Option One, America’s sixth-biggest lender of sub-prime mortgages, has become the latest victim of the credit crunch, having closed its doors yesterday after its owner H&R Block failed to finalise a sale of the unit to Cerberus, the investment firm.

The lender, once expected to fetch $1.3 billion (£632 million), stopped taking new loan applications, with the loss of 620 jobs, after the $800 million sale agreed in April fell through in the wake of America’s mortgage melt-down.

H&R, America’s biggest tax adviser, said that it would try to sell Option One’s loan servicing business, which bills and collects payments from the borrower for the lender, as a separate entity. It hopes that it will fetch more than a renegotiated deal with Cerberus for the whole unit.

Richard Breeden, the former head of the US Securities and Exchange Commission who was appointed chairman of H&R last month, said: “The mortgage market has undergone vast changes since last April.

“We could not find a way to restructure the original transaction to mutual satisfaction. The company is determined to complete our exit from sub-prime mortgage lending without delay.”

H&R bought Option One for $218 million in 1997 from Fleet Financial, which is now part of Bank of America. The aim was to cushion the seasonal nature of the group’s tax advisory business, which typically makes little or no money for three quarters of every year.

As America’s mortgage market boomed, Option One contributed significantly to H&R’s profits, accounting for more than half in 2004. As defaults on sub-prime loans jumped this year, lenders and investors have collectively lost tens of billions of dollars. This has pushed down the price of houses and resulted in the closure of lenders, hedge funds and other investment businesses, with the loss of more than 100,000 jobs.

The sub-prime woes have also fed through into a wider credit crunch, which has made it much harder for private equity firms to finance leveraged buyouts and led many deals to be renegotiated or fall through.

Last month, Cerberus walked away from the $7 billion takeover that it had agreed of United Rentals, the world’s largest equipment rental business, while in August Home Depot cut $2 billion off the price of its building supplies unit to ensure that a sale already agreed with a private equity consortium went ahead.

In other notable deal renegotiations Kohlberg Kravis Roberts and Goldman Sachs walked away from their $8 billion agreed takeover of Harman International, the audio speaker maker, in October, while JC Flowers’ bid to buy Sallie Mae, the student lender, for $26 billion fell through a week later.

Option One said yesterday that it would honour its existing pipeline of agreed loans, with a combined value of about $30 million, and expected to sell most of these on to mortgage investment groups such as Fannie Mae and Freddie Mac.

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