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H&R Block Mops Up Its Mortgage Mess

Shares fell Wednesday after the company reported a wider loss for its Option One lending unit

With H&R Block's (HRB) troublesome Option One Mortgage unit on the auction block, the Kansas City (Mo.) tax preparer said Mar. 14 that it took a $29.2 million pretax loss. Investors, who have worried for months about the company's business selling mortgages to higher-risk borrowers, sold H&R's stock by 2.7% to $19.50 per share on Mar. 14.

Subprime lenders are in a tumult after lending rates rose during recent months and made borrowing more expensive (see, 3/14/07, "The Mounting Uncertainty over Subprime"). Several major subprime lenders, including ResMae Mortgage, Mortgage Lenders Network USA, and OwnIt Mortgage Solutions, have declared bankruptcy since December.

The bad news has kept piling in. On Tuesday, the state of Massachusetts subpoenaed Bear Stearns (BSC) and UBS Securities (UBS) for information on how they rated the stocks of subprime lenders. Meanwhile major subprime lenders struggle: San Diego-based Accredited Home Lenders Holding (LEND) is scrambling to raise capital and New Century Financial's (NEWC.PK) lenders have cut off financing amid a criminal probe of New Century's accounting practices.

"In light of the extreme volatility in the mortgage market, we conducted a rigorous review," of how much Option One Mortgage's value has depreciated, said CEO Mark A. Ernst in a press release March 14. H&R Block's discontinued mortgage operations resulted in a $15.5 million increase of net loss for the 2007 third quarter to $60.3 million.

But Ernst has been battling the problems at Option One for months. The lender has been getting stricter with its loan-selling criteria, for example. H&R Block's 30-day first payment default rate at Jan. 31 was 3.13%, down from 3.83% at Oct. 31, the best rate seen since June.

The company remains committed to its plan to sell Option One by the end of the month. Standard & Poor's Equity Research maintained a buy opinion on H&R's stock after the news, explaining that H&R Block's discontinued mortgage operations were already excluded from earnings estimates anyway. (S&P, like, is owned by The McGraw-Hill Companies.)

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