Ally Bank 2011 Annual Report Download - page 192

Table of Contents
Notes to Consolidated Financial Statements
Ally Financial Inc. • Form 10−K
compliance with Federal Housing Administration regulations, policies, and procedures. The federal, state, and local laws, rules, and regulations to which our
U.S. mortgage business is subject, among other things, impose licensing obligations and financial requirements; limit the interest rates, finance charges, and
other fees that can be charged; regulate the use of credit reports and the reporting of credit information; impose underwriting requirements; regulate
marketing techniques and practices; require the safeguarding of nonpublic information about customers; and regulate servicing practices, including the
assessment, collection, foreclosure, claims handling, and investment and interest payments on escrow accounts.
Certain of our mortgage subsidiaries are required to satisfy regulatory net worth requirements. Failure to meet minimum capital requirements can
initiate certain mandatory actions by federal, state, and foreign agencies that could have a material effect on our results of operations and financial
condition. These entities were in compliance with these requirements at December 31, 2011.
Insurance Companies
Our Insurance operations are subject to certain minimum aggregate capital requirements, net asset and dividend restrictions under applicable state and
foreign insurance law, and the rules and regulations promulgated by various U.S. and foreign regulatory agencies. Under various state and foreign insurance
regulations, dividend distributions may be made only from statutory unassigned surplus, with approvals required from the regulatory authorities for
dividends in excess of certain statutory limitations. At December 31, 2011, the maximum dividend that could be paid by the U.S. insurance subsidiaries over
the next twelve months without prior statutory approval was $135 million. Total assets of our Insurance operations were $8.0 billion and $8.8 billion at
December 31, 2011 and 2010, respectively.
24. Derivative Instruments and Hedging Activities
We enter into interest rate and foreign−currency swaps, futures, forwards, options, and swaptions in connection with our market risk management
activities. Derivative instruments are used to manage interest rate risk relating to specific groups of assets and liabilities, including investment securities,
MSRs, debt, and deposits. In addition, we use foreign exchange contracts to mitigate foreign−currency risk associated with foreign−currency−denominated
investment securities, foreign−currency−denominated debt, foreign exchange transactions, and our net investment in foreign subsidiaries. Our primary
objective for utilizing derivative financial instruments is to manage market risk volatility associated with interest rate and foreign−currency risks related to
the assets and liabilities.
Interest Rate Risk
We execute interest rate swaps to modify our exposure to interest rate risk by converting certain fixed−rate instruments to a variable rate and certain
variable−rate instruments to a fixed rate. We monitor our mix of fixed− and variable−rate debt in relation to the rate profile of our assets. When it is cost
effective to do so, we may enter into interest rate swaps to achieve our desired mix of fixed− and variable−rate debt. Derivatives qualifying for hedge
accounting consist of fixed−rate debt obligations in which receive−fixed swaps are designated as hedges of specific fixed−rate debt obligations. In June
2011, we also executed derivatives qualifying for hedge accounting that consisted of an existing variable−rate liability in which pay fixed swaps are
designated as hedges of the expected future cash flows in the form of interest payments on the outstanding borrowing associated with Ally Bank's secured
floating−rate credit facility.
We enter into economic hedges to mitigate exposure for the following categories.
• MSRs and retained interests — Our MSRs and retained interest portfolios are generally subject to loss in value when mortgage rates decline.
Declining mortgage rates generally result in an increase in refinancing activity that increases prepayments and results in a decline in the value of
MSRs and retained interests. To mitigate the impact of this risk, we maintain a portfolio of financial instruments, primarily derivative
instruments that increase in value when interest rates decline. The primary objective is to minimize the overall risk of loss in the value of MSRs
and retained interests due to the change in fair value caused by interest rate changes.
We may use a multitude of derivative instruments to manage the interest rate risk related to MSRs and retained interests. They include,
but are not limited to, interest rate futures contracts, call or put options on U.S. Treasuries, swaptions, MBS, futures, U.S. Treasury futures,
interest rate swaps, interest rate floors, and interest rate caps. We monitor and actively manage our risk on a daily basis.
• Mortgage loan commitments and mortgage and automobile loans held−for−sale — We are exposed to interest rate risk from the time an interest
rate lock commitment (IRLC) is made until the time the mortgage loan is sold. Changes in interest rates impact the market price for our loans; as
market interest rates decline, the value of existing IRLCs and loans held−for−sale increase and vice versa. Our primary objective in risk
management activities related to IRLCs and mortgage loans held−for−sale is to eliminate or greatly reduce any interest rate risk associated with
these items.
The primary derivative instrument we use to accomplish the risk management objective for mortgage loans and IRLCs is forward sales
of MBS, primarily Fannie Mae or Freddie Mac to−be−announced securities. These instruments typically are entered into at the time the IRLC is
made. The value of the forward sales contracts moves in the opposite direction of the value of our IRLCs and mortgage loans held−for−sale. We
also use other derivatives, such as interest rate swaps, options, and futures, to economically hedge automobile loans held−for−sale and certain
portions of the mortgage portfolio. Nonderivative instruments, such as short positions of U.S. Treasuries, may also be periodically used to
economically hedge the mortgage portfolio.
• Debt — With the exception of a portion of our fixed−rate debt and a portion of our outstanding floating−rate borrowing associated with Ally
Bank's secured floating−rate credit facility, we do not apply hedge accounting to our derivative portfolio held to mitigate
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