Dec. 4 (Bloomberg) -- H&R Block Inc., the biggest U.S. tax preparer, shut its subprime home-lending unit and cut 620 jobs after a sale to Cerberus Capital Management LP unraveled.

H&R Block will try to sell the portion of Option One Mortgage Corp. that does billing and collections, the Kansas City, Missouri-based company said today in a statement. The decision eliminates more than 40 percent of the unit's remaining staff and may trigger $200 million in pretax costs.

Chairman Richard Breeden is trying to salvage a yearlong effort to sell the unit, which his predecessor Mark Ernst once predicted would fetch $1.3 billion. Ernst left his job last month after subprime mortgage markets collapsed and triggered $1 billion of losses at Option One. Breeden, who won a proxy fight to get on the board, had urged Ernst to ``stop the bleeding.''

``This is not a market where people are willing to step up and assume risks that may be unquantifiable, and that was the albatross around the neck of Option One,'' said David Roberts, who oversees $20 million for Tallahassee, Florida-based Harvest Investment Advisors, including H&R Block shares.

H&R Block fell 16 cents to $19.30 in 4:03 p.m. New York Stock Exchange composite trading, leaving the stock down about 16 percent this year. The so-called servicing business may sell for more than $600 million, exceeding what Cerberus would have paid for all of Option One, said UBS AG analyst Andrew Fones in a research note today. He rates the shares ``buy.''

Costs of Decision

Cerberus, the New York-based private-equity company, and H&R Block canceled their April sales agreement with each side bearing its own costs, the statement said. The shutdown affects offices in Irvine, California, where Option One is based, Houston and Orlando, Florida, H&R Block spokesman Nick Iammartino said.

H&R Block's costs include $75 million for the shutdown, $7 million for restructurings announced in August and as much as $125 million tied to a revaluation of the billing and collection unit's assets, the statement said.

``The company is determined to complete our exit from subprime mortgage lending without further delay, and today's action largely completes that objective,'' Breeden said in today's statement.

H&R Block had said earlier this year that the sale to Cerberus was in jeopardy and pushed the completion date back from October to December. The two sides tried to modify the terms, including a sale of just the servicing unit, Iammartino said. The talks collapsed ``in light of the widespread changes in mortgage market conditions,'' H&R Block said in today's statement.

Weak Credit

Subprime mortgages are given to people with the weakest credit and the highest risk of default. Nationwide, late payments on subprime loans rose to a five-year high in the second quarter and foreclosures set a record, driving down the value of mortgage-backed securities and companies that create such loans and bonds.

Cerberus already had stakes in at least two other money- losing subprime lenders, Houston-based Aegis Mortgage Corp. and GMAC LLC, the owner of Residential Capital LLC. Aegis went bankrupt in August and bond research firm Gimme Credit has said ResCap may meet a similar fate. Peter Duda, spokesman for Cerberus, declined to comment.

More charges may lie ahead for H&R Block because of ``ongoing and severe deterioration'' in markets for subprime assets, Gimme Credit analyst Kathleen Shanley said today in a research note. She recommends investors avoid H&R Block bonds. Fones said $1.2 billion of mortgage assets held by H&R Block's bank are now likely worth $800 million.

Subprime Casualties

At least 100 home lenders have halted operations or sold themselves in 2007 amid the worst U.S. housing slump in 16 years. The fallout has toppled more than half a dozen hedge funds and CEOs at three of the world's biggest banks.

While Option One has stopped accepting loan applications, it will honor $30 million of existing commitments, most of which may be sold to Fannie Mae or Freddie Mac, H&R Block said.

Employees are being notified today and the cuts will be mostly complete by the end of January, Iammartino said. The servicing business will stay open in Irvine and Jacksonville, Florida with 800 employees, he said.

Boom and Bust

Option One was the sixth-largest U.S. subprime home lender through Sept. 30, according to trade publication Inside Mortgage Finance. Ernst put the unit up for sale in November 2006, and the deal with Cerberus was originally valued by UBS AG at about $800 million.

H&R Block bought Option One in 1997 from Fleet Financial Group Inc., now a part of Charlotte, North Carolina-based Bank of America Corp. The goal was to cushion the seasonality of the tax business, which typically makes little or no money for three quarters every year.

As the U.S. housing market boomed and lending to subprime borrowers surged, Option One provided more than half of H&R Block's pretax income in 2004, exceeding the contribution of the tax-preparation business. At one point, the unit originated $40 billion in mortgages annually and employed about 4,000 people, H&R Block said last year.

Loan servicing companies charge owners of mortgages a fee to collect and process monthly payments from homeowners during the life of a mortgage loan. The businesses can become more valuable during bad housing markets because borrowers are less likely to move or refinance, which creates a longer stream of servicing fees.

To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net

Last Updated: December 4, 2007 16:24 EST