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Mortgage Loans Held for Portfolio
 9 Months Ended
Sep. 30, 2020
SEC Schedule, 12-29, Real Estate Companies, Investment in Mortgage Loans on Real Estate [Abstract]  
Mortgage Loans Held for Portfolio Mortgage Loans Held for Portfolio
Under the MPF Program, the Bank invests in mortgage loans that it purchases from its participating members and housing associates. The Bank’s participating members originate, service, and credit enhance residential mortgage loans that are sold to the Bank. See Note 8 for further information regarding transactions with related parties.

The following table presents balances as of September 30, 2020 and December 31, 2019 for mortgage loans held for portfolio.
(in thousands)September 30, 2020December 31, 2019
Fixed-rate long-term single-family mortgages (1)
$4,818,470 $4,863,177 
Fixed-rate medium-term single-family mortgages (1)
178,619 167,156 
Total par value4,997,089 5,030,333 
Premiums87,883 82,108 
Discounts(2,776)(3,616)
Hedging adjustments14,203 13,632 
Total mortgage loans held for portfolio (2)
$5,096,399 $5,122,457 
Allowance for credit losses on mortgage loans(6,654)(7,832)
Mortgage loans held for portfolio, net$5,089,745 $5,114,625 
Note:
(1) Long-term is defined as greater than 15 years. Medium-term is defined as a term of 15 years or less.
(2) Amounts exclude accrued interest receivable of $27.2 million and $26.9 million at September 30, 2020 and December 31, 2019.

The following table details the par value of mortgage loans held for portfolio outstanding categorized by type as of September 30, 2020 and December 31, 2019.
(in thousands)September 30, 2020December 31, 2019
Conventional loans$4,831,899 $4,856,543 
Government-guaranteed/insured loans165,190 173,790 
Total par value$4,997,089 $5,030,333 

Purchases, Sales and Reclassifications. During the nine months ended September 30, 2020 and 2019, there were no significant purchases or sales of financing receivables. Furthermore, none of the financing receivables were reclassified to held-for-sale.

Conventional MPF Loans - Credit Enhancements (CE). The conventional MPF loans held for portfolio are required to be credit enhanced as determined through the use of a validated model so the risk of loss is limited to the losses within the Bank's risk tolerance. The Bank and its participating financial institution (PFI) share the risk of credit losses on conventional MPF loan products held for portfolio, by structuring potential losses into layers with respect to each master commitment. After considering the borrower’s equity and any Primary Mortgage Insurance (PMI), credit losses on mortgage loans in a master commitment are then absorbed by the Bank’s First Loss Account (FLA). If applicable to the MPF product, the Bank will withhold a PFI’s scheduled performance CE fee in order to reimburse the Bank for any losses allocated to the FLA (recaptured CE Fees). If the FLA is exhausted, the credit losses are then absorbed by the PFI up to an agreed upon CE amount. The CE amount could be covered by supplemental mortgage insurance (SMI) obtained by the PFI. Thereafter, any remaining credit losses are absorbed by the Bank.

Payment Status of Mortgage Loans. Payment status is the key credit quality indicator for conventional mortgage loans and allows the Bank to monitor the migration of past due loans. Past due loans are those where the borrower has failed to make timely payments of principal and/or interest in accordance with the terms of the loan. Other delinquency statistics include nonaccrual loans and loans in process of foreclosure.
Credit Quality Indicator for Conventional Mortgage Loans. The following table presents the payment status for conventional mortgage loans at September 30, 2020 and December 31, 2019.
September 30, 2020
(in thousands)Origination Year
Payment Status, at amortized cost (1)
Prior to 20162016 to 2020Total
Past due 30-59 days$15,526 $26,498 $42,024 
Past due 60-89 days7,299 23,754 31,053 
Past due 90 days or more24,825 82,906 107,731 
Total past due loans$47,650 $133,158 $180,808 
Current loans1,230,149 3,515,988 4,746,137 
Total conventional loans (2)
$1,277,799 $3,649,146 $4,926,945 
Payment Status, at recorded investment (1)
December 31, 2019
Past due 30-59 days$43,872 
Past due 60-89 days8,601 
Past due 90 days or more12,826 
Total past due loans$65,299 
Current loans4,904,683 
Total conventional loans$4,969,982 
Note:
(1) The recorded investment at December 31, 2019 includes accrued interest receivable whereas the amortized cost at September 30, 2020 excludes accrued interest receivable.
(2) Includes approximately $128.8 million par value of loans in a forbearance or repayment plan as a result of COVID-19, of which approximately $1.2 million was current, $16.1 million was 30-59 days past due, $23.0 million was 60-89 days past due, and $88.5 million was 90 days or more past due at September 30, 2020.

Other Delinquency Statistics. The following table presents the delinquency statistics for the Bank’s mortgage loans at September 30, 2020 and December 31, 2019.
September 30, 2020
(dollars in thousands)Conventional MPF Loans
Government-Guaranteed or Insured Loans (2)
Total
In process of foreclosures, included above (1)
$9,872 $3,026 $12,898 
Serious delinquency rate (2)
2.3 %5.7 %2.4 %
Past due 90 days or more still accruing interest$— $7,893 $7,893 
Loans on nonaccrual status (3)
$123,935 $— $123,935 
December 31, 2019
(dollars in thousands)Conventional MPF Loans
Government-Guaranteed or Insured Loans (2)
Total
In process of foreclosures, included above (1)
$4,740 $1,110 $5,850 
Serious delinquency rate (2)
0.3 %1.9 %0.3 %
Past due 90 days or more still accruing interest$— $3,363 $3,363 
Loans on nonaccrual status (3)
$14,890 $— $14,890 
Note:
(1) Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been reported. Loans in process of foreclosure are included in past due or current loans dependent on their delinquency status.
(2) Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total loan portfolio class.
(3) All conventional mortgage loans on non-accrual status had an associated ACL or available credit enhancements to absorb expected credit losses.
Mortgage Loans Held for Portfolio ACL. For information on the prior methodology for evaluating credit losses, as well as a discussion on classes of financing receivables, the Bank’s policies for impairing financing receivables, placing them on non-accrual status, and charging them off when necessary, see Note 10 - Allowance for Credit Losses of the audited financial statements in the Bank’s 2019 Form 10-K.

    Conventional MPF - Expected Losses. Conventional loans are evaluated collectively when similar risk characteristics exist. Conventional loans that do not share risk characteristics with other pools are evaluated for expected credit losses on an individual basis. The Bank determines its allowances for credit losses on conventional loans through analyses that include consideration of various loan portfolio and collateral-related characteristics, such as past performance, current conditions, and reasonable and supportable forecasts of expected economic conditions. The Bank uses a third-party model to estimate expected credit losses over the life of the loans. The estimate of the expected credit losses includes coverage of certain losses by PMI, if applicable. The model relies on a number of inputs, such as housing price forecasts and interest rates as well as historical borrower behavior experience. The Bank’s reasonable and supportable forecast for housing prices is two years. The Bank then reverts to historic averages over a three year period. The Bank may incorporate a qualitative adjustment to the model results, if deemed appropriate, based on current market conditions or results.

The estimated credit loss on collateral dependent loans is charged-off against the reserve. However, if the estimated loss can be recovered through CE, a receivable is established, resulting in a net charge-off. A mortgage loan is considered collateral dependent if repayment is expected to be provided by the sale of the underlying property, that is, if it is considered likely that the borrower will default. The expected credit loss of a collateral dependent mortgage loan to determine the charge-off is equal to the difference between the amortized cost of the loan and the estimated fair value of the collateral, less estimated selling costs. The estimate of the expected credit losses includes coverage of certain losses by PMI, if applicable. The estimated fair value of the collateral is determined based on a value provided by a third-party’s retail-based Automated Valuation Model (AVM). The Bank adjusts the AVM based on the amount it has historically received on liquidations. Expected recoveries of prior charge-offs, as determined by a third-party model, if any, are included in the allowance for credit losses.

Conventional MPF - COVID-19-Related Modifications. Through the MPF Program, the Bank may grant a forbearance period to borrowers due to COVID-19-related difficulties regardless of the status of the loan at the time of the request. The Bank continues to apply its accounting policy for determining days past due, non-accrual, and charge-offs during the forbearance period. For MPF loans that have received COVID-19-related forbearance and meet certain criteria, the Bank may not charge-off the MPF loan, including when it is 180 or more days delinquent, if the Bank expects to recover its amortized cost. After the forbearance period, the Bank may modify the borrower's MPF loan. The Bank has elected to suspend TDR accounting for eligible modifications under Section 4013 of the CARES Act. For additional information regarding the CARES Act, refer to Note 1 - Changes in Accounting Principle and Recently Issued Accounting Standards and Interpretations in this Form 10-Q.

As of September 30, 2020, there was approximately $128.8 million in par value of conventional loans in a forbearance or repayment plan as a result of COVID-19, which represented approximately 3% of our mortgage loans held for portfolio at September 30, 2020. Of the conventional loans in a forbearance plan as a result of COVID-19, approximately 95% of the loans were not deemed to be collateral dependent and not charged-off.

Conventional MPF - Expected Recoveries. With the adoption of ASU 2016-13, the Bank is permitted to recognize a recovery through the provision for credit losses where expected lifetime credit losses are less than the amounts previously charged-off. This includes potentially recording a negative ACL for certain of the Bank's MPF products. The reduction to the ACL for expected recoveries is partially offset by a reversal of expected CE, resulting in a net impact to the Bank's Statements of Condition.

Conventional MPF - Application of CE. The Bank also incorporates associated CE, if any, to determine its estimate of expected credit losses. The Bank records an ACL for expected credit losses that exceed the amount the Bank expects to receive from available CE. Potential recoveries from CE for conventional loans are evaluated at the individual master commitment level to determine the CE available to recover losses on loans under each individual master commitment.
Conventional MPF - Rollforward of ACL
Three months ended September 30,Nine months ended September 30,
(in thousands)2020201920202019
Balance, beginning of period$5,900 $8,493 $7,832 $7,309 
Adjustment for cumulative effect of accounting change - adoption of ASU 2016-13(1)
— — (3,875)— 
(Charge-offs) Recoveries, net (2)
(584)(172)(428)(85)
Provision for credit losses1,338 (61)3,125 1,036 
Balance, September 30$6,654 $8,260 $6,654 $8,260 
Note:
(1) As a result of adopting ASU 2016-13, the reduction to the Bank's ACL of $3.9 million was largely offset by a reversal of CE receivable of $3.8 million, resulting in a net impact of adoption of $0.1 million.
(2) Net charge-offs that the Bank does not expect to recover through CE receivable.

Government-Guaranteed or Insured Mortgage Loans. The Bank invests in government-guaranteed or insured fixed-rate mortgage loans secured by one-to-four family residential properties. Government-guaranteed or insured mortgage loans are those insured or guaranteed by the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), the Rural Housing Service (RHS) of the Department of Agriculture and/or by Housing and Urban Development (HUD). The servicer provides and maintains insurance or a guarantee from the applicable government agency. The servicer is responsible for compliance with all government agency requirements and for obtaining the benefit of the applicable guarantee or insurance with respect to defaulted government-guaranteed or insured mortgage loans. Any losses on these loans that are not recovered from the issuer or the guarantor are absorbed by the servicer. Therefore, the Bank only has credit risk for these loans if the servicer fails to pay for losses not covered by the guarantee or insurance. Based on the Bank's assessment of its servicers and the collateral backing the loans, the risk of loss was immaterial. Consequently, the Bank has not recorded an ACL for government-guaranteed or insured mortgage loans at September 30, 2020 or December 31, 2019. Furthermore, none of these mortgage loans has been placed on non-accrual status because of the U.S. government guarantee or insurance on these loans and the contractual obligation of the loan servicer to repurchase the loans when certain criteria are met.

Real Estate Owned (REO). The Bank had $1.0 million and $2.0 million of REO reported in Other assets on the Statement of Condition at September 30, 2020 and December 31, 2019, respectively.