A private equity firm headed by billionaire Wilbur Ross would become the second-largest servicer of subprime loans — collecting payments on about half a million mortgages — if it closes a deal to acquire the servicing business of Option One Mortgage Corp.

H&R Block Inc. announced today that W.L. Ross & Co. LLC has agreed to purchase the servicing business of its Option One Mortgage subsidiary and the company’s call center in India for about $1.1 billion

At the end of January, Option One held servicing rights to $54 billion in mortgages, or about 300,000 loans, according to H&R Block’s latest quarterly report to investors.

WL Ross last year agreed to pay about $500 million for the rights to service bankrupt lender American Home Investment Corp.’s portfolio of more than 200,000 subprime loans.

Together, the Option One and American Home Investment Corp. servicing portfolios would total $95 billion, making W.L. Ross the nation’s second-largest subprime loan servicers, behind Countrywide Financial Corp., the firm said in a statement.

H&R Block said it would clear only about $270 million if the deal closes, as Option One has about $700 million in outstanding debt.

Both parties can walk away without obligations if the deal does not close by May 30. In a statement, H&R Block Chairman Richard Breeden said that in today’s "turbulent markets, the challenge is to complete a transaction, not simply announce an agreement."

H&R Block last year shut down Option One’s mortgage origination business and laid off 620 employees after a deal to sell the company to Cerberus Capital Management fell through (see Inman News story).

At the end of January, the delinquency rate in Option One’s servicing portfolio hit 24.4 percent, more than double the 11.2 percent rate the year before. The average FICO score for borrowers was 621.

The agreement between Option One and W.L. Ross subsidiary AH Mortgage Acquisition Co. Inc. provides for a deduction in the sales price if 30-day delinquencies rise above a threshold of 38.5 percent before April 30 or 39.5 percent after May 1.

If the deal closes, W.L. Ross has agreed "to offer positions with comparable terms to a substantial number of the employees of the servicing business," H&R Block said.


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