Note L: 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, 2014 and 2013, it had cash deposits and letters of credit outstanding that totaled $72.8 million and $73.0 million, respectively, pertaining to land and lot option purchase contracts with aggregate purchase prices of $847.1 million and $869.1 million, respectively. At December 31, 2014 and 2013, the Company had $1.4 million and $2.5 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. During 2013, the increasing interest rate environment resulted in loan commitments being extended up to 270 days. The Company had outstanding IRLCs with notional amounts that totaled $148.0 million and $269.2 million at December 31, 2014 and 2013, 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)			2014			2013			2012

Total rent expense1		$	7,333		$	6,553		$	5,933
Less: income from subleases			(305	)		(323	)		(385	)

Net rent expense		$	7,028		$	6,230		$	5,548

1	Excludes rent expense associated with the Company's discontinued operations, which totaled $556,000 for the year ended December 31, 2012.

At December 31, 2014, future minimum rental commitments under noncancellable leases with remaining terms in excess of one year were as follows:

(in thousands)

2015	$	5,270
2016		4,276
2017		3,126
2018		2,062
2019		1,318
Thereafter		892
Less: income from subleases		(198	)

Total lease commitments	$	16,746

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, 2014, development bonds totaled $189.4 million, while performance-related cash deposits and letters of credit totaled $87.3 million. At December 31, 2013, development bonds totaled $138.9 million, while performance-related cash deposits and letters of credit totaled $64.0 million. In the event that any such bonds or letters of credit are called, the Company would be required to reimburse the issuer; it does not, however, 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 investor. 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.

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:

	YEAR ENDED DECEMBER 31,
		2014		2013		2012		2011		2010		2009

Prime		67.6	%	57.2	%	48.6	%	42.2	%	34.9	%	32.9	%
Government (FHA/VA/USDA)		32.4		42.8		51.4		57.8		65.1		67.1

Total		100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%
Average FICO credit score (unaudited)		732		733		731		726		723		717
Average combined loan-to-value ratio (unaudited)		87.8	%	89.8	%	90.1	%	90.3	%	90.8	%	91.4	%

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 related to 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 $1.4 million for these types of claims as of December 31, 2014, but it may have additional exposure. The Company accrued $11.5 million for these types of claims as of December 31, 2013. (See "Part I, Item 3, Legal Proceedings.")

The following table displays changes in the Company's mortgage loan loss reserves and related legal reserves during the years ended December 31, 2014, 2013 and 2012:

(in thousands)		2014			2013			2012

Balance at January 1	$	11,472		$	10,484		$	10,141
Provision for losses		5,634			1,580			1,156
Settlements made		(15,709	)		(592	)		(813	)

Balance at December 31	$	1,397		$	11,472		$	10,484

During 2014, the Company increased its legal reserve by $5.8 million related to the settlement of Ryland Mortgage Company's lawsuit with Countrywide and any other potential claims related to repurchase and indemnity obligations arising out of the sale of mortgage loans associated with loan purchase agreements between Countrywide and Ryland Mortgage Company.

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 its 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, 2014, 2013 and 2012:

(in thousands)		2014			2013			2012

Balance at January 1	$	23,139		$	18,188		$	20,648
Warranties issued		11,583			9,052			3,899
Changes in liability for accruals related to pre-existing warranties		1,299			1,891			1,866
Settlements made		(10,465	)		(5,992	)		(8,225	)

Balance at December 31	$	25,556		$	23,139		$	18,188

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. At December 31, 2014 and 2013, RHIC had $12.5 million and $13.9 million, respectively, in insurance 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 actuarial projections of historical loss development.

The following table displays changes in RHIC's insurance reserves during the years ended December 31, 2014, 2013 and 2012:

(in thousands)		2014			2013			2012

Balance at January 1	$	13,857		$	14,813		$	18,209
Insurance expense provisions or adjustments		3,200			1,445			(1,369	)
Loss expenses paid		(4,536	)		(2,401	)		(2,027	)

Balance at December 31	$	12,521		$	13,857		$	14,813

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 on 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) damages sought are speculative, unspecified or indeterminate; (b) proceedings are in the early stages or impacted significantly by future legal determinations or judicial decisions; (c) 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 ASC No. 450 ("ASC 450"), "Contingencies," 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 occasionally need to adjust the accruals to reflect developments that could affect its estimate of potential losses. Moreover, in accordance with ASC 450, 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 probable and reasonably estimable, it had legal reserves of $5.7 million and $17.2 million at December 31, 2014 and 2013, 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 $1.0 million in the aggregate.