Note K: 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 December 31, 2012 and 2011, it had cash deposits and letters of credit outstanding that totaled $53.1 million and $51.9 million, respectively, pertaining to land and lot option purchase contracts with aggregate purchase prices of $589.6 million and $407.6 million, respectively. At December 31, 2012 and 2011, the Company had $492,000 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 $137.7 million and $114.6 million at December 31, 2012 and 2011, respectively. Hedging instruments, including forward-delivery contracts, are utilized to mitigate the risk associated with interest rate fluctuations on IRLCs.

The following table summarizes the Company's rent expense, which primarily relates to its office facilities, model homes, furniture and equipment:


	YEAR ENDED DECEMBER 31,
(in thousands)		2012			2011			2010

Total rent expense¹	$	5,933		$	7,087		$	11,210
Less: income from subleases		(385	)		(456	)		(1,431	)

Net rent expense	$	5,548		$	6,631		$	9,779

¹: Excludes rent expense associated with the Company's discontinued operations, which totaled $556,000, $365,000 and $306,000 for the years ended December 31, 2012, 2011 and 2010, respectively.

At December 31, 2012, future minimum rental commitments under noncancellable leases with remaining terms in excess of one year were as follows:


(in thousands)

2013	$	4,501
2014		4,623
2015		4,087
2016		2,868
2017		1,751
Thereafter		2,621
Less: income from subleases		(226	)

Total lease commitments	$	20,225

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 December 31, 2012, development bonds totaled $108.4 million, while performance-related cash deposits and letters of credit totaled $52.0 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 loan purchasers that it breached certain limited standard industry representations and warranties in its sale agreements. There has been an increased industrywide effort by loan purchasers to defray losses from mortgages purchased 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:


	TWELVE MONTHS ENDED DECEMBER 31,											AVERAGE
		2012		2011		2010		2009		2008			2005-2007

Prime		48.6	%	42.2	%	34.9	%	32.9	%	51.8	%		67.7	%
Government (FHA/VA/USDA)		51.4		57.8		65.1		67.1		48.2			13.8
Alt A		–		–		–		–		–			16.5
Subprime		–		–		–		–		–			2.0

Total		100.0	%	100.0	%	100.0	%	100.0	%	100.0	%		100.0	%
Average FICO credit score		731		726		723		717		711			713
Average combined loan-to-value ratio		90.1	%	90.3	%	90.8	%	91.4	%	90.1	%		88.4	%

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 HUD, 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 definitively estimated, the Company has accrued $10.5 million for these types of claims as of December 31, 2012, but it may have additional exposure. (See "Part I, Item 3, Legal Proceedings.")

The following table displays changes in the Company's mortgage loan loss and related legal reserves during the years ended December 31, 2012, 2011 and 2010:


(in thousands)		2012			2011			2010

Balance at January 1	$	10,141		$	8,934		$	17,875
Provision for losses		1,156			1,368			8,461
Settlements made		(813	)		(161	)		(17,402	)

Balance at December 31	$	10,484		$	10,141		$	8,934

Subsequent changes in conditions or available information may change assumptions and estimates. Mortgage loan loss reserves and related legal reserves were included 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 obligations in cases of unexpected claims. Actual future warranty costs could differ from current estimates.

The following table summarizes changes in the Company's product liability reserves during the years ended December 31, 2012, 2011 and 2010:


(in thousands)		2012			2011			2010

Balance at January 1	$	20,648		$	20,112		$	24,268
Warranties issued		3,899			3,549			4,565
Changes in liability for accruals related to pre-existing warranties		1,866			2,823			5,645
Settlements made		(8,225	)		(5,836	)		(14,366	)

Balance at December 31	$	18,188		$	20,648		$	20,112

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 December 31, 2012 and 2011, RHIC had $14.8 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 changes in RHIC's insurance reserves during the years ended December 31, 2012, 2011 and 2010:


(in thousands)		2012			2011			2010

Balance at January 1	$	18,209		$	21,141		$	25,069
Insurance expense provisions or adjustments		(1,369	)		(900	)		(2,553	)
Loss expenses paid		(2,027	)		(2,032	)		(1,375	)

Balance at December 31	$	14,813		$	18,209		$	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.

In view of the inherent unpredictability of outcomes in legal matters, particularly where (a) the damages sought are speculative, unspecified or indeterminate, (b) the proceedings are in the early stages or impacted significantly by future legal determinations or judicial decisions, (c) the matters involve unsettled questions of law, multiple parties or complex facts and circumstances, or (d) insured risk transfer or coverage is undetermined, there is considerable uncertainty surrounding the timing or resolution of these matters, including a possible eventual loss. Given this inherent unpredictability, actual future litigation costs could differ from the Company's current estimates. At the same time, the Company believes that adequate provisions have been made for the resolution of all known claims and pending litigation for probable losses. In accordance with applicable accounting guidance, the Company accrues amounts for legal matters where it believes they present loss contingencies that are both probable and reasonably estimable. In such cases, however, the Company may be exposed to losses in excess of any amounts accrued and may need to adjust the accruals from time to time to reflect developments that could affect its estimate of potential losses. Moreover, in accordance with applicable accounting guidance, if the Company does not believe that the potential loss from a particular matter is both probable and reasonably estimable, it does not make an accrual and will monitor the matter for any developments that would make the loss contingency both probable and reasonably estimable. For matters as to which the Company believes a loss is reasonably probable and estimable, at December 31, 2012 and 2011, the Company had legal reserves of $17.9 million and $16.5 million, respectively. (See "Part I, Item 3, Legal Proceedings.") It currently estimates that the range of reasonably possible losses, in excess of amounts accrued, could be up to approximately $13 million in the aggregate.