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Beazer Reveals Violations Of Federal Regulations

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Written by: Mike Drummond AND Rick Rothacker
10/12/2007

Beazer Homes USA could lose its ability to offer government-backed home loans in Charlotte and across the country, after announcing Thursday that it found evidence its employees violated federal housing regulations.

The Atlanta-based home builder said the violations were "particularly in relation" to down payment assistance programs for Federal Housing Administration insured loans dating to at least 2000.

Beazer, in revealing interim findings of an internal investigation, also said that it would restate earnings as far back as 1999 and that its past financial statements should no longer be relied upon.

Federal agencies, including the Department of Housing and Urban Development and the FBI, have been investigating Beazer since a March series by the Observer that found the company in the Charlotte area sometimes crossed the line between selling homes to people who could barely afford them to selling to people who couldn't.

The series, which highlighted the Southern Chase subdivision in Cabarrus County, charted how Beazer's aggressive sales tactics contributed to an unusually high foreclosure rate in many of its Charlotte-area starter-home developments.

Most Beazer buyers in the area used loans insured by the Federal Housing Administration, which is part of HUD.

Beazer's mortgage subsidiary was among the most active in the FHA home loan program in the Charlotte region. From 1997 through August 2006, Beazer Mortgage made 2,322 FHA insured loans in the area.

Those loans often were aggressive. The company provided down payments for most of its borrowers in the Charlotte area, leaving them with little stake in the homes. It also arranged loans with monthly payments that started low but rose sharply after the first and second years, a feature known as a buydown.

Both the down-payment gifts and the buydowns were associated with a higher risk of foreclosure, the Observer found.

The FHA requires a borrower to make a 3 percent down payment. This shows the borrower has savings and a stake in the house. But many borrowers in Beazer-built Southern Chase had minimal savings. So Beazer gave the funds to specialized nonprofits, which gave the money to the buyer. The FHA allowed the practice, although it undermined the purpose of the rule.

The Observer found that Beazer incorporated the cost of the down payment into the price of the home, according to Beazer sales documents and a former Beazer employee. Raising the price of homes to cover the gift is a violation of federal regulations.

The Observer's investigation also documented four instances of loans arranged by Beazer that were approved based on misstated information about applicants' income and debts. Knowingly falsifying information on a loan application is a federal crime.

HUD adopted a rule that prohibits the down payment money from coming, directly or indirectly, from the seller to prevent the type of gift Beazer provided to its buyers. The rule takes effect Oct. 31.

Bill Glavin, special assistant to the FHA commissioner, said Thursday that Beazer would be barred from participating in the FHA program in Charlotte if HUD violations occurred. "If they did this all over the country," he said, "it would be a headquarters action, and they'd be banned throughout the country."

Beazer provided no specifics on the extent of the violations. It told The Wall Street Journal they were concentrated "disproportionately" in North Carolina.

The company said it may be liable for losses suffered by HUD or companies that bought the mortgages it originated. The Observer found that the FHA has paid more than $5 million to cover defaulted loans in Southern Chase.

Beazer said it would attempt to reach a settlement with regulators for between $8 million and $15 million but said there was no assurance this could be done.

"The factors influencing the extent of such potential future liability include, among other things, the number of FHA-insured loans originated by Beazer Mortgage Corp., the percentage of such loans in which misrepresentations or fraud may have occurred, and the default rate, principal amount and losses associated with such loans," the company said.

The Securities and Exchange Commission, the FBI and the IRS, all of which are investigating Beazer, declined to comment Thursday. The company did not respond to requests for comment.

Earnings restatement

Beazer's report comes amid industrywide woes from slumping home sales, escalating foreclosure rates and falling housing prices.The company's shares, which are down from a 52-week high of $48.60, rose 20 cents, or 2 percent, to $10.13 Thursday.

Beazer said it would complete its financial restatements "as soon as practical."

Shareholders rely on a company's financial statements as a window into current performance and future prospects. The company said it could not yet quantify the total impact of the restatements.

The company said it believes the earnings restatement will add more than $25 million to its cumulative pre-tax income. The restatement, however, is expected to reduce pre-tax income for the year ended Sept. 30, 2006, by about $20 million. That would amount to about 3 percent of the $613 million in pre-tax income it previously reported for fiscal 2006.

In essence, the investigation found that reserves and liabilities such as land development costs were being improperly booked in prior accounting periods, leading to increased income in fiscal 2006.Beazer previously disclosed that Michael Rand, its former chief accounting officer, may have inflated reserves and other accrued liabilities in earlier periods. Rand was fired in June after the company said its internal investigation found he had attempted to destroy documents in violation of corporate policies.

Beazer on Thursday also released selected financial data for its fiscal fourth quarter, which ended Sept. 30 Net new home orders dropped 52 percent and home closings fell 39 percent from a year ago. The company said it had more than $400 million in cash on hand at the end of the quarter.

Beazer said it plans to release financial results for the quarter ended Sept. 30 after completing the restatement if not sooner. It has not yet filed a required securities filing for the quarter ended June 30.

In a research report Thursday, JPMorgan Chase & Co. analysts said the fines and restatements "do not seem material."

"While we believe the findings are a modest positive, we remain concerned with ... lingering litigation risk," the analysts wrote.

The firm kept its "underweight" rating on Beazer's stock, noting orders fell more than expected and a change that now makes its credit facility with lenders secured.

Charlotte-area developments

Kenneth Davies, a Charlotte lawyer representing at least 10 homeowners in the Oak Hill subdivision suing Beazer, called the announcement "good news for us."

Davies said he will seek the full report, which could expose "higher levels of the corporate structure."

"Their excuse would be this is just a bad apple," he added. "But that's a key thing. I think this report may help establish management-level fraud."

Lea Tingley and husband Mark live in the Southern Chase subdivision. They're suing Beazer.

"I'm glad that everybody else is going to know that they are up to no good," Lea Tingley said Thursday.

The Tingleys' lawyer, Matthew Arnold, said Beazer's announcement contained "smoke."

"Our job," he said, "will be to see how big the fire is."

What's Next for Beazer

  • A settlement with regulators may cost as much as $15 million.
  • The home builder needs to complete earnings restatement, which could add about $25 million to its overall bottom line but reduce fiscal 2006 income by $20 million.
  • Investigations by the U.S. attorney's office and the Securities and Exchange Commission continue.
  • Beazer still faces civil lawsuits by homeowners

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