A Builder's Lending Under Scrutiny

Federal investigators are looking into Beazer's mortgage practices

Amid the subprime meltdown, mortgage brokers and lenders that cater to risky borrowers have come under fire. Now one major homebuilder is feeling the heat. Federal investigators, as first reported by BusinessWeek.com, have opened a criminal probe into the lending practices of Beazer Homes USA Inc.

Atlanta-based Beazer, which operates in more than 40 markets across the country, rode high during the housing boom, profiting from selling the homes it constructed as well as financing some of the buyers who moved into them. It's a common industry practice, but the feds are worried Beazer may have pushed the bounds. Last week the FBI, the Internal Revenue Service, the Justice Dept., and the Inspector General of the Housing & Urban Development Dept. started looking into the company's mortgage business and other dealings. "We're looking at all types of [potential] fraud associated with Beazer--corporate, mortgage, investments," says FBI spokesman Ken Lucas, noting the joint investigation itself doesn't prove any wrongdoing. Beazer said in a press release on Mar. 28 that it was fully cooperating with a document request by the U.S. Attorney: "Beazer Homes has a long established commitment to managing and conducting business in an honest, ethical, and lawful manner."

The Beazer inquiry is just the latest twist in the subprime saga, marking the first known federal investigation into the mortgage lending arm of a national homebuilder. As default and foreclosure rates have skyrocketed, stories of predatory lending practices have surfaced. As with others caught in regulators' sights, the worry over Beazer may be whether its lending arm aggressively pushed loans to home buyers who ultimately couldn't afford them and perhaps doctored loan applications to qualify those borrowers. Beazer financed a large number of mortgages for low-income borrowers, loans often insured by the federal government through Ginnie Mae. The Charlotte Observer reported in mid-March on unusually high foreclosure rates at a handful of Beazer housing developments in North Carolina and abusive lending practices, allegations the company disputed in its recent statement.

Still, this new wrinkle raises the question of whether Beazer's troubles are isolated. Increasingly homebuilders have relied on in-house mortgage arms as part of their sales techniques. There's nothing inherently wrong with that approach. But with the entire housing industry under a microscope, some regulators are taking a closer look at such relationships. Mark Pearce, North Carolina's deputy banking commissioner, sent a letter in early March to all lenders and brokers in the state, including Beazer, saying his office was scrutinizing the industry's dealings with builders as part of a broader examination of mortgage practices. "Builders and lenders may have aligned interests in selling a house and making a mortgage loan. It may be not in the best interest of the borrowers," says Pearce. "There is an incentive structure there to close the deal."

For Beazer, the investigation is the darkest mark on an already tough year. Earnings per share dropped 9% in 2006. On Feb. 12, Beazer fired its chief counsel "for a pattern of personal conduct, which includes violations of company policies." Meanwhile, the stock has dropped from around 70 to below 29 over the past year--falling more than 8% in the day after the news of the inquiry broke.

By Dawn Kopecki

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