We record impairment losses on inventories related to communities under development and held for future development when events and circumstances indicate that they may be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their related carrying amounts. If the expected undiscounted cash flows are less than the carrying amount, then the community is written down to its fair value. We estimate the fair value of each impaired community by determining the present value of the estimated future cash flows at a discount rate commensurate with the risk of the respective community. ForIn the six months ended April 30, first quarter of fiscal 2018, we did not record impairment losses, therefore, no discount rate was used for impairments. In the first quarter of fiscal 2017, our discount rate used for the impairments recorded ranged from 18.3% to 19.8%. For the six months ended April 30, 2016, our discount rate used for the impairments recorded ranged from 16.8% to 18.5%. No discount rate was used for communities impaired on land held for sale and purchase offer prices were used to determine the fair value of such communities. Should the estimates or expectations used in determining cash flows or fair value decrease or differ from current estimates in the future, we may need to recognize additional impairments. 

During the sixthree months ended April 30, 2017 January 31, 2018 and 2016,2017, we evaluated inventories of all 381387 and 478390 communities under development and held for future development or sale, respectively, for impairment indicators through preparation and review of detailed budgets or other market indicators of impairment. During the three months ended January 31, 2018, we did not find any indicators of impairment and therefore did not perform any detailed impairment calculations.We performed detailed impairment calculations during the sixthree months ended April 30,January 31, 2017 and 2016 for nine and 20six of those communities (i.e., those with a projected operating loss or other impairment indicators), respectively, with an aggregate carrying value of $66.9 million and $89.0 million, respectively.$13.8 million. Of those communities tested for impairment during the sixthree months ended April 30,January 31, 2017, and 2016, three and nine communitiesone community with an aggregate carrying value of $45.8$1.2 million, and $43.5 million, respectively, had undiscounted future cash flowsflow that only exceeded the carrying amount by less than 20%. As a result of our impairment analysis, we recorded aggregate impairment losses of $1.5 million and $4.2 million, in one and six communities, respectively, with an aggregate pre-impairment values of $8.5 million and $21.1 million, respectively, for the three and six months ended April 30,January 31, 2017, respectively, and recorded aggregate impairment losses of $5.4 million and $15.1 million, in four and ten communities, respectively, with an aggregate pre-impairment values of $16.7 million and $45.4 million, respectively, for the three and six months ended April 30, 2016, respectively, which are included in the Condensed Consolidated StatementsStatement of Operations on the line entitled “Homebuilding: Inventory impairment loss and land option write-offs” and deducted from inventory. Impairments decreasedinventory, of $2.7 million for the six months ended April 30, 2017 compared to the same periodfive communities, with a pre-impairment value of the prior year as the impairments recorded for the six months ended April 30, 2016 were mainly for land held for sale in the Midwest and Northeast.$12.6 million. The pre-impairment value represents the carrying value, net of prior period impairments, if any, at the time of recording the impairment.

The Condensed Consolidated StatementsStatement of Operations line entitled “Homebuilding: Inventory impairment loss and land option write-offs” also includes write-offs of options and approval, engineering and capitalized interest costs that we record when we redesign communities and/or abandon certain engineering costs and we do not exercise options in various locations because the communities' pro forma profitability is not projected to produce adequate returns on investment commensurate with the risk. Total aggregate write-offs related to these items were $0.4$0.4 million and $4.3$0.5 million for the three months ended April 30, 2017 January 31, 2018 and 2016, respectively, and $0.9 million and $6.3 million for the six months ended April 30, 2017, and 2016, respectively. Such write-offs were primarily located in our Southeast segment for the first half of fiscal 2017 and in all of our segments for the first half of fiscal 2016. Occasionally, these write-offs are offset by recovered deposits (sometimes through legal action) that had been written off in a prior period as walk-away costs. Historically, these recoveries have not been significant in comparison to the total costs written off. The number of lots walked away from during the three months ended April 30, 2017 January 31, 2018 and 20162017 were 478627 and 2,263, respectively,1,061, respectively. The walk-aways were located in all segments except the Southeast in the first quarter of fiscal 2018 and were 1,539located in all segments except the Southwest and 3,519 duringWest in the six months ended April 30, 2017 and 2016, respectively.first quarter of 2017.

We decide to mothball (or stop development on) certain communities when we determine that the current performance does not justify further investmentinvestment at the time. When we decide to mothball a community, the inventory is reclassified on our Condensed Consolidated Balance Sheets from “Sold and unsold homes and lots under development” to “Land and land options held for future development or sale.” During the first half quarter of fiscal 2017,2018, we did not mothball any additional communities, but we sold twoor sell any previously mothballed communities, andbut we re-activated twoone previously mothballed communities.community. As of April 30, 2017 January 31, 2018 and October 31, 2016, 2017, the net book value associated with our 2521 and 2922 total mothballed communities was $66.0$35.6 million and $74.4$36.7 million, respectively, which was net of impairment charges recorded in prior periods of $239.9$206.5 million and $296.3$214.1 million, respectively.

From time to time we enter into option agreements that include specific performance requirements whereby we are required to purchase a minimum number of lots. Because of our obligation to purchase these lots, for accounting purposes in accordance with Accounting Standards Codification (“ASC”) 360-20-40-38,360-20-40-38, we are required to record this inventory on our Condensed Consolidated Balance Sheets. As of April 30, 2017 January 31, 2018 and October 31, 2016, 2017, we had no specific performance options.

We sell and lease back certain of our model homeshomes with the rightright to participate in the potential profit when each home is sold to a third party at the end of the respective lease. As a result of our continued involvement, for accounting purposes in accordance with ASC 360-20-40-38,360-20-40-38, these sale and leaseback transactions are considered a financing rather than a sale. Therefore, for purposes of our Condensed Consolidated Balance Sheets, at April 30, 2017 January 31, 2018 and October 31, 2016, 2017, inventory of $76.5$39.4 million and $79.2$58.5 million, respectively, was recorded to “Consolidated inventory not owned,” with a corresponding amount of $68.1$35.8 million and $69.7$51.8 million (net of debt issuance costs), respectively, recorded to “Liabilities from inventory not owned” for the amount of net cash received from the transactions.

We have land banking arrangements,arrangements, whereby we sell our land parcels to the land bankers and they provide us an option to purchase back finished lots on a predetermined basis.schedule. Because of our options to repurchase these parcels, for accounting purposes, in accordance with ASC 360-20-40-38,360-20-40-38, these transactions are considered a financing rather than a sale. For purposes of our Condensed Consolidated Balance Sheets, at April 30, 2017 January 31, 2018 and October 31, 2016, 2017, inventory of $78.1$54.5 million and $129.5$66.3 million, respectively, was recorded asto “Consolidated inventory not owned,” with a corresponding amount of $48.6$32.2 million and $80.5$39.3 million (net of debt issuance costs), respectively, recorded to “Liabilities from inventory not owned” for the amount of net cash received from the transactions.

The Company enters into land and lot option purchase contracts to procure land or lots for the construction of homes. Under these contracts, the Company will fund a stated deposit in consideration for thethe right, but not the obligation,obligation, to purchase land or lots at a future point in time with predetermined terms. Under the terms of the option purchase contracts, many of the option deposits are not refundable at the Company's discretion. Under the requirements of ASC 810, certain option purchase contracts may result in the creation of a variable interest in the entity (“VIE”) that owns the land parcel under option.

In compliance with ASC 810, the Company analyzes its option purchase contracts to determine whether the corresponding land sellers are VIEs and, if so, whether the Company is the primary beneficiary. Although the Company does not have legal title to the underlying land, ASC 810 requires the Company to consolidate a VIE if the Company is determined to be the primary beneficiary. In determining whether it is the primary beneficiary, the Company considers, among other things, whether it has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance. Such activities would include, among other things, determining or limiting the scope or purpose of the VIE, selling or transferring property owned or controlled by the VIE, or arranging financing for the VIE. The Company also considers whether it has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE. As a result of its analyses, the Company determined that as of April 30, 2017January 31,2018 and October 31, 2016, 2017, it was not the primary beneficiary of any VIEs from which it is purchasing land under option purchase contracts.

We will continue to secure land and lots using options, some of which are with VIEs. Including deposits on our unconsolidated VIEs, at April 30, 2017, January 31, 2018, we had total cash deposits amounting to $52.9$56.3 million to purchase land and lots with a total purchase price of $980.8 million.$1.0 billion. The maximum exposure to loss with respect to our land and lot options is limited to the deposits plus any pre-development costs invested in the property, although some deposits are refundable at our request or refundable if certain conditions are not met.

General liability insurance for homebuilding companies and their suppliers and subcontractors is very difficult to obtain. The availability of general liability insuranceinsurance is limited due to a decreaseddecreased number of insurance companies willing to underwrite for the industry. In addition, those few insurers willing to underwrite liability insurance have significantly increased the premium costs. To date, we have been able to obtain general liability insurance but at higher premium costs with higher deductibles. Our subcontractors and suppliers have advised us that they have also had difficulty obtaining insurance that also provides us coverage. As a result, we have an owner controlled insurance program for certain of our subcontractors whereby the subcontractors pay us an insurance premium (through a reduction of amounts we would otherwise owe such subcontractors for their work on our homes) based on the risk type of the trade. We absorb the liability associated with their work on our homes as part of our overall general liability insurance at no additional cost to us because our existing general liability and construction defect insurance policy and related reserves for amounts under our deductible covers construction defects regardless of whether we or our subcontractors are responsible for the defect. For the sixthree months ended April 30, 2017 January 31, 2018 and 2016,2017, we received $1.8$1.0 million and $2.0$0.9 million, respectively, from subcontractors related to the owner controlled insurance program, which we accounted for as a reduction to inventory.

We accrue for warranty costs that are covered under our existing general liability and construction defect policy as part of our general liabilityliability insurance deductible. This accrualaccrual is expensed as selling, general and administrative costs. For homes delivered in fiscal 20172018 and 2016,2017, our deductible under our general liability insurance is a $20$20 million aggregate for construction defect and warranty claims. For bodily injury claims, our deductible per occurrence in fiscal 20172018 and 20162017 is $0.25$0.25 million, up to a $5$5 million limit. Our aggregate retention in fiscal 2017 and 2016 is $21 million for construction defect, warranty and bodily injury claims.claims is $20 million for fiscal 2018 and $21 million for fiscal 2017. In addition, we establish a warranty accrual for lower cost related issues to cover home repairs, community amenities and land development infrastructure that are not covered under our general liability and construction defect policy. We accrue an estimate for these warranty costs as part of cost of sales at the time each home is closed and title and possession have been transferred to the homebuyer. Additions and charges in the warranty reserve and general liability reserve for the three and six months ended April 30, 2017 January 31, 2018 and 20162017 were as follows:

Warranty accruals are based upon historical experience. We engage a third-partythird-party actuary that uses our historical warranty and construction defect data to assist our management in estimating our unpaid claims, claim adjustment expenses and incurred but not reported claims reserves for the risks that we are assuming under the general liability and construction defect programs. The estimates include provisions for inflation, claims handling and legal fees.

Insurance claims paid by our insurance carriers, excluding insurance deductibles paid, were $0.2 million and $0.5less than$0.1 million for both the three months ended April 30, 2017 January 31, 2018 and 2016, respectively, and $0.2 million and $3.7 million for the six months ended April 30, 2017 and 2016, respectively, for prior year deliveries. During the first half of fiscal 2016, we settled two construction defect claims relating to the Northeast segment which made up the majority of the payments. 

Cash represents cash deposited in checking accounts. Cash equivalents include certificates of deposit, Treasury bills and government money money–market funds with maturities of 90 days or less when purchased. Our cash balances are held at a few financial institutions and may, at times, exceed insurable amounts. We believe we help to mitigate this risk by depositing our cash in major financial institutions. At April 30, 2017January 31, 2018 and October 31, 2016, $6.72017, $12.5 million and $9.4$13.3 million, respectively, of the total cash and cash equivalents was in cash equivalents, the book value of which approximates fair value.

Homebuilding - Restricted cash and cash equivalents on the Condensed Consolidated Balance Sheets totaled $24.7$3.2 million and $22.9$2.1 million as of April 30, 2017January 31, 2018 and October 31, 2016,2017, respectively, which includesincluded cash collateralizing our letter of credit agreements and facilities as discussed in Note 10.11. Also included in this balance were (1) homebuilding customers’ deposits of $0.5 million and $0.4 million at January 31, 2018 and October 31, 2017, respectively, which are subject to restrictions on our use.

Financial services restricted cash and cash equivalents, which are included in Financial services other assets on the Condensed Consolidated Balance Sheets, totaled $15.9 million and $22.3 million as of January 31, 2018 and October 31, 2017, respectively. Included in this balance were (1) financial services customers’ deposits of $0.1 million and $20.9$13.9 million at April 30, 2017, respectively,January 31, 2018 and $2.2 million and $15.1$20.0 million as of October 31, 2016, respectively,2017 which are restricted fromsubject to restrictions on our use, by us, and (2) $2.0 million of restricted cash at April 30, 2017January 31, 2018 and $3.9$2.3 million at October 31, 20162017, respectively, of restricted cash under the terms of our mortgage warehouse lines of credit.

Total Homebuilding Customers’ deposits are shown as a liability on the Condensed Consolidated Balance Sheets. These liabilities are significantly more than the applicable periods’ restricted cash balances because in some states the deposits are not restricted from use and, in other states, we are able to release the majority of these customer deposits to cash by pledging letters of credit and surety bonds.

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-partythird-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.”

At April 30, 2017 January 31, 2018 and October 31, 2016,2017, $72.064.5 million and $147.4$119.6 million, respectively, of mortgages held for sale were pledged against our mortgage warehouse lines of credit (see Note 10)10). We may incur losses with respect to mortgages that were previously sold that are delinquent and which had underwriting defects, but only to the extent the losses are not covered by mortgage insurance or the resale value of the home. The reserves for these estimated losses are included in the “Financial services – Accounts payable and other liabilities”services” balances on the Condensed Consolidated Balance Sheets. As of April 30, 2017 January 31, 2018 and 2016,2017, we had reserves specifically for 9445 and 13293 identified mortgage loans, respectively, as well as reserves for an estimate for future losses on mortgages sold but not yet identified to us. In fiscal 2017, the adjustment to pre-existing provisions for losses from changes in estimates is primarily due to the settlement of a dispute for significantly less than the amount that had been previously reserved.

The activity in our loan origination reserves during the three and six months ended April 30, 2017 January 31, 2018 and 20162017 was as follows:

We hadhave nonrecourse mortgage loans for certain communities totaling $66.4 million and $82.1$64.5 million (net of debt issuance costs) at April 30, 2017 both January 31, 2018 and October 31, 2016, 2017, respectively, which are secured by the related real property, including any improvements, with an aggregate book value of $192.7$172.7 million and $201.8$157.8 million, respectively. The weighted-average interest rate on these obligations was 5.1% 5.3% at both January 31, 2018 and 4.9% at April 30, 2017 and October 31, 2016, respectively, 2017 and the mortgage loan payments on each community primarily correspond to home deliveries. We also had nonrecourse mortgage loans on our corporate headquarters totaling $13.7 million and $14.3$13.0 million at April 30, 2017 and October 31, 2016, respectively. These loans had a weighted-average interest rate of 8.8% at both April 30,2017. On November 1, 2017, and October 31, 2016, respectively. As of April 30, 2017, these loans had installment obligationswere paid in full in connection with annual principal maturities in the years ending October 31 of: $0.7 million in 2017, $1.4 million in 2018, $1.5 million in 2019, $1.7 million in 2020, $1.8 million in 2021 and $6.6 million after 2021.sale of our corporate headquarters building.

In June 2013, K. Hovnanian Enterprises, Inc. (“K. Hovnanian”), as borrower, and we and certain of our subsidiaries, as guarantors, entered into a five-year, $75.0 million unsecured revolving credit facility (the “Credit Facility”) with Citicorp USA, Inc., as administrative agent and issuing bank, and Citibank, N.A., as a lender. The Credit Facility is available for both letters of credit and general corporate purposes. The Credit Facility does not contain any financial maintenance covenants, but does contain certain restrictive covenants that track those contained in our indenture governing the 8.0% Senior Notes due 2019, which are described in Note 11. The Credit Facility also contains certain customary events of default which would permit the administrative agent at the request of the required lenders to, among other things, declare all loans then outstanding to be immediately due and payable if such default is not cured within applicable grace periods, including the failure to make timely payments of amounts payable under the Credit Facility or other material indebtedness or the acceleration of other material indebtedness, the failure to comply with agreements and covenants or for representations or warranties to be correct in all material respects when made, specified events of bankruptcy and insolvency, and the entry of a material judgment against a loan party. Outstanding borrowings under the Credit Facility accrue interest at an annual rate equal to either, as selected by K. Hovnanian, (i) the alternate base rate plus the applicable spread determined on the date of such borrowing or (ii) an adjusted London Interbank Offered Rate (“LIBOR”) rate plus the applicable spread determined as of the date two business days prior to the first day of the interest period for such borrowing. As of April 30, 2017 there were $52.0 million of borrowings and $15.4 million of letters of credit outstanding under the Credit Facility. As of October 31, 2016, there were $52.0 million of borrowings and $17.9 million of letters of credit outstanding under the Credit Facility. As of April 30, 2017, we believe we were in compliance with the covenants under the Credit Facility.

In addition to the Credit Facility, we have certain stand–alone cash collateralized letter of credit agreements and facilities under which there was a total of $1.7 million letters of credit outstanding at both April 30, 2017 and October 31, 2016, respectively. These agreements and facilities require us to maintain specified amounts of cash as collateral in segregated accounts to support the letters of credit issued thereunder, which will affect the amount of cash we have available for other uses. As of both April 30, 2017 and October 31, 2016, the amount of cash collateral in these segregated accounts was $1.7 million, which is reflected in “Restricted cash and cash equivalents” on the Condensed Consolidated Balance Sheets.

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 and related servicing rights are sold in the secondary mortgage market within a short period of time. In certain instances, we retain the servicing rights for a small amount of loans. K. Hovnanian Mortgage finances the origination of mortgage loans through various master repurchase agreements, which are recorded in financial services liabilities on the Condensed Consolidated Balance Sheets.

Our secured Master Repurchase Agreement with JPMorgan Chase Bank, N.A. (“Chase Master Repurchase Agreement”), which was amended on January 31, 2017 2018 to extend the maturity to January 30, 2018, 31, 2019, is a short-term borrowing facility that provides up to $50.0$50.0 million through maturity. The loan is secured by the mortgages held for sale and is repaid when we sell the underlying mortgage loans to permanent investors. Interest is payable monthly on outstanding advances at an adjusted LIBOR rate, which was 1.0%1.58% at April 30, 2017, January 31, 2018, plus the applicable margin of 2.5% or 2.63% based upon type of loan. As of April 30, 2017 January 31, 2018 and October 31, 2016, 2017, the aggregate principal amount of all borrowings outstanding under the Chase Master Repurchase Agreement was $27.8$21.3 million and $44.1$41.5 million, respectively.

K. Hovnanian Mortgage has another secured Master Repurchase Agreement with Customers Bank (“Customers Master Repurchase Agreement”), which was amended on February 17, 2017, that16, 2018. The Customers Master Repurchase Agreement is a short-term borrowing facility that provides up to $50.0$50.0 million through its maturity on February 16, 2018. 15, 2019. The loan is secured by the mortgages held for sale and is repaid when we sell the underlying mortgage loans to permanent investors. Interest is payable daily or as loans are sold to permanent investors on outstanding advances at the current LIBOR rate, plus the applicable margin ranging from 2.5%2.375% to 5.25%5.125% based on the type of loan and the number of days outstanding on the warehouse line. As of April 30, 2017 January 31, 2018 and October 31, 2016, 2017, the aggregate principal amount of all borrowings outstanding under the Customers Master Repurchase Agreement was $27.8$29.6 million and $38.8$40.7 million, respectively.