Bloomberg is reporting today that the sale of Option One, H&R Block’s subprime mortgage unit, may be in jeopardy as the company is in default of many of the originally agreed-to deal points with buyer Cerberus Capital Management.
From Bloomberg:
H&R Block Inc., the biggest U.S. tax- preparation company, said it may shut a subprime-mortgage unit if sale negotiations with a hedge-fund manager collapse.
Cerberus Capital Management LP, which agreed in April to purchase the entire Option One Mortgage Corp. subsidiary, may buy just the loan-servicing business as demand for mortgages continues to deteriorate, Kansas City, Missouri-based H&R Block said today in a statement. Failure to renegotiate terms of the sale would force H&R block to close Option One, it said.
More from the OC Register:
The Option One announcement was included in H&R Blocks 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 Ones remaining origination business, which would be pursued immediately. As a result, certain shutdown costs may be incurred.
Cerberus would purchase Option Ones 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 theres no guarantee Cerberus will agree to all the changes and the deal might fall through.
Some of my friends work over at Option One and have anecdotally confirmed the massive drop-off in originations since the onset of the subprime mortgage meltdown. The company continues to make adjustments to its product guidelines, and is rumored to be making the push towards conforming-only products (that is unsubstantiated at this time). The company also pared their outside sales-staff down significantly a few weeks ago, in an attempt to reduce losses associated with the origination side of the business.
It makes sense as Cerberus already has exposure to further potential losses directly and indirectly tied to the mortgage industry with its investments in GMAC and DaimlerChrysler. I would imagine that Cerberus would want the servicing platform as Option One handles a large portfolio of loans originated by themselves and others.
We’ll keep you posted as this story develops.
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[Source: Blown Mortgage]
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