HR Block 2010 Annual Report Download - page 59

For investments in mortgage-backed securities, amortization of premiums and accretion of discounts are
recognized in interest income using the interest method, adjusted for anticipated prepayments where applicable.
We update our estimates of expected cash flows periodically and recognize changes in calculated effective yields
as appropriate.
Our investment in the stock of the Federal Home Loan Bank (FHLB) is carried at cost, as it is a restricted
security, which is required to be maintained by H&R Block Bank (HRB Bank) for borrowing availability. The cost
of the stock represents its redemption value, as there is no ready market value.
REAL ESTATE OWNED –Real estate owned (REO) includes foreclosed properties securing mortgage loans.
Foreclosed assets are adjusted to fair value less costs to sell upon transfer of the loans to REO. Subsequently, REO
is carried at the lower of carrying value or fair value less costs to sell. Fair value is generally based on independent
market prices or appraised values of the collateral. Subsequent holding period losses and losses arising from the
sale of REO are expensed as incurred. REO is included in prepaid expenses and other current assets in the
consolidated balance sheets.
MORTGAGE LOANS HELD FOR INVESTMENT –Mortgage loans held for investment represent loans originated
or acquired with the ability and current intent to hold to maturity. Loans held for investment are carried at
amortized cost adjusted for charge-offs, net allowance for loan losses, deferred fees or costs on originated loans
and unamortized premiums or discounts on purchased loans. Loan fees and certain direct loan origination costs
are deferred and the net fee or cost is recognized in interest income over the lives of the related loans. Unearned
income, premiums and discounts on purchased loans are amortized or accreted into income over the estimated life
of the loan using methods that approximate the interest method based on assumptions regarding the loan
portfolio, including prepayments adjusted to reflect actual experience.
We record an allowance representing our estimate of credit losses inherent in the loan portfolio at the balance
sheet date. Loan recoveries and the provision for credit losses increase the allowance, while loan charge-offs
decrease the allowance. A current assessment of the value of the loan is made when the loan is no later than
60 days past due and any loan balance in excess of the value less costs to sell the property is charged off.
We evaluate mortgage loans less than 60 days past due on a pooled basis and record a loan loss allowance for
those loans in the aggregate. We stratify these loans based on our view of risk associated with various elements of
the pool and assign estimated loss rates based on those risks. Loss rates consider both the rate at which loans will
become delinquent (frequency) and the amount of loss that will ultimately be realized upon occurrence of a
liquidation of collateral (severity), and are primarily based on historical experience and our assessment of
economic and market conditions.
Loans are considered impaired when we believe it is probable we will be unable to collect all principal and
interest due according to the contractual terms of the note, or when the loan is 60 days past due. Impaired loans are
reviewed individually and a specific loan loss allowance is recorded based on the fair value of the underlying
collateral.
We classify loans as non-accrual when full and timely collection of interest or principal becomes uncertain, or
when they are 90 days past due. Interest previously accrued, but not collected, is reversed against current interest
income when a loan is placed on non-accrual status. Accretion of deferred fees is discontinued for non-accrual
loans. Payments received on non-accrual loans are recognized as interest income when the loan is considered
collectible and applied to principal when it is doubtful that full payment will be collected. Loans are not placed
back on accrual status until collection of principal and interest is reasonably assured as a result of the borrower
bringing the loan into compliance with the contractual terms of the loan. Prior to restoring a loan to accrual status,
management considers a borrower’s prospects for continuing future contractual payments.
From time to time, as part of our loss mitigation process, we may agree to modify the contractual terms of a
borrower’s loan. We have developed loan modification programs designed to help borrowers refinance adjustable-
rate mortgage loans prior to rate reset. In cases where we modify a loan and in so doing grant a concession to a
borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (TDR). We
may consider the borrower’s payment status and history, the borrower’s ability to pay upon a rate reset on an
adjustable-rate mortgage, the size of the payment increase upon a rate reset, the period of time remaining prior to
the rate reset and other relevant factors in determining whether a borrower is experiencing financial difficulty. A
borrower who is current may be deemed to be experiencing financial difficulty in instances where the evidence
suggests an inability to pay based on the original terms of the loan after the interest rate reset and, in the absence of
a modification, may default on the loan. We evaluate whether the modification represents a concession we would
not otherwise consider, such as a lower interest rate than what a new borrower of similar credit risk would be
offered. A loan modified in a troubled debt restructuring, including a loan that was current at the time of
modification, is placed on non-accrual status until we determine future collection of principal and interest is
reasonably assured, which generally requires the borrower to demonstrate a period of performance according to
H&R BLOCK 2010 Form 10K 43