UPDATE 3-Mortgage investors zero in on ex-H&R Block lender

* Mortgage bond holders banding together over big losses

* Investors want defunct H&R Block unit to buy back loans

* Effort follows Bank of America deal with bond insurer

* H&R Block shares tumble as much as 9 percent (Adds closing share price)

By Al Yoon and Tom Hals

NEW YORK/WILMINGTON, Del., May 9 (Reuters) - A group of mortgage bond investors are banding together in a novel bid to force H&R Block Inc's defunct subprime lending unit to buy back billions of dollars in soured home loans, the group's lawyer said on Monday.

Shares of H&R Block (HRB.N), best known as a tax preparer, fell as much as 9 percent after Reuters reported the investor campaign, before closing down 7.6 percent.

The plea to other bond investors may hasten the laborious task of gathering the numbers needed to demand accountability for faulty loans pooled into investments -- mortgage-related securities that plummeted in value and helped trigger the worst financial crisis since the 1930s.

In a new tactic, the investors are issuing a general call to others holding securities backed by loans originated by Option One Mortgage, a top 10 subprime lender during the housing boom, said Talcott Franklin, the Dallas-based lawyer spearheading the effort.

H&R Block sold the servicing assets of Option One in 2008 but retained some liability of the company, now known as Sand Canyon Corp (SCC), including some loan repurchase obligations.

The investors -- whom Franklin declined to name -- hope to amass 25 percent of many of the bonds, which will give them the contractual right to make demands on the trustee, and ultimately the lender to repurchase loans, he said.

An H&R Block spokesman said the company hasn't received any related requests and cannot comment on actions by outside parties.

Holders of Option One mortgage bonds felt emboldened by Bank of America Corp's (BAC.N) recent $1.6 billion settlement with Assured Guaranty Ltd (AGO.N), which insured the bank's mortgage bonds, the person involved with the campaign said.

However, if the ratio of payments to claims from that deal were applied to the Option One mortgage bonds, "Option One and H&R Block would run out of money very fast," the person said.

As a result, the campaign seeks to level the playing field among mortgage bond investors by giving everyone a chance to participate. It will then guide the trustees who administer the mortgage bonds to pinpoint which loans should be considered first for repurchase.

"It struck us that they are going to insist that there be some prioritization of deals. We think we have a pretty good head start on having our deals being at top of the list," said the campaign source, who did not want to be identified for fear of damaging trading relationships.

Franklin said the public call should make it clear that investors holding losses needed to join or lose out on any potential recovery.

"A number of investors have acted and are continuing to do so now," Franklin said in an interview. "Those who haven't acted to date may be realizing that someday, the train will leave the station."

H&R Block shares closed down $1.31 at $15.93, the lowest closing price since March 17.

$100 BILLION PROBLEM

Wall Street banks have been somewhat protected from potential legal claims tied to dud loans because investors have been slow to organize, but that may change.

While the new tactic takes aim at Option One, a person involved in the campaign said the approach will be applied toward other lenders.

"You'll see us involved in other transactions soon," the person said. "It's just the stars aligned on this one before they aligned on other ones. I think across the board you will start to see investors to pursue this more vigorously."

Faulty mortgages in bonds packaged as top-notch assets by Wall Street banks and other non-government entities could cost lenders as much as $100 billion, according to some analysts, although to date there have been few settlements.

Franklin's investor clients currently hold 25 percent of voting rights on at least 64 securities containing loans made by Option One, which stopped lending in December 2007. Unless investors can show they own a quarter of a deal, they cannot force a trustee or loan servicer to investigate suspected violations in underwriting.

Losses on Option One's securitized loans could top $12 billion, based on those already registered and loans that are delinquent or in foreclosure, a source close to the group said. That dwarfs the $740 million in claims registered with SCC through Jan. 31, according to an H&R Block regulatory filing.