HR Block 2007 Annual Report Download - page 44

prime loans. Under these conditions non-prime originators generally perform on its contractual obligations. We manage this risk through the
reported significant increases in losses and many were unable to meet use of a policy that includes credit standard guidelines, counterparty
their financial obligations. As a result, during our fourth quarter our diversification, monitoring of counterparty financial condition, use of
mortgage operations originated mortgage loans that, by the time we master netting agreements with counterparties, and exposure limits
sold them in the secondary market, were valued at less than par. based on counterparty credit, exposure amount and management risk
Conditions in the non-prime mortgage industry resulted in significant tolerance. The policy is reviewed on an annual basis and as conditions
losses in our mortgage operations during the fourth quarter of fiscal warrant. See Item 7A, under ‘‘Discontinued Operations’’ and Item 8,
year 2007. See additional discussion of the performance of our mortgage note 20 to our consolidated financial statements for discussion of our
operations in Item 7, under ‘‘Discontinued Operations.’’ If conditions in derivative instruments.
the non-prime mortgage industry do not improve, it could adversely DELINQUENCY RATES –Our underwriting criteria or collection
affect the results of our mortgage operations. methods may not provide adequate protection against the risks inherent
LEGISLATION AND REGULATION –Several states and cities are in the loans we originate and sell. In the event of a default, we may be
considering or have passed laws, regulations or ordinances aimed at required to repurchase loans previously sold. Repurchased loans are
curbing predatory lending and servicing practices. The federal normally sold in subsequent sale transactions. In the event a
government is also considering legislative and regulatory proposals in repurchased loan cannot be sold, the collateral value of the financed
this regard. In general, these proposals involve lowering the existing item may not cover the outstanding loan balance and costs of recovery.
federal HOEPA thresholds for defining a ‘‘high-cost’’ loan and In the event our mortgage loans held for sale or mortgage loans
establishing enhanced protections and remedies for borrowers who underlying our residual interests in securitizations experience higher
receive such loans. If unfavorable laws and regulations are passed, it delinquencies, foreclosures, repossessions or losses than anticipated,
could restrict our ability to originate loans. If rating agencies refuse to our results of operations or financial condition could be adversely
rate our loans, loan buyers may not want to purchase loans labeled as affected. Any sustained period of increased delinquencies, foreclosures
‘‘high-cost,’’ and it could restrict our ability to sell our loans in the or losses could harm our ability to originate and sell loans, the prices
secondary market. Accordingly, all of these items could adversely affect we receive on our loans, or the values of our mortgage servicing rights
our results of operations. and residual interests in securitizations, which could adversely affect
m16
In 2002, the Federal Reserve Board adopted changes to Regulation C our financial condition and results of operations. See additional
promulgated under the HMDA. Among other things, the new regulations discussion of our loan repurchases in Item 8, note 20 to the
require lenders to report pricing data on loans with annual percentage consolidated financial statements.
rates that exceed the yield on treasury bills with comparable maturities REAL ESTATEMARKET –Our residual interests and beneficial
by 3%. The expanded reporting was effective in 2004 for reports filed in interest in Trusts are secured by mortgage loans, which are in turn
2005. We anticipate that a majority of our loans would be subject to the secured by residential real estate. Any material decline in real estate
expanded reporting requirements. The expanded reporting does not values would likely result in higher delinquencies, defaults and
provide for additional loan information such as credit risk, debt-to- foreclosures and losses. Additionally, a significant portion of the
income ratio, loan-to-value ratio, documentation level or other salient mortgage loans we originate or service is secured by properties in
loan features. However, reported information may lead to increased California. A decline in the economy or the residential real estate
litigation as the information could be misinterpreted by third parties market values, or the occurrence of a natural disaster not covered by
and could adversely affect our results of operations. standard homeowners’ insurance policies, such as an earthquake,
COUNTERPARTY CREDIT RISK –Derivative instruments involve hurricane or wildfire, could decrease the value of mortgaged properties.
counterparty credit risk, which is the risk that a counterparty may fail to
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We completed construction of new corporate headquarters during fiscal which is located in Kansas City, Missouri. Our former corporate
year 2007, and consolidated the majority of our Kansas City-based headquarters building was sold during fiscal year 2007.
personnel into one facility. We own our new corporate headquarters, Most of our tax offices, except those in shared locations, are operated
under leases throughout the U.S. Our Canadian executive offices are
H&R BLOCK 2007 Form 10K