Once again the lure of sub-prime lending beckons. And I thought they just did tax returns.
H&R Block Faces Issues
With Mortgage Business
online.wsj.com
By JOSEPH T. HALLINAN
Staff Reporter of THE WALL STREET JOURNAL
Famous for its tax-preparation service, H&R Block Inc. last year prepared 16.9 million individual income-tax returns, or about 14% of all individual returns filed with the Internal Revenue Service.
But the fastest-growing money maker for the Kansas City, Mo., company these days is its mortgage business, which last year originated nearly $11.5 billion in loans. The business, which caters to poor credit risks, has been growing much faster than its U.S. tax business. In the fiscal year ended April 30, Block's pretax income from mortgage operations grew 146% over the year before. The tax business, while still the largest in the U.S., grew just 23%.
If those rates remain unchanged, the mortgage business will this year for the first time provide most of Block's pretax income. In the most-recent fiscal year, mortgage operations accounted for 47.3% of Block's pretax income.
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Much of Block's mortgage growth has come because the company uses a fairly common but controversial accounting treatment that allows it to accelerate revenue, and thus income. This treatment, known as gain-on-sale accounting, has come back to haunt other lenders, including Conseco Inc. and AmeriCredit Corp. At Block, gains from sales of mortgage loans accounted for 62% of revenue at the mortgage unit last year.
In essence, under gain-on-sale accounting, lenders post upfront the estimated profit from a securitization transaction, which is the sale to investors of a pool of loans. Specifically, the company selling the loans records profit for the excess of the sales price and the present value of the estimated interest income that is expected to be received on the loans above the amounts funded on the loans and the present value of the interest agreed to be paid to the buyers of the loan-backed securities.
But if the expected income stream is cut short -- say, because more borrowers refinance their loans than expected when the profit was calculated -- the company essentially has to reverse some of the gain, taking a charge. |
