Subprime lender Option One Mortgage Corp.’s eight warehouse lenders will have the legal right to terminate their obligations to fund future loans at the end of April, and take away Option One’s right to service existing loans.
Option One had an agreement with its creditors requiring it to generate income of at least $1 for four consecutive quarters, ending Jan. 31. Option One, which posted an estimated $60.3 million in losses for the quarter ending Jan. 31, said it obtained waivers from the warehouse lenders on Jan. 24 relieving it of the requirement to turn a profit. The waivers are set to expire April 27.
In a Securities and Exchange Commission filing Wednesday, Option One parent company H&R Block Inc. said Option One is not expected to return to profitability before the waivers expire, but that it should be able to obtain new agreements “from a sufficient number of warehouse providers to allow Option One to continue its off-balance-sheet financing activities.”
Option One’s warehouse lenders were providing $16 billion in off-balance-sheet loan capacity as of Jan. 31, about $14.5 billion of which was committed, H&R Block said.
“If (Option One) can not obtain the waivers, warehouse facility providers would have the right to terminate their future funding obligations under the applicable warehouse facilities, terminate (Option One’s) right to service the loans remaining in the applicable warehouse,” or request reimbursement totaling 10 percent of the balance of loans financed, the company said.
“While this termination could adversely impact (Option One’s) ability to fund new loans, we believe this risk is mitigated by options available to H&R Block,” the company told investors in the SEC filing.
Option One’s warehouse facility providers include Bank of America, JPMorgan Chase Bank, Citigroup Global Markets Realty Corp., Greenwich Capital Financial Products Inc., HSBC Securities (USA) Inc., HSBC Bank USA, Lehman Brothers Bank and Merrill Lynch Bank USA.
H&R Block, which has been attempting to sell Option One, also said it had revised its estimate of Option One’s losses for the quarter ending Jan. 31 to reflect an additional $29 million pretax loss discovered in a re-evaluation of its obligations to warehouse lenders.
The review, which delayed the filing of the company’s quarterly report, was conducted because of “recent market conditions resulting in significant declines in the value of mortgage loans, including the value of nonperforming loans,” and required Option One to “significantly lower modeled cash flows” to reflect the potential for additional losses.
In a prepared statement issued today, H&R Block Chief Executive Officer Mark Ernst said the company is progressing as planned with the sale of Option One, and hopes to announce “results and further steps” by the end of the month.
“In light of the extreme volatility in the mortgage market, we conducted a rigorous review of the carrying value of all the assets of our Option One Mortgage Corporation subsidiary,” Ernst said. “We continue to believe that the net asset value in this business is appropriate and prudent.”