9.	Mortgage Loans Held for Sale

Our wholly owned mortgage banking subsidiary, K. Hovnanian American Mortgage, LLC (“K. Hovnanian Mortgage”), originates mortgage loans, primarily from the sale of our homes. Such mortgage loans are sold in the secondary mortgage market within a short period of time of origination. Mortgage loans held for sale consist primarily of single-family residential loans collateralized by the underlying property. We have elected the fair value option to record loans held for sale and therefore these loans are recorded at fair value with the changes in the value recognized in the Condensed Consolidated Statements of Operations in “Revenues: Financial services.” We currently use forward sales of mortgage-backed securities (“MBS”), interest rate commitments from borrowers and mandatory and/or best efforts forward commitments to sell loans to

third

-party purchasers to protect us from interest rate fluctuations. These short-term instruments, which do

not

require any payments to be made to the counterparty or purchaser in connection with the execution of the commitments, are recorded at fair value. Gains and losses on changes in the fair value are recognized in the Condensed Consolidated Statements of Operations in “Revenues: Financial services.”

July 31, 2019

and

October 31, 2018,

$68.7

million and

$115.2

million, respectively, of mortgages held for sale were pledged against our mortgage warehouse lines of credit (see Note

). We

may

incur losses with respect to mortgages that were previously sold that are delinquent and which had underwriting defects, but only to the extent the losses are

not

covered by mortgage insurance or resale value of the home. The reserves for these estimated losses are included in the “Financial services” liability balances on the Condensed Consolidated Balance Sheets. As of

July 31, 2019

and

2018,

we had reserves specifically for

and

identified mortgage loans, respectively, as well as reserves for an estimate for future losses on mortgages sold but

not

yet identified to us.

The activity in our loan origination reserves during the

three

and

nine

months ended

July 31, 2019

and

2018

was as follows:

	Three Months Ended July 31,		Nine Months Ended July 31,
(In thousands)	2019	2018	2019		2018

Loan origination reserves, beginning of period	$1,269	$3,271	$2,563		$3,158
Provisions for losses during the period	61	39	139		107
Adjustments to pre-existing provisions for losses from changes in estimates	-	-	(22	)	45
Payments/settlements	-	-	(1,350	)	-
Loan origination reserves, end of period	$1,330	$3,310	$1,330		$3,310