H&R Block: Subprime Salvage

H&R Block(HRB Quote) agreed to sell its struggling subprime mortgage business, Option One Mortgage, to private-equity giant Cerberus Capital Management.

Terms haven't been fully set. Cerberus will pay "the value of tangible net assets of the business" at closing, minus $300 million. H&R Block said it has the right to sell certain Option One assets before closing, expected in the quarter ending in October.

"Given that provision and changing market conditions," the company said, "the tangible net asset value at closing will be different than it was at Jan. 31."

Specifically, it will likely be substantially lower, given the steep decline this spring in the business of lending to homebuyers with spotty credit histories. At Jan. 31, the tangible net assets of Option One were $1.27 billion.

But credit quality in the nonprime mortgage business has plunged this year, putting some 50 lenders out of business, according to Bloomberg, and forcing onetime highflier New Century (NEWC Quote) into bankruptcy. Wall Street has been skeptical that H&R Block would get anything for Option One.

H&R Block put Option One up for sale in November, saying it hoped to get $1.3 billion for the unit. The company said as recently as a month ago that it still hoped to get that much. But H&R conceded in late March that it wouldn't be able to close a deal by its March 31 target.

Cerberus becomes the latest private investment player to make a big plunge into subprime. Hedge fund Farallon bailed out Accredited Home Lenders (LEND Quote) earlier this spring and also made a move into manufactured housing.