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Local Edition SECONDARY MARKET Ally's Shift Away from Lending Leads to Improving Profits Following additional efforts to reposition or eliminate portions of the company's mortgage operations, Ally reported positive net income to end 2012. The bank remains one of the largest institutions still on the hook for bailout money, having received a total $17.2 billion in investments from the Treasury. A report released by the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) in late January asserts that Treasury failed to assemble a "concrete plan" to exit its investment with the bank. Carpenter said repaying the government is one of Ally's biggest goals for this year. "The momentum created in 2012 positions Ally to make additional strides in 2013," he said. "Our focus remains on delivering strong results from our leading franchises, completing our strategic transformation, gaining additional efficiencies in the business, and repaying the U.S. Treasury investment." A na ly t ic s Michigan // Ally Financial reported net income of $1.4 billion for 2012's last quarter as the bank continues to shift away from the mortgage business. Last quarter's $1.4 billion income was a marked turnaround from the net loss of $206 million reported at the end of 2011. For the entire year, Ally recorded a net income of $1.2 billion compared with a net loss of $157 million in 2011. According to the company's quarterly earnings report, results for Q 4 were mostly driven by growth in its core auto finance franchise. Performance was "also affected by strong gain on sale revenue in mortgage operations, as well as $1.3 billion from the release of tax valuation allowance and related effects." Ally's mortgage subsidiary, Residential Capital, declared bankruptcy in May last year. Walter Investment Management Corp. announced at the end of January it had completed its acquisition of ResCap's originations and capital markets platform. se c on da r y m a r k e t New York // A judge in the Southern District of New York ruled that Flagstar Bancorp will have to pay Assured Guaranty Municipal Corp. more than $90 million for defective mortgages packaged in residential mortgage-backed securities (RMBS). U.S. District Judge Jed Rakoff ruled that Flagstar must pay $90.1 million to Assured for misrepresenting loans in insured securities. Flagstar must also pay interest, attorneys' fees, and other costs to be determined. In his ruling, Rakoff said the case "essentially reduces to a resolution of conflicting expert testimony." In the end, he sided with Assured's underwriting expert, who testified that more than 75 percent of the loans collected in a random sample of 800 loans showed evidence of "material breach" of Flagstar's representations and warranties. In a statement, Assured President and CEO Dominic Frederico called the decision "an important victory" that "sets a strong precedent in support of the rights of Assured Guaranty in these cases." "The court recognized and clearly articulated the responsibility of an R&W [representations and warranties] provider to honor its contractual obligations to purchase defective mortgage loans," Frederico said. "His decision establishes clear liability as it relates to originators and securitizers of RMBS transactions and strengthens Assured Guaranty's resolve to seek full recovery from R&W providers that refuse to recognize this liability." Assured has also pursued Credit Suisse and UBS over similar allegations. Ally announced in October it is "exploring alternatives" for its agency mortgage servicing rights portfolio and its mortgage business lending operation. In its quarterly filing, the bank said it "is encouraged by the initial interest." Going forward, Ally intends to continue originating a "modest level" of residential jumbo mortgages for its own portfolio through third-party relationships. "This past year represented another significant step forward in Ally's evolution and further defining its future path. A number of strategic actions were taken that will reshape and strengthen the company going forward. Agreements were reached to sell the international operations at a substantial premium, and steps were taken to further address the legacy mortgage risks," said Ally CEO Michael A. Carpenter. s e r v ic i ng Siding with Assured Guaranty Municipal Corp, U.S. District Judge Jed Rakoff ordered Flagstar to pay damages related to the misrepresentation of mortgage-backed securities. The ruling may indeed set a precedent for other insurers to take advantage of. MBIA Insurance Corporation has filed its own suit against Flagstar for allegedly breaching loan warranties and has another suit against Bank of America over mortgages originated by Countrywide. What lasting effect the ruling will have is still unclear, however, as it may be turned around. Flagstar issued a statement following the decision, saying that the company "strongly disagrees with the court's ruling and intends to vigorously contest the outcome on appeal." Or ig i nat ion Flagstar to Pay $90.1M for Breach of Warranties The M Report | 93