Through The Fly's Eyes: H&R Block

from Theflyonthewall.com








Mortgage Business Rolls Over With Housing

H&R Block's (HRB) subprime mortgage business, Option One, reported awful results, showing the effects of a weak housing market. The sub-prime mortgage business outlook has become so bad that earlier in the quarter H&R Block decided to put Option One up for sale.

H&R Block management said Option One has generated a cumulative $2.8 billion in pre tax earnings since it was purchased in 1997. However, management has decided not to battle through this subprime market downturn.

* Loan sale premiums are down
* Derivative losses are higher
* Higher default rates and loss severity
* Early payment defaults are moving higher and Option One is adopting more stringent FICO criteria for mortgages
* Non-prime mortgage purchases are down almost 50% from last year

Management said the industry is moving to a more vertically integrated model and Option One's stand-alone strategy might not work in the future.

Option One has a book value of $1.3 billion and a tax basis of $600 million. Look for the company to move quickly to get out of this business.