Option One Deal Sinking Fast On Further Losses

H&R Block Inc. posted a net loss of $302.6 million for the quarter ending July 31, largely due to deep losses at Option One Mortgage Corp. as the deal to sell off the troubled mortgage subsidiary comes under ever-darkening clouds.The Kansas City-based tax preparer said would abandon the mortgage business entirely regardless of how well negotiations with Cerberus Capital Management proceed.Although H&R Block said that the details of their exit remain “fairly fluid at the moment," the company announced it has stopped approving any new nonconforming loans and would limit originations to $200 million a month. The company originated $27.1 billion in loans last year.H&R Block indicated that some of the deal’s conditions would have to be waived or changed, such as requirements that it have $2 billion in loans funded within 60 days of closing and the ability to warehouse at least $8 billion in loans.Both of those conditions appear unlikely to be met by the struggling Irvine, California-based subprime lender.Earlier this year, H&R Block had announced that Cerberus would purchase Option One for $300 million less than the net value of Option One's assets.Unable to meet the conditions, H&R Block Inc. said it was negotiating a modification to the deal that would only involve the sale of the unit’s servicing operations. The company said it would take on shutdown costs if the negotiation were successful."H&R Block would be responsible for divesting or winding down Option One's remaining origination business, which would be pursued immediately," said the company. During a conference call, chairman and CEO Mark Ernst said, "The mortgage origination market is in the midst of the most severe dislocation it has seen in years, maybe the most severe since the 1930s." In 2007, H&R Block has reduced the workforce at Option One by more than half, leaving about 400 originators among a mortgage staff of approximately 2,400 people.H&R Block reported a $192.8 million at the subprime unit for the fiscal quarter ending July 31, along with a $109.8 million loss for business not involving Option One and other discontinued operations.Posted on Friday, August 31, 2007 by staff