/ResCap has stated that it intends to comply with the loan modification provisions of the NMS, which is consistent with a New York bankruptcy court order that says that the filing of the Chapter 11 “shall not modify or affect the terms and provisions of, nor the rights and obligations under [NMS and other consent judgments].”
Time will tell how GMAC/ResCap views its obligations under the NMS. However, it is also likely that the GMAC/ResCap’s mortgage portfolio will be sold to another big mortgage servicer, which will affect the applicability of the NMS with regard to the home loans in the portfolio.