Feds Are Investigating Homebuilder Beazer

BusinessWeek has learned that the nation's sixth-largest residential builder is being probed in connection with potential mortgage fraud

Amid the meltdown of the subprime housing sector, mortgage lenders and brokers have come under fire from state and federal officials for predatory lending practices with those risky borrowers. Now one national homebuilder is feeling the heat. BusinessWeek has learned that federal investigators have opened a broad criminal probe into lending practices, some financial transactions, and other dealings at Beazer Homes USA (BZH).

Atlanta-based Beazer, the nation's sixth-largest residential homebuilder, rode high during the heyday of the housing boom—profiting from selling the homes it constructed and often financing the buyers as well through a wholly owned mortgage arm. It's common in the industry, but Beazer may have pushed the bounds: The North Carolina field offices of the Federal Bureau of Investigation, the Internal Revenue Service, and the Justice Dept. have recently opened a joint investigation into the company over such matters.

The Inspector General of Housing & Urban Development is also part of the group since a large percentage of Beazer's loans were made to low-income borrowers and insured by the federal government through the Government National Mortgage Assn., according to people familiar with the investigation.

"Actively Pursuing Fraud"

Investigators, however, are not limiting their probe to possible mortgage fraud. "There's all sorts of potential fraud issues here," FBI spokesman Ken Lucas told BusinessWeek. "We're looking at all types of [potential] fraud associated with Beazer—corporate, mortgage, investments."

After BusinessWeek posted its initial story of the investigation online, Beazer released a statement saying it could not "comment on or verify any investigation. However, we will fully cooperate with any investigation by any government agency."

The U.S. Attorney's office in North Carolina, which is leading the charge, also would not confirm or deny an investigation into Beazer. But Gretchen Shappert, the U.S. Attorney for the Western District of North Carolina, said her office has been actively pursuing mortgage fraud among lenders, builders, appraisers, and others since 2002.

"Our experience has shown that mortgage fraud cuts a wide swath," says Shappert. "As the housing market and lending regulations tighten, we expect more, not less, fraud in the housing market."

High Foreclosure Rate

The joint investigation stems from a series of articles that ran in The Charlotte Observer in mid-March, detailing allegations of abusive lending practices and unusually high foreclosure rates in a handful of Beazer housing developments in North Carolina. The paper's investigation alleges that foreclosure rates in several Beazer developments ran at around 20%, compared with the national average of 3%. At the time, Beazer said in a written statement that the high foreclosure rates were an anomaly. Still, such allegations have also sparked a class action against Beazer.

Could Beazer's troubles spread to other homebuilders? Like Beazer, homebuilders across the country have increasingly relied on in-house mortgage arms as part of their sales strategy over the last few years, financing a growing volume of loans used to buy their own properties. There's nothing inherently wrong with the tactic. But with default and foreclosure rates creeping higher, the entire housing industry, including builders, is being scrutinized.

Tighter Standards Ahead

Homebuilders have already been feeling the pain. Beazer's stock has fallen from around $70 to roughly $32 over the past year. And the outlook isn't good. The rate of new homes sales fell by 18.3% in February over the previous year, the second consecutive monthly drop and lowest level since August, 2000. The National Association of Home Builders blamed, in part, bad weather in the Northeast and Midwest.

There's also a growing worry over the mess in subprime. The group's most recent survey shows industry executives have "serious concerns about how the subprime-related shakeout in the mortgage market will affect the housing sector," NAHB President Brian Catalde said in a statement. "Lending standards apparently are tightening not only in the subprime market but in other components of mortgage lending as well, and this is creating tremendous uncertainties regarding the near-term outlook for homes sales and housing production."

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