H&R; Block ponders sale of mortgage unit

H&R; Block Inc. said Monday that it was “evaluating strategic alternatives” including a sale for its Irvine-based Option One Mortgage Corp., which has turned unprofitable amid intense competition in its shrinking business -- higher-cost “sub-prime” mortgages to borrowers considered risky because of low credit scores or insufficient income or home equity.

H&R; Block, the Kansas City, Mo.-based company known best as a tax preparer, also lowered its earnings guidance for the year because of the downturn in the mortgage market. It said it now expected to earn $1.20 to $1.45 a share in its current fiscal year, which began May 1. The company previously had forecast $1.60 to $1.85 a share.

In its recent annual report, the company said the sub-prime market, which enjoyed unparalleled growth earlier this decade as interest rates fell and home prices rose, could “no longer count on rising volume to improve results.” Instead, it said, winners in the industry would be determined by “cost competitiveness and service quality.”

H&R; Block Chairman Mark Ernst said in a statement that Option One had “one of the most efficient cost structures in the industry.” Nonetheless, he said, selling Option One “would enable H&R; Block to further focus management resources on its core businesses and create long-term shareholder value.”

The company said it had retained Goldman, Sachs & Co. to assist in the review of alternatives.

Several sub-prime firms have been sold recently to Wall Street firms that process mortgages into bonds: Bear Stearns Cos., which owns Texas-based EMC Mortgage Corp., agreed last month to buy Irvine-based Encore Credit Corp.; Merrill Lynch recently agreed to buy San Jose-based First Franklin Financial Corp.; and Morgan Stanley agreed over the summer to buy Virginia-based Saxon Capital Inc.