GE Warns It Might Put Subprime Lending Unit Into Bankruptcy Filing
04 May 2018 - 7:20AM
Dow Jones News
By Katy Stech Ferek and Thomas Gryta
General Electric Co. warned it might put its dormant subprime
mortgage business, long-plagued by legal trouble, into bankruptcy
protection.
A bankruptcy filing could be a way for the lender, WMC Mortgage,
to deal with potential courtroom losses and other future
liabilities, the company said late Tuesday in a filing with the
Securities and Exchange Commission.
A GE spokeswoman declined to comment beyond the filing.
GE recently set aside a $1.5 billion reserve related to a
Justice Department investigation into the WMC Mortgage business,
which stopped nearly all new loan originations in 2007.
WMC Mortgage was a large mortgage lender to people with low
credit scores before the financial crisis. GE Capital Corp., the
company's finance unit, bought the subprime lender in 2004 and sold
the operation's assets in 2007 after racking up about $1 billion in
losses in that year alone. Even though WMC Mortgage's assets were
sold, it is still part of GE Capital.
Putting WMC Mortgage into bankruptcy protection would make GE
the latest major corporation to use the chapter 11 process to deal
with years-old mortgage problems in court. Ally Financial Inc.,
General Motors Co.'s ex-financing arm, put its mortgage business
into bankruptcy in 2012 as a way to get out from under billions of
dollars in lawsuits. The WMC Mortgage bankruptcy warning in GE's
filing was earlier reported by CNN.
It is unclear how much exposure GE could shed by putting WMC
Mortgage into bankruptcy. The process could accelerate settlements
that GE agrees to fund. At a minimum, the filing would temporarily
stop litigation against the unit as it looks to cap its
exposure.
In the SEC filing, GE officials said they are having trouble
estimating the exact loss the company could face from the Justice
Department investigation and several lawsuits involving the
subprime business. In February, GE disclosed that government
officials are likely to claim the business violated federal lending
laws in 2006 and 2007.
One case against WMC Mortgage involving $800 million in loans
went to trial earlier this year in federal court in New Haven,
Conn. Testimony included examples of individual applicants applying
for multiple loans within weeks of each other, while showing
drastically higher income or misrepresenting other information on
documents. Closing arguments are scheduled for June.
Major banks such as Citigroup Inc. and Morgan Stanley have paid
billions in dollars in penalties to resolve allegations that they
understated the risk of mortgages bundled into securities that
fueled the housing bubble in the last decade and exacerbated the
subsequent collapse.
The total claims GE faces tied to the mortgage-related lawsuits
is $3.4 billion, according to regulatory filings. The company
already had set aside a reserve for the lawsuits, standing at $342
million at the end of March, but said in Tuesday's filing it could
face as much as $500 million in additional losses.
Write to Katy Stech Ferek at katherine.stech@wsj.com and Thomas
Gryta at thomas.gryta@wsj.com
(END) Dow Jones Newswires
May 03, 2018 17:05 ET (21:05 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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