GUARANTY OBLIGATION AND ALLOWANCE FOR RISK-SHARING OBLIGATIONS

9 Months Ended

Sep. 30, 2011

GUARANTY OBLIGATION AND ALLOWANCE FOR RISK-SHARING OBLIGATIONS

GUARANTY OBLIGATION AND ALLOWANCE FOR RISK-SHARING OBLIGATIONS

NOTE 5—GUARANTY OBLIGATION AND ALLOWANCE FOR RISK-SHARING OBLIGATIONS

When a loan is sold under the Fannie Mae DUS program, the Company typically agrees to guarantee a portion of the ultimate loss incurred on the loan should the borrower fail to perform. The compensation for this risk is a component of the servicing fee on the loan. No guaranty is provided for loans sold under the Freddie Mac or HUD loan programs, or those loans the Company originates in a brokerage capacity.

A summary of our guaranty obligation for the three and nine months ended September 30, 2011 and 2010 is as follows (in thousands):

	For the three months ended September 30,						For the nine months ended September 30,
	2011			2010			2011			2010
Beginning balance	$	9,398		$	8,502		$	8,928		$	8,751
Guaranty obligation recognized	740			574			2,019			1,577
Amortization of guaranty obligation	(470		)	(297		)	(1,279		)	(1,549		)
Ending Balance	$	9,668		$	8,779		$	9,668		$	8,779

We evaluate the allowance for risk-sharing obligations by monitoring the performance of each loan for triggering events or conditions that may signal a potential default. In situations where payment under the guaranty is probable and estimable on a specific loan, we record an additional liability for the estimated allowance for risk-sharing through a charge to the provision for risk-sharing obligations in the income statement, along with a write-off of the loan-specific MSR. The amount of the provision reflects our assessment of the likelihood of payment by the borrower, the estimated disposition value of the underlying collateral and the level of risk-sharing. Historically, initial loss recognition occurs at or before the loan becoming 60 days delinquent. We regularly monitor risk-sharing obligations on all loans and update our loss estimates as current information is received. A summary of our allowance for risk-sharing for the three and nine months ended September 30, 2011 and 2010 is as follows (in thousands):

	For the three months ended September 30,					For the nine months ended September 30,
	2011			2010		2011			2010
Beginning balance	$	13,383		$	5,984	$	10,873		$	5,552
Provision for risk sharing obligations	937			1,817		3,447			4,397
Write-offs	(680		)	—		(680		)	(2,148		)
Ending Balance	$	13,640		$	7,801	$	13,640		$	7,801

As of September 30, 2011, the maximum quantifiable contingent liability associated with the Company’s guarantees under the Fannie Mae DUS agreement was $1.4 billion. The maximum quantifiable contingent liability is not representative of the actual loss we would incur. We would be liable for this amount only if all of the loans we service for Fannie Mae, for which we retain some risk of loss, were to default and all of the collateral underlying these loans was determined to be without value at the time of settlement.