Servicing Activities

Mortgage Servicing Rights

The following table summarizes activity related to MSRs, which are carried at fair value. Management estimates fair value using our transaction data and other market data or, in periods when there are limited MSRs market transactions that are directly observable, internally developed discounted cash flow models (an income approach) are used to estimate the fair value. These internal valuation models estimate net cash flows based on internal operating assumptions that we believe would be used by market participants in orderly transactions combined with market-based assumptions for loan prepayment rates, interest rates, and discount rates that we believe approximate yields required by investors in this asset.



Three months ended March 31, ($ in millions)	2013 (a)(b)			2012 (c)
Estimated fair value at January 1,	$	952		$	2,519
Additions recognized on sale of mortgage loans	54			75
Changes in fair value
Due to changes in valuation inputs or assumptions used in the valuation model	(28		)	163
Other changes in fair value	(61		)	(162		)
Estimated fair value at March 31,	$	917		$	2,595


(a)	The remaining balance is at Ally Bank, due to the deconsolidation of ResCap.


(b)	In April 2013, we sold our agency MSRs portfolio. Refer to Note 27 for further details.


(c)	Includes activities of our discontinued operations.

Changes in fair value due to changes in valuation inputs or assumptions used in the valuation model include all changes due to a revaluation by a model or by a benchmarking exercise. Other changes in fair value primarily include the accretion of the present value of the discount related to forecasted cash flows and the economic runoff of the portfolio. Refer to Note 1 to the Consolidated Financial Statements in our 2012 Annual Report on Form 10-K for additional information regarding our significant assumptions and valuation techniques used in the valuation of mortgage servicing rights.

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.



($ in millions)	March 31, 2013			December 31, 2012
Weighted average life (in years)	5.4			4.6
Weighted average prepayment speed	10.3		%	13.5		%
Impact on fair value of 10% adverse change	$	(64	)	$	(77	)
Impact on fair value of 20% adverse change	(122		)	(144		)
Weighted average discount rate	9.3		%	7.7		%
Impact on fair value of 10% adverse change	$	(42	)	$	(10	)
Impact on fair value of 20% adverse change	(80		)	(19		)

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 20 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.



	Three months ended March 31,
($ in millions)	2013			2012
Change in estimated fair value of mortgage servicing rights	$	(89	)	$	(10	)
Change in fair value of derivative financial instruments	(112		)	(96		)
Servicing asset valuation and hedge activities, net	$	(201	)	$	(106	)

Mortgage Servicing Fees

The components of mortgage servicing fees were as follows.



	Three months ended March 31,
($ in millions)	2013		2012
Contractual servicing fees, net of guarantee fees and including subservicing	$	58	$	86
Late fees	1		2
Ancillary fees	4		4
Total mortgage servicing fees	$	63	$	92

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 Condensed Consolidated Balance Sheet and totaled $78 million and $82 million at March 31, 2013 and December 31, 2012, respectively. We maintained an allowance for uncollected primary servicing advances of $1 million and $1 million at March 31, 2013 and December 31, 2012, respectively. Our potential obligation is influenced by the loan’s performance and credit quality.

Mortgage Serviced Assets

Total serviced mortgage assets consist of primary servicing activities. These include loans owned by Ally Bank, where Ally Bank is the primary servicer, and loans sold to third-party investors, where Ally Bank has retained primary servicing. Loans owned by Ally Bank are categorized as loans held-for-sale or finance receivables and loans, which are discussed in further detail in Note 6 and Note 7, respectively. The loans sold to third-party investors were sold through off-balance sheet GSE securitization transactions.

The unpaid principal balance of our serviced mortgage assets were as follows.



($ in millions)	March 31, 2013		December 31, 2012
On-balance sheet mortgage loans
Held-for-sale and investment	$	9,208	$	10,938
Off-balance sheet mortgage loans
Loans sold to third-party investors
GSEs	117,675		119,384
Whole-loan	2		2
Total primary serviced mortgage loans (a)	$	126,885	$	130,324


(a)	In April 2013, we sold our agency MSRs portfolio, refer to Note 27 for further details.

Ally Bank is subject to certain net worth requirements associated with its servicing agreements with Fannie Mae and Freddie Mac. The majority of Ally Bank’s serviced mortgage assets are subserviced by GMAC Mortgage, LLC, a subsidiary of ResCap, pursuant to a servicing agreement. At March 31, 2013, Ally Bank was in compliance with the requirements of the servicing agreements.

Automobile Finance Servicing Activities

We service consumer automobile contracts. Historically, we have sold a portion of our consumer automobile contracts. With respect to contracts we sell, we retain the right to service and earn a servicing fee for our servicing function. Typically, we conclude that the fee we are paid for servicing consumer automobile finance receivables represents adequate compensation, and consequently, we do not recognize a servicing asset or liability. We recognized automobile servicing fees of $19 million and $30 million, during the three months ended March 31, 2013 and 2012, respectively.

Automobile Finance Serviced Assets

The total serviced automobile finance loans outstanding were as follows.



($ in millions)	March 31, 2013		December 31, 2012
On-balance sheet automobile finance loans and leases
Consumer automobile	$	55,014	$	53,715
Commercial automobile	31,875		32,822
Operating leases	14,828		13,550
Operations held-for-sale	15,304		25,979
Other	45		41
Off-balance sheet automobile finance loans
Loans sold to third-party investors
Securitizations	1,317		1,474
Whole-loan	5,374		6,541
Other (a)	9,060		—
Total serviced automobile finance loans and leases	$	132,817	$	134,122


(a)	Consists of serviced assets sold in conjunction with the divestiture of our Canadian automotive finance operations.