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Allowance for Loss-Sharing Obligations

6 Months Ended

Jun. 30, 2020

Allowance for Loss-Sharing Obligations

Allowance for Loss-Sharing Obligations

Note 11 — Allowance for Loss-Sharing Obligations

Our allowance for loss-sharing obligations related to the Fannie Mae DUS program is as follows (in thousands):


		Three Months Ended June 30,						Six Months Ended June 30,
		2020			2019			2020			2019
Beginning balance		$	70,752		$	34,518		$	34,648		$	34,298
Impact of adopting CECL - January 1, 2020			—			—			14,406			—
Provisions for loss sharing			2,673			1,675			24,569			2,554
Provisions reversal for loan repayments			(277)			(1,307)			(636)			(1,732)
Recoveries (charge-offs), net			72			(469)			233			(703)
Ending balance		$	73,220		$	34,417		$	73,220		$	34,417

When a loan is sold under the Fannie Mae DUS program, we undertake an obligation to partially guarantee the performance of the loan. A liability is recognized for the fair value of the guarantee obligation undertaken for the non-contingent aspect of the guarantee and is removed only upon either the expiration or settlement of the guarantee. At June 30, 2020 and 2019, guarantee obligations of $32.8 million and $31.6 million, respectively, were included in the allowance for loss-sharing obligations.

In addition to and separately from the fair value of the guarantee, we estimate our allowance for loss-sharing under CECL over the contractual period in which we are exposed to credit risk. The current expected loss related to loss-sharing was based on a collective pooling basis with similar risk characteristics, a reasonable and supportable forecast and a reversion period based on our average historical losses through the remaining contractual term of the portfolio. The increase in the provision for credit losses during the six months ended June 30, 2020 of $24.6 million, compared to the January 1, 2020 cumulative-effect adjustment upon adoption of CECL of $14.4 million, is primarily attributed to the significant adverse change in the economic outlook due to the COVID-19 pandemic.

When we settle a loss under the DUS loss-sharing model, the net loss is charged-off against the previously recorded loss-sharing obligation. The settled loss is often net of any previously advanced principal and interest payments in accordance with the DUS program, which are reflected as reductions to the proceeds needed to settle losses. At June 30, 2020 and December 31, 2019, we had outstanding advances of $0.3 million and $0.5 million, respectively, which were netted against the allowance for loss-sharing obligations.

At June 30, 2020, our allowance for loss-sharing obligations, associated with expected losses under CECL was $40.4 million and represented 0.26% of the Fannie Mae servicing portfolio.

At June 30, 2020 and December 31, 2019, the maximum quantifiable liability associated with our guarantees under the Fannie Mae DUS agreement was $2.91 billion and $2.73 billion, respectively. The maximum quantifiable liability is not representative of the actual loss we would incur. We would be liable for this amount only if all of the loans we service for Fannie Mae, for which we retain some risk of loss, were to default and all of the collateral underlying these loans was determined to be without value at the time of settlement.