HR Block 2008 Annual Report Download - page 34

Loan Repurchase Obligations. OOMC remains exposed to losses relating to mortgage loans it previously
originated. Non-prime mortgage loans originated by OOMC were sold either as whole-loan sales to single third-
party buyers or in the form of a securitization. In the case of a securitization, non-prime mortgage loans were pooled and
sold as mortgage backed securities, generally with a residual interest retained by OOMC. Retained residuals were
frequently pooled and sold in subsequent transactions referred to as net interest margin transactions.
OOMC entered into indemnification agreements with third-parties relating to mortgage loans transferred
through whole-loan sales or securitizations, which may require OOMC to repurchase loans previously sold or
otherwise indemnify third-parties for losses incurred by them up to the agreed upon amount of indemnification. In
some instances, H&R Block, Inc. was required to guarantee OOMC’s obligations. Obligations to repurchase loans
may arise from early payment default provisions or representation and warranty breaches. Early payment default
provisions involved third-party whole-loan buyers whereby OOMC is generally required to repurchase loans if the
first monthly payment due to the purchaser is not made. Given that OOMC ceased originating loans in January
2008, we do not expect continuing risk of loss related to early payment defaults. Repurchase obligations may also
arise from breaches of various representations and warranties OOMC made when selling loans, which in turn may
require OOMC to either repurchase the applicable mortgage loans or indemnify the purchaser or insurer. These
representations and warranties vary based on the nature of the transaction and the buyer’s requirements but
generally pertain to, among other things, (1) OOMC’s ownership of the loan, (2) the validity of the lien securing the
loan, (3) the absence of delinquent taxes or liens against property securing the loan, (4) the effectiveness of title
insurance on the property securing the loan, (5) the process used in selecting loans for inclusion in a transaction,
(6) compliance with loan criteria established by the purchaser, (7) the accuracy of information provided by the
borrowers, (8) compliance with OOMC underwriting guidelines, and (9) compliance with applicable laws. These
representations and warranties and corresponding repurchase obligations generally are not subject to stated
limits or a stated term and, therefore, may continue for the foreseeable future.
When OOMC repurchases loans, it is subject to loss for the difference between the principal amount of the loan
(together with accrued interest) and the value it will realize upon resale of the loan or liquidation of the property
securing the loan. OOMC routinely estimates future potential obligations relating to loan repurchases and records
liabilities currently for losses it may realize in the future. Future losses may exceed amounts currently reflected in
the financial statements and are impacted by the following factors:
쐍The volume of claims by third-parties requesting OOMC to repurchase loans. Claim volume may be impacted
by future delinquencies in the underlying loans and/or actual or perceived credit loss exposure;
쐍OOMC’s ability to defend against claims that do not represent valid representation and warranty breaches;
쐍The value that OOMC is able to realize for loans actually repurchased. Those values are impacted primarily by
demand and pricing for mortgage loans in the secondary market, and residential home prices.
To the extent that future claim volumes exceed current estimates, or the value of mortgage loans and residential
home prices decline, future losses may be greater than these estimates and those differences may be significant.
The valuation of OOMC’s residual interests and mortgage loans held for sale includes many estimates
and assumptions made by management surrounding interest rates, prepayment speeds and credit
losses. Variation in the factors underlying these assumptions could affect our results of operations.
At April 30, 2008, OOMC held residual interests valued at $16.7 million, mortgage loans held for sale (net of related
allowances) totaling $13.0 million and real estate owned of $6.2 million. The mortgage industry and housing
market continue to be extremely volatile, which could result in further impairments to OOMC’s residual interests
and mortgage loans held for sale. See additional discussion of the performance of mortgage operations in Item 7,
under “Discontinued Operations.”
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Most of our tax offices, except those in shared locations, are operated under leases throughout the U.S. Our
Canadian executive offices are located in a leased office in Calgary, Alberta. Our Canadian tax offices are operated
under leases throughout Canada.
RSM’s executive offices are located in leased offices in Bloomington, Minnesota. Its administrative offices are
located in leased offices in Davenport, Iowa. RSM also leases office space throughout the U.S.
14 H&R BLOCK 2008 Form 10K