Mark Ernst, chief executive of H&R Block, made the comments after it emerged that Cerberus Capital Managament, the US hedge fund, was in advanced talks to reduce the $1 billion price that it agreed to pay to H&R five months ago for one of its subsidiaries.
Cerberus is hoping that “material adverse market conditions” could let it either cut the price for Option One Mortgage Company or walk away from the agreed deal altogether.
Mr Ernst attributed two thirds of that loss to the Option One Mortgage operations, bought in 1997.
Since the surge in mortgage delinquencies in America and the slowing of the property market, Option One has cut its lending by 80 per cent. It now offers mortgages worth $200 million a month, down from the $1 billion a month lent before this summer’s crisis. That sharp decrease breaches terms of the sale of the unit to Cerberus.
However, Mr Ernst said that he would rather have risked the success of the sale, and the future of the unit, than continue to sell mortgages in the current market. He said that H&R would close the unit if sale talks fail. Cerberus Capital was unavailable for comment yesterday.
Meanwhile, Freddie Mac, the American mortgage financier, yesterday admitted to a 45 per cent slide in profits during the second quarter of the year. It said that it had taken a $320 million hit over the period on new mortgages and reported net income of $764 million, down from $1.4 billion for the same period the year before.
Anthony Piszel, Freddie Mac’s chief financial officer, said: “Assuming nothing changes over the balance of the quarter, it will put pressure on our fair-value returns.”
In June, Freddie Mac returned to quarterly reporting for the first time since accounting and management problems forced it to restate $5 billion in earnings several years ago.
Freddie Mac – more formally the Federal Home Loan Mortage Corporation – buys mortgages, pools them and then sells them on as mortgage-backed securities. Although the company is privately owned, it is sponsored by the US Government and allowed to make loans and offer loan guarantees.
Freddie Mac, and its larger government-sponsored sibling Fannie Mae, were created by Congress to pump money into the $8 trillion home mortgage market by buying banks’ mortgages and selling them on.
Combined, Fannie and Freddie finance or guarantee about two thirds of all American mortgages. They are seen as more cautious than the lenders catering to borrowers with poor credit that have collapsed this year.
Nevertheless, Freddie Mac’s total credit-related expenses – expected losses and expenses from mortgages projected to fail – leapt by 74 per cent in the second quarter to $336 million, up from $193 million a year earlier.
Democrats in Congress want to raise the individual limit for home mortgages that Fannie and Freddie are allowed to buy as a way to help to stabilise the mortgage market.