ALLOWANCE FOR RISK-SHARING OBLIGATIONS

9 Months Ended

Sep. 30, 2024

ALLOWANCE FOR RISK-SHARING OBLIGATIONS

ALLOWANCE FOR RISK-SHARING OBLIGATIONS

NOTE 4—ALLOWANCE FOR RISK-SHARING OBLIGATIONS

When a loan is sold under the Fannie Mae Delegated Underwriting and Servicing (“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. Substantially all loans sold under the Fannie Mae DUS program contain modified or full risk-sharing guaranties that are based on the credit performance of the loan. The Company records an estimate of the contingent loss reserve for Current Expected Credit Losses (“CECL”), for all loans in its Fannie Mae at-risk servicing portfolio. Most loans are collectively evaluated while a small portion is individually evaluated. For loans that are individually evaluated, a reserve for estimated credit losses is recorded when it is probable that a risk-sharing loan will foreclose or has foreclosed and it is expected to result in a loss for the Company (“collateral-based reserves”), and a reserve for estimated credit losses is recorded for all other risk-sharing loans which are collectively evaluated (“CECL allowance”). The combined loss reserve is presented as Allowance for risk-sharing obligations on the Condensed Consolidated Balance Sheets.

Activity related to the allowance for risk-sharing obligations for the three and nine months ended September 30, 2024 and 2023 follows:

	For the three months ended				For the nine months ended
	September 30,				September 30,
Roll Forward of Allowance for Risk-Sharing Obligations (in thousands)	2024		2023		2024		2023
Beginning balance	$	30,477	$	32,410	$	31,601	$	44,057
Provision (benefit) for risk-sharing obligations		(150)		555		(1,274)		(11,092)
Write-offs		(468)		(2,008)		(468)		(2,008)
Ending balance	$	29,859	$	30,957	$	29,859	$	30,957

The Company assesses several qualitative and quantitative factors to calculate the CECL allowance each quarter including the current and expected unemployment rate, macroeconomic conditions, and the multifamily market. The key inputs for the CECL allowance are the historic loss rate, the forecast-period loss rate, the reversion-period loss rate, and the UPB of the at-risk servicing portfolio. A summary of the key inputs of the CECL allowance as of the end of each of the quarters presented and the provision (benefit) impact during each quarter for the nine months ended September 30, 2024 and 2023 follows.

		2024
CECL Allowance Calculation Inputs, Details, and Provision Impact		Q1		Q2		Q3		Total
Forecast-period loss rate (in basis points)		2.3		2.3		2.1		N/A
Reversion-period loss rate (in basis points)		1.3		1.3		1.2		N/A
Historical loss rate (in basis points)		0.3		0.3		0.3		N/A
At-risk Fannie Mae servicing portfolio UPB (in billions)	$	59.2	$	59.5	$	60.6		N/A
CECL allowance (in millions)	$	25.0	$	24.9	$	23.4		N/A
Provision (benefit) for CECL allowance (in millions)	$	(1.5)	$	(0.1)	$	(1.5)	$	(3.1)

		2023
CECL Allowance Calculation Inputs, Details, and Provision Impact		Q1		Q2		Q3		Total
Forecast-period loss rate (in basis points)		2.3		2.3		2.3		N/A
Reversion-period loss rate (in basis points)		1.5		1.5		1.5		N/A
Historical loss rate (in basis points)		0.6		0.6		0.6		N/A
At-risk Fannie Mae servicing portfolio UPB (in billions)	$	54.5	$	55.7	$	57.4		N/A
CECL allowance (in millions)	$	28.7	$	28.9	$	31.0		N/A
Provision (benefit) for CECL allowance (in millions)	$	(11.0)	$	0.2	$	0.5	$	(10.3)

During the first quarters of both 2024 and 2023, the Company updated its 10-year look-back period, resulting in loss data from the earliest year being replaced with the loss data for the most recently completed year. The look-back period updates resulted in the historical loss rate factors decreasing and the benefit for CECL allowance, as noted in the table above. The Company also slightly increased its forecast-period and reversion-period loss rates during the three months ended March 31, 2023 to incorporate uncertain macroeconomic conditions. For the three months ended March 31, 2024, the ratio of the forecast-period loss rate to the historical loss rate increased, resulting in a much lower benefit for CECL allowance.

During the third quarter of 2024, the Company updated its forecast-period loss rate from 2.3 basis points to 2.1 basis points, leading to the benefit for CECL allowance shown above. During the third quarter of 2023, the provision for CECL allowance shown above was primarily the result of an increased at-risk UPB.

The weighted average remaining life of the at-risk Fannie Mae servicing portfolio as of September 30, 2024 was 5.8 years compared to 6.4 years as of December 31, 2023.

As of September 30, 2024, the Company had seven loans with aggregate collateral-based reserves of $6.5 million compared to three loans with aggregate collateral-based reserves of $2.8 million as of December 31, 2023.

As of September 30, 2024 and 2023, the maximum quantifiable contingent liability associated with the Company’s guaranties for the at-risk loans serviced under the Fannie Mae DUS agreement was $12.5 billion and $11.8 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.