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Buyout Specialist Antes Up a Bet on Servicing Rights
By Ted Cornwell
To a lot of business people today, anything associated with the subprime mortgage world looks toxic. But not to Wilbur Ross.
WL Ross & Co., the private equity firm run by billionaire turnaround specialist Wilbur Ross, has agreed to pay approximately $1.1 billion to buy Option One's mortgage servicing rights and related assets from H&R Block. That's more than $800 million more than JP Morgan was originally slated to pay for the troubled investment banking firm Bear Stearns & Company (although JP Morgan later raised its offer).
But a closer look at the numbers suggests that the servicing rights themselves are not what are propping up the price for servicing rights on the $53 billion Option One portfolio of home loans.
WL Ross said it is paying $41 million for the servicing rights. It is also paying $942 million plus $100 million of retained receivables for the $1.1 billion of servicing advances included in the deal, and $65 million for other servicing related assets.
Under the deal, WL Ross said the advances are expected to increase to about $1.2 billion and will be purchased at a 3% discount as well.
Option One's servicing facilities in Irvine, Calif.; Jacksonville, Fla., Las Vegas and a call center in Pune, India are included in the sale as well.
The move catapults Mr. Ross's company into the top ranks of nonprime mortgage servicers. And it may not be his last foray into the sector.
"Notwithstanding the problems of the subprime lending industry, we regard mortgage servicing as an attractive business and believe that there are considerable economies of scale attached to it. We shall therefore continue to seek acquisitions of prime, Alt-A and subprime servicing," Mr. Ross said in a news release.
The Option One portfolio will be managed by WL Ross & Company's AH Mortgage Acquisition company, which was created when the firm bought American Home Mortgage Investment's servicing rights out of bankruptcy last year.
WL Ross earlier acquired $42 billion of mortgage servicing rights from the American Home deal. Its combined total will be $95 billion presuming the Option One acquisition closes. That will make WL Ross, a company that only recently entered the mortgage servicing business and is currently not an originator, the nation's second largest subprime mortgage servicer behind Countrywide.
As for job security, it's unclear what impact the deal will have on the most of Option One's servicing employees.
WL Ross said it would offer positions with comparable terms to "a substantial portion" of Option One's servicing staff.
For its part, H&R Block said the deal is expected to reduce its debt by $750 million and return approximately $270 million in cash to the company. However, H&R Block said the sale of the MSRs and related assets is not likely to result in a significant gain or loss of net income.
The deal is subject to a number of closing conditions, including a provision that would reduce the price being paid by WL Ross if delinquencies in the portfolio rise above a certain threshold.
"In today's turbulent markets, the challenge is to complete a transaction, not simply announce an agreement. We have reached what we consider to be a good agreement with WL Ross & Co., whose reputation for completing transactions is excellent," said Richard Breedon, Chairman of H&R Block, in a statement. He said the sale of the MSRs would allow his company to focus on its core tax preparation business.
H&R Block had an earlier deal to sell its Option One Mortgage unit to Cerberus Capital, but that deal fell through. The company stopped originating mortgages at that time.
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