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2010-12-28 11:31 by Karl Denninger
in Housing , 1 references Ignore this thread
Let's Move Money From One Pocket To Another!

That will make it all ok, right?

DETROIT, Dec. 27, 2010 /PRNewswire/ -- Ally Financial Inc. (Ally) today announced that its mortgage unit, Residential Capital, LLC (ResCap), and certain ResCap subsidiaries have reached an agreement with Fannie Mae to resolve potential repurchase exposure for breaches of selling representations and warranties.  The agreement covers loans serviced by GMAC Mortgage on behalf of Fannie Mae prior to June 30, 2010 and all mortgaged-backed securities that Fannie Mae purchased at various times prior to the settlement, including private label securities.  The settlement was for approximately $462 million and releases ResCap and its subsidiaries from liability related to approximately $292 billion of original unpaid principal balance ($84 billion of current UPB) on these loans.  

"Potential" exposure?

Uh huh.

Incidentally, what's this "mortgage-backed securities that Fannie Mae purchased?"

I thought Fannie took whole loans and bundled them into securities?  Are we now seeing the soft underbelly of what Fannie (and Freddie) actually did during the bubble come out into the light of day?

See, it's not common knowledge that the GSEs were buying MBS on the market, but they in fact were.  They were, like a lot of people, "reaching for yield" and buying crap.  And whether that crap-buying happened because they were stupid or whether they were intentionally-deceived is an open question.

$462 million dollars to "release" them from liability on something that has less than 1/4 of the original exposure outstanding?

Where'd the other 3/4 go?  Was it refinanced or defaulted?  This is not a trivial matter and note that it is unaddressed in the press release.

"We are very encouraged to have reached this agreement with Fannie Mae," said ResCap Chief Executive Officer Thomas Marano.  "They are a key counterparty to our mortgage business and we look forward to continuing our important and productive relationship.  With our de-risking initiatives largely complete, the mortgage business will focus predominantly on the origination and servicing of conforming mortgages, which is where the company holds leadership positions."

I'm sure you are.  After all, passing money from one pocket to the other (the Federal Government owns about half of Rescap, and all of Fan/Fred nowdays) has to be an interesting way of claiming you "fixed" a problem.  The last time I checked there was no material difference between having a $20 in one pocket or in the other.

This sounds a lot like GM claiming they "paid" the government off - by taking a loan from the government.  Or the various similar claims by AIG. 

The obvious secondary question is of the part of Ally that is privately owned, why are we buying off the potential liability that those private entities still had, and who authorized what is an effective disbursement of taxpayer funds to these entities?

Update: In a conversation with Jim Olecki at Ally the firm was unable to provide more color on the current unpaid principal balances (how much of the decrease is from normal run-off and prepays .vs. defaults)