Ally Bank 2012 Annual Report Download - page 150

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The key economic assumptions and sensitivity of the fair value of MSRs to immediate 10% and 20% adverse changes in those
assumptions were as follows.
December 31, ($ in millions) 2012 2011
Weighted average life (in years) 4.6 4.7
Weighted average prepayment speed 13.5% 15.7%
Impact on fair value of 10% adverse change $ (77) $ (135)
Impact on fair value of 20% adverse change (144) (257)
Weighted average discount rate 7.7% 10.2%
Impact on fair value of 10% adverse change $ (10) $ (59)
Impact on fair value of 20% adverse change (19) (114)
These sensitivities are hypothetical and should be considered with caution. Changes in fair value based on a 10% and 20% variation in
assumptions generally cannot be extrapolated because the relationship of the change in assumptions to the change in fair value may not be
linear. Also, the effect of a variation in a particular assumption on the fair value is calculated without changing any other assumption. In
reality, changes in one factor may result in changes in another (e.g., increased market interest rates may result in lower prepayments and
increased credit losses) that could magnify or counteract the sensitivities. Further, these sensitivities show only the change in the asset
balances and do not show any expected change in the fair value of the instruments used to manage the interest rates and prepayment risks
associated with these assets.
Risk Mitigation Activities
The primary risk of our servicing rights is interest rate risk and the resulting impact on prepayments. A significant decline in interest
rates could lead to higher-than-expected prepayments that could reduce the value of the MSRs. We economically hedge the impact of these
risks with both derivative and nonderivative financial instruments. Refer to Note 22 for additional information regarding the derivative
financial instruments used to economically hedge MSRs.
The components of servicing valuation and hedge activities, net, were as follows.
Year ended December 31, ($ in millions) 2012 2011 2010
Change in estimated fair value of mortgage servicing rights $ (677) $ (1,606) $ (872)
Change in fair value of derivative financial instruments 669 817 478
Servicing asset valuation and hedge activities, net $ (8) $ (789) $ (394)
Mortgage Servicing Fees
The components of mortgage servicing fees were as follows.
Year ended December 31, ($ in millions)2012 2011 2010
Contractual servicing fees, net of guarantee fees and including subservicing $ 504 $ 977 $ 998
Late fees 29 65 77
Ancillary fees 59 156 187
Total mortgage servicing fees $ 592 $ 1,198 $ 1,262
Mortgage Servicing Advances
In connection with our primary Mortgage servicing activities (i.e., servicing of mortgage loans), we make certain payments for property
taxes and insurance premiums, default and property maintenance payments, as well as advances of principal and interest payments before
collecting them from individual borrowers. Servicing advances including contractual interest, are priority cash flows in the event of a loan
principal reduction or foreclosure and ultimate liquidation of the real estate-owned property. These servicing advances are included in other
assets on the Consolidated Balance Sheet and totaled $82 million and $1.9 billion at December 31, 2012 and 2011, respectively. We maintain
an allowance for uncollected primary servicing advances of $1 million and $43 million at December 31, 2012 and 2011, respectively. Our
potential obligation is influenced by the loan’s performance and credit quality. Additionally, we have a fiduciary responsibility for mortgage
escrow and custodial funds that totaled $0 billion and $4.4 billion at December 31, 2012 and 2011, respectively. A portion of these balances
are included in deposit liabilities on our Consolidated Balance Sheet. Refer to Note 14 for additional information.
Due to the deconsolidation of ResCap on May 14, 2012, we no longer act as a subservicer or master servicer of mortgage loans. Refer to
Note 1 for more information regarding the deconsolidation. When we acted as a subservicer of mortgage loans we performed the
responsibilities of a primary servicer but did not own the corresponding primary servicing rights. We received a fee from the primary servicer
for such services. As the subservicer, we had the same responsibilities of a primary servicer in that we made certain payments of property
Table of Contents
Notes to Consolidated Financial Statements
Ally Financial Inc. • Form 10-K