Ally Gears Up for Friday Foreclosure Settlement Deadline (Update 1)

Updated with news of Ally Financial's foreclosure related charge.

NEW YORK ( TheStreet) -- Ally Financial said it will take a $270 million charge related to foreclosure matters in the fourth quarter of 2011, which is anticipated to result in a loss.

The charge is for "penalties expected to be imposed by certain of our regulators and other governmental agencies in connection with foreclosure related matters," the company said.

The charge will result in ResCap's tangible net worth falling below $250 million, the minimum amount required at the end of each month according to certain credit facilities. However, Ally will be pumping in $196.5 million into the subsidiary towards capital contribution to remedy the situation. Still, because of the covenant breach, ResCap is seeking waivers from applicable lenders, which it says it expects to receive.

Ally is set to report fourth-quarter results on Thursday. Significantly, the announcement of the charge comes amid reports that states have until Feb.3 to join a nationwide settlement with banks over allegedly deceptive foreclosure practices.

The 50 state attorneys general have been in year- long negotiations with the nation's biggest mortgage servicers including Bank of America ( BAC), JPMorgan Chase ( JPM), Wells Fargo ( WFC), Citigroup ( C) and Ally Financial- to reach a settlement that would hold banks accountable for improper foreclosure practices including robo-signing and to push them towards offering more relief to borrowers by way of principal reductions.

Banks have in turn been seeking a release from future claims from banks. Recent reports suggest that states will only agree not to pursue further claims related to foreclosure documentation and that banks will not be released from criminal liabilities.

A settlement with all 50 states is expected to be positive for bank stocks because it will help put atleast some of the mortgage liabilities to rest.

The talks have frequently collapsed over the past year, upsetting expectations, with states including California, Nevada, Delaware and Massachusetts threatening to pull out of the talks arguing that the settlement was inadequate. The office of California AG Kamala Harris as recently as last week said it would not sign the deal as drafted. Many analysts believe a deal without California, which has been among the worst affected by the housing bust, would be negative for banks.

The Obama administration has been urging the states to reach an agreement, as the deadlock has weighing on the housing market. But some states have felt that the settlement will hinder their ability to pursue investigations independently.

Last week, President Obama announced a new mortgage fraud unit to be led by New York Attorney General Eric Schniderman. The announcement is expected to help states reach an agreement sooner, although JPMorgan Chase CEO Jamie Dimon said it would likely derail settlement talks.

At stake is the ability for a potential 1 million borrowers to lower the principal on the mortgage that they owe. The Obama administration and officials at the Fed are pushing for greater principal reductions as it has the effect of both providing relief and wiping out negative home equity which limits the ability of troubled borrowers to refinance their homes or sell to pay off their debt.

Separately, the Treasury announced revised guidelines for its mortgage modification program, tripling the incentives it pays to servicers to reduce the principal on mortgages.

--Written by Shanthi Bharatwaj in New York

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