GUARANTY OBLIGATION AND ALLOWANCE FOR RISK-SHARING OBLIGATIONS

3 Months Ended

Mar. 31, 2022

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. The guaranty obligation is presented as a component of Other liabilities on the Condensed Consolidated Balance Sheets. Activity related to the guaranty obligation for the three months ended March 31, 2022 and 2021 is presented in the following table:

	For the three months ended
	March 31,
Roll Forward of Guaranty Obligation (in thousands)	2022		2021
Beginning balance	$	47,378	$	52,306
Additions, following the sale of loan		1,551		1,721
Amortization and write-offs		(2,439)		(2,191)
Ending balance	$	46,490	$	51,836

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 Condensed Consolidated Balance Sheets.

Activity related to the allowance for risk-sharing obligations for the three months ended March 31, 2022 and 2021 follows:

	For the three months ended
	March 31,
Roll Forward of Allowance for Risk-Sharing Obligations (in thousands)	2022		2021
Beginning balance	$	62,636	$	75,313
Provision (benefit) for risk-sharing obligations		(9,392)		(10,733)
Write-offs		—		—
Ending balance	$	53,244	$	64,580

During the first quarter of 2022, the Company updated its historical loss rate factor calculation to the current 10-year rolling period. The historical loss rate used for the calculation of the CECL reserve was 1.2 basis points as of March 31, 2022 compared to 1.8 basis points as of December 31, 2021, resulting in the benefit for risk-sharing obligations for the three months ended March 31, 2022 seen above. The loss rates for the forecast period and the reversion period did not change from December 31, 2021. During the first quarter of 2021, reported and forecasted unemployment rates significantly improved compared to December 31, 2020. In response to improving unemployment statistics and the expected continued overall health of the multifamily market, the Company reduced the loss rate for the forecast period to four basis points as of March 31, 2021 from six basis points as of December 31, 2020, resulting in the benefit for risk-sharing obligations for the three months ended March 31, 2021 as seen above.

The calculated CECL reserve for the Company’s $49.7 billion at-risk Fannie Mae servicing portfolio as of March 31, 2022 was $42.5 million compared to $52.3 million as of December 31, 2021. The weighted-average remaining life of the at-risk Fannie Mae servicing portfolio as of March 31, 2022 was 7.4 years compared to 7.5 years as of December 31, 2021.

Three loans had aggregate collateral-based reserves of $10.8 million and $10.3 million as of March 31, 2022 and December 31, 2021, respectively.

As of March 31, 2022 and 2021, the maximum quantifiable contingent liability associated with the Company’s guaranties for the at-risk loans serviced under the Fannie Mae DUS agreement was $10.2 billion and $9.3 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.