GUARANTY OBLIGATION AND ALLOWANCE FOR RISK-SHARING OBLIGATIONS

12 Months Ended

Dec. 31, 2019

GUARANTY OBLIGATION AND ALLOWANCE FOR RISK-SHARING OBLIGATIONS

Guaranty Obligation and Allowance for Risk-Sharing Obligations

NOTE 4—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. 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 years ended December 31, 2019 and 2018 is presented in the following table:

	For the year ended December 31,
Roll Forward of Guaranty Obligation (in thousands)	2019		2018
Beginning balance	$	46,870	$	41,187
Additions, following the sale of loan		17,939		13,851
Amortization		(9,663)		(8,009)
Other		(451)		(159)
Ending balance	$	54,695	$	46,870

Activity related to the allowance for risk-sharing obligations for the years ended December 31, 2019 and 2018 follows:

	For the year ended December 31,
Roll Forward of Allowance for Risk-sharing Obligations (in thousands)	2019		2018
Beginning balance	$	4,622	$	3,783
Provision (benefit) for risk-sharing obligations		6,398		680
Write-offs		—		—
Other		451		159
Ending balance	$	11,471	$	4,622

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.”

During the year ended December 31, 2019, two loans defaulted, resulting in the recognition of a specific reserve of $6.9 million with a corresponding amount included as a component of provision expense. The properties related to these two at risk loans were in the same city. The Company does not have any additional at risk loans related to properties in this city. The Allowance for risk-sharing obligations as of December 31, 2019 is substantially comprised of the specific reserves related to these two loans. The Allowance for risk-sharing obligations as of December 31, 2018 was based primarily on the Company’s collective assessment of the probability of loss related to the loans on the watch list as of December 31, 2018.

As of December 31, 2019 and 2018, the maximum quantifiable contingent liability associated with the Company’s guarantees under the Fannie Mae DUS agreement was $7.5 billion and $6.7 billion, respectively. This maximum quantifiable contingent liability relates to the at risk loans serviced for Fannie Mae at the specific point in time indicated. The term and the amount of the liability vary with the origination and payoff activity of the at risk portfolio. 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 at risk loans it services for Fannie Mae were to default and all of the collateral underlying these loans were determined to be without value at the time of settlement. For example, over the past three years, the Company recognized no net write-offs of risk-sharing obligations, while the average unpaid principal balance of the at risk loans within the Company’s servicing portfolio over the past three years was $30.3 billion.