Allowance for Loan Losses

6 Months Ended

Jun. 30, 2022

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. 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 June 30,				For the Six Months Ended June 30,
	2022		2021		2022		2021
	(Dollars in millions)
Single-family allowance for loan losses:
Beginning balance	$	(5,241)	$	(8,547)	$	(4,950)	$	(9,344)
Benefit (provision) for loan losses	(248)		2,493		(530)		3,164
Write-offs	248		149		275		220
Recoveries	(84)		(77)		(117)		(79)
Other	(64)		(82)		(67)		(25)
Ending Balance	$	(5,389)	$	(6,064)	$	(5,389)	$	(6,064)
Multifamily allowance for loan losses:
Beginning balance	$	(658)	$	(1,081)	$	(679)	$	(1,208)
Benefit (provision) for loan losses	(12)		35		16		130
Write-offs	—		14		—		47
Recoveries	(10)		(18)		(17)		(19)

Ending Balance	$	(680)	$	(1,050)	$	(680)	$	(1,050)
Total allowance for loan losses:
Beginning balance	$	(5,899)	$	(9,628)	$	(5,629)	$	(10,552)
Benefit (provision) for loan losses	(260)		2,528		(514)		3,294
Write-offs	248		163		275		267
Recoveries	(94)		(95)		(134)		(98)
Other	(64)		(82)		(67)		(25)
Ending Balance	$	(6,069)	$	(7,114)	$	(6,069)	$	(7,114)

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 meaningful 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 also results 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 largest driver of our single-family provision for loan losses for the three and six months ended June 30, 2022 was an increase in actual and projected interest rates as of June 30, 2022 compared with March 31, 2022 and 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.

Some of the provision from increased actual and projected interest rates in the first half of 2022 was offset by a benefit from actual and forecasted home price growth. While home price growth was strong in the second quarter and first half of 2022, some recent market indicators suggest that home price growth may be moderating at a faster pace than indicated by our home price forecast, which reduced the benefit from home price growth recognized in the second quarter and first half of 2022.

The primary factors that contributed to our single-family benefit for loan losses for the three months ended June 30, 2021 were:

•Benefit from actual and forecasted home price growth. For the three months ended June 30, 2021, home price growth was very strong. We also increased our expectations for home price growth on a national basis for full-year 2021.

•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 lower actual and projected interest rates. Actual and projected interest rates decreased as of June 30, 2021 compared with March 31, 2021.

•Benefit from changes in assumptions regarding COVID-19 forbearance and loan delinquencies as discussed below.

The primary factors that contributed to our single-family benefit for loan losses for the six months ended June 30, 2021 were:

•Benefit from actual and forecasted home price growth.

•Benefit from the redesignation of certain reperforming single-family loans from HFI to HFS consistent with the discussion above.

•Benefit from changes in assumptions regarding COVID-19 forbearance and loan delinquencies. For the three and six months ended June 30, 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 to account for uncertainty. The decrease in uncertainty as of June 30, 2021 compared with the end of 2020 was primarily driven by the passage of the American Rescue Plan Act of 2021, which provided additional economic stimulus and helped support continued economic recovery. In addition, the implementation of the COVID-19 vaccination program in the United States contributed to a significant increase in business activity and an improved economy in 2021, decreased uncertainty surrounding the post-pandemic recovery. There was also decreased political uncertainty, as well as a decrease in the number of borrowers in a COVID-19-related forbearance, lessening expectations of loan losses. However, management continued to apply its judgment and supplemented model results as of June 30, 2021 as uncertainty remained regarding the loss mitigation outcomes of borrowers still in forbearance and the future course of the pandemic, including the impact on the economy of the spread of new variants of the virus and low vaccination rates in certain areas of the country.

The impact of the factors above was partially offset by a provision from higher actual and projected interest rates. Actual and projected interest rates were higher as of June 30, 2021 compared with December 31, 2020.

The primary factor that contributed to our multifamily provision for loan losses for the three months ended June 30, 2022, was a provision expense from higher actual and projected interest rates. This provision was partially offset by a benefit from actual and projected economic data, including strong property value growth, driven by continued demand for multifamily housing.

The primary factor that contributed to our multifamily benefit for loan losses in the six months ended June 30, 2022, was a benefit from actual and projected economic data. This benefit was partially offset by a provision from higher actual and projected interest rates.

The primary factors that contributed to our multifamily benefit for loan losses for the three and six months ended June 30, 2021 were:

•Benefit from actual and projected economic data. For the three and six months ended June 30, 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 second quarter and first half of 2021.

•Benefit from lower expected credit losses as a result of the COVID-19 pandemic. Similar to our single-family provision for loan losses described above, for both the three and six months ended June 30, 2021, management used its judgment to further reduce the non-modeled adjustment that was previously applied to the loss projections developed by our credit loss model to account for uncertainty. The remaining non-modeled adjustment as of June 30, 2021, reflected management’s judgment that uncertainty remained surrounding the subsequent course of the pandemic, including new strains of the virus and its effect on the economy.