H&R Block Sale of Option One Mortgage Corp. Hits Bump In The Road

August 31, 2007

H&R Block Inc. said yesterday that continued problems in credit markets were forcing it to renegotiate the sale of its Option One Mortgage Corp. arm to a subsidiary of Cerberus Capital Management.

In a conference call with analysts, chief executive Mark Ernst stated the obvious by saying that the mortgage origination market was in the midst of “the most severe dislocation it has seen in years, maybe the most severe since the 1930s.”

Ernst said that H&R Block is actively looking to get out of lending to subprime customers, regardless of the negotiations with Cerberus. “When and how exactly that would happen is fairly fluid at the moment,” he added.

“Essentially, the deal is off,” wrote Goldman Sachs analyst James Fotheringham in response to H&R Block’s announcement. He also noted that the ongoing turmoil in the finance markets reduces the chance for a new buyer.

The Option One work force has been cut down significantly - by more than half. The company announced yesterday it has stopped approving any new loans that don’t comply with Fannie Mae and Freddie Mac requirements, limiting loan originations to $200 million a month, beginning next month.

H&R Block announced this year that the Cerberus subsidiary would buy Option One for $300 million less than the net value of the subprime mortgage unit’s assets, but that number number still has not been determined due to the fact that the subprime market is continuing its downward spiral.

Source: Baltimore Sun

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