Majestic Research

Reuters

Beazer Homes Facing Widespread Probe, Shares Slide

Published: March 28, 2007

Beazer Homes USA Inc. , the No. 6 U.S. home builder, said on Wednesday it received a request for documents from federal prosecutors in a probe relating to its mortgage business, sending its shares down as much as 11.8 percent.

The company, which builds houses for many first-time buyers, said it has been in contact with the U.S. attorney’s office and is cooperating with federal investigators concerning the investigation into its mortgage business.

Late Tuesday, a representative at the FBI’s office in Charlotte, North Carolina, said the agency was “conducting a potential fraud investigation” into Beazer.

It has also been reported that the U.S. Internal Revenue Service and Department of Justice had opened a probe into Beazer’s lending practices, but neither the U.S. attorney’s office in Charlotte not the IRS would comment.

The Inspector General of the U.S. Department of Housing and Urban Development (HUD) is also part of the investigative group because a large number of Beazer’s loans were made to low-income borrowers and insured by the Government National Mortgage Association, according to an article published by BusinessWeek.

“At this time, there have been no allegations of any wrongdoing,” Beazer said in a statement.

Beazer’s shares fell at one point to $27.71—its lowest price in 3-1/2 years—and were still off $3 at $28.41 in morning trading on the New York Stock Exchange.

Fears the subprime market could drag down all the U.S. home builders punished the entire sector as the Dow Jones U.S. Home Construction index <.DJUSHB> has lost about 20 percent since the beginning of February. The index was off 3.3 percent on Wednesday, with big declines by Standard Pacific Corp., off 5 percent, and Centex Corp., down 4.3 percent.

The Bubble

The U.S. housing market has suffered from a steep downturn for more than a year, as high prices and climbing interest rates have driven away prospective buyers.

Meanwhile, default rates in the subprime segment of the U.S. mortgage market have jumped in recent months and threaten to prolong the housing downturn. At least 20 lenders in the subprime mortgage sector, which serves borrowers with poor credit histories, have gone out of business.

The crisis has triggered broader concerns the fallout may spread to mainstream lenders and damage the U.S. economy.

U.S. home builder Lennar Corp.—the No. 3 builder—said on Tuesday that widening problems in the subprime lending sector weakened an already anemic market, echoing comments made last week by KB Home.

The subprime crisis could extend a weak U.S. housing market already weighed down by too much inventory, Majestic Research analyst John Tomlinson said.

“Do credit availability and lending standards become tighter and then hurt a market that’s already been one of the weakest that we’ve seen in years?” he said.

Lawsuit Filed

The current investigation into Beazer followed articles published this month by the Charlotte Observer newspaper that detailed allegations of abusive lending practices and high foreclosure rates in some Beazer developments.

Beazer said it has found no evidence in internal investigations to support the Observer’s allegations.

The Observer’s investigation alleged foreclosure rates in several Beazer developments ran at around 20 percent, compared with the national average of 3 percent. Beazer said at the time the high foreclosure rates were an anomaly.

Last week, a North Carolina law firm filed a lawsuit in state court seeking class-action status against Beazer, accusing the home builder and its mortgage company of selling mortgages to unqualified buyers. The suit seeks damages for each class member of less than $74,999. (Additional reporting by Karen Jacobs in Charlotte and Jonathan Stempel in New York)