Reuters: Bankruptcy News: UPDATE 2-Ally Financial profits rise on mortgage servicing

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UPDATE 2-Ally Financial profits rise on mortgage servicing Apr 26th 2012, 16:56 Thu Apr 26, 2012 12:56pm EDT * Net income $310 mln vs $146 mln year-ago * Executives say Chrysler non-renewal of lending pact expected * Auto finance results slip By David Henry and Rick Rothacker April 26 (Reuters) - Ally Financial Inc, a mortgage and auto lender owned largely by the U.S. government, reported a higher quarterly profit on higher valuations for its mortgage servicing rights. The earnings report came a day after Ally received notice from Chrysler Group LLC that the automaker would not renew a preferred lending agreement that has been in place since 2009. In a conference call with analysts on Thursday, Ally executives said Chrysler's decision had been expected. The Detroit-based lender has struggled to repay its government bailout because of problems with its Residential Capital LLC mortgage unit. In the conference call, executives signaled a ResCap bankruptcy filing remains an option, as it would distance the parent company from ResCap's mortgage liabilities. Ally reported net income of $310 million for the first quarter, compared with $146 million a year earlier. Operating earnings from its mortgage business were $191 million, up from $43 million. The improvement resulted from higher values for mortgage servicing rights, as well as additional lending tied to government refinancing programs, the company said. Profits from auto finance, which the company said is as key to its future, declined 15 percent to $442 million. The company said lease profit margins in North America were down. Ally's lending agreement with Chrysler extends through April 30, 2013. It would have been renewed until April 30, 2014, if the automaker had not given notice by the end of the month. According to debt analyst Kathleen Shanley of Gimme Credit, the end of the Chrysler agreement will not be material to Ally financially but underscores the intense competition the company faces in auto lending. Ally is preparing for a possible bankruptcy filing for its ResCap subsidiary, which holds the company's old mortgage assets, according to people familiar with the matter. There is pressure to get the filing completed before mid-May, when unsecured notes come due for ResCap, these sources said. In the conference call with analysts, Ally Chief Executive Michael Carpenter said Ally and ResCap have been examining strategic alternatives that range from "staying the course" to bankruptcy for the mortgage unit. Carpenter emphasized that Ally and ResCap are separate entities and that a ResCap bankruptcy decision would be made by the mortgage unit's board. During the housing boom, ResCap was a key source of profits for Ally, which was previously the financing arm of General Motors and known as GMAC. In the conference call, Ally's finance and corporate planning executive, Jeff Brown, said the bank's ResCap liabilities played a "pretty meaningful role" in the failure of Ally to pass this year's Federal Reserve stress test in March. Ally expects to resubmit its capital plan to the Fed in the next 90 days, and the proposal could incorporate options for separating ResCap from Ally, he said. Ally has two secured lending facilities outstanding to ResCap, but the parent company feels good about the collateral, Brown said. This month, Ally did not renew a $500 million unsecured credit line with ResCap as part of its efforts to reduce mortgage risk, he said. Carpenter said Ally would provide more information about the financial implications of a ResCap bankruptcy in its quarterly securities filing in a week or so. Ally, which is 73.8 percent-owned by the U.S. Treasury, had hoped to repay the government through an initial public stock offering, but last year it shelved those plans as problems mounted at ResCap and market conditions deteriorated amid the European debt crisis. The government injected more than $17 billion into GMAC in 2008 and 2009 as its mortgage losses ballooned. Ally said it has since repaid $5.4 billion. Link this Share this Digg this Email Reprints

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