Ally Bank 2012 Annual Report Download - page 84

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Our economic exposure related to the securitization trusts is generally limited to cash reserves, our other interests retained in financial
asset sales, and our customary representation and warranty provisions described in Note 10 to the Consolidated Financial Statements. The
trusts have a limited life and generally terminate upon final distribution of amounts owed to investors or upon exercise by us, as servicer of a
cleanup call option, when the servicing of the sold contracts becomes burdensome. In addition, the trusts do not invest in our equity or in the
equity of any of our affiliates.
Purchase Obligations
Certain of the structures related to whole-loan sales, securitization transactions, and other off-balance sheet activities contain provisions
that are standard in the whole-loan sale and securitization markets where we may (or, in certain limited circumstances, are obligated to)
purchase specific assets from entities. Our obligations are as follows.
Loan Repurchases and Obligations Related to Loan Sales
ResCap Bankruptcy Filing
As described in Note 1 and Note 29 to the Consolidated Financial Statements, on May 14, 2012, Residential Capital, LLC (ResCap) and
certain of its wholly owned direct and indirect subsidiaries (collectively, the Debtors) filed voluntary petitions for relief under Chapter 11 of
the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. As a result of the deconsolidation of
ResCap, a significant portion of our representation and warranty reserve was eliminated. Representation and warranty reserve was $105
million at December 31, 2012 with respect to Ally Bank's sold and serviced loans.
Overview
Ally Bank, within our Mortgage operations, sells loans that take the form of securitizations guaranteed by Fannie Mae and Freddie Mac.
In connection with securitizations and loan sales, the trustee, for the benefit of the related security holders, is provided various representations
and warranties related to the loans sold. The specific representations and warranties typically relate to, among other things, the ownership of
the loan, the validity of the lien securing the loan, the loan's compliance with the criteria for inclusion in the transaction, including compliance
with underwriting standards or loan criteria established by the buyer, the ability to deliver required documentation and compliance with
applicable laws. In general, the representations and warranties described above may be enforced against Ally Bank at any time unless a sunset
provision is in place. Upon discovery of a breach of a representation or warranty, the breach is corrected in a manner conforming to the
provisions of the sale agreement. This may require Ally Bank to repurchase the loan, indemnify the investor for incurred losses, or otherwise
make the investor whole. See Repurchase Process below.
Originations
Representation and warranty risk-mitigation strategies include, but are not limited to, pursuing settlements with investors where
economically beneficial in order to resolve a pipeline of demands in lieu of loan-by-loan assessments that could result in repurchasing loans,
aggressively contesting claims we do not consider valid (rescinding claims), or seeking recourse against correspondent lenders from whom
we purchased loans wherever appropriate.
The following table summarizes domestic mortgage loans sold by ResCap where Ally Bank maintained the mortgage servicing rights;
and following the deconsolidation of ResCap, the loans that were sold by Ally Bank. The following table presents domestic mortgage loans
sold categorized by GSE (original unpaid principal balance).
Year ended December 31, ($ in billions)2012 2011 2010 2009 2008 2007
Fannie Mae $ 21.5 $ 33.8 $ 35.2 $ 21.1 $ 17.7 $ 6.7
Freddie Mac 6.9 15.8 15.7 8.5 8.6 2.3
Total sales (a) $ 28.4 $ 49.6 $ 50.9 $ 29.6 $ 26.3 $ 9.0
(a) Representation and warranty obligations vary by loan and may not apply to all loans sold by Ally Bank.
Representation and Warranty Obligation Reserve Methodology
The liability for representation and warranty obligations reflects management's best estimate of probable lifetime losses at Ally Bank. We
consider historical and recent demand trends in establishing the reserve. The methodology used to estimate the reserve considers a variety of
assumptions including borrower performance (both actual and estimated future defaults), repurchase demand behavior, historical loan defect
experience, historical mortgage insurance rescission experience, and historical and estimated future loss experience, which includes
projections of future home price changes as well as other qualitative factors including investor behavior. In cases where we may not be able to
reasonably estimate losses, a liability is not recognized. Management monitors the adequacy of the overall reserve and makes adjustments to
the level of reserve, as necessary, after consideration of other qualitative factors including ongoing dialogue and experience with
counterparties.
At the time a loan is sold, an estimate of the fair value of the liability is recorded and classified in accrued expenses and other liabilities
on our Consolidated Balance Sheet and recorded as a component of gain (loss) on mortgage and automotive loans, net, in our Consolidated
Statement of Comprehensive Income. We recognize changes in the liability when additional relevant information becomes available. Changes
in the estimate are recorded as other operating expenses in our Consolidated Statement of Comprehensive Income. The repurchase reserve at
December 31, 2012, relates exclusively to GSE exposure. Ally Bank experienced a decrease in new claims for the year ended December 31,
Table of Contents
Management's Discussion and Analysis
Ally Financial Inc. • Form 10-K