Regulation

Leave It to Beazer: Lending Rules Breached

The homebuilder improperly recorded liabilities relating to home loans, and will restate its financials and negotiate a settlement with the SEC.
Stephen TaubOctober 12, 2007

Following a Beazer Homes USA internal probe that found the company’s mortgage-origination unit violated federal lending rules, Beazer said it would restate its 2004 through 2006 financials.

The restatements will reportedly affect reporting going as far back as 1999. Employees of the subsidiary, Beazer Mortgage, ran afoul of U.S. Department of Housing and Urban Development rules related to down-payment aid programs in making certain Federal Housing Administration–insured loans, the homebuilder stated on Thursday.

The company did not state which HUD rules were breached. Most Beazer home buyers have used loans insured by the FHA, a part of HUD, according to Charlotte.com, the Website of The Charlotte Observer. By guaranteeing repayment of mortgage loans, the FHA enables lenders to charge lower interest rates and accept lower down payments, according to the site, which notes that lenders may make riskier bets because they don’t lose money when borrowers default.

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By correcting the mortgage unit’s errors, Beazer USA expects to boost the company’s pretax income over the entire three-year period by more than $25 million. But pretax income for the 2006 fiscal year will fall by about $20 million as revenue and income from that year is shifted into future periods.

The internal probe also unearthed the existence of a continuing interest in the potential appreciation of model homes sold in certain sale-leaseback deals, says Beazer. Those transactions did not qualify for sale-leaseback accounting and should have booked as financing transactions under generally accepted accounting principles. Beazer says it intends to negotiate a settlement with regulatory authorities that will cost it between $8 million and $15 million.

Beazer previously disclosed that it had received a subpoena from the U.S. Attorney’s Office in the Western District of North Carolina seeking documents concerning its mortgage-origination services. The company also is being investigated by the Securities and Exchange Commission.

In early September, a trustee for Beazer Homes USA’s senior notes notified the company that it would be in default if it did not file its June 30 quarterly report, which was delayed by the mortgage-origination probe, within 60 days. But Beazer asserted that it didn’t believe it was in default, contending that under the note contract it is required only to deliver to the trustee copies of its SEC reports within 15 days of filing them with the commission.

The company has asked the U.S. District Court in Atlanta to declare that the filing delay doesn’t mean it is in default. Much is at stake here: if, after the 60-day period, Beazer is still deemed to be in default, its noteholders could demand an acceleration of payments.