Ally Bank 2011 Annual Report Download - page 171

Table of Contents
Notes to Consolidated Financial Statements
Ally Financial Inc. • Form 10−K
During 2010, we further completed the sale of our significant retained residuals and subordinate bonds related to certain other on−balance sheet
securitization entities, which were consolidated upon adoption of ASU 2009−17 (but were not consolidated prior to the adoption of ASU 2009−17). Since
we disposed of our variable interests in these securitization entities to unrelated third parties, a reassessment was required to determine whether we
continued to hold a controlling financial interest. All subordinate retained economic interests in these entities were sold and therefore we no longer held a
controlling financial interest. All assets and liabilities associated with the trust were derecognized and all retained interests in the entities, including
insignificant retained senior interests and mortgage servicing rights, were recorded at their fair values at the date of deconsolidation. Consolidated assets and
consolidated liabilities of $709 million and $707 million, respectively, associated with this transaction were derecognized and a gain of $1 million was
recorded.
We continue to hold servicing rights associated with these deconsolidation transactions, however retained servicing does not preclude deconsolidation
because the retained servicing we hold does not absorb a potentially significant level of variability in the securitization entities. Upon completion of the sale,
$9 million of servicing rights and $1 million of retained interests associated with this transaction were recorded.
12. Servicing Activities
Mortgage Servicing Rights
The following table summarizes activity related to MSRs, which are carried at fair value. Although there are no market transactions that are directly
observable, management estimates fair value based on the price it believes would be received to sell the MSR asset in an orderly transaction under current
market conditions.
Year ended December 31, ($ in millions) 2011 2010
Estimated fair value at January 1, $ 3,738 $ 3,554
Additions recognized on sale of mortgage loans 622 1,006
Additions from purchases of servicing rights 31 56
Subtractions from sales of servicing assets (266) (1)
Changes in fair value
Due to changes in valuation inputs or assumptions used in the valuation model (1,041) 23
Other changes in fair value (565) (894)
Decrease due to change in accounting principle — (19)
Other changes that affect the balance — 13
Estimated fair value at December 31, $ 2,519 $ 3,738
Changes in fair value due to changes in valuation inputs or assumptions used in the valuation model include all changes due to a revaluation by a
model or by a benchmarking exercise. Other changes in fair value primarily include the accretion of the present value of the discount related to forecasted
cash flows and the economic runoff of the portfolio. The decrease due to change in accounting principle reflects the effect of the initial adoption of
ASU 2009−17.
The key economic assumptions and sensitivity of the fair value of MSRs to immediate 10% and 20% adverse changes in those assumptions were as
follows.
December 31, ($ in millions) 2011 2010
Weighted average life (in years) 4.7 7.0
Weighted average prepayment speed 15.7% 9.8%
Impact on fair value of 10% adverse change $ (135) $ (155)
Impact on fair value of 20% adverse change (257) (295)
Weighted average discount rate 10.2% 12.3%
Impact on fair value of 10% adverse change $ (59) $ (80)
Impact on fair value of 20% adverse change (114) (156)
These sensitivities are hypothetical and should be considered with caution. Changes in fair value based on a 10% and 20% variation in assumptions
generally cannot be extrapolated because the relationship of the change in assumptions to the change in fair value may not be linear. Also, the effect of a
variation in a particular assumption on the fair value is calculated without changing any other assumption. In reality, changes in one factor may result in
changes in another (e.g., increased market interest rates may result in lower prepayments and increased credit losses) that could magnify or counteract the
sensitivities. Further, these sensitivities show only the change in the asset balances and do not show any expected change in the fair value of the instruments
used to manage the interest rates and prepayment risks associated with these assets.
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