Cerberus passes on H&R Block's mortgage business

The Associated Press reports that Cerberus Capital Management, the hedge fund, has decided to abandon its deal to purchase the mortgage business of H&R Block (NYSE: HRB). H&R Block's mortgage business, which has stopped accepting new mortgage applications, said it will lay off about 620 employees, close three offices and take a $75 million restructuring charge as it shuts down lending at Option One Mortgage Corp. (OOMC).

Why did Cerberus back out of the deal? The deal was struck in April, and since then the mortgage market has had some big downs. While Cerberus and H&R Block tried to renegotiate the agreement regarding Option One, they could not come to terms, announcing the termination was ''fully amicable." OOMC will honor $30 million worth of existing commitments.

The market is not happy with this announcement, sending H&R Block stock down 5.6% in premarket. It makes me wonder how much Cerberus -- which is already neck deep in mortgage problems with its GMAC ResCap investment -- must be thinking about the prospects for the mortgage industry. I would guess that the more it's learned, the less it likes.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.