H&R; Block to sell mortgage unit
H&R; Block Inc. said Friday that it would sell Option One Mortgage Corp., its troubled Irvine-based sub-prime lending unit, to private equity firm Cerberus Capital Management.
Shares of Kansas City, Mo.-based H&R; Block, best known for its tax preparation business, rose 73 cents to $22.56.
The sale amount is still to be determined, but analysts estimated that the final amount would be perhaps 40% less than H&R; Block had originally hoped. The discount reflects problems in the business of making sub-prime mortgage loans to credit-challenged borrowers amid a weak housing market and rising loan defaults.
“Within a year, all of the independents will be gone,” said analyst David Olson, president of Wholesale Access Mortgage Research & Consulting Inc. “There’s just not enough profit for them to sustain themselves.”
OOMB Acquisition Corp., a newly formed subsidiary of New York-based Cerberus, will buy Option One for the value of its mortgage assets minus $300 million.
The final price won’t be set until the deal closes in H&R; Block’s second quarter, which ends in October, but it probably will be less than $1 billion -- perhaps as low as $700 million or $800 million, said Alex Paris, an analyst at Barrington Research in Chicago.
H&R; Block Chief Executive Mark Ernst told analysts that even at the discounted price, he was glad to have reached a deal.
“Given the significant changes in the sub-prime market, we’re pleased with the outcome,” he said.
The sale ended concerns that H&R; Block would be able to find a buyer for the unit as defaults on sub-prime mortgages rose to the highest level in four years.
Tough times for lenders will last for at least two more years, said Olson, who predicted that federal regulators would start pushing interest rates down by the end of 2007 and lay the groundwork for an industry comeback.
Also Friday, U.S. Treasury Secretary Henry M. Paulson Jr. said that the housing market correction appeared to be at or near its bottom and that troubles in the sub-prime mortgage market were unlikely to spread throughout the economy, Reuters reported.
