SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2020

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Summary of Significant Accounting Policies

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation—The condensed consolidated financial statements include the accounts of Walker & Dunlop, Inc., its wholly owned subsidiaries, and its majority owned subsidiaries. The Company consolidates entities in which it has a controlling financial interest based on either the variable interest entity (“VIE”) or the voting interest model. The Company is required to first apply the VIE model to determine whether it holds a variable interest in an entity, and if so, whether the entity is a VIE. Under the VIE model, the Company consolidates an entity when it both holds a variable interest in an entity and is the primary beneficiary. If the Company determines it does not hold a variable interest in a VIE, it then applies the voting interest model. Under the voting interest model, the Company consolidates an entity when it holds a majority voting interest in an entity. If the Company does not have a majority voting interest but has significant influence, it uses the equity method of accounting. In instances where the Company owns less than 100% of the equity interests of an entity but owns a majority of the voting interests or has control over an entity, the Company accounts for the portion of equity not attributable to Walker & Dunlop, Inc. as Noncontrolling interests on the balance sheet and the portion of net income (loss) not attributable to Walker & Dunlop, Inc. as Net income (loss) from noncontrolling interests on the income statement.

Use of Estimates—The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, including guaranty

obligations, allowance for risk-sharing obligations, capitalized mortgage servicing rights, derivative instruments and disclosure of contingent assets and liabilities. Actual results may vary from these estimates.

Coronavirus Disease—In January 2020, the first cases of a novel strain of the coronavirus known as Coronavirus Disease 2019 (“COVID-19” or the “virus”) were reported in the U.S., and in March 2020 the World Health Organization recognized the virus as a global pandemic. In the months since, the COVID-19 pandemic has caused significant global economic disruption as a result of the measures taken by countries and local municipalities to contain the spread of the virus (the “COVID-19 Crisis” or the “Crisis”). In the U.S., the only country in which the Company operates, federal, state and local authorities have taken actions to both contain the spread of the virus while simultaneously providing substantial liquidity to Americans, domestic businesses, and the financial markets in an effort to mitigate the adverse financial impact of the virus.

The COVID-19 Crisis has not had a material impact on the Company’s operations, its cash flows, or the amount and availability of its liquidity. Management has made adjustments to the carrying values of the Company’s liabilities impacted by the Crisis based on its best estimates and assumptions, including the Company’s estimate of expected credit losses under both the Fannie Mae Delegated Underwriting and Servicing^TM (“DUS”) program and the loans originated and held by the Company.

Subsequent Events—The Company has evaluated the effects of all events that have occurred subsequent to September 30, 2020. There have been no material events that would require recognition on the condensed consolidated financial statements. The Company has made certain disclosures in the notes to the condensed consolidated financial statements of events that have occurred subsequent to September 30, 2020. No other material subsequent events have occurred that would require disclosure.

Derivative Assets and Liabilities—Loan commitments that meet the definition of a derivative are recorded at fair value on the Condensed Consolidated Balance Sheets upon the executions of the commitment to originate a loan with a borrower and to sell the loan to an investor, with a corresponding amount recognized as revenue on the Condensed Consolidated Statements of Income. The estimated fair value of loan commitments includes (i) the fair value of loan origination fees and premiums on anticipated sale of the loan, net of co-broker fees (included in Derivative assets on the Condensed Consolidated Balance Sheets and as a component of Loan origination and debt brokerage fees, net on the Condensed Consolidated Statements of Income); (ii) the fair value of the expected net cash flows associated with the servicing of the loan, net of any estimated net future cash flows associated with the risk-sharing obligation (or the “guaranty obligation” included in Derivative assets on the Condensed Consolidated Balance Sheets and in Fair value of expected net cash flows from servicing, net on the Condensed Consolidated Statements of Income); and (iii) the effects of interest rate movements between the trade date and the balance sheet date. Loan commitments are generally derivative assets but can become derivative liabilities if the effects of the interest rate movement between the trade date and the balance sheet date are greater than the combination of (i) and (ii) above. Forward sale commitments that meet the definition of a derivative are recorded as either derivative assets or derivative liabilities depending on the effects of the interest rate movements between the trade date and the balance sheet date. Adjustments to the fair value are reflected as a component of income within Loan origination and debt brokerage fees, net on the Condensed Consolidated Statements of Income. The co-broker fees for the three months ended September 30, 2020 and 2019 were $5.1 million and $5.7 million, respectively, and $20.4 million and $13.9 million for the nine months ended September 30, 2020 and 2019, respectively.

The Company presents two components of its revenue as Loan origination and debt brokerage fees, net and Fair value of expected net cash flows from servicing, net. In the Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2019, the Company presented these two lines as one line item called Gains from mortgage banking activities and disclosed the breakout of Gains from mortgage banking activities in a footnote to the consolidated financial statements. The footnote disclosure is no longer considered necessary as the breakout is provided on the face of the Condensed Consolidated Statements of Income. All prior periods have been adjusted to conform to the current-year presentation.

Guaranty Obligation, net and Allowance for Risk Sharing Obligations—When a loan is sold under the DUS program, the Company undertakes an obligation to partially guarantee the credit performance of the loan. Upon loan sale, a liability for the fair value of the obligation undertaken in issuing the guaranty is recognized and presented as Guaranty obligation, net on the Condensed Consolidated Balance Sheets. The recognized guaranty obligation is the fair value of the Company’s obligation to stand ready to perform, including credit risk, over the term of the guaranty.

In determining the fair value of the guaranty obligation, the Company considers the risk profile of the collateral, historical loss experience, and various market indicators. Generally, the estimated fair value of the guaranty obligation is based on the present value of the

cash flows expected to be paid under the guaranty over the estimated life of the loan discounted using a rate consistent with what is used for the calculation of the mortgage servicing right for each loan. The life of the guaranty obligation is the estimated period over which the Company believes it will be required to stand ready under the guaranty. Subsequent to the initial measurement date, the liability is amortized over the life of the guaranty period, unless the loan defaults or is paid off prior to maturity, using the straight-line method as a component of and reduction to Amortization and depreciation on the Condensed Consolidated Statements of Income.

Overall Current Expected Credit Losses (“CECL”) Approach

The Company uses the weighted-average remaining maturity method (“WARM”) for calculating its allowance for risk-sharing obligations, the Company’s liability for the off-balance-sheet credit exposure associated with the Fannie Mae at-risk DUS loans. WARM uses an average annual charge-off rate that contains loss content over multiple vintages and loan terms and is used as a foundation for estimating the CECL reserve. The average annual charge-off rate is applied to the unpaid principal balance (“UPB”) over the contractual term, further adjusted for estimated prepayments and amortization to arrive at the CECL reserve for the entire current portfolio as described further below.

Considering the Company’s long history servicing Fannie Mae DUS loans, the Company maximizes the use of historical internal data because the Company has extensive historical data from which to calculate historical loss rates and principal paydown by loan term type for its exposure to credit loss on its homogeneous portfolio of Fannie Mae DUS multifamily loans. Additionally, the Company believes its properties, loss history, and underwriting standards are not similar to public data such as loss histories for loans originated for collateralized mortgage-backed securities conduits.

Runoff Rate

One of the key inputs into a WARM calculation is the runoff rate, which is the expected rate at which loans in the current portfolio will prepay and amortize in the future. As the loans the Company originates have different original lives and runoff over different periods, the Company groups loans by similar origination dates (vintage) and contractual maturity terms for purposes of calculating the runoff rate. The Company originates loans under the DUS program with various terms generally ranging from several years to 15 years; each of these various loan terms has a different runoff rate.

The Company uses its historical runoff rate for each of the different loan term pools as a proxy for the expected runoff rate. The Company believes that borrower behavior and macroeconomic conditions will not deviate significantly, on average, from historical performance over the approximately ten-year period in which the Company has compiled the actual loss data. The ten-year period captures the various cycles of industry performance and provides a period that is long enough to capture sufficient observations of runoff history. In addition, due to the prepayment protection provisions for Fannie Mae DUS loans, we have not seen significant volatility in historical prepayment rates due to changes in interest rates and would not expect this to change materially in future periods.

The historical annual runoff rate is calculated for each year of a loan’s life for each vintage in the portfolio and aggregated with the calculated runoff rate for each comparable year in every vintage. For example, the annual runoff rate for the first year of loans originated in 2010 is aggregated with the annual runoff rate for the first year of loans originated in 2011, 2012, and so on to calculate the average annual runoff rate for the first year of a loan. This average runoff calculation is performed for each year of a loan’s life for each of the various loan terms to create a matrix of historical average annual runoffs by year for the entire portfolio.

The Company segments its current portfolio of at-risk DUS loans outstanding by original loan term type and years remaining and then applies the appropriate historical average runoff rates to calculate the expected remaining balance at the end of each reporting period in the future. For example, for a loan with an original ten-year term and seven years remaining, the Company applies the historical average annual runoff rate for a ten-year loan for year four to arrive at the remaining UPB one year from the current period, the historical average runoff rate for year five to arrive at the remaining UPB two years from the current period, and so on up to the loan’s maturity date.

CECL Reserve Calculation

Once the Company has calculated the estimated outstanding UPB for each future year until maturity for each loan term type, the Company then applies the average annual charge-off rate (as further described below) to each future year’s expected UPB. The Company

then aggregates the allowance calculated for each year within each loan term type and for all different maturity years to arrive at the CECL reserve for the portfolio.

The weighted-average annual charge-off rate is calculated using a ten-year look-back period, utilizing the average portfolio balance and settled losses for each year. A ten-year period is used as the Company believes that this period of time includes sufficiently different economic conditions to generate a reasonable estimate of expected results in the future, given the relatively long-term nature of the current portfolio. This approach captures the adverse impact of the years following the great financial crisis of 2007-2010 because multifamily commercial loans have a lag period from the time of initial distress indications through the timing of loss settlement. The same loss rate is utilized across each loan term type as the Company is not aware of any historical or industry-published data to indicate there is any difference in the occurrence probability or loss severity for a loan based on its loan origination term.

Reasonable and Supportable Forecast Period

The Company currently uses one year for its reasonable and supportable forecast period (the “forecast period”) as the Company believes forecasts beyond one year are inherently less reliable. The Company uses forecasts of unemployment rates, historically a highly correlated indicator for multifamily occupancy rates, and net operating income growth to assess what macroeconomic and multifamily market conditions are expected to be like over the coming year. The Company then associates the forecasted conditions with a similar historical period over the past ten years, which could be one or several years, and uses the Company’s average loss rate for that historical period as a basis for the charge-off rate used for the forecast period. For all remaining years until maturity, the Company uses the weighted-average annual charge-off rate for the ten-year period as described above to estimate losses. The average loss rate from a historical period used for the forecast period may be adjusted as necessary if the forecasted macroeconomic and industry conditions differ materially from the historical period.

Identification of Specific Reserves for Defaulted Loans

The Company monitors the performance of each risk-sharing loan for events or conditions which may signal a potential default. The Company’s process for identifying which risk-sharing loans may be probable of default consists of an assessment of several qualitative and quantitative factors including payment status, property financial performance, local real estate market conditions, loan-to-value ratio, debt-service-coverage ratio (“DSCR”), property condition, and financial strength of the borrower or key principal(s). In instances where payment under the guaranty on a specific loan is determined to be probable (as the loan is probable of foreclosure or has foreclosed), the Company separately measures the expected loss through an assessment of the underlying fair value of the asset, disposition costs, and the risk-sharing percentage (the “specific reserve”) through a charge to the provision for risk-sharing obligations, which is a component of Provision (benefit) for credit losses on the Condensed Consolidated Statements of Income. These loans are removed from the WARM calculation described above, and the associated loan-specific mortgage servicing right and guaranty obligation are written off. The expected loss on the risk-sharing obligation is dependent on the fair value of the underlying property as the loans are collateral dependent. Historically, initial recognition of a specific reserve occurs at or before a loan becomes 60 days delinquent.

The amount of the specific reserve considers historical loss experience, adverse situations affecting individual loans, the estimated disposition value of the underlying collateral, and the level of risk sharing. The estimate of property fair value at initial recognition of the specific reserve is based on appraisals, broker opinions of value, or net operating income and market capitalization rates, depending on the facts and circumstances associated with the loan. The Company regularly monitors the specific reserves on all applicable loans and updates loss estimates as current information is received. The settlement with Fannie Mae is based on the actual sales price of the property and selling and property preservation costs and considers the Fannie Mae loss-sharing requirements. The maximum amount of the loss the Company absorbs at the time of default is generally 20% of the origination UPB of the loan.

Loans Held for Investment, net—Loans held for investment are multifamily loans originated by the Company for properties that currently do not qualify for permanent GSE or HUD (collectively, the “Agencies”) financing. These loans have terms of up to three years and are all multifamily loans with similar risk characteristics and no geographic concentration. The loans are carried at their unpaid principal balances, adjusted for net unamortized fees and costs, and net of any allowance for loan losses.

As of September 30, 2020, Loans held for investment, net consisted of 16 loans with an aggregate $347.1 million of unpaid principal balance less $0.8 million of net unamortized deferred fees and costs and $4.2 million of allowance for loan losses. As of December 31, 2019,

Loans held for investment, net consisted of 22 loans with an aggregate $546.6 million of unpaid principal balance less $2.0 million of net unamortized deferred fees and costs and $1.1 million of allowance for loan losses.

During the third quarter of 2018, the Company transferred a portfolio of participating interests in loans held for investment to a third party that is scheduled to mature in the third quarter of 2021. The Company accounted for the transfer as a secured borrowing. The aggregate unpaid principal balance of the loans of $81.5 million and $78.3 million was presented as a component of Loans held for investment, net on the Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019, respectively, and the secured borrowing of $73.3 million and $70.5 million was included within Other liabilities on the Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019, respectively. The Company does not have credit risk related to the $73.3 million of loans that were transferred.

The Company assesses the credit quality in the same manner as it does for the loans in the Fannie Mae at-risk portfolio as described above and records a specific reserve for these loans. The allowance for loan losses is estimated collectively for loans with similar characteristics. The collective allowance is based on the same methodology that the Company uses to estimate its CECL reserves for at-risk Fannie Mae DUS loans as described above because the nature of the underlying collateral is the same, and the loans have similar characteristics, except they are significantly shorter in maturity. The reasonable and supportable forecast period used for the CECL allowance for loans held for investment is one year.

The charge-off rate for the forecast period was 36 basis points and nine basis points as of September 30, 2020 and January 1, 2020, respectively. The charge-off rate for the remaining period until maturity was nine basis points as of both September 30, 2020 and January 1, 2020.

One loan held for investment with an unpaid principal balance of $14.7 million that was originated in 2017 was delinquent and on non-accrual status as of September 30, 2020 and December 31, 2019. The Company had a $3.0 million specific reserve for this loan as of September 30, 2020 and $0.6 million specific reserve as of December 31, 2019 and has not recorded any interest related to this loan since it went on non-accrual status. All other loans were current as of September 30, 2020 and December 31, 2019. The amortized cost basis of loans that were current as of September 30, 2020 and December 31, 2019 were $331.5 million and $529.9 million, respectively. As of September 30, 2020, $164.5 million of the loans that were current were originated in 2018, while $167.9 million were originated in 2019.

Prior to 2019, the Company had not experienced any delinquencies related to its loans held for investment. The Company has never charged off any loans held for investment.

Provision (benefit) for Credit Losses—The Company records the income statement impact of the changes in the allowance for loan losses and the allowance for risk-sharing obligations within Provision (benefit) for credit losses on the Condensed Consolidated Statements of Income. NOTE 4 contains additional discussion related to the allowance for risk-sharing obligations. Provision (benefit) for credit losses consisted of the following activity for the three and nine months ended September 30, 2020 and 2019:

	For the three months ended				For the nine months ended
	September 30,				September 30,
Components of Provision (Benefit) for Credit Losses (in thousands)	2020		2019		2020		2019
Provision (benefit) for loan losses	$	2,179	$	58	$	3,107	$	706
Provision (benefit) for risk-sharing obligations		1,304		(830)		28,922		2,158
Provision (benefit) for credit losses	$	3,483	$	(772)	$	32,029	$	2,864

Net Warehouse Interest Income—The Company presents warehouse interest income net of warehouse interest expense. Warehouse interest income is the interest earned from loans held for sale and loans held for investment. Generally, a substantial portion of the Company’s loans is financed with matched borrowings under one of its warehouse facilities. The remaining portion of loans not funded with matched borrowings is financed with the Company’s own cash. The Company also fully funds a small number of loans held for sale or loans held for investment with corporate cash. Warehouse interest expense is incurred on borrowings used to fund loans solely while they are held for sale or held for investment. Warehouse interest income and expense are earned or incurred on loans held for sale after a loan is closed and before a loan is sold. Warehouse interest income and expense are earned or incurred on loans held for investment after a loan is closed and before

a loan is repaid. Included in Net warehouse interest income for the three and nine months ended September 30, 2020 and 2019 are the following components:

	For the three months ended				For the nine months ended
	September 30,				September 30,
Components of Net Warehouse Interest Income (in thousands)	2020		2019		2020		2019
Warehouse interest income - loans held for sale	$	12,649	$	11,721	$	37,150	$	38,697
Warehouse interest expense - loans held for sale		(7,780)		(10,812)		(24,475)		(37,549)
Net warehouse interest income - loans held for sale	$	4,869	$	909	$	12,675	$	1,148
Warehouse interest income - loans held for investment	$	4,015	$	7,381	$	15,083	$	24,428
Warehouse interest expense - loans held for investment		(1,326)		(2,118)		(5,304)		(5,972)
Warehouse interest income - secured borrowings		869		888		2,564		2,696
Warehouse interest expense - secured borrowings		(869)		(888)		(2,564)		(2,696)
Net warehouse interest income - loans held for investment	$	2,689	$	5,263	$	9,779	$	18,456
Total net warehouse interest income	$	7,558	$	6,172	$	22,454	$	19,604

Statement of Cash Flows—For presentation on the Condensed Consolidated Statements of Cash Flows, the Company considers pledged cash and cash equivalents (as detailed in NOTE 9) to be restricted cash and restricted cash equivalents. The following table, in conjunction with the detail of Pledged securities, at fair value included in NOTE 9, is a reconciliation of total cash, cash equivalents, restricted cash, and restricted cash equivalents as presented on the Condensed Consolidated Statements of Cash Flows to the related captions on the Condensed Consolidated Balance Sheets as of September 30, 2020 and 2019 and December 31, 2019 and 2018.

	September 30,				December 31,
Description (in thousands)	2020		2019		2019		2018
Cash and cash equivalents	$	294,873	$	65,641	$	120,685	$	90,058
Restricted cash		12,383		9,138		8,677		20,821
Pledged cash and cash equivalents (NOTE 9)		21,324		5,361		7,204		9,469
Total cash, cash equivalents, restricted cash, and restricted cash equivalents	$	328,580	$	80,140	$	136,566	$	120,348

Income Taxes—The Company records the realizable excess tax benefits from stock compensation as a reduction to income tax expense. The realizable excess tax benefits were $3.0 million and $0.4 million for the three months ended September 30, 2020 and 2019, respectively, and $6.0 and $3.9 million for the nine months ended September 30, 2020 and 2019, respectively.

Contracts with Customers—Substantially all of the Company’s revenues are derived from the following sources, all of which are excluded from the accounting provisions applicable to contracts with customers: (i) financial instruments, (ii) transfers and servicing, (iii) derivative transactions, and (iv) investments in debt securities/equity-method investments. The remaining portion of revenues is derived from contracts with customers. The Company’s contracts with customers do not require significant judgment or material estimates that affect the determination of the transaction price (including the assessment of variable consideration), the allocation of the transaction price to performance obligations, and the determination of the timing of the satisfaction of performance obligations. Additionally, the earnings process for the Company’s contracts with customers is not complicated and is generally completed in a short period of time. The following table presents information about the Company’s contracts with customers for the three and nine months ended September 30, 2020 and 2019:

	For the three months ended				For the nine months ended
	September 30,				September 30,
Description (in thousands)	2020		2019		2020		2019		Statement of income line item
Certain loan origination fees	$	10,731	$	18,754	$	40,769	$	45,665	Loan origination and debt brokerage fees, net
Property sales broker fees, investment management fees, application fees, and other		11,288		15,022		34,560		35,429	Other revenues
Total revenues derived from contracts with customers	$	22,019	$	33,776	$	75,329	$	81,094

Litigation—In the ordinary course of business, the Company may be party to various claims and litigation, none of which the Company believes is material. The Company cannot predict the outcome of any pending litigation and may be subject to consequences that could include fines, penalties, and other costs, and the Company’s reputation and business may be impacted. The Company believes that any liability that could be imposed on the Company in connection with the disposition of any pending lawsuits would not have a material adverse effect on its business, results of operations, liquidity, or financial condition.

Recently Adopted and Recently Announced Accounting Pronouncements—There have been no material changes to the accounting policies discussed in NOTE 2 of the Company’s 2019 Form 10-K, except for the changes to the Company’s accounting policies related to the allowance for risk-sharing obligations and allowance for loan losses in connection with the adoption of the CECL accounting standard as disclosed in the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2020. There are no recently announced but not yet effective accounting pronouncements that are expected to have a material impact to the Company as of September 30, 2020.