Clock Ticking at H&R Block

The company said in a quarterly filing two weeks ago that as of Jan. 31, Option One did not meet the "minimum net income" covenant contained in eight of its warehouse facilities. While it obtained waivers through April 27, the company is looking for extensions.

Last week, a group of lenders including Bank of America(BAC) and Wells Fargo(WFC) cut funding to the subprime mortgage subsidiary in half, to $2 billion, though they extended their off-balance sheet financing commitment though next year.

Yet the company indicated earlier this month that it expects to sell the unit for around book value. H&R Block has further surprised Wall Street by not taking a big writedown on Option One.

"In light of the extreme volatility in the mortgage market, we conducted rigorous review of the carrying value of all the assets of our Option One Mortgage Corporation subsidiary," CEO Mark Ernst said March 14. "We continue to believe that the net asset value in this business is appropriate and prudent."

Pinnick cautions that it's possible that H&R Block may not be able to sell the unit at all. Still, shares have "reached a valuation floor," she writes, since H&R Block is trading as if the mortgage operations have no value. She upgraded her rating on the stock to equal weight -- the equivalent of a hold position -- in the note.

Shares fell 16 cents Thursday to $20.68.

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