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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

For the quarterly period ended June 30, 2020

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For the transition period from                      to

Commission File Number: 001-35000

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Walker & Dunlop, Inc.

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(Exact name of registrant as specified in its charter)

7501 Wisconsin Avenue, Suite 1200E

Bethesda, Maryland 20814

(301) 215-5500

(Address of principal executive offices and registrant’s telephone number, including area code)

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Not Applicable

(Former name, former address, and former fiscal year if changed since last report)

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

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Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

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As of July 29, 2020, there were 31,104,094 total shares of common stock outstanding.

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Walker & Dunlop, Inc.
Form 10-Q
INDEX

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See accompanying notes to condensed consolidated financial statements.

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See accompanying notes to condensed consolidated financial statements.

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Use of Estimates—The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, including guaranty obligations, allowance for risk-sharing obligations, capitalized mortgage servicing rights, derivative instruments and disclosure of contingent assets and liabilities. Actual results may vary from these estimates.

Coronavirus Disease—In January 2020, the first cases of a novel strain of the coronavirus known as Coronavirus Disease 2019 (“COVID-19” or, “the virus”) were reported in the U.S., and in March 2020 the World Health Organization recognized the virus as a global pandemic. In the months since, the COVID-19 pandemic has caused significant global economic disruption as a result of the measures taken by countries and local municipalities to contain the spread of the virus (the “COVID-19 Crisis” or the “Crisis”). In the U.S., the only country that the Company operates in, Federal, state and local authorities have taken actions to both contain the spread of the virus while simultaneously providing substantial liquidity to Americans, domestic businesses, and the financial markets in an effort to mitigate the adverse financial impact of the virus.

The COVID-19 Crisis has not had a material impact on the Company’s operations, its cash flows, or the amount and availability of its liquidity. Although it is not possible to reliably estimate the extent and duration of the COVID-19 Crisis as of the date of this quarterly report on Form 10-Q, management has made adjustments to the carrying values of the Company’s liabilities impacted by the Crisis based on its best estimates and assumptions including the Company’s estimate of future expected credit losses under both the Fannie Mae Delegated Underwriting and Servicing^TM (“DUS”) program and the loans originated for the Company balance sheet. The Company continues to generate positive cash flow to support its business activities as its most significant capital relationships (Fannie Mae, Freddie Mac and HUD) have not been meaningfully affected by the Crisis. In addition, the financial institutions with which the Company partners to provide warehouse financing do not appear to have been materially impacted by the Crisis, and there has not been, and we do not expect there to be, any disruption to the amount or availability of liquidity necessary to support the Company’s operations.

Subsequent Events—The Company has evaluated the effects of all events that have occurred subsequent to June 30, 2020. There have been no material events that would require recognition in the condensed consolidated financial statements. The Company has made certain disclosures in the notes to the condensed consolidated financial statements of events that have occurred subsequent to June 30, 2020. No other material subsequent events have occurred that would require disclosure.

Derivative Assets and Liabilities—Loan commitments can meet the definition of derivative asset and are recorded at fair value in the Condensed Consolidated Balance Sheets upon the executions of the commitment to originate a loan with a borrower and to sell the loan to an investor, with a corresponding amount recognized as revenue in the Condensed Consolidated Statements of Income. The estimated fair value of loan commitments includes (i) the fair value of loan origination fees and premiums on anticipated sale of the loan, net of co-broker fees (included in Derivative assets in the Condensed Consolidated Balance Sheets and as a component of Loan origination and debt brokerage fees, net in the Condensed Consolidated Income Statements), (ii) the fair value of the expected net cash flows associated with the servicing of the loan, net of any estimated net future cash flows associated with the risk-sharing obligation (or the “guaranty obligation;” included in Derivative assets in the Condensed Consolidated Balance Sheets and in Fair value of expected net cash flows from servicing, net in the Condensed Consolidated Income Statements), and (iii) the effects of interest rate movements between the trade date and balance sheet date. Loan commitments are generally derivative assets but can become derivative liabilities if the effects of the interest rate movement between the trade date and the balance sheet are greater than the combination of (i) and (ii) above. Forward sales commitments can meet the definition of either a derivative asset or derivative liability depending on the effects of the interest rate movements between the trade date and the balance sheet date. Adjustments to the fair value are reflected as a component of income within Loan origination and debt brokerage fees, net in the Condensed Consolidated Statements of Income. The co-broker fees for the three months ended June 30, 2020 and 2019 were $7.9 million and $5.4 million, respectively, and $15.3 million and $8.2 million for the six months ended June 30, 2020 and 2019, respectively. The fair value of expected guaranty obligation recognized at commitment for the three months ended June 30, 2020 and 2019 were $1.3 million and $4.4 million respectively, and $2.6 million and $8.5 million for the six months ended June 30, 2020 and 2019, respectively.

The Company presents two components of its revenue as Loan origination and debt brokerage fees, net and Fair value of expected net cash flows from servicing, net. Previously, the Company presented these two lines as one line item called Gains from mortgage banking activities and disclosed the breakout of Gains from mortgage banking activities in a footnote to the consolidated financial statements. The footnote disclosure is no longer considered necessary as the breakout is provided on the face of the Condensed Consolidated Statements of Income. All prior periods have been adjusted to conform to the current-year presentation.

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Guaranty Obligation and Allowance for risk sharing obligations— When a loan is sold under the DUS program, the Company undertakes an obligation to partially guarantee the credit performance of the loan. Upon loan sale, a liability for the fair value of the obligation undertaken in issuing the guaranty is recognized and presented as Guaranty obligation, net of accumulated amortization on the Condensed Consolidated Balance Sheets. The recognized guaranty obligation is the fair value of the Company’s obligation to stand ready to perform over the term of the guaranty, including credit risk.

In determining the fair value of the guaranty obligation, the Company considers the risk profile of the collateral, historical loss experience, and various market indicators. Generally, the estimated fair value of the guaranty obligation is based on the present value of the cash flows expected to be paid under the guaranty over the estimated life of the loan discounted using a rate consistent with what is used for the calculation of the mortgage servicing right for each loan. The estimated life of the guaranty obligation is the estimated period over which the Company believes it will be required to stand ready under the guaranty. Subsequent to the initial measurement date, the liability is amortized over the life of the guaranty period, unless the loan defaults or is paid off prior to maturity, using the straight-line method as a component of and reduction to Amortization and depreciation in the Condensed Consolidated Statements of Income.

Overall CECL Approach

The Company uses the weighted-average remaining maturity method (“WARM”) for calculating its allowance for risk-sharing obligations, the Company’s liability for the off-balance-sheet credit exposure associated with the Fannie Mae at risk DUS loans. WARM uses an average annual charge-off rate that contains loss content over multiple vintages and loan terms and is used as a foundation for estimating the current expected credit losses (“CECL”) reserve. The average annual charge-off rate is applied to the unpaid principal balance (“UPB”) over the contractual term, further adjusted for estimated prepayments and amortization to arrive at the CECL reserve for the entire current portfolio as described further below.

Considering the Company’s long history servicing Fannie Mae DUS loans, the Company maximizes the use of historical internal data because the Company has extensive historical data from which to calculate historical loss rates and principal paydown by loan term type for its exposure to credit loss on its homogeneous portfolio of Fannie Mae DUS multifamily loans. Additionally, the Company believes its properties, loss history, and underwriting standards are not similar to public data such as loss histories for loans originated for collateralized mortgage-backed securities conduits.

Runoff Rate

One of the key inputs into a WARM calculation is the runoff rate, which is the expected rate at which loans in the current portfolio will prepay and amortize in the future. As the loans the Company originates have different original lives and runoff over different periods, the Company groups loans by similar origination dates (vintage) and contractual maturity terms for purposes of calculating the runoff rate. The Company originates loans under the DUS program with various terms generally ranging from several years to 15 years; each of these various loan terms has a different runoff rate.

The Company uses its historical runoff rate for each of the different loan term pools as a proxy for the expected runoff rate. The Company believes that borrower behavior and macroeconomic conditions will not deviate significantly from historical performance over the approximately ten-year period over which the Company has compiled the actual loss data. The ten-year period captures the various cycles of industry performance and provides a period that is long enough to capture sufficient observations of runoff history. In addition, due to the prepayment protection provisions for Fannie Mae DUS loans, we have not seen significant volatility in historical prepayment rates due to changes in interest rates and would not expect this to change in future periods.

The historical annual runoff rate is calculated for each year of a loan’s life for each vintage in the portfolio and aggregated with the calculated runoff rate for each comparable year in every vintage. For example, the annual runoff rate for the first year of loans originated in 2010 is aggregated with the annual runoff rate for the first year of loans originated in 2011, 2012, and so on to calculate the average annual runoff rate for the first year of a loan. This average runoff calculation is performed for each year of a loan’s life for each of the various loan terms to create a matrix of historical average annual runoffs by year for the entire portfolio.

The Company segments its current portfolio of at risk DUS loans outstanding by original loan term type and years remaining and then applies the appropriate historical average runoff rates to calculate the expected remaining balance at the end of each reporting period in the future. For example, for a loan with an original ten-year term and seven years remaining, the Company applies the historical average annual

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runoff rate for a ten-year loan for year four to arrive at the remaining UPB one year from the current period, the historical average runoff rate for year five to arrive at the remaining UPB two years from the current period, and so on up to the loan’s maturity date.

CECL Reserve Calculation

Once the Company has calculated the estimated outstanding UPB for each future year until maturity for each loan term type, the Company then applies the average annual charge-off rate (as further described below) to each future year’s expected UPB. The Company then aggregates the allowance calculated for each year within each loan term type and for all different maturity years to arrive at the CECL reserve for the portfolio.

The weighted-average annual charge-off rate is calculated using a ten-year look-back period, utilizing the average portfolio balance and settled losses for each year. A ten-year period is used as the Company believes that this period of time includes sufficiently different economic conditions to generate a reasonable estimate of expected results in the future, given the relatively long-term nature of the current portfolio. This approach captures the adverse impact of the years following the great financial crisis of 2007-2010 because multifamily commercial loans have a lag period from the time of initial distress indications through the timing of loss settlement. The same loss rate is utilized across each loan term type as the Company is not aware of any historical or industry-published data to indicate there is any difference in the occurrence probability or loss severity for a loan based on its loan origination term.

Reasonable and Supportable Forecast Period

The Company currently uses one year for its reasonable and supportable forecast period (the “forecast period”) as the Company believes forecasts beyond one year are inherently less reliable. The Company uses forecasts of unemployment rates, historically a highly correlated indicator for multifamily occupancy rates, and net operating income growth to assess what macroeconomic and multifamily market conditions are expected to be like over the coming year. The Company then associates the forecasted conditions with a similar historical period over the past ten years, which could be one or several years, and uses the Company’s average loss rate for that historical period as a basis for the charge-off rate used for the forecast period. For all remaining years until maturity, the Company uses the weighted-average annual charge-off rate for the ten-year period as described above to estimate losses. The average loss rate from a historical period used for the forecast period may be adjusted as necessary if the forecasted macroeconomic and industry conditions differ materially from the historical period.

Identification of Specific Reserves for Defaulted Loans

The Company monitors the performance of each risk-sharing loan for events or conditions which may signal a potential default. The Company’s process for identifying which risk-sharing loans may be probable of default consists of an assessment of several qualitative and quantitative factors including payment status, property financial performance, local real estate market conditions, loan-to-value ratio, debt-service-coverage ratio (“DSCR”), property condition, and financial strength of the borrower or key principal(s). In instances where payment under the guaranty on a specific loan is determined to be probable (as the loan is probable of foreclosure or has foreclosed), the Company separately measures the expected loss through an assessment of the underlying fair value of the asset, disposition costs, and the risk-sharing percentage (the “specific reserve”) through a charge to the provision for risk-sharing obligations, which is a component of Provision for credit losses in the Condensed Consolidated Statements of Income. These loans are removed from the WARM calculation described above, and the associated loan-specific mortgage servicing right and guaranty obligation are written off. The expected loss on the risk-sharing obligation is dependent on the fair value of the underlying property as the loans are collateral dependent. Historically, initial recognition of a specific reserve occurs at or before a loan becomes 60 days delinquent.

The amount of the specific reserve considers historical loss experience, adverse situations affecting individual loans, the estimated disposition value of the underlying collateral, and the level of risk sharing. The estimate of property fair value at initial recognition of the specific reserve is based on appraisals, broker opinions of value, or net operating income and market capitalization rates, depending on the facts and circumstances associated with the loan. The Company regularly monitors the specific reserves on all applicable loans and updates loss estimates as current information is received. The settlement with Fannie Mae is based on the actual sales price of the property and selling and property preservation costs and considers the Fannie Mae loss-sharing requirements. The maximum amount of the loss the Company absorbs at the time of default is generally 20% of the origination unpaid principal balance of the loan.

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Loans Held for Investment, net—Loans held for investment are multifamily loans originated by the Company for properties that currently do not qualify for permanent GSE or HUD (collectively, the “Agencies”) financing. These loans have terms of up to three years and are all multifamily loans with similar risk characteristics and no geographic concentration. The loans are carried at their unpaid principal balances, adjusted for net unamortized fees and costs, and net of any allowance for loan losses.

As of June 30, 2020, Loans held for investment, net consisted of 19 loans with an aggregate $407.6 million of unpaid principal balance less $1.1 million of net unamortized deferred fees and costs and $2.0 million of allowance for loan losses. As of December 31, 2019, Loans held for investment, net consisted of 22 loans with an aggregate $546.6 million of unpaid principal balance less $2.0 million of net unamortized deferred fees and costs and $1.1 million of allowance for loan losses.

During the third quarter of 2018, the Company transferred a portfolio of participating interests in loans held for investment to a third party that is scheduled to mature in the third quarter of 2021. The Company accounted for the transfer as a secured borrowing. The aggregate unpaid principal balance of the loans of $79.0 million and $78.3 million is presented as a component of Loans held for investment, net in the Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019, respectively, and the secured borrowing of $71.1 million and $70.5 million is included within Other liabilities in the Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019, respectively. The Company does not have credit risk related to the $71.1 million of loans that were transferred.

The Company assesses the credit quality in the same manner as it does for the loans in the Fannie Mae at risk portfolio as described above and records a specific reserve for impaired loans. The allowance for loan losses is estimated collectively for loans with similar characteristics and for which there is no evidence of impairment. The collective allowance is based on the same methodology that the Company uses to estimate its CECL reserves for at risk Fannie Mae DUS loans as described above because the nature of the underlying collateral is the same, and the loans have similar characteristics, except they are significantly shorter in maturity. The reasonable and supportable forecast period used for the CECL reserve for loans held for investment is one year.

Due to the forecasted economic conditions associated with the Crisis, the Company recorded a $1.1 million provision for loan losses during the three months ended March 31, 2020, and a small benefit for the three months ended June 30, 2020 as the balance of these loans decreased. The charge-off rate for the forecasted period was 36 basis points and nine basis points as of June 30, 2020 and January 1, 2020, respectively. The charge-off rate for the remaining period until maturity was nine basis points as of both June 30, 2020 and January 1, 2020.

One loan held for investment with an unpaid principal balance of $14.7 million that was originated in 2017 was delinquent, impaired, and on non-accrual status as of June 30, 2020 and December 31, 2019. The Company had a $0.6 million specific reserve for this loan as of June 30, 2020 and December 31, 2019 and has not recorded any interest related to this loan since it went on non-accrual status. All other loans were current as of June 30, 2020 and December 31, 2019. The amortized cost basis of loans that were current as of June 30, 2020 and December 31, 2019 was $391.8 million and $531.9 million, respectively. As of June 30, 2020, $162.0 million of the loans that were current were originated in 2018, while $230.9 million were originated in 2019.

Prior to 2019, the Company had not experienced any delinquencies related to its loans held for investment. The Company has never charged off any loans held for investment.

Provision for Credit Losses—The Company records the income statement impact of the changes in the allowance for loan losses and the allowance for risk-sharing obligations within Provision for credit losses in the Condensed Consolidated Statements of Income. NOTE 4 contains additional discussion related to the allowance for risk-sharing obligations. Provision for credit losses consisted of the following activity for the three and six months ended June 30, 2020 and 2019:

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Net Warehouse Interest Income—The Company presents warehouse interest income net of warehouse interest expense. Warehouse interest income is the interest earned from loans held for sale and loans held for investment. Generally, a substantial portion of the loans that are held for sale or held for investment are financed with matched borrowings under one of our warehouse facilities. The portion of loans held for sale or held for investment not funded with matched borrowings is financed with the Company’s own cash. The Company fully funds a small number of loans held for sale or loans held for investment with corporate cash. Warehouse interest expense is incurred on borrowings used to fund loans solely while they are held for sale or for investment. Warehouse interest income and expense are earned or incurred on loans held for sale after a loan is closed and before a loan is sold. Warehouse interest income and expense are earned or incurred, respectively, on loans held for investment after a loan is closed and before a loan is repaid. Included in Net warehouse interest income for the three and six months ended June 30, 2020 and 2019 are the following components:

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Statement of Cash Flows—For presentation in the Condensed Consolidated Statements of Cash Flows, the Company considers pledged cash and cash equivalents (as detailed in NOTE 9) to be restricted cash and restricted cash equivalents. The following table, in conjunction with the detail of Pledged securities, at fair value presented in NOTE 9, presents a reconciliation of the total of cash, cash equivalents, restricted cash, and restricted cash equivalents as presented in the Condensed Consolidated Statements of Cash Flows to the related captions in the Condensed Consolidated Balance Sheets as of June 30, 2020 and 2019 and December 31, 2019 and 2018.

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Income Taxes—The Company records the realizable excess tax benefits from stock compensation as a reduction to income tax expense. The Company recorded realizable excess tax benefits of $0.1 million and zero during the three months ended June 30, 2020 and 2019, respectively, and $3.1 and $3.4 million during the six months ended June 30, 2020 and 2019, respectively.

Contracts with Customers—Substantially all of the Company’s revenues are derived from the following sources, all of which are excluded from the accounting provisions applicable to contracts with customers: (i) financial instruments, (ii) transfers and servicing, (iii) derivative transactions, and (iv) investments in debt securities/equity-method investments. The remaining portion of revenues is derived from contracts with customers. The Company’s contracts with customers do not require significant judgment or material estimates that affect the determination of the transaction price (including the assessment of variable consideration), the allocation of the transaction price to performance obligations, and the determination of the timing of the satisfaction of performance obligations. Additionally, the earnings process for the Company’s contracts with customers is not complicated and is generally completed in a short period of time. The following table presents information about the Company’s contracts with customers for the three and six months ended June 30, 2020 and 2019:

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Litigation—In the ordinary course of business, the Company may be party to various claims and litigation, none of which the Company believes is material. The Company cannot predict the outcome of any pending litigation and may be subject to consequences that could include fines, penalties, and other costs, and the Company’s reputation and business may be impacted. The Company believes that any liability that could be imposed on the Company in connection with the disposition of any pending lawsuits would not have a material adverse effect on its business, results of operations, liquidity, or financial condition.

Recently Adopted and Recently Announced Accounting Pronouncements—There have been no material changes to the accounting policies discussed in NOTE 2 of the Company’s 2019 Form 10-K, except for the changes to the Company’s accounting policies related to the allowance for risk-sharing obligations and allowance for loan losses in connection with the adoption of a new accounting standard as disclosed in the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2020. There are no recently announced but not yet effective accounting pronouncements that are expected to have a material impact to the Company as of June 30, 2020.

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NOTE 3—MORTGAGE SERVICING RIGHTS

Mortgage servicing rights (“MSRs”) represent the carrying value of the commercial servicing rights retained by the Company for mortgage loans originated and sold and MSRs acquired from third parties. The initial capitalized amount is equal to the estimated fair value of the expected net cash flows associated with the servicing rights. MSRs are amortized using the interest method over the period that servicing income is expected to be received. The Company has one class of MSRs.

The fair values of the MSRs at June 30, 2020 and December 31, 2019 were $959.0 million and $910.5 million, respectively. The Company uses a discounted static cash flow valuation approach, and the key economic assumption is the discount rate. For example, see the following sensitivities:

The impact of a 100-basis point increase in the discount rate at June 30, 2020 is a decrease in the fair value of $28.6 million.

The impact of a 200-basis point increase in the discount rate at June 30, 2020 is a decrease in the fair value of $55.5 million.

These sensitivities are hypothetical and should be used with caution. These hypothetical scenarios do not include interplay among assumptions and are estimated as a portfolio rather than for individual assets.

Activity related to capitalized MSRs for the three and six months ended June 30, 2020 and 2019 is shown in the table below:

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The following table summarizes the gross value, accumulated amortization, and net carrying value of the Company’s MSRs as of June 30, 2020 and December 31, 2019:

The expected amortization of MSRs recorded as of June 30, 2020 is shown in the table below. Actual amortization may vary from these estimates.

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NOTE 4—GUARANTY OBLIGATION AND ALLOWANCE FOR RISK-SHARING OBLIGATIONS

When a loan is sold under the Fannie Mae DUS program, the Company typically agrees to guarantee a portion of the ultimate loss incurred on the loan should the borrower fail to perform. The compensation for this risk is a component of the servicing fee on the loan. The guaranty is in force while the loan is outstanding. The Company does not provide a guaranty for any other loan product it sells or brokers. Activity related to the guaranty obligation for the three and six months ended June 30, 2020 and 2019 is presented in the following table:

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Activity related to the allowance for risk-sharing obligations for the three and six months ended June 30, 2020 and 2019 is shown in the following table:

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As of January 1, 2020, the Company recognized the CECL transition adjustment based on its assessment of the multifamily market and the macroeconomic environment at that time, concluding that the projections for the coming year were for continued strong performance similar to the past few years. The Company’s losses have been de minimis over the past few years. Considering that the Company’s historical loss rate consisted of both strong and weak multifamily and macroeconomic periods, the Company concluded it was appropriate to adjust the loss rate downward for the forecast period. The loss factor applied for the forecast period in the WARM CECL calculation was one basis point, which approximated the average of the actual loss rate for the past two years as these conditions were expected to prevail over the course of the forecast period. The Company reverted to the actual historical loss rate of 1.76 basis points for all remaining years in the calculation.

Conditions changed significantly beginning in March 2020 due to the Crisis across the world and the resulting global social distancing and lockdown measures that were put in place by national/state/local authorities with varying expected longevities. These actions reversed macroeconomic conditions from sustained strength to short-term global economic contraction, causing unemployment rates to rise sharply and a recession to ensue.

These conditions have impacted, and are expected to continue to impact, unemployment rates and consumer incomes which are expected to have an adverse impact on multifamily occupancy rates and property cash flows in the near term, increasing the likelihood of delinquencies, loan defaults, and risk-sharing losses. The Company concluded that the potential impacts due to the Crisis are expected to be generally consistent with the great financial crisis of 2007-2010. However, the Company expects the Crisis will impact the multifamily market over a one-year period instead of a two-year period but result in less severe losses over the shortened time frame. The charge offs recorded by the Company during the great financial crisis of 2007-2010 totaled 12 basis points over the two-year period. The Company adjusted the charge-off rate down to seven basis points to reflect the current expected economic and operating environment based on the following:

The charge-off rate of seven basis points was used for the forecast period as of March 31, 2020 and June 30, 2020, with a reversion to the historical weighted average charge-off rate of 1.76 basis points for all remaining years in the calculation.

The calculated CECL reserve for the Company’s $39.9 billion at risk Fannie Mae servicing portfolio as of June 30, 2020 was $62.3 million compared to $34.7 million as of the date of adoption of ASU 2016-13 on January 1, 2020. The significant increase in the CECL reserve was principally related to the forecasted impacts of the Crisis. The weighted-average remaining life of the at risk Fannie Mae servicing portfolio as of June 30, 2020 was 7.7 years.

Two loans that defaulted in 2019, have aggregate specific reserves of $6.9 million as of June 30, 2020. The properties related to these two at risk loans were both off-campus student living facilities in the same city. The Company does not have any additional at risk loans related to student living facilities in this city.

As of June 30, 2020, the maximum quantifiable contingent liability associated with the Company’s guarantees under the Fannie Mae DUS agreement was $8.3 billion. The maximum quantifiable contingent liability is not representative of the actual loss the Company would incur. The Company would be liable for this amount only if all of the loans it services for Fannie Mae, for which the Company retains some risk of loss, were to default and all of the collateral underlying these loans were determined to be without value at the time of settlement.

NOTE 5—SERVICING

The total unpaid principal balance of loans the Company was servicing for various institutional investors was $100.0 billion as of June 30, 2020 compared to $93.2 billion as of December 31, 2019.

As of June 30, 2020 and December 31, 2019, custodial escrow accounts relating to loans serviced by the Company totaled $2.3 billion and $2.6 billion, respectively. These amounts are not included in the accompanying Condensed Consolidated Balance Sheets as such amounts

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are not Company assets. Certain cash deposits associated with the escrow accounts at other financial institutions exceed the Federal Deposit Insurance Corporation insured limits. The Company places these deposits with financial institutions that meet the requirements of the Agencies and where it believes the risk of loss to be minimal.

For most loans we service under the Fannie Mae DUS program, we are required to advance the principal and interest payments and guarantee fees for up to four months should a borrower cease making payments under the terms of their loan, including while that loan is in forbearance. After advancing for four months, we request reimbursement by Fannie Mae for the principal and interest advances, and Fannie Mae will reimburse us within 60 days of the request. As of June 30, 2020, the Company had advances of $1.1 million related to loans in our Fannie Mae portfolio. The Company has borrowing capacity, as more fully described in NOTE 6, to fund these advances. The Company had an immaterial amount of borrowings related to advances on the Fannie Mae DUS portfolio as of June 30, 2020.

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For loans we service under the Ginnie Mae (“HUD”) program, we are obligated to advance the principal and interest payments and guarantee fees until the HUD loan is brought current, fully paid, or assigned to HUD. We are eligible to assign a loan to HUD once it is in default for 30 days. If the loan is not brought current, or the loan otherwise defaults, we are not reimbursed for our advances until such time as we assign the loan to HUD or work out a payment modification for the borrower. For loans in default, we may repurchase those loans out of the Ginnie Mae security, at which time our advance requirements cease and we may then modify and resell the loan or assign the loan back to HUD, at which time we will be reimbursed for our advances. As of June 30, 2020, the Company had advances of $4.8 million for loans in our HUD portfolio.

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We are not obligated to make advances on any of the other loans we service in our portfolio, including loans we service under the Freddie Mac Optigo program.

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As of June 30, 2020 and December 31, 2019, the Company had $5.9 million and $2.1 million of aggregate outstanding principal and interest and tax and escrow advances, respectively. These advances are included as a component of Receivables, net in the Condensed Consolidated Balance Sheets.

NOTE 6—WAREHOUSE NOTES PAYABLE

At June 30, 2020, to provide financing for the Company’s loan origination activities, the Company has arranged for warehouse lines of credit. In support of the Agencies’ programs, the Company has committed and uncommitted warehouse lines of credit in the amount of $3.0 billion with certain national banks and a $1.5 billion uncommitted facility with Fannie Mae (collectively, the “Agency Warehouse Facilities”). The Company has pledged substantially all of its loans held for sale against the Agency Warehouse Facilities.

Additionally, at June 30, 2020, the Company has arranged for warehouse lines of credit in the amount of $0.3 billion with certain national banks to assist in funding loans held for investment under the Interim Program (“Interim Warehouse Facilities”). The Company has pledged all of its loans held for investment for which funding is obtained against these Interim Warehouse Facilities.

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The following table provides additional detail about the warehouse lines of credit at June 30, 2020:

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