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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006, or
 
[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             .
 
Commission file number: 1-3754
 
GMAC LLC
(Exact name of registrant as specified in its charter)
 
     
Delaware
(State or other jurisdiction of
incorporation or organization)
  38-0572512
(I.R.S. Employer
Identification No.)
 
200 Renaissance Center
P.O. Box 200 Detroit, Michigan
48265-2000
(Address of principal executive offices)
(Zip Code)
 
(313) 556-5000
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act (all on the New York Stock Exchange):
 
     
Title of each class
   
 
61/8% Notes due January 22, 2008
  7.30% Public Income NotES (PINES) due March 9, 2031
87/8% Notes due June 1, 2010
  7.35% Notes due August 8, 2032
6.00% Debentures due April 1, 2011
  7.25% Notes due February 7, 2033
10.00% Deferred Interest Debentures due December 1, 2012
  7.375% Notes due December 16, 2044
10.30% Deferred Interest Debentures due June 15, 2015
   
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X] No [ ]
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act).
 
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
 
Aggregate market value of voting and non-voting common equity held by non-affiliates: Not applicable, as GMAC LLC has no publicly traded equity securities.
 
Documents incorporated by reference. None.
 
 


 

 
INDEX
GMAC LLC  Form 10-K
 
 
             
        Page  
 
 
           
  Business     2  
  Risk Factors     4  
  Unresolved Staff Comments     11  
  Properties     11  
  Legal Proceedings     11  
  Submission of Matters to a Vote of Security Holders     13  
             
           
  Market for Registrant’s Common Equity, Related Matters and Issuer Purchases of Equity Securities     14  
  Selected Financial Data     15  
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     16  
  Quantitative and Qualitative Disclosures about Market Risk     63  
  Financial Statements and Supplementary Data     65  
    Statement of Responsibility for Preparation of Financial Statements     65  
    Management’s Report on Internal Control over Financial Reporting     66  
    Reports of Independent Registered Public Accounting Firm     67  
    Consolidated Statement of Income     69  
    Consolidated Balance Sheet     70  
    Consolidated Statement of Changes in Equity     71  
    Consolidated Statement of Cash Flows     72  
    Notes to Consolidated Financial Statements     73  
             
           
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     125  
  Controls and Procedures     125  
  Other Information     125  
  Directors, Executive Officers and Corporate Governance     126  
  Executive Compensation     129  
  Security Ownership of Certain Beneficial Owners and Management and Related Matters     150  
  Certain Relationships and Related Transactions, and Director Independence     150  
  Principal Accountant Fees and Services     158  
             
           
  Exhibits, Financial Statement Schedules     159  
         
Index of Exhibits
    159  
         
    162  
 Employment Agreement, dated November 30, 2006 - Eric Feldstein
 Employment Agreement, dated November 30, 2006 - William Muir
 Employment Agreement, dated November 30, 2006 - Sanjiv Khattri
 Long-Term Incentive Plan LLC Long-Term Phantom Interest Plan, effective December 18, 2006
 Form of Award Agreement related to the GMAC Long-Term Incentive Plan LLC Long Term Phantom Interest Plan
 Form of Award Agreement related to the GMAC Long-Term Incentive Plan LLC Long Term Phantom Interest Plan
 Management LLC Class C Membership Interest Plan, effective December 18, 2006
 Form of Award Agreement related to GMAC Management LLC Class C Membership Interest Plan
 Form of Award Agreement related to GMAC Management LLC Class C Membership Interest Plan
 Retention Bonus Plan, effective November 30, 2006
 Plan and Summary Description
 Computation of Ratio of Earnings to Fixed Charges
 Subsidiaries of the Registrant as of December 31, 2006
 Consent of Independent Registered Public Accounting Firm
 Certification of Principal Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)
 Certification of Principal Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)
 Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350


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Explanatory Note
GMAC LLC  Form 10-K
 
 
 
GMAC LLC (referred to herein as GMAC, we, our or us) is restating our historical consolidated financial statements for the years ended December 31, 2005 and 2004, the Consolidated Statements of Income, Changes in Equity and Cash Flows for the year ended December 31, 2004, and other selected financial data as presented in Item 6 as of December 31, 2004 and for the years ended December 31, 2003 and 2002 and certain quarterly financial information included in Item 8. As discussed in our Form 8-K filed on February 16, 2007, this restatement relates to the accounting treatment for certain hedging transactions under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted (SFAS 133). We are also correcting certain other out-of-period errors, which were deemed immaterial, individually and in the aggregate, in the periods in which they were originally recorded and identified. Because of this SFAS 133 restatement, we are correcting these amounts to record them in the proper period.
 
The following table sets forth a reconciliation of previously reported and restated net income for the periods shown. The restatement resulted in a $10 million decrease to retained earnings at January 1, 2002 from $10,815 million to $10,805 million.
 
                                         
    Net income for the year ended December 31,  
($ in millions)   2005     2004     2003     2002        
 
 
Previously reported net income
    $2,394       $2,913       $2,793       $1,870          
Elimination of hedge accounting related to certain debt instruments
    (256 )     (143 )     (361 )     553          
Other, net
    136       52       (153 )     (82 )        
 
 
Total pre-tax
    (120 )     (91 )     (514 )     471          
Related income tax effects
    8       72       227       (138 )        
 
 
Restated net income
    $2,282       $2,894       $2,506       $2,203          
 
 
% change
    (4.7 )     (0.7 )     (10.3 )     17.8          
 
 
 
For additional information relating to the effect of the restatement, refer to the following items:
 
 
Part II

Item 6 — Selected Financial Data
Item 7 — Management’s Discussion and Analysis of Results of Operations and Financial Condition
Item 7A — Quantitative and Qualitative Disclosure about Market Risk
Item 8 — Financial Statements and Supplementary Data
Item 9A — Controls and Procedures

Part IV

Item 15 — Exhibits and Financial Statements Schedule
 
In light of the restatement, readers should not rely on our previously filed financial statements and other financial information for the periods after the January 1, 2001 adoption of SFAS 133.


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Part I
GMAC LLC  Form 10-K
 
 
 
Item 1. Business
 
General
GMAC was founded in 1919 as a wholly owned subsidiary of General Motors Corporation (General Motors or GM). On November 30, 2006, GM sold a 51% interest in us for approximately $7.4 billion (the Sale Transactions) to FIM Holdings LLC (FIM Holdings). FIM Holdings is an investment consortium led by Cerberus FIM Investors, LLC (the sole managing member), and including Citigroup Inc., Aozora Bank Ltd., and a subsidiary of The PNC Financial Services Group, Inc.
 
Our Business
We are a leading independent global diversified financial services Company with approximately $287 billion of assets and operations in approximately 40 countries. We currently operate in the following lines of business — Automotive Finance, Mortgage (Residential Capital LLC or ResCap) and Insurance. The following table reflects the primary products and services offered by each of our lines of businesses.
 
 
 
Global Automotive Finance
We are one of the world’s largest automotive financing companies with operations in approximately 40 countries. Our automotive finance business extends automotive financing services primarily to franchised GM dealers and their customers through two reporting segments — North American Automotive Finance Operations and our International Automotive Finance Operations.
 
Through our Automotive Financing operations, we:
 
  Provide consumer automotive financing products and services, including purchasing or originating, selling and securitizing automotive retail contracts and leases with retail customers primarily from GM and GM-affiliated dealers and performing service activities, such as collection and processing activities related to those contracts;
 
  Provide automotive dealer financing products and services, including financing the purchases of new and used vehicles by dealers, making loans or extending revolving lending facilities for other purposes to dealers, selling and securitizing automotive dealer receivables and loans, and servicing and monitoring such financing;
 
  Provide fleet financing to automotive dealers and others for the purchase of vehicles they lease or rent to others;
 
  Provide full service individual leasing and fleet leasing products, including maintenance, fleet and accident management services, as well as fuel programs, short-term vehicle rental and title and licensing services; and
 
  Hold a portfolio of automotive retail contracts, leases and automotive dealer finance receivables for investment, together with interests retained from our securitization activities.


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GMAC LLC  Form 10-K
 

 
ResCap
We are a leading real estate finance company focused primarily on the residential real estate market. Our business activities include the origination, purchase, servicing, sale and securitization of residential mortgage loans.
 
Through our ResCap operations, we:
 
  Originate, purchase, sell and securitize residential mortgage loans primarily in the United States, as well as internationally;
 
  Provide primary and master servicing to investors in our residential mortgage loans and securitizations;
 
  Provide collateralized lines of credit, which we refer to as warehouse lending facilities, to other originators of residential mortgage loans both in the United States and Mexico;
 
  Hold a portfolio of residential mortgage loans for investment together with interests retained from our securitization activities;
 
  Provide bundled real estate services, including real estate brokerage services, full service relocation services, mortgage closing services and settlement services; and
 
  Provide specialty financing and equity capital to residential land developers and homebuilders, resort and time share developers and health care providers.
 
Insurance
We offer automobile service contracts, personal automobile insurance coverages (ranging from preferred to non-standard risk), selected commercial insurance coverages and other consumer products as well as provide certain reinsurance coverages.
 
Through our Insurance operations, we:
 
  Provide automotive extended service and maintenance contracts through automobile dealerships, primarily GM dealers in the United States and Canada, and similar products outside the United States;
 
  Provide automobile physical damage insurance and other insurance products to dealers in the U.S. and internationally;
 
  Offer property and casualty reinsurance programs primarily to regional direct insurance companies in the U.S. and internationally;
 
  Offer vehicle and home insurance in the U.S. and internationally through a number of distribution channels, including independent agents, affinity groups and the internet; and
 
  Invest proceeds from premiums and other revenue sources in an investment portfolio from which payments are made as claims are settled.
 
Certain Regulatory Matters
We are subject to various regulatory, financial and other requirements of the jurisdictions in which our businesses operate. Following is a description of some of the primary regulations that affect our business.
 
International Banks and Finance Companies
Certain of our foreign subsidiaries operate in local markets as either banks or regulated finance companies and are subject to regulatory restrictions, including Financial Services Authority (FSA) requirements. These regulatory restrictions, among other things, require that our subsidiaries meet certain minimum capital requirements and may restrict dividend distributions and ownership of certain assets. As of December 31, 2006, compliance with these various regulations has not had a material adverse effect on our consolidated financial position, results of operations or cash flows. Total assets in regulated international banks and finance companies approximated $15.5 billion and $12.9 billion as of December 31, 2006 and 2005, respectively.
 
Depository Institutions
GMAC Bank, which provides services to both the Automotive Finance and ResCap operations, is licensed as an industrial bank pursuant to the laws of Utah and its deposits are insured by the Federal Deposit Insurance Corporation (FDIC). GMAC is required to file periodic reports with the FDIC concerning its financial condition. Assets in GMAC Bank approximated $20.2 billion at December 31, 2006. As of December 31, 2005, certain depository institution assets were held at a Federal savings bank that was wholly-owned by ResCap. Effective November 22, 2006, substantially all of these federal savings bank assets and liabilities were transferred at book value to GMAC Bank. Total assets of these institutions at December 31, 2005, approximated $16.9 billion.
 
Furthermore, our Automotive Finance and ResCap operations have subsidiaries that are required to maintain regulatory capital requirements under agreements with Freddie Mac, Fannie Mae, Ginnie Mae, the Department of Housing and Urban Development, the Utah State Department of Financial Institutions and the Federal Deposit Insurance Corporation.
 
Insurance Companies
Our Insurance operations are subject to certain minimum aggregate capital requirements, restricted net asset and dividend restrictions under applicable state insurance laws and the rules and regulations promulgated by the Financial Services Authority in England, the Office of the Superintendent of Financial Institutions of Canada, the National Insurance and Bonding Commission of Mexico and the National Association of Securities Dealers. Under the various state insurance regulations, dividend distributions may be made only from statutory unassigned surplus, with approvals required from the state regulatory authorities for dividends in excess of certain statutory limitations.
 
As previously disclosed on a Form 8-K filed October 27, 2005, Securities and Exchange Commission (SEC) and federal grand jury subpoenas have been served on our entities in connection with industry-wide investigations into practices in the insurance industry relating to loss mitigation insurance products such as finite risk insurance. We are cooperating with the investigations.


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GMAC LLC  Form 10-K
 

 
Other Regulations
Some of the other more significant regulations that GMAC is subject to include:
 
Privacy
The Gramm-Leach-Bliley Act imposes additional obligations on us to safeguard the information we maintain on our customers and permits customers to “opt-out” of information sharing with third parties. Regulations have been enacted by several agencies that may increase our obligations to safeguard information. In addition, several federal agencies are considering regulations that require more stringent “opt-out” notices or even require “opt-out” notices. Also, several states have enacted even more stringent privacy legislation. For example, California has passed legislation known as the California Financial Information Privacy Act and the California On-Line Privacy Protection Act. Both pieces of legislation became effective July 2004 and impose additional notification obligations on us that are not preempted by existing federal law. If a variety of inconsistent state privacy rules or requirements are enacted, our compliance costs could increase substantially.
 
Fair Credit Reporting Act
The Fair Credit Reporting Act provides a national legal standard for lenders to share information with affiliates and certain third parties and to provide firm offers of credit to consumers. In late 2003 the Fair and Accurate Credit Transactions Act was enacted, making this preemption of conflicting state and local laws permanent. The Fair Credit Reporting Act was also amended to place further restrictions on the use of information sharing between affiliates, to provide new disclosures to consumers when risk based pricing is used in the credit decision and to help protect consumers from identity theft. All of these new provisions impose additional regulatory and compliance costs on us and reduce the effectiveness of our marketing programs.
 
Employees
We had 31,400 and 33,900 employees worldwide as of December 31, 2006 and 2005, respectively.
 
Additional Information
A description of our lines of business, along with the results of operations for each segment, industry and competition, and the products and services offered are contained in the individual business operations sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations, which begins on page 16. Financial information related to reportable segments and geographic areas is provided in Note 22.
 
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K (and amendments to such reports) are available on our internet website, free of charge, as soon as reasonably practicable after the reports are electronically filed with or furnished with the SEC. These reports are available at www.gmacfs.com, under United States, Investor Relations, SEC Filings and Annual Review. These reports can also be found on the SEC website located at www.sec.gov.
 
Item 1A. Risk Factors
Because of the following factors, as well as other factors affecting our operating results and financial condition, past financial performance should not be considered a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.
 
Risks Related to Our Business
Rating agencies may downgrade their ratings for GMAC or ResCap in the future, which would adversely affect our ability to raise capital in the debt markets at attractive rates and increase the interest that we pay on our outstanding publicly traded notes, which could have a material adverse effect on our results of operations and financial condition.
 
Substantially all of our unsecured debt has been rated by four nationally recognized statistical rating organizations. Commencing late in 2001, concerns over the competitive and financial strength of GM, including whether it would experience a labor interruption and how it would fund its health care liabilities, resulted in a series of credit rating actions on our unsecured debt concurrent with a series of credit actions that downgraded the credit rating on GM’s debt. As a result, our unsecured borrowing spreads widened significantly over the past several years substantially reducing our access to the unsecured debt markets and impacting our overall cost of borrowing.
 
Future downgrades of our credit ratings would increase borrowing costs and further constrain our access to unsecured debt markets, including capital markets for retail debt, and as a result, would negatively affect our business. In addition, future downgrades of our credit ratings could increase the possibility of additional terms and conditions being added to any new or replacement financing arrangements, as well as impact elements of certain existing secured borrowing arrangements.
 
Our business requires substantial capital, and if we are unable to maintain adequate financing sources, our profitability and financial condition will suffer and jeopardize our ability to continue operations.
 
Our liquidity and ongoing profitability are, in large part, dependent upon our timely access to capital and the costs associated with raising funds in different segments of the capital markets. Currently, our primary sources of financing include public and private securitizations and whole loan sales. To a lesser extent, we also use institutional unsecured term debt, commercial paper and retail debt offerings. Reliance on any one source can change going forward.
 
We depend and will continue to depend on our ability to access diversified funding alternatives to meet future cash flow requirements and to continue to fund our operations. Negative credit events specific to us or our 49% owner, GM, or other events affecting the overall debt markets have adversely impacted our funding sources, and continued or additional negative events could further adversely impact our funding sources, especially over the long term. As an example, an insolvency event for GM would curtail our ability to utilize certain of our automotive wholesale loan


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GMAC LLC  Form 10-K
 

securitization structures as a source of funding in the future. Furthermore, ResCap’s access to capital can be impacted by changes in the market value of its mortgage products and the willingness of market participants to provide liquidity for such products. If we are unable to maintain adequate financing or if other sources of capital are not available, we could be forced to suspend, curtail or reduce certain aspects of our operations, which could harm our revenues, profitability, financial condition and business prospects.
 
Furthermore, we utilize asset and mortgage securitizations and sales as a critical component of our diversified funding strategy. Several factors could affect our ability to complete securitizations and sales, including conditions in the securities markets generally, conditions in the asset-backed or mortgage-backed securities markets, the credit quality and performance of our contracts and loans, our ability to service our contracts and loans and a decline in the ratings given to securities previously issued in our securitizations. Any of these factors could negatively affect the pricing of our securitizations and sales, resulting in lower proceeds from these activities.
 
Within this Form 10-K, we have restated prior period financial information to eliminate hedge accounting treatment that had been applied to certain callable debt hedged with derivatives. As a result, it is possible that some of our lenders under certain of our liquidity facilities could claim that they are not obligated to honor their lending commitments. We believe that any such claim would not be sustainable. Renewal and revision of these facilities is imminent, which likely will eliminate the issue. There can be no assurance that we are correct in our assessments. If we are not, available funding under certain of our liquidity facilities could be adversely impacted.
 
Our indebtedness and other obligations are significant and could materially adversely affect our business.
 
We have a significant amount of indebtedness. As of December 31, 2006, we had approximately $237 billion in principal amount of indebtedness outstanding. Interest expense on our indebtedness constitutes approximately 67% of our total financing revenues. In addition, under the terms of our current indebtedness, we have the ability to create additional unsecured indebtedness. If our debt payments increase, whether due to the increased cost of existing indebtedness or the incurrence of additional indebtedness, we may be required to dedicate a significant portion of our cash flow from operations to the payment of principal of, and interest on, our indebtedness, which would reduce the funds available for other purposes. Our indebtedness also could limit our ability to withstand competitive pressures and reduce our flexibility in responding to changing business and economic conditions.
 
The profitability and financial condition of our operations are dependent upon the operations of General Motors Corporation.
 
A significant portion of our customers are those of GM, GM dealers and GM related employees. As a result, various aspects of GM’s business, including changes in the production or sale of GM vehicles, the quality or resale value of GM vehicles, the use of GM marketing incentives and other factors impacting GM or its employees could significantly affect our profitability and financial condition.
 
We provide vehicle financing through purchases of retail automotive and lease contracts with retail customers of primarily GM dealers. We also finance the purchase of new and used vehicles by GM dealers through wholesale financing, extend other financing to GM dealers, provide fleet financing for GM dealers to buy vehicles they rent or lease to others, provide wholesale vehicle inventory insurance to GM dealers, provide automotive extended service contracts through GM dealers and offer other services to GM dealers. In 2006 our shares of GM retail sales and sales to dealers were 38% and 80%, respectively, in markets where GM operates. As a result, GM’s level of automobile production and sales directly impacts our financing and leasing volume, the premium revenue for wholesale vehicle inventory insurance, the volume of automotive extended service contracts and the profitability and financial condition of the GM dealers to whom we provide wholesale financing, term loans and fleet financing. In addition, the quality of GM vehicles affects our obligations under automotive extended service contracts relating to such vehicles. Further, the resale value of GM vehicles, which may be impacted by various factors relating to GM’s business such as brand image or the number of new GM vehicles produced, affects the remarketing proceeds we receive upon the sale of repossessed vehicles and off-lease vehicles at lease termination.
 
GM utilizes various rate, residual value and other financing incentives from time to time. The nature, timing and extent of GM’s use of incentives has a significant impact on our consumer automotive financing volume and our share of GM’s retail sales, which we refer to as our penetration level. For example, GM held a 72 hour promotion during July 2006 in which we offered retail contracts at 0% financing for 72 months. Primarily as a result of this promotion, we experienced a significant increase in our consumer automotive financing penetration levels during this period. GM has provided financial assistance and incentives to its franchised dealers through guarantees, agreements to repurchase inventory, equity investments and subsidies that assist dealers in making interest payments to financing sources. These financial assistance and incentive programs are provided at the option of GM, and they may be terminated in whole or in part at any time. While the financial assistance and incentives do not relieve the dealers from their obligations to us or their other financing sources, if GM were to reduce or terminate any of their financial assistance and incentive programs, the timing and amount of payments from GM franchised dealers to us may be adversely affected.
 
We have substantial credit exposure to General Motors Corporation.
 
We have entered into various operating and financing arrangements with GM. As a result of these arrangements, we have substantial credit exposure to GM. However, as part of the Sale Transactions, this credit exposure has been reduced due to the termination of various inter-company credit facilities. In addition, certain unsecured exposure to GM entities in the U.S. has been contractually capped at $1.5 billion (actual exposure of $749 million at December 31, 2006).


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GMAC LLC  Form 10-K
 

As a marketing incentive GM may sponsor residual support programs as a way to lower customer’s monthly payments. Under residual support programs the contractual residual value is adjusted above GMAC’s standard residual rates. At lease origination, GM pays us the present value of the estimated amount of residual support it expects to owe at lease termination. When the lease terminates, GM makes a “true-up” payment to us if its estimated residual support payment was too low, and it still owes us money. Similarly, we make a “true-up” payment to GM if GM’s estimated residual payment was too high, and it overpaid GMAC. Additionally, under what we refer to as lease pull ahead programs, customers are encouraged to terminate leases early in conjunction with the acquisition of a new GM vehicle. As part of these programs, we waive the customer’s remaining payment obligation under the current lease, and under most programs, GM compensates us for the foregone revenue from the waived payments. Since these programs generally accelerate our remarketing of the vehicle, the re-sale proceeds are typically higher than otherwise would have been realized had the vehicle been remarketed at lease contract maturity. The reimbursement from GM for the foregone payments is, therefore, reduced by the amount of this benefit. GM makes estimated payments to us at the end of each month in which customers have pulled their leases ahead. As with residual support payments, these estimates are “trued up” once all the vehicles that could have been pulled ahead have terminated and been remarketed. To the extent that the original estimates were incorrect, GM or GMAC may be obligated to pay each other the difference, as appropriate under the lease pull-ahead programs. GM is also responsible for risk sharing on returned lease vehicles in the U.S. whose resale proceeds are below standard residual values (limited to a floor).
 
Historically GM has made all payments related to such programs and arrangements on a timely basis. However, if GM is unable to pay, fails to pay or is delayed in paying these amounts, our profitability, financial condition and cash flow could be adversely affected.
 
On October 8, 2005, Delphi Corporation, GM’s largest supplier, filed a petition for Chapter 11 proceedings under the United States Bankruptcy Code. In connection with the split-off of Delphi from GM in 1999, GM entered into contracts with certain unions to provide contingent benefit guarantees for limited pension and post retirement health care and life insurance benefits to certain former GM employees who transferred to Delphi in connection with the split-off. GM is contractually responsible for such payments to the extent Delphi fails to pay these benefits at required levels. Furthermore, there can be no assurance GM will be able to recover the full amount of any benefit guarantee payments as required by an indemnification arrangement between GM and Delphi, and any payment by Delphi may be significantly limited. Also, Delphi has significant financial obligations to GM. As a result of Delphi’s restructuring, Delphi’s obligation may be substantially compromised, which could have an adverse impact on GM.
 
Our earnings may decrease because of increases or decreases in interest rates.
 
Our profitability is directly affected by changes in interest rates. The following are some of the risks we face relating to an increase in interest rates:
 
  Rising interest rates will increase our cost of funds.
 
  Rising interest rates may reduce our consumer automotive financing volume by influencing consumers to pay cash for, as opposed to financing, vehicle purchases.
 
  Rising interest rates generally reduce our residential mortgage loan production as borrowers become less likely to refinance and the costs associated with acquiring a new home becomes more expensive.
 
  Rising interest rates will generally reduce the value of mortgage and automotive financing loans and contracts and retained interests and fixed income securities held in our investment portfolio.
 
We are also subject to risks from decreasing interest rates. For example, a significant decrease in interest rates could increase the rate at which mortgages are prepaid, which could require us to write down the value of our retained interests. Moreover, if prepayments are greater than expected, the cash we receive over the life of our mortgage loans held for investment and our retained interests would be reduced. Higher-than-expected prepayments could also reduce the value of our mortgage servicing rights and, to the extent the borrower does not refinance with us, the size of our servicing portfolio. Therefore, any such changes in interest rates could harm our revenues, profitability and financial condition.
 
Our hedging strategies may not be successful in mitigating our risks associated with changes in interest rates and could affect our profitability and financial condition, as could our failure to comply with hedge accounting principles and interpretations.
 
We employ various economic hedging strategies to mitigate the interest rate and prepayment risk inherent in many of our assets and liabilities. Our hedging strategies rely on assumptions and projections regarding our assets, liabilities and general market factors. If these assumptions and projections prove to be incorrect or our hedges do not adequately mitigate the impact of changes in interest rates or prepayment speeds, we may experience volatility in our earnings that could adversely affect our profitability and financial condition.
 
In addition, hedge accounting in accordance with SFAS 133 requires the application of significant subjective judgments to a body of accounting concepts that is complex and for which the interpretations have continued to evolve within the accounting profession and amongst the standard-setting bodies. Within this Form 10-K, we have restated prior period financial information to eliminate hedge accounting treatment that had been applied to certain callable debt hedged with derivatives. As a result of this


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matter, we have also communicated in this Form 10-K that we have a material weakness in internal control over financial reporting with regard to the documentation and effectiveness assessment of derivatives used in such callable debt hedge strategies. As further described in Item 1B on page 11, we are in receipt of two comments from the SEC’s Division of Corporation Finance on our 2005 10-K and subsequent filings pertaining to specific aspects of our compliance with SFAS 133. We believe the ultimate resolution of these comments will not have a material affect on our consolidated financial statements presented herein. If, however, upon resolution of these comments the accounting treatment for these matters is determined to be different, it could have a significant impact to our financial condition and results of operations.
 
Our residential mortgage subsidiary’s ability to pay dividends to us is restricted by contractual arrangements.
 
On June 24, 2005, we entered into an operating agreement with GM and ResCap, the holding company for our residential mortgage business, to create separation between GM and ourselves, on the one hand, and ResCap, on the other. The operating agreement restricts ResCap’s ability to declare dividends or prepay subordinated indebtedness to us. As a result of these arrangements, ResCap has obtained investment grade credit ratings for its unsecured indebtedness that are separate from our ratings. This operating agreement was amended on November 27, 2006, and again on November 30, 2006, in conjunction with the Sale Transactions. Among other things, these amendments removed GM as a party to the agreement.
 
The restrictions contained in the ResCap operating agreement include the requirements that ResCap’s member’s equity be at least $6.5 billion for dividends to be paid. If ResCap is permitted to pay dividends pursuant to the previous sentence, the cumulative amount of such dividends may not exceed 50% of our cumulative net income (excluding payments for income taxes from our election for federal income tax purposes to be treated as a limited liability company), measured from July 1, 2005, at the time such dividend is paid. These restrictions will cease to be effective if ResCap’s member’s equity has been at least $12 billion as of the end of each of two consecutive fiscal quarters or if we cease to be the majority owner. In connection with the Sale Transactions, GM was released as a party to this operating agreement, but it remains in effect between ResCap and us. At December 31, 2006, ResCap had consolidated equity of approximately $7.7 billion.
 
A failure of or interruption in the communications and information systems on which we rely to conduct our business could adversely affect our revenues and profitability.
 
We rely heavily upon communications and information systems to conduct our business. Any failure or interruption of our information systems or the third-party information systems on which we rely could cause underwriting or other delays and could result in fewer applications being received, slower processing of applications and reduced efficiency in servicing. The occurrence of any of these events could have a material adverse effect on our business.
 
We use estimates and assumptions in determining the fair value of certain of our assets, in determining our allowance for credit losses, in determining lease residual values and in determining our reserves for insurance losses and loss adjustment expenses. If our estimates or assumptions prove to be incorrect, our cash flow, profitability, financial condition and business prospects could be materially adversely affected.
 
We use estimates and various assumptions in determining the fair value of many of our assets, including retained interests and securitizations of loans and contracts, mortgage servicing rights and other investments, which do not have an established market value or are not publicly traded. We also use estimates and assumptions in determining our allowance for credit losses on our loan and contract portfolios, in determining the residual values of leased vehicles and in determining our reserves for insurance losses and loss adjustment expenses. It is difficult to determine the accuracy of our estimates and assumptions, and our actual experience may differ materially from these estimates and assumptions. As an example, the continued decline of the domestic housing market, especially with regard to the nonprime sector, has resulted in increases of the allowance for loan losses at ResCap for 2006. A material difference between our estimates and assumptions and our actual experience may adversely affect our cash flow, profitability, financial condition and business prospects.
 
Our business outside the United States exposes us to additional risks that may cause our revenues and profitability to decline.
 
We conduct a significant portion of our business outside the United States. We intend to continue to pursue growth opportunities for our businesses outside the United States, which could expose us to greater risks. The risks associated with our operations outside the United States include:
 
  multiple foreign regulatory requirements that are subject to change;
 
  differing local product preferences and product requirements;
 
  fluctuations in foreign currency exchange rates and interest rates;
 
  difficulty in establishing, staffing and managing foreign operations;
 
  differing labor regulations;
 
  consequences from changes in tax laws; and
 
  political and economic instability, natural calamities, war and terrorism.
 
The effects of these risks may, individually or in the aggregate, adversely affect our revenues and profitability.


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GMAC LLC  Form 10-K
 

Our business could be adversely affected by changes in currency exchange rates.
 
We are exposed to risks related to the effects of changes in foreign currency exchange rates. Changes in currency exchange rates can have a significant impact on our earnings from international operations. While we carefully watch and attempt to manage our exposure to fluctuation in currency exchange rates, these types of changes can have material adverse effects on our business and results of operations and financial condition.
 
We are exposed to credit risk which could affect our profitability and financial condition.
 
We are subject to credit risk resulting from defaults in payment or performance by customers for our contracts and loans, as well as contracts and loans that are securitized and in which we retain a residual interest. For example, the continued decline in the domestic housing market has resulted in an increase in delinquency rates related to mortgage loans that ResCap either holds or retains an interest in. There can be no assurances that our monitoring of our credit risk as it impacts the value of these assets and our efforts to mitigate credit risk through our risk-based pricing, appropriate underwriting policies and loss mitigation strategies are or will be sufficient to prevent an adverse effect on our profitability and financial condition. As part of the underwriting process, we rely heavily upon information supplied by third parties. If any of this information is intentionally or negligently misrepresented and the misrepresentation is not detected prior to completing the transaction, the credit risk associated with the transaction may be increased.
 
Recent developments in the residential mortgage market, especially in the nonprime sector, may adversely affect our revenues, profitability and financial condition
 
Recently, the residential mortgage market in the United States, and especially the nonprime sector, has experienced a variety of difficulties and changed economic conditions that adversely affected our earnings and financial condition in the fourth quarter of 2006. Delinquencies and losses with respect to ResCap’s nonprime mortgage loans increased significantly and may continue to increase. Housing prices in many states have also declined or stopped appreciating, after extended periods of significant appreciation. In addition, the liquidity provided to the nonprime sector has recently been significantly reduced, which will likely cause ResCap’s nonprime mortgage production to decline. These trends have resulted in significant writedowns to ResCap’s mortgage loans held for sale portfolio and additions to allowance for loan losses for its mortgage loans held for investment and warehouse lending receivables portfolios. The lack of liquidity may also have the effect of reducing the margin available to ResCap in its sales and securitizations of nonprime mortgage loans.
 
Another factor that may result in higher delinquency rates on mortgage loans is the scheduled increase in monthly payments on adjustable rate mortgage loans. This increase in borrowers’ monthly payments, together with any increase in prevailing market interest rates, may result in significantly increased monthly payments for borrowers with adjustable rate mortgage loans. Borrowers seeking to avoid these increased monthly payments by refinancing their mortgage loans may no longer be able to fund available replacement loans at comparably low interest rates. A decline in housing prices may also leave borrowers with insufficient equity in their homes to permit them to refinance their loans or sell their homes. In addition, these mortgage loans may have prepayment premiums that inhibit refinancing.
 
Certain government regulators have observed these issues involving nonprime mortgages and have indicated an intention to review the mortgage loan programs. To the extent that regulators restrict the volume, terms and/or type of nonprime mortgage loan, the liquidity of our nonprime mortgage loan production and our profitability from nonprime mortgage loans could be negatively impacted. Such activity could also negatively impact our Warehouse Lending volumes and profitability.
 
The events surrounding the nonprime segment have forced certain originators to exit the market. Such activities may limit the volume of nonprime mortgage loans available for us to acquire and/or our Warehouse Lending volumes, which could negatively impact our profitability.
 
These events, alone or in combination, may contribute to higher delinquency rates, reduce origination volumes or reduce Warehouse Lending volumes at ResCap. These events could adversely affect our revenues, profitability and financial condition.
 
General business and economic conditions of the industries and geographic areas in which we operate affect our revenues, profitability and financial condition.
 
Our revenues, profitability and financial condition are sensitive to general business and economic conditions in the United States and in the markets in which we operate outside the United States. A downturn in economic conditions resulting in increased unemployment rates, increased consumer and commercial bankruptcy filings or other factors that negatively impact household incomes could decrease demand for our financing and mortgage products and increase delinquency and loss. In addition, because our credit exposures are generally collateralized, the severity of losses is particularly sensitive to a decline in used vehicle and residential home prices.
 
Some further examples of these risks include the following:
 
  A significant and sustained increase in gasoline prices could decrease new and used vehicle purchases, thereby reducing the demand for automotive retail financing and automotive wholesale financing.
 
  A general decline in residential home prices in the United States could negatively affect the value of our mortgage loans held for investment and our retained interests in securitized mortgage loans. Such a decrease could also restrict our ability to originate, sell or securitize mortgage loans and impact the repayment of advances under our warehouse loans.


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GMAC LLC  Form 10-K
 

  An increase in automotive labor rates or parts prices could negatively affect the value of our automotive extended service contracts.
 
Our profitability and financial condition may be materially adversely affected by decreases in the residual value of off-lease vehicles.
 
Our expectation of the residual value of a vehicle subject to an automotive lease contract is a critical element used to determine the amount of the lease payments under the contract at the time the customer enters into it. As a result, to the extent the actual residual value of the vehicle, as reflected in the sales proceeds received upon remarketing, is less than the expected residual value for the vehicle at lease inception, we incur a loss on the lease transaction. General economic conditions, the supply of off-lease vehicles and new vehicle market prices heavily influence used vehicle prices and thus the actual residual value of off-lease vehicles. GM’s brand image, consumer preference for GM products and GM’s marketing programs that influence the new and used vehicle market for GM vehicles also influence lease residual values. In addition, our ability to efficiently process and effectively market off-lease vehicles impacts the disposal costs and proceeds realized from the vehicle sales. While GM provides support for lease residual values including through residual support programs, this support by GM does not in all cases entitle us to full reimbursement for the difference between the remarketing sales proceeds for off-lease vehicles and the residual value specified in the lease contract. Differences between the actual residual values realized on leased vehicles and our expectations of such values at contract inception could have a negative impact on our profitability and financial condition.
 
Fluctuations in valuation of investment securities or significant fluctuations in investment market prices could negatively affect revenues.
 
Investment market prices in general are subject to fluctuation. Consequently, the amount realized in the subsequent sale of an investment may significantly differ from the reported market value that could negatively affect our revenues. Fluctuation in the market price of a security may result from perceived changes in the underlying economic characteristics of the investee, the relative price of alternative investments, national and international events and general market conditions.
 
Changes in existing U.S. government-sponsored mortgage programs, or disruptions in the secondary markets in the United States or in other countries in which our mortgage subsidiaries operate, could adversely affect the profitability and financial condition of our mortgage business.
 
The ability of ResCap to generate revenue through mortgage loan sales to institutional investors in the United States depends to a significant degree on programs administered by government-sponsored enterprises such as Fannie Mae, Freddie Mac, Ginnie Mae and others that facilitate the issuance of mortgage-backed securities in the secondary market. These government-sponsored enterprises play a powerful role in the residential mortgage industry and our mortgage subsidiaries have significant business relationships with them. Proposals are being considered in Congress and by various regulatory authorities that would affect the manner in which these government-sponsored enterprises conduct their business, including proposals to establish a new independent agency to regulate the government-sponsored enterprises, to require them to register their stock with the SEC, to reduce or limit certain business benefits they receive from the U.S. government and to limit the size of the mortgage loan portfolios they may hold. Any discontinuation of, or significant reduction in, the operation of these government-sponsored enterprises could adversely affect our revenues and profitability. Also, any significant adverse change in the level of activity in the secondary market, including declines in the institutional investors’ desire to invest in our mortgage products, could adversely affect our business.
 
We may be required to repurchase contracts and provide indemnification if we breach representations and warranties from our securitization and whole loan transactions, which could harm our profitability and financial condition.
 
When we sell retail contracts or leases through whole loan sales or securitize retail contracts, leases or wholesale loans to dealers, we are required to make customary representations and warranties about the contracts, leases or loans to the purchaser or securitization trust. Our whole loan sale agreements generally require us to repurchase retail contracts or provide indemnification if we breach a representation or warranty given to the purchaser. Likewise, we are required to repurchase retail contracts, leases or loans and may be required to provide indemnification if we breach a representation or warranty in connection with our securitizations.
 
Similarly, sales by our mortgage subsidiaries of mortgage loans through whole loan sales or securitizations require us to make customary representations and warranties about the mortgage loans to the purchaser or securitization trust. Our whole loan sale agreements generally require us to repurchase or substitute loans if we breach a representation or warranty given to the purchaser. In addition, our mortgage subsidiaries may be required to repurchase mortgage loans as a result of borrower fraud or if a payment default occurs on a mortgage loan shortly after its origination. Likewise, we are required to repurchase or substitute mortgage loans if we breach a representation or warranty in connection with our securitizations. The remedies available to a purchaser of mortgage loans may be broader than those available to our mortgage subsidiaries against the original seller of the mortgage loan. If a mortgage loan purchaser enforces its remedies against our mortgage subsidiaries, we may not be able to enforce the remedies we have against the seller of the loan or the borrower.


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GMAC LLC  Form 10-K
 

Significant indemnification payments or contract, lease or loan repurchase activity of retail contracts or leases or mortgage loans could harm our profitability and financial condition.
 
We and our mortgage subsidiaries have repurchase obligations in our respective capacities as servicers in securitizations and whole loan sales. If a servicer breaches a representation, warranty or servicing covenant with respect to an automotive receivable or mortgage loan, then the servicer may be required by the servicing provisions to repurchase that asset from the purchaser. If the frequency at which repurchases of assets occurs increases substantially from its present rate, the result could be a material adverse effect on our financial condition, liquidity and results of operations or those of our mortgage subsidiaries.
 
A loss of contractual servicing rights could have a material adverse effect on our financial condition, liquidity and results of operations.
 
We are the servicer for all of the receivables we have originated and transferred to other parties in securitizations and whole loan sales of automotive receivables. Our mortgage subsidiaries service the mortgage loans we have securitized, and we service the majority of the mortgage loans we have sold in whole loan sales. In each case, we are paid a fee for our services, which fees in the aggregate constitute a substantial revenue stream for us. In each case, we are subject to the risk of termination under the circumstances specified in the applicable servicing provisions.
 
In most securitizations and whole loan sales, the owner of the receivables or mortgage loans will be entitled to declare a servicer default and terminate the servicer upon the occurrence of specified events. These events typically include a bankruptcy of the servicer, a material failure by the servicer to perform its obligations, and a failure by the servicer to turn over funds on the required basis. The termination of these servicing rights, were it to occur, could have a material adverse effect on our financial condition, liquidity and results of operations and those of our mortgage subsidiaries. For the year ended December 31, 2006, our consolidated mortgage servicing fee income was approximately $1.6 billion.
 
The regulatory environment in which we operate could have a material adverse effect on our business and earnings.
 
Our domestic operations may be subject to various laws and judicial and administrative decisions imposing various requirements and restrictions relating to supervision and regulation by state and federal authorities. Such regulation and supervision are primarily for the benefit and protection of our customers, not for the benefit of investors in our securities, and could limit our discretion in operating our business. Noncompliance with applicable statutes or regulations could result in the suspension or revocation of any license or registration at issue, as well as the imposition of civil fines and criminal penalties. In addition, changes in the accounting rules or their interpretation could have an adverse effect on our business and earnings.
 
Our operations are also heavily regulated in many jurisdictions outside the United States. For example, certain of our foreign subsidiaries operate either as a bank or a regulated finance company, and our insurance operations are subject to various requirements in the foreign markets in which we operate. The varying requirements of these jurisdictions may be inconsistent with U.S. rules and may materially adversely affect our business or limit necessary regulatory approvals, or if approvals are obtained, we may not be able to continue to comply with the terms of the approvals or applicable regulations. In addition, in many countries the regulations applicable to the financial services industry are uncertain and evolving, and it may be difficult for us to determine the exact regulatory requirements.
 
Our inability to remain in compliance with regulatory requirements in a particular jurisdiction could have a material adverse effect on our operations in that market with regard to the affected product and on our reputation generally. No assurance can be given that applicable laws or regulations will not be amended or construed differently, that new laws and regulations will not be adopted or that we will not be prohibited by local laws from raising interest rates above certain desired levels, any of which could materially adversely affect our business, financial condition or results of operations.
 
The worldwide financial services industry is highly competitive. If we are unable to compete successfully or if there is increased competition in the automotive financing, mortgage and/or insurance markets or generally in the markets for securitizations or asset sales, our margins could be materially adversely affected.
 
The markets for automotive and mortgage financing, insurance and reinsurance are highly competitive. The market for automotive financing has grown more competitive as more consumers are financing their vehicle purchases, primarily in North America and Europe. Our mortgage business faces significant competition from commercial banks, savings institutions, mortgage companies and other financial institutions. Our insurance business faces significant competition from insurance carriers, reinsurers, third-party administrators, brokers and other insurance-related companies. Many of our competitors have substantial positions nationally or in the markets in which they operate. Some of our competitors have lower cost structures, lower cost of capital and are less reliant on securitization and sale activities. We face significant competition in various areas, including product offerings, rates, pricing and fees, and customer service. If we are unable to compete effectively in the markets in which we operate, our profitability and financial condition could be negatively affected.
 
The markets for asset and mortgage securitizations and whole loan sales are competitive, and other issuers and originators could increase the amount of their issuances and sales. In addition, lenders and other investors within those markets often establish limits on their credit exposure to particular issuers, originators and asset classes, or they may require higher returns to increase the amount of their exposure. Increased issuance by other participants in the market, or decisions by investors to limit their credit exposure to — or to require


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GMAC LLC  Form 10-K
 

a higher yield for — us or to automotive or mortgage securitizations or whole loans, could negatively affect our ability and that of our subsidiaries to price our securitizations and whole loan sales at attractive rates. The result would be lower proceeds from these activities and lower profits for our subsidiaries and us.
 
Item 1B. Unresolved Staff Comments
On February 16, 2007, we filed a Form 8-K, with respect to Item 4.02(a) “Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review”, announcing our intention to make adjustments related to our accounting for certain hedging activities under SFAS 133. As a result of these adjustments, the GMAC Audit Committee determined that our previously issued consolidated financial statements for periods after the January 1, 2001 adoption of SFAS 133 should no longer be relied upon. Following this announcement, we received a letter from the SEC’s Division of Corporation Finance on our 2005 10-K and subsequent filings. The letter, dated February 23, 2007, includes two comments pertaining to our hedging relationship testing methodologies and consideration of credit ratings in assessing hedge effectiveness for purposes of SFAS 133. We submitted our response to these comments to the SEC on March 12, 2007 and will continue to work to resolve these comments with the SEC staff. We believe the ultimate resolution of these comments will not have a material affect on our consolidated financial statements as presented herein. If, however, upon resolution of these comments the accounting treatment for these matters is determined to be different, it could have a significant impact to our financial condition and results of operations.
 
Item 2. Properties
Our primary executive and administrative offices are located in Detroit, Michigan, and comprise approximately 220,000 square feet pursuant to a lease agreement expiring in November 2016. In addition, we have corporate offices in New York, New York, comprising 18,000 square feet of office space under a lease that expires in July 2011.
 
The primary offices for our North American Automotive Finance operations are located in Detroit, Michigan, and are included in the totals referenced above. Our International Automotive Finance operations include leased space in over 30 countries totaling approximately 740,000 square feet. The largest countries include the United Kingdom and Germany with approximately 147,000 square feet and 120,000 square feet of office space under lease, respectively.
 
The primary offices for our U.S. Insurance operations are located in Southfield, Michigan; Maryland Heights, Missouri; and Winston-Salem, North Carolina. In Southfield, we lease approximately 76,000 square feet of office space under leases expiring in September 2008. Our Maryland Heights and Winston-Salem offices are approximately 136,000 square feet and 444,000 square feet, respectively, under leases expiring in September 2014. ABA Seguros, one of our insurance subsidiaries, leases approximately 435,000 square feet for offices throughout Mexico.
 
The primary offices for our ResCap operations are located in Horsham, Pennsylvania and Minneapolis, Minnesota. In Horsham, we lease approximately 427,000 square feet of office space expiring between April 2007 and April 2009. In April 2007 ResCap plans on moving from the Horsham facilities to a facility in Ft. Washington, Pennsylvania. In Ft. Washington, ResCap will be leasing 450,000 square feet of office space pursuant to a lease that expires in November 2019. The Horsham leases will be canceled by the landlord when the operations move into the Ft. Washington facility. In Minneapolis, we lease approximately 525,000 square feet of office space expiring between March 2013 and December 2013. ResCap also has significant leased offices in Costa Mesa, California (151,000 square feet) expiring in December 2013, Dallas, Texas (205,000 square feet) expiring in March 2015 and San Diego, California (90,000 square feet) expiring in March 2008. ResCap also owns a 155,000 square foot facility in Waterloo, Iowa.
 
In addition to the properties described above, we lease additional space throughout the United States and in the approximately 40 countries in which we operate, including additional facilities in Canada, Germany, the United Kingdom and the Netherlands. We believe that our facilities are adequate for us to conduct our present business activities.
 
Item 3. Legal Proceedings
We are subject to potential liability under various governmental proceedings, claims and legal actions that are pending or otherwise have been asserted against us.
 
We are named as defendants in a number of legal actions, and we are occasionally involved in governmental proceedings arising in connection with our respective businesses. Some of the pending actions purport to be class actions. We establish reserves for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. The actual costs of resolving legal claims may be higher or lower than any amounts reserved for such claims. Based on information currently available, advice of counsel, available insurance coverage and established reserves, it is the opinion of management that the eventual outcome of the actions against us, including those described below, will not have a material adverse effect on our consolidated financial condition, results of operations or cash flows. However, in the event of unexpected future developments, it is possible that the ultimate resolution of legal matters, if unfavorable, may be material to our consolidated financial condition, results of operations or cash flows. Furthermore, any claim or legal action against GM that results in GM incurring significant liability could also have an adverse effect on our consolidated financial condition, results of operations or cash flows. For a discussion of pending cases against GM, refer to Item 3 in GM’s 2006 Annual Report on Form 10-K, filed separately with the SEC, which report is not deemed incorporated into any of our filings under the Securities Act of 1933, as amended (Securities Act) or the Securities Exchange Act of 1934, as amended (Exchange Act).
 
Pending legal proceedings, other than ordinary routine litigation incidental to the business, to which GMAC became, or was, a party


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GMAC LLC  Form 10-K
 

during the year ended December 31, 2006, or subsequent thereto, but before the filing of this report are summarized as follows:
 
Shareholder Class Actions
On September 19, 2005, a purported class action complaint, Folksam Asset Management v. General Motors, et al., was filed in the U.S. District Court for the Southern District of New York, naming as defendants GM, GMAC, and GM Chairman and Chief Executive Officer G. Richard Wagoner, Jr.; Vice Chairman John Devine; Treasurer Walter G. Borst; and Chief Accounting Officer Peter Bible. Plaintiffs purported to bring the claim on behalf of purchasers of GM debt and/or equity securities during the period February 25, 2002, through March 16, 2005. The complaint alleges that defendants violated Section 10(b) and, with respect to the individual defendants, Section 20(a) of the Exchange Act. The complaint also alleges violations of Sections 11 and 12(a), and, with respect to the individual defendants, Section 15 of the Securities Act, in connection with certain registered debt offerings during the class period. In particular, the complaint alleges that GM’s cash flows during the class period were overstated based on the “reclassification” of certain cash items described in GM’s 2004 Form 10-K. The reclassification involves cash flows relating to the financing of GMAC wholesale receivables from dealers that resulted in no net cash receipts and GM’s decision to revise Consolidated Statements of Net Cash for the years ended 2002 and 2003. The complaint also alleges misrepresentations relating to forward-looking statements of GM’s 2005 earnings forecast that were later revised significantly downward. In October 2005 a similar suit, asserting claims under the Exchange Act based on substantially the same factual allegations, was filed and subsequently consolidated with the Folksam case, Galliani, et al. v. General Motors, et al. The consolidated suit was recaptioned as In re General Motors Securities Litigation. Under the terms of the Sale Transactions, GM is indemnifying GMAC in connection with these cases.
 
On November 18, 2005, plaintiffs in the Folksam case filed an amended complaint, which adds several additional investors as plaintiffs, extends the end of the class period to November 9, 2005, and names as additional defendants three current and one former member of GM’s audit committee, as well as independent accountants, Deloitte & Touche LLP. In addition to the claims asserted in the original complaint, the amended complaint adds a claim against defendants Wagoner and Devine for rescission of their bonuses and incentive compensation during the class period. It also includes further allegations regarding GM’s accounting for pension obligations, restatement of income for 2001, and financial results for the first and second quarters of 2005. Neither the original complaint nor the amended complaint specify the amount of damages sought and the defendants have no means to estimate damages the plaintiffs will seek based upon the limited information available in the complaint. On January 17, 2006, the court made provisional designations of lead plaintiff and lead counsel, which designations were made final on February 6, 2006. Plaintiffs subsequently filed a second amended complaint, which added various underwriters as defendants.
 
Plaintiffs filed a third amended securities complaint in In re General Motors Securities and Derivative Litigation on August 15, 2006 (certain shareholder derivative cases brought against GM were consolidated with In re General Motors Securities Litigation for coordinated or consolidated pretrial proceedings and the caption was modified). The amended complaint did not include claims against the underwriters previously named as defendants, alleged a proposed class period of April 13, 2000, through March 20, 2006, did not include the previously asserted claim for the rescission of incentive compensation against Mr. Wagoner and Mr. Devine, and contained additional factual allegations regarding GM’s restatements of financial information filed with its reports to the SEC. On October 13, 2006, the defendants filed a motion to dismiss the amended complaint in the shareholder class action litigation. This motion remains pending before the Court. On December 14, 2006, plaintiffs filed a motion for leave to file a fourth amended complaint in the event the Court grants the defendants’ motion to dismiss. The defendants will oppose this motion.
 
Motion for Consolidation and Transfer to the Eastern District of Michigan
On December 13, 2005, defendants in In re General Motors Securities Litigation (previously Folksam Asset Management v. General Motors, et al. and Galliani v. General Motors, et al.) and in certain other litigation against GM filed a Motion with the Judicial Panel on Multidistrict Litigation to transfer and consolidate those cases for pretrial proceedings in the United States District Court for the Eastern District of Michigan.
 
On January 5, 2006, the defendants submitted to the Judicial Panel on Multidistrict Litigation an Amended Motion seeking to add to their original Motion several other lawsuits pending against GM for consolidated pretrial proceedings in the United States District Court for the Eastern District of Michigan. On April 17, 2006, the Judicial Panel on Multidistrict Litigation entered an order transferring In re General Motors Securities Litigation to the U.S. District Court for the Eastern District of Michigan for coordinated or consolidated pretrial proceedings with several other lawsuits pending against GM. The case is now captioned In re General Motors Securities and Derivative Litigation.
 
Bondholder Class Actions
On November 29, 2005, Stanley Zielezienski filed a purported class action, Zielezienski, et al. v. General Motors, et al. The action was filed in the Circuit Court for Palm Beach County, Florida, against GM; GMAC; GM Chairman and Chief Executive Officer G. Richard Wagoner, Jr.; GMAC Chairman Eric A. Feldstein; and certain GM and GMAC officers, namely, William F. Muir, Linda K. Zukauckas, Richard J.S. Clout, John E. Gibson, W. Allen Reed, Walter G. Borst, John M. Devine and Gary L. Cowger. The action also names certain underwriters of GMAC debt securities as defendants. The complaint alleges that defendants violated Section 11 of the Securities Act, and with respect to all defendants except GM, Section 12(a)(2) of the Securities Act. The complaint also alleges that GM violated Section 15 of the Securities Act. In particular, the complaint alleges material misrepresentations in


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GMAC LLC  Form 10-K
 

certain GMAC financial statements incorporated by reference with GMAC’s 2003 Form S-3 Registration Statement and Prospectus. More specifically, the complaint alleges material misrepresentations in connection with the offering for sale of GMAC SmartNotes in certain GMAC financial statements contained in GMAC’s Forms 10-Q for the quarterly periods ended in March 31, 2004, and June 30, 2004, and the Form 8-K which disclosed financial results for the quarterly period ended in September 30, 2004, were materially false and misleading as evidenced by GMAC’s 2005 restatement of these quarterly results. In December 2005 the plaintiff filed an amended complaint making substantially the same allegations as were in the previous filing with respect to additional debt securities issued by GMAC during the period April 23, 2004 — March 14, 2005, and adding approximately 60 additional underwriters as defendants. The complaint does not specify the amount of damages sought and the defendants have no means to estimate damages the plaintiffs will seek based upon the limited information available in the complaint. On January 6, 2006, defendants named in the original complaint removed this case to the U.S. District Court for the Southern District of Florida, and on April 3, 2006, that court transferred the case to the U.S. District Court for the Eastern District of Michigan.
 
On December 28, 2005, J&R Marketing, SEP, filed a purported class action, J&R Marketing, et al. v. General Motors Corporation, et al. The action was filed in the Circuit Court for Wayne County, Michigan, against GM; GMAC; GM Chairman and Chief Executive Officer G. Richard Wagoner, Jr.; GMAC Chairman Eric A. Feldstein; William F. Muir; Linda K. Zukauckas; Richard J.S. Clout; John E. Gibson; W. Allen Reed; Walter G. Borst; John M. Devine; Gary L. Cowger; and several underwriters of GMAC debt securities. Similar to the original complaint filed in the Zielezienski case described above, the complaint alleges claims under Sections 11, 12(a), and 15 of the Securities Act based on alleged material misrepresentations or omissions in the Registration Statements for GMAC SmartNotes purchased between September 30, 2003, and March 16, 2005, inclusive. The complaint alleges inadequate disclosure of GM’s financial condition and performance as well as issues arising from GMAC’s 2005 restatement of quarterly results for the three quarters ended September 30, 2005. The complaint does not specify the amount of damages sought and the defendants have no means to estimate damages the plaintiffs will seek based upon the limited information available in the complaint. On January 13, 2006, defendants removed this case to the U.S. District Court for the Eastern District of Michigan.
 
On February 17, 2006, Alex Mager filed a purported class action, Mager v. General Motors Corporation, et al. The action was filed in the U.S. District Court for the Eastern District of Michigan and is substantively identical to the J&R Marketing case described above. On February 24, 2006, J&R Marketing filed a motion to consolidate the Mager case with its case (discussed above) and for appointment as lead plaintiff and the appointment of lead counsel. On March 8, 2006, the court entered an order consolidating the two cases and subsequently consolidated those cases with the Zielezienski case described above. Lead plaintiffs’ counsel has been appointed, and on July 28, 2006, plaintiffs filed a Consolidated Amended Complaint, differing mainly from the initial complaints by asserting claims for GMAC debt securities purchased during a different time period, of July 28, 2003, through November 9, 2005, and added additional underwriter defendants. On August 28, 2006, the underwriter defendants were dismissed without prejudice.
 
On September 25, 2006, the GM and GMAC defendants filed a motion to dismiss the Consolidated Amended Complaint in these cases filed by J&R Marketing, Zielezienski and Mager. On February 27, 2007, the U.S. District Court for the Eastern District of Michigan issued an opinion granting Defendants’ motion to dismiss and dismissing Plaintiffs’ complaint in these consolidated cases. Under the terms of the Sale Transactions, GM is indemnifying GMAC in connection with these cases.
 
Item 4. Submission of Matters to a Vote of Security Holders
None.


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Part II
GMAC LLC  Form 10-K
 
 
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Prior to the Sale Transactions, GMAC was a wholly owned subsidiary of GM and, accordingly, there was no market for our common stock. We paid cash dividends to GM of $4.8 billion in 2006, $2.5 billion in 2005, and $1.5 billion in 2004.
 
Subsequent to the Sale Transactions, there continues to be no established trading market for our ownership interests as we are a privately held company. We have authorized and have outstanding common membership interests consisting of 51,000 Class A Membership Interests (Class A Interests) and 49,000 Class B Membership Interests (Class B Interests) (Class A Interests and Class B Interests are collectively referred to as our Common Equity Interests), which have equal rights and preferences in our assets. FIM Holdings owns all 51,000 Class A Interests (a 51% ownership interest in us) and GM, through a wholly-owned subsidiary of GM, owns all 49,000 Class B Interests (a 49% ownership interest in us). We have further authorized 2,110,000 Preferred Membership Interests (Preferred Interests). In connection with the Sale Transactions, FIM Holdings purchased 555,000 Preferred Interests for a cash purchase price of $500 million and GM and GM Preferred Finance Co. Holdings, Inc., a wholly-owned subsidiary of GM, purchased 1,555,000 Preferred Interests for a cash purchase price of $1.4 billion.
 
We have further authorized 5,820 Class C Membership Interests, which are deemed “profits interests” in GMAC. Class C Membership Interests may be issued from time to time pursuant to the GMAC Management LLC Class C Membership Interest Plan. No Class C Membership Interests have been granted to management as of December 31, 2006.
 
We are required to make quarterly distributions to holders of the Preferred Interests. Distributions will be made in cash on a pro rata basis no later than the tenth business day following the delivery of the quarterly financial statements by GMAC. Distributions are issued in units of $1,000 and will accrue yield during each fiscal quarter at a rate of 10% per annum. Our Board of Managers (Board) may reduce any distribution to the extent required to avoid a reduction of the equity capital of GMAC below a minimum amount of equity capital equal to the net book value of GMAC as of November 30, 2006 (determined in accordance with GAAP). In addition, our Board may suspend the payment of distributions with respect to any one or more fiscal quarters with majority members’ consent. If distributions are not made with respect to any fiscal quarter, the distributions will be non-cumulative and will be reduced to zero. If the accrued yield of GMAC’s Preferred Interests for any fiscal quarter is fully paid to the preferred holders, then the excess of the net financial book income of GMAC in any fiscal quarter over the amount of yield distributed to the holders of our preferred equity interests in such fiscal quarter, will be distributed to the holders of our common equity interests (Class A and Class B Membership Interests) as follows: at least 40% of the excess will be paid for fiscal quarters ending prior to December 31, 2008, and at least 70% of the excess will be paid for fiscal quarters ending after December 31, 2008. In this event, distribution priorities are to common equity interest holders first, up to the agreed upon amounts, and then ratably to Class A, Class B and Class C Membership Interest holders based on the total interest of each such holder.


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GMAC LLC  Form 10-K
 

 
Item 6. Selected Financial Data
The selected financial data set forth in this Item 6 have been restated to reflect corrections of errors in our consolidated financial statements and other financial information. The nature of the restatement and the effect on the financial statement line items are more fully described in Notes 1 and 24 of the Notes to the Consolidated Financial Statements.
 
                                         
As of or for the year ended December 31,
        Restated  
($ in millions)   2006     2005     2004     2003     2002  
 
 
Total financing revenue and other income (a)
    $35,723       $33,267       $30,193       $27,592       $24,460  
Interest expense
    (15,560 )     (13,106 )     (9,659 )     (7,948 )     (6,299 )
Provision for credit losses
    (2,000 )     (1,074 )     (1,953 )     (1,721 )     (2,153 )
 
 
Total net financing revenue and other income
    18,163       19,087       18,581       17,923       16,008  
Goodwill and other intangible assets impairment (b)
    (840 )     (712 )                  
Noninterest expense
    (15,095 )     (14,896 )     (14,325 )     (14,053 )     (12,596 )
 
 
Income before income tax expense
    2,228       3,479       4,256       3,870       3,412  
Income tax expense (c)
    (103 )     (1,197 )     (1,362 )     (1,364 )     (1,209 )
 
 
Net income
    $2,125       $2,282       $2,894       $2,506       $2,203  
Dividends paid to GM (d)
    $9,739       $2,500       $1,500       $1,000       $400  
Total assets
    $287,439       $320,557       $324,042       $288,019       $227,724  
Total debt
    $236,985       $254,698       $268,997       $238,760       $182,777  
Preferred Interests (e)
    $2,195       $—       $—       $—       $—  
Equity
    $14,369       $21,685       $22,436       $20,273       $18,152  
 
 
(a)  Amount includes realized capital gains of $1.1 billion and $327 for the periods ended December 31, 2006 and 2005, respectively. The 2006 increase is primarily related to the rebalancing of our investment portfolio at our Insurance operations, which occurred during the fourth quarter.
(b)  Relates to goodwill and other intangible asset impairments taken at our Commercial Finance Group operating segment (in 2006 and 2005) and our former commercial mortgage operations (in 2005).
(c)  Effective November 28, 2006, GMAC, along with certain U.S. subsidiaries, converted to a limited liability corporation (LLC) and became a pass-through entity for U.S. federal income tax purposes. Due to our change in tax status, a net deferred tax liability of $791 was eliminated through income tax expense upon conversion to an LLC.
(d)  Amount includes cash dividends of $4.8 billion and non-cash dividends of $4.9 billion in 2006. During the fourth quarter of 2006 in connection with the Sale Transactions, GMAC made $7.8 billion of dividends to GM which was comprised of the following (i) a cash dividend of $2.7 billion representing a one-time distribution to GM primarily to reflect the increase in GMAC’s equity resulting from the elimination of a portion of our net deferred tax liabilities arising from the conversion of GMAC and certain of our subsidiaries to a limited liability company, (ii) certain assets with respect to automotive leases owned by GMAC and its affiliates having a net book value of approximately $4.0 billion and related deferred tax liabilities of $1.8 billion, (iii) certain Michigan properties with a carrying value of approximately $1.2 billion to GM, (iv) intercompany receivables from GM related to tax attributes of $1.1 billion, (v) net contingent tax assets of $491 and (vi) other miscellaneous transactions.
(e)  Represents the redemption value of the preferred interests issued in November 2006 and held by GM and a wholly owned subsidiary of GM of $1,555 and FIM Holdings of $555, related accrued dividends of $21 and redemption premium in excess of face value of $64.
 


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Management’s Discussion and Analysis
GMAC LLC  Form 10-K
 
 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
  Overview
 
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contain forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. The following section is qualified in its entirety by the more detailed information, including our financial statements and the notes thereto, which appear elsewhere in this Annual Report.
 
Restatement of Previously Issued Consolidated Financial Statements
As discussed in Notes 1 and 24 to the Consolidated Financial Statements, we are restating our historical Consolidated Balance Sheet as of December 31, 2005 and Consolidated Statements of Income, Changes in Equity and Cash Flows for the two years then ended. This restatement relates to the accounting treatment for certain hedging transactions under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted (SFAS 133). We are also correcting certain other out-of-period errors, which were deemed immaterial, individually and in the aggregate, in the years in which they were originally recorded and identified. These items relate to transactions involving certain transfers of financial assets, valuations of certain financial instruments, amortization of unearned income of certain products, income taxes and other inconsequential items. Because of this derivative restatement, we are correcting these amounts to record them in the proper period.
 
The following table sets forth a reconciliation of previously reported and restated net income for the annual periods shown. The restatement increased January 1, 2004 retained earnings to $14,114 million from $14,078 million. The increase of $36 million was comprised of a $55 million increase related to the elimination of a hedge accounting related to certain debt instruments and a decrease of $16 related to other immaterial items.
 
                 
    Net income for the year ended December 31,
   
 
($ in millions)   2005   2004
 
 
Previously reported net income
    $2,394       $2,913  
Elimination of hedge accounting related to certain debt instruments
    (256 )     (143 )
Other, net
    136       52  
 
 
Total pre-tax
    (120 )     (91 )
Related income tax effects
    8       72  
 
 
Restated net income
    $2,282       $2,894  
 
 
% change
    (4.7 )     (0.7 )
 
 
 
As a result of a recent review of our hedge documentation for certain fair value hedges, management concluded that such documentation and hedge effectiveness assessment methodologies related to particular hedges of callable fixed rate debt instruments funding our North American Automotive Finance operations did not satisfy the requirements of SFAS 133. One of the requirements of SFAS 133 is that hedge accounting is appropriate only for those hedging relationships for which a company has a sufficiently documented expectation that such relationships will be highly effective in achieving offsetting changes in fair values or cash flows attributable to the risk being hedged at the inception of the hedging relationship. To determine whether transactions continue to satisfy this requirement, companies must periodically assess and document the effectiveness of hedging relationships both prospectively and retrospectively.
 
Management determined that hedge accounting treatment should not have been applied to these hedging relationships. As a result, we should not have recorded any adjustments on the debt instruments included in the hedging relationships related to changes in fair value due to movements in the designated benchmark interest rate. Accordingly, we have restated our Consolidated Financial Statements for the years ended December 31, 2005 and 2004 from the amounts previously reported to remove such recorded adjustments on these debt instruments from our reported interest expense during the affected years. The elimination of hedge accounting treatment introduces increased funding cost volatility in our restated results. The changes in the fair value of fixed rate debt previously recorded were affected by changes in the designated benchmark interest rate (LIBOR). Prior to the restatement, adjustments to record increases in the value of this debt occurred in periods when interest rates declined, and adjustments to record decreases in value were made in periods when interest rates rose. As a result, changes in the benchmark interest rates caused volatility in the debt’s fair value adjustments that were recognized in our historical earnings, which were mitigated by the changes in the


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Management’s Discussion and Analysis
GMAC LLC  Form 10-K
 

value of the interest rate swaps in the hedge relationships. The interest rate swaps which economically hedge these debt instruments continue to be recorded at fair value with changes in fair value recorded in earnings.
 
The accompanying MD&A considers the effects of this restatement described above and described in Notes 1 and 24 to our Consolidated Financial Statements.
 
Background
GMAC is a leading global financial services firm with approximately $287 billion of assets and operations in approximately 40 countries. Founded in 1919 as a wholly owned subsidiary of General Motors Corporation, GMAC was originally established to provide GM dealers with the automotive financing necessary for the dealers to acquire and maintain vehicle inventories and to provide retail customers the means by which to finance vehicle purchases through GM dealers.
 
On November 30, 2006, GM sold a 51% interest in us for approximately $7.4 billion (the Sale Transactions) to FIM Holdings LLC (FIM Holdings). FIM Holdings is an investment consortium led by Cerberus FIM Investors, LLC, the sole managing member and also including, Citigroup Inc., Aozora Bank Ltd., and a subsidiary of The PNC Financial Services Group, Inc. During the first quarter of 2007, under the terms of the purchase and sale agreement between FIM Holdings and GM, a final purchase price settlement is required to the extent that GMAC’s equity upon the November 30, 2006 closing of the sale transaction differed from a specified level. As a result, we expect to receive a common equity injection from GM of approximately $1 billion, based on these final settlement provisions.
 
Our products and services have expanded beyond automotive financing as we currently operate in the following lines of business — Automotive Finance, ResCap and Insurance. The following table summarizes the operations of each line of business for the periods ended December 31, 2006, 2005 and 2004. Operating results for each of the lines of business are more fully described in the MD&A sections that follow.
                                         
        2005
  2004
  2006-2005
  2005-2004
Year ended December 31, ($ in millions)   2006   (Restated)   (Restated)   % change   % change
 
 
 
Net financing revenue and other income
                                       
Automotive Finance
  $ 9,133     $ 8,888     $ 9,321       3       (5 )
ResCap
    2,984       4,234       3,878       (30 )     9  
Insurance
    5,616       4,259       3,983       32       7  
Other
    430       1,706       1,399       (75 )     22  
                 
                 
Net income (loss)
                                       
Automotive Finance
  $ 1,174       $880     $ 1,341       33       (34 )
ResCap
    705       1,021       904       (31 )     13  
Insurance
    1,127       417       329       170       27  
Other
    (881 )     (36 )     320       n/m       (111 )
 
 
n/m  = not meaningful
 
  Our Automotive Finance operations offer a wide range of financial services and products (directly and indirectly) to retail automotive consumers, automotive dealerships and other commercial businesses. Our Automotive Finance operations are comprised of two separate reporting segments — North American Automotive Finance Operations and International Automotive Finance Operations. The products and services offered by our Automotive Finance operations include the purchase of retail installment sales contracts and leases, offering of term loans, dealer floor plan financing and other lines of credit to dealers, fleet leasing and vehicle remarketing services. While most of our operations focus on prime automotive financing to and through GM or GM affiliated dealers, our Nuvell operation, which is part of our North American Automotive Finance Operations, focuses on nonprime automotive financing to GM-affiliated and non-GM dealers. Our Nuvell operation also provides private-label automotive financing. In addition, our Automotive Financing operations utilize asset securitization and whole loan sales as a critical component of our diversified funding strategy. The Funding and Liquidity and the Off-Balance Sheet Arrangements sections of this MD&A provide additional information about the securitization and whole loan sale activities of our Automotive Finance operations.
 
  Our ResCap operations involve the origination, purchase, servicing, sale and securitization of consumer (i.e., residential) and mortgage loans and mortgage-related products (e.g., real estate services). Typically, mortgage loans are originated and sold to investors in the secondary market, including securitization transactions in which the assets are legally sold but are accounted for as secured financings. In March 2005 we transferred ownership of GMAC Residential and GMAC-RFC to a newly formed wholly owned subsidiary holding company, ResCap. For additional information, please refer to ResCap’s Annual Report on Form 10-K for the period ended December 31, 2006, filed separately with the SEC, which report is


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Management’s Discussion and Analysis
GMAC LLC  Form 10-K
 

not deemed incorporated into any of our filings under the Securities Act or the Exchange Act.
 
As part of this transfer of ownership, certain agreements were put in place between ResCap and us that restrict ResCap’s ability to declare dividends or prepay subordinated indebtedness owed to us. While we believe the restructuring of these operations and the agreements between ResCap and us allow ResCap to access more attractive sources of capital, the agreements inhibit our ability to return funds for dividends and debt payments.
 
  Our Insurance operations offer automobile service contracts and underwrite personal automobile insurance coverage (ranging from preferred to non-standard risks) and selected commercial insurance and reinsurance coverage. We are a leading provider of automotive extended service contracts with mechanical breakdown and maintenance coverages. Our automotive extended service contracts offer vehicle owners and lessees mechanical repair protection and roadside assistance for new and used vehicles beyond the manufacturer’s new vehicle warranty. We underwrite and market non-standard, standard and preferred risk physical damage and liability insurance coverages for passenger automobiles, motorcycles, recreational vehicles and commercial automobiles through independent agency, direct response and internet channels. Additionally, we market private-label insurance through a long-term agency relationship with Homesite Insurance, a national provider of home insurance products. We provide commercial insurance, primarily covering dealers’ wholesale vehicle inventory, and reinsurance products. Internationally, ABA Seguros provides certain commercial business insurance exclusively in Mexico.
 
  Other operations consists of our Commercial Finance Group, an equity investment in Capmark (our former commercial mortgage operations), certain corporate activities, and reclassifications and elimination between the reporting segments.
 
Consolidated Results of Operations
 
The following table summarizes our consolidated operating results for the periods indicated. Refer to the operating segment sections for a more complete discussion of operating results by line of business.
 
                                         
        2005
  2004
  2006-2005
  2005-2004
Year ended December 31, ($ in millions)   2006   (Restated)   (Restated)   % change   % change
 
 
Revenue
                                       
Total financing revenue
    $23,103       $21,312       $20,325       8       5  
Interest expense
    (15,560 )     (13,106 )     (9,659 )     19       36  
Provision for credit losses
    (2,000 )     (1,074 )     (1,953 )     86       (45 )
                 
                 
Net financing revenue
    5,543       7,132       8,713       (22 )     (18 )
Net loan servicing income
    770       922       678       (16 )     36  
Insurance premiums and service revenue
    4,183       3,762       3,528       11       7  
Investment income
    2,143       1,216       845       76       44  
Gains on sale of equity method investment
    411                   n/m          
Other income
    5,113       6,055       4,817       (16 )     26  
                 
                 
Total net financing revenue and other income
    18,163       19,087       18,581       (5 )     3  
Depreciation expense on operating leases
    (5,341 )     (5,244 )     (4,828 )     2       9  
Insurance losses and loss adjustment expenses
    (2,420 )     (2,355 )     (2,371 )     3       (1 )
Impairment of goodwill and other intangible assets
    (840 )     (712 )           18        
Other expense
    (7,334 )     (7,297 )     (7,126 )     1       2  
                 
                 
Income before income tax expense
    2,228       3,479       4,256       (36 )     (18 )
Income tax expense
    (103 )     (1,197 )     (1,362 )     (91 )     (12 )
                 
                 
Net income
    $2,125       $2,282       $2,894       (7 )     (21 )
 
 
n/m=not meaningful
 
2006 Compared to 2005
We earned $2.1 billion in 2006, down 7% from earnings of $2.3 billion in 2005. This reflects record earnings in the insurance business and continued growth in Automotive Finance that provided earnings support for our ResCap business, which was adversely affected by a decline in the residential housing market and deterioration in the nonprime securitization market in the U.S. Net income includes a one-time tax benefit of $791 million in the fourth quarter of 2006 from our conversion of GMAC and several of our domestic subsidiaries to an LLC in connection with the November sale of a controlling investment in GMAC and non-cash after-tax goodwill and intangible asset impairment charges of $695 million in the third quarter of 2006 related to our Commercial Finance business.


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Management’s Discussion and Analysis
GMAC LLC  Form 10-K
 

 
Total financing revenue increased by 8% in 2006 compared to 2005. Consumer revenue increased 5% due to growth in the consumer mortgage loan portfolio as well as increases in the mortgage loan yields, driven by an increase in mortgage rates during 2006. Commercial revenue increased 16% primarily due to higher market interest rates as the majority of the commercial lending and mortgage lending portfolio is of a floating rate nature. Operating lease revenue rose 10% due to an increase in the average size of our operating lease portfolio, despite the transfer of operating lease assets to GM during November 2006.
 
Interest expense increased by 19%, consistent with the overall increase in market interest rates during the year, but also reflective of the widening of our corporate credit spreads, based on our credit rating. The provision for credit losses increased 86% as compared to 2005. The increase was primarily the result of higher loss severity trends at ResCap, which is attributable to general economic conditions including slower home price appreciation, and deterioration in nonprime credit performance (including increases in nonprime delinquencies).
 
Insurance premiums and service revenue earned increased by 11% compared to 2005. This increase was driven by the extended service contract line primarily due to premiums and revenue from a higher volume of contracts written in prior years. Growth in domestic consumer products was primarily related to the acquisition of MEEMIC Insurance Services Corporation (MEEMIC), a consumer products business that offers automobile and homeowners insurance in the Midwest, which was partially offset by a decline in its existing business due to a competitive environment.
 
Investment income increased 76% compared to 2005. The increase was primarily attributable to higher realized capital gains of approximately $900 million, as well as increased interest and dividend income due to higher average portfolio balances throughout the majority of the year from our Insurance business. The increased capital gains result primarily from the rebalancing of the investment portfolio in the fourth quarter, reducing the level of equity holdings from about 30 percent of the portfolio to less than 10 percent, reducing the level of investment leverage and freeing up capital for growth and dividends.
 
Gains on sale of equity method investment primarily represented the sale of ResCap’s equity investment during the second quarter of 2006 in a regional homebuilder which resulted in a gain of $415 million ($259 million after-tax). Other income decreased 16% compared to 2005 as a result of a decrease in our net loan servicing income, primarily as a result of servicing asset valuation adjustments related to our ResCap operations as well as decreases in net income as a result of our sale of approximately 79% of the former commercial mortgage business during the first quarter.
 
Insurance losses and loss adjustment expenses increased 3% compared to 2005. The increase was primarily driven by the acquisition of MEEMIC and growth in the domestic assumed reinsurance and international consumer products businesses. This increase was partially offset by favorable loss trends experienced in the domestic and international extended service contract product lines.
 
Impairment of goodwill and other intangible assets increased 18% compared to 2005, as a result of higher impairment charges recorded by our Commercial Finance Group. During the 2006 year, we were able to contain our other expenses, which remained relatively flat, as compared to 2005.
 
Income tax expense was $103 million for 2006, compared to $1.2 billion in 2005. The change was primarily a result of our conversion to an LLC during 2006, which resulted in an income tax benefit of $791 million.
 
2005 Compared to 2004
We earned $2.3 billion in 2005, down $0.6 billion from record earnings of $2.9 billion in 2004. Earnings included non-cash goodwill impairment charges of $439 million (after-tax), which were recognized in the fourth quarter of 2005. The charges related predominately to our Commercial Finance Group and primarily to the goodwill recognized in connection with the 1999 acquisition of the majority of the business. Excluding these impairment charges, we earned $2.7 billion in 2005. Earnings were driven by record results in our mortgage and insurance operations. Strong earnings were achieved despite a difficult environment that included higher market interest rates, a series of credit rating actions and the significant impact of Hurricane Katrina.
 
Total financing revenue increased by 5% primarily due to increases in commercial interest income, operating lease income and revenue from mortgages held for sale. The increase in commercial revenue was primarily the result of higher market interest rates as the majority of the portfolio is floating rate. Operating lease revenue increased due to growth in the size of the leasing portfolio of approximately 20% compared to 2004. Revenues associated with loans held for sale also increased due to an increase in mortgage production.
 
Interest expense increased by 36%, consistent with the overall increase in market interest rates during the year, but also reflective of the widening of our corporate credit spreads, as a result of credit rating actions taking during and before 2005. The provision for credit losses decreased by 45% as compared to 2004, despite the impact of loss reserves recorded in the third quarter of 2005 related to accounts impacted by Hurricane Katrina. The decrease in provision for credit losses was attributable to both our Automotive Finance and ResCap operations. The decrease in provision at our Automotive Finance operations was due to a combination of lower consumer asset levels due to an increase in whole loan sales, improved loss performance on retail contracts and improved performance on the non-automotive commercial portfolio. Lower provision for credit losses at ResCap was primarily due to favorable loss severity and frequency of loss, as compared to previous estimates, primarily as a result of the effects of home price appreciation. Insurance premiums and service revenue earned increased by 7% as a result of contract growth across the major product lines (domestic and international).


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Management’s Discussion and Analysis
GMAC LLC  Form 10-K
 

 
Investment and other income increased by 44% and 26%, respectively, as compared to 2004. The increase was primarily due to interest income from cash and investments in U.S. Treasury securities, the favorable impact on the valuation of retained securitization interests at ResCap, higher investment income at our former commercial mortgage business and higher capital gains at our Insurance operations.
 
Depreciation on operating lease assets increased 9% as a result of higher average operating lease asset levels as compared to 2004. In addition, other expense was slightly higher mainly due to increased compensation and benefits expense primarily at our ResCap operations, consistent with the increase in loan production and higher supplemental compensation resulting from increased profitability. Insurance losses and loss adjustment expenses and other operating expenses were relatively stable as compared to 2004.
 
Net income was also negatively impacted by non-cash goodwill impairment charges of $712 million, which were recognized in the fourth quarter of 2005. The charges related predominately to our Commercial Finance Group and primarily to the goodwill recognized in connection with the 1999 acquisition of the majority of this business.
 
Our effective tax rate was 34.4%, consistent with the 32.0% rate experienced in 2004.
 
Outlook
The closing of the Sale Transactions has resulted in a new strategic direction, transforming us from primarily a captive operation into an independent, globally-diversified financial services company. We now have formalized long-term operating agreements with GM, but also have a greater opportunity to leverage existing dealer relationships to expand our presence in non-GM dealer networks. This is expected to provide us with opportunities for an increasingly diversified revenue stream. The sale also created a strengthened capital position with required capital infusions by GM and FIM Holdings, which are expected to provide additional resources for further growth. We have new and expanded funding facilities based on our improved credit profile. Our overall outlook for 2007 is positive with the global automotive finance and insurance business expected to continue to post profits. We further expect the real estate finance business to continue to weaken with declining home sales and mortgage originations, while we seek to increase U.S. market share and pursue growth opportunities worldwide. The following summarizes the key business issues for our operations in 2007:
 
  Automotive Finance — In 2007 we expect higher interest rates, higher energy prices, and a weakening housing market could exert pressure on our consumer automotive finance customers resulting in continuing further deterioration in credit performance compared to 2006. We also expect credit performance in our commercial portfolios could worsen in 2007 as more dealers experience financial distress as a result of declining profitability, which is directly correlated with deterioration in GM’s U.S. market share. Such pressure on GM sales also adversely impacts our volumes.
 
We actively manage our credit risk and believe that as of December 31, 2006, we are adequately reserved for potential losses incurred in the portfolios. However, a negative change in economic factors (particularly in the U.S. economy) could adversely impact our future earnings. As many of our credit exposures are collateralized by vehicles, the severity of losses is particularly sensitive to a decline in used vehicle prices, which can also adversely effect residual values in our lease portfolio. In addition, the overall frequency of losses would be negatively influenced by deterioration in macro-economic factors, which, in addition to those noted above, include higher unemployment rates and bankruptcy filings (both consumer and commercial).
 
  ResCap — In 2007 if the domestic market economics conditions persist, the unfavorable impacts on our residential mortgage operations may continue. These domestic economic conditions include declining home appreciation and, in some areas, a decline in home prices, a significant deterioration in the nonprime securitization market, and a significant increase in nonprime delinquencies. The economic conditions will result in our residential mortgage operations having lower net interest margin, higher provision for loan losses, lower gain on sale margins and loan production, real estate investment impairments and reduced gains on dispositions of real estate acquired through foreclosure.
 
We are exposed to valuation and credit risk on the portfolio of residential mortgage loans held for sale and held for investment, as well as on the interests retained from our securitization activities of these asset classes. In addition, we are exposed to credit risk in our asset-based lending business. Credit losses in our consumer portfolio are influenced by general business and economic conditions of the industries and countries in which we operate. We actively manage our credit risk and believe that as of December 31, 2006, we are adequately reserved for potential losses incurred in the portfolios. However, a negative change in economic factors (particularly in the U.S. economy) could adversely impact our 2007 earnings. As many of our credit exposures are collateralized by homes, the severity of losses is particularly sensitive to a decline in residential home prices. In addition, the overall frequency of losses would be negatively influenced by an increase in macro-economic factors, such as unemployment rates and bankruptcy filings.
 
  Insurance — In 2007 we expect to have positive underwriting results and a stable investment portfolio. We will continue to aggressively pursue growth in both the domestic and international markets in all product lines through examining viable organic growth initiatives and strategic acquisitions.
 
Our extended service product line will face pressures from GM’s recent announcement that it was extending its powertrain warranty in the United States and Canada across its entire new and used car and light-duty truck lineup. Although challenging, we expect to mitigate the impact through the offerings of alternative products to the retail customer. We are also


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Management’s Discussion and Analysis
GMAC LLC  Form 10-K
 

dependent on new vehicle market sales and vehicle quality. Our domestic consumer products continue to expect a competitive pricing environment in 2007 with higher loss costs expected in the industry due to medical and repair cost inflation. Extraordinary weather conditions can have a large impact on underwriting results in our consumer and automobile dealership physical damage products. We mitigate our potential loss exposure through active management of claim settlement activities and believe we are adequately reserved for unpaid losses and loss adjustment expenses at December 31, 2006.
 
We expect to have a more stable earnings stream from our investment portfolio due to a higher allocation in fixed income securities. Through the recent review of our portfolio, we sold a significant portion of our equity securities to monetize the high level of unrealized capital gains, which had grown considerably in recent years due to strong market performance, and to reduce our exposure to the inherently volatile equity markets from just over 30% to under 10%. The performance of our portfolio is dependent on the investment market prices and underlying factors.
 
  Funding and liquidity — Our ability to fund our Automotive Finance and ResCap operations is a key component of our profitability. Over the past several years, prior to the Sale Transactions in November 2006, we have experienced a series of negative credit rating actions, resulting in the downgrade of our credit ratings to below investment grade. The negative actions were primarily due to concerns regarding the financial outlook of GM related to its overall market position in the automotive industry. As a result, our unsecured borrowing spreads have widened significantly, impacting our overall cost of borrowings, as well as reducing our net financing margins. Since the Sale Transactions our spreads have narrowed, although challenges in the U.S. residential mortgage market have widened ResCap spreads recently. Despite these challenges, we have continued to meet funding demands and maintain a strong liquidity profile by shifting to more secured sources of funding and whole loan sales. In 2007 management expects to continue to focus efforts on utilizing secured sources and whole loan sales to fund our automotive operations, issuing unsecured debt on an opportunistic basis to complement our secured funding sources. Refer to the Funding and Liquidity section in this MD&A for further discussion.
 
  Automotive Finance Operations
 
Results of Operations
The following table summarizes the operating results of our Automotive Finance operations for the periods indicated. The amounts presented are before the elimination of balances and transactions with our other operating segments and include eliminations of balances and transactions among our North American Operations and International operating segments.
                                         
          2005
    2004
    2006-2005
    2005-2004
 
Year ended December 31, ($ in millions)   2006     (Restated)     (Restated)     % change     % change  
 
 
 
Revenue
                                       
Consumer
    $5,681       $6,549       $6,796       (13 )     (4 )
Commercial
    1,602       1,431       1,362       12       5  
Operating leases
    7,734       7,022       6,567       10       7  
               
Total automotive financing revenue
    15,017       15,002       14,725             2  
Interest expense
    (9,002 )     (9,223 )     (7,285 )     (2 )     27  
Provision for credit losses
    (511 )     (415 )     (959 )     23       (57 )
               
Net automotive financing revenue
    5,504       5,364       6,481       3       (17 )
Net loan servicing income
    270       122       58       121       110  
Net gains on sales
    537       455       530       18       (14 )
Investment income
    481       237       194       103       22  
Other income
    2,341       2,710       2,058       (14 )     32  
               
Total net automotive financing revenue and other income
    9,133       8,888       9,321       3       (5 )
Depreciation expense on operating leases
    (5,328 )     (5,235 )     (4,822 )     2       9  
Other noninterest expense
    (2,748 )     (2,356 )     (2,641 )     17       (11 )
Income tax benefit (expense)
    117       (417 )     (517 )     (128 )     (19 )
               
Net income
    $1,174       $880       $1,341       33       (34 )
               
Total assets
    $153,410       $192,424       $223,541       (20 )     (14 )
 
 


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Management’s Discussion and Analysis
GMAC LLC  Form 10-K
 

2006 Compared to 2005
Automotive Finance operations net income increased 33% during the 2006 year. Net income was positively impacted by $383 million related to the write-off of certain net deferred tax liabilities as part of our conversion to an LLC during November 2006. Results for 2006 include the earnings impact of $1 billion debt tender offer to repurchase certain deferred interest debentures, which resulted in an after-tax unfavorable impact of $135 million during the third quarter. Absent the impact of the tender offer and the write-off of certain deferred taxes, Automotive Finance net income in 2006 was $46 million higher than in 2005.
 
Total automotive financing revenue was relatively flat in 2006, compared to the prior year, as lower consumer revenue was offset by higher commercial and operating lease revenues in the North American operations. The decrease in consumer revenue was consistent with the reduction in consumer asset levels as a result of continued whole loan sale activity. Consumer automotive finance receivables declined by approximately $10.4 billion, or 15%, since December 31, 2005. The size of our commercial finance receivable portfolio was relatively consistent with 2005. Commercial revenue increased approximately 12% year over year as a result of higher earning rates on the portfolio from an increase in market interest rates in 2006. Operating lease revenue and related depreciation expense increased 10% and 2%, respectively, year over year consistent with the higher average size of the operating lease portfolio. The increase in the average portfolio is reflective of continued strong lease volumes in North American operations and higher average customer balances.
 
Interest expense decreased 2% compared to 2005. When excluding the unfavorable pretax impact of the debt tender offer of approximately $225 million, interest expense decreased approximately 5%. This decline in interest was mainly due to the decrease in our debt balance, which was partially offset by higher market interest rates.
 
The provision for credit losses increased in comparison to the prior year, which is largely a result of a deterioration in the credit performance of the consumer portfolio in North America, as a result of increased loss frequency and severity. Refer to the Credit Risk discussion within this Automotive Finance Operations section of the MD&A for further discussion.
 
Our servicing fee income increased 121% compared to 2005. This increase was primarily related to the increase in our average serviced asset base. Investment income increased in 2006, as compared to 2005. The increase is largely a result of higher short-term interest rates and asset balances in 2006 versus 2005. In addition, noninterest expenses increased in comparison with 2005 levels due to an overall decline in operating lease remarketing results because of a softening in used vehicle prices and an overall decrease in lease termination volume.
 
Total income tax expense declined by $534 million in 2006, as compared to 2005, primarily due to our conversion to an LLC. A decline in pre-tax income for the year, lower Canadian corporate and provincial tax rates and the elimination of the Large Corporation Tax in Canada during the second quarter also contributed to the decline.
 
Prior to the Sale Transactions, we distributed to GM certain assets with respect to automotive leases owned by us and our affiliates having a net book value of $4.0 billion and related deferred tax liabilities of $1.8 billion. The distribution consisted of $12.6 billion of U.S. operating lease assets, $1.5 billion of restricted cash and miscellaneous assets and a $10.1 billion note payable.
 
2005 Compared to 2004
Automotive Finance operations net income was $880 million, a decrease of 34% in comparison to 2004. Income decreased primarily due to lower net interest margins as a result of higher borrowing costs. The decline in net interest margins was partially offset by lower consumer credit provisions, primarily as a result of lower asset levels and improved credit performance. Net income from International operations remained strong at $408 million in 2005, as compared to $415 million earned in 2004, despite a decrease in net interest margins.
 
Total automotive financing revenue increased 2% as compared to 2004. The commercial portfolio benefited from an increase in market interest rates as the majority of the portfolio is of a floating rate nature. Operating lease revenue increased year over year as the size of the operating lease portfolio increased by approximately 20% since December 2004. The increase in the portfolio is reflective of GM’s shift of some marketing incentives to consumer leases from retail contracts late in 2004.
 
Our provision for losses decreased 57% as compared to the 2004 year. This decrease resulted from a combination of lower consumer asset levels primarily due to an increase in whole loan sales, improved loss performance on retail contracts.
 
The increase in interest expense of $1.9 billion is consistent with the overall increase in market interest rates during the year, but also reflective of the widening of our corporate credit spreads as we experienced a series of credit rating actions over the past few years. The impact of the increased spreads will continue to affect results, as our lower cost debt matures, leaving debt borrowed at higher spreads on the books. Refer to the Funding and Liquidity section of this MD&A for further discussion.
 
Our servicing fee income increased 110% compared to 2004, due to an increase in whole loan sales activity.
 
Industry and Competition
The consumer automotive finance market is one of the largest consumer finance segments in the United States. The industry is generally segmented according to the type of vehicle sold (new versus used) and the buyer’s credit characteristics (prime, nonprime or sub-prime). In 2006 and 2005 we purchased or originated


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Management’s Discussion and Analysis
GMAC LLC  Form 10-K
 

$60.7 billion and $58.4 billion, respectively, of consumer automotive retail or lease contracts.
 
The consumer automotive finance business is largely dependent on new vehicle sales volumes, manufacturers’ promotions and the overall macroeconomic environment. Competition tends to intensify when vehicle production decreases. Because of our relationship with GM, our penetration of GM volumes generally increases when GM uses subvented financing rates as a part of its promotion program. In conjunction with the Sale Transaction GM has agreed to continue to provide vehicle financing and leasing incentives exclusively through us for a 10 year period.
 
The consumer automotive finance business is highly competitive. We face intense competition from large suppliers of consumer automotive finance, which include captive automotive finance companies, large national banks and consumer finance companies. In addition, we face competition from smaller suppliers, including regional banks, savings and loans associations and specialized providers, such as local credit unions. Some of our larger competitors have access to significant capital and resources. Smaller suppliers often have a dominant position in a specific region or niche segment, such as used vehicle finance or nonprime customers.
 
Commercial financing competitors are primarily comprised of other manufacturer’s affiliated finance companies, independent commercial finance companies and national and regional banks. Refer to Risk Factors in Item 1A for further discussion.
 
Consumer Automotive Financing
We provide two basic types of financing for new and used vehicles: retail automotive contracts and automotive lease contracts. In most cases, we purchase retail contracts and leases for new and used vehicles from GM-affiliated dealers when the vehicles are purchased by consumers. In a number of markets outside the United States, we are a direct lender to the consumer. Our consumer automotive financing operations generate revenue through finance charges or lease payments and fees paid by customers on the retail contracts and leases. In connection with lease contracts, we also recognize a gain or loss on the remarketing of the vehicle. For purposes of discussion in this section of the MD&A, the loans related to our automotive lending activities are referred to as retail contracts. The following discussion centers on our operations in the United States, which are generally reflective of our global business practices; however, certain countries have unique statutory or regulatory requirements that impact business practices. The effects of such requirements are not significant to our consolidated financial condition, results of operations or cash flows.
 
The amount we pay a dealer for a retail contract is based on the negotiated purchase price of the vehicle and any other products, such as extended service contracts, less any vehicle trade-in value and any down payment from the consumer. Under the retail contract, the consumer is obligated to make payments in an amount equal to the purchase price of the vehicle (less any trade-in or down payment) plus finance charges at a rate negotiated between the consumer and the dealer. In addition, the consumer is also responsible for charges related to past due payments. When we purchase the contract, it is normal business practice for the dealer to retain some portion of the finance charge as income for the dealership, such that some of the finance charges the consumer pays to us and the remainder is paid to the dealer. Our agreements with dealers place a limit on the amount of the finance charges they are entitled to retain. While we do not own the vehicles we finance through retail contracts, we hold a perfected security interest in those vehicles.
 
With respect to consumer leasing, we purchase leases (and the associated vehicles) from dealerships. The purchase prices of the consumer leases are based on the negotiated price for the vehicle, less any vehicle trade-in and down payment from the consumer. Under the lease, the consumer is obligated to make payments in amounts equal to the amount by which the negotiated purchase price of the vehicle (less any trade-in value and any down payment) exceeds the projected residual value (including rate support) of the vehicle at lease termination, plus lease charges. The consumer is also responsible for charges for past due payments, excess mileage and excessive wear and tear. When the lease contract is entered into, we estimate the residual value of the leased vehicle at lease termination. We base our determination of the projected residual values on a guide published by an independent publisher of vehicle residual values, which is stated as a percentage of the manufacturer’s suggested retail price. These projected values may be upwardly adjusted as a marketing incentive, if GM or GMAC considers an above-market residual appropriate to encourage consumers to lease vehicles or for a low mileage lease program. Our standard leasing plan, SmartLease, requires a monthly payment by the consumer. We also offer an alternative leasing plan, SmartLease Plus, which requires one up-front payment of all lease amounts at the time the consumer takes possession of the vehicle.
 
In addition to the SmartLease plans, we offer the SmartBuy plan through dealerships to consumers. SmartBuy combines certain features of a lease contract with those of a traditional retail contract. Under the SmartBuy plan, the customer pays regular monthly payments that are generally lower than would otherwise be owed under a traditional retail contract. At the end of the contract, the customer has several options, including keeping the vehicle by making a final balloon payment or returning the vehicle to us and paying a disposal fee plus any applicable excess wear and excess mileage charges. Unlike a lease contract, during the course of the SmartBuy contract the customer owns the vehicle, and we hold a perfected security interest in the vehicle.
 


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Management’s Discussion and Analysis
GMAC LLC  Form 10-K
 

With respect to all financed vehicles, whether subject to a retail contract or a lease contract, we require that property damage insurance be maintained by the consumer. In addition, on lease contracts we require that bodily injury and comprehensive and collision insurance be maintained by the consumer.
 
Consumer automotive finance retail revenue accounted for $5.7 billion, $6.5 billion and $6.8 billion of our revenue in 2006, 2005 and 2004, respectively.
 
The following table summarizes our new vehicle consumer financing volume and our share of GM retail sales:
 
                                                   
    GMAC volume     Share of GM retail sales
Year ended December 31, (units in thousands)   2006   2005   2004     2006   2005   2004
GM vehicles
                                                 
North America
                                                 
Retail contracts
    973       984       1,396         29%       27%       36%  
Leases
    624       574       489         19%       15%       13%  
Total North America
    1,597       1,558       1,885         48%       42%       49%  
International (retail contracts and leases)
    533       527       534         24%       26%       30%  
Total GM units financed
    2,130       2,085       2,419         38%       36%       43%  
Non-GM units financed
    68       72       74                            
Total consumer automotive financing volume
    2,198       2,157       2,493                            
                                                   
 
Our consumer automotive financing volume and penetration levels are significantly impacted by the nature, timing and extent of GM’s use of rate, residual and other financing incentives for marketing purposes on consumer retail automotive contracts and leases. Our penetration levels were higher in 2006 than what was experienced in 2005, primarily as a result of a GM marketing program run in July, the 72-hour sale, which offered consumers special rate financing on retail contracts for up to 72 months. Conversely, GM’s Employee Discount for Everyone marketing program, which was introduced in June 2005 and ran through September 2005, had a negative impact on our penetration levels in 2005. Although GM benefited from an increase in sales, our penetration levels decreased, as the program did not provide consumers with additional incentives to finance with us. Our International operations’ consumer penetration levels declined, primarily as a result of a reduction in GM incentives on new vehicles, as well as the inclusion of GM vehicle sales in China in the penetration calculation, where we commenced operations in late 2004.
 
GM Marketing Incentives
GM may elect to sponsor incentive programs (on both retail contracts and leases) by supporting financing rates below the standard market rates at which we purchase retail contracts. Such marketing incentives are also referred to as rate support or subvention. When GM utilizes these marketing incentives, it pays us at contract inception the present value of the difference between the customer rate and our standard rates, which we defer and recognize as a yield adjustment over the life of the contract.
 
GM may also provide incentives, referred to as residual support, on leases. As previously mentioned, we bear a portion of the risk of loss to the extent the value of a leased vehicle upon remarketing is below the projected residual value of the vehicle at the time the lease contract is signed. However, these projected values may be upwardly adjusted as a marketing incentive, if GM considers an above-market residual appropriate to encourage consumers to lease vehicles. Such residual support by GM results in a lower monthly lease payment by the consumer. GM reimburses us to the extent remarketing sales proceeds are less than the residual value set forth in the lease contract. In addition to GM residual support, in some cases, GMAC may provide residual support on leases to further encourage consumers to lease certain vehicles.
 
In addition to the residual support arrangement, GM shares in residual risk on all off-lease vehicles sold at auction. Specifically, we and GM share a portion of the loss when resale proceeds fall below the standard residual values on vehicles sold at auction. GM reimburses us for a portion of the difference between proceeds and the standard residual value (up to a specified limit).
 
Under what we refer to as pull ahead programs, consumers are encouraged to terminate leases early in conjunction with the acquisition of a new GM vehicle. As part of these programs, we waive the customer’s remaining payment obligation, and under most programs, GM compensates us for the foregone revenue from the waived payments. Additionally, since these programs generally accelerate our remarketing of the vehicle, the sale proceeds are typically higher than otherwise would have been realized had the vehicle been remarketed at lease contract maturity. The reimbursement from GM for the foregone payments is, therefore, reduced by the amount of this benefit.
 
In connection with the sale, we amended our risk sharing agreement with GM. The new agreement will apply to new lease contracts entered into after November 30, 2006. GM is responsible for risk sharing on returned lease vehicles in the U.S. and Canada whose resale proceeds are below standard residual values (limited to a floor). GM will also pay us a quarterly leasing payment in


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Management’s Discussion and Analysis
GMAC LLC  Form 10-K
 

connection with the agreement beginning in the first quarter of 2009 and ending in the fourth quarter of 2014.
 
Additionally, we entered into an exclusivity agreement with GM where U.S. vehicle financing and leasing incentives will be offered only through us for a period of 10 years. In connection with our right to use the “GMAC” name and for the exclusivity related to special financing and leasing incentives, we will pay GM an annual fee of $75 million. We will have the right to prepay these exclusivity fees to GM at any time.
 
The following table summarizes the percentage of our annual retail contracts and lease volume that includes GM-sponsored rate and residual incentives.
 
                         
Year ended December 31,   2006   2005   2004
 
North America
    90%       78%       63%  
International
    49%       53%       58%  
 
 
 
Consumer Credit Approval
Before purchasing a retail contract or lease from the dealer, we perform a credit review based on information provided by the dealer. As part of this process we evaluate, among other things, the following factors:
 
  the consumer’s credit history, including any prior experience with us;
 
  the asset value of the vehicle and the amount of equity (down payment) in the vehicle; and
 
  the term of the retail contract or lease.
 
We use a proprietary credit scoring system to support this credit approval process and to manage the credit quality of the portfolio. We use credit scoring to differentiate expected default rates of credit applicants, enabling us to better evaluate credit applications for approval and to tailor the pricing and financing structure based on this assessment of credit risk. We periodically review our credit scoring models and update them based on historical information and current trends. However, these actions by management do not eliminate credit risk. Improper evaluations of contracts for purchase and changes in the applicant’s financial condition subsequent to approval could negatively affect the quality of our receivables portfolio, resulting in credit losses.
 
Upon successful completion of our credit underwriting process, we purchase the retail automotive financing contract or lease from the dealer.
 
Consumer Credit Risk Management
Credit losses in our consumer automotive retail contract and lease portfolio are influenced by general business and economic conditions, such as unemployment rates, bankruptcy filings and used vehicle prices. We analyze credit losses according to frequency (i.e., the number of contracts that default) and severity (i.e., the dollar magnitude of loss per occurrence of default). We manage credit risk through our contract purchase policy, credit approval process (including our proprietary credit scoring system) and servicing capabilities.
 
In general, the credit quality of the off-balance sheet portfolio is representative of our overall managed consumer automotive retail contract portfolio. However, the process of creating a pool of retail automotive finance receivables for securitization or sale typically involves excluding retail contracts that are greater than 30 days delinquent at such time. In addition, the process involves selecting from a pool of receivables that are currently outstanding and therefore, represent “seasoned” contracts. A seasoned portfolio that excludes delinquent contracts historically results in better credit performance in the managed portfolio than in the on-balance sheet portfolio of retail automotive finance receivables. In addition, the current off-balance sheet transactions are comprised mainly of subvented rate retail automotive finance receivables, which generally attract higher quality customers (who would otherwise be cash purchasers) than customers typically associated with non-subvented receivables.
 
The managed portfolio includes retail receivables held on-balance sheet for investment and receivables securitized and sold that we continue to service and in which we have a continuing involvement (i.e., in which we retain an interest or risk of loss in the underlying receivables); it excludes securitized and sold automotive finance receivables that we continue to service but in which we have no other continuing involvement (serviced-only portfolio). We believe the disclosure of the managed portfolio credit experience presents a more complete presentation of our credit exposure because the managed basis reflects not only on-balance sheet receivables but also securitized assets in which we retain a risk of loss in the underlying assets (typically in the form of a subordinated retained interest).
 


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Management’s Discussion and Analysis
GMAC LLC  Form 10-K
 

The following tables summarize pertinent loss experience in the managed and on-balance sheet consumer automotive retail contract portfolio. Consistent with the presentation in our Consolidated Balance Sheet, retail contracts presented in the table represent the principal balance of the automotive finance receivable less unearned income.
 
                                                               
    Average retail
  Annual charge-offs,
         
    assets   net of recoveries (a)     Net charge-off rate    
Year ended December 31, ($ in millions)   2006   2006   2005   2004     2006   2005   2004    
 
 
Managed
                                                             
North America
    $55,715       $569       $735       $912         1.02 %     0.99 %     1.10 %    
International
    15,252       112       132       130         0.73 %     0.89 %     0.94 %    
                               
                               
Total managed
    $70,967       $681       $867       $1,042         0.96 %     0.98 %     1.08 %    
 
 
On-balance sheet
                                                             
North America
    $50,305       $559       $719       $890         1.11 %     1.05 %     1.18 %    
International
    15,251       112       132       130         0.73 %     0.89 %     0.94 %    
                               
                               
Total on-balance sheet
    $65,556       $671       $851       $1,020         1.02 %     1.02 %     1.14 %    
 
 
(a)  Net charge-offs exclude amounts related to residual losses on balloon automotive SmartBuy finance contracts. These amounts totaled $26, $1 and $31 for the years ended December 31, 2006, 2005 and 2004 respectively.
 
The following table summarizes pertinent delinquency experience in the consumer automotive retail contract portfolio.
 
                 
    Percent of retail contracts 30 days
    or more past due (a)
    Managed   On-balance sheet
    2006   2005   2006   2005
 
 
North America
  2.49%   2.21%   2.73%   2.37%
International
  2.63%   2.68%   2.63%   2.68%
 
 
Total
  2.54%   2.33%   2.70%   2.46%
 
 
(a)  Past due contracts are calculated on the basis of the average number of contracts delinquent during a month and exclude accounts in bankruptcy.
 
In addition to the preceding loss and delinquency data, the following table summarizes bankruptcies and repossession information for the United States consumer automotive retail contract portfolio (which represents approximately 53% and 65% of our on-balance sheet consumer automotive retail contract portfolio for the 2006 and 2005 year, respectively):
 
                                 
    Managed   On-balance sheet
Year ended December 31,   2006   2005   2006   2005
 
 
Average retail contracts in bankruptcy
(in units) (a)
    88,658       102,858       87,731       98,744  
Bankruptcies as a percent of average number of contracts outstanding
    2.62%       2.27%       2.78%       2.35%  
Retail contract repossessions
(in units)
    89,345       101,546       87,900       98,838  
Repossessions as a percent of average number of contracts outstanding
    2.64%       2.24%       2.78%       2.35%  
 
 
(a)  Average retail contracts in bankruptcy are calculated using the yearly average of the month end bankruptcies.
 
Servicing
Servicing activities consist largely of collecting and processing customer payments, responding to customer inquiries such as requests for payoff quotes, processing customer requests for account revisions such as payment extensions and refinancings, maintaining a perfected security interest in the financed vehicle, monitoring vehicle insurance coverage, and disposing of off-lease vehicles.
 
Our customers have the option to remit payments based on monthly billing statements, coupon books or electronic funds transfers. Customer payments are processed by regional third-party

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GMAC LLC  Form 10-K
 

processing centers that electronically transfer payment data to customers’ accounts.
 
Servicing activities also include initiating contact with customers who fail to comply with the terms of the retail contract or lease. Such contacts typically begin with a reminder notice when the account is seven to 15 days past due. Telephone contact typically begins when the account is 10 to 20 days past due. Accounts that become 45 to 48 days past due are transferred to special collection centers that track accounts more closely. The nature and timing of these activities depend on the repayment risk that the account poses.
 
During the collection process, we may offer a payment extension to a customer experiencing temporary financial difficulty. A payment extension enables the customer to delay monthly payments for 30, 60 or 90 days, thereby deferring the maturity date of the contract by such period of delay. Extensions granted to a customer typically do not exceed 90 days in the aggregate over any 12-month period or 180 days in aggregate over the life of the contract. If the customer’s financial difficulty is not temporary, and management believes the customer could continue to make payments at a lower payment amount, we may offer to rewrite the remaining obligation, extending the term and lowering the monthly payment obligation. Extensions and rewrites are techniques that help mitigate financial loss in those cases where management believes the customer will recover from financial difficulty and resume regularly scheduled payments, or can fulfill the obligation with lower payments over a longer time period. Before offering an extension or rewrite, collection personnel evaluate and take into account the capacity of the customer to meet the revised payment terms. While the granting of an extension could delay the eventual charge-off of an account, typically we are able to repossess and sell the related collateral, thereby mitigating the loss. As an indication of the effectiveness of our consumer credit practices, of the total amount outstanding in the United States traditional retail portfolio as of December 31, 2003, only 6.3% of the extended or rewritten accounts were subsequently charged off, through December 31, 2006. A three-year period was utilized for this analysis as this approximates the weighted average remaining term of the portfolio. As of December 31, 2006, 5.5% of the total amount outstanding in the portfolio had been granted an extension or rewritten.
 
Subject to legal considerations, we will normally begin repossession activity once an account becomes 60 days past due. Repossession may occur earlier if management determines the customer is unwilling to pay, the vehicle is in danger of being damaged or hidden, or the customer voluntarily surrenders the vehicle. Approved third-party repossession firms handle repossessions. Normally, the customer is given a period of time to redeem the vehicle by paying off the account or bringing the account current. If the vehicle is not redeemed, it is sold at auction. If the proceeds do not cover the unpaid balance, including unpaid finance charges and allowable expenses, the resulting deficiency is charged off. Asset recovery centers pursue collections on accounts that have been charged off, including those accounts where the vehicle was repossessed and skip accounts where the vehicle cannot be located.
 
We have historically serviced retail contracts and leases in our managed portfolio. We will continue selling retail contracts (on a “whole loan” basis) that we purchase. With respect to retail and lease contracts we sell, we retain the right to service such retail contracts and leases and earn a servicing fee for such servicing functions. Semperian LLC, a subsidiary, performs most servicing activities for U.S. retail contracts and consumer automotive leases on our behalf. Semperian’s servicing activities are performed in accordance with our policies and procedures.
 
As of December 31, 2006 and 2005, our total consumer automotive serviced portfolio was $123.0 billion and $124.1 billion, respectively, while our consumer automotive managed portfolio was $91.9 billion and $108.4 billion in 2006 and 2005, respectively.
 
Allowance for Credit Losses
Our allowance for credit losses is intended to cover management’s estimate of incurred losses in the portfolio. Refer to the Critical Accounting Estimates section of this MD&A and Note 1 to our Consolidated Financial Statements for further discussion.
 
The following table summarizes activity related to the consumer allowance for credit losses for our automotive finance operations.
 
                     
Year ended December 31,
           
($ in millions)   2006   2005    
 
Allowance at beginning of year
    $1,618       $2,035      
Provision for credit losses
    520       443      
Charge-offs
                   
Domestic
    (724 )     (839 )    
Foreign
    (171 )     (192 )    
 
 
Total charge-offs
    (895 )     (1,031 )    
 
 
Recoveries
                   
Domestic
    151       131      
Foreign
    47       48      
 
 
Total recoveries
    198       179      
 
 
Net charge-offs
    (697 )     (852 )    
Impacts of foreign currency translation
    16       (12 )    
Securitization activity
    3       4      
 
 
Allowance at end of year
    $1,460       $1,618      
Allowance coverage (a)
    2.39 %     2.26 %    
 
 
(a)  Represents the related allowance for credit losses as a percentage of total on-balance sheet consumer automotive retail contracts.
 
The overall credit performance of the consumer portfolio deteriorated from the prior year consistent with the decline in the level of overall managed and on-balance sheet receivables as we continued to execute more whole loan sales. Similar to securitizations, the process of creating a pool of retail automotive finance receivables for whole loan sales typically involves excluding retail contracts that are greater than 30 days delinquent at such


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Management’s Discussion and Analysis
GMAC LLC  Form 10-K
 

time and selecting from a pool of receivables currently outstanding, which therefore, represent seasoned contracts. A seasoned portfolio that excludes delinquent contracts historically results in better credit performance, and as a result, the increase in whole loan activity over the past year has impacted the charge-offs as a percentage of the managed and on-balance sheet portfolio, when compared to the comparable period in the prior year. In addition to the impact of whole loan activity, delinquencies in the North American operations managed and on-balance sheet portfolio were negatively impacted by an aging of the overall portfolio as consumer serviced assets continued to decrease, as compared to prior year levels. International consumer credit portfolio performance remained strong as both delinquencies and charge-offs declined as compared to prior year levels.
 
Credit fundamentals in our consumer automotive portfolio deteriorated in 2006 relative to 2005 experience. Delinquencies, repossessions and loss severity all increased as compared to 2005. The increase in loss severity is illustrated by an increase in the average loss incurred per new vehicle repossessed in the United States traditional portfolio, which increased from $7,825 in 2005 to $8,129 in 2006. The increase in loss severity is attributable to a weakening in the used vehicle market resulting from a lower demand for used vehicles, as a result of new vehicle incentive programs, and higher fuel costs. The increase in delinquency trends in the North American portfolio is the result of lower on-balance sheet prime retail asset levels, primarily as a result of an increase in whole loan sales, the shrinking and aging of the portfolio and a weaker U.S. economy as compared to recent years. Conversely, delinquency trends in the International portfolio showed an improvement in 2006, as a result of a change in the mix of new and used retail contracts in the portfolio, as well as a significant improvement in the credit performance in certain international countries.
 
Despite the increase in delinquencies and loss severity, consumer credit loss rates in North America remained relatively stable in 2006 as compared to 2005. The decrease in the number of bankruptcies in the U.S. portfolio in 2006 was due to the change in bankruptcy law, effective October 17, 2005, which subsequently made it more difficult for some U.S. consumers to qualify for certain protections previously afforded to bankruptcy debtors. New bankruptcy filings in our U.S. portfolio increased dramatically in October 2005, prior to the change in law and decreased in 2006.
 
The allowance for credit losses as a percentage of the total on-balance sheet consumer portfolio remained stable in comparison to December 2005 as the consumer allowance year over year decreased along with automotive retail asset levels.
 
Our consumer automotive leases are operating leases and, therefore, exhibit different loss performance as compared to consumer automotive retail contracts. Credit losses on the operating lease portfolio are not as significant as losses on retail contracts because lease losses are limited to past due payments, late charges, and fees for excess mileage and excessive wear and tear. Since some of these fees are not assessed until the vehicle is returned, credit losses on the lease portfolio are correlated with lease termination volume. As further described in the Critical Accounting Estimates section of this MD&A, credit risk is considered within the overall depreciation rate and the resulting net carrying value of the operating lease asset. North American operating lease accounts past due over 30 days represented 1.51% and 1.33% of the total portfolio at December 31, 2006 and 2005, respectively.
 
Remarketing and Sales of Leased Vehicles
When we acquire a consumer lease, we assume ownership of the vehicle from the dealer. Neither the consumer nor the dealer is responsible for the value of the vehicle at the time of lease termination. Typically, the vehicle is returned to us for remarketing through an auction. We generally bear the risk of loss to the extent the value of a leased vehicle upon remarketing is below the projected residual value determined at the time the lease contract is signed. However, GM shares this risk with us in certain circumstances, as described previously at GM Marketing Incentives.
 
When vehicles are not purchased by customers or the receiving dealer at lease termination, we regain possession of the leased vehicles from the customers and sell the vehicles, primarily through physical and internet auctions. The following table summarizes our methods of vehicle sales in the United States at lease termination, stated as a percentage of total lease vehicle disposals.
 
                 
Year ended December 31,   2006   2005   2004    
 
Auction
               
Physical
  44%   42%   43%    
Internet
  38%   39%   39%    
Sale to dealer
  12%   12%   12%    
Other (including option exercised by lessee)
  6%   7%   6%    
 
 
 
We primarily sell our off-lease vehicles through:
 
  Physical auctions — We dispose of approximately half of our off-lease vehicles not purchased at termination by the lease consumer or dealer through traditional official GM-sponsored auctions. We are responsible for handling decisions at the auction, including arranging for inspections, authorizing repairs and reconditioning, and determining whether bids received at auction should be accepted.
 
  Internet auctions — We offer off-lease vehicles to GM dealers and affiliates through a proprietary internet site (SmartAuction). This internet sales program was established in 2000 to increase the net sales proceeds from off-lease vehicles by reducing the time between vehicle return and ultimate disposition, which in turn would reduce holding costs and broaden the number of prospective buyers, thereby maximizing proceeds. We maintain the internet auction site, set the pricing floors on vehicles and


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Management’s Discussion and Analysis
GMAC LLC  Form 10-K
 

administer the auction process. We earn a service fee for every sale. Remarketing fee revenue, primarily generated through SmartAuction, was $76.0 million, $63.5 million and $57.6 million for 2006, 2005 and 2004, respectively.
 
Lease Residual Risk Management
We are exposed to residual risk on vehicles in the consumer lease portfolio. This lease residual risk represents the possibility that the actual proceeds realized upon the sale of returned vehicles will be lower than the projection of these values used in establishing the pricing at lease inception. The following factors most significantly influence lease residual risk:
 
  Used vehicle market — We are at risk due to changes in used vehicle prices. General economic conditions, off-lease vehicle supply and new vehicle market prices (of both GM and other manufacturers) most heavily influence used vehicle prices.
 
  Residual value projections — As previously discussed, we establish residual values at lease inception by consulting independently published guides and periodically review these residual values during the lease term. These values are projections of expected values in the future (typically between two and four years) based on current assumptions for the respective make and model. Actual realized values often differ.
 
  Remarketing abilities — Our ability to efficiently process and effectively market off-lease vehicles impacts the disposal costs and the proceeds realized from vehicle sales.
 
  GM vehicle and marketing programs — GM influences lease residual results in the following ways:
 
  •  GM provides support to us for certain residual deficiencies.
 
  •  The brand image and consumer preference of GM products impact residual risk, as our lease portfolio consists primarily of GM vehicles.
 
  •  GM marketing programs may influence the used vehicle market for GM vehicles, through programs such as incentives on new vehicles, programs designed to encourage lessees to terminate their leases early in conjunction with the acquisition of a new GM vehicle (referred to as pull ahead programs) and special rate used vehicle programs.
 
The following table summarizes the volume of lease terminations and the average sales proceeds on 24, 36 and 48-month scheduled lease terminations in the United States serviced lease portfolio for the years indicated. The 36 month terminations represented approximately 51%, 69%, and 73% of our total terminations in 2006, 2005 and 2004, respectively.
 
                         
Year ended December 31,   2006   2005   2004
 
 
Off-lease vehicles remarketed (in units)
    272,094       283,480       413,621  
Sales proceeds on scheduled lease terminations ($ per unit)
                       
24-month
    $16,236       $16,755       $16,345  
36-month
    13,848       13,949       13,277  
48-month
    12,284       12,209       11,354  
 
 
 
Our off-lease vehicle remarketing results remained relatively stable in 2006, as compared to the past few years, despite a weaker used vehicle market, primarily as a result of a decline in the volume of vehicles coming off-lease and the fact that the underlying contractual residual values (on the current portfolio) were lower than the residuals established on prior years’ volume. Additionally, we have continued aggressive use of the internet in disposing of off-lease vehicles. This initiative has improved efficiency, reduced costs and ultimately increased the net proceeds on the sale of off-lease vehicles. In 2007 continued improvement in remarketing results is expected as the favorable effect of lower contractual residual values continues.
 
In recent years, the percentage of lease contracts terminated prior to the scheduled maturity date has increased primarily due to GM-sponsored pull ahead programs. Under these marketing programs, consumers are encouraged to terminate leases early in conjunction with the acquisition of a new GM vehicle. The sales proceeds per vehicle on scheduled lease terminations in the preceding table do not include the effect of payments related to the pull ahead programs.
 
Commercial Automotive Financing
 
Automotive Wholesale Dealer Financing
One of the most important aspects of our automotive financing operations is supporting the sale of GM vehicles through wholesale or floor plan financing, primarily through automotive finance purchases by dealers of new and used vehicles manufactured or distributed by GM and, less often, other vehicle manufacturers, prior to sale or lease to the retail customer. Wholesale automotive financing represents the largest portion of our commercial financing business and is the primary source of funding for GM dealers’ purchases of new and used vehicles. In 2006 we financed six million new GM vehicles (representing an 80% share of GM sales to dealers). In addition, we financed approximately 140,000 new non-GM vehicles. The following discussion centers on our operations in the United States, which are generally reflective of our global business practices; however, certain countries have unique statutory or regulatory requirements that impact business practices. The effects of such requirements are not significant to our consolidated financial condition, results of operations or cash flows.


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Management’s Discussion and Analysis
GMAC LLC  Form 10-K
 

 
Wholesale credit is arranged through lines of credit extended to individual dealers. In general, each wholesale credit line is secured by all the vehicles financed by us and, in some instances, by other assets owned by the dealer or the operator’s/owner’s personal guarantee. The amount we advance to dealers is equal to 100% of the wholesale invoice price of new vehicles, which includes destination and other miscellaneous charges, and with respect to vehicles manufactured by GM and other motor vehicle manufacturers, a price rebate, known as a holdback, from the manufacturer to the dealer in varying amounts stated as a percentage of the invoice price. Interest on wholesale automotive financing is generally payable monthly. Most wholesale automotive financing is structured to yield interest at a floating rate indexed to the Prime Rate. The rate for a particular dealer is based on, among other things, competitive factors, the amount and status of the dealer’s creditworthiness and various incentive programs.
 
Under the terms of the credit agreement with the dealer, we may demand payment of interest and principal on wholesale credit lines at any time. However, unless we terminate the credit line or the dealer defaults, we generally require payment of the principal amount financed for a vehicle upon its sale or lease by the dealer to the customer. Ordinarily, a dealer has between one and five days, based on risk and exposure of the account, to satisfy the obligation.
 
Wholesale automotive financing accounted for $1.3 billion, $1.1 billion and $1.1 billion of our revenues in 2006, 2005 and 2004, respectively.
 
The following table summarizes our wholesale financing of new vehicles and share of GM sales to dealers in markets where we operate.
 
                                                   
    GMAC volume     Share of GM retail sales
Year ended December 31, (units in thousands)   2006   2005   2004     2006   2005   2004
GM vehicles
                                                 
North America
    3,464       3,798       4,153         76%       80%       81%  
International
    2,658       2,462       2,207         86%       84%       86%  
Total GM vehicles
    6,122       6,260       6,360         80%       82%       83%  
Non-GM vehicles
    140       180       198                            
Total wholesale volume
    6,262       6,440       6,558                            
                                                   
 
Our wholesale automotive financing continues to be the primary funding source for GM dealer inventories. Penetration levels in North America in 2006 continued to reflect traditionally strong levels but declined from 2005 levels. International levels increased in 2006 mainly due to growth in China and improvement in their penetration levels.
 
Credit Approval
Prior to establishing a wholesale line of credit, we perform a credit analysis of the dealer. During this analysis, we:
 
  review credit reports, financial statements and may obtain bank references;
 
  evaluate the dealer’s marketing capabilities;
 
  evaluate the dealer’s financial condition; and
 
  assess the dealer’s operations and management.
 
Based on this analysis, we may approve the issuance of a credit line and determine the appropriate size. The credit lines represent guidelines, not limits. Therefore, the dealers may exceed them on occasion, an example being a dealer exceeding sales targets contemplated in the credit approval process. Generally, the size of the credit line is intended to be an amount sufficient to finance approximately a 90 day supply of new vehicles and a 30-60 day supply of used vehicles. Our credit guidelines ordinarily require that advances to finance used vehicles be approved on a unit by unit basis.
 
Commercial Credit
Our credit risk on the commercial portfolio is markedly different than that of our consumer portfolio. Whereas the consumer portfolio represents a homogeneous pool of retail contracts and leases that exhibit fairly predictable and stable loss patterns, the commercial portfolio exposures are less predictable. In general, the credit risk of the commercial portfolio is tied to overall economic conditions in the countries in which we operate. Further, our credit exposure is concentrated in automotive dealerships (primarily GM dealerships). Occasionally, GM provides payment guarantees on certain commercial loans and receivables we have outstanding. As of December 31, 2006 and 2005, approximately $169 million and $934 million, respectively, in commercial loans and receivables were covered by a GM guarantee.
 
Credit risk is managed and guided by policies and procedures established and controlled by Corporate, that are designed to ensure that risks are accurately and consistently assessed, properly approved and continuously monitored. Our wholly owned subsidiaries approve significant transactions and are responsible for credit risk assessments (including the evaluation of the adequacy of the collateral). Our wholly owned subsidiaries also monitor the credit risk profile of individual borrowers and the aggregate portfolio of borrowers — either within a designated geographic region or a particular product or industry segment. Corporate approval is required for transactions exceeding business unit approval limits. Credit risk monitoring is supplemented at the corporate portfolio level through a periodic review performed by our Chief Credit Officer.
 


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Management’s Discussion and Analysis
GMAC LLC  Form 10-K
 

To date, the commercial receivables that have been securitized and accounted for as off-balance sheet transactions primarily represent wholesale lines of credit extended to automotive dealerships, which historically have experienced low losses and some dealer term loans. Historically, only wholesale accounts were securitized, resulting in our managed portfolio being substantially the same as our on-balance sheet portfolio. As a result, only the on-balance sheet commercial portfolio credit experience is presented in the following table:
 
                                                               
    Total
  Impaired
    Average
  Annual charge-offs,
   
    loans   loans (a)     loans   net of recoveries    
Year ended December 31, ($ in millions)   2006   2006   2005     2006   2006   2005   2004    
 
Wholesale
    $20,577       $338       $299         $21,473       $6       $4       $2      
              1.64 %     1.45 %               0.03 %     0.02 %     0.01 %    
Other commercial automotive financing
    3,842       52       142         4,138       4       1       4      
              1.35 %     1.36 %               0.10 %     0.02 %     0.03 %    
 
 
Total on-balance sheet
    $24,419       $390       $441         $25,611       $10       $5       $6      
              1.60 %     1.42 %               0.04 %     0.02 %     0.02 %    
 
 
(a)  Includes loans where it is probable that we will be unable to collect all amounts due according to the terms of the loan.
 
Annual charge-offs on the wholesale portfolio remained at traditionally low levels in 2006, while charge-offs declined for the other commercial automotive financing portfolio. Impaired loans in the wholesale commercial loan portfolio increased in comparison to December 2005 levels, as a result of an increase in the amounts outstanding in the wholesale lines of credit for certain dealer accounts. In addition, impaired loans declined in the other commercial automotive financing portfolio since December 2005.
 
Servicing and Monitoring
We service all of the wholesale credit lines in our portfolio as well as the wholesale automotive finance receivables that we have securitized. A statement setting forth billing and account information is prepared by us and distributed on a monthly basis to each dealer. Interest and other non-principal charges are billed in arrears and are required to be paid immediately upon receipt of the monthly billing statement. Generally, dealers remit payments to GMAC through wire transfer transactions initiated by the dealer through a secure web application.
 
Dealers are assigned a credit category based on various factors, including capital sufficiency, operating performance, financial outlook, and credit and payment history. The credit category impacts the amount of the line of credit, the determination of further advances and the management of the account. We monitor the level of borrowing under each dealer’s account daily. When a dealer’s balance exceeds the credit line, we may temporarily suspend the granting of additional credit or increase the dealer’s credit line or take other actions, following evaluation and analysis of the dealer’s financial condition and the cause of the excess.
 
We periodically inspect and verify the existence of dealer vehicle inventories. The timing of the verifications varies and no advance notice is given to the dealer. Among other things, verifications are intended to determine dealer compliance with the financing agreement and confirm the status of our collateral.
 
Other Commercial Automotive Financing
We also provide other forms of commercial financing for the automotive industry. The following describes our other automotive financing markets and products:
 
  Automotive dealer term loans — We make loans to dealers to finance other aspects of the dealership business. These loans are typically secured by real estate, other dealership assets and occasionally the personal guarantees of the individual owner of the dealership. Automotive dealer loans comprised 2% of our Automotive Financing operations’ assets as of December 31, 2006, consistent with 2005.
 
  Automotive fleet financing — Dealers, their affiliates and other companies may obtain financing to buy vehicles, which they lease or rent to others. These transactions represent our fleet financing activities. We generally have a security interest in these vehicles and in the rental payments. However, competitive factors may occasionally limit the security interest in this collateral. Automotive fleet financing comprised less than 1% of our Automotive Financing operations’ assets as of December 31, 2006, consistent with 2005.
 
  Full service leasing products — We offer full service individual and fleet leasing products in Europe, Mexico, and Australia. In addition to financing the vehicles, we offer maintenance, fleet and accident management services, as well as fuel programs, short-term vehicle rental, and title and licensing services. Full service leasing products comprised 2% and 1% of our Automotive Finance operations’ assets as of December 31, 2006 and 2005, respectively.


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Management’s Discussion and Analysis
GMAC LLC  Form 10-K
 

  ResCap
 
Results of Operations
The following table summarizes the operating results for ResCap for the periods indicated. The amounts presented are before the elimination of balances and transactions with our other operating segments.
 
                                         
                2006-2005
  2005-2004
Year ended December 31, ($ in millions)   2006   2005   2004   % change   % change
 
 
Revenue
                                       
Total financing revenue
    $7,405       $5,226       $4,834       42       8  
Interest expense
    (6,447 )     (3,874 )     (2,405 )     66       61  
Provision for credit losses
    (1,334 )     (626 )     (978 )     113       (36 )
                 
                 
Net financing revenue (loss)
    (376 )     726       1,451       (152 )     (50 )
Servicing fees
    1,584       1,417       1,297       12       9  
Amortization and impairment
          (762 )     (1,015 )     (100 )     (25 )
Servicing asset valuation and hedge activities, net
    (1,100 )     61       243       n/m       (75 )
                 
                 
Net loan servicing income
    484       716       525       (32 )     36  
Gains on sale of loans, net
    890       1,037       690       (14 )     50  
Other income
    1,986       1,755       1,212       13       45  
                 
                 
Total net financing revenue and other income
    2,984       4,234       3,878       (30 )     9  
Noninterest expense
    (2,568 )     (2,607 )     (2,371 )     (2 )     10  
Income tax benefit (expense)
    289       (606 )     (603 )     (148 )     1  
                 
                 
Net income
    $705       $1,021       $904       (31 )     13  
                 
                 
Total assets
    $130,569       $118,608       $93,941       10       26  
 
 
n/m = not meaningful
 
2006 Compared to 2005
ResCap operations’ net income for 2006 declined 31% when compared to 2005. The 2006 operating results were adversely affected by domestic economic conditions especially during the fourth quarter. These developments were offset by the conversion to an LLC for income tax purposes, which resulted in the elimination of a $523 million net deferred tax liability. Excluding the LLC benefit, our net income was $182 million. The adverse conditions affecting the business included the following:
 
  Interest rates have steadily increased since the middle of 2005. Rising rates have the impact of decreasing mortgage affordability. In addition, long-term rates have remained low relative to short-term rates (i.e., a flattening of the yield curve) and, in some instances, have been lower than short-term rates (i.e., an inverted yield curve). This results in a reduction in net interest margin and generally has a negative effect on our hedging result.
 
  The rising interest rate environment has contributed to lower home sales and an increased inventory of unsold homes. Accordingly, the level of home price appreciation declined to a five-year low in the fourth quarter of 2006 and in a number of areas in the country has resulted in a decline in the appreciation of home prices and, in some areas, a decline in home values, which has increased the severity of our loan losses.
 
  The nonprime securitization market significantly deteriorated during the fourth quarter of 2006. Nonprime loan prices declined significantly due to the changing market conditions and our ability to securitize delinquent subprime loans was severely restricted. This had a significant negative impact on nonprime sales margins and impacted the fair value of our delinquent loans in our mortgage loans held for sale portfolio.
 
  In the fourth quarter of 2006, nonprime delinquencies rose significantly. The combination of lower home prices and sales and loan defaults has put significant pressure on a number of nonprime lenders, including our nonprime warehouse lending customers. This resulted in a significant provision for loan losses due to the decline in value of the collateral for our loans.
 
  The economic conditions resulted in lower net interest margins, higher provisions for loan losses, lower gains on sale margins and loan production, real estate investment impairments, and reduced gains on dispositions of real estate acquired through foreclosure. As these domestic market conditions persist, these unfavorable impacts on our results of operations may continue.
 
The mortgage loan production in 2006 was $189.4 billion, an increase of 8% from $175.6 billion in 2005. Domestic mortgage loan production increased 2% and international loan production increased 68% in 2006 compared to 2005. Domestic loan production increased due to increases in production of prime second-lien and


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Management’s Discussion and Analysis
GMAC LLC  Form 10-K
 

prime non-conforming products. U.K. operations provided the majority of the international increase.
 
ResCap net financing revenue was ($376) million in 2006 compared to $726 million in 2005, a decrease of 152%. Total financing revenue increased 42% compared to the prior year, primarily as a result of the increase in our average interest-earning assets, including mortgage loans held for sale, mortgage loans held for investment and lending receivables. Interest expense increased 66% during the 2006 year due to increases in the average amount of interest-bearing liabilities outstanding to fund asset growth as well as increases in funding costs primarily due to the increase in market interest rates.
 
The provision for credit losses was approximately $1.3 billion in 2006 compared to $626 million in 2005, representing an increase of approximately 113%. The majority of this increase occurred in the fourth quarter as the decline in the domestic housing market accelerated and the market for nonprime loans significantly deteriorated. These market conditions resulted in our increasing loss estimates for the number and estimated charge-offs, an increase in nonprime delinquencies and significant stress on warehouse lending customers. The increase in the provision for loan losses was driven by an increase in delinquent loans. These developments resulted in higher loss severity assumptions for new loan production, as compared to the prior year period, when the market observed home price appreciation. If home prices continue to weaken, it may have a continued negative effect on the provision for credit losses.
 
Net loan servicing income decreased 32% compared to 2005 due to negative servicing asset valuations, which were partially offset by an increase in the size of the mortgage servicing rights portfolio. The negative servicing asset valuation was primarily due to derivative hedging results, which were negatively impacted by lower market volatility and the inverted yield curve. The domestic servicing portfolio was approximately $412.4 billion as of December 31, 2006, an increase of approximately $57.5 billion or 16% from $354.9 billion as of December 31, 2005. Gains on sales of loans decreased 14% due to our inability in the fourth quarter of 2006 to include nonprime delinquent loans in our nonprime securitizations.
 
Other income increased 13% during the 2006 year due to a gain on the sale of an interest in a regional home builder in the second quarter of 2006 resulting in a gain of $415 million ($259 million after-tax). This was partially offset by lower income from sales of real estate owned and lower valuations of real estate owned due to lower home prices as well as lower management fee income due to the elimination of an off-balance sheet warehouse lending facility during the fourth quarter of 2005.
 
Noninterest expense decreased in 2006 by 2% compared to 2005. This decrease was primarily attributable to a $42.6 million gain from the curtailment of a pension plan as well as lower real estate commissions due to the softening of the real estate market. These reductions were partially offset by higher professional fees that were incurred in conjunction with the integration of GMAC Residential and Residential Capital Group into the U.S. Residential Finance Group.
 
Income tax benefit was $289 million, which included a conversion benefit of $523 million related to ResCap’s election to be treated as an LLC for federal income tax purposes. The benefit was the result of the elimination of net deferred tax liabilities. Almost all significant domestic legal entities of ResCap have been converted to LLC’s with the exception of GMAC Bank. Effective December 2006, federal income tax expense is no longer incurred for the entities that made the election.
 
2005 Compared to 2004
Net financing revenue was $726 million in 2005 compared to approximately $1.5 billion in 2004, a decrease of $725 million or 50%. Our total financing revenue increased $392 million in 2005 compared to the prior year, primarily as a result of an increase in interest earning assets including mortgage loans held for sale, mortgage loans held for investment, lending receivables and other interest-earning assets. Interest expense increased approximately $1.5 billion in 2005 compared to the prior year due to both an increase in the volume of interest-bearing liabilities and an increase in the cost of those funds. Funding costs increased in 2005 primarily due to the increase in short-term market interest rates. Additionally, the cost of funds has increased as lower cost affiliate borrowings were replaced with unsecured debt.
 
The provision for credit losses was $626 million in 2005 compared to $978 million in 2004, representing a decrease of $352 million or 36%. The provision for credit losses was lower in 2005 compared to the prior year primarily due to favorable severity assumptions resulting from home price appreciation along with a slower rate of increase in delinquencies, including nonaccrual loans, during 2005 compared to 2004 as the rate of seasoning of the portfolio slowed. These positive effects were partially offset by provisions for Hurricane Katrina.
 
Net loan servicing income increased from $525 million during 2004 to $716 million during 2005, representing an increase of $191 million or 36%. Net loan servicing income increased as a result of increased mortgage servicing fees due to growth in the residential servicing portfolio in 2005 as compared to 2004. In addition, net servicing income benefited from a reduction in amortization and impairment due to the favorable impact of slower than expected prepayments consistent with observed trends in the portfolio and rising interest rates.
 
Gains on sale of loans increased $347 million or 50%, compared to 2004 due to higher overall loan production and the increased volume of off-balance sheet securitizations versus on-balance sheet secured financings. Other income increased 45% or $543 million in 2005 primarily related to favorable net impact on the valuation of retained interests from updating estimates of future credit losses resulting from favorable credit loss experience and favorable changes in market rates, offset by the reduction in valuation of residual assets affected by Hurricane Katrina. In addition, other


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Management’s Discussion and Analysis
GMAC LLC  Form 10-K
 

income includes an increase in other investment income related to certain equity investments as well as interest earned on investments in U.S. Treasury securities. Noninterest expense increased $236 million or 10% compared to 2004, primarily due to salary and commission increases in loan production, number of employees and new location occupancy costs.
 
Industry and Competition
The U.S. residential mortgage market had been a growth market for the last several decades. This growth had been driven by a variety of factors, including low interest rates, increasing rates of homeownership, greater access to mortgage financing, the development of an efficient secondary market, home price appreciation and the tax advantage of mortgage debt compared to other forms of consumer debt. Origination of residential mortgage loans has increased during the 2006 year; however, the pace of growth has declined given the softening real estate market, rising interest rates and various concerns about the U.S. economy. The domestic mortgage origination market was estimated to be approximately $2.5 trillion in 2006 and $3.0 trillion in 2005.
 
Prime credit quality mortgage loans are the largest component of the residential mortgage market in the U.S. with loans conforming to the underwriting standards of Fannie Mae and Freddie Mac, Veterans’ Administration-guaranteed loans and loans insured by the Federal Housing Administration representing a significant portion of all U.S. residential mortgage production. Prime credit quality loans that do not conform to the underwriting standards of the government-sponsored enterprises, because their original principal amounts exceed Fannie Mae or Freddie Mac limits or because they do not otherwise meet the relevant documentation or property requirements, represent a growing portion of the residential mortgage market. Home equity mortgage loans, which are typically mortgage loans secured by a second (or more junior) lien on the underlying property, continue to grow in significance within the U.S. residential real estate finance industry.
 
The development of an efficient secondary market for residential mortgage loans, including the securitization market, has played an important role in the growth of the residential real estate finance industry. Mortgage-backed and mortgage-related asset-backed securities are issued by private sector issuers as well as by government-sponsored enterprises, primarily Fannie Mae and Freddie Mac.
 
An important source of capital for the residential real estate finance industry is warehouse lending. These facilities provide funding to mortgage loan originators until the loans are sold to investors in the secondary mortgage loan market.
 
The global mortgage markets, particularly in Europe, are less mature than the U.S. mortgage market. The historic lack of available sources of liquidity make these markets a potential opportunity for growth. As a result, many of our competitors have entered the global mortgage markets.
 
Our mortgage business operates in a highly competitive environment and faces significant competition from commercial banks, savings institutions, mortgage companies and other financial institutions. In addition, ResCap earnings are subject to volatility due to seasonality inherent in the mortgage banking industry and volatility in interest rate markets.
 
U.S. Residential Real Estate Finance
Through our activities at ResCap, we are one of the largest residential mortgage producers and servicers in the U.S., producing approximately $162 billion in residential mortgage loans in 2006 and servicing approximately $412 billion in residential mortgage loans as of December 31, 2006. We are also one of the largest non-agency issuers of mortgage-backed and mortgage-related asset-backed securities in the United States. The principal activities of our U.S. residential real estate finance business include originating, purchasing, selling and securitizing residential mortgage loans; servicing residential mortgage loans for ourselves and others; providing warehouse financing to residential mortgage loan originators and correspondent lenders to originate residential mortgage loans; creating a portfolio of mortgage loans and retained interests from our securitization activities; conducting limited banking activities through GMAC Bank; and providing real estate closing services.
 
Sources of Loan Production
We have three primary sources for our residential mortgage loan production: the origination of loans through our direct lending network, the origination of loans through our mortgage brokerage network and the purchase of loans in the secondary market (primarily from correspondent lenders).
 
  Direct Lending Network — Our direct lending network consists of retail branches, internet and telephone-based operations. Our retail network targets customers desiring face-to-face service. Typical referral sources are realtors, homebuilders, credit unions, small banks and affinity groups. We originate residential mortgage loans through our direct lending network under two brands: GMAC Mortgage and ditech.com.
 
  Mortgage Brokerage Network — We also originate residential mortgage loans through mortgage brokers. Loans sourced by mortgage brokers are funded by us and generally closed in our name. When originating loans through mortgage brokers, the mortgage broker’s role is to identify the applicant, assist in completing the loan application, gather necessary information and documents and serve as our liaison with the borrower through the lending process. We review and underwrite the application submitted by the mortgage broker, approve or deny the application, set the interest rate and other terms of the loan and, upon acceptance by the borrower and satisfaction of all conditions required by us, fund the loan. We qualify and approve all mortgage brokers who generate mortgage loans for us, and we continually monitor their performance.


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GMAC LLC  Form 10-K
 

  Correspondent Lender and other Secondary Market Purchases — Loans purchased from correspondent lenders are originated or purchased by the correspondent lenders and subsequently sold to us. As with our mortgage brokerage network, we approve any correspondent lenders who participate in our loan purchase programs.
 
We also purchase pools of residential mortgage loans from entities other than correspondent lenders, which we refer to as bulk purchases. These purchases are generally made from large financial institutions. In connection with these purchases, we typically conduct due diligence on all or a sampling of the mortgage pool and use our underwriting technology to determine if the loans meet the underwriting requirements of our loan programs. Some of the residential mortgage loans we obtain in bulk purchases are “seasoned” or “distressed”. Seasoned mortgage loans are loans that generally have been funded for more than 12 months, while distressed mortgage loans are loans that are currently in default or otherwise nonperforming.
 
The following summarizes our domestic mortgage loan production by channel:
 
                                                 
    U.S. mortgage loan production by channel  
    2006     2005     2004  
          Dollar
          Dollar
          Dollar
 
Year ended December 31,
  No. of
    amount of
    No. of
    amount of
    No. of
    amount of
 
($ in millions)   loans     loans     loans     loans     loans     loans  
 
 
Retail branches
    103,139       $15,036       126,527       $19,097       134,160       $18,012  
Direct lending (other than retail branches)
    135,731       12,547       161,746       17,228       148,343       16,209  
Mortgage brokers
    169,200       29,025       134,263       22,961       111,571       16,302  
Correspondent lender and secondary market purchases
    642,169       104,960       552,624       99,776       533,459       82,504  
 
 
Total U.S. production
    1,050,239       $161,568       975,160       $159,062       927,533       $133,027  
 
 
 
Types of Mortgage Loans
We originate and acquire mortgage loans that generally fall into one of the following five categories:
 
  Prime Conforming Mortgage Loans — These are prime credit quality first-lien mortgage loans secured by single-family residences that meet or conform to the underwriting standards established by Fannie Mae or Freddie Mac for inclusion in their guaranteed mortgage securities programs.
 
  Prime Non-Conforming Mortgage Loans — These are prime credit quality first-lien mortgage loans secured by single-family residences that either (1) do not conform to the underwriting standards established by Fannie Mae or Freddie Mac, because they have original principal amounts exceeding Fannie Mae and Freddie Mac limits ($417,000 in 2006 and 2007 and $359,650 in 2005), which are commonly referred to as jumbo mortgage loans or (2) have alternative documentation requirements and property or credit-related features (e.g., higher loan-to-value or debt-to-income ratios) but are otherwise considered prime credit quality due to other compensating factors.
 
  Government Mortgage Loans — These are first-lien mortgage loans secured by single-family residences that are insured by the Federal Housing Administration or guaranteed by the Veterans Administration.
 
  Nonprime Mortgage Loans — These are first-lien and certain junior lien mortgage loans secured by single-family residences made to individuals with credit profiles that do not qualify for a prime loan, have credit-related features that fall outside the parameters of traditional prime mortgage products or have performance characteristics that otherwise expose us to comparatively higher risk of loss.
 
  Prime Second-Lien Mortgage Loans — These are open- and closed-end mortgage loans secured by a second or more junior lien on single-family residences, which include home equity mortgage loans.
 


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Management’s Discussion and Analysis
GMAC LLC  Form 10-K
 

The following table summarizes our domestic mortgage loan production by type:
 
                                                 
    U.S. mortgage loan production by type  
    2006     2005     2004  
          Dollar
          Dollar
          Dollar
 
Year ended December 31,
  No. of
    amount of
    No. of
    amount of
    No. of
    amount of
 
($ in millions)   loans     loans     loans     loans     loans     loans  
 
 
Prime conforming
    233,058       $43,350       275,351       $50,047       276,129       $45,593  
Prime non-conforming
    193,736       60,294       192,914       55,811       163,260       43,473  
Government
    25,474       3,665       31,164       4,251       40,062       4,834  
Nonprime
    193,880       30,555       226,317       35,874       217,344       27,880  
Prime second-lien
    404,091       23,704       249,414       13,079       230,738       11,247  
 
 
Total U.S. production
    1,050,239       $161,568       975,160       $159,062       927,533       $133,027  
 
 
 
Underwriting Standards
All the mortgage loans we originate and most of the mortgage loans purchased are subject to our underwriting guidelines and loan origination standards. When originating mortgage loans directly through our retail branches, or by internet or telephone, or indirectly through mortgage brokers, we follow established lending policies and procedures that require consideration of a variety of factors, including:
 
  the borrower’s capacity to repay the loan;
 
  the borrower’s credit history;
 
  the relative size and characteristics of the proposed loan; and
 
  the amount of equity in the borrower’s property (as measured by the borrower’s loan-to-value ratio).
 
Our underwriting standards have been designed to produce loans that meet the credit needs and profiles of our borrowers, thereby creating more consistent performance characteristics for investors in our loans. When purchasing mortgage loans from correspondent lenders, we either re-underwrite the loan prior to purchase or delegate underwriting responsibility to the correspondent lender originating the mortgage loan.
 
To further ensure consistency and efficiency, much of our underwriting analysis is conducted through the use of automated underwriting technology. We also conduct a variety of quality control procedures and periodic audits to ensure compliance with our origination standards, including our responsible lending standards and legal requirements. Although many of these procedures involve manual reviews of loans, we seek to leverage our technology in further developing our quality control procedures. For example, we have programmed many of our compliance standards into our loan origination systems and continue to use and develop automated compliance technology to mitigate regulatory risk.
 
Sale and Securitization of Assets
We sell most of the mortgage loans we originate or purchase. In 2006 we sold $152.7 billion in mortgage loans. We typically sell our Prime Conforming Mortgage Loans in sales that take the form of securitizations guaranteed by Fannie Mae or Freddie Mac, and we typically sell our Government Mortgage Loans in securitizations guaranteed by the Government National Mortgage Association or Ginnie Mae. In 2006 we sold $45.9 billion of mortgage loans to government-sponsored enterprises, or 30% of the total loans we sold, and $106.8 billion to other investors through whole loan sales and securitizations, including both on-balance sheet and off-balance sheet securitizations.
 
Our sale and securitization activities include developing asset sale or retention strategies, conducting pricing and hedging activities and coordinating the execution of whole loan sales and securitizations.
 
In addition to cash we receive in exchange for the mortgage loans we sell to the securitization trust, we often retain interests in the securitization trust as partial payment for the loans and generally hold these retained interests in our investment portfolio. These retained interests may take the form of mortgage-backed or mortgage-related asset-backed securities (including senior and subordinated interests), interest-only, principal-only, investment grade, non-investment grade or unrated securities.
 
Servicing Activities
Although we sell most of the residential mortgage loans that we produce, we generally retain the rights to service these loans. The mortgage servicing rights we retain consist of primary and master servicing rights. Primary servicing rights represent our right to service certain mortgage loans originated or purchased and later sold on a servicing-retained basis through our securitization activities and whole loan sales, as well as primary servicing rights we purchase from other mortgage industry participants. When we act as primary servicer, we collect and remit mortgage loan payments, respond to borrower inquiries, account for principal and interest, hold custodial and escrow funds for payment of property taxes and insurance premiums, counsel or otherwise work with delinquent borrowers, supervise foreclosures and property dispositions and generally administer the loans. Master servicing rights represent our right to service mortgage-backed and mortgage-related asset-backed securities and whole loan packages sold to investors. When we act as master servicer, we collect


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GMAC LLC  Form 10-K
 

mortgage loan payments from primary servicers and distribute those funds to investors in mortgage-backed and mortgage-related asset-backed securities and whole loan packages. Key services in this regard include loan accounting, claims administration, oversight of primary servicers, loss mitigation, bond administration, cash flow waterfall calculations, investor reporting and tax reporting compliance. In return for performing primary and master servicing functions, we receive servicing fees equal to a specified percentage of the outstanding principal balance of the loans being serviced and may also be entitled to other forms of servicing compensation, such as late payment fees or prepayment penalties. Our servicing compensation also includes interest income or the float earned on collections that are deposited in various custodial accounts between their receipt and our distribution of the funds to investors.
 
The value of our mortgage servicing rights is sensitive to changes in interest rates and other factors (see further discussion in the Critical Accounting Estimates section of this MD&A). We have developed and implemented an economic hedge program to, among other things, mitigate the overall risk of impairment loss due to a change in the fair value of our mortgage servicing rights. In accordance with this economic hedge program, we designate hedged risk as the change in the total fair value of our capitalized mortgage servicing rights. The success or failure of this economic hedging program may have a material effect on our results of operations.
 
The following table summarizes the primary domestic mortgage loan servicing portfolio for which we hold the corresponding mortgage servicing rights:
 
                                                 
    U.S. mortgage loan servicing portfolio  
    2006     2005     2004  
          Dollar
          Dollar
          Dollar
 
Year ended December 31,
  No. of
    amount of
    No. of
    amount of
    No. of
    amount of
 
($ in millions)   loans     loans     loans     loans     loans     loans  
 
 
Prime conforming
    1,456,344       $203,927       1,393,379       $186,405       1,323,918       $165,577  
Prime non-conforming
    319,255       101,138       257,550       76,980       203,822       55,585  
Government
    181,563       18,843       181,679       18,098       191,844       18,328  
Nonprime
    409,516       55,750       493,486       56,373       505,929       51,139  
Prime second-lien
    784,170       32,726       500,534       17,073       445,396       13,718  
 
 
Total U.S. production (a)
    3,150,848       $412,384       2,826,628       $354,929       2,670,909       $304,347  
 
 
(a)  Excludes loans for which we acted as a subservicer. Subserviced loans totaled 290,992 with an unpaid principal balance of $55.4 billion as of December 31, 2006; 271,489 with an unpaid principal balance of $38.9 billion as of December 31, 2005; and 99,082 with an unpaid principal balance of $13.9 billion as of December 31, 2004.
 
Warehouse Lending
We are one of the largest providers of warehouse lending facilities to correspondent lenders and other mortgage originators in the United States. These facilities enable those lenders and originators to finance residential mortgage loans until they are sold in the secondary mortgage loan market. We provide warehouse lending facilities for a full complement of residential mortgage loans, including mortgage loans we acquire through our correspondent lenders. Advances under our warehouse lending facilities are generally fully collateralized by the underlying mortgage loans and bear interest at variable rates. As of December 31, 2006, we had total warehouse line of credit commitments of approximately $13.2 billion, against which we had advances outstanding of approximately $8.8 billion. We purchased approximately 23% of the mortgage loans financed by our warehouse lending facilities in 2006.
 
Other Real Estate Finance and Related Activities
We provide bundled real estate services to consumers, including real estate brokerage services, full service relocation services, mortgage closing services and settlement services. Through GMAC Bank, which commenced operations in North America in August 2001, ResCap offers a variety of personal investment products to its customers, including consumer deposits, consumer loans and other investment services. GMAC Bank also provides collateral pool certification and collateral document custodial services to third-party customers. We provide real estate brokerage and full-service relocation to consumers as well as real estate closing services, such as obtaining flood and tax certifications, appraisals, credit reports and title insurance.
 
Business Capital
Business Capital conducts the following business activities: residential construction finance, residential equity, model home finance, resort finance and health capital. The residential construction finance, residential equity and model home finance businesses all provide capital to residential land developers and homebuilders to finance residential real estate projects for sale, using a variety of capital structures. The resort finance business provides debt capital to resort and timeshare developers and the health capital business provides debt capital to health care providers, primarily in the health care services sector. We have


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GMAC LLC  Form 10-K
 

historically retained and serviced most of the loans and investments that we originate in the Business Capital Group.
 
In almost all cases, we source our transactions either through our loan officers or referrals. Our residential construction finance, residential equity and model home finance businesses have relationships with many large homebuilders and residential land developers across the United States. Our resort finance business has relationships primarily with large private timeshare developers and our health capital business has relationships with physician groups and other healthcare service providers. We believe that we have been able to provide creative capital solutions tailored to our customers’ individual needs, resulting in strong relationships with our customers. Because of these relationships, we have been able to conduct multiple and varied transactions with these customers to expand our business.
 
International Business
Outside the United States, our International operations are primarily located in the United Kingdom, The Netherlands, and Germany.
 
The following table summarized our international mortgage loan production:
 
                                                 
    International mortgage loan production  
    2006     2005     2004  
          Dollar
          Dollar
          Dollar
 
Year ended December 31,
  No. of
    amount of
    No. of
    amount of
    No. of
    amount of
 
($ in millions)   loans     loans     loans     loans     loans     loans  
 
 
United Kingdom
    93,215       $22,417       57,747       $12,538       58,838       $11,571  
Continental Europe
    21,849       3,926       15,618       2,833       7,915       1,718  
Other
    11,915       1,439       12,605       1,168       9,216       724  
 
 
Total international loan production
    126,979       $27,782       85,970       $16,539       75,969       $14,013  
 
 
 
The following table sets forth our international servicing portfolio for which we hold the corresponding mortgage servicing rights:
 
                                                 
    International servicing portfolio  
    2006     2005     2004  
          Dollar
          Dollar
          Dollar
 
Year ended December 31,
  No. of
    amount of
    No. of
    amount of
    No. of
    amount of
 
($ in millions)   loans     loans     loans     loans     loans     loans  
 
 
United Kingdom
    108,672       $23,817       91,574       $16,219       59,599       $14,349  
Continental Europe
    49,251       9,956       33,273       5,796       17,486       4,005  
Other
    17,990       2,444       13,573       1,696       21,100       1,084  
 
 
Total international servicing portfolio
    175,913       $36,217       138,420       $23,711       98,185       $19,438  
 
 
 
Credit Risk Management
As previously discussed, we often sell mortgage loans to third parties in the secondary market subsequent to origination or purchase. While loans are held in mortgage inventory prior to sale in the secondary market, we are exposed to credit losses on the loans. In addition, we bear credit risk through investments in subordinate loan participations or other subordinated interests related to certain consumer and commercial mortgage loans sold to third parties through securitizations. Management estimates credit losses for mortgage loans held for sale and subordinate loan participations and records a valuation allowance when losses are considered probable and estimable. The valuation allowance is included as a component of the fair value and carrying amount of mortgage loans held for sale. As previously discussed, certain loans that are sold in the secondary market are subject to recourse in the event of borrower default. Management closely monitors historical experience, borrower payment activity, current economic trends and other risk factors, and establishes an allowance for foreclosure losses that, we believe, is sufficient to cover incurred foreclosure losses in the portfolio.
 
We periodically acquire or originate certain finance receivables and loans held for investment purposes. Additionally, certain loans held as collateral for securitization transactions (treated as financings) are also classified as mortgage loans held for investment. We have the intent and ability to hold these finance receivables and loans for the foreseeable future. Credit risk on finance receivables and mortgage loans held for investment is managed and guided by policies and procedures that are designed to ensure that risks are accurately assessed, properly approved and continuously monitored. In particular, we use risk-based loan pricing and appropriate underwriting policies and loan-collection methods to manage credit risk. Management closely monitors historical experience, borrower payment activity, current economic trends and other risk factors and establishes an allowance for credit losses, which we consider


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GMAC LLC  Form 10-K
 

sufficient to cover incurred credit losses in the portfolio of loans held for investment.
 
In addition to credit exposure on the mortgage loans held for sale and held for investment portfolios, we also bear credit risk related to investments in certain asset- and mortgage-backed securities, which are carried at estimated fair value (or at amortized cost for those classified as held to maturity) in our Consolidated Balance Sheet. Typically, our non-investment grade and unrated asset- and mortgage-backed securities provide credit support and are subordinate to the higher-rated senior certificates in a securitization transaction.
 
We are also exposed to risk of default by banks and financial institutions that are counterparties to derivative financial instruments. These counterparties are typically rated single A or above. This credit risk is managed by limiting the maximum exposure to any individual counterparty and, in some instances, holding collateral, such as cash deposited by the counterparty.
 
Allowance for Credit Losses
Our allowance for credit losses is intended to cover management’s estimate of incurred losses in the portfolio. Refer to the Critical Accounting Estimates section of this MD&A and Note 1 to our Consolidated Financial Statements for further discussion.
 
The following table summarizes the activity related to the allowance for credit losses.
 
                             
($ in millions)   Consumer   Commercial   Total    
 
Balance at January 1, 2005
    $916       $142       $1,058      
Provision for credit losses
    574       52       626      
Charge-offs
    (461 )     (7 )     (468 )    
Recoveries
    37             37      
 
 
Balance at December 31, 2005
    1,066       187       1,253      
Provision for credit losses
    1,116       218       1,334      
Charge-offs
    (721 )     (9 )     (730 )    
Recoveries
    47       1       48      
 
 
Balance at December 31, 2006
    $1,508       $397       $1,905      
Allowance coverage 2005 (a)
    1.6 %     1.4 %     1.5 %    
Allowance coverage 2006 (a)
    2.2 %     2.7 %     2.2 %    
 
 
(a)  Represents the related allowance for credit losses as a percentage of total on-balance sheet residential mortgage loans.


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Management’s Discussion and Analysis
GMAC LLC  Form 10-K
 

Nonperforming Assets
The following table summarizes the nonperforming assets in our on-balance sheet held for sale and held for investment residential mortgage loan portfolios for each of the periods presented. Nonperforming assets are nonaccrual loans, foreclosed assets and restructured loans. Mortgage loans are generally placed on nonaccrual status when they are 60 days or more past due or when the timely collection of the principal of the loan, in whole or in part, is doubtful. Management’s classification of a loan as nonaccrual does not necessarily indicate that the principal of the loan is uncollectible in whole or in part. In certain cases, borrowers make payments to bring their loans contractually current; in all cases, our mortgage loans are collateralized by residential real estate. As a result, our experience has been that any amount of ultimate loss is substantially less than the unpaid balance of a nonperforming loan.
 
                     
Year ended December 31, ($ in millions)   2006   2005    
 
Nonaccrual loans:
                   
Mortgage loans:
                   
Prime conforming
    $11       $10      
Prime nonconforming
    419       362      
Prime second-lien
    142       85      
Nonprime (a)
    6,736       5,731      
Lending receivables:
                   
Warehouse (b)
    1,318       42      
Construction (c)
    69       8      
Commercial real estate
          17      
 
 
Total nonaccrual assets
    8,695       6,255      
Restructured loans
    8       23      
Foreclosed assets
    1,141       506      
 
 
Total nonperforming assets
  $ 9,844     $ 6,784      
 
 
Total nonperforming assets as a percentage of total ResCap assets
    7.5 %     5.7 %    
 
 
(a)  Includes $415 and $374 for 2006 and 2005, respectively, of loans that were purchased distressed and already in nonaccrual status.
(b)  Includes $10 of nonaccrual restructured loans as of December 31, 2006 that are not included in “Restructured Loans.”
(c)  Includes $19 and $9 for 2006 and 2005, respectively, of nonaccrual restructured loans that are not included in restructured loans.
 
The following table summarizes the delinquency information for our mortgage loans held for investment portfolio:
 
                                 
    2006   2005
December 31,
      %
      %
($ in millions)   Amount   of total   Amount   of total
 
Current
  $ 55,964       81     $ 56,576       83  
Past due
                               
30 to 59 days
    4,273       6       4,773       7  
60 to 89 days
    1,818       3       1,528       2  
90 days or more
    3,403       5       2,258       4  
Foreclosures pending
    2,132       3       1,356       2  
Bankruptcies
    1,219       2       1,520       2  
                         
                         
Total unpaid principal balances
    68,809               68,011          
Net premiums
    627               948          
                         
                         
Total
  $ 69,436             $ 68,959          
 
 
 
In the fourth quarter of 2006, we experienced a significant increase in nonprime delinquencies. Loans 60 days or more delinquent, which are all nonaccrual loans, increased from 10.6% of the mortgage loans held for investment portfolio as of September 30, 2006, to 12.5% as of December 31, 2006. In addition, the level of home price appreciation declined to a five-year low, which negatively impacted the severity we experienced upon the disposal of real estate acquired through foreclosure.
 
We originate and purchase mortgage loans that have contractual features that may increase our exposure to credit risk and thereby result in a concentration of credit risk. These mortgage loans include loans that may subject borrowers to significant future payment increases, create the potential for negative amortization of the principal balance or result in high loan-to-value ratios. These loan products include interest only mortgages, option adjustable rate mortgages, high loan-to-value mortgage loans and teaser rate mortgages. Total loan production and combined exposure related to these products recorded in finance receivables and loans and loans held for sale for the years ended and as of December 31, 2006 and 2005 is summarized as follows:
 
                                 
        Unpaid principal
    Loan production
  balance as of
    for the year   December 31,
($ in millions)   2006   2005   2006   2005
 
Interest only mortgage loans
  $ 48,335     $ 43,298     $ 22,416     $ 19,361  
Payment option adjustable rate mortgage loans
    18,308       5,077       1,955       1,114  
High loan-to-value (100% or more) mortgage loans
    8,768       6,610       11,978       13,364  
Below market initial rate (teaser) mortgages
    257       537       192       411  
 
 
 
The underwriting guidelines for these products takes into consideration the borrower’s capacity to repay the loan and credit


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Management’s Discussion and Analysis
GMAC LLC  Form 10-K
 

history. We believe our underwriting procedures adequately consider the unique risks which may come from these products. We conduct a variety of quality control procedures and periodic audits to ensure compliance with our underwriting standards.
 
  Interest-only mortgages — Allow interest-only payments for a fixed period of time. At the end of the interest-only period, the loan payment includes principal payments and increases significantly. The borrower’s new payment, once the loan becomes amortizing (i.e., includes principal payments), will be greater than if the borrower had been making principal payments since the origination of the loan.
 
  Payment option adjustable rate mortgages — Permit a variety of repayment options. The repayment options include minimum, interest-only, fully amortizing 30-year and fully amortizing 15-year payments. The minimum payment option sets the monthly payment at the initial interest rate for the first year of the loan. The interest rate resets after the first year, but the borrower can continue to make the minimum payment. The interest-only option sets the monthly payment at the amount of interest due on the loan. If the interest-only option payment would be less than the minimum payment, the interest-only option is not available to the borrower. Under the fully amortizing 30-year and 15-year payment options, the borrower’s monthly payment is set based on the interest rate, loan balance and remaining loan term.
 
  High loan-to-value mortgages — Defined as first-lien loans with loan-to-value ratios in excess of 100% or second-lien loans that when combined with the underlying first-lien mortgage loan result in a loan-to-value ratio in excess of 100%.
 
  Below market rate (teaser) mortgages — Contain contractual features that limit the initial interest rate to a below market interest rate for a specified time period with an increase to a market interest rate in a future period. The increase to the market interest rate could result in a significant increase in the borrower’s monthly payment amount.
 
 
  Insurance
 
Results of Operations
The following table summarizes the operating results of our Insurance operations for the periods indicated. The amounts presented are before the elimination of balances and transactions with our other operating segments.
 
                                         
                      2006-2005
    2005-2004
 
Year ended December 31, ($ in millions)   2006     2005     2004     % change     % change  
   
Revenue
                                       
Insurance premiums and service revenue earned
    $4,149       $3,729       $3,502       11       6  
Investment income
    1,321       408       345       224       18  
Other income
    146       122       136       20       (10 )
                 
                 
Total Insurance premiums and other income
    5,616       4,259       3,983       32       7  
Insurance losses and loss adjustment expenses
    (2,420 )     (2,355 )     (2,371 )     3       (1 )
Acquisition and underwriting expense
    (1,478 )     (1,186 )     (1,043 )     25       14  
Premium tax and other expense
    (92 )     (86 )     (83 )     7       4  
                 
                 
Income before income taxes
    1,626       632       486       157       30  
Income tax expense
    (499 )     (215 )     (157 )     132       37  
                 
                 
Net income
    $1,127       $417       $329       170       27  
                 
                 
Total assets
  $ 13,424     $ 12,624     $ 11,744       6       8  
                 
                 
Insurance premiums and service revenue written
    $4,001       $4,039       $3,956       (1 )     2  
                 
                 
Combined ratio (a)
    92.3 %     93.9 %     95.7 %                
 
 
 
                                       
(a)  Management uses combined ratio as a primary measure of underwriting profitability, with its components measured using accounting principles generally accepted in the United States of America. Underwriting profitability is indicated by a combined ratio under 100% and is calculated as the sum of all reported losses and expenses (excluding interest and income tax expense) divided by the total of premiums and service revenues earned and other income.
 
2006 Compared to 2005
Net income from Insurance totaled a record $1.1 billion in 2006, as compared to $417 million in 2005. The increase in income was mainly a result of higher realized capital gains of approximately $1.0 billion in 2006 as compared to $108 million in 2005. Underwriting results were favorable primarily due to increased insurance premiums and service revenue earned and improved loss and loss adjustment expense experience partially offset by higher


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Management’s Discussion and Analysis
GMAC LLC  Form 10-K
 

expenses, resulting in a favorable decline of 1.6% in the combined ratio. In addition, 2006 results were enhanced by the first quarter acquisition of MEEMIC, a consumer products business that offers automobile and homeowners insurance in the Midwest.
 
Insurance premiums and service revenue earned grew by $420 million, or 11%, over 2005. This increase was driven by the extended service contract line primarily due to premiums and revenue from a higher volume of contracts written in prior years. Growth in domestic consumer products, mainly from the acquisition of MEEMIC, was partially offset by a decline in existing business due to a competitive environment. In addition, domestic and international assumed reinsurance businesses grew due to new product introductions, while international consumer products have seen improvement in existing business.
 
Investment income increased by $913 million or 224% in 2006 compared to 2005. The increase was primarily attributable to higher realized capital gains, as well as increased interest and dividend income due to higher average portfolio balances throughout the majority of the year. During the fourth quarter, as part of our investment and capital strategy, the Insurance operations completed a securities portfolio review and decided to reduce the elevated investment leverage and redirect capital for growth strategies and dividends. This was achieved by reducing the investment in equity securities from just over 30% of total invested assets to under 10%. The proceeds from the sales have been either invested in fixed income securities or will be used to remit dividends in 2007. The market value of the investment portfolio was $7.6 billion and $7.7 billion at December 31, 2006 and 2005, respectively.
 
Insurance losses and loss adjustment expenses increased by $65 million, or 3%. The increase was primarily driven by the acquisition of MEEMIC and growth in the domestic assumed reinsurance and international consumer products businesses. This increase was partially offset by favorable loss trends experienced in the domestic and international extended service contract product lines driven by product mix, improved vehicle quality and aggressive loss control efforts and lower losses in domestic consumer products due to decreased earned premium. Acquisition and underwriting expenses increased $292 million, or 25% in 2006, as compared to 2005, due to higher insurance premiums and service revenue earned and higher amortization of deferred acquisition costs.
 
Insurance premiums and service revenue written totaled $4.0 billion in 2006, unchanged from 2005. Impacts in the year can be attributed to fewer extended service contracts sold, lower levels of new business and renewals in domestic consumer products due to a competitive marketplace and the discontinuation of our force-place products. The primary factors impacting extended service contract volume throughout the year were declining vehicle retail sales for GM brand products and lower penetration. The decrease in written business was partially offset by the acquisition of MEEMIC and growth in the assumed reinsurance product line with the introduction of new products.
 
In addition, the results were impacted by GM’s announcement in the third quarter that it was extending its powertrain warranty in the United States and Canada across its entire 2007 car and light-duty truck lineup. The warranty extension provides coverage for up to five years or 100,000 miles. GM also expanded its roadside assistance and courtesy transportation programs to match the powertrain warranty term. Refunds of $9.7 million were made in the fourth quarter to customers who had already purchased an extended service contract on a 2007 GM vehicle. The ongoing financial impact is expected to be mitigated by alternative products offered to customers immediately after the announcement of the warranty extension.
 
2005 Compared to 2004
Insurance generated record net income of $417 million in 2005, up $88 million or 27% over the previous record earnings in 2004 of $329 million. The higher net income is evidenced by a decrease in the combined ratio to 93.9% from the prior year of 95.7%, primarily driven by improved loss experience. The increase reflects a combination of strong results achieved through increased premium revenue, higher realized capital gains and improved investment portfolio performance. The favorable impact of these items during 2005 was partially offset by increased acquisition and underwriting expenses and higher income taxes, commensurate with increased volumes and revenues.
 
The 6% increase in insurance premiums and service revenue earned was driven by business growth across major product lines (domestic and international). Consumer products experienced higher volumes in a highly competitive market, partly driven by the acquisition of several fleet contracts in Mexico. In addition, automotive extended service contracts experienced volume growth, with strong growth outside of the traditional General Motors Protection Plan. Increased earnings were also driven by multi-year extended service contracts and the Guaranteed Asset Protection product written in prior years entering higher earning rate periods. This was partially offset by lower revenues for the automobile dealer physical damage product due to lower dealer inventories.
 
The increase in investment income was attributable to higher interest and dividends from a larger portfolio balance through the majority of the year, as well as a higher yield on the fixed income portfolio. In addition, a higher amount of capital gains was realized in comparison to 2004. Certain securities were liquidated in December 2005 in anticipation of the acquisition of MEEMIC Insurance Company, which was completed on January 4, 2006, with a purchase price of $325 million.
 
Industry and Competition
We operate in a highly competitive environment and face significant competition from insurance carriers, reinsurers, third-party administrators, brokers and other insurance-related companies. Competitors in the property and casualty markets in which we operate consist of large multi-line companies and smaller specialty carriers. Our competitors sell directly to customers through the mail


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Management’s Discussion and Analysis
GMAC LLC  Form 10-K
 

or the internet, or they use agency sales forces. None of the companies in this market, including us, holds a dominant overall position in these markets.
 
Through our Insurance operations, we provide automobile and homeowners insurance, automobile mechanical protection, reinsurance and commercial insurance. We primarily operate in the United States; however, we also have operations in the United Kingdom, Canada, Mexico, and throughout Europe and Latin America.
 
Factors affecting our consumer products business include overall demographic trends that impact the volume of vehicle owners requiring insurance policies, as well as claims behavior. Since the business is highly regulated in the U.S. by state insurance agencies and primarily by national regulators outside the U.S., differentiation is largely a function of price and service quality. In addition to pricing policies, profitability is a function of claims costs as well as investment income. Although the industry does not experience significant seasonal trends, it can be negatively impacted by extraordinary weather conditions that can affect frequency and severity of automobile claims. Our automotive extended service contract business is dependent on new vehicle sales and market penetration.
 
The Insurance operations are subject to market pressures which can result in price erosion in the personal automobile and commercial insurance products. In addition, future performance can be impacted by extraordinary weather that can affect frequency and severity of automobile and other contract claims.
 
While we expect that contract volumes will grow, we are unable to predict if market pricing pressures will adversely impact future performance.
 
Royalty Arrangement
For certain insurance products, GM and GMAC have entered into agreements allowing GMAC to use the GM name on certain insurance products. In exchange, GMAC will pay to GM a minimum annual guaranteed royalty fee of $15 million.
 
Consumer Products
We underwrite and market non-standard, standard and preferred risk physical damage and liability insurance coverages for private passenger automobiles, motorcycles, recreational vehicles and commercial automobiles through independent agency, direct response and internet channels. Additionally, we market private-label insurance through a long-term agency relationship with Homesite Insurance, a national provider of home insurance products. We currently operate in 48 states and the District of Columbia in the United States, with a significant amount of our business written in California, Florida, Michigan, New York and North Carolina.
 
As of December 31, 2006, we had approximately 1.9 million consumer products policyholders. Our consumer product policies are offered on a direct response basis through affinity groups, worksite programs, the internet and through an extensive network of independent agencies. Approximately 435,000 of our policyholders were GM-related persons as of December 31, 2006. Through our relationship with GM, we utilize direct response and internet channels to reach GM’s current employees and retirees, as well as their families, and GM dealers and suppliers and their families. We have similar programs that utilize relationships with affinity groups. In addition, we reach a broader market of customers through independent agents and internet channels.
 
While we underwrite most of the consumer products we offer, we do not underwrite the homeowners insurance offered through the GMAC Insurance Homeowners Program. The GMAC Insurance Homeowners Program is a long-term agency relationship between GMAC Insurance and Homesite Insurance, a national provider of home insurance products. The relationship provides for Homesite Insurance to be the exclusive underwriter of homeowners insurance for our direct automobile and home insurance customer base, with Homesite Insurance assuming all underwriting risk and administration responsibilities. We receive a commission based on the policies written through this program.
 
ABA Seguros, one of Mexico’s largest automobile insurers, is a subsidiary of GMAC Insurance. ABA Seguros underwrites personal automobile insurance and certain consumer and commercial business coverages exclusively in Mexico. In Europe, we assume selected motor insurance risks, including credit life, through programs with Vauxhall, Opel and SAAB vehicle owner relationships as well as similar programs in Latin America and Asia Pacific regions. We also sell personal automobile insurance in Ontario and Quebec, Canada and in Germany.
 
Other Consumer Products
We are a leading provider of automotive extended service contracts with mechanical breakdown and maintenance coverages. Our automotive extended service contracts offer vehicle owners and lessees mechanical repair protection and roadside assistance for new and used vehicles beyond the manufacturer’s new vehicle warranty. These extended service contracts are marketed through automobile dealerships, on a direct response basis and through independent agents in the U.S. and Canada. The extended service contracts cover virtually all vehicle makes and models; however, our flagship extended service contract product is the General Motors Protection Plan. A significant portion of our overall vehicle service contracts is through the General Motors Protection Plan and covers vehicles manufactured by General Motors and its subsidiaries.
 
Our other products include Guaranteed Asset Protection (GAP) Insurance, which allows the recovery of a specified economic loss beyond the insured value. Internationally, our U.K.-based Car Care Plan subsidiary sells GAP products and provides automotive extended service contracts to customers via direct and dealer distribution channels; it is a leader in the extended service contract market in the U.K. Car Care Plan also operates in Mexico, Brazil and Germany.


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Management’s Discussion and Analysis
GMAC LLC  Form 10-K
 

 
Commercial Products
We provide commercial insurance, primarily covering dealers’ wholesale vehicle inventory, and reinsurance products. Internationally, ABA Seguros provides certain commercial business insurance exclusively in Mexico and Car Care Plan reinsures dealer vehicle inventory in Europe, Latin America and Asia Pacific.
 
We are a market leader with respect to wholesale vehicle inventory insurance. Our wholesale vehicle inventory insurance provides physical damage protection for dealers’ floor plan vehicles. It includes coverage for both GMAC and non-GMAC financed inventory and is available in the U.S. to virtually all new car franchise dealerships.
 
We also conduct reinsurance operations primarily in the United States market through our subsidiary, GMAC RE, which underwrites diverse property and casualty risks. Reinsurance coverage is primarily insurance for insurance companies, designed to stabilize their results, protect against unforeseen events and facilitate business growth. We primarily provide reinsurance through broker treaties and direct treaties with other insurers, and we also provide facultative reinsurance. Facultative reinsurance allows the reinsured party the option of submitting individual risks and allows the reinsurer the option of accepting or declining individual risks. Reinsurance products are offered internationally, generated primarily from GM and GMAC distribution channels.
 
International operations also manage a fee-focused insurance program on which commissions are earned from third party insurers offering insurance products primarily to GMAC customers worldwide.
 
Underwriting and Risk Management
We determine the premium rates for our insurance policies and pricing for our extended service contracts based upon an analysis of expected losses using historical experience and anticipated future trends. For example, in pricing our extended service contracts, we make assumptions as to the price of replacement parts and repair labor rates in the future.
 
In underwriting our insurance policies and extended service contracts, we assess the particular risk involved and determine the acceptability of the risk, as well as the categorization of the risk for appropriate pricing. We base our determination of the risk on various assumptions tailored to the respective insurance product. With respect to extended service contracts, assumptions include the quality of the vehicles produced and new model introductions. Personal automotive insurance assumptions include individual state regulatory requirements.
 
In some instances, ceded reinsurance is used to reduce the risk associated with volatile businesses, such as catastrophe risk in United States dealer vehicle inventory insurance or smaller businesses, such as Canadian automobile or European dealer vehicle inventory insurance. In 2006 we ceded approximately 12% of our consumer products insurance premiums to government-managed pools of risk. Our consumer products business is covered by traditional catastrophe protection, aggregate stop loss protection and an extension of catastrophe coverage for hurricane events. In addition, loss control techniques, such as hail nets or storm path monitoring to assist dealers in preparing for severe weather, help to mitigate loss potential.
 
We mitigate losses by the active management of claim settlement activities using experienced claims personnel and the evaluation of current period reported claims. Losses for these events may be compared to prior claims experience, expected claims or loss expenses from similar incidents to assess the reasonableness of incurred losses.
 
Loss Reserves
In accordance with industry and accounting practices and applicable insurance laws and regulatory requirements, we maintain reserves for both reported losses and losses incurred but not reported, as well as loss adjustment expenses. These reserves are based on various estimates and assumptions and are maintained both for business written on a current basis and policies written and fully earned in prior years, to the extent there continues to be outstanding and open claims in the process of resolution. Refer to the Critical Accounting Estimates section of this MD&A and Note 1 to our Consolidated Financial Statements for further discussion. The estimated values of our prior reported loss reserves and changes to the estimated values are routinely monitored by credentialed actuaries. Our reserve estimates are regularly reviewed by management. However, since the reserves are based on estimates and numerous assumptions, the ultimate liability may differ from the amount estimated.
 
Investments
A significant aspect of our Insurance operations is the investment of proceeds from premiums and other revenue sources. We will use these investments to satisfy our obligations related to future claims at the time such claims are settled. Investment securities are classified as available for sale and carried at fair value. Holding period losses on investment securities that are considered by management to be other than temporary are recognized in earnings, through a write-down in the carrying value to the current fair value of the investment. Unrealized gains or losses (excluding other than temporary impairments) are included in other comprehensive income, as a component of equity. Fair value of fixed income and equity securities is based upon quoted market prices where available.
 
Our Insurance operations have a Finance Committee, which develops guidelines and strategies for these investments. The guidelines established by this finance committee reflect our risk tolerance, liquidity requirements, regulatory requirements and rating agencies considerations, among other factors. Our investment portfolio is managed by General Motors Asset Management (GMAM). GMAM directly manages certain portions of our insurance investment portfolio and recommends, oversees and evaluates specialty asset managers in other areas.


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Management’s Discussion and Analysis
GMAC LLC  Form 10-K
 

 
Financial Strength Ratings
Substantially all of our U.S. Insurance operations have a Financial Strength Rating (FSR) and an Issuer Credit Rating (ICR) from A.M. Best Company. Our Insurance operations outside the U.S. are not rated. The FSR is intended to be an indicator of the ability of the insurance company to meet its senior most obligations to policyholders. Lower ratings generally result in fewer opportunities to write business as insureds, particularly large commercial insureds, and insurance companies purchasing reinsurance, have guidelines requiring high FSR ratings.
 
On November 30, 2006, A.M. Best confirmed the FSR of our U.S. Insurance companies at A− and raised the outlook to stable.
 
  Other Operations
 
In 2006, net loss for our Other operations was $881 million as compared to $36 million in 2005. The decrease from the prior year was mainly due to the decline in our income from Capmark (our former commercial mortgage operation) of $237 million due to the sale of 79% of the business on March 23, 2006, additional non-cash goodwill impairment charges, higher loss provisions and the tax impact related to the company’s LLC conversion.
 
At our Commercial Finance Group, we recognized non-cash goodwill and intangible asset impairment charges in accordance with Statements of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142) and No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), of $840 million ($695 million after-tax) during 2006 as the carrying value for the assets were greater than their fair value based on a discounted cash flow model. The business also experienced a goodwill impairment charge of $712 million ($439 million after-tax) million in 2005. All goodwill for our Other operations has been written off as of December 31, 2006. The provision for credit losses increased by $122 million mostly due to a decline in the present value of expected future cash flows or collateral value, for collateral dependent loans, resulting from management’s decision to take a liquidate versus hold approach to many troubled legacy accounts. Higher funding and maintenance costs on these primarily non-earning loans drove the change in approach. Finally, the results were also unfavorably impacted by the write-off of $115 million of deferred tax assets related to the LLC conversion.
 
Net financing revenue and other income decreased mainly from the sale of Capmark in 2006, as the results of operations of Capmark were fully consolidated in 2005.
 
In 2005, our Other operations incurred a net loss of $36 million as compared to net income of $320 million in 2004. The decrease mainly resulted from goodwill impairment in 2005 of $712 million ($439 million after-tax) related to our Commercial Finance Group and our affordable housing partnership business within our former commercial mortgage business. These charges resulted from the carrying value for the assets were greater than their fair value based on a discounted cash flow model, as determined during our annual impairment tests required to be made for all of our reporting units in accordance with SFAS 142. Net income was also negatively affected by an increase in other noninterest expense of $77 million. These declines were partially offset by increases in net financing revenue and other income of $307 million due to higher loan production and asset levels and lower income taxes of $126 million due to lower earnings.


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Management’s Discussion and Analysis
GMAC LLC  Form 10-K
 

  Funding and Liquidity
 
Funding Sources and Strategy
Our liquidity and our ongoing profitability is, in large part, dependent upon our timely access to capital and the costs associated with raising funds in different segments of the capital markets. Over the past several years, our funding strategy has focused on the development of diversified funding sources across a global investor base, both public and private and, as appropriate, the extension of debt maturities. This diversification has been achieved in a variety of ways, including whole loan sales, the public debt capital markets, conduit facilities and asset-backed securities, as well as through deposit-gathering and other financing activities.
 
In 2006, as part of the Sale Transactions, GMAC was able to further diversify our funding through the issuance of $2.1 billion in preferred interests to FIM Holdings, GM and GM Preferred Finance Co. Holdings, Inc. Additionally, as a result of the Sale Transactions and improved credit ratings, our unsecured credit spreads tightened.
 
During the first quarter of 2007, under the terms of the purchase and sale agreement between FIM Holdings and GM, a final purchase price adjustment is required to the extent that GMAC’s equity upon the November 30, 2006 closing of the sale transaction differs from a specified level. As a result, we expect to receive a common equity injection from GM of approximately $1 billion, based on these final settlement provisions.
 
In 2005, as a result of a series of credit rating downgrades, our unsecured credit spreads widened to unprecedented levels. In anticipation of and as a result of these credit rating actions, we modified our diversified funding strategy to focus on secured funding and automotive whole loan sales. These funding sources are generally unaffected by ratings on unsecured debt and, therefore, offer both relative stability in spread and access to the market.
 
The diversity of our funding sources enhances funding flexibility, limits dependence on any one source of funds and results in a more cost effective strategy over the longer term. In developing this approach, management considers market conditions, prevailing interest rates, liquidity needs and the desired maturity profile of our liabilities. This strategy has helped us maintain liquidity during periods of weakness in the capital markets, changes in our business or changes in our credit ratings. Despite our diverse funding sources and strategies, our ability to maintain liquidity may be affected by certain risk. Refer to Risk Factors in Item 1A. for further discussion.
 
The following table summarizes debt and other sources of funding by source for the periods indicated:
                 
    Outstanding
        2005
December 31, ($ in millions)   2006   (Restated)
 
 
Commercial paper
    $1,523       $524  
Institutional term debt
    70,266       82,538  
Retail debt programs
    29,308       34,482  
Secured financings
    123,485       121,138  
Bank loans and other
    12,512       15,704  
 
 
Total debt (a)
    237,094       254,386  
Bank deposits (b)
    10,488       6,855  
Off-balance sheet securitizations: (c)
               
Retail finance receivables
    7,456       3,165  
Wholesale loans
    18,624       20,724  
Mortgage loans
    118,918       77,573  
 
 
Total funding
    392,580       362,703  
Less: cash reserves (d)
    (18,252 )     (19,605 )
 
 
Net funding
  $ 374,328     $ 343,098  
 
 
Leverage ratio per covenant (e)
    10.8:1       7.6:1  
 
 
Funding commitments ($ in billions)
               
Bank liquidity facilities (f)
    $43.8       $44.1  
Secured funding facilities (g)
    $188.7       $161.8  
 
 
(a)  Excludes fair value adjustment as described in Note 12 to our Consolidated Financial Statements.
(b)  Includes consumer and commercial bank deposits and dealer wholesale deposits.
(c)  Represents net funding from securitizations of retail and wholesale automotive receivables and mortgage loans accounted for as sales, as further described in Note 7 to our Consolidated Financial Statements.
(d)  Includes $15.5 billion cash and cash equivalents and $2.8 billion invested in marketable securities at December 31, 2006, and $15.4 billion and $4.2 billion, respectively, at December 31, 2005.
(e)  As described in Note 12 to our Consolidated Financial Statements, our liquidity facilities and certain other funding facilities contain a leverage ratio covenant of 11.0:1, which excludes from debt certain securitization transactions that are accounted for on-balance sheet as secured financings (totaling $81,461 and $94,346 at December 31, 2006, and December 31, 2005, respectively).
(f)   Represents both committed and uncommitted bank liquidity facilities. Refer to Note 12 to our Consolidated Financial Statements for details.
(g)  Represents both committed and uncommitted secured funding facilities. Includes commitments with third-party asset-backed commercial paper conduits, as well as forward flow sale agreements with third parties, securities purchase commitments with third parties and repurchase facilities. Refer to Note 12 to our Consolidated Financial Statements for further details.


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Management’s Discussion and Analysis
GMAC LLC  Form 10-K
 

 
Short-term Debt
We obtain short-term funding from the sale of floating rate demand notes under a program referred to as GMAC LLC Demand Notes. These notes can be redeemed at any time at the option of the holder thereof without restriction.
 
Long-term Unsecured Debt
Our long-term unsecured financings are generated to fund long-term assets, over-collateralization required to support our conduits, the liquidity portfolio and the continued growth of our loan portfolios. We meet these financing needs from a variety of sources, including public corporate debt and credit facilities. The public corporate debt markets are a key source of financing for us. We access these markets by issuing senior unsecured notes, but are pursuing other structures that will provide efficient sources of term liquidity. Following the Sale Transactions and after being absent from the U.S. capital markets for a couple years, on December 15, 2006, we issued $1 billion of Senior Unsecured Notes due December 15, 2011.
 
GMAC has various liquidity facilities with a number of different lenders in multiple jurisdictions. As a result of having to restate prior period financial information to eliminate hedge accounting treatment that had been applied to certain callable debt hedged with derivatives, it is possible that some of our lenders under certain of our liquidity facilities could claim that they are not obligated to honor their commitments. While such a claim would not be entirely unreasonable, we believe that any such claims would not be sustainable. Nor do we believe that this matter is likely to be tested, because we have no current need or intention to draw on any of the more significant existing facilities, and renewal and revision of them is imminent, which likely will eliminate the issue. There can be no assurance that we are correct in our assessments. If we are not, and multiple claims were asserted and substantiated, available funding under certain of our liquidity facilities could be adversely impacted. However, we believe such an impact is manageable because of our current, substantial liquidity position, including $18.3 billion of global cash balances, among various other sources of liquidity.
 
From time to time, we repurchase previously issued debt as part of our cash and liquidity management strategy. In October 2006 we successfully completed a debt tender offer to retire $1 billion of deferred interest debentures, which will contribute to interest savings going forward.
 
We have also been able to diversify our unsecured funding through the formation of ResCap. ResCap, an indirect wholly owned subsidiary, was formed as the holding company of our residential mortgage businesses and, in the second quarter of 2005, successfully achieved an investment grade rating (separate from GMAC). In the fourth quarter of 2005, ResCap filed a $12 billion shelf registration statement and has subsequently issued $8.5 billion of notes through December 31, 2006.
 
Secured Financings and Off-Balance Sheet Securitizations
As part of our ongoing funding and risk management practices, we have established secondary market trading and securitization arrangements that provide long-term financing primarily for our automotive and mortgage loans. We have had consistent and reliable access to these markets through our securitization activities in the past and expect to continue to access the securitization markets. Refer to the Off Balance Sheet Arrangements section of this MD&A for further detail.
 
In 2006 approximately 91% of our U.S. Automotive volume was funded through a secured funding arrangement or automotive whole loan sale. The increased use of whole loan sales is part of the migration to an “originate and sell” model for our U.S. Automotive Finance business. In 2006 we executed approximately $16 billion in automotive whole loan sales.
 
Customer Deposits
Through our banking activities in our Automotive Finance and ResCap operations, bank deposits (certificates of deposits and brokered deposits) have become an important funding source for us.
 
Cash Reserves
We maintain a large cash reserve, including certain marketable securities that can be utilized to meet our obligations in the event of any market disruption. GMAC ended the year with exceptional liquidity. Cash and cash equivalents and certain marketable securities totaled $18.3 billion as of December 31, 2006, up from $14.1 billion on September 30, 2006. The increase in cash reflects stronger-than-expected capital markets during the fourth quarter, which allowed GMAC and ResCap to raise additional unsecured funds at cost effective levels.
 
Other Sources
On March 23, 2006, we completed the sale of approximately 79% of our equity in Capmark. Under the terms of the transaction, we received $8.8 billion at closing, which is comprised of sale proceeds and repayment of intercompany debt, thereby increasing our liquidity position and reducing the amount of funding required.
 
Funding Commitments
We actively manage our liquidity and mitigate our liquidity risk by maintaining sufficient short-term and long-term financing, maintaining diversified secured funding programs and maintaining sufficient reserve liquidity. Refer to Note 12 for further detail.
 
In April 2006 in conjunction with the announcement of the sale of 51% of GMAC, we announced that we expected to arrange two asset-backed funding facilities totaling up to $25 billion, which would support our ongoing business and enhance our liquidity position. Citigroup has committed $12.5 billion in aggregate to these two facilities. In August 2006, we closed on the first of the two asset backed funding facilities, a three year, $10 billion facility with a subsidiary of Citigroup. In a review of GMAC’s overall liquidity position, GMAC has decided to pursue a smaller asset-based funding facility and is in the process of structuring that facility at the present time. The funding facilities are in addition to Citigroup’s initial equity investment in FIM Holdings.
 
Credit Ratings
The cost and availability of unsecured financing is influenced by credit ratings, which are intended to be an indicator of the


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GMAC LLC  Form 10-K
 

creditworthiness of a particular company, security or obligation. Lower ratings generally result in higher borrowing costs as well as reduced access to capital markets. This is particularly true for certain term debt institutional investors whose investment guidelines require investment grade term ratings and for short-term institutional investors (money market investors in particular) whose investment guidelines require the two highest rating categories for short-term debt. Substantially all of our debt has been rated by nationally recognized statistical rating organizations.
 
Concerns over the competitive and financial strength of GM, including how it will fund its health care liabilities and uncertainties at Delphi Corporation, resulted in a series of credit rating actions, which commenced late in 2001. In the second and third quarters of 2005, Standard & Poor’s, Fitch and Moody’s downgraded GMAC’s senior debt to a non-investment grade rating with DBRS continuing to maintain an investment grade rating on our senior debt. In the fourth quarter of 2005, Fitch and S&P downgraded our ratings further. As a result of GM’s announcement on October 17, 2005, that it was exploring the possible sale of a controlling interest in us to a strategic partner, the four rating agencies changed our review status to either evolving or developing. On March 16, 2006, Moody’s placed our senior unsecured ratings under review for a possible downgrade. Following the April 3, 2006 announcement by GM that it agreed to sell a 51% interest in us, Fitch revised our rating watch status to Positive from Evolving, indicating that the ratings may be upgraded or maintained at current levels. As a result of the consummation of GM’s sale of a controlling stake in GMAC, S&P and Fitch raised GMAC’s ratings, although they remain below investment grade. Fitch removed the rating from Ratings Watch, and S&P removed the rating from CreditWatch. Both DBRS and Moody’s affirmed our ratings.
 
The following table summarizes our current ratings, outlook and the date of last rating or outlook change by the respective nationally recognized rating agencies.
 
                         
Rating
  Commercial
  Senior
      Date of
agency   paper   debt   Outlook   last action
 
Fitch
  B   BB+   Positive   November 30, 2006 (a)
Moody’s
  Not-Prime   Ba1   Negative   November 30, 2006 (b)
S&P
  B-1   BB+   Developing   November 27, 2006 (c)
DBRS
  R-3   BBB (low)   Stable   November 30, 2006 (d)
 
 
(a)  Fitch upgraded our senior debt to BB+ from BB, affirmed the commercial paper rating of B, and removed the rating from Rating Watch on November 30, 2006. The outlook remained Positive.
(b)  Moody’s confirmed our senior debt rating at Ba1 and the commercial paper rating at Not-Prime, removed the rating from CreditWatch and maintained the outlook at Negative on November 30, 2006.
(c)  Standard & Poor’s upgraded our senior debt to BB+ from BB, confirmed the commercial paper rating of B-1, removed the rating from CreditWatch and maintained the Developing outlook on November 27, 2006.
(d)  DBRS confirmed our senior debt of BBB (low) and the commercial paper rating of R-3, removed the rating from Under Review status and changed the outlook from Developing to Stable on November 30, 2006.
 
In addition, ResCap, our indirect wholly owned subsidiary, has investment grade ratings (separate from GMAC) from the nationally recognized rating agencies. The following table summarizes ResCap’s current ratings, outlook and the date of the last rating or outlook change by the respective agency.
 
                         
Rating
  Commercial
  Senior
      Date of
agency   paper   debt   Outlook   last action
 
Fitch
  F2   BBB   Positive   November 30, 2006 (a)
Moody’s
  P-3   Baa3   Stable   November 30, 2006 (b)
S&P
  A-3   BBB   Negative   November 27, 2006 (c)
DBRS
  R-2 (middle)   BBB   Stable   November 30, 2006 (d)
 
 
(a)  Fitch upgraded the senior debt of ResCap to BBB from BBB–, upgraded the commercial paper rating to F2 from F3, removed the ratings from Rating Watch Positive and maintained the outlook at Positive on November 30, 2006.
(b)  Moody’s affirmed its rating of the senior debt of ResCap at Baa3 and of the commercial paper rating at P3, removed the review status of the long-term debt ratings and assigned a stable outlook at November 30, 2006.
(c)  Standard & Poor’s upgraded the senior debt of ResCap to BBB from BBB–, affirmed the short-term rating of A-3, removed the ratings from Credit Watch and changed the outlook from Evolving to Negative on November 27, 2006.
(d)  DBRS initial ratings for ResCap were assigned and on October 11, 2005, DBRS placed the ratings under review with developing implications and affirmed the review status on October 17, 2005. On November 30, 2006, DBRS affirmed ResCap’s short- and long-term ratings, removed the rating from Under Review status and changed the outlook from Developing to Stable.
 
Derivative Financial Instruments
In managing the interest rate and foreign exchange exposures of a multinational finance company, we utilize a variety of interest rate and currency derivative financial instruments. As an end user of these financial instruments, we are in a better position to minimize our funding costs, enhancing our ability to offer attractive, competitive financing rates to our customers. Our derivative financial instruments consist primarily of interest rate swaps, futures and options, currency swaps, and forwards used to hedge related assets or funding obligations. The use of these instruments is further described in Note 15 to our Consolidated Financial Statements.
 
Derivative financial instruments involve, to varying degrees, elements of credit risk in the event a counterparty should default, and market risk, as the instruments are subject to rate and price fluctuations. Credit risk is managed through periodic monitoring and approval of financially sound counterparties and through limiting the potential credit exposures to individual counterparties to predetermined exposure limits. Market risk is inherently limited by the fact that the instruments are used for risk management purposes only and, therefore, generally designated as hedges of assets or liabilities. Market risk is also managed on an ongoing basis by monitoring the fair value of each financial instrument position and further by measuring and monitoring the volatility of such positions, as further described in the Market Risk section of this MD&A.


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GMAC LLC  Form 10-K
 

  Off-balance Sheet Arrangements
 
We use off-balance sheet entities as an integral part of our operating and funding activities. The arrangements include the use of qualifying special purpose entities (QSPEs) and variable interest entities (VIEs) for securitization transactions, mortgage warehouse facilities and other mortgage-related funding programs. The majority of our off-balance sheet arrangements consist of securitization structures believed to be similar to those used by many other financial service companies.
 
The following table summarizes assets carried off-balance sheet in these entities.
 
                 
December 31, ($ in billions)   2006   2005
 
 
Securitization (a)
               
Retail finance receivables
    $8.2       $6.0  
Wholesale loans
    19.9       21.4  
Mortgage loans
    121.7       79.4  
 
 
Total securitization
    149.8       106.8  
Other off-balance sheet activities
Mortgage warehouse
    0.3       0.6  
Other mortgage
    0.1       0.2  
 
 
Total off-balance sheet activities
  $ 150.2     $ 107.6  
 
 
(a)  Includes only securitizations accounted for as sales under SFAS 140, as further described in Note 7 to our Consolidated Financial Statements.
 
Securitization
As part of our ongoing operations and overall funding and liquidity strategy, we securitize consumer automotive finance retail contracts, wholesale loans, mortgage loans, and asset-backed securities. Securitization of assets allows us to diversify funding sources by enabling us to convert assets into cash earlier than what would have occurred in the normal course of business and to support the core activities of Automotive Finance and ResCap relative to originating and purchasing finance receivables and loans. Termination of our securitization activities would reduce funding sources for both Automotive Finance and ResCap and disrupt the core mortgage banking activity, adversely impacting our operating results.
 
Information regarding our securitization activities is further described in Note 7 to our Consolidated Financial Statements. As part of these activities, assets are generally sold to bankruptcy-remote subsidiaries. These bankruptcy-remote subsidiaries are separate legal entities that assume the risk and reward of ownership of the receivables. Neither we nor these subsidiaries are responsible for the other entities’ debts, and the assets of the subsidiaries are not available to satisfy our claim or those of our creditors. In turn, the bankruptcy-remote subsidiaries establish separate trusts to which they transfer the assets in exchange for the proceeds from the sale of asset- or mortgage-backed securities issued by the trust. The trusts’ activities are generally limited to acquiring the assets, issuing asset- or mortgage-backed securities, making payments on the securities and periodically reporting to the investors. Due to the nature of the assets held by the trusts and the limited nature of each trust’s activities, most trusts are QSPEs, in accordance with Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS 140). In accordance with SFAS 140, assets and liabilities of the QSPEs are generally not consolidated in our Consolidated Balance Sheet, and therefore, we account for the transfer of assets into the QSPE as a sale.
 
Certain of our securitization transactions, while similar in legal structure to the transactions described in the foregoing (i.e., the assets are legally sold to a bankruptcy-remote subsidiary), do not meet the isolation and control criteria of SFAS 140 and, therefore, are accounted for as secured financings. As secured financings, the underlying automotive finance retail contracts, automotive leases or mortgage loans remain in our Consolidated Balance Sheet with the corresponding obligation (consisting of the debt securities issued) reflected as debt. We recognize income on the finance receivables, automotive leases and loans and interest expense on the securities issued in the securitization, and we provide for credit losses on the finance receivables and loans as incurred. Approximately $94.3 billion and $98.7 billion of our finance receivables, automotive leases and loans were related to secured financings at December 31, 2006 and 2005, respectively. Refer to Note 12 to our Consolidated Financial Statements for further discussion.
 
The increase in the amount of mortgage loans carried in off-balance sheet facilities reflects ResCap’s increased use of securitization transactions accounted for as sales versus those accounted for as secured financings, and whole loan sales in order to take advantage of certain market conditions in 2006 in which it was, more economical to securitize or sell the credit risk on nonprime and home equity products, from a pricing and execution perspective, than to retain them on-balance sheet.
 
As part of our securitization activities, we typically agree to service the transferred assets for a fee, and we may earn other related ongoing income. We may also retain a portion of senior and subordinated interests issued by the trusts; for transactions accounted for as sales, these interests are reported as investment securities in our Consolidated Balance Sheet and are disclosed in Note 7 to our Consolidated Financial Statements. Subordinate interests typically provide credit support to the more highly rated senior interests in a securitization transaction and may be subject to all or a portion of the first loss position related to the sold assets. The amount of the fees earned and the levels of retained interests that we maintain are disclosed in Note 5 to our Consolidated Financial Statements.


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GMAC LLC  Form 10-K
 

 
We sometimes use derivative financial instruments to facilitate securitization activities, as further described in Note 15 to our Consolidated Financial Statements.
 
Our exposure related to the securitization trusts is generally limited to cash reserves held for the benefit of investors in the trusts’ retained interests and certain purchase obligations. 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. In certain transactions, limited recourse provisions exist that allow holders of the asset- or mortgage-backed securities to put those securities back to us.
 
We have also entered into agreements to provide credit loss protection for certain high loan-to-value (HLTV) mortgage loan securitization transactions. We are required to perform on our guaranty obligation when the security credit enhancements are exhausted and losses are passed through to investors. The guarantees terminate the first calendar month during which the security aggregate note amount is reduced to zero. Refer to Note 23 to our Consolidated Financial Statements and the Guarantees section in this MD&A for further information.
 
Other Off-Balance Sheet Activities
We also use other off-balance sheet entities for operational and liquidity purposes, which are in addition to the securitization activities that are part of the transfer and servicing of financial assets under SFAS 140 (as described in the previous section). The purposes and activities of these entities vary, with some entities representing QSPEs under SFAS 140 and others, whose activities are not sufficiently limited to meet the QSPE criteria of SFAS 140, considered to be VIEs and accounted for in accordance with FASB Interpretation No. 46R, Consolidation of Variable Interest Entities (FIN 46R).
 
We may also act as a counterparty in derivative financial instruments with these entities to facilitate transactions. Although representing effective risk management techniques, these derivative financial instrument positions do not qualify for hedge accounting treatment, as the assets or liabilities that are economically hedged are carried off-balance sheet. As such, these derivative financial instruments are reported in our Consolidated Balance Sheet at fair value, with valuation adjustments reflected in our Consolidated Statement of Income on a current period basis, and are disclosed in Note 15 to our Consolidated Financial Statements.
 
Our most significant off-balance sheet entity is described as follows:
 
  New Center Asset Trust (NCAT) — NCAT is a QSPE that was established for purchasing and holding privately issued asset-backed securities created through our automotive finance asset securitization activities, as previously described. NCAT funds the activity through the issuance of asset-backed commercial paper. NCAT acquires the asset-backed securities from special purpose trusts established by our limited purpose bankruptcy-remote subsidiaries. As of December 31, 2006, NCAT had $9.5 billion in asset-backed securities, which were fully supported by commercial paper. We act as administrator of NCAT to provide for the administration of the trust. NCAT maintains a $18.3 billion revolving credit agreement, characterized as a liquidity and receivables purchase facility, to support its issuance of commercial paper. Refer to Note 12 to our Consolidated Financial Statements for further discussion. The assets underlying the NCAT securities are retail finance receivables, wholesale loans and operating leases that are securitized as a part of our automotive finance funding strategies. As such, the $9.5 billion of NCAT securities outstanding at December 31, 2006, are considered in the non-mortgage securitization amounts included in the table on page 46.
 
We do not guarantee debt issued in connection with any of our off-balance sheet facilities, nor do we guarantee liquidity support (to the extent applicable) that is provided by third-party banks. Further, there are limited recourse provisions that would permit holders to put debt obligations back to us. If liquidity banks fail to renew their commitment (which commitments may be subject to periodic renewal) and we are unable to find replacement liquidity support or alternative financing, the outstanding commercial paper would be paid with loans from participating banks, and proceeds from the underlying assets would be used to repay the banks. Finally, none of these entities related to our off-balance sheet facilities owns stock in us or any of our affiliates.
 
Purchase Obligations and Options
Certain of the structures related to securitization transactions and other off-balance sheet activities contain provisions, which are standard in the securitization industry, where we may (or, in limited circumstances, are obligated to) purchase specific assets from the entities. Our purchase obligations relating to off-balance sheet transactions are as follows:
 
  Representations and warranties obligations — In connection with certain asset sales and securitization transactions, we typically deliver standard representations and warranties to the purchaser regarding the characteristics of the underlying transferred assets. These representations and warranties conform to specific guidelines, which are customary in securitization transactions. These clauses are intended to ensure that the terms and conditions of the sales contracts are met upon transfer of the assets. Prior to any sale or securitization transaction, we perform due diligence with respect to the assets to be included in the sale to ensure that they meet the purchaser’s requirements, as expressed in the representations and warranties. Due to these procedures, we believe the potential for loss under these arrangements is remote. Accordingly, no liability is reflected in our Consolidated Balance Sheet related to these potential obligations. The maximum potential amount of future payments we could be required to make would be equal to the current balances of all


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GMAC LLC  Form 10-K
 

assets subject to such securitization or sale activities. We do not monitor the total value of assets historically transferred to securitization vehicles or through other asset sales. Therefore, we are unable to develop an estimate of the maximum payout under these representations and warranties.
 
Representations and warranties made by us in off-balance sheet arrangements relate to the required characteristics of the receivables (e.g., contains customary and enforceable provisions, is secured by an enforceable lien, has an original term of no less than x months and no greater than y months, etc.) as of the initial sale date. Purchasers rely on these representations and warranties, which are common in the securitization industry, when purchasing the receivables. In connection with mortgage assets, it is common industry practice to include assets in a sale of mortgage loans before we have physically received all of the original loan documentation from a closing agent, recording office or third-party register. In these cases, the loan origination process is completed through the disbursement of cash and the settlement process with the consumer; however, all of the loan documentation may not have been received by us and, in some cases, delivered to custodians that hold them for investors. When the documentation process is not yet complete, a representation is given that documents will be delivered within a specified number of days after the initial sale date.
 
Loans for which there are trailing or defective legal documents generally perform as well as loans without such administrative complications. Such loans merely fail to conform to the requirements of a particular sale. Upon discovery of a breach of a representation, the loans are either corrected in a manner conforming to the provisions of the sale agreement, replaced with a similar mortgage loan that conforms to the provisions, or investors are made whole by us through the purchase of the mortgage loan at a price determined by the related transaction documents, consistent with industry practice.
 
We purchased $157 million and $29 million in mortgage assets under these provisions in 2006 and 2005, respectively. The majority of purchases under representations and warranties occurring in 2006 and 2005 resulted from the inability to deliver underlying mortgage documents within a specified number of days after the initial sale date. The remaining purchases occurred due to a variety of non-conformities (typically related to clerical errors discovered after sale in the post-closing review).
 
  Administrator or servicer actions — In our capacity as servicer, we covenant, in certain automotive securitization transaction documents, that we will not amend or modify certain characteristics of any receivable after the initial sale date (e.g., amount financed, annual percentage rate, etc.). In addition, we are required to service sold receivables in the same manner in which we service owned receivables. In servicing our owned receivables, we may make changes to the underlying contracts at the request of the borrower, for example, because of errors made in the origination process or to prevent imminent default as a result of temporary economic hardship (e.g., borrower requested deferrals or extensions). When we would otherwise modify an owned receivable in accordance with customary servicing practices, therefore, we are required to modify a sold and serviced receivable, also in accordance with customary servicing procedures. If the modification is not otherwise permitted by the securitization transaction documents, we are required to purchase such serviced receivable that has been sold. We purchased $27 million and $76 million in automotive receivables under these provisions in 2006 and 2005, respectively.
 
Our purchase options relating to off-balance sheet transactions are as follows:
 
  Asset performance conditional calls — In our mortgage off-balance sheet transactions, we typically retain the option (but not an obligation) to purchase specific assets that become delinquent beyond a specified period of time, as set forth in the transaction legal documents (typically 90 days). We report affected assets when the purchase option becomes exercisable. Assets are purchased after the option becomes exercisable when it is in our best economic interest to do so. We purchased $324 million and $99 million of mortgage assets under these provisions in 2006 and 2005, respectively.
 
  Cleanup calls — In accordance with SFAS 140, we retain a cleanup call option in securitization transactions that allows the servicer to purchase the remaining transferred financial assets, once such assets or beneficial interests reach a minimal level and the cost of servicing those assets or beneficial interests become burdensome in relation to the benefits of servicing (defined as a specified percentage of the original principal balance). We purchased $1.3 billion and $2.9 billion in assets under these cleanup call provisions in 2006 and in 2005, respectively.
 
When purchases of assets from off-balance sheet facilities occur, either as a result of an obligation to do so or upon us obtaining the ability to acquire sold assets through an option, any resulting purchase is executed in accordance with the legal terms in the facility or specific transaction documents. In most cases, we record no net gain or loss, as the provisions for the purchase of specific assets in automotive receivables and mortgage asset transactions state that the purchase price is equal to the unpaid principal balance (i.e., par value) of the receivable, plus any accrued interest thereon. An exception relates to cleanup calls, which may result in a net gain or loss. In these cases, we record assets when the option to purchase is exercisable, as determined by the legal documentation. Any difference between the purchase price and amounts paid to discharge third-party beneficial interests is remitted to us through the recovery on the related retained interest. Any resulting gain or loss is recognized upon the exercise of a cleanup call option.


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GMAC LLC  Form 10-K
 

  Guarantees
We have entered into arrangements that contingently require payments to non-consolidated third parties that are defined as guarantees. The following table summarizes primary categories of guarantees, with further qualitative and quantitative information in Note 23 to our Consolidated Financial Statements:
 
                 
        Carrying
    Maximum
  value of
December 31, 2006 ($ in millions)   liability   liability
 
Standby letters of credit
    $161       $7  
HLTV and international securitization
    108        
Agency loan program
    6,390        
Guarantees for repayment of third-party debt
    617        
Repurchase guarantees
    204        
Non-financial guarantees
    233        
Other guarantees
    223       4  
 
 
 
Standby letters of credit — Letters of credit are issued by our financing and ResCap operations that represent irrevocable guarantees of payment of specified financial obligations of a client and which are generally collateralized by assets.
 
Securitizations and sales — Under certain mortgage securitization and sales transactions, we have agreed to guarantee specific amounts depending on the performance of the underlying assets. In particular, these guarantees relate to particular agency loans sold with recourse, high loan-to-value securitizations and sales of mortgage-related securities.
 
Agency loan program — Our ResCap operations deliver loans to certain agencies that allow streamlined loan processing and limited documentation requirements. In the event any loans delivered under these programs reach a specified delinquency status, we may be required to provide certain documentation or, in some cases, repurchase the loan or indemnify the investor for any losses sustained.
 
Guarantees for repayment of third-party debt — Under certain arrangements, we guarantee the repayment of third-party debt obligations in the case of default. Some of these guarantees are collateralized by letters of credit.
 
Repurchase guarantees — We have issued guarantees to buyers of certain mortgage loans whereby, if a closing condition or document deficiency is identified by an investor after the closing, we may be required to indemnify the investor in the event the loan becomes delinquent.
 
Non-financial guarantees — In connection with the sale of 79% of our equity in Capmark we were released from all financial guarantees related to the former GMAC Commercial Mortgage business. Certain non-financial guarantees did survive closing, but we are indemnified by Capmark for payments made or liabilities incurred by us in connection with these guarantees.
 
In addition to these guarantees, we have standard indemnification clauses in some of our funding arrangements that would require us to pay lenders for increased costs due to certain changes in laws or regulations. Furthermore, our ResCap operations sponsor certain agents who originate mortgage loans under government programs, and we have guaranteed uninsured losses resulting from the actions of the agents. As the nature of these exposures is unpredictable and not probable, management is not able to estimate a liability for the guarantees in these arrangements.


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Management’s Discussion and Analysis
GMAC LLC  Form 10-K
 

  Aggregate Contractual Obligations
 
The following table provides aggregated information about our outstanding contractual obligation as of December 31, 2006, that are disclosed elsewhere in our Consolidated Financial Statements.
 
                                         
    Payments due by period  
       
          Less than
                More than
 
December 31, 2006 ($ in millions)   Total     1 year     1-3 years     3-5 years     5 years  
 
 
Description of obligation:
                                       
Debt
                                       
Unsecured (a)
    $99,568       $22,823       $27,617       $21,244       $27,884  
Secured
    94,314       12,391       23,100       3,638       55,185  
Mortgage purchase and sale commitments
    34,950       26,294       5,591       95       2,970  
Commitments to remit excess cash flows on certain loan portfolios
    5,334       5,334                    
Commitments to sell retail automotive receivables
    21,500                   21,500        
Commitments to provide capital to equity method investees
    278             116       4       158  
Commitments to fund construction lending
    352       59       275       18        
Lending commitments
    16,400       13,709       1,406       627       658  
Lease commitments
    868       207       283       166       212  
Purchase obligations
    1,093       322       440       246       85  
Bank certificates of deposit
    6,686       3,969       2,253       424       40  
Total
    $281,343       $85,108       $61,081       $47,962       $87,192  
(a)  Total amount reflects the remaining principal obligation and excludes fair value adjustment of $109 and unamortized discount of $386.
 
The foregoing table does not include our reserves for insurance losses and loss adjustment expenses, which total $2.6 billion as of December 31, 2006. While payments due on insurance losses are considered contractual obligations because they relate to insurance policies issued by us, the ultimate amount to be paid and the timing of payment for an insurance loss is an estimate, subject to significant uncertainty. Furthermore, the timing on payment is also uncertain; however, the majority of the balance is expected to be paid out in less than five years.
 
The following provides a description of the items summarized in the preceding table of contractual obligations:
 
Debt — Amounts represent the scheduled maturity of debt at December 31, 2006, assuming that no early redemptions occur. For debt issuances without a stated maturity date (i.e.,  Demand Notes), the maturity is assumed to occur within one year. The maturity of secured debt may vary based on the payment activity of the related secured assets. Debt issuances redeemable at or above par during the callable period are presented based on stated maturity date. The amounts presented are before the effect of any unamortized discount or fair value adjustment. Refer to Note 12 to our Consolidated Financial Statements for additional information on our debt obligations.
 
Mortgage purchase and sale commitments — As part of our ResCap operations, we enter into commitments to originate, purchase, and sell mortgages and mortgage-backed securities. Refer to Note 23 to our Consolidated Financial Statements for additional information on our mortgage purchase and sale commitments.
 
Commitments to remit excess cash flows on certain loan portfolios — We are committed to remitting, under certain shared execution arrangements, cash flows that exceed a required rate of return less credit loss reimbursements. This commitment is accounted for as a derivative. Refer to Note 23 to our Consolidated Financial Statements for additional information on our shared execution arrangements.
 
Commitments to sell retail automotive receivables — We have entered into agreements with third-party banks to sell automotive retail receivables in which we transfer all credit risk to the purchaser (retail automotive whole loan transactions). Refer to Note 23 to our Consolidated Financial Statements for additional information.
 
Commitments to fund construction lending — We have entered into agreements to fund construction and resort financing through financing obtained from third-party asset-backed paper commercial conduits.
 
Commitments to provide capital to equity method investees — As part of arrangements with specific private equity funds, we are obligated to provide capital to equity method investees. Refer to Note 23 to our Consolidated Financial Statements for additional information.
 
Lending commitments — Both our Automotive Financing and ResCap operations have outstanding revolving lending commitments

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GMAC LLC  Form 10-K
 

with customers. The amounts presented represent the unused portion of those commitments as of December 31, 2006, that the customers may draw upon, in accordance with the lending arrangement. Refer to Note 23 to our Consolidated Financial Statements for additional information on our lending commitments.
 
Lease commitments — We have obligations under various operating lease arrangements (primarily for real property) with noncancelable lease terms that expire after December 31, 2006. Refer to Note 23 to our Consolidated Financial Statements for additional information on our lease commitments.
 
Purchase obligations — We enter into multiple contractual arrangements for various services. The arrangements represent fixed payment obligations under our most significant contracts and primarily relate to contracts with information technology providers. Refer to Note 23 to our Consolidated Financial Statements for additional information on our purchase obligations.
 
Bank certificates of deposit — We accept cash deposits through GMAC Bank. A portion of these deposits are escrow balances related to the servicing of mortgage loans.
 
  Critical Accounting Estimates
 
Accounting policies are integral to understanding our Management’s Discussion and Analysis of Financial Condition and Results of Operations. The preparation of financial statements, in accordance with accounting principles generally accepted in the United States of America (GAAP), requires management to make certain judgments and assumptions, based on information available at the time of the financial statements, in determining accounting estimates used in the preparation of such statements. Our significant accounting policies are described in Note 1 to our Consolidated Financial Statements; critical accounting estimates are described in this section. Accounting estimates are considered critical if the estimate requires management to make assumptions about matters that were highly uncertain at the time the accounting estimate was made and if different estimates reasonably could have been used in the reporting period, or changes in the accounting estimate are reasonably likely to occur from period to period that would have a material impact on our financial condition, results of operations or cash flows. Our management has discussed the development, selection and disclosure of these critical accounting estimates with the Audit Committee of the Board, and the Audit Committee has reviewed our disclosure relating to these estimates.
 
Determination of the Allowance for Credit Losses
The allowance for credit losses is management’s estimate of incurred losses in our lending portfolios. Management periodically performs detailed reviews of these portfolios to determine if an impairment has occurred and to assess the adequacy of the allowance for credit losses, based on historical and current trends and other factors affecting credit losses. Additions to the allowance for credit losses are charged to current period earnings through the provision for credit losses; amounts determined to be uncollectible are charged directly against the allowance for credit losses, while amounts recovered on previously charged-off accounts increase the allowance. Determination of the allowance for credit losses requires management to exercise significant judgment about the timing, frequency and severity of credit losses which could materially affect the provision for credit losses and, therefore, net income. The methodology for determining the amount of the allowance differs for consumer and commercial portfolios.
 
The consumer portfolios consist of smaller-balance, homogeneous contracts and loans, divided into two broad categories — automotive retail contracts and residential mortgage loans. Each of these portfolios is further divided by our business units into several pools (based on contract type, underlying collateral, geographic location, etc.), which are collectively evaluated for impairment. Due to the homogenous nature of the portfolios, the allowance for credit losses is based on the aggregated characteristics of the portfolio. The allowance for credit losses is established through a process that begins with estimates of incurred losses in each pool based upon various statistical analyses (including migration analysis), in which historical loss experience, believed by management to be indicative of the current environment, is applied to the portfolio to estimate incurred losses. In addition, management considers the overall portfolio size and other portfolio indicators (i.e., delinquencies, portfolio credit quality, etc.), as well as general economic and business trends that management believes are relevant to estimating incurred losses.
 
The commercial loan portfolio is comprised of larger-balance, non-homogeneous exposures within our Automotive Financing, Commercial Financing and ResCap operations. These loans are evaluated individually and are risk-rated based upon borrower, collateral and industry-specific information that management believes is relevant to determining the occurrence of a loss event and measuring impairment. Management establishes specific allowances for commercial loans determined to be individually impaired. The allowance for credit losses is estimated by management based upon the borrower’s overall financial condition, financial resources, payment history and, when applicable, the estimated realizable value of any collateral. In addition to the specific allowances for impaired loans, we maintain allowances that are based on a collective evaluation for impairment of certain commercial portfolios. These allowances are based on historical loss experience, concentrations, current economic conditions and performance trends within specific geographic and portfolio segments.
 
The determination of the allowance for credit losses is influenced by numerous assumptions. The critical assumptions underlying the


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GMAC LLC  Form 10-K
 

allowance for credit losses include: (1) segmentation of loan pools based on common risk characteristics; (2) identification and estimation of portfolio indicators and other factors that management believes are key to estimating incurred credit losses and (3) evaluation by management of borrower, collateral and geographic information. Management monitors the adequacy of the allowance for credit losses and makes adjustments as the assumptions in the underlying analyses change to reflect an estimate of incurred credit losses as of the reporting date, based upon the best information available at that time.
 
At December 31, 2006, the allowance for credit losses was $3.6 billion, as compared to $3.1 billion at December 31, 2005. The provision for credit losses was $2.0 billion for the year ended December 31, 2006, as compared to $1.1 billion for 2005 and $2.0 billion for 2004. Our allowance for credit losses and the provision for credit losses increased primarily due to negative loss severity trends in our consumer portfolio as well as a decline in the performance of the non-automotive commercial portfolio at our financing operations.
 
The allowance for credit losses represents management’s estimate of incurred credit losses in the portfolios based on assumptions management believes are reasonably likely to occur. However, since this analysis involves a high degree of judgment, the actual level of credit losses will vary depending on actual experiences in relation to these assumptions. Accordingly, management estimates a range of reasonably possible incurred credit losses within the consumer and commercial portfolios. Management maintains an allowance for credit losses that it believes represents the best estimate of the most likely outcome within that range.
 
Valuation of Automotive Lease Residuals
Our Automotive Financing operations have significant investments in vehicles in our operating lease portfolio. In accounting for operating leases, management must make a determination at the beginning of the lease of the estimated realizable value (i.e., residual value) of the vehicle at the end of the lease. Residual value represents an estimate of the market value of the vehicle at the end of the lease term, which typically ranges from two to four years. We establish residual values at contract inception by using independently published residual values (as further described in the Lease Residual Risk discussion within the Automotive Financing Operations section of this MD&A). The customer is obligated to make payments during the term of the lease for the difference between the purchase price and the contract residual value. However, since the customer is not obligated to purchase the vehicle at the end of the contract, we are exposed to a risk of loss to the extent the value of the vehicle is below the residual value estimated at contract inception. Management periodically performs a detailed review of the estimated realizable value of leased vehicles to assess the appropriateness of the carrying value of lease assets.
 
To account for residual risk, we depreciate automotive operating lease assets to estimated realizable value at the end of the lease on a straight-line basis over the lease term. The estimated realizable value is initially based on the residual value established at contract inception. Over the life of the lease, management evaluates the adequacy of the estimate of the realizable value and may make adjustments to the extent the expected value of the vehicle at lease termination changes. Any such adjustments would result in a change in the depreciation rate of the lease asset, thereby impacting the carrying value of the operating lease asset. Overall business conditions (including the used vehicle market), our remarketing abilities and GM’s vehicle and marketing programs may cause management to adjust initial residual projections (as further described in the Lease Residual Risk Management discussion in the Automotive Financing Operations section of this MD&A). In addition to estimating the residual value at lease termination, we must also evaluate the current value of the operating lease assets and test for the impairment to the extent necessary in accordance with SFAS 144. Impairment is determined to exist if the undiscounted expected future cash flows (including the expected residual value) are lower than the carrying value of the asset.
 
Our depreciation methodology on operating lease assets considers management’s expectation of the value of the vehicles upon lease termination, which is based on numerous assumptions and factors influencing used automotive vehicle values. The critical assumptions underlying the estimated carrying value of automotive lease assets include: (1) estimated market value information obtained and used by management in estimating residual values, (2) proper identification and estimation of business conditions, (3) our remarketing abilities and (4) GM’s vehicle and marketing programs. Changes in these assumptions could have a significant impact on the value of the lease residuals.
 
Our net investment in operating leases totaled $24.2 billion (net of accumulated depreciation of $6.1 billion) at December 31, 2006, as compared to $31.2 billion (net of accumulated depreciation of $8.2 billion) at December 31, 2005. Depreciation expense for the year ended December 31, 2006, 2005 and 2004 was $5.3 billion, $5.2 billion and $4.8 billion, respectively. Prior to the Sale Transactions, we distributed to GM certain assets with respect to automotive leases owned by us and our affiliates having a net book value of $4.0 billion (and related deferred tax liabilities of $1.8 billion). The distribution consisted of $12.6 billion of U.S. operating lease assets, $1.5 billion of restricted cash and miscellaneous assets and a $10.1 billion note payable.
 
Valuation of Mortgage Servicing Rights
Mortgage servicing rights represent the capitalized value associated with the right to receive future cash flows in connection with the servicing of mortgage loans. Mortgage servicing rights constitute a significant source of value derived from originating or acquiring mortgage loans. Because residential mortgage loans typically contain a prepayment option, borrowers often elect to prepay their mortgages, refinancing at lower rates during declining interest rate environments. When this occurs, the stream of cash flows generated from servicing the original mortgage loan is terminated.


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GMAC LLC  Form 10-K
 

As such, the market value of residential mortgage servicing rights is very sensitive to changes in interest rates, and tends to decline as market interest rates decline and increase as interest rates rise.
 
We capitalize mortgage servicing rights on loans that we have originated based upon the fair market value of the servicing rights associate with the underlying mortgage loans at the time the loans are sold or securitized. We capitalize purchased mortgage servicing rights at cost (which approximates the estimated fair market value of such assets).
 
Effective January 1, 2006, mortgage servicing rights are carried at fair value.
 
Prior to 2006, the carrying value of mortgage servicing rights was dependent upon whether the rights were hedged. We carried mortgage servicing rights that received hedge accounting treatment at fair value. Changes in fair value were recognized in current period earnings, which were generally offset by changes in the fair value of the underlying derivative if the changes in the value of the asset and derivative were highly correlated. The majority of our mortgage servicing rights were hedged as part of our risk management program. Mortgage servicing rights that did not receive hedge accounting were carried at the lower of cost or fair value. We evaluated mortgage servicing rights for impairment by stratifying our portfolio on the basis of the predominant risk characteristics (mortgage product type and interest rate). To the extent that the carrying value of an individual tranche exceeded its estimated fair value, the mortgage servicing rights were considered impaired. We recognized impairment that was considered to be temporary through the establishment of (or increase in) a valuation allowance, with a corresponding unfavorable effect on earnings. If it was later determined all or a portion of the temporary impairment no longer existed for a particular tranche, we reduced the valuation allowance, with a favorable effect on earnings. If the impairment was determined to be other than temporary, the valuation allowance was reduced along with the carrying value of the mortgage servicing right.
 
Accounting principles generally accepted in the United States of America require that the value of mortgage servicing rights be determined based upon market transactions for comparable servicing assets or, in the absence of representative market trade information, based upon other available market evidence and modeled market expectations of the present value of future estimated net cash flows that market participants would expect to be derived from servicing. In certain international markets with very limited or no market evidence, we have determined it is not practicable to determine fair value. In other circumstances when benchmark transaction data is not available, management relies on estimates of the timing and magnitude of cash inflows and outflows to derive an expected net cash flow stream and then discounts this stream using an appropriate market discount rate. Servicing cash flows primarily include servicing fees, float income and late fees, less operating costs to service the loans. Cash flows are derived based on internal operating assumptions, which management believes would be used by market participants, combined with market-based assumptions for loan prepayment rates, interest rates and discount rates that management believes approximate yields required by investors in this asset. Management considers the best available information and exercises significant judgment in estimating and assuming values for key variables in the modeling and discounting process.
 
We use the following key assumptions in our valuation approach:
 
  Prepayments — The most significant driver of mortgage servicing rights value is actual and anticipated portfolio prepayment behavior. Prepayment speed represents the rate at which borrowers repay the mortgage loans prior to scheduled maturity. As interest rates rise, prepayment speeds generally slow, and as interest rates decline, prepayment speeds generally accelerate. When mortgage loans are paid or expected to be paid sooner than originally estimated, the expected future cash flows associated with servicing the loans are reduced. We primarily use third-party models to project residential mortgage loan payoffs. In other cases, we estimated prepayment speeds based on historical and expected future prepayment rates. We measure model performance by comparing prepayment predictions against actual results at both the portfolio and product level.
 
  Discount rate — The mortgage servicing rights cash flows are discounted at prevailing market rates, which include an appropriate risk-adjusted spread.
 
  Base mortgage rate — The base mortgage rate represents the current market interest rate for newly originated mortgage loans. This rate is a key component in estimating prepayment speeds of our portfolio, because the difference between the current base mortgage rate and the interest rate on existing loans in our portfolio is an indication of the borrower’s likelihood to refinance.
 
  Cost to service — In general, servicing cost assumptions are based on actual expenses directly related to servicing. These servicing cost assumptions are compared to market servicing costs when market information is available. Our servicing cost assumptions include expenses associated with our activities related to loans in default.
 
  Volatility — Volatility represents the expected rate of change of interest rates. The volatility assumption used in or valuation methodology is intended to place a band around the potential interest rate movements from one period to the next. We use implied volatility assumptions in connection with the valuation of our mortgage servicing rights. Implied volatility is defined as the expected rate of change in interest rates derived from the prices at which options on interest rate swaps, or swaptions, are trading. We update our volatility assumptions for the change in implied swaption volatility during the period, adjusted by the ratio of historical mortgage swaption volatility.


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GMAC LLC  Form 10-K
 

 
We periodically perform a series of reasonableness tests, as management deems appropriate, including the following:
 
  Review and compare recent bulk mortgage servicing right acquisition activity.  We evaluate market trades for reliability and relevancy and then consider, as appropriate, our estimate of fair value of each significant deal to the traded price. Currently, there is a lack of comparable transactions between willing buyers and sellers in the bulk acquisition market, which are our best indicators of fair value. However, we continue to monitor market activity on an ongoing basis.
 
  Review and compare recent flow servicing trades.  We evaluate market trades of flow transactions to compare prices on our mortgage servicing rights. Fair values of flow market transactions may differ from our fair value estimate for several reasons, including age/credit seasoning of product, perceived profit margin/discount assumed by aggregators, economy of scale benefits and cross-sell benefits.
 
  Review and compare fair value price/multiples.  We evaluate and compare our fair value price/multiples to market fair price/multiples quoted in external surveys produced by third parties.
 
  Reconcile actual monthly cash flows to projections.  We reconcile actual monthly cash flows to those projected in the mortgage servicing rights valuation. Based upon the results of this reconciliation, we assess the need to modify the individual assumptions used in the valuation. This process ensures the model is calibrated to actual servicing cash flow results.
 
We generally expect our valuation to be within a reasonable range of that implied by each test. If we determine our valuation has exceeded the reasonable range, we may adjust it accordingly.
 
The assumptions used in modeling expected future cash flows of mortgage servicing rights have a significant impact on the fair value of mortgage servicing rights and potentially a corresponding impact to earnings. For example, a 10% increase in the prepayment assumptions would have negatively impacted the fair value of the residential mortgage servicing rights asset by $227 million, or approximately 5%, as of December 31, 2006. This sensitivity is hypothetical and is designed to highlight the magnitude a change in assumptions could have. The calculation assumes that a change in the constant prepayment assumption would not impact other modeling assumptions. However, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. In addition, the factors that may cause a change in the prepayment assumption may also positively or negatively impact other areas (i.e., decreasing interest rates while increasing prepayments would likely have a positive impact on mortgage loan production volume and gains recognized on the sale of mortgage loans).
 
At December 31, 2006, based upon the market information obtained, we determined that our mortgage servicing rights valuations and assumptions used to value those servicing rights were reasonable and consistent with what an independent market participant would use to value the asset. At December 31, 2006, we had $4.9 billion outstanding in mortgage servicing rights as compared to $4.0 billion at December 31, 2005.
 
Valuation of Interests in Securitized Assets
When we securitize automotive retail contracts, wholesale finance receivables, mortgage loans and mortgage-backed securities, we typically retain an interest in the sold assets. These interests may take the form of asset- and mortgage-backed securities (including senior and subordinated interests), interest-only, principal-only, investment grade, non-investment grade or unrated securities. We retain an interest in these transactions to provide a form of credit enhancement for the more highly rated securities or because it is more economical to hold these interests as opposed to selling. In addition to the primary securitization activities, our mortgage operations purchase mortgage-backed securities, interest-only strips and other interests in securitized mortgage assets. In particular, we have mortgage broker-dealer operations that are in the business of underwriting, private placement, trading and selling of various mortgage-backed securities. As a result of these activities, we may hold investments (primarily with the intent to sell or securitize) in mortgage-backed securities similar to those retained by us in securitization activities. Interests in securitized assets are accounted for as investments in debt securities pursuant to Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS 115). Our estimate of the fair value of these interests requires management to exercise significant judgment about the timing and amount of future cash flows of the securities.
 
Interests in securitized assets that are classified as trading or available for sale are valued on the basis of external dealer quotes, where available. External quotes are not available for a significant portion of these assets, given the relative illiquidity of such assets in the market. In these circumstances, valuations are based on internally-developed models, which consider recent market transactions, experience with similar securities, current business conditions, analysis of the underlying collateral and third-party market information, as available. In conjunction with the performance of such valuations, management determined that the assumptions and the resulting valuations of asset- and mortgage-backed securities were reasonable and consistent with what an independent market participant would use to value the positions. In addition, we have certain interests in securitized assets that are classified as held to maturity. Investments classified as held to maturity are carried at amortized cost and are periodically reviewed for impairment.
 
Estimating the fair value of these securities requires management to make certain assumptions based upon current market information. The following describes the significant assumptions impacting future cash flow and, therefore, the valuation of these assets.
 
  Prepayment Speeds — Prepayment speeds are primarily impacted by changes in interest rates. As interest rates rise, prepayment speeds generally slow, and as interest rates


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GMAC LLC  Form 10-K
 

decrease, prepayment speeds generally accelerate. Similar to mortgage servicing rights, estimated prepayment speeds significantly impact the valuation of our residential mortgage-backed securities because increases in actual and expected prepayment speed significantly reduce expected cash flows from these securities. For certain securities, management is able to obtain market information from parties involved in the distribution of such securities to estimate prepayment speeds. In other cases, management estimates prepayment speeds based upon historical and expected future prepayment rates. In comparison to residential mortgage-backed securities, prepayment speeds on the automotive asset-backed securities are not as volatile and do not have as significant an earnings impact due to the relative short contractual term of the underlying receivables and the fact that many of these receivables have below-market contractual rates due to GM-sponsored special rate incentive programs.
 
  Credit Losses — Expected credit losses on assets underlying the asset- and mortgage-backed securities also significantly impact the estimated fair value of the related residual interests we retain. Credit losses can be impacted by many economic variables including unemployment, housing valuation and regional factors. The type of loan product and the interest rate environment are also key variables impacting the credit loss assumptions. For certain securities, market information for similar investments is available to estimate credit losses and collateral defaults (e.g., dealer-quoted credit spreads). For other securities, future credit losses are estimated using internally- developed credit loss models, which generate indicative credit losses on the basis of our historical credit loss frequency and severity.
 
  Discount Rate — Discount rate assumptions are primarily impacted by changes in the assessed risk on the sold assets or similar assets and market interest rate movements. Discount rate assumptions are determined using data obtained from market participants, where available, or based on current relevant treasury rates plus a risk-adjusted spread, based on analysis of historical spreads on similar types of securities.
 
  Interest Rates — Estimates of interest rates on variable- and adjustable-rate contracts are based on spreads over the applicable benchmark interest rate using market-based yield curves. The movement in interest rates can have a significant impact on the valuation of retained interests in floating-rate securities.
 
Asset- and mortgage-backed securities are included as a component of investment securities in our Consolidated Balance Sheet. Changes in the fair value of asset- and mortgage-backed securities held for trading are included as a component of investment income in our Consolidated Statement of Income. The changes in the fair value of asset-and-mortgage-backed securities available for sale are recorded in other comprehensive income, a component of equity in our Consolidated Balance Sheet. If management determines that other than temporary impairment should be recognized related to asset-and-mortgage-backed securities available for sale, we recognize such amounts in investment income in our Consolidated Statement of Income.
 
Similar to mortgage servicing rights, changes in model assumptions can have a significant impact on the carrying value of interests in securitized assets. Note 7 to our Consolidated Financial Statements summarizes the impact on the fair value due to a change in key assumptions for the significant categories of interests in securitized assets as of December 31, 2006. The processes and assumptions used to determine the fair value of interest in securitized assets results in a valuation that fairly states the assets and are consistent with what a market participant would use to value the positions. At December 31, 2006 and 2005, the total interests in securitized assets approximated $6.3 billion and $4.0 billion, respectively.
 
Determination of Reserves for Insurance Losses and Loss Adjustment Expenses
Our Insurance operations include an array of insurance underwriting, including consumer products, automotive extended service contracts, assumed reinsurance and commercial coverage that creates a liability for unpaid losses and loss adjustment expenses incurred (further described in the Insurance section of this MD&A). The reserve for insurance losses and loss adjustment expenses represents an estimate of our liability for the unpaid cost of insured events that have occurred as of a point in time. More specifically, it represents the accumulation of estimates for reported losses and an estimate for losses incurred but not reported, including claims adjustment expenses.
 
GMAC Insurance’s claim personnel estimate reported losses based on individual case information or average payments for categories of claims. An estimate for current incurred, but not reported, claims is also recorded based on the actuarially-determined expected loss ratio for a particular product, which also considers significant events that might change the expected loss ratio, such as severe weather events and the estimates for reported claims. These estimates of the reserves are reviewed regularly by the product line management, by actuarial and accounting staffs and, ultimately, by senior management.
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