BusinessWeek Cover Story - Bonfire Of The Builders
Earlier this year, Beazer received a subpoena from the Justice Dept. seeking documents related to its home loans, and the company is also under civil investigation by the North Carolina Attorney General's office... Wall Street egged on the often-reckless underwriting by buying vast quantities of home loans for repackaging as securities. Now that the boom has fizzled and foreclosure rates are rising, the important role of large homebuilders as lenders is also coming into sharper focus...Builders allegedly violated federal lending standards to get customers to sign on the dotted line. KB Home (KBH) paid a record $3.2 million settlement in July, 2005, to resolve allegations by the Housing & Urban Development Dept. that the builder's mortgage unit overstated borrowers' income, among other practices, to obtain loan approvals. KB, which denied wrongdoing, sold its loan business before settling... Busy developers that provided Wall Street with equity-underwriting business discovered they had friends in the investment banking world.
Bonfire Of The Builders
By rushing into the mortgage business big-time, homebuilders helped fuel the housing crisis
AUGUST 13, 2007
MARKETS IN TURMOIL
By Mara Der Hovanesian
Elizabeth and Armando Motto are living a real estate nightmare with a new breed of monster: the big homebuilder as lender. In November, 2005, the couple, who have four children, agreed to pay $540,000 for a newly built three-bedroom house in suburban Clarksburg, Md., near Washington, D.C. Rather than send them to a bank, the builder, Beazer Homes USA Inc. (BZH ), offered to provide a mortgage itself in an arrangement of the sort that helped fuel the long housing boom across the country
But when it appeared that the Mottos might not qualify financially for the loan, things took a troubling turn. Beazer, according to the couple, inflated the pair's earnings in loan-application documents by incorrectly stating they were collecting rental income from the house they were leaving. "I don't want to misrepresent myself," Elizabeth said in e-mail correspondence with Beazer's outside mortgage service, dated July 14, 2006. But in the end, the couple signed the documents, and soon after they closed on the Clarksburg house.
They now regret it. The Mottos moved to Clarksburg, but they haven't succeeded in unloading their previous home in Rockville, Md. They have nearly $1 million in mortgage debt on the two dwellings. With $145,000 in family income, Elizabeth says, they are "on the brink of foreclosure" on both houses. "We are so broke."
Beazer, one of the dozen or so large publicly traded builders that have started or stepped up mortgage-lending businesses to put more buyers in freshly finished houses, declines to discuss specific customers. The Atlanta company has much more than the Mottos to worry about. On Aug. 1 its stock fell nearly 18% on rumors that it was preparing to file for Chapter 11 bankruptcy court protectionâwhich Beazer swiftly denied, calling the Wall Street gossip "scurrilous and unfounded." Just five days earlier, Beazer revealed that the Securities & Exchange Commission had elevated an informal inquiry into its mortgage business to a formal investigation. The company warned that criminal penalties could follow. Earlier this year, Beazer received a subpoena from the Justice Dept. seeking documents related to its home loans, and the company is also under civil investigation by the North Carolina Attorney General's office.
Leslie H. Kratcoski, Beazer's vice-president for investor relations and corporate communications, says in an e-mail that the company "intends to continue to fully cooperate with all related inquiries but does not have further comment at this time."
EGGED ON BY WALL STREET...
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