H&R; Block bid to sell division fails

H&R; Block Inc. said Tuesday that a deal to sell its troubled mortgage lending arm had fallen through, forcing it to scrap most of the $1-billion business.

The Kansas City-based tax preparer and Cerberus Capital Management said they had terminated their agreement, announced in April, for a Cerberus subsidiary to buy Option One Mortgage Corp.

H&R; Block is accepting no new mortgage applications and will lay off about 620 employees, close three offices and take a $75-million restructuring charge as it shuts down operations, the company said.

The company said it would honor $30-million worth of existing commitments. Most of these will be eligible for sale to mortgage giants Fannie Mae or Freddie Mac, H&R; Block said, with the rest sold to investors.

H&R; Block also said it would sell its mortgage servicing business, which will result in an asset impairment charge for the quarter ended Oct. 31 of no more than $125 million. The company hired Lazard Asset Management to handle that sale and said it was determining the unit’s value.

Kathleen Shanley, an analyst for corporate bond research firm Gimme Credit, said in a note to clients that Option One had a net book value of $1.1 billion as of July, according to the latest available figures.

“Given the ongoing and severe deterioration in the sub-prime sector, it would surprise us if a $125-million charge would be sufficient to mark down this business to its current value,” Shanley wrote.

Cerberus and H&R; Block have tried to renegotiate the agreement regarding Option One over the last several months as the mortgage market was rocked by sub-prime defaults and tightened lending.

Under the original deal, Cerberus was to pay $300 million less than Option One’s net asset value.

As of H&R; Block’s fiscal first quarter, which ended in July, 3.09% of mortgages were defaulting in the first few months of payments, a situation that generally requires the company to buy back the loans from investors. That number had fallen from a default rate of 3.1% in the fourth quarter of the last fiscal year and 3.56% in its third quarter.

H&R; Block will release its second-quarter financial results Monday.

Purchased nine years ago, Option One had been a good provider to H&R; Block’s bottom line, accumulating $2.8 billion in pretax profit over that period. But with the meltdown of the sub-prime mortgage market, which provides money to people with spotty credit, the bottom dropped out for Option One as it recorded a $1.2-billion loss last fiscal year and added $331 million in losses during the first quarter of this fiscal year.

H&R; Block shares closed down 16 cents at $19.30.