HR Block 2007 Annual Report Download - page 68

expand existing capacity, we would be in violation of this warehouse securitization. The decision of the beneficial interest holders to
capacity requirement. complete a loan sale or a securitization is dependent on market
OOMC will not meet this financial covenant at July 31, 2007. We have, conditions.
however, obtained waivers from a sufficient number of warehouse For fiscal year 2007, the final disposition of loans sold by the Trusts
providers to allow OOMC to continue to fund loans using its off-balance was 61% loan sales and 39% securitizations. For fiscal year 2006, the
sheet financing facilities. At our current origination levels, we estimate final disposition of loans sold by the Trusts was 77% loan sales and 23%
we would only need waivers for between $3.0 billion and $4.0 billion of securitizations. The higher percentage of loan sale transactions versus
available capacity at any given time. However, the sale of OOMC is securitizations is due to more favorable pricing in the loan sale market
subject to various closing conditions, including that OOMC maintain at and also results in cash being received earlier. Loans sold through
least $8.0 billion of total capacity in its warehouse facilities throughout whole loan transactions will generally include first payment to the
the period to the closing date (of which at least $2.0 billion is to be in investor provisions that, in the past, have not been included in
the form of unused capacity at the closing date). securitization transactions. The overall value of the transaction is
If OOMC cannot obtain extensions or the waivers, warehouse facility analyzed when determining the disposal strategy. The loan sale market
providers would have the right to terminate their future funding has improved since April 30, 2007 and, as a result, we have committed to
obligations under the applicable warehouse facilities, terminate OOMC’s several whole loan sale transactions.
right to service the loans remaining in the applicable warehouse or If the Trusts sell the mortgage loans in a loan sale, we receive cash for
request funding of the 10% guarantee. This termination could adversely our beneficial interest in Trusts, but continue to maintain repurchase
impact OOMC’s ability to fund new loans and our ability to complete the reserves. In a securitization transaction, the Trusts transfer the loans
OOMC sales transaction. See Item 8, note 20 to our consolidated and the corresponding right to receive all payments on the loans to our
financial statements. consolidated special purpose entity, after which we transfer our
Waivers of the minimum net income financial covenant obtained by beneficial interest in Trusts and the loans to a securitization trust. The
OOMC on April 27, 2007 expire as follows: securitization trust meets the definition of a QSPE and is therefore not
(in 000s)
consolidated. The securitization trust issues bonds, which are
Amount supported by the cash flows from the pooled loans, to third-party
m40
investors. We retain an interest in the loans in the form of a trading
July 30, 2007 $2,250,000
July 31, 2007 1,500,000 residual interest and, therefore, usually assume the first risk of loss for
October 2, 2007 1,000,000
credit losses in the loan pool. As the cash flows of the underlying loans
October 31, 2007 2,002,000
and market conditions change, the value of our trading residual
January 15, 2008 500,000
interests may also change, resulting in potential write-ups or
April 25, 20082,000,000
impairment of these residual interests.
During fiscal year 2007, we amended our warehouse facility with At the settlement of each securitization, we record cash received and
Citigroup Global Markets Realty Corp (Citigroup) to split OOMC’s our residual interests. Additionally, we reverse the beneficial interest in
existing warehouse financing arrangement with Citigroup into two Trusts. The resulting residual interests are classified as trading
separate warehouse facilities, one of which is an on-balance sheet securities. See Item 8, note 1 to our consolidated financial statements
facility with capacity of $500.0 million and the other an off-balance for our methodology used in valuing our residual interests.
sheet facility. Loans totaling $52.7 million were held on the on-balance To accelerate the cash receipts from our residual interests, we
sheet line at April 30, 2007, with the related loans and liability reported securitize the majority of our trading residual interests in net interest
in assets and liabilities held for sale. margin (NIM) transactions. In a NIM transaction, the trading residual
When we sell loans to the Trusts, we remove the mortgage loans from interests are transferred to another QSPE (NIM trust), which then
our balance sheet and record the gain or loss on the sale, cash proceeds, issues bonds to third-party investors. The proceeds from the bonds are
MSRs, repurchase reserves and a beneficial interest in Trusts, which returned to us as payment for the trading residual interests. The bonds
represents our residual interest in the ultimate expected outcome from are secured by these pooled residual interests and are obligations of the
the disposition of the loans by the Trusts. Our beneficial interest in NIM trust. We retain a subordinated interest in the NIM trust, and
Trusts totaled $41.1 million and $188.0 million at April 30, 2007 and 2006, receive cash flows on our residual interest generally after the NIM
respectively. bonds issued to the third-party investors are paid in full.
Subsequently, the Trusts, in response to the exercise of a put option At the settlement of each NIM transaction, we remove the trading
by the third-party beneficial interest holders, either sell the loans residual interests sold from our consolidated balance sheet and record
directly to third-party investors or back to us to pool the loans for the cash received and the new residual interest retained. These new
H&R BLOCK 2007 Form 10K