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Minyan Mailbag: Room for Cerberus?


If Cerberus walks away from this possible transaction all together, then HRB has full exposure to whatever remains in the portfolio.


Prof. Succo,

As I was standing in line for my morning Venti at Starbucks (SBUX) I glanced at the Houston paper and noticed that another mortgage company(Aegis) was discontinuing making loans.
As I read further the article mentioned that the parent company of Aegis could choose to inject more capital, but it doubted that they would.

Interestingly, the parent company is Cerberus. If it is shutting down its own mortgage company, which got out of the subprime business in Sept 2006, why would they buy Option One? I am thinking this deal may not get done at all. Now for the 64,000 dollar question. What will not being able to sell Option One do to earnings? Does Option One have exposure to buying back bundled loans if the default rate reaches a certain percentage? Is H&R Block (HRB) on the hook for that exposure if it exists?

In my opinion, Congress is going to try to bail out the home market, but I think it is just too big . If Jim Cramer is right and we could see 7 mln foreclosures, the actual exposure is probably about 15% per house. If the average loan was $150,000, that is about $15 bln in lost equity. But how can Congress keep people from being foreclosed if they can not make the monthly note? The only real answer is lowering interest rates, and Congress is going to really have to bully Bernanke to get there. Next question, where are those 7 mln people going to go to live? If they hit the rental market, will that drive up rental rates, or will all those foreclosed homes be turned into rental units?

In Houston in the late '80s we had tens of thousands of houses foreclosed, and a huge number of those became rental houses. As I read this, and think back to 1988, I am thinking maybe that 15% lost equity figure above is low. In retrospect, we saw house prices drop 30 to 50% in any area that was not extremely settled(very few houses selling annually).This will dramatically affect state income in terms of property values.Additionally, home equity evaporates as your neighbors house is foreclosed. This is already affecting Florida as sales tax is dropping there already.

Thank you for the time you take to write your columns. They are appreciated.

-Minyan Mitchell


From what I know, Mr. Cramer had not mentioned mortgage troubles nor its impact on the general economy until recently when the problems became very obvious. He has, however, advocated his aggressively bullish stance all the while.

As for Cerberus, the deal it has struck with H&R Block (HRB) is no deal at all. The company has an option on Option One that they do not have to exercise. There is not even a price set. This is why we continue to see HRB write down this business with each passing quarter. If Cerberus walks away from this possible transaction all together, then HRB has full exposure to whatever remains in the portfolio.

HRB's other businesses do throw off cash and the marquee value might be worth something, but I have that worth maybe $10 a share.

-Prof. Succo

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