Ally Bank 2011 Annual Report Download - page 164

Table of Contents
Notes to Consolidated Financial Statements
Ally Financial Inc. • Form 10−K
securitization entities, which may or may not be consolidated on our Consolidated Balance Sheet. We securitize consumer and commercial automobile loans
and operating leases through private−label securitizations. We securitize consumer mortgage loans through transactions involving the GSEs or private−label
mortgage securitizations. During 2010 and 2011, our consumer mortgage loans were primarily securitized through the GSEs.
In executing a securitization transaction, we typically sell pools of financial assets to a wholly owned, bankruptcy−remote SPE, which then transfers
the financial assets to a separate, transaction−specific securitization entity for cash, servicing rights, and in some transactions, other retained interests. The
securitization entity is funded through the issuance of beneficial interests in the securitized financial assets. The beneficial interests take the form of either
notes or trust certificates which are sold to investors and/or retained by us. These beneficial interests are collateralized by the transferred loans and entitle
the investors to specified cash flows generated from the securitized loans. In addition to providing a source of liquidity and cost−efficient funding,
securitizing these financial assets also reduces our credit exposure to the borrowers beyond any economic interest we may retain.
Each securitization is governed by various legal documents that limit and specify the activities of the securitization entity. The securitization entity is
generally allowed to acquire the loans, to issue beneficial interests to investors to fund the acquisition of the loans, and to enter into derivatives or other
yield maintenance contracts (e.g., coverage by monoline bond insurers) to hedge or mitigate certain risks related to the financial assets or beneficial interests
of the entity. A servicer, who is generally us, is appointed pursuant to the underlying legal documents to service the assets the securitization entity holds and
the beneficial interests it issues. Servicing functions include, but are not limited to, making certain payments of property taxes and insurance premiums,
default and property maintenance payments, as well as advancing principal and interest payments before collecting them from individual borrowers. Our
servicing responsibilities, which constitute continued involvement in the transferred financial assets, consist of primary servicing (i.e., servicing the
underlying transferred financial assets) and/or master servicing (i.e., servicing the beneficial interests that result from the securitization transactions).
Certain securitization entities also require the servicer to advance scheduled principal and interest payments due on the beneficial interests issued by the
entity regardless of whether cash payments are received on the underlying transferred financial assets. Accordingly, we are required to provide these
servicing advances when applicable. Refer to Note 1 and Note 12 for additional information regarding our servicing rights.
The GSEs provide a guarantee of the payment of principal and interest on the beneficial interests issued in securitizations. In private−label
securitizations, cash flows from the assets initially transferred into the securitization entity represent the sole source for payment of distributions on the
beneficial interests issued by the securitization entity and for payments to the parties that perform services for the securitization entity, such as the servicer
or the trustee. In certain private−label securitization transactions, a liquidity facility may exist to provide temporary liquidity to the entity. The liquidity
provider generally is reimbursed prior to other parties in subsequent distribution periods. Monoline insurance may also exist to cover certain shortfalls to
certain investors in the beneficial interests issued by the securitization entity. As noted above, in certain private−label securitizations, the servicer is required
to advance scheduled principal and interest payments due on the beneficial interests regardless of whether cash payments are received on the underlying
transferred financial assets. The servicer is allowed to reimburse itself for these servicing advances. Additionally, certain private−label securitization
transactions may allow for the acquisition of additional loans subsequent to the initial loan transfer. Principal collections on other loans and/or the issuance
of new beneficial interests, such as variable funding notes, generally fund these loans; we are often contractually required to invest in these new interests.
We may retain beneficial interests in our private−label securitizations, which may represent a form of significant continuing economic interest. These
retained interests include, but are not limited to, senior or subordinate mortgage− or asset−backed securities, interest−only strips, principal−only strips, and
residuals. Certain of these retained interests provide credit enhancement to the trust as they may absorb credit losses or other cash shortfalls. Additionally,
the securitization agreements may require cash flows to be directed away from certain of our retained interests due to specific over−collateralization
requirements, which may or may not be performance−driven.
We generally hold certain conditional repurchase options that allow us to repurchase assets from the securitization entity. The majority of the
securitizations provide us, as servicer, with a call option that allows us to repurchase the remaining transferred financial assets or outstanding beneficial
interests at our discretion once the asset pool reaches a predefined level, which represents the point where servicing becomes burdensome (a clean−up call
option). The repurchase price is typically the par amount of the loans plus accrued interest. Additionally, we may hold other conditional repurchase options
that allow us to repurchase a transferred financial asset if certain events outside our control are met. The typical conditional repurchase option is a
delinquent loan repurchase option that gives us the option to purchase the loan or contract if it exceeds a certain prespecified delinquency level. We
generally have complete discretion regarding when or if we will exercise these options, but generally, we would do so only when it is in our best interest.
Other than our customary representation and warranty provisions, these securitizations are nonrecourse to us, thereby transferring the risk of future
credit losses to the extent the beneficial interests in the securitization entities are held by third parties. Representation and warranty provisions generally
require us to repurchase loans or indemnify the investor or other party for incurred losses to the extent it is determined that the loans were ineligible or were
otherwise defective at the time of sale. Refer to Note 31 for detail on representation and warranty provisions. We did not provide any noncontractual
financial support to any of these entities during 2011 or 2010.
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