H&R; Block Buys Santa Ana Mortgage Firm

Tax giant H&R; Block Inc., moving to bolster its fledgling financial services business, said Wednesday it has acquired high-risk mortgage lender Option One Mortgage Corp. in Santa Ana for $190 million in cash.

Option One, which made $1.1 billion in loans through 41 locations nationwide last year, is owned by Fleet Financial Group Inc., which bought the Santa Ana company just two years ago. Fleet Financial, based in Providence, R.I., announced in December that it planned to sell the Santa Ana operation.

“Fleet just really wanted to focus on their core business, which is banking on the Eastern seaboard,” said William D. Davis, vice president and a founder of Option One.

Pending regulatory approval, the deal should close in June, Block officials said.

Option One makes fixed-rate and variable loans to individuals who could not qualify for a traditional home loan. Then it pools these loans and sells them to institutional investors, Davis said.

The purchase of Option One, the country’s 15th-largest sub-prime lender, represents H&R; Block’s most aggressive move into the lending area. The Kansas City-based company owns a minority interest in another sub-prime lender and has originated some high-risk loans out of its own offices. Still, this business equals only about one quarter of Option One’s, said William Anderson, president of Block Financial Corp., H&R; Block’s financial services arm.

Anderson said Block plans to retain Option One’s management and its 561 employees, including 241 at its Santa Ana headquarters.

“We decided to buy this business because we like the way existing management runs it. We’ll stay out of their way and let them continue to run the business,” Anderson said. This year the company is on schedule to originate about $1.5 billion in loans.

Option One was started in 1992 as a subsidiary of Plaza Home Mortgage. In 1995, facing much competition and a slowdown in home refinancing, Plaza’s board of directors voted to sell the company, including a much smaller Option One, to Fleet Financial for $120 million.

A large parent such as H&R; Block should insulate the company from interest rate fluctuations and other dips in the real estate market, Davis said. “We can go forward knowing we can weather any economic cycle,” he added.

The profitability of sub-prime loans, which carry a higher interest rate, have lured large financial institutions such as Aames Financial Corp. and Countrywide Home Loans, which have snapped up smaller established sub-prime lenders.

However, many sub-prime clients do not pay on time, and aggressive loan-servicing operations are required. Currently, Option One services about $2.3 billion in loans, and H&R; Block officials say they even plan to use the service to handle other loans.