Allowance for Loan Losses

3 Months Ended

Mar. 31, 2022

Allowance for Loan LossesWe 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. 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 condensed consolidated statements of operations and comprehensive income.


	For the Three Months Ended March 31,
		2022		2021
		(Dollars in millions)
Single-family allowance for loan losses:
Beginning balance		$	(4,950)	$	(9,344)
Benefit (provision) for loan losses		(282)		671
Write-offs		27		71
Recoveries		(33)		(2)
Other		(3)		57
Ending Balance		$	(5,241)	$	(8,547)
Multifamily allowance for loan losses:
Beginning balance		$	(679)	$	(1,208)
Benefit for loan losses		28		95
Write-offs		—		33
Recoveries		(7)		(1)

Ending Balance		$	(658)	$	(1,081)
Total allowance for loan losses:
Beginning balance		$	(5,629)	$	(10,552)
Benefit (provision) for loan losses		(254)		766
Write-offs		27		104
Recoveries		(40)		(3)
Other		(3)		57
Ending Balance		$	(5,899)	$	(9,628)

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.

In recent periods, changes in actual and projected interest rates have been a significant driver of our benefit or provision for loan losses as these changes drive prepayment speeds and impact the measurement of the economic concessions granted to borrowers on modified loans. However, pursuant to our adoption of ASU 2022-02 on January 1, 2022, we prospectively discontinued TDR accounting and no longer measure the economic concession for restructurings occurring on or after the adoption date. This accounting will also result in the elimination of any existing economic concession related to a loan that was previously designated as a TDR if such loan is restructured on or after January 1, 2022. See "Note 1, Summary of Significant Accounting Policies—New Accounting Guidance" for more information about our adoption of ASU 2022-02.

The primary factors that contributed to our single-family provision for loan losses in the first quarter of 2022 were a provision for higher actual and projected interest rates partially offset by a benefit from the release of economic concessions.

•Actual and projected interest rates were higher as of March 31, 2022 compared with December 31, 2021. As mortgage rates increase, we expect a decrease in future prepayments on single-family loans, including modified loans accounted for as TDRs. Lower expected prepayments extend the expected lives of these TDR loans, which increases the expected impairment relating to economic concessions provided on them, resulting in a provision for loan losses.

•This was partially offset by a benefit from the release of economic concessions on loans previously designated as TDRs that received loss mitigation arrangements during the quarter. As described above, pursuant to our adoption of accounting guidance ASU 2022-02, we remove from our allowance the prior economic concession recorded on a loan previously designated as a TDR when the loan is modified or receives or extends a loss mitigation arrangement such as a forbearance plan, repayment plan or other loan workout during the period.

The primary factors that contributed to our single-family benefit for loan losses in the first quarter of 2021 were:

•Benefit from actual and expected home price growth. During the first quarter of 2021, home price growth was unseasonably strong. We also increased our expectations for home price growth on a national basis for full-year 2021. 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 reperforming single-family loans from HFI to HFS. We redesignated certain reperforming single-family loans from HFI to HFS, 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 for loan losses.

•Benefit from changes in assumptions regarding COVID-19 forbearance and change in actual and expected loan delinquencies. Management continued to apply its judgment and supplemented model results as of March 31, 2021, due to continued uncertainty regarding the loss mitigation outcomes of borrowers in forbearance, and uncertainty regarding the future impact of the pandemic, including the efficacy of the COVID-19 vaccines on new strains of the virus and its effect on the economy. Although uncertainty remained, our expected loan losses as a result of the COVID-19 pandemic decreased in the first quarter of 2021, driven by the passage of the American Rescue Plan, which provided additional economic stimulus and helped support the continued economic recovery. In addition, decreased political uncertainty compared with the end of 2020 combined with the increased progression of the COVID-19 vaccines rollout lessened expectations of loan losses. Based on these factors in the first quarter of 2021, management used its judgment to reduce the non-modeled adjustment that was previously applied to the loss projections developed by our credit loss model.

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 the first quarter of 2021:

•Provision from higher actual and projected interest rates as mortgage interest rates increased in the first quarter of 2021.

In the first quarter of 2022, the multifamily benefit for loan losses was a result of the reduction in our loan loss reserves primarily due to strong multifamily market fundamentals.

The primary factors that impacted our multifamily benefit for loan losses in the first quarter of 2021 were:

•Benefit from actual and projected economic data. In the first quarter of 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 default, resulting in a benefit for loan losses for the quarter.

•Benefit from changes in expected loan losses as a result of the COVID-19 pandemic. Similar to our single-family provision for loan losses described above, management continued to apply its judgment and supplemented model results as of March 31, 2021, due to continued uncertainty regarding the future impact of the pandemic, including the efficacy of the COVID-19 vaccines on new strains of the virus and its effect on the economy. Although uncertainty remained, our expected loan losses as a result of the COVID-19 pandemic decreased in the first quarter of 2021 driven by positive economic growth and the passage of the American Rescue Plan, which provided additional economic stimulus. Based on these factors in the first quarter of 2021, management used its judgment to reduce the non-modeled adjustment that was previously applied to the loss projections developed by our credit loss model.