Two weeks ago, a Westchester family had finally reached the end of seven years in foreclosure hell.
Then the plate tectonics of the massive bank that controls their fate shifted. Ally Financial, formerly GMAC, filed Chapter 11 bankruptcy for its troubled Residential Capital mortgage unit last Monday. Ally owes taxpayers roughly $12 billion in bailout money and is majority-owned by Uncle Sam.
This unprecedented bankruptcy of a mega-servicer is hitting ordinary New York families hard, with worse blows to come. Inside Mortgage Finance publisher Guy Cecala estimates the bankruptcy affects roughly 120,000 loans in New York, out of 2.4 million ResCap consumer mortgages.
Unemployment caused the Westchester family to miss mortgage payments and seek Chapter 13 bankruptcy protection. Now they are in limbo, awaiting approval by the ResCap Chapter 11 judge.
“Resolution is on hold,” said the family’s lawyer, Linda Tirelli, who could not disclose more details because the deal is still pending. “GMAC has sought bankruptcy protection like many of its customers have.”
The giant servicer will continue operating while selling assets. But GMAC has sent out notices to attorneys regarding non-foreclosure litigation, indicating it’s taking advantage of the automatic freeze bankruptcy puts on such cases.
That will further burden New York’s overstressed court system, as consumers from across the nation seek hearings in the Southern District, where the case was filed.
“GMAC is using bankruptcy to maximize its position in litigation,” said Tirelli. “It will proceed in foreclosures, but for any borrower with a claim against GMAC, they are saying, Sorry, go to NY and file a motion.’”
In addition, homeowners negotiating a foreclosure settlement deal or loan modification will likely have to start again after the servicing rights are sold, since such deals are not usually transferred, said lawyer Max Gardner.
“Ally’s goal is to get out of the mortgage business and wash their hands of it,” said Cecala. “The sooner Ally can do that, the better [for Ally], but that doesn’t necessarily benefit the borrower.”
A ResCap spokeswoman insisted that, “The Chapter 11 filings should have no impact on our ability to help keep families in their homes and assist borrowers in distress.”