HR Block 2007 Annual Report Download - page 38

by issuing a loan approval or denial. In some cases, we issue a When non-prime loans are sold or securitized, we generally retain the
‘‘conditional approval,’’ which requires the submission of additional right to service the loans, which results in MSR assets being recorded
information or clarification. The mortgage loans are underwritten with a on our balance sheet. Assumptions used in estimating the value of MSRs
view toward resale in the secondary market. are discussed in Item 7, ‘‘Critical Accounting Policies’’ and Item 8, note 1
RETAIL. HRBMC originates our retail mortgage loans. In fiscal year to our consolidated financial statements. In addition to servicing loans
2007, 58% of HRBMC’s originations were non-prime and 42% were we originate, we also service non-prime loans originated by other
prime, compared to 69% and 31%, respectively, in 2006. During fiscal lenders, designated in the above table as sub-servicing. MSRs are
year 2007, approximately 24% of HRBMC’s loans were made to existing recorded only in conjunction with our originated or purchased loan-
H&R Block clients compared to 20% in 2006. servicing portfolio.
The application and approval process in our retail locations is similar GEOGRAPHIC DISTRIBUTION –The following table details the
to those described previously under ‘‘Wholesale.’’ HRBMC’s non-prime percent of non-prime loan origination volume and our loan origination
mortgage loans are primarily sold to OOMC. Substantially all of branches by state, excluding our retail channel, for fiscal years 2007 and
HRBMC’s prime mortgage loans are sold to Countrywide Home Loans, 2006:
Inc. (Countrywide). The majority of mortgage loans sold to
2007 2006
Countrywide are underwritten through an automated system under
Percentof Number of Percent of Number of
which Countrywide assumes our representations and warranties, which
State Volume BranchesVolume Branches
comply with Countrywide’s underwriting guidelines. This agreement
California 23.5% 424.5% 6
allows us to achieve improved execution due to price, efficiencies in
Florida 11.0% 310.7% 3
delivery, and elimination of redundancies in operations. We do not
New York 9.2% 1 9.1% 2
retain servicing rights related to the prime mortgage loans. See
Texas 6.4% 2 4.6% 3
discussion of our prime warehouse line in Item 7, under ‘‘Capital Massachusetts 5.0% 1 6.7% 2
New Jersey 4.9% 1 5.1% 1
Resources and Liquidity.’’
Other 40.0% 10 39.3% 17
SALE AND SECURITIZATION OF LOANS –Substantially all non-prime
mortgage loans are sold daily to qualifying special purpose entities SEASONALITY OF BUSINESS –Residential mortgage volume is not
m10
(Trusts). See discussion of our loan sale and securitization process in subject to significant seasonal fluctuations. The mortgage business is
Item 7, under ‘‘Off-Balance Sheet Financing Arrangements.’’ cyclical, however, and directly affected by national economic
Loans meeting certain specified criteria are sold to HRB Bank, which conditions, trends in business and finance and is impacted by changes
holds the loans for investment purposes. in interest rates.
SERVICING –Loan servicing involves collecting and remitting COMPETITIVE CONDITIONS –The non-prime residential mortgage
mortgage loan payments, making required advances, accounting for loan market is highly competitive. There are a substantial number of
principal and interest, holding escrow for payment of taxes and companies competing in the residential loan market, including mortgage
insurance and contacting delinquent borrowers. We receive loan- banking companies, commercial banks, savings associations, credit
servicing fees monthly over the life of the mortgage loans. We primarily unions and other financial institutions. During fiscal year 2007, the
service non-prime mortgage loans. At the end of fiscal year 2007, we declining performance of non-prime originations, including early
serviced 384,156 loans totaling $67.0 billion, compared to 441,981 loans payment defaults by borrowers, caused a significant increase in losses,
totaling $73.4 billion at April 30, 2006 and 435,290 loans totaling primarily related to loan repurchase obligations and decreases in
$68.0 billion at April 30, 2005. secondary market pricing in the industry. Unable to meet these financial
The following table summarizes our servicing portfolio by origin andobligations, many originators entered bankruptcy or otherwise ceased
includes related mortgage servicing rights (MSRs) as of April 30, 2007 non-prime lending operations during the year. Many of the remaining
and the rate we earned on each type of servicing during fiscal year 2007: competitors are well-capitalized companies that compete vigorously on
(dollars in 000s)
price, service and product differentiation.
Base Rate
There are also numerous companies competing in the business of
Type of Servicing Principal Balance MSR Balance Earned
servicing non-prime loans. No one firm is a dominant supplier of non-prime
Originated $63,868,068 $253,067 0.39%
and prime mortgage loans or a dominant servicer of non-prime loans.
Sub-servicing 3,069,073 –0.22%
Inside B&C Lending ranked OOMC as the number four originator,
Purchased 59,908 –0.50%
based on market share as of March 31, 2007, and the number four
Total $66,997,049 $253,067 0.37%
servicer, based on servicing volume as of March 31, 2007, of non-prime
loans in the industry.
H&R BLOCK 2007 Form 10K