- The Washington Times - Friday, August 31, 2007

KANSAS CITY, Mo. (AP) — H&R Block Inc.‘s planned exit from the collapsing subprime mortgage market now looks like it could be in jeopardy.

The tax-preparation giant here said yesterday that continued problems in the credit markets were forcing it to renegotiate the sale of its Option One Mortgage Corp. arm to a subsidiary of Cerberus Capital Management.

The company disclosed the troubles with the sale of Option One as it announced financial results for its first fiscal quarter, which ended July 31.

In a conference call with analysts, Chief Executive Officer 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.”

H&R Block said if negotiations are successful, it will stop selling new loans through Option One, have several closing requirements waived and try to get Cerberus to close before the current deadline of Dec. 31.



Mr. Ernst said the company will cease lending to people with spotty credit, or subprime customers, regardless of negotiations with Cerberus. “When and how exactly that would happen is fairly fluid at the moment,” he added.

The announcement didn’t provide analysts with much optimism for Option One’s fate.

“Essentially, the deal is off,” wrote Goldman Sachs analyst James Fotheringham in a research note, and added that ongoing turmoil in the finance markets reduces the chance for a new buyer.

Michael Millman, an analyst with Soleil/Millman Research Associates, said it appears H&R Block might be willing to abandon the business at any cost.

“We continue to be concerned that a sale at this time, under suggested terms, is not a good business decision — although possibly good for short-term share price,” Mr. Millman wrote in a note.

H&R Block’s shares rose 34 cents to $19.84 yesterday.

For the three months ending July 31, the nation’s largest tax preparer reported losing $302.6 million, or 93 cents per share, compared with a loss of $131.4 million, or 41 cents per share, during the same quarter a year ago.

H&R Block already slashed its Option One work force by more than half. About 400 workers now originate loans. The company announced yesterday it 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 in September. Last year, the company originated $27.1 billion in loans.

H&R Block announced earlier this year that the Cerberus subsidiary will buy Option One for $300 million less than the net value of the subprime-mortgage unit’s assets, a number that has yet to be determined as the subprime market deteriorates.

Yesterday, the company said some of the conditions of the sale must 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.

The company said if negotiations are successful, it will immediately sell or shut down Option One’s loan origination business and wants Cerberus to buy Option One’s loan servicing platform.

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