H&R Block Inc. is shuttering Option One Mortgage Corp., after agreeing to call off a deal to sell the troubled lender to Cerberus Capital Management.

As of today, Option One has stopped accepting applications for mortgage loans, H&R Block said, and will lay off 620 employees and sell its loan servicing business.

Option One will honor about $30 million loans in the pipeline, most of which are eligible for purchase by Fannie Mae and Freddie Mac.

After funding loan commitments in process, Option One “will complete its exit from all mortgage origination activities,” H&R Block said in a press release.

H&R Block’s Interim Chief Executive Officer Alan Bennett said the company would focus on its core tax preparation business. Bennett became interim CEO after the Nov. 20 resignation of Mark Ernst.

“The principal business of H&R Block is helping millions of individuals and thousands of businesses meet their needs in connection with tax planning and filing tax returns, not making subprime mortgage loans,” Bennett said. “H&R Block’s board is committed to maximizing value for shareholders while exiting the subprime mortgage business in an orderly manner.”

With $40 billion in originations, Option One was one of the 10 largest subprime lenders in 2006, H&R Block said in announcing an April 19 agreement to sell the Irvine, Calif.-based company to an affiliate of Cerberus Capital Management (see Inman News story).

The deal was structured to allow Cerberus, a private investment firm, to pay $300 million less than the company’s book value at the time the sale closed. In return, H&R Block was to be entitled to half of the net income from Option One’s origination business for 18 months after the sale.

The following month, H&R Block announced that it would eliminate 615 jobs at Option One as part of a cost-cutting restructuring plan. Another 575 layoffs were announced in September, after H&R Block said it was unable to meet some conditions of the sale agreement. The conditions included requirements that Option One have $2 billion in loans funded within 60 days of closing and $8 billion in warehouse lines of credit.

In an Aug. 30 report to investors, H&R Block said Option One had “dramatically scaled back” its loan commitments by $200 million a month as it limited originations to loans eligible for purchase by Fannie and Freddie. Option One, H&R Block Mortgage Corp. and two discontinued nonmortgage businesses lost $192.8 million in the quarter ending July 31, H&R Block said at the time, with another $150 million to $200 million in mortgage-related losses anticipated for the quarter ending in October.

H&R Block said today that it had worked with Cerberus in recent months to identify “mutually acceptable alternatives” for restructuring the April deal “in light of the widespread changes in mortgage market conditions and the substantial reduction in new lending by (Option One).”

The discussions, “did not lead to a mutually acceptable agreement,” and H&R Block and Cerberus agreed to terminate the agreement.

Shutting down loan originations at Option One will cost about $75 million, H&R Block said in a regulatory filing, including $27 million in one-time termination benefits, $12 million in lease termination costs, and $34 million in write-offs of property, plant and equipment.

H&R Block said it expects up to $125 million in additional asset impairments for the quarter ending Oct. 31 related to the sale of its servicing business, which mostly collects payments on loans owned by third parties. The company said it has hired the investment banking firm Lazard to advise it on the sale of Option One’s servicing business.

Fabiola Camperi, former executive vice president of operations for Option One, has been named president.

 

***

What’s your opinion? Send your Letter to the Editor to matt@inman.com.

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