Eager to Beazer
Beazer (BZH: 1.91, up 4.37%) settles.
On Bigbuilderonline.com, senior editor Teresa Burney reports:
Several federal agencies have settled a two-year investigation against Beazer Homes USA, agreeing they won’t prosecute the company for criminal mortgage and securities fraud if it meets certain conditions and pays between $48 million and $50 million in restitution over the next 60 months.
For two years, Beazer has been under investigation for fraudulent mortgage practices designed to increase the profit margin for its mortgage subsidiary and to sell its houses as well as for accounting practices designed to “smooth earnings, through cookie-jar accounting,” the Department of Justice said July 1.
Fraudulent mortgage practices? The Wall Street Journal reports:
In the mortgage fraud case, prosecutors said Beazer ignored income requirements in making loans to unqualified buyers, and sought to hide from the Federal Housing Administration that some company branches had excessive default rates on their loans.
Prosecutors also said Beazer charged home buyers interest “discount points” at closing but kept the money and didn’t reduce interest rates on the loans. They added that the home builder provided buyers with cash gifts so they could come up with minimum down payments, only to add the gift price onto the purchase price of the house.
Cookie-jar accounting? Per Investopedia:
An accounting practice where a company uses generous reserves from good years against losses that might be incurred in bad years…
Here’s what UBS housing analysts David Goldberg and Michael Garvey note as indicative of Wall Street’s reaction to the Beazer settlement:
Earlier, Beazer announced it had reached settlements w. the U.S. Attorney, HUD & DOJ. We view the terms of the agreements favorably, as: 1) in our opinion, the impact from both a FCF and EPS perspective will be minimal, and 2) it allows mgmt to focus on reducing leverage and improving financial flexibility. Despite these benefits, we expect the company will continue to underperform given the more severe liquidity constraints it faces. Further, reflecting the limited visibility around potential changes to the co’s cap structure, we remain cautious.
So short term, from a liquidity standpoint, the $55 million settlement is a non-issue.
How about below the surface? CEO Ian McCarthy, whom we feel was unfairly demonized earlier this year in Time magazine’s “25 People to Blame for the Financial Crisis,” apologizes.
Credit: Time Magazine, Photo Illustration: Brendan McDermid / Landov; Getty . Click to access original Time article.
“We deeply regret these matters and have used what we have learned to strengthen our control and compliance culture and reinforce our absolute commitment to act according to the highest standards of ethical conduct throughout our organization. We are pleased that the governmental authorities recognized our cooperation and remedial measures,” said Ian J. McCarthy, president and chief executive officer.
Control and compliance culture? Come on, Ian. Couldn’t you and Beazer corporate attorneys have come up with more genuine language of remorse and accountability than that?
And now what? What, after all, is Beazer Homes?
McCarthy had worked for five years-plus on the Beazer brand. It was to unify a holding company of acquisitions, regions, and divisions into an operating company that stood for quality and value for customers. Why, during good times, was the “culture of control and compliance” not a top priority as a unifying brand imperative? How was a culture that permitted lying to customers and government officials committed to any ethical standards, let alone the highest?
One thing the economy has shown us in the past 36 months is that there is no shortage of home building companies.
So now the Beazer Homes trust mark stands for what it stands for among its customers, partners, shareholders, municipal contacts, and a highly skeptical public at large. All those hundreds and hundreds of good, honest, talented men and women who work for Beazer, including, mind you, Ian McCarthy, carry an added burden, working for a company that admits it played the game unfairly.
Here are some questions to ponder.
- Major home builders often close ranks around most issues, but as critical housing economics and policy issues continue to make it onto Capitol Hill’s agenda, will the home building sector be able to put its best foot forward with an acknowledged cheater as part of the bidding.
- Home builders, essentially compete with one another, so would the disappearance of one of the top 10 builders come as any surprise or bother anybody?
- Importantly, how widespread are (or were) the practices that Beazer got nailed and scapegoated for? Is mortgage fraud the “performance enhancing drugs” of home building?
- Exactly where does the notion of being trustworthy fit into home building business cultures if market demand and profitability can (and does) trump integrity and honesty?
It’s hard to imagine that Beazer could have been alone in allowing the chicanery to occur in its system when the system’s capacity was stressed to the max and everything that could get built got sold for asking price or more.
HousingWire.com reports:
“This action shows that the Administration is serious about making the housing market safe from mortgage fraud and will crackdown on those who violate the trust of American homebuyers,” said HUD Secretary Shaun Donovan. “At this time of uncertainty in the mortgage market, it is especially important that lenders, including builder-affiliated lenders, are held to the highest standards of conduct.”
It marks the second multi-million-dollar settlement over the company’s mortgage practices in as many months. In May, Beazer Mortgage agreed to pay out $2.5m to more than 1,000 North Carolina borrowers as part of a settlement reached with the North Carolina Office of the Commissioner of Banks over alleged origination violations in 2007.
Beazer’s investor relations release says:
These settlements enable the Company to close an unfortunate chapter in its history and focus its efforts on executing the Company’s financial and operating business plan for the benefit of the Company’s shareholders, employees, and customers.
Perhaps the settlement enables Beazer to close a chapter. We hope for the sake of many, many associates who depend on the company for their livelihood, that that’s the case.
But the unfortunate chapter whose plot thickens as public perception, consumer behavior, legislative votes, and business and financial decisions blur into a unified combative force is still open for all home builders.
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You asked, “Importantly, how widespread are (or were) the practices that Beazer got nailed and scapegoated for? Is mortgage fraud the “performance enhancing drugs” of home building?”
The answer is that this is VERY widespread. Many builders opened in-house lending co’s and engaged in the same practices. Even if they didn’t outright own their own mortgage co, they set up affiliated business arrangements with a lender, e.g. Countrywide which was a major builder preferred lender and is now being accused of appraisal fraud in conjuntion with KB Home. Countrywide has also settled w/some state agencies re: predatory/fraudulent lending. Countrywide is now owned by B of A as you probably know.
Making these toxic loans, even if they had to commit crimes to do it, was lucrative. The FBI found and reported several yrs ago that 80% of mortgage fraud was done by industry insiders, and warned it could seriously damage the economy. Had that kind of news made it to mainstream media as often as Britny Spears activities, maybe the public would’ve been wise to these scams instead of duped by them. The industry committed crimes, and if the company has enough money or convinces the govt it can repay it, will settle and escape prosecution. Smaller co’s are seeing their CEO’s tried and jailed for the same things. These larger co’s CEO’s should be joining them there, not buying their way out of it. BTW, several big builders settled for millions w/HUD a couple yrs ago for lending law violations. Obviously these fines and settlements don’t have any effect. They just pass the cost on to the consumer!