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Note 10 - Mortgage Loans Held for Sale

6 Months Ended

Apr. 30, 2023

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

10.

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 are collateralized by the underlying property. Loans held for sale are recorded at fair value with the changes in the value recognized in the Condensed Consolidated Statements of Operations in “Financial services” revenue. We use forward sales of mortgage-backed securities (“MBS”), interest rate commitments from borrowers and forward commitments to sell loans to third parties to protect us from interest rate fluctuations.

At April 30, 2023 and October 31, 2022, $73.9 million and $92.5 million, respectively, of mortgages held for sale were pledged against our mortgage warehouse lines of credit (see Note 11). 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 the resale value of the home. The reserves for these estimated losses are included in “Financial services” liabilities on the Condensed Consolidated Balance Sheets. At April 30, 2023 and October 31, 2022, we had reserves specifically for 11 and 14 identified mortgage loans, respectively, as well as reserves for an estimate of future losses on mortgages sold but not yet identified to us.

The activity in our loan origination reserves during the three and six months ended April 30, 2023 and 2022 was as follows:

	Three Months Ended					Six Months Ended
	April 30,					April 30,
(In thousands)	2023		2022			2023		2022

Loan origination reserves, beginning of period	$	1,827	$	1,673		$	1,795	$	1,632
Provisions for losses during the period		45		49			77		90
Adjustments to pre-existing provisions for losses from changes in estimates		34		(8	)		34		(8	)
Loan origination reserves, end of period	$	1,906	$	1,714		$	1,906	$	1,714