GUARANTY OBLIGATION AND ALLOWANCE FOR RISK-SHARING OBLIGATIONS

12 Months Ended

Dec. 31, 2021

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, 2021 and 2020 is presented in the following table:

	For the year ended December 31,
Roll Forward of Guaranty Obligation (in thousands)	2021		2020
Beginning balance	$	52,306	$	54,695
Additions, following the sale of loan		5,607		5,755
Amortization and write-offs		(10,535)		(9,612)
Other		—		1,468
Ending balance	$	47,378	$	52,306

Substantially all loans sold under the Fannie Mae DUS program contain partial or full risk-sharing guaranties that are based on the credit performance of the loan. The Company records an estimate of the loss reserve for CECL for all loans in its Fannie Mae at-risk servicing portfolio and presents this loss reserve as Allowance for risk-sharing obligations on the Consolidated Balance Sheets.

Activity related to the allowance for risk-sharing obligations for the years ended December 31, 2021 and 2020 follows:

	For the year ended December 31,
Roll Forward of Allowance for Risk-Sharing Obligations (in thousands)	2021		2020
Beginning balance	$	75,313	$	11,471
Adjustment related to adoption of CECL		—		31,570
Provision (benefit) for risk-sharing obligations		(12,677)		33,740
Write-offs		—		—
Other				(1,468)
Ending balance	$	62,636	$	75,313

As a result of the onset of the pandemic and the resulting forecasts for elevated unemployment rates during 2020, the Company’s loss rate for the forecast period was six basis points as of December 31, 2020, resulting in the substantial provision for risk-sharing obligations for the year ended December 31, 2020 and an increase in the allowance for risk-sharing obligations as of December 31, 2020 as seen above. During 2021, economic conditions have improved significantly compared to 2020, with reported and forecast unemployment rates significantly better compared to December 31, 2020. In response to improving unemployment statistics and the current and expected overall health of the multifamily market, the Company adjusted the loss rate for the forecast period from six basis points as of December 31, 2020 to three basis points as December 31, 2021. The decrease in the loss rate resulted in the benefit for risk-sharing obligations seen above for the year ended December 31, 2021. For the remaining expected life of the portfolio, the Company reverted over a one-year period on a straight-line basis to a historical loss rate of just under two basis points for all periods shown in the roll forward above.

The calculated CECL reserve for the Company’s $48.0 billion at-risk Fannie Mae servicing portfolio as of December 31, 2021 was $52.3 million compared to $67.0 million as of December 31, 2020. The decrease in the CECL reserve was principally related to the improvements in the unemployment statistics and overall health of the multifamily market noted above. The weighted-average remaining life of the at-risk Fannie Mae servicing portfolio as of December 31, 2021 was 7.5 years.

Three loans had aggregate collateral-based reserves of $10.3 million as of December 31, 2021. Two of those loans also had collateral-based reserves of $8.3 million as of December 31, 2020 as we have not yet settled the risk-sharing losses on those two loans with Fannie Mae.

As of December 31, 2021 and 2020, the maximum quantifiable contingent liability associated with the Company’s guarantees under the Fannie Mae DUS agreement was $10.1 billion and $9.0 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 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.