Ally Bank 2011 Annual Report Download - page 140

Table of Contents
Notes to Consolidated Financial Statements
Ally Financial Inc. • Form 10−K
of loss is determined to be reasonably possible, estimable, and material to the financial statements, disclosure regarding details of the matter and an
estimated range of loss is required. The estimated range of possible loss does not represent our maximum loss exposure. Financial statement disclosure is
also required for matters that are deemed probable or reasonably possible, material to the financial statements, but for which an estimated range of loss is
not possible to determine. While we believe our reserves are adequate, the outcome of legal and regulatory proceedings is extremely difficult to predict and
we may settle claims or be subject to judgments for amounts that differ from our estimates. For information regarding the nature of all material
contingencies, refer to Note 31.
Loan Repurchase and Obligations Related to Loan Sales
Our Mortgage operations sell loans that take the form of securitizations guaranteed by the GSEs and whole−loan purchasers. In addition, we
infrequently sell securities to investors through private−label securitizations. In connection with these activities we provide to the GSEs, investors,
whole−loan purchasers, and financial guarantors (monolines) various representations and warranties related to the loans sold. These representations and
warranties generally relate to, among other things, the ownership of the loan, the validity of the lien securing the loan, the loan's compliance with the criteria
for inclusion in the transaction, including compliance with underwriting standards or loan criteria established by the buyer, ability to deliver required
documentation and compliance with applicable laws. Generally, the representations and warranties described in Note 31 may be enforced at any time over
the life of the loan. ResCap assumes all of the customary representation and warranty obligations for loans purchased from Ally Bank and subsequently sold
into the secondary market. In the event ResCap fails to meet these obligations, Ally Financial Inc. has provided a guarantee to Ally Bank that covers it from
liability.
Upon a breach of a representation, we correct the breach in a manner conforming to the provisions of the sale agreement. This may require us either to
repurchase the loan or to indemnify (make−whole) a party for incurred losses or provide other recourse to a GSE or investor. Repurchase demands and
claims for indemnification payments are reviewed on a loan−by−loan basis to validate if there has been a breach requiring repurchase or a make−whole
payment. We actively contest claims to the extent we do not consider them valid. In cases where we repurchase loans, we bear the credit loss on the loans.
Repurchased loans are classified as held−for−sale and initially recorded at fair value and subsequently at the lower of cost or market. We seek to manage the
risk of repurchase and associated credit exposure through our underwriting and quality assurance practices and by servicing mortgage loans to meet investor
standards.
The reserve for representation and warranty obligations reflects management's best estimate of probable lifetime loss. We consider historical and
recent demand trends in establishing the reserve. The methodology used to estimate the reserve considers a variety of assumptions including borrower
performance (both actual and estimated future defaults), repurchase demand behavior, historical loan defect experience, historical and estimated future loss
experience, which includes projections of future home price changes as well as other qualitative factors including investor behavior. In cases where we do
not have or have limited current or historical demand experience with an investor, because it is difficult to predict the level and timing of future demands, if
any, losses cannot currently be reasonably estimated, and a liability is not recognized. Management monitors the adequacy of the overall reserve and makes
adjustments to the level of reserve, as necessary, after consideration of other qualitative factors including ongoing dialogue with counterparties.
At the time a loan is sold, an estimate of the fair value of the liability is recorded and classified in other liabilities on our Consolidated Balance Sheet,
and recorded as a component of gain (loss) on mortgage and automotive loans, net, in our Consolidated Statement of Income. We recognize changes in the
reserve when additional relevant information becomes available. Changes in the liability are recorded as other operating expenses in our Consolidated
Statement of Income.
Earnings per Common Share
We compute earnings (loss) per common share by dividing net income (loss) (after deducting dividends on preferred stock) by the weighted−average
number of common shares outstanding during the period. We compute diluted earnings (loss) per common share by dividing net income (loss) (after
deducting dividends on preferred stock) by the weighted−average number of common shares outstanding during the period plus the dilution resulting from
the conversion of convertible preferred stock, if applicable.
Derivative Instruments and Hedging Activities
We primarily use derivative instruments for risk management purposes. Derivatives held for trading purposes are limited to those entered into by our
broker−dealer. Some of our derivative instruments are designated in qualifying hedge accounting relationships; other derivative instruments do not qualify
for hedge accounting or are not elected to be designated in a qualifying hedging relationship. In accordance with applicable accounting standards, all
derivative financial instruments, whether designated for hedge accounting or not, are required to be recorded on the balance sheet as assets or liabilities and
measured at fair value. Additionally, we report derivative financial instruments on the Consolidated Balance Sheet on a gross basis. For additional
information on derivative instruments and hedging activities, refer to Note 24.
At inception of a hedge accounting relationship, we designate each qualifying derivative financial instrument as a hedge of the fair value of a
specifically identified asset or liability (fair value hedge); as a hedge of the variability of cash flows to be received or paid related to a recognized asset or
liability (cash flow hedge); or as a hedge of the foreign−currency exposure of a net investment in a foreign operation. We formally document all
relationships between hedging instruments and hedged items and risk management objectives for undertaking various hedge transactions. Both at the
hedge's inception and on an ongoing basis, we formally assess whether the derivatives that are used in hedging relationships are highly effective in
offsetting changes in fair values or cash flows of hedged items.
Changes in the fair value of derivative financial instruments that are designated and qualify as fair value hedges along with the gain or loss on the
hedged asset or liability attributable to the hedged risk, are recorded in the current period earnings. For qualifying cash flow
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