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 June 30, 2015 and December 31, 2014, it had cash deposits and letters of credit outstanding that totaled $75.2 million and $72.8 million, respectively, pertaining to land and lot option purchase contracts with aggregate purchase prices of $783.7 million and $847.1 million, respectively. At June 30, 2015 and December 31, 2014, the Company had $1.4 million in commitments with respect to option contracts having specific performance provisions.

In the normal course of business and pursuant to its risk-management policy, RMC enters, as an end user, into derivative instruments, including forward-delivery contracts for loans; options on forward-delivery contracts; and options on futures contracts, to minimize the impact of movement in market interest rates on IRLCs. Major factors influencing the use of various hedging contracts include general market conditions, interest rates, types of mortgages originated and the percentage of IRLCs expected to fund. The market risk assumed while holding the hedging contracts generally mitigates the market risk associated with IRLCs. RMC is exposed to credit-related losses in the event of nonperformance by counterparties to certain hedging contracts. Credit risk is limited to those instances where RMC is in a net unrealized gain position. It manages this credit risk by entering into agreements with counterparties meeting its credit standards and by monitoring position limits. IRLCs represent loan commitments with customers at market rates generally up to 180 days before settlement and expose RMC to market risk should mortgage rates increase. IRLCs had interest rates generally ranging from 3.5 percent to 4.8 percent at June 30, 2015 and December 31, 2014. Outstanding IRLCs had notional amounts that totaled $311.5 million and $148.0 million at June 30, 2015 and December 31, 2014, respectively. Hedging instruments, including forward-delivery contracts, are utilized to mitigate the risk 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 or letters of credit in support of its contractual obligations. At June 30, 2015, performance bonds totaled $203.1 million, while performance-related cash deposits and letters of credit totaled $97.0 million. At December 31, 2014, performance bonds totaled $189.4 million, while performance-related cash deposits and letters of credit totaled $87.3 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 RMC 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, but it does retain 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 RMC’s mortgage loan types originated, its homebuyers’ average credit scores and its loan-to-value ratios:



	SIX MONTHS ENDED JUNE 30,
	SIX MONTHS ENDED JUNE 30,		TWELVE MONTHS ENDED DECEMBER 31,
	2015		2014		2013		2012		2011		2010
Prime	66.2	%	67.6	%	57.2	%	48.6	%	42.2	%	34.9	%
Government (FHA/VA/USDA)	33.8	%	32.4	%	42.8	%	51.4	%	57.8	%	65.1	%
Total	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%
Average FICO credit score	730		732		733		731		726		723
Average combined loan-to-value ratio	87.9	%	87.8	%	89.8	%	90.1	%	90.3	%	90.8	%

RMC has 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, RMC accrued $1.3 million and $1.4 million for these types of claims as of June 30, 2015 and December 31, 2014, respectively, but it may have additional exposure. 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 following table displays the changes in the Company’s mortgage loan loss reserves and related legal reserves during the six-month periods presented:



(in thousands)	2015			2014
Balance at January 1	$	1,397		$	11,472
Provision for losses	242			6,056
Settlements made	(322		)	(231		)
Balance at June 30	$	1,317		$	17,297

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 the changes in the Company’s product liability reserves during the six-month periods presented:



(in thousands)	2015			2014
Balance at January 1	$	25,556		$	23,139
Warranties issued	3,963			4,562
Changes in liability for accruals related to pre-existing warranties	(13		)	657
Settlements made	(5,018		)	(4,679		)
Balance at June 30	$	24,488		$	23,679

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 June 30, 2015 and December 31, 2014, RHIC had $11.0 million and $12.5 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 actuarial projections of the Company's historical loss development and industry trends.

The following table displays changes in RHIC’s insurance reserves during the six-month periods presented:



(in thousands)	2015			2014
Balance at January 1	$	12,521		$	13,857
Insurance expense provisions or adjustments	—			1,900
Loss expenses paid	(1,569		)	(2,488		)
Balance at June 30	$	10,952		$	13,269

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. However, 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 $6.4 million and $5.7 million at June 30, 2015 and December 31, 2014, respectively. (See “Part II, Item 1, Legal Proceedings.”) It currently estimates that the range of reasonably possible losses, in excess of amounts accrued, could be up to approximately $1.3 million in the aggregate.