HR Block 2007 Annual Report Download - page 112

$38.4 million for this obligation on our consolidated balance sheets, 2006, $744.0 million and $358.2 million, respectively, was maintained in
which is included in current liabilities held for sale. In May 2007 the various OC accounts. These accounts are not assets of the Company
purchaser exercised that right and we now hold the residual interest and are not reflected in the accompanying consolidated financial
from that securitization. statements, other than to the extent potential OC cash flows are
In the normal course of business, we maintain recourse with standard included as part of residual interest valuations.
representations and warranties customary to the mortgage banking OOMC has guaranteed up to a maximum amount equal to
industry. Violations of these representations and warranties may require approximately 10% of the aggregate principal balance of mortgage loans
us to repurchase loans previously sold. Repurchased loans are normally held by the Trusts before ultimate disposition of the loans by the Trusts.
sold in subsequent sale transactions. The following table summarizes This obligation can be called upon in the event adequate proceeds are
our loan repurchase activity: not available from the sale of the mortgage loans to satisfy the current
(dollars in 000s)
or ultimate payment obligations of the Trusts. No losses have been
April 30, 2007 2006 sustained on this commitment since its inception. The total principal
amount of Trust obligations outstanding as of April 30, 2007 and 2006
Loans repurchased during the period (1) $989,992 $297,606
Repurchase reserves added during period 388,733 73,562 was $1.5 billion and $7.8 billion, respectively. The fair value of mortgage
Repurchase reserves added as a percent of
loans held by the Trusts as of April 30, 2007 and 2006 was $1.5 billion
originations 1.44% 0.18%
and $7.9 billion, respectively. At April 30, 2007 and 2006 we recorded
(1) The fiscal year 2007 amount includes $11.2 million in loans repurchased from HRB
liabilities of $0.03 million and $1.7 million, respectively, which are
Bank.
included in current liabilities held for sale in the consolidated balance
sheets. Under the warehouse agreements, we may be required to
A liability has been established related to the potential loss on provide funds in the event of declining loan values, but only to the
repurchase of loans previously sold of $38.4 million and $33.4 million at extent of the 10% guaranteed amount. Funds provided as a result of
April 30, 2007 and 2006, respectively. On an ongoing basis, we monitor declining loan values at April 30, 2007 and 2006 totaled $78.3 million and
the adequacy of our repurchase liability, which is established upon the $19.7 million, respectively. Of the amount provided as of April 30, 2007,
initial sale of the loans, and is included in current liabilities held for sale $44.0 million relates to our off-balance sheet warehouse facilities and is
in the consolidated balance sheets. During the year ended April 30,
m84
included in the beneficial interest in Trusts while the remaining
2007, we experienced higher early payment defaults, resulting in an $34.3 million relates to our on-balance sheet facility. At April 30, 2006,
increase in actual and expected loan repurchase activity. As a result, we all the funds provided were included in the beneficial interest in Trusts.
increased our reserves accordingly. In establishing our reserves, we’ve WAREHOUSE FACILITIES.Substantially all non-prime mortgage loans
assumed all loans that are currently delinquent and subject to we originate are sold daily to the Trusts. Loans totaling $1.5 billion and
contractual repurchase terms will be repurchased, and that $7.8 billion were held by the Trusts as of April 30, 2007 and 2006,
approximately 5% of loans previously sold but not yet subject to respectively, and were not recorded on our consolidated balance sheets.
contractual repurchase terms will be repurchased. Based on historical The Trusts purchase the loans from us using committed warehouse
experience, we assumed an average 26% loss severity on all loans facilities, arranged by us, and totaling $9.3 billion in the aggregate.
repurchased and expected to be repurchased as of April 30, 2007. These facilities are subject to various OOMC performance triggers,
We are responsible for servicing mortgage loans for others of limits and financial covenants, including tangible net worth, income and
$63.9 billion and subservicing loans of $3.1 billion at April 30, 2007. leverage ratios and may be subject to margin calls. We hold an interest
We are required, under the terms of our securitizations, to build in the Trusts equal to the difference between the fair value of the assets
and/or maintain overcollateralization (OC) to specified levels, using the and cash proceeds, adjusted for contractual advance rates, received
excess cash flows received, until specified percentages of the from the Trusts. In addition to the margin call feature, loans sold to the
securitized portfolio are attained. We fund the OC account from the Trust are subject to repurchase if certain criteria are not met, including
proceeds of the sale. Future cash flows to the residual holder are used loan default provisions. Unfavorable fluctuations in loan value are
to amortize the bonds until a specific percentage of either the original guaranteed up to 10% of the original fair value. Additional uncommitted
or current balance is retained, which is specified in the securitization facilities of $2.0 billion bring total capacity to $11.3 billion at April 30,
agreement. The bondholders’ recourse to us for credit losses is limited 2007.
to the future excess cash flows and the amount of OC held by the trust. As of April 30, 2007, OOMC did not meet the ‘‘minimum net income’’
Upon maturity of the bonds, any remaining amounts in the trust are financial covenant contained in certain of its committed warehouse
distributed. The estimated future cash flows to be distributed to us are facilities. This covenant requires OOMC to maintain a cumulative
included as part of the residual valuation and are valued based upon minimum net income of at least $1 for the four consecutive fiscal
anticipated distribution from the OC account. As of April 30, 2007 and
H&R BLOCK 2007 Form 10K