Note 7 - Mortgage Loans Held for Sale

12 Months Ended

Oct. 31, 2018

Notes to Financial Statements

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

7.

Mortgage Loans Held for Sale

Our wholly owned mortgage banking subsidiary, K. Hovnanian American Mortgage, LLC (“K. Hovnanian Mortgage”) originates mortgage loans, primarily from the sale of our homes. Such mortgage loans are sold in the secondary mortgage market within a short period of time of origination. Mortgage loans held for sale consist primarily of single-family residential loans collateralized by the underlying property. We have elected the fair value option to record loans held for sale and therefore these loans are recorded at fair value with the changes in the value recognized in the Consolidated Statements of Operations in “Revenues: Financial services.” We currently use forward sales of mortgage-backed securities (“MBS”), interest rate commitments from borrowers and mandatory and/or best efforts forward commitments to sell loans to

third

-party purchasers to protect us from interest rate fluctuations. These short-term instruments, which do

not

require any payments to be made to the counterparty or purchaser in connection with the execution of the commitments, are recorded at fair value. Gains and losses on changes in the fair value are recognized in the Consolidated Statements of Operations in “Revenues: Financial services.”

At

October 31, 2018

and

2017,

$115.2

million and

$119.6

million, respectively, of mortgages held for sale were pledged against our mortgage warehouse lines of credit (see Note

8

). We

may

incur losses with respect to mortgages that were previously sold that are delinquent and which had underwriting defects, but only to the extent the losses are

not

covered by mortgage insurance or resale value of the home. The reserves for these estimated losses are included in the “Financial services” liability balances on the Consolidated Balance Sheets. As of

October 31, 2018

and

2017,

we had reserves specifically for

46

and

45

identified mortgage loans, respectively, as well as reserves for an estimate for future losses on mortgages sold but

not

yet identified to us. In both fiscal

2018

and

2017,

the adjustments to pre-existing provisions for losses from changes in estimates were primarily due to the settlements of disputes for significantly less than the amounts that had been previously reserved.

The activity in our loan origination reserves in fiscal

2018

and

2017

was as follows:

	Year Ended
	October 31,
(In thousands)	2018		2017
Loan origination reserves, beginning of period	$3,158		$8,137
Provisions for losses during the period	160		165
Adjustments to pre-existing provisions for losses from changes in estimates	(755	)	(4,571	)
Payments/settlements	-		(573	)
Loan origination reserves, end of period	$2,563		$3,158