HR Block 2006 Annual Report Download - page 95

The following table summarizes the key drivers of loan origination loan size and interest rates, coupled with updated valuation
volumes and related gains on sales of mortgage loans: assumptions. During fiscal year 2006 we updated our assumptions used
(dollars in 000s)
to value our MSRs. The assumptions were updated primarily to reflect
Year Ended April 30, 2006 2005 lower servicing costs, in particular interest paid to bondholders on
monthly loan prepayments, and higher discount rates. These changes in
Application process:
Total number of applications 369,210 335,203
assumptions increased the weighted average value of MSRs recorded
Number of sales associates(1) 2,814 3,526
during fiscal year 2006 by approximately $37.0 million (9 basis points of
Closing ratio(2) 60.3% 58.3%
total retained MSRs of 61 basis points) over the prior year.
Originations:
To mitigate the risk of short-term changes in market interest rates
Total number of originations 222,749 195,392
related to our loan originations and beneficial interest in Trusts, we use
WAC 7.87% 7.36%
various derivative financial instruments. During the current year, we
Average loan size (all loans) $ 183 $ 159
recorded a net $141.2 million in gains, compared to $46.9 million in the
Total originations $ 40,779,763 $ 31,001,724
Direct origination and acquisition expenses,
prior year, related to our interest rate swaps and other derivative
net $ 387,911 $ 378,674
instruments. This increase was primarily due to rising short-term
Revenue (loan value):
interest rates and an increase in the average notional amount of swap
Net gain on sale – gross margin(3) 1.76% 2.64%
arrangements to $8.4 billion in the current year, compared to $2.4 billion
(1) Includes all direct sales and back office sales support associates.
in fiscal year 2005. See Item 8, note 8 to the consolidated financial
(2) Percentage of loans funded divided by total applications in the period.
statements.
(3) Defined as gain on sale of mortgage loans (including gain or loss on derivatives,
In fiscal year 2006, we completed sales of available-for-sale residual
mortgage servicing rights and net of direct origination and acquisition expenses)
interests and recorded a gain of $31.5 million. These sales accelerated
divided by origination volume.
cash flows from these residual interests, effectively realizing previously
Despite a 31.5% increase in loan origination volume, gains on sales of recorded unrealized gains included in other comprehensive income. We
mortgage loans decreased $196.7 million, primarily as a result of recorded a gain of $15.4 million in the prior year on a similar
moderating demand by loan buyers and rising two-year swap rates. transaction.
Market interest rates, based on the two-year swap, increased from an During fiscal year 2006, our available-for-sale residual interests
average of 3.32% last year to 4.63% in the current year. However, our performed better than expected in our internal valuation models, with
WAC increased only 51 basis points, up to 7.87% from 7.36% in the prior lower credit losses than originally modeled, partially offset by higher
year. Due to competitive market conditions, we were unable to align our than expected interest rates. We recorded favorable pretax
WAC with increases in market rates. As such, our loan sale premium mark-to-market adjustments, which increased the fair value of these
declined 135 basis points, to 1.42% from 2.77% last year. In the current residual interests $53.3 million during the year. These adjustments were
year, we also increased our loss reserves $11.6 million above our normal recorded, net of write-downs of $18.0 million and deferred taxes of
loss accrual, primarily related to repurchase activity related to early $13.5 million, in other comprehensive income and will be accreted into
payment defaults, which reduced gains on sales of mortgage loans. The income throughout the remaining life of the residual interests.
mortgage industry has seen an increase in early payment defaults over Offsetting this increase were impairments of $34.1 million, which were
the past few months, and we have taken steps in reaction to our loss recorded in gains on sales of mortgage assets. Future changes in
exposure. interest rates or other assumptions, based on market conditions or
The initial value of MSRs we recorded in fiscal year 2006 increased to actual loan pool performance, could cause additional adjustments to the
61 basis points from 44 basis points in the prior year, which resulted in fair value of these residual interests and could cause changes to the
an increase of $113.0 million in gains on sales of mortgage loans. These accretion of these residual interests in future periods.
increases were primarily due to higher origination volumes, average
H&R BLOCK 2006 Form 10K
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