The residential mortgage division of Ally Financial posted earnings of $34 million in the first quarter, a 78% decline from the same period a year ago.

Compared to the fourth quarter, Ally’s mortgage unit, Residential Capital Corp. (ResCap), saw earnings fall by 72%.

The bank holding company reports mortgage earnings through two separate segments: ‘origination and servicing’ and a line item called ‘legacy.’ When its troubled legacy assets are factored out, Ally Financial’s mortgage unit posted net earnings of $73 million in 1Q, a slight improvement over 1Q10.

However, like many large lenders, ResCap’s residential production took it on the chin during the quarter, falling to $12.2 billion, almost half of what it funded in the fourth quarter. “Production decreased on a sequential basis due to the refinance market moderating during the quarter,” the company said in an earnings statement released Tuesday morning.

ResCap funds loans through all three production channels, and in some cases Ally provides warehouse lines to correspondent sellers.

Ally Financial, whose common stock is controlled by the U.S. Treasury hopes to go public some time this year. Among residential lenders and servicers, it ranks fifth in both categories, according to figures compiled by National Mortgage News and the Quarterly Data Report.

ResCap, which still uses the trade name GMAC Mortgage, also reported that it has made “substantial improvements” to its foreclosure policies and procedures. (Ally was one of several megabanks signing a servicing consent order with federal banking regulators this spring.)

“Over the last six months, GMAC Mortgage has significantly bolstered the execution and documentation of its affidavit review process,” the company said.

All of Ally Financial earned $146 million in the first quarter of 2011, compared to $162 million in the year ago period.

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