Option One Sold
Chuck Ponzi April 20th, 2007
Now that Option One has been on the selling block for some time, it seemed like H&R Block would never be able to get out of its subprime mess. The subprime smearout has had far-reaching implications for the local economy. I think we’re all interested in how Option One’s new overlords will treat the underlings. It seems that Cerberus Capital Management has purchased Option One $300 million less than tangible net assets. Yahoo reports:
H&R Block Inc. will sell its troubled Option One Mortgage Corp. subsidiary to an affiliate of Cerberus Capital Management LP, the finance management company said Friday, in a continued shakeout of the subprime lending market.
OOMB Acquisition Corp., a newly formed company, will pay $300 million less than the value of Option One’s tangible net assets, which were valued at $1.27 billion on Jan. 31.
H&R Block will also receive an “earnout” representing half of Option One’s loan origination sales for 18 months after the deal closes, which is expected in the company’s second quarter, ending Oct. 31. The earnout is capped at $300 million.
That seems like a very expensive price for one of the worst underwriters of Neg-am products. Someone at Cerberus must think that the subprime mess is nearly blown over. I don’t think so, and I think there are significant liabilities that go along with the entire business model.
With Bear Stearn’s announcement yesterday effectively capping Neg-Am products at 110% of original value, that may prompt others to follow suit (hat-tip to Calculated Risk). I believe the cap at OO is 120%. Can someone clarify if that is wrong? **Updated**
Any way you look at it, Alt-A is beginning to show cracks. Yahoo tells us more:
Don’t expect a quick recovery from the subprime mortgage debacle.
That’s the view of well-known value investor Robert Rodriguez. A rare switch-hitter in the fund industry, he runs both a stock and bond fund: FPA New Income, a $1.8 billion fixed-income fund (one of Money’s 70 recommended funds) and $2.2 billion FPA Capital, a small value fund (currently closed to new investors), which both have solid long-term records.
Rodriguez is a contrarian who buys issues that are out of favor on Wall Street, and he keeps a sharp eye on risk. When he cannot find compelling bargain, or when he sees economic problems mounting, he lets cash build up in his portfolios. Recently, cash made up a hefty 40 percent of assets in both FPA Capital (FPPTX and FPA New Income (FPNIX.
“We see significant risks, so I’m in preservation mode,” said Rodriguez.
Topping Rodriguez’s list of worries is the collapse of the subprime mortgage market, where he first saw problems emerging two years ago. “Starting in 2004, it’s has been one of the worst mortgage underwriting cycles that I’ve seen in my career,” says Rodriguez. “Lending standards deteriorated as more and more groups got access to credit even though they didn’t qualify.”
Right now, the economic consensus is that the subprime fallout will cause only a temporary economic downturn. It’s a view that Rodriguez does not share.
“It’s still early in the cycle to know how things will turn out. But I think the notion that we won’t have a major economic readjustment is really optimistic.”
I think we all envy optimists, but optimism can be fatal if you ignore the risks and warning signs. We hope that Option One’s new owner can bring their company into some semblance of an organized entity. Good luck to them.
I look at these things and think its more like they compartmentalize the damage.
Basically they sort through this POS for valuable loans/real estate and keep that. Transfer the stuff to divsion they want to keep.
The other stuff they accelerate the failure and see what they can get in bailout terms from some government plan.
Or its just that there is so much money floating around.
Perhaps since they are in the capital buisness they are feeling more of that inflation so the numbers are more workable for them.
Also wonder if all those MBS will present an opporitunity for financial guys as yourself to handle the forclosure/distress processing.
I know banks handle that stuff but since all that stuff has been handed off to bond holders, there should be some opporitunity. You go in and propose to manage the loans for fee/percentage and mittegate losses.
Oh,
I have another odd question. In some ways since China has latched itself to the dollar as currency does that mean their defacto currency is the dollar?
Its kind of odd but that is the other edge of the knife in the currency game they have been playing.
This is such a huge issue and I can’t believe people profess to have “a handle on it” already, and can now start making solid risk assessments going forward. Then again, the new overlords of Option One must have done some due diligence, right?
The invincible run-up in real estate went on for years and no one applied the breaks. The meltdown in real estate will extend way past 2007 anyway, so the optimists will have to excuse readers for not swallowing the b.s. offered back then, and not demonstrating much patience for the new b.s. now.
Most option ARMs are 115% or 110%. I don’t think there were any 120% or that option one was doing option arms but I could be wrong. They are not doing them now. http://www.oomc.com/broker/broker_rateguide.asp
What I do know is Goldman Sachs doesn’t like CA’s housing market or Coutrywide’s amount of option arms.
You appear to be right on that point. I did a strike-out to that reference back to OOMC.
Chuck
If I am doing my math correctly, they bought the assets of the company for about $0.75 on a dollar. Even if they had to foreclose on every loan in the portfolio, they should get $0.6 on a dollar. As long as the foreclosure rate stays below 60%, they should make money. If the housing market improves and people can refinance out of these loans, they should generate some good fees and get the principal back. All this is assuming they don’t generate any more loans. This looks like a liquidation play by the new buyer.