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Mar 17, 2008
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Investor Ross buys H&R Block mortgage service unit

By
Reuters
Published
Mar 17, 2008

By Joseph A. Giannone

NEW YORK (Reuters) - Billionaire investor Wilbur Ross, who made his fortune making bold bets on distressed industries, is buying H&R Block Inc's mortgage servicing business for $1.1 billion amid the worst market crisis in decades.

Ross will emerge the No. 2 U.S. subprime mortgage servicer with a deal announced at the same time as humbled investment bank Bear Stearns leaps into the arms of JPMorgan Chase, and mortgage fund Carlyle Capital Corp collapses.

Both developments stem from the accelerating demise of mortgage and credit markets.

Yet Ross, who successfully bought coal, textile and steel companies when they were on the ropes, is charging ahead in the mortgage business.

"Notwithstanding the problems in subprime lending, we regard mortgage servicing as an attractive business," Ross said in an interview.

WL Ross & Co., the investment firm founded by Ross, will add the fourth-largest U.S. servicer of subprime mortgages with a portfolio of about $53 billion. Ross said he wants to acquire more prime loan, "Alt-A" and subprime servicing businesses.

"This gives us a lot of scale in that industry, a lot of operating synergies. The combined companies will have better cash flow than the two would have independently," he said.

Ross joins a short list of investors who believe the business of sending out bills and collecting loan payments will hold up well as lending activity slumps and defaults rise.

In September Ross acquired the loan servicing unit of American Home Mortgage AHMIQ.PK out of federal bankruptcy court for about $500 million, a business that now has $42 billion of loan rights.

Countrywide Financial CFC.N has the biggest servicing business, Ross said.

SIGNIFICANT RISKS

Under the terms of the deal, Ross is paying $41 million for Option One's mortgage servicing rights, a business Block carried on its books for $166 million. He will pay $65 million for about $85 million of other servicing-related assets.

Ross is also paying $942 million cash and $100 million of retained receivables for $1.1 billion of advances -- payments made by Option One to lenders on behalf of late borrowers.

Analysts say Ross is getting valuable assets at a steep discount, yet the deal still carries significant risks.

"It's all how you see things shaking out," Fox-Pitt Kelton mortgage analyst Matthew Howlett said. "The timing looks very attractive, given a clearly distressed market. You can buy things on the cheap. If you have good servicing, you can generate a lot of value."

Howlett says servicing assets are most valuable when combined with investments in actual mortgage loans.

Ross said he would offer jobs with comparable terms to a "substantial portion" of Option One employees, though he said it is too early to determine how many jobs will be cut. Ross said Option One facilities in India could drive down costs.

H&R Block, an income tax preparation company hobbled by its expansion into the mortgage business, said the deal will reduce debt by $700 million and leave it with a net $270 million of cash. Block does not expect a major gain or loss on the sale.

"No doubt this is good news. Providing the deal closes, it also closes a chapter for H&R Block: It gets them out of Option One," Barrington Research analyst Alexander Paris said.

The deal also delivers some rare good news for a company suffering heavy losses on Option One's mortgage lending business, woes that led to the ouster of former Block CEO Mark Ernst last year.

Paris estimated Block was worth $18 to $20 a share assuming zero value of the servicing business. "Anything north of zero is a big positive," he said.

Block shares were up 24 cents, or 1.4 percent, at $17.71 in midday trading on the New York Stock Exchange.

(Reporting by Joseph A. Giannone; Editing by Brian Moss and John Wallace)

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