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When you hear the name H&R Block you immediately think of taxes. For a while during the housing boom, however, the well-known Kansas City company was actually making more money in home mortgages than it was preparing tax returns. Last week the company announced better earnings for its third fiscal quarter, but that was only because Block now classifies its mortgage operations as discontinued. The lending business lost $70 million for the quarter, which ended January 31. The tax business only earned $25 million during the same period.
One may ask what Block was doing in the mortgage business? The idea was a classic one. We’ve got offices, a strong brand name, we’re not busy most of the year. Let’s find another financial services product we can sell to our customers. Since most Block tax clients are not well-to-do, the business known as subprime mortgages seemed like a nice fit. It wasn’t.
Block chased borrowers who shouldn’t have been borrowing right along with the rest of subprime lenders. The whole category is tatters these days, with defaults for the industry up and several lenders going bankrupt. It’s doubtful Block chief exec Mark Ernst will get a whole lot of the mortgage business, which operates under the name Option One. An annoucement is expected next month. Meanwhile, Block’s share price languishes about where it was in 2002, before the housing zoom took off. Sometimes the best diversification is no diversification. That’s should have been Block’s Option One.
BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.