Allowance for Loan Losses

12 Months Ended

Dec. 31, 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, including the transition impact of adopting the CECL standard, on January 1, 2020.

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,
	2022		2021		2020
	(Dollars in millions)
Single-family allowance for loan losses:
Beginning balance	$	(4,950)	$	(9,344)	$	(8,759)
Transition impact of the adoption of the CECL standard	—		—		(1,229)
Benefit (provision) for loan losses	(5,061)		4,503		127
Write-offs	883		417		457
Recoveries	(276)		(419)		(93)
Other	(39)		(107)		153
Ending balance	$	(9,443)	$	(4,950)	$	(9,344)
Multifamily allowance for loan losses:
Beginning balance	$	(679)	$	(1,208)	$	(257)
Transition impact of the adoption of the CECL standard	—		—		(493)
Benefit (provision) for loan losses	(1,245)		519		(593)
Write-offs	43		59		136
Recoveries	(23)		(49)		(1)
Ending balance	$	(1,904)	$	(679)	$	(1,208)
Total allowance for loan losses:
Beginning balance	$	(5,629)	$	(10,552)	$	(9,016)
Transition impact of the adoption of the CECL standard	—		—		(1,722)
Benefit (provision) for loan losses	(6,306)		5,022		(466)
Write-offs	926		476		593
Recoveries	(299)		(468)		(94)
Other	(39)		(107)		153
Ending balance	$	(11,347)	$	(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 volume and pricing of loans redesignated 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. Pursuant to our adoption of ASU 2022-02, effective 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 primary factors that contributed to our single-family provision for loan losses for 2022 were:

•Net provision from actual and forecasted home prices. Provision from home price changes was primarily driven by our home price forecast, which estimates home price declines in 2023 and 2024. Lower forecasted home prices increase the likelihood that loans will default and increase the amount of credit loss on loans that do default, which increases our estimate of loss reserves and provision for loan losses.

•Provision from changes in loan activity, which includes provision on newly acquired loans. The portion of our single-family acquisitions consisting of purchase loans increased in 2022 compared with 2021. As we shift to more purchase loans, the credit profile of our acquisitions weakens as purchase loans generally have higher origination LTV ratios than refinance loans. This drove a higher estimated risk of default and loss severity in the allowance and therefore a higher loan loss provision for those loans at the time of acquisition. In addition, in 2022, our loan loss provision also increased as our more negative home price forecast increased our estimate of losses on newly acquired loans.

•Provision from higher actual and projected interest rates. 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 loans resulting in an increase in expected losses. For TDR loans, longer expected lives also increase the expected impairment relating to economic concessions provided on them, resulting in a provision for loan losses.

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

•Benefit from actual and forecasted home prices. In 2021, actual home price growth was at record levels. 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 loans from HFI to HFS. We redesignated certain nonperforming and 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 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.

The impact of these factors was partially offset by provision for higher actual and projected interest rates, which reduced our single-family benefit for loan losses recognized in 2021.

The increase in single-family write-offs in 2022 compared with 2021 was primarily driven by higher lower-of-cost-or-market adjustments at the time of loan redesignation due to price declines on our HFS loans as interest rates rose during the year. In addition, we had higher write-offs on single-family loans that went into foreclosure in 2022.

The primary factors that contributed to our multifamily provision for loan losses in 2022 were:

•Provision relating to our multifamily seniors housing portfolio. As of December 31, 2022, our estimate of credit losses reflected an increased probability of default and greater expected severity of loss on our seniors housing portfolio. As of December 31, 2022, nearly all of the seniors housing loans in our guaranty book of business were current on their payments. However, our seniors housing portfolio has been disproportionately impacted by recent market conditions, which has resulted in higher expected losses on this portfolio.

Seniors housing has been negatively impacted by elevated vacancy rates and higher operating costs, which have been exacerbated by recent inflation pressures. This has reduced the net operating income on many seniors housing properties, which in turn has led to lower estimated property values. These factors, combined

with increased costs associated with adjustable-rate mortgages due to a sharp rise in short-term interest rates during the latter half of 2022, have put additional stress on our seniors housing portfolio and increased our estimate of credit losses on these loans. As of December 31, 2022, our seniors housing portfolio had an unpaid principal balance of $16.6 billion, of which 39% were adjustable-rate mortgages.

•Provision for higher actual and projected interest rates. Rising interest rates may reduce the ability of multifamily borrowers to refinance their loans, which often have balloon balances at maturity, increasing our provision for loan losses. Additionally, rising interest rates increase the chance that multifamily borrowers with adjustable-rate mortgages may default due to higher payments if the property net operating income is not increasing at a similar pace.

The primary factors that contributed to our multifamily benefit for loan losses in 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 credit losses.

•Benefit from lower expected credit losses as a result of the COVID-19 pandemic. Similar to our single-family benefit for credit 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.