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Note 15. Commitments and Contingencies
Commitments
In the ordinary course of business, the Company acquires rights under option agreements to purchase land or lots for use in future homebuilding operations. At March 31, 2012 and December 31, 2011, it had cash deposits and letters of credit outstanding that totaled $51.4 million and $51.9 million, respectively, pertaining to land and lot option purchase contracts with aggregate purchase prices of $509.9 million and $407.6 million, respectively. At March 31, 2012 and December 31, 2011, the Company had $1.1 million and $1.0 million, respectively, in commitments with respect to option contracts having specific performance provisions.
IRLCs represent loan commitments with customers at market rates generally up to 180 days before settlement. The Company had outstanding IRLCs with notional amounts that totaled $139.8 million and $114.6 million at March 31, 2012 and December 31, 2011, respectively. Hedging instruments, including forward-delivery contracts, are utilized to hedge the risks associated with interest rate fluctuations on IRLCs.
Contingencies
As an on-site housing producer, the Company is often required by some municipalities to obtain development or performance bonds and letters of credit in support of its contractual obligations. At March 31, 2012, development bonds totaled $93.3 million, while performance-related cash deposits and letters of credit totaled $47.8 million. At December 31, 2011, development bonds totaled $93.9 million, while performance-related cash deposits and letters of credit totaled $37.2 million. In the event that any such bonds or letters of credit are called, the Company would be required to reimburse the issuer; however, it does not believe that any currently outstanding bonds or letters of credit will be called.
Substantially all of the loans the Company originates are sold within a short period of time in the secondary mortgage market on a servicing-released basis. After the loans are sold, ownership, credit risk and management, including servicing of the loans, passes to the third-party purchaser. RMC retains no role or interest other than standard industry representations and warranties. The Company retains potential liability for possible claims by purchasers of the loans that it breached certain limited standard industry representations and warranties in its sale agreements. There has been an increased industrywide effort by purchasers of the loans to defray losses from purchased mortgages in an unfavorable economic environment by claiming to have found inaccuracies related to sellers’ representations and warranties in particular sale agreements. There is industry debate regarding the extent to which such claims are justified. The significant majority of these claims relate to loans originated in 2005, 2006 and 2007, when underwriting standards were less stringent.
The following table summarizes the composition of the Company’s mortgage loan types originated, its homebuyers’ average credit scores and its loan-to-value ratios:
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|
|
THREE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MONTHS ENDED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MARCH 31, |
|
|
|
TWELVE MONTHS ENDED DECEMBER 31, |
|
|
|
|
2012 |
|
2011 |
|
2010 |
|
2009 |
|
2008 |
|
2007 |
|
|
Prime |
|
49.1 |
% |
42.2 |
% |
34.9 |
% |
32.9 |
% |
51.8 |
% |
72.0 |
% |
|
Government (FHA/VA) |
|
50.9 |
|
57.8 |
|
65.1 |
|
67.1 |
|
48.2 |
|
20.1 |
|
|
Alt A |
|
- |
|
- |
|
- |
|
- |
|
- |
|
7.5 |
|
|
Subprime |
|
- |
|
- |
|
- |
|
- |
|
- |
|
0.4 |
|
|
Total |
|
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
|
Average FICO credit score |
|
730 |
|
726 |
|
723 |
|
717 |
|
711 |
|
713 |
|
|
Average combined loan-to-value ratio |
|
90.4 |
% |
90.3 |
% |
90.8 |
% |
91.4 |
% |
90.1 |
% |
89.1 |
% |
While the Company’s access to delinquency information is limited subsequent to loan sale, based on a review of information provided voluntarily by certain investors and on government loan reports made available by the U.S. Department of Housing and Urban Development, the Company believes that the average delinquency rates of RMC’s loans are generally in line with industry averages. Delinquency rates for loans originated in 2008 and subsequent years are significantly lower than those originated in 2005 through 2007. The Company primarily attributes this decrease in delinquency rates to the industrywide tightening of credit standards and the elimination of most nontraditional loan products.
The Company’s mortgage operations have established reserves for possible losses associated with mortgage loans previously originated and sold to investors based upon, among other things, actual past repurchases and losses through the disposition of affected loans; an analysis of repurchase requests received and the validity of those requests; and an estimate of potential liability for valid claims not yet received. Although the amount of an ultimate loss cannot be reasonably estimated, the Company has accrued $9.8 million for these types of claims as of March 31, 2012, but it may have additional exposure. (See “Part I, Item 3, Legal Proceedings.”)
The following table represents the changes in the Company’s mortgage loan loss and related legal reserves during the three-month periods presented:
|
(in thousands) |
|
2012 |
|
2011 |
|
|
Balance at January 1 |
|
$ |
10,141 |
|
$ |
8,934 |
|
|
Provision for losses |
|
(12 |
) |
(70 |
) |
|
Settlements made |
|
(345 |
) |
(140 |
) |
|
Balance at March 31 |
|
$ |
9,784 |
|
$ |
8,724 |
|
Subsequent changes in conditions or available information may change assumptions and estimates. Mortgage loan loss reserves and related legal reserves were reflected in “Accrued and other liabilities” within the Consolidated Balance Sheets, and their associated expenses were included in “Financial services” expense within the Consolidated Statements of Earnings.
The Company provides product warranties covering workmanship and materials for one year, certain mechanical systems for two years and structural systems for ten years. It estimates and records warranty liabilities based upon historical experience and known risks at the time a home closes as a component of cost of sales, as well as upon identification and quantification of the obligations in cases of unexpected claims. Actual future warranty costs could differ from current estimates.
The following table summarizes the changes in the Company’s product liability reserves during the three-month periods presented:
|
(in thousands) |
|
2012 |
|
2011 |
|
|
Balance at January 1 |
|
$ |
20,648 |
|
$ |
20,112 |
|
|
Warranties issued |
|
707 |
|
861 |
|
|
Changes in liability for accruals related to pre-existing warranties |
|
207 |
|
421 |
|
|
Settlements made |
|
(1,837 |
) |
(1,293 |
) |
|
Balance at March 31 |
|
$ |
19,725 |
|
$ |
20,101 |
|
The Company requires substantially all of its subcontractors to have workers’ compensation insurance and general liability insurance, including construction defect coverage. RHIC provided insurance services to the homebuilding segments’ subcontractors in certain markets until June 1, 2008. RHIC insurance reserves may have the effect of lowering the Company’s product liability reserves, as collectibility of claims against subcontractors enrolled in the RHIC program is generally higher. At March 31, 2012 and December 31, 2011, RHIC had $17.8 million and $18.2 million, respectively, in subcontractor product liability reserves, which were included in “Accrued and other liabilities” within the Consolidated Balance Sheets. Reserves for loss and loss adjustment expense are based upon industry trends and the Company’s annual actuarial projections of historical loss development.
The following table displays the changes in RHIC’s insurance reserves during the three-month periods presented:
|
(in thousands) |
|
2012 |
|
2011 |
|
|
Balance at January 1 |
|
$ |
18,209 |
|
$ |
21,141 |
|
|
Insurance expense provisions or adjustments |
|
- |
|
- |
|
|
Loss expenses paid |
|
(448 |
) |
- |
|
|
Balance at March 31 |
|
$ |
17,761 |
|
$ |
21,141 |
|
Expense provisions or adjustments to RHIC’s insurance reserves were included in “Financial services” expense within the Consolidated Statements of Earnings.
The Company is party to various legal proceedings generally incidental to its businesses. Litigation reserves have been established based on discussions with counsel and the Company’s analysis of historical claims. The Company has, and requires its subcontractors to have, general liability insurance to protect it against a portion of its risk of loss and to cover it against construction-related claims. The Company establishes reserves to cover its self-insured retentions and deductible amounts under those policies. Due to the high degree of judgment required in determining these estimated reserve amounts and to the inherent variability in predicting future settlements and judicial decisions, actual future litigation costs could differ from the Company’s current estimates. The Company believes that adequate provisions have been made for the resolution of all known claims and pending litigation for probable losses. At March 31, 2012 and December 31, 2011, the Company had legal reserves of $16.0 million and $16.5 million, respectively. (See “Part II, Item 1, Legal Proceedings.”)
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