Mortgage Trouble Hits H&R Block

H&R Block (HRB Quote) said late Thursday that it will likely need to set aside $61.3 million, or 19 cents a share, to protect against loan liabilities related to rising mortgage delinquencies at its Option One Mortgage unit.

The nation's largest tax preparer also said it will need to boost its loan-liability cash reserves owing to recent increases in loan repurchases, "which have been noted industrywide."

The stock plunged on the news and was lately down $1.98, or 8.7%, to $20.81. Volume was much heavier than normal.

Other mortgage lenders, including Countrywide Financial(CFC Quote), Downey Financial(DSL Quote), New Century Financial(NEW Quote) and IndyMac(NDE Quote), were weaker in morning trading.

The KBW Mortgage Finance Index, which has lost about 10% since May, edged lower.

H&R Block believes it will need to repurchase a pretax total of $102.1 million in loans. The company said $46.1 million of the loans were sold during the quarter ended July 31, and $56 million were sold in previous quarters.

The company attributed the rising level of loan repurchases primarily to a higher level of repurchase requests from loan buyers and an increase in mortgage customers who have fallen behind on loan payments.

The announcement prompted UBS to downgrade H&R Block's shares to neutral. The loss will be recorded in the company's fiscal first-quarter results due out Aug. 31, and more details will be announced during the earnings conference call.