H&R Block Posts Huge Option One MortgageLinked Loss

Tax preparation giant H&R Block lost $502 million in its fiscal second quarter, blaming the poor performance on its discontinued subprime mortgage unit, Option One Mortgage.

H&R Block is now trying to sell Option One’s $62.3 billion servicing business after a deal to sell the entire company to hedge fund giant Cerberus Capital fell apart.

By discontinuing Option One’s operations, Block took a total pretax loss of $551 million. Included in that number is a $252 million loss on the sale of $3 billion in whole loans. It also lost $123 million due to mortgage related impairment charges tied to mortgage and servicing assets.

H&R Block Take A $34 Million Option One Mortgage Loss

Mortgage originations will fall below the $2 trillion level in 2008 for the first time since 2000, Mortgage Bankers Association chief economist Doug Duncan told reporters.

Originations were $2.7 trillion in 2006 and are projected to be $2.3 trillion for this year. Next year, volume will fall to $1.9 trillion, the MBA economist said.

Regarding the credit crunch, “if it is all about subprime, why did Cerberus have a problem” getting the funding for its eventual acquisition of Chrysler, Mr. Duncan asked. The real issue, he said, is leverage, although issues with subprime mortgages were the trigger.

Mortgage industry job losses will top 100,000 and possibly go as high as 110,000, he predicted. Back in 2004, when there was a brief market slowdown, Mr. Duncan predicted there would be job losses of 80,000.

It is an obvious fact Mr Duncan, not a crystal ball prediction, with the decrease in mortgage production, there will be a need for fewer originators.

While there were some initial job cuts back then, growth in the asset backed business led to an increase in employment. Now we are seeing those cuts being made, enhanced by the new hires, he said.

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Subprime mortgage company Aegis Mortgage, has filed for chapter 11 bankruptcy protection, listing 35 of its largest unsecured creditors who are owed about $90 million.

Aegis Mortgage which is owned by hedge fund giant Cerberus Capital stopped funding loans and laid off most of its production staff.

According to its Delaware bankruptcy filing, the lender’s top five creditors are: Morgan Stanley ($16 million); Countrywide Financial, ($14 million); EMC Mortgage, Lewisville, ($11 million); Aurora Loan Services, ($9 million) and Goldman Sachs ($8 million).

Option One Mortgage has trimmed 185 account executives from its work force as part of a restructuring plan, reporting that more cuts may lie ahead.

Meanwhile, the nation’s third-largest subprime mortgage lender said the sale of the company to hedge fund [tag-cat}Cerberus Capital[/tag-cat] is moving forward and still may close by Oct. 31, the end of its fiscal second quarter. There has been speculation in the market that Cerberus may be getting cold feet in regard to Option One.

Earlier in the week, the Cerberus-owned Aegis Mortgage of Houston stopped funding loans and trimmed hundreds of workers. In May, Option One announced plans to close 12 mortgage processing offices and trim 600 workers by early September.

In April Cerberus agreed to pay just shy of $1 billion in cash for Option One, but the price is based on Option One’s net asset value, which has dropped during the nation’s subprime crisis.