Allowance for Loan Losses

12 Months Ended

Dec. 31, 2021

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.

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, on January 1, 2020. 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 benefit or provision for loan losses excludes provision for accrued interest receivable losses, guaranty loss reserves and credit losses on available-for-sale (“AFS”) debt securities. Cumulatively, these amounts are recognized as “Benefit (provision) for credit losses” in our consolidated statements of operations and comprehensive income.


	For the Year Ended December 31,
	2021		2020
	(Dollars in millions)
Single-family allowance for loan losses:
Beginning balance	$	(9,344)	$	(8,759)
Transition impact of the adoption of the CECL standard	—		(1,229)
Benefit (provision) for loan losses	4,503		127
Write-offs	417		457
Recoveries	(419)		(93)
Other	(107)		153
Ending Balance	$	(4,950)	$	(9,344)
Multifamily allowance for loan losses:
Beginning balance	$	(1,208)	(257)
Transition impact of the adoption of the CECL standard	—		(493)
Benefit (provision) for loan losses	519		(593)
Write-offs	59		136
Recoveries	(49)		(1)
Ending Balance	$	(679)	$	(1,208)
Total allowance for loan losses:
Beginning balance	$	(10,552)	$	(9,016)
Transition impact of the adoption of the CECL standard	—		(1,722)
Benefit (provision) for loan losses	5,022		(466)
Write-offs	476		593
Recoveries	(468)		(94)
Other	(107)		153
Ending Balance	$	(5,629)	$	(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 type, volume and effectiveness of our loss mitigation activities, including forbearances 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, 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 and the pace and strength of the economy’s subsequent recovery, which require significant management judgment.

The primary factors that contributed to our single-family benefit for loan losses for 2021 were:

•Benefit from actual and forecasted home price growth. In 2021, actual home price growth was at record levels. We expect home price growth to moderate in 2022, with slower growth expected thereafter. Higher home prices decrease the likelihood that loans will default and reduce the amount of credit loss on loans that do default, which impacts our estimate of losses and ultimately reduces our loss reserves and provision for loan losses.

•Benefit from the redesignation of certain nonperforming and reperforming single-family loans from HFI to HFS. We redesignated certain nonperforming and reperforming single-family loans from HFI to HFS, 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 net benefit for loan losses.

•Benefit from changes in assumptions regarding COVID-19 forbearance and loan delinquencies. During the first half of 2021, management used its judgment to supplement the loss projections developed by our credit loss model to account for uncertainty arising from the COVID-19 pandemic that was not represented in historical data or otherwise captured by our credit model. For the second half of 2021, management removed the remaining non-modeled adjustment as the effects of the government’s economic stimulus, the vaccine rollout, and the effectiveness of COVID-19-related loss mitigation strategies were much less uncertain. Specifically, the decrease in uncertainty as of December 31, 2021 compared with the end of 2020 was primarily driven by the passage of the American Rescue Plan Act of 2021 and the broad implementation of the COVID-19 vaccination program in the United States, which contributed to a significant increase in business activity and helped support continued economic growth. There has also been a steady decline in the number of borrowers in a COVID-19-related forbearance, lessening expectations of loan losses. Additionally, we believe the array of possible future economic environments included in our credit model, which captures scenarios that may be remote, combined with data consumed over the course of the COVID-19 pandemic, such as forbearance outcomes, have removed the need to continue to supplement modeled results.

The impact of these factors was partially offset by the impact of the following factor, which reduced our single-family benefit for loan losses recognized in 2021.

•Provision for higher actual and projected interest rates. Actual and projected interest rates were higher as of December 31, 2021 compared with December 31, 2020. As mortgage rates increase, we expect a decrease in future prepayments on single-family loans, including modified loans. Lower expected prepayments extend the expected lives of modified loans, which increases the expected impairment relating to term and interest-rate concessions provided on these loans, resulting in a provision for loan losses.

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 expected more moderate home price growth for 2021.

•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 expected to continue in 2021. We expected continuing low interest rates would result in a continuing high level of 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 intended 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.

•Provision from changes in actual and expected loan delinquencies and change in assumptions regarding COVID-19 forbearance, which included 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 required significant management judgment regarding a number of matters, including our expectations surrounding the length of time that loans would remain in forbearance and the type and extent of loss mitigation that might be needed when loans exited 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 believed the model used to estimate single-family loan losses did not capture the entirety of losses we expected to incur relating to COVID-19 at that time. 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 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 reduced the non-modeled adjustment initially recorded in the first quarter of 2020.

However, 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 at that time.

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.

The primary factors that contributed to our multifamily benefit for loan losses for 2021 were:

•Benefit from actual and projected economic data. In 2021, property value forecasts increased due to continued demand for multifamily housing. In addition, improved job growth led to an increase in projected average property net operating income, which reduced the probability of loan defaults, resulting in a benefit for loan losses for the year.

•Benefit from lower expected loan losses as a result of the COVID-19 pandemic. Similar to our single-family benefit for loan losses described above, for the first half of 2021 management used its judgment to supplement the loss projections developed by our credit loss model to account for uncertainty arising from the COVID-19 pandemic. For the second half of 2021, management removed the remaining non-modeled adjustment as the effects of the economic stimulus, the vaccine rollout, and the effectiveness of COVID-19-related loss mitigation strategies were much less uncertain.

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 expected would result in a decrease in multifamily property net operating income and property values. In addition, the multifamily provision for loan losses included increased expected loan losses on seniors housing loans, as these properties were disproportionately impacted by the pandemic. Consistent with the single-family discussion above, we believed the model we used to estimate multifamily loan losses did not capture the entirety of losses we expected to incur relating to COVID-19 at that time. Accordingly, management used its judgment to increase the loss projections developed by our credit loss model. The model consumed data from the initial quarters of the pandemic, but we continued to apply management judgment and supplement model results as of December 31, 2020, taking into account the continued high degree of uncertainty that remained related to the impact of the pandemic.

The following table displays changes in single-family and multifamily allowance for loan losses for the year ended 2019 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
	(Dollars in millions)
Single-family allowance for loan losses:
Beginning balance		$	(13,969)
Benefit for loan losses		3,988
Write-offs		1,299
Recoveries		(71)
Other		(6)
Ending Balance		$	(8,759)
Multifamily allowance for loan losses:
Beginning balance		$	(234)
Provision for loan losses		(27)
Write-offs		8
Recoveries		(4)
Ending Balance		$	(257)
Total allowance for loan losses:
Beginning balance		$	(14,203)
Benefit for loan losses		3,961
Write-offs		1,307
Recoveries		(75)
Other		(6)
Ending Balance		$	(9,016)