16. Commitments and Contingencies

Surety Bonds and Letters of Credit.

We are required to obtain surety bonds and letters of credit in support of our obligations for land development and subdivision improvements, homeowner association dues, warranty work, contractor license fees and earnest money deposits. At September 30, 2016, we had outstanding surety bonds and letters of credit totaling $179.3 million and $58.9 million, respectively, including $32.6 million in letters of credit issued by HomeAmerican. The estimated cost to complete obligations related to these bonds and letters of credit were approximately $53.8 million and $31.9 million, respectively. All letters of credit as of September 30, 2016, excluding those issued by HomeAmerican, were issued under

our unsecured revolving credit facility (see Note 18 for further discussion of the revolving credit facility)

. We expect that the obligations secured by these performance bonds and letters of credit generally will be performed in the ordinary course of business and in accordance with the applicable contractual terms. To the extent that the obligations are performed, the related performance bonds and letters of credit should be released and we should not have any continuing obligations. However, in the event any such performance bonds or letters of credit are called, our indemnity obligations could require us to reimburse the issuer of the performance bond or letter of credit.

We have made no material guarantees with respect to third-party obligations.

Mortgage Loan Loss Reserves.

In the normal course of business, we establish reserves for potential losses associated with HomeAmerican’s sale of mortgage loans to third-parties. These reserves are created to address repurchase and indemnity claims by third-party purchasers of the mortgage loans, which claims arise primarily out of, but are not limited to, allegations of homebuyer fraud at the time of origination of the loan, missing documentation, loan processing defects or defective appraisals. These reserves are based upon, among other things: (1) pending claims received from third-party purchasers associated with previously sold mortgage loans; (2) a current assessment of the potential exposure associated with future claims of loan processing defects or homebuyer fraud in mortgage loans originated in prior periods; and (3) historical loss experience. In addition to reserves established for mortgage loans previously sold to third-parties, we establish reserves for loans that we have been required to repurchase. Our mortgage loan reserves are reflected as a component of accrued liabilities in the financial services section of the consolidated balance sheets, and the associated expenses are included in expenses in the financial services section of the consolidated statements of operations and comprehensive income.

The following table summarizes the mortgage loan loss reserve activity for the three and nine months ended September 30, 2016 and 2015:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2016		2015			2016			2015
	(Dollars in thousands)
Balance at beginning of period	$	160	$	1,058		$	201		$	810
Expense provisions		6		39			6			764
Cash payments		-		(325	)		-			(325	)
Adjustments		-		(568	)		(41	)		(1,045	)
Balance at end of period	$	166	$	204		$	166		$	204

Legal Reserves.

Because of the nature of the homebuilding business, we have been named as defendants in various claims, complaints and other legal actions arising in the ordinary course of business, including product liability claims and claims associated with the sale and financing of homes. In the opinion of management, the outcome of these ordinary course matters will not have a material adverse effect upon our financial condition, results of operations or cash flows.

Lot Option Contracts

. In the normal course of business, we enter into lot option purchase contracts (“Option Contracts”), generally through a deposit of cash or a letter of credit, for the right to purchase land or lots at a future point in time with predetermined terms. The use of such land option and other contracts generally allow us to reduce the risks associated with direct land ownership and development, reduces our capital and financial commitments, and minimizes the amount of land inventories on our consolidated balance sheets. Our obligation with respect to Option Contracts is generally limited to forfeiture of the related deposits. At September 30, 2016, we had cash deposits and letters of credit totaling $6.9 million and $2.4 million, respectively, at risk associated with the option to purchase 2,504 lots.