FANNIE MAE COMMITMENTS AND PLEDGED SECURITIES

3 Months Ended

Mar. 31, 2020

FANNIE MAE COMMITMENTS AND PLEDGED SECURITIES

Fannie Mae Commitments and Pledged Securities

NOTE 9—FANNIE MAE COMMITMENTS AND PLEDGED SECURITIES

Fannie Mae DUS Related Commitments—Commitments for the origination and subsequent sale and delivery of loans to Fannie Mae represent those mortgage loan transactions where the borrower has locked an interest rate and scheduled closing, and the Company has entered into a mandatory delivery commitment to sell the loan to Fannie Mae. As discussed in NOTE 8, the Company accounts for these commitments as derivatives recorded at fair value.

The Company is generally required to share the risk of any losses associated with loans sold under the Fannie Mae DUS program. The Company is required to secure these obligations by assigning restricted cash balances and securities to Fannie Mae, which are classified as Pledged securities, at fair value on the Condensed Consolidated Balance Sheets. The amount of collateral required by Fannie Mae is a formulaic calculation at the loan level and considers the balance of the loan, the risk level of the loan, the age of the loan, and the level of risk-sharing. Fannie Mae requires restricted liquidity for Tier 2 loans of 75 basis points, which is funded over a 48-month period that begins upon delivery of the loan to Fannie Mae. Pledged securities held in the form of money market funds holding U.S. Treasuries are discounted 5%, and multifamily Agency mortgage-backed securities (“Agency MBS”) are discounted 4% for purposes of calculating compliance with the restricted liquidity requirements. As seen below, the Company held substantially all of its pledged securities in Agency MBS as of March 31, 2020. The majority of the loans for which the Company has risk sharing are Tier 2 loans.

The Company is in compliance with the March 31, 2020 collateral requirements as outlined above. As of March 31, 2020, reserve requirements for the DUS loan portfolio will require the Company to fund $68.5 million in additional pledged securities over the next 48 months, assuming no further principal paydowns, prepayments, or defaults within the at risk portfolio. Fannie Mae periodically reassesses the DUS Capital Standards and may make changes to these standards in the future. The Company generates sufficient cash flow from its operations to meet these capital standards and does not expect any future changes to have a material impact on its future operations; however, any future increases to collateral requirements may adversely impact the Company’s available cash.

Fannie Mae has established benchmark standards for capital adequacy and reserves the right to terminate the Company's servicing authority for all or some of the portfolio if at any time it determines that the Company's financial condition is not adequate to support its obligations under the DUS agreement. The Company is required to maintain acceptable net worth as defined in the agreement, and the Company satisfied the requirements as of March 31, 2020. The net worth requirement is derived primarily from unpaid balances on Fannie Mae loans and the level of risk sharing. At March 31, 2020, the net worth requirement was $200.7 million, and the Company's net worth, as defined in the requirements, was $763.6 million, as measured at our wholly owned operating subsidiary, Walker & Dunlop, LLC. As of March 31, 2020, the Company was required to maintain at least $39.7 million of liquid assets to meet operational liquidity requirements for

Fannie Mae, Freddie Mac, HUD, and Ginnie Mae. As of March 31, 2020, the Company had operational liquidity, as defined in the requirements, of $291.9 million, as measured at our wholly owned operating subsidiary, Walker & Dunlop, LLC.

Pledged Securities, at Fair Value—Pledged securities, at fair value consisted of the following balances as of March 31, 2020 and 2019 and December 31, 2019 and 2018:

	March 31,				December 31,
(in thousands)	2020		2019		2019		2018
Pledged cash and cash equivalents:
Restricted cash	$	2,989	$	5,583	$	2,150	$	3,029
Money market funds		5,554		840		5,054		6,440
Total pledged cash and cash equivalents	$	8,543	$	6,423	$	7,204	$	9,469
Agency MBS		112,952		111,143		114,563		106,862
Total pledged securities, at fair value	$	121,495	$	117,566	$	121,767	$	116,331

The information in the preceding table is presented to reconcile beginning and ending cash, cash equivalents, restricted cash, and restricted cash equivalents in the Condensed Consolidated Statements of Cash Flows as more fully discussed in NOTE 2.

The investments in Agency debt securities consist of Agency MBS and are all accounted for as AFS securities. The following table provides additional information related to the AFS Agency MBS as of March 31, 2020 and December 31, 2019:

Fair Value and Amortized Cost of Agency MBS (in thousands)	March 31, 2020		December 31, 2019
Fair value	$	112,952	$	114,563
Amortized cost		114,528		113,580
Total gains for securities with net gains in AOCI		17		1,145
Total losses for securities with net losses in AOCI		(1,593)		(162)
Fair value of securities with unrealized losses		85,974		66,526

The Company has not recorded an allowance for credit losses for any of the securities whose fair value is less than amortized costs as of March 31, 2020. These unrealized losses were primarily related to interest-only Agency MBS securities caused by short-term fluctuations in the fair value of these securities. The contractual cash flows of these securities are guaranteed by the GSEs, which are government-sponsored enterprises under the conservatorship of the Federal Housing Finance Agency. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of these securities. The Company does not intend to sell any of the Agency MBS, nor does the Company believe that it is more likely than not that it would be required to sell these investments before recovery of their amortized cost basis, which may be at maturity. None of the pledged securities has been in a continuous unrealized loss position for more than 12 months.

The following table provides contractual maturity information related to the Agency MBS. The money market funds invest in short-term Federal Government and Agency debt securities and have no stated maturity date.

	March 31, 2020
Detail of Agency MBS Maturities (in thousands)	Fair Value		Amortized Cost
Within one year	$	—	$	—
After one year through five years		2,605		2,630
After five years through ten years		94,860		95,159
After ten years		15,487		16,739
Total	$	112,952	$	114,528