Residential Capital L.L.C., which was a big subprime mortgage lender and still employs 1,385 in Fort Washington, filed for bankruptcy protection Monday in New York.
The move, which analysts had been expecting for months, is a reminder of the distress that festers in some corners of the financial industry following the bursting of the home mortgage bubble five years ago.
Ally Financial Inc., the owner of Residential Capital (ResCap), said that unloading the money-losing mortgage subsidiary and shedding certain other operations would enable it more quickly to repay the $12 billion it still owes the federal government from bailouts in 2008 and 2009.
Ally, which is based in Detroit and employs an additional 770 in Fort Washington, is the former finance arm of General Motors Co. Taxpayers own 74 percent of Ally, whose core business is auto lending.
The Chapter 11 bankruptcy filing calls for the sale of ResCap's assets. Nationstar Mortgage L.L.C., a Texas company funded by private-equity firm Fortress Investment Group L.L.C., has agreed to buy the mortgage origination and servicing businesses. Other remnants of ResCap are to be sold to Ally.
"The decision by the ResCap board to pursue this course will best enable it to preserve more than 3,500 jobs and keep its talented workforce focused on assisting homeowners by servicing the more than 2.4 million loans in its portfolio," Ally chief executive Michael A. Carpenter said.
ResCap is among the last of the high-flying mortgage lenders of the early 2000s to go through the bankruptcy grinder. It had previously gone through wrenching restructurings with $15 billion in mortgage-related losses from 2007 through 2009 and a 75 percent reduction in its workforce, from 14,000 at its peak in early 2007.
The company continued losing money in subsequent years, needing steady support from Ally to keep operating. Those losses played a big part in blocking Ally from its much-anticipated initial public offering. Most recently, ResCap was near default on a $20 million interest payment due April 17.
Despite the turmoil, a ResCap spokeswoman said the Philadelphia-area ResCap jobs were safe.
"We don't anticipate any headcount changes here in Fort Washington. These employees play a vital role at the company, and will continue to going forward," said Susan Fitzpatrick. She said that about 80 percent of Ally's senior management is based in ResCap's Montgomery County offices.
Nationstar was not quite so definitive in its news release. "We look forward to working with many exceptional professionals from ResCap," Nationstar CEO Jay Bray said.
But Nationstar, founded in 2007 and based near Dallas, already had 2,599 employees at the end of last year, according a Securities and Exchange Commission filing, raising the possibility in the mind of one observer that Nationstar might not need all of the ResCap workers.
Combining operations "is never as simple as 2 and 2 equals 4," said Guy Cecala, of Inside Mortgage Finance, a trade publication in Bethesda, Md.
Cecala said that Nationstar is the process of building a full-fledged mortgage operation that would service existing mortgages and originate new loans with home buyers. The origination arm is relatively small, ranking 37th in the nation last year with $3.4 billion in mortgages - 18 percent more than in 2010 even though the overall market was down 17 percent, Cecala said. Ally Financial and related entities were the fifth largest in 2011, with $56.2 billion in mortgages.
Nationstar "is relatively small at this point. That may be a positive" for the ResCap workforce, Cecala said.
The deal with Nationstar, which now services 645,000 residential mortgages with outstanding principal of $107 billion, is subject to a bankruptcy auction. The ResCap deal would add $374 billion in mortgage servicing to Nationstar's books. Nationstar would receive a $72 million breakup fee and up to $10 million for expenses if it does not win the auction.
A federal official said the bankruptcy filing, which listed $15.7 billion in assets and $15.3 billion in debt, was probably a good move from the perspective of taxpayers, who poured a total of $17.2 billion into Ally, which used to be called the General Motors Acceptance Corp.
"While it is unfortunate that a Chapter 11 filing became necessary for ResCap, we believe that this action puts taxpayers in a stronger position to continue recovering their investment in Ally Financial," Timothy G. Massad, assistant secretary for financial stability at the U.S. Department of the Treasury, said in a statement.