Financial Guarantee Liability

12 Months Ended

Dec. 31, 2019

Newmark shares risk of loss for loans originated under the Fannie Mae DUS and Freddie TAH programs and could incur losses in the event of defaults under or foreclosure of these loans. Under the guarantee, Newmark’s maximum contingent liability to the extent of actual losses incurred is approximately 33% of the outstanding principal balance on Fannie Mae DUS or Freddie TAH loans. Risk sharing percentages are established on a loan-by-loan basis when originated, with most loans at 33% and “modified” loans at lower percentages. Under certain circumstances, risk sharing percentages can be revised subsequent to origination or Newmark could be required to repurchase the loan. In the event of a loss resulting from a catastrophic event that is not required to be covered by borrowers’ insurance policies, Newmark can recover the loss under its mortgage impairment insurance policy. Any potential recovery is subject to the policy’s deductibles and limits.

Changes in the estimated liability under the guarantee liability were as follows (in thousands):



Balance, January 1, 2018	$	54
Reversal of provision	(22		)
Balance, December 31, 2018	32
Reversal of provision	(17		)
Balance, December 31, 2019	$	15

In order to monitor and mitigate potential losses, Newmark uses an internally developed loan rating scorecard for determining which loans meet Newmark’s criteria to be placed on a watch list. Newmark also calculates default probabilities based on internal ratings and expected losses on a loan-by-loan basis. This methodology uses a number of factors, including, but not limited to, debt service coverage ratios, collateral valuation, the condition of the underlying assets, borrower strength and market conditions (See Note 12 — “Credit Enhancement Receivable, Contingent Liability and Credit Enhancement Deposit” for further explanation of credit protection provided by DB Cayman). The provisions for risk sharing are included in “Operating, administrative and other” on the accompanying consolidated statements of operations as follows (in thousands):



	For the years ended December 31,
	2019			2018			2017
Increase (decrease) to financial guarantee liability	$	(17	)	$	(22	)	$	(359	)
Decrease (increase) to credit enhancement asset	—			10			147
Increase (decrease) to contingent liability	—			—			6
Total	$	(17	)	$	(12	)	$	(206	)