Mortgage Funding on the Chopping Block

As the Senate holds hearings on the subprime lending crisis, H&R Block announces that funding for its mortgage loan unit has been cut nearly in half.

H&R Block disclosed that funding for its mortgage loan subsidiary, Option One, was cut from $4 billion to a little more than $2 billion by lenders Bank of America and Wells Fargo.

The new facilities now bear interest at one-month LIBOR (London Interbank Offered Rate) plus additional margin rates, H&R Block stated in a regulatory filing.

H&R Block elaborated that the Bank of America facility is subject to various performance triggers, limits and financial covenants, including a tangible net worth ratio, capital adequacy test, net income test, and cross-default features in which a default under other arrangements to fund daily non-prime originations would trigger a default.

Under the Bank of America facility, non-prime loans originated by Option One are sold daily to a company trust, which uses the facility to purchase the loans. The trust subsequently sells the loans directly to third-party investors or back to Option One, which pools them for securitization.

H&R Block’s filing comes just as the Senate holds hearings on the subprime lending crisis; the House plans hearings for next week.

“It has taken far too long for the regulators to act,” said Sen. Christopher Dodd (D-Conn.), chairman of the Senate Banking Committee, in a statement.

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