Ally Bank 2011 Annual Report Download - page 23

Table of Contents
Ally Financial Inc. • Form 10−K
parties begin to attempt to put back loans, a significant increase in activity beyond that experienced today could occur, resulting in additional future losses at
our Mortgage Companies. At December 31, 2011, our reserve for representation and warranty obligations was $825 million. It is difficult to determine the
accuracy of our estimates and assumptions used to determine this reserve. For example, if the law were to develop that disagrees with our interpretation that
a claimant must prove that the alleged breach of representations and warranties was caused by the alleged adverse effect on the interest of the claimant, it
could significantly impact our determination of the reserve. In addition, if recent court rulings related to monoline litigation that have allowed sampling of
loan files instead of a loan−by−loan review to determine if a representations and warranties breach has occurred are followed generally by the courts,
private−label securitization investors may view litigation as a more attractive alternative to a loan−by−loan review. As a result of these and other
developments, the actual experience at our Mortgage Companies may differ materially from these estimates and assumptions. Refer to Note 31 to the
Consolidated Financial Statements for further details.
Further, claims related to private−label mortgage−backed securities (MBS) have been brought against Ally and certain of its subsidiaries under
federal and state securities laws and contract laws (among other theories), and additional similar claims are likely to be brought in the future. Several
securities law cases have been brought by various third−party investors relating to MBS, where investors have alleged misstatements and omissions in
registration statements, prospectuses, prospectus supplements, and other documents related to MBS offerings. In addition, there are two cases pending
where MBIA Insurance Corporation (MBIA), a monoline bond insurance company, has alleged, among other things, that two of our Mortgage Companies
breached their contractual representations and warranties relating to the characteristics of the mortgage loans contained in certain insured MBS offerings.
MBIA further alleges that such entities failed to follow certain remedy procedures set forth in the contracts and improperly serviced the mortgage loans.
Along with claims of breach of contract, MBIA also alleges fraud. In addition, there are four cases where Financial Guaranty Insurance Company (FGIC)
has alleged, among other things, that certain of our mortgage subsidiaries breached their contractual representations and warranties relating to the
characteristics of the mortgage loans contained in certain insured MBS offerings. FGIC further alleges that our subsidiaries breached contractual obligations
to permit access to loan files and certain books and records. Along with claims of breach of contract, FGIC also alleges fraud in one of the three cases. We
expect our Mortgage Companies to receive additional repurchase demands from MBIA and FGIC, the amount of which could be substantial. In addition,
litigation from other monoline bond insurance companies is likely. Third−party investors may also bring contractual representation and warranties claims
against us. Refer to Note 31 to the Consolidated Financial Statements for further details with respect to existing litigation.
Certain of our mortgage subsidiaries received subpoenas in July 2010 from the Federal Housing Finance Agency (FHFA), which is the conservator of
Fannie Mae and Freddie Mac. The subpoenas relating to Fannie Mae investments have been withdrawn with prejudice. The FHFA indicated that documents
provided in response to the remaining subpoenas will enable the FHFA to determine whether they believe issuers of private−label MBS are potentially
liable to Freddie Mac for losses they might have incurred. Although Freddie Mac has not brought any representation and warranty claims against us with
respect to private label securities subsequent to the settlement, they may well do so in the future. The FHFA has commenced securities and related common
law fraud litigation against certain of our mortgage subsidiaries with respect to certain of Freddie Mac's private label securities investments. Refer to Note
31 to the Consolidated Financial Statements for additional information.
We believe it is reasonably possible that losses at our Mortgage Companies beyond amounts currently reserved for the matters described above could
occur, and such losses could have a material adverse impact on our results of operations, financial position, or cash flows. However, based on currently
available information, we are unable to estimate a range of reasonably possible losses above reserves that have been established.
Changes in existing U.S. government−sponsored mortgage programs, restrictions on our access to such programs, or disruptions in the secondary
markets in the United States or in other countries in which we operate could adversely affect our profitability and financial condition.
Our ability to generate revenue through mortgage loan sales to institutional investors in the United States depends to a significant degree on programs
administered by the GSEs and others that facilitate the issuance of MBS in the secondary market. These GSEs play a powerful role in the residential
mortgage industry and we have significant business relationships with them. Proposals have been enacted in the U.S. Congress and are under consideration
by various regulatory authorities that would affect the manner in which these GSEs conduct their business to require them to register their stock with the
SEC to reduce or limit certain business benefits that they receive from the U.S. government and to limit the size of the mortgage loan portfolios that they
may hold. Furthermore, the Obama administration released a report in 2011 that recommended winding down Fannie Mae and Freddie Mac. We do not
know what impact, if any, the report would have on the future of the GSEs. Moreover, the results of the upcoming U.S. presidential election may also have a
significant impact on the future of the GSEs. In addition, the GSEs themselves have been negatively affected by recent mortgage market conditions,
including conditions that have threatened their access to debt financing. Any discontinuation of, or significant reduction in, the operation of these GSEs
could adversely affect our revenues and profitability. Also, any significant adverse change in the level of activity in the secondary market including declines
in institutional investors' desire to invest in our mortgage products could materially adversely affect our business.
We are exposed to consumer credit risk, which could adversely affect our profitability and financial condition.
We are subject to credit risk resulting from defaults in payment or performance by customers for our contracts and loans, as well as contracts and
loans that are securitized and in which we retain a residual interest. For example, the continued decline in the domestic housing market and the increase in
unemployment rates resulted in an increase in delinquency rates related to mortgage loans that ResCap and Ally
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