Allowance for Loan Losses

12 Months Ended

Dec. 31, 2020

We maintain an allowance for loan losses for HFI loans held by Fannie Mae and by consolidated Fannie Mae MBS trusts, excluding loans for which we have elected the fair value option. When calculating our allowance for loan losses, we consider the unpaid principal balance, net of unamortized premiums and discounts, and other cost basis adjustments of HFI loans at the balance sheet date. We record write-offs as a reduction to our allowance for loan losses at the point of foreclosure, completion of a short sale, upon the redesignation of nonperforming and reperforming loans from HFI to HFS or when a loan is determined to be uncollectible. See “Note 1, Summary of Significant Accounting Policies” for additional information and accounting policies on loans held for sale and changes resulting from our adoption of the CECL standard.

The following table displays changes in our allowance for single-family loans, multifamily loans and total allowance for loan losses, including the transition impact of adopting the CECL standard. The provision for loan losses excludes provision for accrued interest receivable losses, guaranty loss reserves and credit losses on AFS debt securities. Cumulatively, these expenses are recognized as “Benefit (provision) for credit losses” in our consolidated statements of operations and comprehensive income.


	For the Year Ended December 31,
	2020
	(Dollars in millions)
Single-family allowance for loan losses:
Beginning balance	$	(8,759)
Transition impact of the adoption of the CECL standard	(1,229)
Benefit for loan losses	127
Write-offs	457
Recoveries	(93)
Other	153
Ending Balance	$	(9,344)
Multifamily allowance for loan losses:
Beginning balance	$	(257)
Transition impact of the adoption of the CECL standard	(493)
Provision for loan losses	(593)
Write-offs	136
Recoveries	(1)
Ending Balance	$	(1,208)
Total allowance for loan losses:
Beginning balance	$	(9,016)
Transition impact of the adoption of the CECL standard	(1,722)
Provision for loan losses	(466)
Write-offs	593
Recoveries	(94)
Other	153
Ending Balance	$	(10,552)

Our benefit or provision for loan losses can vary substantially from period to period based on a number of factors, such as changes in actual and forecasted home prices or property valuations, fluctuations in actual and forecasted interest rates, borrower payment behavior, events such as natural disasters or pandemics, the types and volume of our loss mitigation activities, including forbearance and loan modifications, the volume of foreclosures completed, and the redesignation of loans from HFI to HFS. Our benefit or provision can also be impacted by updates to the models, assumptions, and data used in determining our allowance for loan losses. As described below, during 2020, our benefit or provision for loan losses and our loss reserves have been significantly affected by our estimates of the impact of the COVID-19 pandemic, which require significant management judgment. Changes in our estimates of borrowers that will ultimately receive forbearance and even more significantly, the loss mitigation outcomes of affected borrowers after the forbearance period ends, remain uncertain and can affect the amount of benefit or provision for loan losses we recognize.

The primary factors that contributed to our single-family benefit for loan losses in 2020 were:

•Benefit from actual and expected home price growth. In the first quarter of 2020, we significantly reduced our expectations for home price growth to near-zero for 2020. However, the negative impact from the first quarter of 2020 was more than offset by a robust increase in actual home price growth through the remainder of 2020 despite the COVID-19 pandemic. In addition, we also expect more moderate home price growth for 2021. Higher home prices decrease the likelihood that loans will default and decrease the amount of credit loss on loans that do default, which impacts our estimate of losses and ultimately decreases our loss reserves and provision for loan losses.

•Benefit from lower actual and projected interest rates. For much of 2020, we continued to be in a historically low interest rate environment, which we expect to continue in 2021. As mortgage interest rates decline, we expect an increase in future prepayments on single-family loans, including modified loans. Higher expected prepayments shorten the expected lives of modified loans, which decreases the expected impairment relating to term and interest-rate concessions provided on these loans and results in a benefit for loan losses.

•Benefit from the redesignation of certain reperforming single-family loans from HFI to HFS. In the third quarter of 2020, we resumed sales of reperforming loans after our suspension of new loan sales in the second quarter of 2020. As a result, we redesignated certain reperforming single-family loans from HFI to HFS in the second half of 2020, as we no longer intend to hold them for the foreseeable future or to maturity. Upon redesignation of these loans, we recorded the loans at the lower of cost or fair value with a write-off against the allowance for loan losses. Amounts recorded in the allowance related to these loans exceeded the amounts written off, resulting in a benefit.

These benefits were substantially offset by the impact of the COVID-19 pandemic, including increased delinquencies, as described below, which resulted in a net benefit for the year.

•Provision from changes in actual and expected loan delinquencies and change in assumptions regarding COVID-19 forbearance, which includes adjustments to modeled results. The economic dislocation caused by the COVID-19 pandemic was a significant driver of credit-related expenses during 2020, with the majority of the impact recognized in the first quarter of 2020. Estimating expected loan losses as a result of the COVID-19 pandemic continues to require significant management judgment regarding a number of matters, including our expectations surrounding the length of time that loans remain in forbearance and the type and extent of loss mitigation that may be needed when loans exit a COVID-19-related forbearance, political uncertainty and the high degree of uncertainty regarding the future course of the pandemic, including new strains of the virus and its effect on the economy. As a result, we believe the model used to estimate single-family loan losses does not capture the entirety of losses we expect to incur relating to COVID-19. Accordingly, management used its judgment to significantly increase the loss projections developed by our credit loss model in the first quarter of 2020. The model has consumed data from the initial quarters of the pandemic, including loan delinquencies, and updated credit profile data for loans in forbearance. As more of this data was consumed by our credit loss model throughout the year, we have reduced the non-modeled adjustment initially recorded in the first quarter of 2020.

Management continued to apply its judgment and supplement model results as of December 31, 2020, taking into account the continued high degree of uncertainty regarding the future impact of the pandemic and its effect on the economy. In determining our allowance for loan losses as of December 31, 2020, we revised downward our estimate of the amount of single-family borrowers who would ultimately receive forbearance due to a COVID-19-related financial hardship from our March 31, 2020 estimate based on recent economic data and actual forbearance activity observed during the last nine months of 2020.

The primary factor that contributed to a decrease in single-family write-offs in 2020 compared with 2019 was a reduction in the volume of reperforming loans redesignated from HFI to HFS.

Our multifamily provision for loan losses in 2020 was driven by higher expected losses as a result of the economic dislocation caused by the COVID-19 pandemic and heightened economic uncertainty, driven by elevated unemployment, which we expect will result in a decrease in multifamily property income and property values. In addition, the multifamily provision for loan losses includes increased expected loan losses on seniors housing loans, as these properties have been disproportionately impacted by the pandemic. Consistent with the single-family discussion above, we believe the model we use to estimate multifamily loan losses does not capture the entirety of losses we expect to incur relating to COVID-19. Accordingly, management used its judgment to increase the loss projections developed by our credit loss model. The model has consumed data from the initial quarters of the pandemic, but we continue to apply management judgment and supplement model results as of December 31, 2020, taking into account the continued high degree of uncertainty that remains relating to the impact of the pandemic.

The primary factor that contributed to increased multifamily write-offs in 2020 compared with 2019 was a write down in the value of a seniors housing portfolio during the third quarter of 2020 following its default on its forbearance agreement.

The following tables display changes in single-family and multifamily allowance for loan losses for the years ended 2019 and 2018 and the amortized cost in our HFI loans by impairment or allowance methodology and portfolio segment as of each year-end prior to the adoption of the CECL standard. For a description of our previous allowance and impairment methodology refer to “Note 1, Summary of Significant Accounting Policies.”


	For the Year Ended December 31,
	2019		2018
	(Dollars in millions)
Single-family allowance for loan losses:
Beginning balance	$	(13,969)	$	(18,849)
Benefit for loan losses	3,988		2,990
Write-offs	1,299		2,148
Recoveries	(71)		(240)
Other	(6)		(18)
Ending Balance	$	(8,759)	$	(13,969)
Multifamily allowance for loan losses:
Beginning balance	$	(234)	$	(235)
Provision for loan losses	(27)		(3)
Write-offs	8		4
Recoveries	(4)		—
Ending Balance	$	(257)	$	(234)
Total allowance for loan losses:
Beginning balance	$	(14,203)	$	(19,084)
Benefit for loan losses	3,961		2,987
Write-offs	1,307		2,152
Recoveries	(75)		(240)
Other	(6)		(18)
Ending Balance	$	(9,016)	$	(14,203)


	As of December 31,
	2019
	Single-Family		Multifamily			Total
	(Dollars in millions)
Allowance for loan losses by segment:
Individually impaired loans	$	(8,175)		$	(45)	$	(8,220)
Collectively reserved loans	(584)			(212)		(796)
Total allowance for loan losses	$	(8,759)		$	(257)	$	(9,016)
Amortized cost in loans by segment:
Individually impaired loans	$	97,196		$	680	$	97,876
Collectively reserved loans	2,909,115			329,938		3,239,053
Total amortized cost in loans	$	3,006,311		$	330,618	$	3,336,929