H&R Block Surges as Chief Says Firm Can Handle Mortgage Refunds

H&R Block Inc., the tax preparer whose stock slid 18 percent last month, told investors to ignore speculation that it faces a surge in costs tied to its defunct mortgage business. The shares rose the most in more than a year.

Concern about potential losses tied to buybacks of home loans “is not based on fact,” and reserves to protect the company against claims “are adequate,” Chief Executive Officer Alan Bennett said yesterday during a conference call about fiscal first-quarter earnings. The call included repeated queries about claims, which have totaled more than $680 million.

“There’s nothing that we’re seeing anywhere that would lead to the kind of phone calls we just listened to other than speculators that, in my mind, have probably sold our stock short and then stirred this up,” Bennett said in an interview after the call. Mortgage buyback claims “are getting better,” he said.

H&R Block, the biggest U.S. tax preparer, originated mortgages through January 2008, and some were sold to become part of mortgage-backed securities. Buyers have the right to demand refunds if the loans are later found to have been based on false or missing information, and losses for the biggest U.S. home lenders may total $179 billion, according to Compass Point Research and Trading LLC.

H&R Block has repurchase reserves of $188 million for potential losses on faulty mortgages, interim Chief Financial Officer Jeffrey Brown said during the conference call.

‘Adequate’ Reserves

The company’s mortgage buyback liability “remains within our reserved expectations, and we continue to view related reserves as adequate,” Brown said.

“As of right now, they’re not seeing the claims,” David Burtzlaff, a Dallas-based analyst with Stephens Inc., said today in a telephone interview. “I’m still concerned that they may see more claims in the future. If they don’t, the stock probably will move higher. It’s been pushed down because of this fear.”

Shares of H&R Block rose 73 cents, or 5.8 percent, to $13.30 at 4 p.m. in New York Stock Exchange composite trading, the biggest one-day gain since June 2009. They have declined 41 percent this year, the second-worst performance in the Standard & Poor’s 500 Index.

‘Word on the Street’

“Word on the street” was that the Kansas City, Missouri- based H&R Block was among the recipients of 64 subpoenas issued by the Federal Housing Finance Agency in July that sought information on mortgage buybacks, Michael Millman, founder of Millman Research Associates, said yesterday on the conference call. Bennett said he “can’t comment as to speculation.” Millman had a “buy” rating on the stock.

The FHFA oversees Fannie Mae and Freddie Mac, which buy and sell mortgages from originators. They’ve been sustained by U.S. aid since being placed under federal conservatorship in September 2008, and are under pressure from Congress to recoup losses from soured mortgages.

Credit-default swaps to protect against losses on H&R Block bonds for five years surged 274.2 basis points to 322.3 basis points this year through yesterday, according to CMA DataVision prices.

That means it costs $274,200 more annually on a contract protecting $10 million of debt. Credit-default swaps act like insurance contracts, paying the owner in the event of a default.

Short Interest Rose

Short interest in H&R Block has increased to 3.1 percent of outstanding shares as of yesterday, from 1.4 percent on July 15, according to Data Explorers, a London-based research firm that tracks short sales. Short sellers profit from the decline in share prices by selling borrowed stock and later replacing it with cheaper shares.

H&R Block’s portfolio of originated mortgage loans has declined 34 percent, to $33 billion, from the principal balance when the company stopped servicing mortgages, Brown said.

Of the $33 billion, $15 billion of the portfolio was originated before 2006, with the rest in 2006 and 2007. “We believe the likelihood of repurchase claims decline as loans become more seasoned,” he said.

About one-third of the portfolio is securitized, and the company had $500 million of direct loan sales to government- sponsored entities such as Fannie Mae and Freddie Mac, Brown said.

Since April 2008, the company has received cumulative repurchase claims on an unpaid principal balance of $686 million of loans, he said. The company has reviewed $557 million of that balance and has realized losses of $55 million since then.

As of July 31, claims are under review on $136 million of an unpaid principal balance of loans, Brown said.

Second Term

H&R Block reported a loss from continuing operations of $127.6 million, or 40 cents a share, for the three months ending July 10, compared with $130.6 million, or 39 cents, in the same period last year. The average estimate of eight analysts surveyed by Bloomberg was a loss of 41 cents a share. The net loss narrowed to $130.7 million from $133.6 million.

Bennett, the 59-year-old director and former CEO, returned in July after Russ Smyth resigned. The company stopped providing detailed earnings guidance earlier this year after missing its fiscal 2010 forecast as online competitors such as Intuit Inc.’s TurboTax gained share.

“The reason we didn’t give specific guidance for this year is we have to prove that whatever guidance we give is credible,” Bennett said in the interview.

Competing better online is “a strategic imperative for 2011,” he said. The company has lost more than 2 million retail tax clients in the last two years to rivals including Mountain View, California-based Intuit, which said Aug. 19 that unit sales of its Web-based TurboTax software climbed 19 percent for fiscal 2010.

To contact the reporter on this story: Craig Trudell in New York at ctrudell1@bloomberg.net.

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