Ally Bank 2011 Annual Report Download - page 136

Table of Contents
Notes to Consolidated Financial Statements
Ally Financial Inc. • Form 10−K
Consumer Automobile Portfolio Segment
The allowance for loan losses within the consumer automobile portfolio segment is calculated using proprietary statistical models and other risk
indicators applied to pools of loans with similar risk characteristics, including credit bureau score, loan−to−value and vehicle type, to arrive at an estimate of
incurred losses in the portfolio. These statistical loss forecasting models are utilized to estimate incurred losses and consider a variety of factors including,
but not limited to, historical loss experience, estimated defaults based on portfolio trends, delinquencies, and general economic and business trends. These
statistical models predict forecasted losses inherent in the portfolio based on both vintage and migration analyses.
The forecasted losses consider historical factors such as frequency (the number of contracts that we expect to default) and loss severity (the expected
loss on a per vehicle basis). The loss severity within the consumer automobile portfolio segment is impacted by the market values of vehicles that are
repossessed. Vehicle market values are affected by numerous factors including the condition of the vehicle upon repossession, the overall price and
volatility of gasoline or diesel fuel, consumer preference related to specific vehicle segments, and other factors. The historical loss experience is updated
quarterly to incorporate the most recent data reflective of the current economic environment.
The quantitative assessment component maybe supplemented with qualitative reserves based on management's determination that such adjustments
provide a better estimate of credit losses. This qualitative assessment takes into consideration relevant internal and external factors that have occurred but
are not yet reflected in the forecasted losses and may affect the credit quality of the portfolio.
Our methodology and policies with respect to the allowance for loan losses for our consumer automobile portfolio segment did not change during
2011.
Consumer Mortgage Portfolio Segment
The allowance for loan losses within the consumer mortgage portfolio segment is calculated by using proprietary statistical models based on pools of
loans with similar risk characteristics, including credit score, loan−to−value, loan age, documentation type, product type, and loan purpose, to arrive at an
estimate of incurred losses in the portfolio. These statistical loss forecasting models are utilized to estimate incurred losses and consider a variety of factors
including, but not limited to, historical loss experience, estimated foreclosures or defaults based on portfolio trends, delinquencies, and general economic
and business trends.
The forecasted losses are statistically derived based on a suite of loan−level behavior models linked into a state transition modeling framework. This
transition framework predicts various stages of delinquency, default, and voluntary prepayment over the course of the life of the loan. The transition
probability is a function of the loan and borrower characteristics and economic variables and considers historical factors such as frequency (the number of
contracts that we expect to default) and loss severity (the expected loss on a per loan basis). When a default event is predicted, a severity model is applied to
estimate future loan losses. Loss severity within the consumer mortgage portfolio segment is impacted by the market values of foreclosed properties, which
is affected by numerous factors, including geographic considerations and the condition of the foreclosed property. The historical loss experience is updated
quarterly to incorporate the most recent data reflective of the current economic environment.
The quantitative assessment component is supplemented with qualitative reserves based on management's determination that such adjustments provide
a better estimate of credit losses. This qualitative assessment takes into consideration relevant internal and external factors that have occurred but are not yet
reflected in the forecasted losses and may affect the credit quality of the portfolio.
Our methodology and policies with respect to the allowance for loan losses for our consumer mortgage portfolio segment did not change during 2011.
Commercial
The allowance for loan losses within the commercial portfolio is comprised of reserves established for specific loans evaluated as impaired and
portfolio−level reserves based on nonimpaired loans grouped into pools based on similar risk characteristics and collectively evaluated.
A commercial loan is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of
the loan agreement based on current information and events. These loans are primarily evaluated individually and are risk−rated based on borrower,
collateral, and industry−specific information that management believes is relevant in determining the occurrence of a loss event and measuring impairment.
Management establishes specific allowances for commercial loans determined to be individually impaired based on the present value of expected future
cash flows, discounted at the loan's effective interest rate, observable market price or the fair value of collateral, whichever is determined to be the most
appropriate. Estimated costs to sell or realize the value of the collateral on a discounted basis are included in the impairment measurement, when
appropriate.
Loans not identified as impaired are grouped into pools based on similar risk characteristics and collectively evaluated. Our risk rating models use
historical loss experience, concentrations, current economic conditions, and performance trends. The commercial historical loss experience is updated
quarterly to incorporate the most recent data reflective of the current economic environment. The determination of the allowance is influenced by numerous
assumptions and many factors that may materially affect estimates of loss, including volatility of loss given default, probability of default, and rating
migration. In assessing the risk rating of a particular loan, several factors are considered including an evaluation of historical and current information
involving subjective assessments and interpretations. In addition, the allowance related to the commercial portfolio segment is influenced by estimated
recoveries from automotive manufacturers relative to guarantees or
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