According to the U.S. Department of Justice, Ally Financial (ALLY) will pay $52M to resolve allegations accusing its subsidiary Residential Capital (ResCap) of purposely marketing mortgage bonds even though it knew that the mortgages backing the bonds were toxic. At issue are Residential Capital LLC mortgage-backed securities.
10 subprime residential mortgage-backed securities (RMBS) were issued in ’06 and ’07 with Ally Financial’s brokerage firm, Ally Securities, previously known as Residential Funding Securities, in the role of lead underwriter. The government contends that even though Ally Securities purportedly noticed that mortgage loan pools in RASC-EMX securities were deteriorating because of deficiencies in both the underwriting guidelines for the subprime mortgage loans and the diligence employed to the collateral before securitization, the firm took great pains to set up the RASC-EMX brand, secure investors for the RMBS offerings, and direct third-part due diligence to test if the loans were in compliance with disclosures made in public offering documents to investors.
The U.S. Attorney’s Office claims that the firm continued to market the securities to investors even though it knew that the toxic subprime mortgages were likely to become delinquent. The government is alleging that Ally Financial made misstatements about the RMBSs.