H&R Block 2Q loss widens; mortgage claims spike (AP)

By EILEEN AJ CONNELLY, AP Personal Finance Writer Eileen Aj Connelly, Ap Personal Finance Writer – Thu Dec 1, 7:03 pm ET

NEW YORK – A spike in claims related to bad loans written by its now-shuttered subprime mortgage unit shouldn't create any new liability for H&R Block Inc., company executives said Thursday after releasing results that showed a wider loss for its fiscal second-quarter.

The nation's largest tax preparer said claims from investors in securities backed by those mortgages, and from insurers who covered those investments, shot up to $483 million during the quarter, from $21 million a year earlier.

Sand Canyon Corp., as the former OptionOne mortgage unit is now called, reviewed $61 million in claims during the quarter, resulting in incurred losses of $3 million.

While the losses remained in line with prior quarters, the new claims totaled more than three times as many as were filed in the previous four quarters combined. But Block executives said the higher claims won't likely result in a similar increase in losses.

Chief Financial Officer Jeff Brown said since May 2009, 85 percent of claims that Sand Canyon has reviewed were found invalid, mainly because OptionOne was a pure subprime lender, which had relatively weak lending standards.

The claims increase led Sand Canyon to set aside an additional $20 million during the quarter to cover losses. But executives said that doesn't portend any increased liability to Block.

"Whether or not claim activity remains at elevated levels in the near future, we believe Sand Canyon's financial position is sufficient to satisfy all valid claims," said Block CEO Bill Cobb during a conference call to discuss the quarterly results.

He noted Sand Canyon is a "separate legal entity" from Block, and the tax preparer believes it is therefore sheltered from having to pitch in cash to cover any claims.

The issue has weighed on Block shares for some time, as Wall Street has fretted it could end up on the hook for buying back millions more in soured mortgages.

The topic's resurgence after a few quarters in the background hurt Block's shares. In afterhours trading after Block released its results, the company's shares fell 43 cents, or 2.6 percent, to $15.63. The stock closed the regular session at $16.06.

Block said it closed its previously announced sale of its RSM McGladrey business consulting unit on Wednesday. And it booked charges for the previously planned shutdown of its ExpressTax unit.

The resulting shifting of funds boosted Block's loss to $141.7 million, or 47 cents per share, for the three months ended Oct. 31. A year earlier, it posted a loss of $109 million, or 36 cents per share.

Block typically posts a second-quarter loss because most of its revenue comes during the U.S. tax season.

Excluding the ExpressTax charges and losses from discontinued operations, H&R Block said it lost 38 cents per share in the recent quarter.

On the revenue side, growth in Block's Australian tax business helped the quarter's revenue rise 8 percent to $129.2 million, from $119.6 million last year.

That performance fell short of analyst projections.

On average, analysts expected an adjusted loss of 35 cents per share, on $328.9 million in revenue, according to data provided by FactSet. Both figures included RSM McGladrey's business. Last year, the consulting unit took in revenue of $203.4 million in the quarter.

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Citigroup's sale of consumer finance unit hits block: report (Reuters)

(Reuters) – Citigroup's (C.N) attempts to sell its CitiFinancial unit have hit a stumbling block as potential bidders remain uncertain about the unit's funding as a standalone business, the Financial Times reported, citing people familiar with the matter.

CitiFinancial, one of the largest U.S. consumer finance companies, was put up for sale as Citigroup tightened its focus on wealthier, more credit-worthy clients.

In March, Reuters reported the company might retain a stake in the unit and would offer partial financing to bidders, who included the Who's Who of the private equity world.

Potential buyers are waiting for reviews by credit rating agencies, which are expected to report on the units finances in next two weeks, the business daily reported.

Citi also plans to produce audited financial statements on the standalone unit and has not made it clear how large a funding gap it would be prepared to fill, the paper said.

Three groups remain in the sales process -- Blackstone, Carlyle, and Brysam Global Partners form one group, Apollo Management and JC Flowers form a second bidding group, while Centerbridge Capital Partners leads a third -- the Financial Times said.

Citigroup declined to comment.

The CitiFinancial business has a book value of about $2 billion, and comes with some $13 billion of assets.

Citigroup is looking to sell the business without taking losses, unlike insurer American International Group Inc (AIG.N), which last year sold its consumer finance business at a loss.

(Reporting by Jochelle Mendonca in Bangalore, editing by Bernard Orr)

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Summary Box: DOJ tries to stop H&R Block deal (AP)

GOVERNMENT INTERVENES: The Department of Justice is trying to prevent H&R Block Inc. from acquiring the creator of TaxACT Software. The government on Monday filed an antitrust lawsuit, arguing the deal would leave just two major competitors in do-it-yourself tax preparation.

PROPOSED TIE-UP: H&R Block announced plans in October to pay $287.5 million in cash to acquire the parent of privately held 2nd Story Software, which created TaxACT.

MARKET COMPETITION: Regulators say Intuit Inc., H&R Block and TaxACT account for 90 percent of tax prep software sales. Intuit is the market leader, followed by H&R Block and TaxACT.

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H&R Block tumbles on fears regarding mortgages (AP)

By EILEEN AJ CONNELLY, AP Business Writer Eileen Aj Connelly, Ap Business Writer – Mon May 9, 8:54 pm ET

NEW YORK – Shares of H&R Block Inc. lost nearly 8 percent Monday on renewed fears that the company will be dragged back into the subprime mortgage mess.

News that a group of mortgage bond investors may try to force H&R Block's former mortgage unit to buy back potentially billions of dollars in defaulted home loans sent shares sliding.

The mortgages written by Block's former Option One unit, which stopped issuing new loans in December 2007, have been a recurring issue for investors in recent years, but one that had been discounted lately.

Morgan Stanley analyst Vance Edelson said that many — but not all — Block investors had grown complacent about the mortgage issue over the past year. Yet the topic has been raised on every recent conference call. "This has remained part of the investor debate, because many investors have realized that H&R Block is not entirely out of the woods on this issue."

At the end of its fiscal third quarter in March, then-CEO Alan Bennett said the unit created to deal with the remaining mortgage issues, Sand Canyon Corp., had $131 million in reserve to cover potential claims, and that claims were coming in "within reserved expectations."

The exact amount of loans in question is not yet known.

Dallas attorney Talcott Franklin told The Associated Press he is still bringing together the group of investors in mortgage bonds backed by bad Option One loans. Once it is assembled, the group will press H&R Block to repurchase the soured agreements. "At this stage you don't really know what you have, until you actually get confirmation of those holdings," he said.

Some analysts have estimated the bonds purchased by banks and other non-government entities could add up to as much as $100 billion.

An H&R Block spokesman said the company has not received any requests, and cannot comment on actions by outside parties. During a conference call late last month, Bennett said the company would provide "a full update" on mortgage activity when it reports fiscal full-year results on June 23.

Morgan Stanley's Edelson said the company has a number of factors on its side. To force the buyback, bond investors would have to prove there was wrongdoing in the mortgage lending on some level, not simply that a homeowner defaulted on an Option One loan, he said.

"This could be a messy situation that takes years to litigate, because going through all the paperwork is a painstaking process," Edelson said.

Earlier this year, the analyst pointed out to clients that Option One had avoided home equity loans and second liens, which are a typical generator of buybacks. Plus, Block did little business with government sponsored enterprises Fannie Mae and Freddie Mac, which have been the source of most buybacks in the industry.

Franklin said the investors would only need to show a "material and adverse effect." For example, Sand Canyon could be pressed to buy back loans where it could be shown that borrowers committed fraud by providing incorrect information that misrepresented their income. During the housing bubble, such loans were known as "liar's loans" because individuals did not have to provide documentation for their income. "What do you think the odds are that some of the borrowers were, in fact, liars?" the attorney asked.

"A lot of this liability is back-end driven," he added. "If the loan doesn't have a loss associated with it, then there's no repurchase."

Franklin said he hopes the matter can be settled through negotiation, not litigation.

Concerns about the sputtering housing market may have provided fuel to the stock sell-off. With home prices remaining suppressed, and some suggesting the bottom of the market has not yet been reached, investors may be worried that a new round of foreclosures is on the way.

H&R Block shares fell $1.31, or 7.6 percent, to close at $15.93. The stock has traded between $10.13 and $18.08 in the past 52 weeks, with the low point hit in October, the last time the mortgage issue came to the top of traders' agenda.

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