H&R Block Inc. will close 12 branch offices of its home lending unit, Option One Mortgage Corp., and is considering putting the business up for sale.

Irvine, Calif.-based Option One originates subprime residential mortgage loans through wholesale and national accounts and through H&R Block Mortgage Corp. offices. According to H&R Block, Option One was the fifth-largest originator of subprime mortgages in fiscal 2006, with $40 billion in originations. 

But originations are down and defaults are up, and Option One has become a drag on H&R Block’s earnings, the company said. Earnings per share for the year ending April 30, 2007, are now expected to be $1.20 to $1.45, down from previous forecasts of $1.60 to $1.85.

The lower expectations are “entirely attributable to changes in the near-term outlook for the mortgage segment and does not include any impact from a sale or other transaction affecting the business,” the company said.

During the next four months, H&R Block will close one-third of Option One’s branch offices, and has hired Goldman, Sachs & Co. to explore a possible sale of the company, a move that would be subject to approval by H&R Block’s board of directors.

“Option One has generated an outstanding record of growth and profitability during H&R Block’s ownership while achieving one of the most efficient cost structures in the industry,” said Mark Ernst, chairman and chief executive officer. “As a result, it has been difficult to consider other possibilities for this business, but a potential separation of Option One would enable H&R Block to further focus management resources on its core businesses and create long-term shareholder value.”

In August, H&R Block said it was setting aside $102.1 million to cover anticipated losses on loans originated by Option One.

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