March 28 (Bloomberg) -- Shares of Beazer Homes USA Inc. fell 8.4 percent, the biggest drop since July 2002, after the FBI started an investigation into the homebuilder and the U.S. Attorney's office requested documents on its mortgage business.

Beazer said today that there have been no allegations that it did anything wrong and it will cooperate with the request.

The Charlotte Observer reported on March 25 that Beazer sold homes to low-income buyers who couldn't afford them, and the FBI and the U.S. Department of Housing and Urban Development said they would investigate. The FBI yesterday confirmed the probe.

The investigation comes as homebuilders are reporting increasing inventories and declining sales in the deepest housing slump in 15 years. Rising defaults among borrowers whose poor or limited credit histories force them to pay higher interest rates on subprime loans may boost the supply of homes and push prices down further.

``There have been no allegations of any wrongdoing,'' Beazer said today in a statement. ``Based on our internal investigations to date, we have found no evidence to support the allegations in these articles.''

FBI Statement

The Charlotte Observer reported that Beazer arranged 147 loans for buyers in the Beazer-built Southern Chase development of 406 homes in Concord, North Carolina. The loans were based on the assumption that the buyers' incomes would rise. The Federal Housing Administration, which provides loan guarantees for lower-income borrowers, restricted that practice in 2004, the newspaper said.

``The FBI is conducting a potential fraud investigation regarding Beazer, and further comment will come from the U.S. Attorney's office, Western District of North Carolina,'' the FBI said in a statement distributed by its Charlotte, North Carolina, field office yesterday.

Beazer said today the statement by the Federal Bureau of Investigation was ``not authorized and should not have been made.'' It didn't provide further details.

Suellen Pierce, a spokeswoman for the U.S. Attorney's Western North Carolina field office, said she could neither confirm nor deny the existence of an investigation.

The FBI probe was previously reported by Business Week.

Shares of Beazer slid $2.64 to $28.77 at 4:02 p.m. in New York Stock Exchange composite trading. The stock has lost 13 percent this week, reducing the homebuilder's market value to $1.13 billion.

In the North Carolina subdivision written about by the newspaper, Beazer ``served as a broker, not a lender,'' the company said yesterday.

Class Action

One couple who borrowed money from Beazer to buy their home near Charlotte, filed a complaint Friday in state court there, alleging the company conspired to sell them a home they couldn't afford using fraudulent loan information.

The company conspired to urge low-income homebuyers to apply for loans using false information so the applications would be approved, the complaint said.

The plaintiffs, Mark and Lea Tingly, seek class action status for their case on behalf of other Beazer homebuyers. The suit says they seek $75,000 for themselves and no more than that for each of the other plaintiffs. A judge must approve a case for class action status for multiple plaintiffs.

Beazer ``took advantage of a thriving real estate market, low interest rates, lax lending regulations, and desperate prospective homebuyers looking to live the `American Dream,''' the suit said.

Leslie Kratcoski, a Beazer spokeswoman, didn't immediately return a phone call for comment.

Mortgage Unit

Beazer, the ninth-largest U.S. homebuilder by revenue, reported a net loss of $59 million, or $1.54 a share, for the quarter ending Dec. 31 because of asset writedowns and deteriorating sales.

The company builds houses in more than 20 states with an average home price of $287,000. A subsidiary, Beazer Mortgage Corp., finances, originates, processes and brokers mortgages to homebuyers and provides title services, according to a regulatory filing.

The perceived risk of owning Beazer's bonds jumped to the highest on record yesterday and continued to rise today. Credit- default swaps based on $10 million of the company's bonds rose $40,000 to $460,000 today, according to prices from CMA Datavision in London. The contracts, used to speculate on a company's ability to repay its debt, have surged $159,000 since the news of the investigation, CMA prices show. An increase indicates deterioration in the perception of credit quality.

An estimated 60,000 fraudulent mortgages for $4.2 billion were made last year out of a total of $3 trillion of loans, according to the Prieston Group, a Novato, California-based mortgage fraud investigator.

To contact the reporters on this story: Bob Ivry in New York at bivry@bloomberg.net; Andrew Blackman in Berlin at ablackman@bloomberg.net.

Last Updated: March 28, 2007 16:25 EDT