Ross buying H&R Block's troubled mortgage arm for $1.1 billion

NEW YORK -- Billionaire investor Wilbur Ross will pay $1.1 billion for H&R Block's troubled Option One mortgage servicing business, which has been rocked by the nationwide mortgage meltdown.

Option One currently services about $53 billion of subprime mortgages, ranking it the fourth-largest in the nation. H&R Block shut down Option One's mortgage originations after an earlier agreement to sell the division to Cerberus Capital Management fell through.

WL Ross & Co. earlier agreed to acquire $42 billion mortgage servicing rights from American Home Mortgage Investment Corp., and the combined total of $95 billion will create the country's second-largest subprime servicing portfolio, after Countrywide Financial.

WL Ross is paying $41 million for the mortgage servicing rights, $942 million plus $100 million of retained receivable for the $1.1 billion of advances and $65 million for $85 million of other servicing related assets. The advances are expected to increase to about $1.2 billion and the increment will be purchased at a 3 percent discount as well.

WL Ross has agreed to offer comparable positions to a "substantial portion" of employees at Option One's servicing business.

"Notwithstanding the problems of the subprime lending industry, we regard mortgage servicing as an attractive business and believe that there are considerable economies of scale attached to it," said Ross in a statement. "We shall therefore continue to seek acquisitions of prime, Alt-A and subprime servicing."

The transaction is expected to close May 30, subject to regulatory approvals and completion of a $1.2 billion financing which has been committed by existing Option One financing providers.

"In today's turbulent markets, the challenge is to complete a transaction, not simply announce an agreement," said Richard C. Breeden, chairman of H&R Block. "We have reached what we consider to be a good agreement with WL Ross & Co., whose reputation for completing transactions is excellent. However, there is still much work to be done until the business is safely transferred at closing."

Ross has taken advantage of the crisis in the credit markets to buy up assets. In February, he agreed to make up to a $1 billion investment in Bermuda-based bond insurer Assured Guaranty, considered one of the strongest left in its sector.