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Option One Mortgage May Cease Operations

Option One Mortgage Corp., the subprime residential home lending arm of H&R Block, may cease operations amid heavy losses.

H&R Block said last night that it might shut down Option One’s lending operations, and later sell the “quite valuable” loan servicing portion.

Originally, the entire company was to be sold to private equity firm Cerberus Capital Management, but if talks fail, the sale could fall through completely.

H&R Block agreed to sell Option One to the firm back in April for an estimated $1 billion, though mounting losses have put the sale seriously in doubt.

H&R Block announced losses of $192.8 million at Option One and two discontinued businesses, and a total quarterly loss of $302.6 million.

According to data from National Mortgage News, Option One made $29.8 billion in subprime loans last year, but has recently shifted gears dramatically, offering only agency-backed products.

The switch to Fannie Mae and Freddie Mac-backed loans will translate to a sharp decrease in volume, bringing monthly funding volume down to a meager $200 million a month.

The agreement with Cerberus Capital expires on December 31, and H&R Block is in the process of having certain conditions waived, including a requirement that mortgage lender fund $2 billion in loans within 60 days of closing, while retaining a minimum $8 billion warehouse line.

A few weeks ago, Accredited Home Lending had similar problems with its proposed Lone Star merger, and ultimately ceased operations amid liquidity issues.

This is a big deal considering Irvine, CA-based Option One was the nation’s eighth-biggest originator of subprime mortgages last year.

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