HR Block 2007 Annual Report Download - page 110

The key assumptions we used to originally estimate the cash flows Static pool credit losses are calculated by summing the actual and
and values of our residual interests are as follows: projected future credit losses and dividing them by the original balance
of each pool of assets.
2007 2006 2005
At April 30, 2007, the sensitivities of the current fair value of residual
Estimated credit losses 5.09% 2.55% 2.72%
interests and MSRs to 10% and 20% adverse changes in the above key
Discount rate 24.79% 25.00% 25.00%
assumptions are presented in the following table. These sensitivities are
Variable returns to third-party beneficial
hypothetical and should be used with caution. As the figures indicate,
interest holders LIBOR forward curve at closing
changes in fair value based on a 10% variation in assumptions generally
date
cannot be extrapolated because the relationship of the change in
assumption to the change in fair value may not be linear. Also in this
The key assumptions we used to estimate the cash flows and values
table, the effect of a variation of a particular assumption on the fair
of our residual interests and MSRs at April 30 are as follows:
value of the retained interest is calculated without changing any other
April 30, 2007 2006
assumptions; in reality, changes in one factor may result in changes in
Estimated credit losses –residual interests 5.04% 3.07%
another, which might magnify or counteract the sensitivities.
Discount rate –residual interests 24.82% 21.98%
(dollars in 000s)
Discount rate –MSRs 20.00% 18.00%
Variable returns to third-party beneficial interest holders LIBOR forward Residential Mortgage Loans
curve at valuation Beneficial
date AFS interest in Trading
Residuals Trusts Residuals MSRs
We originate both adjustable and fixed rate mortgage loans. A key
Carrying amount/fair value
assumption used to estimate the cash flows and values of the residual
of residuals $90,283 $ 41,057 $72,691 $253,067
interests is average annualized prepayment speeds. Prepayment speeds
Weighted average life (in
include voluntary prepayments, involuntary prepayments and scheduled
years) 5.7 2.4 4.1 1.4
principal payments.
$ impact on fair value:
m82 Prepayments (including
Prepayment rate assumptions are as follows:
defaults):
Months Outstanding Adverse 10% $(3,067) $263 $ (3,517) $ (22,410)
Without Prepayment Adverse 20% (1,186) 545 (3,735) (42,796)
Prior to Penalty Credit losses:
Penalty Adverse 10% $(17,313) $(920) $(6,898) N/A
Expiration Zero-3 Remaining Life Adverse 20% (34,201) (1,737) (12,608) N/A
Adjustable rate mortgage loans: Discount rate:
With prepayment penalties 27% 70% 28% Adverse 10% $(7,189) $(744) $ (2,238) $ (7,570)
Without prepayment penalties 36% 51% 24% Adverse 20% (13,543) (1,461) (4,296) (14,783)
Fixed rate mortgage loans: Variable interest rates:
With prepayment penalties 25% 40% 22% Adverse 10% $481$(8,481) $653 N/A
Adverse 20% 1,210 (16,890)1,174 N/A
For fixed rate mortgages without prepayment penalties, we use an
average prepayment rate of 20% over the life of the loans. Prepayment Increases in prepayment rates related to AFS residuals can generate a
rate is projected based on actual paydown including voluntary, positive impact to fair value when reductions in estimated credit losses
involuntary and scheduled principal payments. and prepayment penalties exceed the adverse impact to accretion from
Expected static pool credit losses are as follows: accelerating the life of the AFS residual interest.
Mortgage Loans Securitized in
2007 2006 2005 2004 2003 Prior
As of:
April 30, 20076.41% 6.79% 5.48% 3.45% 2.57% 5.11%
April 30, 2006–3.05% 2.48% 2.18% 2.13% 4.22%
April 30, 2005––2.83% 2.30% 2.08% 4.01%
April 30, 2004–––3.92% 4.35% 4.35%
H&R BLOCK 2007 Form 10K