GUARANTY OBLIGATION AND ALLOWANCE FOR RISK-SHARING OBLIGATIONS

9 Months Ended

Sep. 30, 2019

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 Delegated Underwriting and Servicing^TM (“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. The guaranty is in force while the loan is outstanding. The Company does not provide a guaranty for any other loan product it sells or brokers. Activity related to the guaranty obligation for the three and nine months ended September 30, 2019 and 2018 is presented in the following table:

	For the three months ended				For the nine months ended
	September 30,				September 30,
Roll Forward of Guaranty Obligation (in thousands)	2019		2018		2019		2018
Beginning balance	$	51,414	$	42,470	$	46,870	$	41,187
Additions, following the sale of loan		3,729		4,078		13,323		9,147
Amortization		(2,365)		(2,057)		(7,061)		(5,814)
Other		(122)		(78)		(476)		(107)
Ending balance	$	52,656	$	44,413	$	52,656	$	44,413

Activity related to the allowance for risk-sharing obligations for the three and nine months ended September 30, 2019 and 2018 is shown in the following table:

	For the three months ended				For the nine months ended
	September 30,				September 30,
Roll Forward of Allowance for Risk-sharing Obligations (in thousands)	2019		2018		2019		2018
Beginning balance	$	7,964	$	4,070	$	4,622	$	3,783
Provision (benefit) for risk-sharing obligations		(830)		515		2,158		773
Write-offs		—		—		—		—
Other		122		78		476		107
Ending balance	$	7,256	$	4,663	$	7,256	$	4,663

When the Company places a loan for which it has a risk-sharing obligation on its watch list, the Company transfers the remaining unamortized balance of the guaranty obligation to the allowance for risk-sharing obligations. When a loan for which the Company has a risk-sharing obligation is removed from the watch list, the loan’s reserve is transferred from the allowance for risk-sharing obligations back to the guaranty obligation, and the amortization of the remaining balance over the remaining estimated life is resumed. This net transfer of the unamortized balance of the guaranty obligation from a noncontingent classification to a contingent classification (and vice versa) is presented in the guaranty obligation and allowance for risk-sharing obligations tables above as “Other.”

The Allowance for risk-sharing obligations as of September 30, 2019 is based largely on the Company’s collective assessment of the probability of loss related to the loans on the watch list as of September 30, 2019. As of September 30, 2019, the maximum quantifiable contingent liability associated with the Company’s guarantees under the Fannie Mae DUS agreement was $7.4 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 were determined to be without value at the time of settlement.