The government owned Ally Financial posted a $210 million loss in the third quarter, dragged down by a $471 million pre-tax charge tied to its mortgage servicing rights.

During its 3Q11 earnings call the firm revealed that it will scale back its presence in the correspondent lending channel.

“Mortgage continues to be a cloud and we're not ignoring this,” said Jeffrey Brown, senior executive vice president of finance and corporate planning.

Brown, however, acknowledged “good core trends” in the firm's mortgage unit, noting that its legacy portfolio, for example, has “held up well.”

According to its earnings report Ally's residential division lost $422 million in 3Q11 compared to a $127 million loss in 2Q. In 3Q 2010, mortgage banking earned a profit of $154 million.

By comparison, the firm's North American auto finance business has posted profits of $550 million or better the past two quarters.

Brown revealed that although Ally is reducing its “least profitable” originations, the company will continue to focus on retail and broker channels. He noted that other players in the industry also have cut back in the correspondent space.

Brown said Ally's performance in mortgages, given MSR concerns, was “not acceptable,” adding that the outlook for mortgage profitability is “very different from a year ago” due in part to regulatory requirements and Basel III, which most banks are implementing ahead of schedule. (Basel III caps how much MSRs can count toward core capital.)

He said while a new model for servicing could emerge which would address these concerns there is too much uncertainty regarding how soon this might happen.

Also, a concern in regard to servicing is the possibility that the government's refinance program could increase prepayments. If it does, the company plans to offset such an event through retail originations.
When asked when or whether it might revive now-shuttered plans for an initial public offering, executives said they would need among other things, for the market to treat financial stocks more kindly.

Executives also addressed potential litigation and regulatory risks related to its mortgage unit, including a pending industry-wide robosigning settlement with state attorneys general. Ally officials said the AG settlement and costs tied to MBS-related legal settlements are manageable.
Analysts have overestimated the possible costs of certain of these settlements, company executives said, noting that they have strong defenses when it comes to certain claims.

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