Option One - H&R Block - Sub-Prime Wholesale

Update - 2008-01-31: Another 505 jobs will be eliminated at Option One according to a report today at Forbes.com:

"The downsizing of the company is a result of the closing of its subprime mortgage arm, Option One Mortgage Corp."

Original post - 2007-12-04: Fresh news from the Associated Press, and published everywhere is the headline, "Cerberus, H&R Block End Mortgage Deal."

"Cerberus Capital Management LP and H&R Block Inc. said Tuesday they terminated their agreement for Cerberus to purchase H&R Block's mortgage subsidiary..."

As one of our readers said "They gave it a good run." As stated in the Wall Street Journal:

"As a result, Option One has stopped originating new loans and will close that part of its operations. H&R Block also plans to sell the unit's mortgage-servicing business."

H&R Block said it will lay off about 620 employees, close three offices and take a $75 million restructuring charge.

This is from the Option One web site:

Dec. 4, 2007

"Today, Option One's parent company, H&R Block Inc., announced that effective immediately Option One will cease accepting new mortgage loan applications."

Join the discussion regarding Option One on our Forum by clicking here.

Moved from the Ailing List

Update 2007-11-23: Option One picked up a $750 million dollar line to fund Servicing, while it lost a line of the same amount to fund originations. From theStreet.com:

"H&R Block has cut hundreds of jobs at Option One and at its shuttered H&R Block Mortgage retail lending franchise, as home prices fall and defaults rise. The company originally agreed to sell Option One to Cerberus Capital Management in the spring. But H&R Block said in August that it was negotiating revised terms for the sale, including an agreement to "wind down" Option One's mortgage origination operations, while Cerberus would only purchase the mortgage-servicing unit."

Click here to read the full story.

Update 2007-10-10:

Recently, a number of banks funding Option One have reduced or eliminated considerable amounts of the lender's credit—to the tune of around or above $4 billion. Here is a sample of the reasoning given (having to do with low or no positive cash flow and breach of debt covenants):

The Terminated Facilities were terminated in light of (i) the pending expiration of waivers of "minimum net income" covenants contained in the Terminated Facilities (which generally required OOMC to maintain a cumulative minimum net income of at least $1 on a rolling basis for the most recently ended four fiscal quarters) and (ii) reduced mortgage origination volume and decreased warehouse financing availability in the current sub-prime mortgage environment.

Update 2007-08-06:

We have received word that Option One has made some changes in their pricing and products. From an email sent out by Option One:

Important News: Pipeline Repricing, Product and
Underwriting Changes Effective Immediately!

As a result of recent market changes, Option One has made the decision to reprice loans in the pipeline and make changes to our current suite of products and underwriting guidelines.

Click here for full details related to:

• Repricing our pipeline
• Stated Income program changes
• Non-Owner Occupied and Second Homes

We thank you for your understanding as we continue to make necessary changes in our products, programs and process. We remain committed to providing you and your borrowers the same excellent service you've come to expect from Option One

If you follow the link, there are quite a few additional details. For example, three year ARMs will no longer be offered and no submissions will be accepted that are secured by Florida Condos. Further, Option One will "only originate Full Doc loans secured by Owner Occupied properties (No 2nd Homes)". Submissions for refinancings on vacant properties or properties that have been listed for sale in the previous three months will also be rejected.

Further, Option One made some significant lay-offs today. Estimates we are recieving put the lay-offs at 60% to two-thirds of Option One's account executives or 150 - 185 people.

Previously (2007-03-14)

Option One is a top-10 subprime lender. H&R block has been looking to jettison this manifest liability for the better part of a year; in their own reports they list Option One under "discontinued operations".

H&R has delayed filing their latest quarterly report due to Option One-related write-downs, $29 mln of which will be added to Q3 2006.

Berkshire-Hathaway has been selling shares of H&R block. Perhaps Buffett connected the dots to the CDO "financial weapons of mass destruction" underlying this business.