H&R Block, the largest U.S. tax preparer, said today its deal to sell Irvine-based subprime lender Option One Mortgage Corp. is in jeopardy amid a global credit crunch. Under terms of a new deal, H&R Block said it would immediately divest or shut down the loan-making operation of Option One.

The Option One announcement was included in H&R Block’s earnings report for its fiscal first quarter. The tax preparer reported a loss of $302.6 million, more than double the year ago loss of $131.4 million.

H&R Block said it has failed to meet certain aspects of its agreement to sell money-losing Option One and is trying to strike a new deal with Cerberus Capital Management, L.P. which was going to buy the mortgage unit. The news follows at least two rounds of layoffs at the lender in the past four months.

Here are the key points of the original deal that H&R Block hopes to change:

• The closing conditions requiring Option One to have $2 billion in loans funded within 60 days of closing and $8 billion minimum in warehouse lines would be waived, with certain other closing conditions being waived or modified.
• H&R Block would be responsible for divesting or winding down Option One’s remaining origination business, which would be pursued immediately. As a result, certain shutdown costs may be incurred.

• Cerberus would purchase Option One’s loan servicing platform.

• The parties are working toward advancing the Dec. 31 contract termination date to provide for an earlier resolution of the Option One situation.

The tax preparer said other parts of the original contract also may be changed or canceled. It said there’s no guarantee Cerberus will agree to all the changes and the deal might fall through.

The original sale, a rather complicated arrangement, was supposed to net H&R Block close to $1 billion based on Option One’s book value. It’s unclear what H&R Block would get in a new deal.

Mark Ernst, chief executive said, “Given the unprecedented disruption in the credit markets, in August we took action to limit any more exposure to non-prime mortgage originations by stopping all but Fannie Mae and Freddie Mac-eligible loans.”

Option One said it’s making fewer loans these days and will be at about a $200 million per month in volume by mid-September. The company said it continues to “restructure” its loan making operation to align with lower volume.

If the market downturn continues the company could take another hit of $150 million to $200 million to “existing residuals, beneficial interests in trusts and loans held for sale.”

On the plus side, the company’s revenues from other operations rose 11 percent to $381.2 million from $342.8 million in last year’s quarter. The company typically reports a loss in its fiscal first quarter after tax season, but it narrowed the loss from other operations to $109.8 million, down 7 percent from $117.8 million a year ago.

“Each of our continuing businesses performed in line with our expectations during the quarter,” Ernst said. “In the tax business, we’ve been investing as planned in initiatives to drive enhanced client service for the coming tax season, leveraging the unique products we can offer clients through H&R Block Bank.”

For the full earnings press release, CLICK HERE.

This entry was posted on Thursday, August 30th, 2007 at 7:58 am and is filed under Company Watch, Option One, Subprime news. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.