Option One Losses Hit H&R Block Hard; Lender Loses Nearly $70 Million

H&R Block Inc. (NYSE:HRB) reported yesterday that it lost a consolidated $44.7 million in the company’s fiscal third quarter for 2007, which ended January 31st.

Losses at the company’s troubled subprime mortgage lending outfit Option One offset nearly $25 million in early tax-season revenues, the company said. Option One lost $69.7 million during the quarter, swamping gains in the company’s tax prep services operation.

The company said it has progressed as planned in its efforts to sell the Option One Mortgage business, saying yesterday that it expects to announce a sale of the subprime lender in March. In spite of confidence that a sale is near, company officials acknowledged on an earnings call yesterday that no formal bids for the Option One business have been made.

The mortgage outfit was a source of profit for the company during the housing boom, but Option One’s most recent earnings fell more than 250 percent from year-ago levels; the lender had earned $42.4 million in 2005.

As with other subprime lenders, an increase in loan loss reserves of approximately $111 million was the driving factor behind losses at the Option One business unit. Approximately $93 million of the reserves were related to loans originated in previous quarters, H&R Block said, due primarily to increases in the company’s estimated loss severity assumption.

Despite the increase in reserves, company officials said early payment default trends have improved, reflecting the company’s efforts to tighten underwriting criteria. The 30-day first payment default rate at January 31 was 3.13 percent, down from 3.83 percent at October 31.

“First payment default rates are the best we’ve seen since June of last year,� CEO Mark Ernst said. “We view this as a good early indicator that actions taken at Option One are improving overall loan quality and payment characteristics. During the course of the sales process, we have continued to make decisions for the business that we believe will best position it for long-term success.�