NOTE 6—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.

A summary of our guaranty obligation for the three months ended March 31, 2013 and 2012 is as follows (in thousands):

	For the three months ended March 31,
	2013			2012
Beginning balance	$	21,155		$	9,921
Guaranty obligation recognized, following the sale of loan	2,154			1,002
Amortization of guaranty obligation	(957		)	(476		)
Ending Balance	$	22,352		$	10,447

The Company evaluates 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, the Company records 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, the loss recognition occurs at or before the loan becoming 60 days delinquent. A summary of our allowance for risk-sharing for the three months ended March 31, 2013 and 2012 is as follows (in thousands):

	For the three months ended March 31,
	2013		2012
Beginning balance	$	15,670	$	14,917
Provision for risk sharing obligations	401		1,224
Write-offs	—		(1,619		)
Ending Balance	$	16,071	$	14,522

As of March 31, 2013, the maximum quantifiable contingent liability associated with the Company’s guarantees under the Fannie Mae DUS agreement was $2.8 billion. The maximum quantifiable contingent liability is not representative of the actual loss the Company would incur. The Company would be liable for this amount only if all of the loans it services for Fannie Mae, for which the Company retains 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.