普爾特房屋 (PHM) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2010 PulteGroup, Inc.

earnings conference call.

My name is Caitlyn and I will be your coordinator for today.

At this time all participants are in listen-only mode.

Later, we will be conducting a question and answer session.

(Operator Instructions).

As a reminder, this conference is being recorded.

I would now like to turn the presentation over to your host for today's call to Mr.

Jim Zeumer.

You may proceed.

Thank you, Caitlyn.

This is Jim Zeumer, Vice President of investor relations for PulteGroup and I want to thank everyone for joining this morning's call to discuss our third quarter results and nine month results for the period ended September 30, 2010.

On the call with me today are Richard Dugas, Chairman, President and CEO; Roger Cregg, Executive Vice President and Chief Financial Officer; and Mike Schweninger, Vice President and Controller.

For those 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 at a later time.

As a reminder, on August 18, 2009, PulteGroup completed its merger with Centex Corporation.

Results reported in the release, now in this call, reflect the inclusion of Centex 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 the 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 at our corporate website, for reconciliation of non-GAAP financial measures to the comparable GAAP numbers.

As always, at the end of our prepared comments we'll have time for Q&A.

We will wait until then to open the queue.

I'll now turn the call over to Richard Dugas for his opening comments.

Richard?

Thanks, Jim, and good morning everyone.

As this morning's press release detailed, PulteGroup reported a meaningful loss for its third quarter, 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 past 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 third-quarter results and details on the charges taken during the period.

Roger?

Thank you, Richard, and good morning, everyone.

Revenues for the quarter from home settlements -- from the homebuilding operations decreased approximately 3% from the prior-year quarter to approximately $1 billion.

Decreased revenues reflect lower unit closings that were below prior year by approximately 7%.

The average sales price increased 5% versus the prior-year quarter to an average of $265,000.

This increase is attributed to the geographical and product mix of homes closed during the quarter.

In the third quarter 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 lots and land parcels to other builders.

Homebuilding gross profits from home settlements for the quarter, including homebuilding interest expense, was approximately $72 million versus a loss of $26 million in the prior-year quarter.

For those with access to the webcast slides, I refer you to slide number six, the adjusted margin analysis, which outlines our gross margins.

Homebuilding gross margins from home settlements as a percentage of revenues was 7% compared with a negative 2.5% in the third quarter of 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 process resulted in a conversion of 16.7% compared to an adjusted margin of 17.2% for the second quarter of 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 costs experienced earlier in the year.

On a comparative basis versus the previous year's third quarter 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 pricing.

Homebuilding 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 adjustments taken in the current quarter.

Also included in the gross margin for the quarter was a charge related to land and community valuation adjustments 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 the third quarter 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%, had been previously impaired.

Additionally, the larger impairments for the quarter, which represented approximately $40 million, or 80% of the total $50 million in impairments, were mainly concentrated in central Florida, Las Vegas and the Tucson markets.

Also for the quarter the acquisition accounting work-in-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 sale 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.

Homebuilding SG&A expenses as 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 include 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 known claims increased by 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 includes 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.

These estimates are subject to a high degree of uncertainty 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 environments, and legal precedence.

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, the third quarter includes approximately $7 million for employee severance and related costs associated with organizational changes and operational realignments 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 costs 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 homebuilding 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 deposits and pre-acquisition costs 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 the fourth quarter of each year, or when events or changes in 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 the third quarter 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 refunds and other tax-related matters.

Accordingly, the implied fair value of the homebuilding 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 unit to its assets and liabilities, with the excess representing implied goodwill.

An 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 thus the $655 million impairment.

The homebuilding pre-tax loss for the quarter of approximately $1.020 billion is inclusive of the charges related to goodwill impairment, insurance and related charges, valuation adjustments and land inventory investments, land held for sale, severance and related charges, and the Centex work in process adjustment for a total of approximately $1.001 billion.

The pre-tax income from Pulte's financial services operations for the third quarter was approximately $3 million.

The quarter also includes severance and lease exit costs of approximately $2 million.

The increase of approximately $12 million versus the previous year's quarter is primarily attributed to no repurchase loss reserve adjustments in the current quarter versus a charge of $11 million in the prior-year quarter.

Total mortgage principal 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 approximately 37% of the loans funded from the financing line in the quarter compared to approximately 43% in the second quarter of 2010.

Pulte Mortgage's capture rate for the current quarter was approximately 78% and the average FICO score for the quarter was 754.

While not significant to our third quarter results, I thought I would take a minute to address the subject of mortgage put backs since there has 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 2,400 loans or about 0.8%.

While others are focused on 2005 through 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 initially do not refute then undergoes an extensive analysis to identify any potential liability and then, if needed, we will attempt to correct the underlying issue and when required to confirm the dollar amount of exposure.

As you're also aware, Centex maintained a subprime mortgage business, which was sold in 2006 and not included in the above mortgage originations.

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 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, PulteGroup 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 principal 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 representations 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 PulteGroup.

Given our experience to date, we do not expect any incremental liability for PulteGroup 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 probable 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 the third quarter.

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 the third quarter 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, our expenses reflect the reduction of approximately $7 million from the combined Pulte and Centex expenses from the previous year's quarter.

For the third quarter the Company's pre-tax loss was approximately $1.024 billion.

The pre-tax loss for the quarter is inclusive of $1.003 billion in charges related to goodwill impairment, insurance-related charges, valuation adjustments in 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 the third quarter was approximately $995 million, or a loss of $2.63 per share, as compared to a net loss of approximately $361 million, or a loss of $1.15 per share for the same period last year.

The quarter reflects a net benefit from income taxes 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 approximately 378.8 million diluted shares for the third quarter of 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 the second quarter of 2010.

During the third quarter our new investment 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 to end the third quarter, we had no outstanding balance drawn on our revolving credit facility.

The Company's gross debt-to-capitalization ratio was approximately 65.1% and on a net basis 42%.

During the third quarter, 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 the fourth quarter.

Interest incurred amounted to approximately $69 million in the quarter compared to $61 million for the same period last year.

PulteGroup shareholder equity for the third quarter 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 pull back in demand there is 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 the third quarter 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, PulteGroup pursued its merger with Centex.

The merger allowed us to accelerate a number of key initiatives geared to 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 PulteGroup to move quickly -- to more quickly move the business back toward making money.

While we can appreciate the third quarter 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 second quarter conference call, higher material costs compress 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 WIP impact.

The merger benefits have been clearly demonstrated within PulteGroup's operating 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 of consistent profitability.

Early in the third quarter we announced a flatter organizational structure.

After this announcement, we have continued to reconfigure our organization to reduce overhead cost 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 cost.

We will begin reporting results under this new structure in the fourth quarter.

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 fourth quarter charge, but with many forecasting demand in 2011 will show only modest gains we are acting proactively now to ensure we maximize the savings opportunity.

Complementing our never-ending work on lowering cost, we continue to strengthen our competitive position through the acquisition of well placed land throughout our markets.

In the third quarter we approved another 28 deals for roughly 1,700 lots.

This brings our total to roughly 7,000 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 communities start selling and closing homes in 2011 and beyond.

In terms of specific results for the quarter, sign-ups for Q3 total 3,566 homes, which was down roughly 12% from reported results for the third quarter of last year.

On a pro forma basis, assuming Pulte and Centex were one company for all of last year's third quarter, year-over-year sign-ups were down approximately 31% on 17% fewer communities.

Sequentially, third quarter sign-ups were down approximately 15% from the second quarter of 2010, which in part reflects normal seasonality of the business and likely some lingering impact from the tax credit expiration.

Monthly sign-ups were relatively stable during the quarter while our cancellation rate for the period was 19.1%.

Last year's merger makes specific comparisons of year-over-year sign-ups 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 our strongest performers.

We saw 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 but 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 inventories sitting on the ground facing limited demand right now.

The good news is that travel and booking data suggests 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 placed 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 move 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 lot position remained just shy of 150,000 lots of which roughly one third are developed.

As we said earlier, during the third quarter we approved 28 new investments representing just over 1,700 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 linchpin to more meaningful gains in housing demand.

And 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's headline numbers, PulteGroup 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.

We'll now open the call to questions and as we've done on prior calls, 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 directly 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 with Credit Suisse.

You may proceed.

Thanks very much.

Was wondering if you can just elaborate a little bit on your -- the last comments in terms of where you're talking about choppy trends through the quarter, wondering if you can comment at all in terms of what you saw through them in the month of October?

And also just the issue of the lack of demand -- or the absence of demand as we look at the existing home market seeing 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 sign-up activity, didn't see a noticeable difference.

When we reference choppy we're primarily meaning market-to-market there.

We saw significant differences in how some markets perform.

October was reasonably within the range of what we saw in Q3 there, not a significant change from 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 going to all of a sudden 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.

Got it, thanks.

And just wondering about the new claims that you talked about.

Is that occurring, is it Companywide, is it related to the Pulte or Centex side?

Any color on that would be great.

Yes, 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.

Thanks.

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, since it's 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.

So I was just wondering if you could be a little bit more specific in terms of describing the patterns of the defects or 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 anymore detail?

Yes, what you've got is you've got 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 and some of it is picked up by the third-party insured's insurance company, some of them are picked up by the trade's insurance companies and then some are picked up by the Company itself because we're self-insured beyond 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 and, again, because of the frequency that we are 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 in themselves.

So with that you -- it's sort of like the 100-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 is that 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.

Got it.

No, that's helpful.

So the accounting was part of it and then, obviously scattered claims.

Now just to get that heart of probably what investors may be thinking about when they look at this, obviously the uncertainty and the unpredictability of this having come up this quarter.

Richard, I guess my question for you 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 makes -- is this something that could happen again, or do you see this as a one off?

Nishu, as you know, we've long lead the industry in overall quality as reported by J.D.

Powers.

It's important to remember that a lot of this, as Roger described, were claims that arose from homes built in the past over which time we tended to dominate these 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.

And again, I want to 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 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.

Thank you.

Good morning, guys.

Richard, you all have done a nice job of cutting SG&A costs 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 break out right now what your fixed versus variable is and is that assuming somewhat of a static market versus what you're seeing right now, or are there some assumptions in there versus relative to volume?

And then on the raw material cost impact that you discussed, any additional info would be helpful there?

Yes, sure.

First of all, the $100 million that we're looking to take out is a combination of field overhead savings from the re-alignment 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 cost in the field, it depends on whether you want to mothball things or continue operating in certain markets, that type of thing.

So I guess theoretically you could say all of those costs are variable, although that's probably not accurate given leases and things like that you have to say.

But we are making these changes to get pro-active.

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 pro-active now.

We're frustrated to be able to be bumping around at the breakeven level, a little bit above, a little bit below at any given quarter on our core business and 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.

Yes, Steve, on the commodity 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, metals have been up this year and the oil-based products, PCV piping that type of thing, has been somewhat flat so year over year, though, again 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 to 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 to 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 longer run we think we can continue to improve margins.

Okay, that's really helpful.

And then you all gave a great explanation on your put-backs, et cetera, 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 that 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 a -- there's always a possibility to do that, except for the exposure that we basically have out there.

And again, as I described, we think that those exposures are minimal given the time and the history that's been behind some of those already, but overall, again, we didn't think that would be prudent to run our business.

Again, there's business implications with that to take that approach on the mortgage business, especially if you look at it today where, again, the agencies are about 100% of what the market is doing today.

So again, I know that from a legal standpoint always looks possible.

Again, 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 Ken Zener of KeyBanc.

You may proceed.

Good morning.

Good morning, Ken.

I do appreciate the comment on the mortgage put-back, which is the first question, and it seems that the $4 billion that would be -- and I'm just reading your guy's language -- as the investor purchased the associated loans would have the recourse to the servicing bank, but it could also go to Centex.

Can you guys just talk about what you do look at to elevate your concerns relative to these asset -- these mortgage-backed security groups taking a while to get together in terms of 25% of the pool before they can go back to the servicers, as we've seen in 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 do these loans come from?

How would you advise us to understand your concern levels?

Well, Ken, this is Roger.

I think 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, 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 market.

Again, everybody has got a hypothetical approach to it.

Again, we have to deal with the reality of what's coming across at us.

So, again, as we work them, the reps and warrants, from a servicer, again, that's what we're looking to make sure we're liable, where others are liable instead, and continue to monitor it.

So it's kind of a touch-and-go game as you look at it from a month-to-month basis or week to week, quite frankly, of what comes across to be a put-back.

And again, it's not something we can estimate to a degree where we're looking at the large numbers.

We've just got to deal with what comes across daily.

No, and I understand that.

I appreciate your comments.

The second question I have is related to 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 it was -- the 50-basis points for direct costs 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 bps that you guys saw in the direct cost and the rest was completely related interest expense, and can you comment about the rising incentives as we move into 4Q relative to falling price in orders overall?

Thank you.

Yes, Ken, this is Richard.

Overall, we have not seen -- excuse me -- outside of 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.

It clearly came up pretty significantly for us through the early part of the year.

I think we referenced on our last call that its begun to flatten out somewhat and that's what we're seeing.

So even as we look at our backlog, as we look at 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.

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?

Yes, Ken.

Just the majority of that came from the commodity costs, and again, taking the interest out because you're really truly looking at what the margin moves.

As Richard said, the overall discounting has come down again this quarter from sales discount.

Second quarter is roughly about 6.3% for us and the third quarter 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 of seeing that commodity cost being moved through.

We're absorbing it and, of course, it comes through when you deliver the house.

So again, a majority of that is really commodity-cost driven.

Your next question comes from the line of Michael Rehaut of JPMorgan.

You may proceed.

Thanks.

Good morning, everyone.

Morning, Mike.

First question, you'd mentioned on a pro-forma basis community count down 17% year over year but going forward, now that you've finally lapped all the comparisons ex-Centex risk -- ex part of Centex, how do you think about communities over the next year into 2011?

Many competitors have talked about anywhere from 10%, 15% community growth on the low end to over 20%.

How do you see community count going and do you have 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?

Yes, Mike, this is Richard, a couple things.

If you remember back with the acquisition of Centex and some of our commentary there, there are 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 revenue performance going forward.

But at this point I would say the trend is still going to be down.

We're still formulating our plans for 2011, I don't know exactly how far down it'll 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 2009 and 2010 to date, which, as others have indicated, are certainly attractive from not only a margin standpoint but a return 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.

Don't have an exact number for you as we're still formulating everything for 2011.

But I just wanted to get that comment in there that if you have 100 communities with ten 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 maybe as relevant as if it were a lot of your core community.

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 clearly impair -- acquire anything that would ultimately get impaired so we're trying to be very cautious.

But nevertheless we are finding success on distressed assets.

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 had alluded to the fact that you haven't seen, at this point, too much of a pick up of incentives materially and that ex these construction costs also gross margin's kind of steady here, so I guess that really absent an improvement in demand or reduction in incentives, the only thing really that can move the gross margin a little bit is accretive new community contribution.

So if you could just give us of what you expect -- there's been across the competitors -- one builder even said they are roughly equal new gross margins of new communities versus older ones.

Others had said even 500-to-600 bps more, how are you coming out on that?

And again, pretty early to guess but what do you see the percent of closings in 2011, even in rough terms just to give us a ballpark from those new communities?

Yes, Mike, this is Richard again.

We are seeing a 200-to-400 basis point improvement in margins from new communities acquired, so relative to what others have said I know a lot of the competitors is out there saying 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 2011.

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 2011 than it was in 2010, for sure.

Your next question comes from the line of Megan McGrath of Barclays Capital.

You may proceed.

Hi, thanks.

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 flow-through evenly?

Yes, 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, a percentage of revenue, of course it's going to be dependent on how revenue flows in terms of the percentages but the actual dollar impact we anticipate having the full run rate of the year for that.

Okay, thanks, and then just a current events question.

Just curious to hear if you've heard from any of your sales folks in the areas impacted by all of the foreclosures issues and the moratorium, if you're actually seeing an 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 run-off there in your markets, as well, either good or bad?

Megan, not any significant changes.

As mentioned, October has been relatively consistent, 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, its 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.

You may proceed.

Thanks.

Good morning, everybody.

Good morning, David.

I was hoping we could talk about the SG&A -- the charge in the SG&A from a little bit different perspective and 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 homes 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 something specifically and maybe it went away or it wasn't there as we look forward?

I'm trying to get an idea if these are actually come through, or if they're just going to be -- this is an accounting necessity and it's not necessarily going to play out that way as we move forward in actual cases?

Yes, 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 times, they fall on different years, the insurance affects it by what you could have bought for insurance in those particular years.

So let's say some of them were back in 2004, 2005.

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 on our businesses, a lot of it's mandated by state governments and so you've got a tail on it that could last ten years.

And so with that, you've got claims that can come in basically at any point in time, but some of our more severe ones were 2005, 2006 timeframe, 2004 timeframe seemed to be at the peak.

Some of them also correlate to when the market started to turn down.

And again, correlate those the 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.

And so it is a bit of art and science when you go through this, sort of throw it in a black box and come up with it, but clearly, when we have issues, we're certainly addressing them and then, again, 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 the sudden you've got rain in areas where you haven't had rain before, significant rain.

Again, not an excuse but with standards that were set for construction standards in a particular point in time may not be appropriate given the changes that we're seeing there.

So again, I know I'm not being specific but there's a lot of different items that make that up and they are 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 changes in timeframes for the estimates, et cetera, when you have a spike in experience level here and you use a different timeframe for estimates that can dramatically effect the actuarial estimates.

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'd 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 accompanied the presentation with, you notice that our experience level went up slightly around the Q2 timeframe and since then its 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 now got it covered for the foreseeable future.

But as Roger indicated, it's a tough science to nail down.

Got it.

The second question I had, Richard, I know somebody asked earlier about the margins on new product and new acquisitions relative to what are you seeing 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 were doing margins relative to the acquired lots from Centex?

And the reason I ask is because at 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 until you make a big land move up front and I'm wondering how that -- how your perspective has changed a couple -- 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 lots comparable to what you're able to get in the broader market today?

Yes, 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 to now because from 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.

Still believe that.

It's a question of, 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?

Yes, David, I think we're still seeing acquisitions that we're doing today greater than what's in our portfolio, and I think you have to remember that what we're still buying land for out there is developed lots.

The majority of them are to developed lots but also below replacement cost and so those are the opportunities 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 and carrying on 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 again, some of those we're not doing but 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 Zelman.

You may proceed.

Good morning, guys.

Hi, Dennis.

Hi.

The first question relates to the charge in the quarter.

If we could just focus on the piece, 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, and maybe split those two out for what actually occurred in the quarter?

Yes, Dennis, this is Roger.

The warranty reserves is totally separate from insurance reserves, so we're carrying insurance reserves that are different than those warranties.

So part is warranty, which is more short term, and this is more long term, so they are different.

That's why you can't compare those numbers in like the overall reserve.

Yes, if you take a look at our self-insurance liabilities for which this charge would have impacted our overall reserve now at the end of the third quarter is $850 million, so completely different than the warranty liability that you were discussing.

Okay, and I have a separate question but just to clarify.

So the bulk of that charge is on the insurance reserve as opposed to the warranty claim?

Correct.

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 a Centex and Pulte side, were sold directly to the GSEs as opposed to other purchasers and who those most relevant counter-parties are right now?

And then in the context of that, have you had conversations with them just to understand the qualitative nature of what they're seeing come back to them and how that might impact the future putbacks, because 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?

Yes, Dennis, this is Roger again.

I don't have -- we're not -- I don't have tracking of the ones that we got put back to us from the channels that they ended upcoming from.

Again, as we said, we basically refute outright about 50% of those, so out of the 2,400 that'd be about 1,200.

We're not tracking the specific channel that they came from 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 look at our reserves, where they're coming from, trying to understand how deep the pool is.

And then again you got the different years and different years created different environments so what was acceptable for a mortgage at that point in time to what wasn't from 2005 to 2008, for instance.

So again, I can't give you anything specific by the channel that we actually got the put back from.

Your next question comes from the line of Joshua Pollard of Goldman Sachs.

You may proceed.

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 taking 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?

Yes, Josh, this is Roger again.

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.

Again, incurred but not reported.

So it wouldn't be for future homes that you might build, that it's for everything that would be in your historical database, if you will, so we're not projecting anything that we haven't built yet.

Now what this does is actuarially an assumption that because you had one, you should have another one.

And again, it's like the 100-year flood.

It doesn't mean it's necessarily going to happen, 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 I'd say maybe 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 type of things.

So there's, again, a lot of judgment, a lot of assumptions that go behind that that create that thinking.

So I wouldn't necessarily say you see anything really come through margin.

This was just SG&A and insurance.

You could possibly see a reversal in a reserve because if we determine 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.

Okay.

So if you think about it, whether it be through SG&A or through 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, let's 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 two 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?

Yes, 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 each quarter we have been taking charges.

The first quarter we took about $10 million, the second quarter we took another $10 million in charges relative to this, and again, the development happened as we came into the third quarter.

As we moved through the third quarter and saw some of these claims develop gave rise to taking a look at our assumptions, how well we thought those assumptions were based, and then making the adjustments to those.

Again, some of that was change in methodology, as well, trying to look at a shorter period than a longer period in the trend.

So again, I would say that you shouldn't see those type of charges going forward.

As far as the DTA, Mike?

Yes, 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.

We'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 Security.

Please proceed.

Hi, guys, just one quick number of questions.

Do you have the owned option split of lots?

Yes.

If you take a look at our 149,000 controlled lots, 15,900 are optioned and 133,400 are owned.

Thank you.

And then just on the $100 million in savings, if I look at your SG&A quarterly run rate of $150 million and corporate's $10 million or so a quarter, on $160 million in SG&A plus corporate a quarter, $100 million over the course of the year and this quickly seems like a very high number, and -- just to me -- and 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 S -- we're talking about commission cuts for salespeople, 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?

Yes, 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 it's probably more than 25% or 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 run rate, if we were starting the Company from scratch, what would we build from the ground up as opposed to looking at it from a 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's 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.

Okay, thanks for the color, Richard.

Sure.

Your next question comes from the line of Susan Berliner of JPMorgan.

You may proceed.

Good morning, thank you.

Roger, I guess I just wanted 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 has a maximum reserve of $100 million and then there's the $4 billion of loans that have been securitized that would first have recourse to the banks and then to Centex or Pulte, and I guess I was wondering on that $4 billion, have you seen any requests at all for anything coming back to you guys?

Yes, Megan.

First I think just a --

Sue.

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 of the population that we originated over that period of time.

And yes, what we're looking at is what channels they come back through.

I don't have specifically the number, if 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, is covered through that bank, as well.

But, the bank is the first stop and then Centex Mortgage would be the second -- CTX Mortgage would be the second stop.

Sue, one other -- 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 2,400 loans of which we refute 50%, et cetera, et cetera, to get you to the overall exposure rate that we have seen collectively.

So 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.

Okay, thanks, and I just had a follow up on the reserves for this quarter.

I guess, I was wondering if there was any parts of the country that were notably impacted and 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?

Yes, 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, was 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, which is a 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 subcontractors we employed or our construction techniques or what have you.

Hopefully it's just one of those things that happened that won't occur again, but again 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.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the presentation, you may now disconnect.

Have a great day.