Federal investigators have subpoenaed mortgage records from Ally Financial Inc., signaling that a probe into troubled mortgages that helped cause the financial meltdown is turning toward original underwriters of home loans that went bad.
Ally, the former finance arm of General Motors that was bailed out by the U.S. government, disclosed the subpoenas Wednesday in a filing with the U.S. Securities and Exchange Commission. The filing is another step in Ally's bid to sell stock in a yet-unscheduled initial public offering.
The subpoenas indicate that investigators now are looking at mortgage originators, companies that signed up borrowers and approved home loans that were bundled into securities and sold to investors. Many of the loans went bad after the housing market collapsed, costing investors billions.
Peter Henning, a former SEC attorney and a law professor at Wayne State University in Detroit, said investigators are looking at originators because of lax lending standards. They also may be looking into whether banks knew the loans were no good but failed to disclose that to investors who bought mortgage securities, he said.
"When you look at the origination standards, there were no standards," Henning said. "It was `pump out product.'"
Ally's filing said that a subpoena from the Justice Department sought "documentation and other information in connection with its investigation of potential fraud related to the origination and/or underwriting of mortgage loans."
Ally also disclosed on Wednesday that it will take a $100 million charge in the second quarter for payments it made to trust funds to cover their losses on mortgages that went bad.
The U.S. government owns 74 percent of Ally, which it got in exchange for a $17.2 billion bailout.
Detroit-based Ally said in its filing that the SEC wants records of payments made to Ally by companies from which Ally bought mortgages. Ally would buy the loans and package them with its own mortgages to form securities, which it would then sell.
Investigators are looking at payments Ally received from mortgage originators in exchange for Ally agreeing not to make the companies buy the loans back if the borrowers didn't make payments, according to the filing. The SEC also is looking for documents that Ally gave to investment trusts that bought the mortgages, the filing said.
Ally may have agreed to payments from mortgage originators in exchange for taking on the risk of the loans defaulting, said Henning, the former SEC attorney.
"Essentially if it's buy this mortgage and I don't care what standard you used to underwrite it, that's certainly something the government is going to want to take a look at," he said. "Did this effectively encourage the originators to basically underwrite any kind of loan they wanted?"
Investigators are likely to have subpoenaed the same records from other big mortgage lenders, but Ally had to disclose them first because it's in the midst of the IPO process, he said. Ally has postponed its IPO because of the stock market slump, but the company is filing periodic updates with regulators.
Ally spokeswoman Gina Proia said the company is working with both agencies to get the documents requested in the subpoenas, which the company received earlier this month. She said she could not comment further. SEC spokesman John Nester and Justice Department spokeswoman Laura Sweeney declined comment.
Ally, formerly GMAC, is now is a bank and auto and mortgage loan company.
Associated Press Writers Pete Yost and Marcy Gordon in Washington contributed to this report.