H&R Block’s Sand Canyon Sued Over Losses on Mortgage Pool

H&R Block Inc.’s Sand Canyon Corp. unit was sued in New York state court by a loan trust servicer for breach of contract involving a pool of mortgages.

Sand Canyon, formerly known as Option One Mortgage Corp., sold the trust more than 7,500 mortgage loans with a total initial principal balance of about $1.5 billion, lawyers for the servicer said in a lawsuit filed in New York state Supreme Court in Manhattan yesterday.

The trust and its investors have lost more than $325 million and about 56 percent of the loans in the pool have been liquidated, modified or are “seriously delinquent,” the servicer, Coppell, Texas-based Homeward Residential Inc., said in the complaint. Homeward Residential was formerly known as American Home Mortgage Servicing Inc.

“The huge losses realized by the Trust, and the very high delinquency and default rates, caused some investors to examine whether Sand Canyon’s representations about these loans had been truthful,” the servicer said in the complaint. “One review of a sample of 392 loans has shown that Sand Canyon breached its representations and warranties with respect to almost 7 out of every 10 of these loans.”

Sand Canyon ceased originating mortgage loans in December 2007, sold its servicing assets to American Home Mortgage Servicing and discontinued remaining operations in April 2008.

H&R Block can’t comment on litigation, Teresa Clark, a spokeswoman for the Kansas City, Missouri-based company, said in an e-mail.

February Suit

Sand Canyon sued American Home Mortgage Servicing in the same court in February, accusing the company of providing electronic copies of loan files to trustees and insurers seeking to bring new claims or demands to repurchase loans or strengthen existing cases.

Sand Canyon said providing the loan files violates an accord between the two companies, reached when American Home Mortgage Servicing agreed to buy Sand Canyon’s mortgage loan servicing portfolio in 2008, which called on both parties to act as allies in the defense of certain liabilities.

American Home Mortgage Servicing moved to dismiss the suit in March, saying it’s required to act in the best interest of mortgage trust investors and must provide information to trustees and investors electronically.

SEC Settlement

H&R Block agreed in April to pay more than $28 million to resolve U.S. Securities and Exchange Commission claims that Option One didn’t tell investors it might be unable to make good on obligations to repurchase faulty mortgages without assistance.

Sand Canyon received $543 million worth of new claims for alleged breaches of representations and warranties since the fiscal third quarter ended Jan. 31, H&R Block said in a regulatory filing in April.

The cases are Homeward Residential Inc. v. Sand Canyon Corp., 651885/2012, and Sand Canyon Corp. v. American Home Mortgage Servicing Inc., 650504/2012, New York state Supreme Court (Manhattan).

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