Richard Dugas - Chairman, President, and Chief Executive Officer
Roger Cregg - Chief Financial Officer and Executive Vice President
James Zeumer - Vice President of Investor & Corporate Communications
Michael Schweninger - Principal Accounting Officer, Vice President and Controller
Daniel Oppenheim - Crédit Suisse First Boston, Inc.
Nishu Sood - Deutsche Bank AG
Stephen East -- Ticonderoga Securities
Kenneth Zener – KeyBanc
Michael Rehaut – JP Morgan
Megan McGrath, Barclays Capital
David Goldberg - UBS Investment Bank
Dennis McGill – Selman
Joshua Pollard – Goldman Sachs
Carl Reichardt -Wells Fargo
Susan Berliener – JP Morgan
PulteGroup, Inc., (PHM) Q3 2010 Earnings Call November 3, 2010 8:30 AM ET
Good day, ladies and gentlemen, and welcome to the Q3 2010 PulteGroup, Inc. Earnings Conference Call. My name is Kaitlyn, and I will be your operator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today’s call, Mr. James Zeumer. Please proceed.
Thank you, Kaitlyn. This is Jim Zeumer, Vice President of Investor Relations for Pulte Group, and I want to thank everyone for joining this morning’s call to discuss our Q3 results, and nine month results, for the period ended September 30, 2010.
On the call with me today are Richard Dugas, Chairman, President and Chief Executive Officer; Roger Cregg, Executive Vice President and Chief Financial Officer; and Mike Schweninger, Vice President and Controller.
For those of you who have access to the Internet, a slide presentation, available at www.pultegroupinc.com will accompany this discussion. The slides will be archived on the site for the next 30 days for those who want to review it later. As a reminder, on August 18, 2009, PulteGroup completed its merger with Centex Corporation. Results reported in the release and on this call reflect the inclusion of Centex's operations for the third quarter of 2010, although results for the comparable prior period have not been adjusted for this merger.
Finally, I want to alert everyone that certain statements and comments made during the course of this call must be considered forward-looking statements as defined by the Securities Litigation Reform Act of 1995. PulteGroup believes such statements are based on reasonable assumptions, but there are no assurances that actual outcomes will not be materially different from those discussed today. All forward-looking statements are based on information available to the company on the date of this call, and the company does not undertake any obligation to publicly update or revise any forward-looking statements as a result of new information in the future.
Participants in today's call should refer to PulteGroup's annual report on Form 10-K for the year ended December 31, 2009, and this morning's press release for a detailed list of risks and uncertainties associated with the business. Certain statements during this call also contain references to non-GAAP financial measures. See this morning's press release, and the accompanying slide presentation, which is available on our corporate website for reconciliation of the non-GAAP financial measures to the comparable GAAP numbers. As always, at the end of our prepared comments, we will have time for Q&A. We will wait until then to open the queue. I’ll now turn over the call over to Richard Dugas for his opening comments. Richard?
Thanks Jim, and good morning everyone. As this morning’s press release detail, Pulte Group reported a meaningful loss for its Q3, driven primarily by the inclusion of two large charges. Reporting these numbers is disappointing, especially given the tremendous strides our operations have made over the last 12 months. Given the charges and their impact on the quarter, I will hold my comments on the state of the industry and our business until later. Right now, let me turn the call over to Roger for a review of our Q3 results and details on the charges taken during the period. Roger?
Thank you, Richard, and good morning everyone. Revenues from the quarter for home settlements, from the home building operation decreased approximately 3% from the prior year quarter, to approximately $1 billion. Decrease revenues reflect lower unit closings that were below prior year by approximately 7%. The average sales price increased by a percent versus the prior year quarter, to an average of $265,000. This increase is contributed to the geographical and product mix of homes closed during the quarter.
In Q3, land sales generated approximately $6 million in total revenues, which is an increase of approximately $3 million versus the previous year’s quarter. The sales in the quarter mainly reflect the sales of lot and land parcels to other builders. Home building gross profits for home settlements for the quarter, including home building interest expense is approximately $72 million versus a loss of $26 million in the prior year quarter.
For those of us with access to the webcast slides, I refer you to slide number six, the adjusted margin analysis, which outlines our gross margins. Home building gross margins from home settlements as a percentage of revenues was 7% compared with a negative 2.5% in Q3 2009. Adjusting the current quarter’s gross margins for land and community valuation charges, interest expense and the acquisition accounting write up for the Centex work in progress, resulted in a conversion of 16.7%, compared to an adjusted margin of 17.2% for Q2 2010. Or, on a sequential basis, a decrease of 50 basis points on an adjusted basis.
This decrease is mainly attributed to the increase in commodity cost, experienced earlier in the year. On a comparative basis versus the previous year’s Q3 conversion of 13.1%, the adjusted increase is approximately 360 basis points. The improved margins versus the previous year’s quarter are a direct result of lower sales incentives, house cost improvements, and relatively stable market prices.
Home building interest expense increased during the quarter to approximately $49 million versus approximately $36 million in the prior year. Included in the interest expense of $49 million is an additional $8 million of expense related to land and community valuation adjustment taken in the current quarter.
Also included in the gross margin for the quarter was a charge related to land and community valuation adjustment in the amount of approximately $50 million. Consistent with prior quarters, we have reviewed all of our communities for impairment indicators. Based on this review in Q3, we identified and tested 48 communities for potential impairments and valuation adjustments. We recorded valuation adjustments on 28 communities for the quarter, of which 14 communities, or 50%, have been previously impaired.
Additionally, the larger impairments for the quarter, which represented approximately $40 million or 80% of the total $50 million impairments were mainly concentrated in central Florida, Las Vegas, and the Tucson markets. Also for the quarter the acquisition accounting work and process charge is approximately $900,000. The total net gain from land sales posted for the quarter was approximately $2 million. The gain is mainly attributed to the sales of lots and parcels of land in the quarter, offset by the fair market value adjustment in the current quarter for land being held for disposition, and land sold in the amount of approximately $600,000, which is included in the land cost of sales.
Home building SG&A expenses, that’s a percent of home sales for the quarter, was approximately 40.7% or $417 million, an increase of approximately $208 million, or 100% versus the prior year quarter. The previous year’s quarter included transaction and integration costs and severance associated with the Centex merger of approximately $51 million.
During the current quarter, we expensed approximately $272 million to increase our insurance reserves, primarily related to general liability reserves. During the quarter, we experienced a greater frequency of newly reported claims, and an increase in specific case reserves related to known claims for homes closed in prior years. Our specific case reserves related to these know claims increased to approximately $46 million, or 17% of the total charge in the quarter.
These reserves are based on an actuarial analysis of historical claims and trends. The actuarial analysis included estimates of claims incurred but not reported, which make up a significant portion of these estimates, and for the quarter, represent approximately 80% of the amount reserved. The calculation of the incurred but not reported reserve is a process that requires judgment and the results of which may remain uncertain for several years, as claims either do or do not materialize.
The estimates are subject to a high degree of uncertainly, due to a number of factors including changes in the timing, frequency and severity of claims reporting and resolution patterns; third party recoveries, insurance industry practices, state regulatory environment and legal precedent. Changes in any number of these factors will significantly impact the estimates of these reserves and are reflected in the incurred but not reported reserve.
In addition, Q3 includes approximately $7 million for employee severance and related cost, associated with organizational changes and operations realignment implemented during the quarter. If we look at the SG&A line, on a pro forma basis, excluding the insurance adjustment in the current quarter and the Centex transaction and integration cost related to the merger in the previous year, our expenses reflect a reduction of approximately $45 million, or 23% from the combined Pulte and Centex SG&A expenses from the previous year’s quarter.
In the home building other income and expense category for the quarter, the expense of approximately $675 million includes a goodwill impairment charge of approximately $655 million. It also includes write off of deposit to pre-acquisition cost resulting from the decision not to pursue certain land acquisitions in the amount of approximately $1 million, and an expense of approximately $7 million associated with overhead expense reductions for lease exit and related costs.
The goodwill is subject to an annual impairment test in Q4 of each year, or when events or changes or circumstances indicate the carrying value amount may not be recoverable. During the quarter, we performed an event driven assessment of the recoverability of goodwill, following deterioration in market conditions and our operating results falling below previously forecasted levels, including a significant loss in Q3, and a sustained decline in our market capitalization.
The decline in the company’s market capitalization occurred in spite of an increase in the company’s tangible book value, since the previous goodwill assessment as of October 31, 2009. The increase in the company’s tangible book value resulted primarily from income tax refund and other tax related matters. According, the implied fair value of the home building business experienced an even more significant decline than the company’s market capitalization.
We evaluate the recoverability of goodwill by following a two step process. Step one involves comparing the carrying value of each of our reporting units to their estimated fair value. We determine the fair value of each reporting unit using accepted valuation methods, including discounted cash flow supplemented by market based assessments of fair value.
As a result of step one of the September 30, 2010 goodwill impairment test, we determined that the carrying value exceeded the fair value of the majority of our reporting units with goodwill. Step two involves allocating the fair value of the reporting to its assets and liabilities, with the excess representing implied goodwill. Impairment loss is recognized if the goodwill exceeds the implied goodwill. Again, the impairment loss is recognized if the recorded goodwill exceeds the implied goodwill.
As a result, we determined that a significant portion of our goodwill balance was impaired and that’s the $655 million impairment. The home building pre-tax loss for the quarter of approximately$1.02 billion, inclusive of the charges related to good will impairment, insurance and related charges, valuations adjustments and land inventory investments, land held for sale, severance and related charges, and the Centex work in process adjustment for a approximately $1.001 billion.
The pretax income for Pulte’s financial services was approximately $3 million. The quarter also includes severance and lease exit cost of approximately $2 million. The increase of approximately $12 million versus the previous year quarter is primarily attributed to no repurchase loss adjustment in the current quarter, versus a charge of $11 million in the prior year quarter.
Total mortgage principle origination dollars were $509 million, a decrease of 18% when compared to the same period last year. The decrease is primarily related to the decrease in unit closing volumes. Total agency originations were $475 million, non agency originations were approximately $5 million, and brokered non funded loans were approximately $29 million.
Additionally, within the funded agency originations, FHA loans were approximately37% of the loans funded from the financing line in the quarter, compared to approximately 43% in Q2 2010. Pulte Mortgages capture rate for the current quarter was approximately 78%, and the average FICO score for the quarter was 754.
While not significant to Q3 results, I thought I would take a moment to address the subject of mortgage put backs, since there’s been so much interest in the subject recently. Also, you will find several slides included in the webcast presentation materials for your reference. From 2005 through 2008 the combined entities of Pulte Mortgage and CTX Mortgage originated approximately 316,000 loans and to date have had repurchase requests received of only 2400 loans, for about eight-tenths of one percent. While others are focused on 2005 to 2008, given our experience and nature of the loans, we believe our risk is primarily associated with originations from 2006 and 2007.
For 2010, the put back volumes increased early in the year, and although volatile from month to month, have been running at an average of approximately 100 per month. On a combined basis, on average, we have been able to successfully refute immediately half of these initial repurchase requests. Any mortgage request we do not refute then undergoes an extensive analysis to identify any potential liability. Then, if needed, we will attempt to correct the underlying issue, and when required to confirm the dollar amount of exposure.
As you are also aware, Centex maintained a sub-prime mortgage business, which was sold in 2006, and not included in the above mortgage origination. There have been no mortgages put back or repurchase requests made at any time since the sale. The original sale agreement caps any potential exposure for loan losses at $100 million. But we do not expect any significant exposure, given the terms and conditions of the agreement, the experience, and the passage of time from the transaction.
Put backs are typically recourse only to our mortgage operations, which is a non-guarantor of the debt of the corporation. Under an existing agreement, Pulte Group agreed to stand behind CTX Mortgage on approximately $4 billion of loans with respect to the liability for breaches of representations and warranties. In addition, there is a pool of loans originated in 2006 and 2007, by CTX Mortgage with a principle balance of $7 billion, from which the servicing rights were primarily purchased by a large national bank.
The investor that purchased the associated loans generally has first sought recourse for any breaches in representation and warranties against this bank. However, the investor also has recourse to CTX Mortgage, and for this limited pool of loans, this recourse to the investor is backed by Pulte Group. Given our experience to date, we do not expect any incremental liability for Pulte Group under this agreement.
We have been dealing with mortgage put backs for the better part of two years, and have tried to be realistic in our assessment of the problem, and clear in our discussions of the possible dollars involved. Based upon facts in our possession, our judgment, experience to date, and our estimate of our probably exposure to these losses, we have accounted for approximately $190 million to date in charges, including reserves totaling approximately $100 million at the end of Q3.
We have posted several charts to the website, www.Pultegroupinc.com , for anyone interested in more details on this issue.
In the other non operating category, pre-tax loss for Q3 of approximately $7 million includes corporate expenses of approximately $9 million, partially offset by net interest income of $2 million, resulting from invested cash balances. If we look at this on a pro forma basis, we expenses reflect a reduction of approximately $7 million on the combined Pulte and Centex expenses from the previous year quarter.
For Q3, the company’s pre-tax loss was approximately $1.024 billion. The pre-tax loss for the quarter is inclusive of $1.003 million related to goodwill and impairments, insurance related charges, valuation adjustments and land inventory and investments, land held for sale, severance and lease exit and related costs, and the acquisition accounting write up for the Centex work in process inventory.
The net loss for Q3 was approximately $959 million, for a loss of $2.63 per share, as compared to a net loss of approximately$361 million, for a loss of $1.15 per share for the same period last year. The quarter reflects a net benefit from net income tax of approximately $29 million, primarily due to the favorable resolution of certain federal and state income tax matters.
The number of shares used in the EPS calculation was approximately378.8 million diluted shares for Q3 2010. The total shares outstanding at September 30, 2010 were approximately 382.4 million shares.
Reviewing the balance sheet for the quarter, we ended with a cash balance of approximately $2.7 billion. House and land inventory ended the quarter at approximately $4.9 billion. The increase in house and land inventory and land held for sale for the quarter was approximately $96 million from Q2 2010. During Q3, our new investments in land were in rolling lot option takedowns and purchases of approximately $110 million, and land development spending of approximately $169 million, with a modest increase in house inventory by approximately $28 million.
With approximately $2.7 billion in cash end of Q3, we had no outstanding balance on our revolving credit facility. The company’s gross debt to capitalization ratio was approximately 65.1%, and on the net basis, 42%. During Q3, we announced a debt tender offer to purchase up to $500 million of aggregate principal amount of currently outstanding debt. We successfully completed the $500 million offer to purchase the notes, and provided the funding for it early in Q4.
Interest incurred amounted to approximately $69 million in the quarter, compared to $61 million for the same period last year. Pulte Group shareholder equity for Q3 was approximately $2.3 billion. We also repurchased no shares during the quarter, and the company has approximately $102 million remaining on the current authorization. With that, I’ll now turn the call back over to Richard. Richard?
Thank you, Roger. For obvious reasons, since the April tax credit expiration and the immediate pullback in demand, there’s intense interest in how home buyers will act over the remainder of 2010. So before we open the call for questions, I want to provide a few comments on our business.
What we saw in Q3 was an industry where demand continued to move along the bottom, as buyers elected to remain on the sidelines. Even as low home prices and record low interest rates combined to create unprecedented affordability, potential buyers are hesitant, given weak economic conditions, limited job growth, and overall uncertainty about near term opportunities.
Last year, working under the assumption that industry demand would remain challenged, Pulte Group pursued its merger with Centex. The merger allowed us to accelerate a number of key initiatives geared deliver greater improvements in overhead leverage, operating efficiency, and overall cost reductions. The obvious goal was and remains returning the business to consistent profitability. As demonstrated in the first half of 2010, the merger allowed Pulte Group to move quickly – to more quickly move the business back toward making money.
While we can appreciate that the Q3 charges make it difficult to see the core business, the underlying run rate for our operations remains close to the break even mark. As discussed during our Q2 conference call, higher material cost compressed gross margins sequentially, but they still remain above last year, up 360 basis points after adjusting for land impairment and interest charges and the Centex whip impact.
The merger benefits have been clearly demonstrated within Pulte Groups top rated numbers, but the gains and overall progress have not been enough to push us solidly into the black for each and every quarter. As a result, we are implementing additional actions to lower cost and push the company further along the path to consistent profitability. Early in Q3, we announced a flatter organizational structure. After this announcement, we have continued to reconfigure our organization to reduce overhead costs and drive greater leverage.
Among the additional steps recently implemented, we have reduced the number of operating areas from six down to four, allowing us to completely remove two area teams and associated costs. We will begin reporting results under this new structure in Q4. Underneath the areas, we have consolidated divisions in Arizona, Florida, and in our New York/New Jersey operations. Along with our field operations, we have further reduced corporate staffing across a number of functions as we continue to streamline our operating process.
In modifying our organizational structure and implementing a series of changes and/or reductions, we are working to reduce overall SG&A spending. On a year over year basis, we expect to reduce 2011 SG&A by approximately $100 million, when compared with 2010. These actions will result in a Q4 charge, but with many forecasting demand in 2011 will show only modest gains, we are acting proactively to ensure we maximize the savings opportunity.
Complementing our never ending work on lowering cost, we can continue to strengthen our competitive position through the acquisition of well placed land throughout our markets. In Q3, we approved another 28 deals for roughly 1700 lots. This brings our total to roughly 7000 lots approved since the start of 2009, which is in addition to the 50,000 lots acquired with the Centex merger.
Given the favorable terms under which we purchased these distressed assets, they can have a positive impact on our results as the underlying community starts selling and closing homes in 2011 and beyond. In terms of specific results for the quarter, signups for Q3 totaled 3566 homes, which was down roughly 12% from reported results for Q3 last year.
On a pro forma basis, assuming Pulte and Centex were one company for all of last year’s Q3, year over year sign ups were down approximately 31% on 17% fewer communities. Sequentially, Q3 signups were down approximately 15% from Q2 2010, which in part reflects normal seasonality of the business, and likely some lingering impact from the tax credit expiration.
Monthly signups were relatively stable during the quarter, while our cancellation rate for the period was 19.1%. Last year’s merger made specific comparisons of year over year signups difficult, so let me provide some qualitative comments about market conditions in the quarter. Within the quarter, demand in our northeast area held up relatively well, as strength in our New England and Delaware valley markets offset some weakness in the mid-Atlantic.
Our southeast operations experienced a similar pattern with solid demand in Atlanta and Nashville, offset by some demand softness in the Carolinas. Once again, our Gulf Coast operations, which span Texas and Florida, were are strongest performers. We say consistent demand throughout Dallas, Houston, Austin, San Antonio; as well as in our north and central Florida operations. Our operations in South Florida experienced some demand softness. We’ll have to see if that’s anything more than a typical summer slowing.
The Midwest and Southwest areas continue to face challenges, with Las Vegas, Phoenix, and St. Louis under noticeable pressure. Phoenix and Las Vegas have lots of existing inventory sitting on the ground, facing limited demand right now. The good news is that travel and booking data suggest that the Las Vegas tourism business is starting to show signs of life. We’ll have to see if this gains momentum.
We have acquired some well place finished lots under attractive terms in both Phoenix and Vegas, which can provide some incremental improvement going forward. Out west, the middle and northern parts of California held up well, as did the Pacific Northwest. Southern California was weaker, as a combination of soft demand and excess inventory in the market has been slow to work off. Overall, demand in the quarter was choppy as we moved from week to week, and from market to market.
I’ll just finish up with a couple of additional data points, and then we can open up the call. At quarter end, our lie position remained just shy of 150,000 lots, of which roughly one-third are developed. As we said earlier, during Q3 we approved 28 new investments representing just over 1700 lots. Between price appreciation and limited supply, good land deals are getting harder to find. We certainly remain engaged in the process throughout the markets, given the positive margin impact these deals can have when acquired under the right terms.
In conclusion, while we’re planning for challenging conditions to remain, there are nonetheless factors in place that could allow for acceleration to the upside. With elections now over, there may be more success in efforts to get the economy started, which we believe is the lynchpin to more meaningful gains in housing demand.
While attention always seems to focus on existing or potential future supply, the more pressing issue really is the absence of demand. With excellent pricing, low mortgage rates, and manageable inventory of new homes in most markets around the country, it won’t take much of an increase in fundamental demand to materially improve overall market conditions. Looking beyond today headline numbers, Pulte Group continues to make steady year over year progress.
In a market environment where conditions remain uncertain, we are taking proactive steps today to further reduce overhead cost, gain greater efficiencies and aggressively manage the factors within our control. Thanks for your time today, and let me turn the call back over to Jim.
Thank you, Richard. I’ll now open the call to questions, and as we’ve done on prior calls, we ask that you keep to one question and a follow up. If you have additional questions, please feel free to get back in the queue or you can certainly follow up with us later on. Operator, please give any needed directions, and we’ll now open the call to questions.
(Operator Instructions.) Your first question comes from the line of Dan Oppenheim, of Credit Suisse. You may proceed.
Daniel Oppenheim - Crédit Suisse First Boston, Inc.
Thanks very much. I was wondering if you could just elaborate a little bit on your last comments, in terms of where you’re talking about choppy trends through the quarter. I wonder if you can comment at all on what you saw through the month of October, and also just the issue of the absence of demand as we look at the existing home market, seeing some activity there. Is there more that the builders can do in terms of pricing to capture more of that demand?
Thanks Dan, this is Richard. Our trends in the quarter were fairly flat in terms of monthly signup activity. We didn’t see a noticeable difference. When we referenced choppy, we were primarily meaning market to market there, we saw a significant differences in how some markets performed. October was reasonably within the range of what we saw in Q3 there, not a significant change in what we saw in Q3 overall. In terms of pricing, certainly selected communities we can drive – pace with price, but it’s not significant, and it tends to be very specific to different assets. In some cases, price is not moving inventory, so we’ve not seen a big issue where price is all of a sudden going to accelerate a lot of activity. I will say value oriented home product, clearly more affordable product, particularly new designs, seems to be doing the best for us, as I think others have reported.
Daniel Oppenheim - Crédit Suisse First Boston, Inc.
Good, thanks. And I was just wondering about the new claims that you talked about. Is that occurring companywide? Is it related to either the Pulte or Centex side? Any color on that would be great.
Yeah, Dan. This is Roger. For this quarter we had more on the Pulte side that was driving that, and typically what we do on a quarterly basis is continue to look at these reserves. What we ended up having was greater development for a number of claims, and some growth in already existing known claims that ended up driving the overall charge.
Your next question comes from the line of Nishu Sood of Deutsche Bank. You may proceed.
Nishu Sood - Deutsche Bank AG
Thanks, guys. I just wanted to follow up on the construction, the warranty charges. I would expect on an ongoing basis in any given quarter you’re going to have a number of claims, this is an ongoing part of the business because of the complexity of the construction process, but a charge of this size kind of implies that there was something systematic, maybe among a product line or in a region or something. I was just wondering if you could be a little more specific in terms of describing the patterns or the (inaudible) of the claims that emerged here. Just on an operating basis, so we can have a better sense of what drove such a large charge in one quarter.
Nishu, this is Richard. I’ll start and then I’ll turn it to Roger for any more detail. We did not see any specific region of the country that jumped out at us. What was unusual here was the number of claims we received in a particular quarter that was completely unforeseen. Most of them related to water intrusion issues, and importantly, there was a portion of the charge taken that was related to actual experience in the quarter, but the much more significant piece related to actuarial estimates for the future, based on the way that the actuary looks at our experience level. We certainly did not foresee anything occurring like this, but I just kind of highlight the difference between the portion that was actually surfaced in the quarter and the actuarial change. Roger, with that any more detail?
Yes, what you’ve got is a complex situation where vendors and trades have insurance, where the company has insurance, and when you get a claim like this, you start to look at the overall cost of them. Some of this picked up by the third party insurance company, some of them are picked up by the trades insurance company and then some are picked up by the company itself, because we’re self insured past a certain point. So as we saw development during this quarter, in certain areas of claims, we have to go back and take a look at our overall reserves from that standpoint from claims development.
In addition, in the quarter we wound up taking a look at a methodology change where typically you would smooth these on an actuarial standpoint over a given number of years. Again, because of the frequency we were seeing, we changed to probably a more conservative approach, in the years that we were using, which also increased the reserve from that standpoint, of taking a shorter period of higher frequency of claims themselves. So with that, it’s sort of like the hundred year flood. You not only have it the one time, but you have to now prepare for it for the second time. So that’s what the incurred but not reported comes down to. If you had one, there must be one out there that would be similar to it, and you should basically put a reserve up for it. So again, that’s where 80% of the reserve was generated from, was more of these incurred but not reported based on some of the developments that we saw over the last quarter.
Nishu Sood - Deutsche Bank AG
Got it, that’s helpful. So the accounting was part of it, and then scattered claims. Now, just to get to the kind of heart of what investors may be thinking about when they look at this, obviously there’s the uncertainty and the unpredictability of this having come up in this quarter. I guess my question would be does this say anything about general construction practices? Is there any concern that has come up for you as you saw this charge develop that—is this something that could happen again, or do you see this as a one-off?
Nishu, as you know, we’ve long led the industry in overall quality, as reported by JDPowers. It’s important to remember that a lot of this, as Roger described, was claims that arose from homes built in the past, over which time we tended to dominate the results. So we’re digging into that. I don’t have any evidence at this point that would suggest that we’re doing anything different than we always have, as an organization, but certainly we’re looking at it. Again, I want to kind of reference the difference between the IB&R and the actual reported claims. As significant as the charge is, I think we have to break it down into the approximately 20% that was in one category versus the 80% IB&R. Having said that, you can assure that we’re taking it very seriously, but I don’t know how there’s any way we could have predicted it. As we indicated in Q3 the experience level of things coming in went up dramatically from any kind of normal reported view. So I don’t have any reason to believe that anything changed in the overall construction environment.
Your next question comes from the line of Stephen East of Ticonderoga Securities. You may proceed.
Stephen East -- Ticonderoga Securities
Thank you, good morning guys. Richard, you guys have done a nice job of cutting SG&A cost, and if I can focus on just the cost picture for a little bit. Your $100 million that you look to take out, could you all sort of break out right now what your fixed versus variable is and is that sort of assuming somewhat of a static market versus what you’re seeing right now, or are the some assumptions in there relative to volume? And then on the raw material cost impact that you discussed, any additional information would be helpful there.
Sure, first of all, the $100 million that we’re looking to take out is a combination of field overhead savings from the realignment of areas and divisions, as well as a very significant move in corporate cost as well. And both are very significant in that $100 million. As we look at fixed versus variable, one person’s fixed is another’s variable, Steve, so we’ve got to be careful what we say here. Generally speaking, at the corporate office, particularly after these changes we’re making, we’re probably down to what I would call 70% plus on the fixed side. In terms of the cost in the field, it depends on whether you want mothball things or continue operating in certain markets, that type of thing. So I guess theoretically all those costs are variable, although that’s probably not accurate given leases and things like that that you have to say, but we are making these changes to get proactive. We’re looking at a relatively similar demand environment as we go into next year, from what we’ve seen this year, which is clearly depressed. We’re not doing this anticipating a gigantic fall off in demand, although since nobody knows, we thought it was appropriate to be proactive now. We’re frustrated to be able to be bumping around at the breakeven level a little bit above, a little bit below any given quarter, on our core business. That’s not acceptable. We want to be solidly profitable, so that’s why we’re taking the actions. In terms of raw materials, maybe Roger can give some color there.
Yeah, Steve. On a commodities side, our margins were, as we said, compressed this quarter from what we saw earlier in the year on the lumber side. Of course, lumber costs have come down, so we ought to see that come back to us as we move forward in the next couple of quarters. Overall, you look at the metals, you know metals have been up this year, the oil based products, PVC pipe and that type of thing has been somewhat flat. So year over year though, definitely up. We’ve done a lot to combat that this year, as you saw in our margin expansion this year. On the house cost side, we continue to work on that, and we’re still doing more of that and hope to benefit the margins as we move forward. So our efforts there are to try and offset those, unless we get very large commodity swings in a very short period of time, very tough to offset that. But nonetheless, over the long run we think we can continue to improve margins.
Stephen East -- Ticonderoga Securities
Okay, that’s really helpful. And you all gave a great explanation on your put backs, etc., and it looks like you don’t have much exposure. I guess the one thing that I want to be clear on, it sounds like there’s not a way you can ring fence the mortgage exposure because of the acquisition, the guarantees that came along with the acquisition. Is that correct?
Well, we think there’s always a possibility to do that, except for the exposure that we basically have out there, and again, as I’ve described, we think that those exposures are minimal, given the time and the history that’s been behind some of those already. But you know, overall, we didn’t think that that would be prudent to run our business. Again, there’s business implications with that, to take that approach on the mortgage business, especially you know, if you look at it today, here again the agencies are about 100% of what the market is doing today. So again, I know that from a legal standpoint it always look possible, but we have the business conditions that we have to take into consideration, to see if that’s practical, to continue to run our business from a commercial standpoint.
Your next question comes from the line of Kenneth Zener of KeyBanc. You may proceed.
Kenneth Zener -- KeyBanc
Good morning. I do appreciate the comment on the mortgage put back, it’s kind of first questions. It seems like the $4 billion that would be – and I’m just reading your guys language – the investor purchased the associated loans would have the recourse to the servicing bank, but it could also go to Centex. Could you guys just talk about what you do look at to elevate your concerns relative to these asset – these mortgage bank security groups taking a while to get together in terms of taking 25% of the pool before they can go back to the servicers, as we’ve seen the last month or two. And when do you get more concerned if that progress continues to the servicer and the servicer perhaps turns around and says where did these loans come from? How would you advise us to understand your concern levels?
Hey Ken, this is Roger. I think you know, we’re constantly watching where they’re coming from all the time, the years that we have these bucketed in, so each one of these is certainly going to be unique in itself, and as large as the size of the businesses were between CTX mortgage and Pulte Mortgage, you know, those are the channels that we continue to monitor for looking at how well we’re reserved. So all we have is to continue to look at what comes across. I know all the things that we put out there in the models are hypothetical, it’s very difficult to know what actually exists in the markets. Again, everybody’s got a hypothetical approach to it. We have to deal with the reality of what’s coming across at us. So again, as we work them, the reps and warrant, from a servicer, that’s where we’re looking to make sure that we’re liable or others are liable instead, and continue to monitor it. So you know, it’s kind of a touch and go game, as you look at it from month to month basis, or week to week, quite frankly. Of what comes across to be a put back. Now, again, it’s not something we can estimate to a degree where we’re looking at the large numbers. We’ve got to deal with what comes across daily.
Kenneth Zener -- KeyBanc
I understand that, and I appreciate your comment. The second question I have is related to the gross margins, which what I do, I know you guys are excluding the interest expense, which has been kind of volatile, but it appears that the 50 basis points for direct cost that you cited, if one just adds back interest expense and it seems like the decline was a bit more than that. Can you talk about the volatility outside of those direct costs? Was it only 50 bpts that you guys saw in the direct cost, and the rest was completely related interest expense? Can you comment about the rising incentives as we move into 4Q relative to falling price and orders overall? Thank you.
Yeah, Ken, this is Richard. Overall we have not seen – excuse me, outside of the commodity cost changes and interest expense that Roger referenced, we have not seen much movement in margins that’s real significant one way or another. You know, it clearly came up pretty significantly for us through the early part of the year. I think we referenced in our last call that it’s begun to flatten out somewhat, and that’s what we’re seeing. So even as we look at our backlog, as we look at kind of what we delivered this quarter, not a big change one direction or another. We are not seeing a significant rise in incentives. I know some have talked about that. Again, potentially our mix could be different. You know, we have still a significant portion of our business in the active adult sector as well, but I would say gross margins appear relatively flat to us. Clearly, we’re working hard to improve them, overall, but as of now I wouldn’t see a significant change going forward. Roger, anything more there?
Yeah, Ken, the majority of that came from the commodity cost, and again, taking the interest out, because you’re really truly looking at what the margin moves, as Richard say, the overall discounting has come down again this quarter. From sales discount Q2 was roughly 6.3% for us, in Q3 it was about 6%. So we’re not seeing any movement in the sales discounting as Richard had mentioned there. So again, we talked about this the last couple of quarters. We’ve seen that commodity cost move through. We’re absorbing it, and of course it comes through when you deliver the house, so again, the majority of that is really commodity cost driven.
Your next question comes from the line of Michael Rehaut with JP Morgan. You may proceed.
Michael Rehaut – JP Morgan
Thanks, good morning everyone. First question, you mentioned that on a pro forma basis community countdown 17% year over year, but going forward, now that you’ve finally lapped all the comparisons, ex-Centex, ex-part of Centex, how do you think about communities over the next year, into 2011? Many competitors have talked about anywhere from 10 to 15% community growth on the low end to over 20, how do you see community count going, and do you have a kind of one foot on the gas, one foot on the brake approach that might hold you back from committing to any type of number in terms of stores next year?
Yeah, Mike, this is Richard. A couple of things – if you remember back to the acquisition of Centex and some of our commentary there, there were a very large number of communities that had a very small number of lots that were part of the acquisition. So I just caution everyone that community count, while certainly a relevant indicator, is not the only indicator of kind of revenue performance going forward. At this point, I would say the trend is still going to be down. We’re still formulating our plans for 2011, don’t know exactly how far down it will be. Probably not as far down as this year, but with that, we have the benefit coming in 2011 of the first significant slug of closings that will come from communities acquired in ’09 and ’10 to date. Which, as others have indicated, are certainly attractive from not only a margins standpoint, but a returns standpoint as well? We’ll have to see how much of that we can bring online as a percentage of our total, to drive community count going forward. But at this point, I would say the trend is still down. I don’t have an exact number for you, as we’re still kind of formulating everything for ’11, but I just want to get that comment in there, that if you have 100 communities with 10 lots or less, which is plus or minus what we had with part of the combination, you’re going to have a lot of community count burn off that is not necessarily as relevant as if it were a lot of your core communities. So agree with you that community count is important, and certainly something we’re watching. We have been acquiring land, we’re trying to be prudent about it. We don’t want to acquire anything that would ultimately get impaired, so we’re trying to be very cautious. But nevertheless, we are finding success on distressed assets.
Michael Rehaut – JP Morgan
Great. I appreciate that, and that kind of leads me into the second question with regards to new communities --contribution next year from new communities. You know, you had alluded to the fact that you haven’t seen, at this point, too much of a pickup of incentives materially and that excess construction costs also gross margin’s kind of steady here, so I guess that kind of really absent some improvement in demand or reduction in incentives, the only thing really that can kind of move the gross margin a little bit is a creative new community contribution, so if you can just give us a sense of what you expect. There’s been, across the competitors, one builder even said that they’re roughly equal, gross margins and new communities versus older ones; others had said even 5 to 600 bpts more. How are you coming out on that, and again, pretty early to guess, but what do you see the percent of closings in ’11? Even in rough terms, just to give us a ballpark from those new communities.
Yeah, Mike, this is Richard again. We are seeing a 2 to 400 basis point improvement in margins from new communities acquired. So relative to what others have said, I know one of the competitors out there has said flat, we’re not seeing that, we’re seeing an improvement, roughly 200 to 400 basis points. As I mentioned earlier, we’re going to be bringing those online primarily in ’11. We had a very small contribution in 2010 from those communities, almost insignificant, but as we get into 2011, it will be greater. I don’t have the exact number, and I’m not trying to not give you the answer, but we’re formulating our plans right now, as they roll up. So more color on that as time goes on, but it’ll be a bigger piece of our business in ’11 than it was in ’10, for sure.
Your next question comes from the line of Megan McGrath, with Barclays Capital. You may proceed.
Megan McGrath-- Barclays Capital
Hi, thanks. I just wanted to follow up on the SG&A reduction for next year. Can you help us out a little bit in terms of the timing of that, as we think about next year? It sounds like you’ve made a lot of the reductions already but should we expect it to kind of flow through evenly?
Yeah, Megan, this is Richard. All the actions that we’re taking, I say all, probably 95% of them are in Q4. As I mentioned, we’ll have a charge in Q4 associated with that, we don’t know how much. But yes, we anticipate having the full run rate of the year there. Now, from an SG&A leverage standpoint of percentage of revenue, of course, it’s going to be dependent on how revenue flows for the quarter, in terms of the percentages, but the actual dollar impact, we anticipate having the full run rate of the year for that.
Megan McGrath-- Barclays Capital
Okay, thanks. And then just sort of a current events question. Just curious to hear if you’ve heard from any of your sales folks in the areas impacted by all the foreclosure issues, and the moratorium, if you’re actually seeing any impact on your sales on the new home side, we’ve heard certainly that things have slowed on the foreclosure side, but are you seeing any kind of runoff there in your markets as well? Either good or bad?
Megan, not really significant change; as mentioned, October has been relatively consistent. You know, absent maybe a little seasonality from the previous quarter, my personal opinion is that foreclosures have been choppy all through this downturn, as they come to market. I don’t think the recent news, if you will, has had any kind of an immediate impact on less homes on the market right away or anything like that, because in my opinion, it’s been this way for the last 18 to 24 months. It doesn’t always get reported, but this has not been a very level process in the way foreclosures get processed, whether it’s one bank or one different entity taking a little different position than someone else. So no, I have not heard from our sales teams that that’s made a difference in business.
Your next question comes from the line of David Goldberg of UBS Investment Bank. You may proceed.
David Goldberg - UBS Investment Bank
Thanks, good morning everybody. I was hoping we could talk about the SG&A, the charge in the SG&A, from a little bit different perspective. What I’m trying to get a better idea of is the actual charges that were incurred – the water damage that you guys referenced. What year were those homes built? And when you look at the actuarial assumptions are we looking at home that were built earlier, later? Is it all kind of a mix? Is there a way to say maybe during a certain time period you might have had a problem, or I mean, specifically and maybe it went away, it wasn’t there as you look forward? I’m just trying to get an idea of these are actually going to come through or if they’re just going to be – if this is just an accounting necessity and it’s not necessarily going to play out that way as you move forward in actual cases.
Yeah, David, this is Roger. There is no way to give you a very short answer to this. It is very complicated, because when you build houses, over periods of time they fall on different years, the insurance affects it by what you could have bought for insurance in those particular years. So you know, let’s say some of them were back in 2004, 2005, you know, you could have a claim in those years, and then you could have a different impact on an actuarial basis because of the way you bought insurance in those particular years. So really, the tail in our business is a lot of it’s mandated by state governments, and so you have a tail on it that could last ten years. So with that, you’ve got claims that can come in at basically any point in time, but some of our more severe ones were ’05, ’06 timeframe. ’04 timeframe seemed to be at the peak, some of them also correlate to when the market started to turn down, and again, correlate those last four years, as pricing has come down significantly, we’ve seen the increase in the number of claims. I’m not saying those are absolutely related, but when you look at what’s happened in the four years, as prices and values have come down, you also see a significant increase in the number of claims. So you know, it is a bit of art and science when you go through this, sort of throw it in the black box and come up with it. But clearly, when we have issues, we’re certainly addressing them, and then some of them we’re more proactive on, which in itself creates a little bit more liability from us, because we do that. So all of our approach to this, as well as the operating procedures, the way we bought insurance, the way the claims are coming in, and there’s some for instance, where all of a sudden you’ve got rain in areas where you haven’t had rain before. Significant rain, again, not an excuse, but standards that were set for construction standards at a particular point in time may not be appropriate given the changes that we’re seeing there. I know I’m not being specific, but there’s a lot of different items that make that up, and they’re not easily just carved out to one little piece that created it.
David, this is Richard. Let me see if I can help a little bit more as well. It’s important to understand when Roger was talking earlier in his script about some of the changed in timeframes for the estimates, etc., when you have a spike in experience level here, and you use a different timeframe for estimates, that can dramatically affect the actuarial estimate. So again, depending on claims levels going forward, it’s possible that the reserves that we have now posted, would be well within the tolerance level and cover those for some period of time. It’s also possible they have to get adjusted, depending on what happens. It’s kind of like the mortgage reserves that we posted in Q2, based on what we saw then, and if you look at the slides, we accompany the presentation with, you notice that our experience level went up slightly around the Q2 timeframe, and since then it’s been trending down a little bit. So I just point out that there’s not necessarily a direct correlation in what you’ve just taken and what you’re going to take. You obviously adjust these assumptions with hopes that you’ve now got it covered for the foreseeable future, but as Roger indicated, it’s a tough science to nail down.
David Goldberg - UBS Investment Bank
Got it, the second question I had, Richard, somebody asked earlier about the margins on new product and new acquisitions relative to what you’ve seen from the legacy land position, and I was wondering if we could get a little bit more fine on that point, and what I was hoping to do was compare the new lot acquisitions that you guys are doing margins relative to the acquired lots from Centex, and the reason I ask is that the time of the acquisition you guys talked about you didn’t think there was going to be a lot of land in the market at really attractive prices, so you make a big land move up front. I’m wondering how your perspective has changed. A year, 18 months after the deal closed, are you finding more lots than you thought, and is the margin that you’re able to achieve on the Centex lot comparable to what you’re able to get in the broader market today?
Yeah, David, good question. First of all, our perspective on new acquisition, if you will, in other words, the smaller very ROI friendly, near term accretive deals has really not changed. We’ve always wanted to be in the market for those. Clearly we had been hopeful that we’d see more of a rebound for now, because kind of for a long term perspective the view is that once the market rebounds, it’s going to be very difficult to get this inexpensive land, so to speak, for a long period of time. I still believe that, it’s a question I think of how long the downturn continues at this rate, overall. Relative to the individual margins on Centex product, Roger, I don’t know if you have any more color there.
Yeah, I do. David, I think we’re still seeing the acquisitions that we’re doing today greater than what’s in our portfolio. I think what you have to remember is what we’re still buying land out there for is developed lots, but also below replacement cost. So you know, those are the opportunities that we’re picking up. We’re not doing a lot of land to develop, because a lot of those still don’t pencil. So there’s still a good degree of spread between what we have been carrying in our books relative to what those opportunities offer us. We’ve seen others though, that quite frankly would be comparable to what we carry. So you know, again, some of those we’re not doing. In general, we’re still seeing a spread over the Centex margins that we’ve got on our books after the purchase accounting adjustments.
Your next question comes from the line of Dennis McGill, of Selman. You may proceed.
Dennis McGill -- Selman
Good morning guys. The first question relates to the charge in the quarter. If we could just focus on the peaks, the 20% of the charge that’s actual known claims, and when we think about that $50 million or so in relation to the warranty reserves that you had to start the quarter of around $85 million, it still seems like a large number. So can you maybe put in context how much of that is actual warranty adjustments versus – it sounds like the insurance reserves could be part of that as well. Maybe split those two out for what actually occurred in the quarter?
Yeah, Dennis, this is Roger. The warranty reserves is totally separate from insurance reserves. So, you know, we’re carrying insurance reserves that are different than those warranties. Part is warranty, which is more short term, and this is more long term. So they are different. That why, you know, you can’t compare those numbers in like the overall reserve.
If you take a look at our self insurance liability for which this charge would have impacted our overall reserve now, at the end of
Q3 is $850 million, so completely different than the warranty liability we were cussing.
Dennis McGill -- Selman
Okay, and I have a separate question, but it’s to clarify, so the bulk of that charge is on the insurance reserve, as opposed to warranty. Fine.
Dennis McGill -- Selman
Okay. The second question just has to do with put backs. Can you just talk about how many of the loans, or what percentage of the loans both on the Centex and Pulte side were sold directly to the GSE as opposed to other purchasers, and who those relevant counter parties are right now, and in the context of that, have you had conversations with them, just to understand sort of the qualitative nature of what they’re seeing come back to them, and how that might impact the future put backs? It seems like obviously the hard data implies it’s decelerating, but wondering if you’ve had any conversations to support that for the future.
Yeah, Dennis, this is Roger again. I don’t have – we’re not tracking the ones that we’ve got put back to us from the channels that they ended up coming from. Again, as we said, we basically refute outright about 50% of those, so out of the 2400 that would be about 1200. We’re not tracking the specific channel that they came from at this point. But again, we sold to so many investors over those years that again, it’s hard to give you a very specific answer to that, other than we’re watching it. Making sure that when we’re looking at our reserves, where they’re coming from, trying to understand how deep the pool is, and then you have the different years, and different years created different environments of what was acceptable for a mortgage at that point in time to what wasn’t in ’05 to ’08 for instance. So again, I can’t give you anything specific by the channel we actually got the put back from.
Your next question comes from the line of Joshua Pollard of Goldman Sachs, you may proceed.
Joshua Pollard – Goldman Sachs
Hi, thanks for taking my question. My first, sorry about this, is around the charge you guys took on the insurance side. My question is what percent of the charge was taken on all homes that you guys have already built, versus in your actuarial assessment, taking charges for future homes built? I’m ultimately trying to determine if there’s any benefit to margins going forward from the large charge that you took.
Yeah, Josh, this is Roger. Again, you know, most of them are incurred but not reported. What that means is that the house is already built, so you must have a claim out there that hasn’t been identified yet, so it must be there. That’s what that means, incurred but not reported. Now, it wouldn’t be for future homes that you might build that it’s for, everything that would be sort of in your historical database, if you will. So we’re not projecting anything that we haven’t built yet. Now what this does in, actuarially an assumption that because you had one, you should have another one. Again, it’s sort of like the hundred year flood. It doesn’t mean it’s necessarily going to happen, it doesn’t mean necessarily that two quarters from now, or even next quarter, we may have a different view based on our experience. But given the experience that we saw develop, you know, I’d say over the last three or four years, where typically you might smooth it over ten years, that’s actuarially how you take a look at those things. Again, there’s a lot of judgment, a lot of assumptions that go behind that that create that thinking. So I wouldn’t necessarily say that you’d see really anything come to margins, with just SG&A and insurance, you could possibly see a reversal and a reserve. If we could determine that the size of that reserve was not sustainable because we’re not seeing any more development happen in the homes that we built, then you would adjust that reserve downward and take it back. But other than that, changing business practices or anything else like that could benefit margins, but nothing directly from the insurance charge that you took.
Joshua Pollard – Goldman Sachs
Okay. So if you think about it, whether it be through SG&A or gross margins, should we expect going forward that you guys would take larger reserves on an ongoing basis? In other words, if you look at the reserve that you guys took over say the last five or ten years, should we expect that over the next number of years? That you guys would be taking a larger reserve up front? That is my first question, and then my sort of data questions are what is your DTA at the end of the quarter, and also what was the number of specs that you guys sold in the quarter?
Okay again, I think did we take a lump sum for – yeah, you bring it up to where you think you are with the assumptions and the judgment that you have for the insurance reserve, so I wouldn’t anticipate another charge like this going forward. Again, that would be a change in conditions and circumstances based on how development happens. So you know, each quarter we have been taking charges. Q1 we took about $10 million, Q2 we took another $10 million, in charges relative to this. Again, the development happened as we came into Q3. As we moved through Q3, we saw some of these claims develop, gave rise to taking a look at our assumption, how well we thought those assumptions were based, and then making the adjustments to those. Some of that is changing methodology as well, trying to look at a shorter period than a longer period as a trend. So again, I would say that you shouldn’t see those type of charges going forward. As far as the DTA, Mike?
Yeah, DTA is $2.4 billion at the end of the quarter, of which we have 100% valuation allowance. And I don’t have the specs sold for the quarter, I’ll have to get back to you on that.
We can get back to you, Josh, on that.
Your next question comes from the line of Carl Reichardt of Wells Fargo Securities. Please proceed.
Carl Reichardt -Wells Fargo
Hey guys. One quick question. Do you have the owned option split of lots?
Yeah, if you take a look at our 149,000 controlled lots, 15,900 are optioned, and 133.400 are owned.
Carl Reichardt -Wells Fargo
Thank you, and then just on the $100 million in savings, as I look at your SG&A quarterly run rate of sort of 150 and corporate 10 or so a quarter; $160 in SG&A plus corporate, $100 million over the course of a year and this quickly seems like a very high number, just to me, so I’m trying to get a sense, just a little more detail from you Richard, or Roger, on specifically what comes out? Are we talking about commission cuts for sales people, we’re talking about decreased marketing expense? I’m just trying to get a sense of how you’re going to get to that number mathematically with the buttons and levers you have to push.
Yeah, Carl. This is Richard. A significant portion of that is the cost to consolidate two areas and the division moves we made in three geographic areas. I don’t have the exact split, but you know, it’s probably more than 25 of 30% of the number, maybe less than 50% of the number. A big portion is at the corporate office. Not a significant change in marketing spend or anything like that. Quite frankly, what we’ve asked ourselves is given the state of business we have at this kind of run rate, if we were starting a company from scratch, what would we build from the ground up, as opposed to looking at it from the standpoint of what we’ve had through the last several years, and that’s resulted in some significant choices that we’ve made on what’s directly adding value today, given the size of our business. So I agree with you, it’s a big number. I will tell you it’s very achievable. We’re not putting that number out there to miss it, and we fully intend to get there. We have actions that have already been undertaken to get us there, overall. So a big portion of it is in the corporate office, Carl, and when you look at all the different pieces that go into it, it might be bigger than you think, but that, combined with the field gets us there.
Carl Reichardt -Wells Fargo
Okay. Thanks for the color Richard.
Your next question comes from the line of Susan Berliener of JP Morgan. You may proceed.
Susan Berliener – JP Morgan
Good morning, thank you. Roger, I guess I just want to follow up on the Centex guarantees, and I’m sorry if I got a little confused on this. I think you said $7 billion kind of has a maximum reserve of $100 million, and then there’s the $4 billion of loans that have been securitized that would have recourse to the bank, and then to Centex or to Pulte, and I guess I wondering on that $4 billion, have you seen any requests at all for anything coming back to you guys?
Yeah, Megan – oh, excuse me, Sue. Just to go back to your comment, the $4 billion was direct to the investor, the $7 billion was to the National Bank. And then from the standpoint of the reserves, the reserves are not just for those, the reserves are for all the population that we originated over that period of time. Yes, what we’re looking at is what channels they come back through. I don’t have, specifically, the number one came out of that or not, but I would imagine that out of the pool of everything we’ve done, there may be some that come out of that. Again, depending on what the underwriting was at that point in time. So when I look at the direct investor, that’s where the guarantee was, and then the bank itself, again because we have a guarantee with an investor, he’s covered through that bank as well. But the bank is the first stop and then CTX Mortgage would be the second stop.
Sue, this is Richard. One other data point, you asked about the $100 million, the $100 million relates to the subprime business that was sold as a maximum exposure, and we indicated in the comments that we’ve not had a single put back request in that channel, at all. The second comment I wanted to make is regarding the entire subject here, it’s covered on that slide in that our overall exposure for the four years has been an attempted put back of 2400 loans of which we refute 50% etc., to get you to the overall exposure rate that we have seen, collectively. We’re very comfortable that our reserves are adequate, given everything that we’ve seen in total without breaking it out specifically one investor at a time. So that’s why we feel like we’re adequately covered.
Susan Berliener – JP Morgan
Okay, thanks. And I just had a follow-up on the reserves for this quarter. I was wondering if there were any parts of the country that were notable impacted. I guess I was just curious as to – typically when we see insurance charges or warranty reserves it’s across the whole sector, so I guess I’m kind of surprised you guys are the only ones who have brought it up thus far.
Yeah, Sue, unfortunately it was not really related to one specific area. It was in a number of different areas. The biggest thing to factor in here though, is the frequency with which it came up. The frequency that came up was significantly different than we had seen in any prior quarter, thus the significant not only direct impact, if you will, but then the actuarial change is the vast majority of it, overall. We certainly did not see it coming, it was unforeseen, but it was not one individual project. It was a number of them. Why they all flowed in one particular quarter we don’t know. We’re certainly examining everything we did, but as I answered to someone earlier, we’re not aware of anything we did different, frankly, than anyone else. Either from sub-contractors we employed or construction techniques or what have you, hopefully it’s just one of those things that happened that won’t occur again, but that’s why the big jump there was based on the frequency, not one particular community.
Ladies and gentlemen, this concludes our question and answer session. I would now like to turn the conference over to Jim Zeumer for closing remarks.
Again I want to thank everybody for your time this morning. We will certainly be available for the remainder of the day to answer any additional questions, and we will look forward to speaking with you in the future. Thanks again.
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