Ally Bank 2012 Annual Report Download - page 120

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Securitizations and Variable Interest Entities
We securitize, sell, and service consumer automobile loans, operating leases, wholesale loans, and consumer mortgage loans.
Securitization transactions typically involve the use of variable interest entities and are accounted for either as sales or secured financings. We
may retain economic interests in the securitized and sold assets, which are generally retained in the form of senior or subordinated interests,
interest- or principal-only strips, cash reserve accounts, residual interests, and servicing rights.
In order to conclude whether or not a variable interest entity is required to be consolidated, careful consideration and judgment must be
given to our continuing involvement with the variable interest entity. In circumstances where we have both the power to direct the activities of
the entity that most significantly impact the entity's performance and the obligation to absorb losses or the right to receive benefits of the
entity that could be significant, we would conclude that we would consolidate the entity, which would also preclude us from recording an
accounting sale on the transaction. In the case of a consolidated variable interest entity, the accounting is consistent with a secured financing,
i.e., we continue to carry the loans and we record the related securitized debt on our balance sheet. Unrecorded economic interests in
consolidated variable interest entities can be determined as the difference between the recognized assets and recognized liabilities.
In transactions where either one or both of the power or economic criteria mentioned above are not met, we then must determine whether
or not we achieve a sale for accounting purposes. In order to achieve a sale for accounting purposes, the assets being transferred must be
legally isolated, not be constrained by restrictions from further transfer, and be deemed to be beyond our control. If we were to fail any of the
three criteria for sale accounting, the accounting would be consistent with the preceding paragraph (i.e., a secured borrowing). Refer to Note
10 for discussion on variable interest entities.
Gains or losses on off-balance sheet securitizations take into consideration the fair value of the retained interests including the value of
certain servicing assets or liabilities, if any, which are initially recorded at fair value at the date of sale. The estimate of the fair value of the
retained interests and servicing requires us to exercise significant judgment about the timing and amount of future cash flows from the
interests. Refer to Note 25 for a discussion of fair value estimates.
Gains or losses on off-balance sheet securitizations and sales are reported in gain (loss) on mortgage and automotive loans, net, in our
Consolidated Statement of Income for consumer automobile loans, wholesale loans, and consumer mortgage loans. Declines in the fair value
of retained interests, other than servicing, below the carrying amount are reflected in other comprehensive income, or as other (loss) gain on
investments, net, in our Consolidated Statement of Income if such declines are determined to be other-than-temporary or if the interests are
classified as trading. Retained interests, as well as any purchased securities, are generally included in available-for-sale investment securities,
trading investment securities, or other assets. Designation as available-for-sale or trading depends on management's intent. Securities that are
noncertificated and cash reserve accounts related to securitizations are included in other assets on our Consolidated Balance Sheet.
We retain servicing responsibilities for all of our consumer automobile loan, operating lease, and wholesale loan securitizations and for
the majority of our consumer mortgage loan securitizations. We may receive servicing fees based on the securitized loan balances and certain
ancillary fees, all of which are reported in servicing fees in the Consolidated Statement of Income. We also retain the right to service the
consumer mortgage loans sold in securitization transactions involving the Federal National Mortgage Association (Fannie Mae), the Federal
Home Loan Mortgage Corporation (Freddie Mac), and the Government National Mortgage Association (Ginnie Mae) (collectively the
Government-sponsored Enterprises or GSEs) and private investors. We also serve as the collateral manager in the securitizations of
commercial investment securities.
Whether on- or off-balance sheet, the investors in the securitization trusts generally have no recourse to our assets outside of customary
market representation and warranty repurchase provisions.
Mortgage Servicing Rights
Primary servicing rights represent our right to service consumer residential mortgages securitized by us or through the GSEs and third-
party whole-loan sales. Primary servicing involves the collection of payments from individual borrowers and the distribution of these
payments to the investors or master servicer. Master-servicing rights represented our right to service mortgage- and asset-backed securities
and whole-loan packages issued for investors. Master-servicing involved the collection of borrower payments from primary servicers and the
distribution of those funds to investors in mortgage- and asset-backed securities and whole-loans packages. We also purchased and sold
primary and master-servicing rights through transactions with other market participants.
We capitalize the value expected to be realized from performing specified mortgage servicing activities for others as mortgage servicing
rights (MSRs) when the expected future cash flows from servicing are projected to be more than adequate compensation for such activities.
These capitalized servicing rights are purchased or retained upon sale or securitization of mortgage loans. MSRs are not recorded on
securitizations accounted for as secured financings.
We measure all mortgage servicing assets and liabilities at fair value. We define our servicing rights based on both the availability of
market inputs and the manner in which we manage the risks of our servicing assets and liabilities. We leverage all available relevant market
data to determine the fair value of our recognized servicing assets and liabilities.
Since quoted market prices for MSRs are not readily available, we estimate the fair value of MSRs by determining the present value of
future expected cash flows using modeling techniques that incorporate management's best estimates of key variables including expected cash
flows, prepayment speeds, and return requirements commensurate with the risks involved. Cash flow assumptions are modeled using our
Table of Contents
Notes to Consolidated Financial Statements
Ally Financial Inc. • Form 10-K