Ally Bank 2011 Annual Report Download - page 34

Table of Contents
Management's Discussion and Analysis
Ally Financial Inc. • Form 10−K
commercial insurance products sold to dealers. As part of our focus on offering dealers a broad range of consumer finance and insurance products, we
provide vehicle service contracts, and maintenance coverage. We also underwrite selected commercial insurance coverage, which primarily insures dealers'
wholesale vehicle inventory in the United States. Additionally, our Insurance operations offer Guaranteed Automobile Protection (GAP) products in the
United States and personal automobile insurance coverage in certain countries outside of the United States.
Mortgage
We report our Mortgage operations as two distinct segments: (1) Origination and Servicing operations and (2) Legacy Portfolio and Other operations.
Our Origination and Servicing operations is one of the leading originators of conforming and government−insured residential mortgage loans in the
United States. We are one of the largest residential mortgage loan servicers in the United States and we provide collateralized lines of credit to other
mortgage originators, which we refer to as warehouse lending. We finance our mortgage loan originations primarily in Ally Bank. We sell the conforming
mortgages we originate or purchase in sales that take the form of securitizations guaranteed by the Federal National Mortgage Association (Fannie Mae) or
the Federal Home Loan Mortgage Corporation (Freddie Mac), and we sell government−insured mortgage loans we originate or purchase in securitizations
guaranteed by the Government National Mortgage Association (Ginnie Mae) or through whole−loan sales. We also selectively originate prime jumbo
mortgage loans in the United States.
Our Legacy Portfolio and Other operations primarily consist of loans originated prior to January 1, 2009, and includes noncore business activities
including discontinued operations, portfolios in runoff, and cash held in the Residential Capital, LLC (ResCap) legal entity. These activities, all of which we
have discontinued, include, among other things: lending to real estate developers and homebuilders in the United States and the United Kingdom;
purchasing, selling and securitizing nonconforming residential mortgage loans (with the exception of U.S. prime jumbo mortgage loans) in both the United
States and internationally; and certain conforming origination channels closed in 2008 and our mortgage reinsurance business.
We re−aligned our business model to focus on our Origination and Servicing operations in response to market developments and based on our ongoing
strategic review of the mortgage business. We have substantially eliminated nonconforming U.S. and international loan production (with the exception of
U.S. prime jumbo mortgage loans) and currently have correspondent, direct, and warehouse lending as our primary channels of production as opposed to
high cost retail branch offices. On November 2, 2011, we announced that in order to proactively address changes in the mortgage industry as a whole, we
will be taking immediate action to reduce the focus on the correspondent mortgage lending channel; however, we will maintain correspondent relationships
with key customers. This reduction will allow us to shift our focus and origination capacity to our retail and direct network channel. As a result, we believe
our exposure to mortgage servicing rights (MSR) asset volatility will decrease over time, and we will be better positioned to comply with Basel III
requirements. This change is also expected to result in a decrease in total origination levels in 2012 as compared to 2011. After consideration of our
experience to−date and the shift in focus to the higher margin retail and direct channels, overall profitability is not expected to be significantly impacted if
we are able to increase our retail and direct production volume due to government refinance programs. We will continue to evaluate this business in the
future and further reductions in the correspondent channel could occur. Our origination platforms deliver products that have liquid market distribution and
sales outlets and are structured to respond quickly as market conditions change. We have also consolidated our servicing operations to streamline our costs
and align ourselves to capture future opportunities as mortgage servicing markets reform.
Additionally, we have implemented several strategic initiatives to reduce the risk related to our Legacy Portfolio and Other operations. These actions
have included, but are not limited to, restructuring of ResCap debt in 2008, moving mortgage loans held−for−investment to held−for sale in 2009 while
recording appropriate market value adjustments, the sale of legacy business platforms including our international operations in the United Kingdom and
continental Europe, and other targeted asset dispositions including domestic and international mortgage loans and commercial finance receivables and loans.
The consolidated assets of our Legacy Portfolio and Other operations have decreased to $10.9 billion at December 31, 2011, from $32.9 billion at
December 31, 2008, due to these actions.
Mortgage loan origination volume is driven by the volume of home sales, prevailing interest rates, and our underwriting standards. Our mortgage
origination volume in 2011 was primarily driven by refinancings that were influenced by historically low interest rates. Our focus in 2012 and future periods
will be on sustaining our position as a leading servicer of conforming and government−insured residential mortgage loans. Additionally, we plan to continue
to manage and reduce mortgage business risk.
On February 9, 2012, we reached an agreement in principle with the federal government and 49 state attorneys general with respect to certain
foreclosure−related matters, which resulted in our Mortgage operations recording a $230 million charge in the fourth quarter of 2011. This charge reflects a
$40 million reduction in the foreclosure related expense accrual that was previously announced on February 2, 2012, as part of our 2011 year−end earnings
release. The charge increased our accrued expenses and other liabilities by $223 million and increased our allowance for servicer advances within other
assets by $7 million on our Consolidated Balance Sheet at December 31, 2011. ResCap recorded $212 million of the $230 million penalty.
ResCap is required to maintain consolidated tangible net worth, as defined, of $250 million at the end of each month, under the terms of certain of its
credit facilities. For this purpose, consolidated tangible net worth is defined as ResCap's consolidated equity excluding intangible assets. As a result of the
fourth quarter charge, ResCap's consolidated tangible net worth was $92 million at December 31, 2011, and was therefore temporarily reduced to below
$250 million. This was, however, immediately remediated by Ally through a capital contribution of $197 million, which was provided through forgiveness
of intercompany debt during January 2012. Notwithstanding the immediate cure, the
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