HR Block 2006 Annual Report Download - page 76

HRBMC, a wholly-owned subsidiary of Option One, is a retail underwritten in a standardized procedure that complies with federal
mortgage lender for prime, non-prime and government loans and is and state laws and regulations. The guidelines are primarily intended to
licensed to conduct business in all 50 states. HRBMC is an approved assess the value of the mortgaged property, evaluate the adequacy of
seller/servicer for Fannie Mae and Freddie Mac and is HUD authorized the property as collateral for the mortgage loan, and assess the
to originate and underwrite FHA and VA mortgage loans. creditworthiness of the related borrower. The underwriting process
In the current year, we terminated approximately 1,200 employees may include an automated underwriting decision system as a tool to
and closed some of our branch offices through a restructuring. This assist in the assessment of the creditworthiness of the borrower. Based
resulted in a pretax charge of $12.6 million. See additional discussion of upon this assessment, we advise the broker whether the loan
our restructuring charge in Item 8, note 16 to the consolidated financial application meets our underwriting guidelines and product description
statements. by issuing a loan approval or denial. In some cases, we issue a
LOAN ORIGINATION –We originated $40.8 billion, $31.0 billion and ‘‘conditional approval,’’ which requires the submission of additional
$23.3 billion in mortgage loans during fiscal years 2006, 2005 and 2004, information or clarification. The mortgage loans are underwritten with a
respectively. Information regarding our non-prime loan originations is view toward resale in the secondary market.
as follows: RETAIL. HRBMC originates our retail mortgage loans. In fiscal year
2006, 69% of our retail originations were non-prime and 31% were prime,
Year Ended April 30, 2006 2005 2004
compared to 75% and 25%, respectively, in 2005. During fiscal year 2006,
Loan type:
approximately 20% of HRBMC’s loans were made to existing H&R Block
2-year ARM 43.9% 61.6% 63.4%
clients compared to 35% in 2005.
3-year ARM 1.9% 4.0% 5.2%
The application and approval process in our retail locations is similar
Fixed 1st 12.7% 17.7% 28.7%
to those described above under ‘‘Wholesale.’’
Fixed 2nd 4.9% 3.8% 1.6%
Interest only 1st 21.1% 12.6% 0.7%
SALE AND SECURITIZATION OF LOANS –Substantially all non-prime
40-Year 13.4% 0.0% 0.0%
mortgage loans are sold daily to qualifying special purpose entities
Other 2.2% 0.3% 0.4%
(Trusts). See discussion of our loan sale and securitization process in
Percentage of fixed-rate mortgages 20.0% 22.1% 30.4%
Item 7, under ‘‘Off-Balance Sheet Financing Arrangements.’’ At April 30,
Percentage of adjustable-rate mortgages 80.0% 77.9% 69.6%
Percentage of first mortgage loans owner- 2006, Option One held $407.5 million in loans for transfer to the H&R
occupied 91.7% 92.6% 92.9%
Block Bank when it commences operations in May 2006. These loans
Loan purpose:
have been classified as held for investment on our consolidated
Cash-out refinance 60.2% 63.5% 67.1%
balance sheet.
Purchase 35.0% 30.8% 26.0%
Substantially all of our retail prime mortgage loans are sold to
Rate or term refinance 4.8% 5.7% 6.9%
Countrywide Home Loans, Inc. (Countrywide). The majority of
WHOLESALE. Wholesale loan originations involve an
mortgage loans sold to Countrywide are underwritten through an
independent broker who assists the borrower in completing the
automated system under which Countrywide assumes our
loan application, which includes securing information regarding
representations and warranties, which comply with Countrywide’s
their assets, liabilities, income, credit history, employment history
underwriting guidelines. This agreement allows us to achieve improved
and personal information. We require a credit report on each
execution due to price, efficiencies in delivery, and elimination of
applicant from an industry-recognized credit reporting company. In
redundancies in operations. We do not retain servicing rights related to
evaluating an applicant’s credit history, we use credit bureau risk
the prime mortgage loans. HRBMC non-prime mortgage loans are sold
scores, generally known as a FICO score, which is a statistical
to Option One. See discussion of our prime warehouse line in Item 7,
ranking of likely future credit performance developed by Fair,
under ‘‘Capital Resources and Liquidity by Segment.’’
Isaac & Company and provided by the three national credit data
SERVICING –Loan servicing involves collecting and remitting
repositories. Qualified independent appraisers are required to
mortgage loan payments, making required advances, accounting for
appraise mortgaged properties used to secure mortgage loans. The
principal and interest, holding escrow for payment of taxes and
broker then identifies a lender who offers a loan product best
insurance and contacting delinquent borrowers. We receive loan-
suited to the borrower’s financial needs. No one broker currently
servicing fees monthly over the life of the mortgage loans. We only
originates more than 0.7% of our total non-prime production.
service non-prime mortgage loans. At the end of fiscal year 2006, we
Upon receipt of an application from a broker, a credit report and an serviced 441,981 loans totaling $73.4 billion, compared to 435,290 loans
appraisal report, one of our branch offices processes and underwrites totaling $68.0 billion at April 30, 2005 and 324,364 loans totaling
the loan. Our underwriting guidelines require mortgage loans be $45.3 billion at April 30, 2004.
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H&R BLOCK 2006 Form 10K