Posted on Wed, Mar. 28, 2007

Home builder under investigation by FBI

BINYAMIN APPELBAUM

bappelbaum@charlotteobserver.com

TODD SUMLIN / Observer Staff

A house under construction in Beazer Home's Fern Hill subdivision.

• Interactive Map | Mecklenburg foreclosures

Beazer Background

Beazer, which is among the nation's 10 largest home builders, has ranked among the largest builders in the Charlotte area over the last decade.

Beazer's chief executive, Ian McCarthy, took the company public in 1994. In 2005, Beazer cracked the Fortune 500, and last year it made $389 million.

The company entered the Charlotte market in 1987 with the purchase of Squires Homes. Beazer is currently building in 14 local subdivisions. It plans a development near Bank of America Stadium, where the Coffee Cup restaurant stands.

Full Series: Sold a Nightmare

The federal government has launched a criminal investigation of "potential fraud" by Beazer Homes USA, including the builder's role in arranging mortgage loans for buyers in its subdivisions.

FBI spokesman Ken Lucas said the bureau's Charlotte office launched a joint investigation of Beazer last week with the Internal Revenue Service and the Department of Housing and Urban Development.

Lucas said the inquiry stems from an Observer investigation, published last week, which found Beazer's aggressive sales tactics contributed to an unusually high foreclosure rate in many of its Charlotte-area starter-home developments.

In a statement, Beazer said it can't "comment on or verify any investigation. However, we will fully cooperate with any investigation by any government agency."

The Atlanta company added, "Beazer Homes has a long established commitment to managing and conducting business in an honest, ethical and lawful manner."

Rising numbers of foreclosures have focused regulatory scrutiny on companies that sold mortgage loans to low-income families over the last decade.

Lending companies have received most of the attention, particularly so-called subprime lenders that make loans with high interest rates. Beazer operated as a builder and a mortgage broker, matching borrowers with lenders.

Many of the nation's largest home builders arrange loans for their buyers. Beazer is the first such company to come under investigation during the current wave of concern about foreclosures.

In Southern Chase, a Beazer starter home development in Cabarrus County, 77 buyers lost homes to foreclosure in a subdivision of 406 houses. That's a rate of about one home in five, more than six times the national average.

The Observer found at least 10 Beazer developments in Mecklenburg County that had even higher rates of foreclosure.

In Southern Chase, Beazer arranged larger loans than some buyers could afford. That allowed it to include the cost of financial incentives in the price of homes. Some of Beazer's actions violated federal lending rules, the Observer found.

The Observer 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.

Beazer said in its statement, "Based on our internal investigations to date, we have not found any evidence to support the allegations in the Charlotte Observer."

Said Observer Editor Rick Thames: "What we reported is documented and out there for Beazer and everyone else to see. We began tracking an abnormally high rate of foreclosures in the Charlotte area more than a year ago. That research eventually led us to subdivisions built by Beazer."

In the Charlotte area, the loans arranged by Beazer for buyers in its subdivisions were often insured by the Federal Housing Administration. The Observer found that FHA loans were associated with more foreclosures in Charlotte than any other kind of loan in recent years.

HUD, which supervises the FHA, told the Observer Friday that it is reviewing lending records from Charlotte and other cities to determine whether Beazer complied with federal lending regulations.

Beazer emphasized in its statement Tuesday that the loans it arranged were ultimately approved and funded by those lenders.

About three-quarters of Beazer's FHA loans in the Charlotte area were approved and funded by National City of Ohio, according to an Observer analysis of federal data. A company spokesman said Tuesday that National City had not been contacted by authorities, "But should we be contacted by any authorities regarding this matter we will certainly cooperate."

Another company that approved and funded some Beazer loans, Opteum Financial, previously told the Observer that it stopped accepting loan applications from Beazer in 2005 because of "the long-term performance of (those) loans."

The government conducted a limited review of Beazer's lending last year in response to Observer inquiries. The agency decided then to take no action, and Beazer voluntarily terminated the license for its Charlotte office to arrange FHA loans. However, the company can still arrange FHA loans for Charlotte-area buyers from other offices.

State regulators have declined to say whether they will investigate.

The couple featured in the Observer's article on Southern Chase, Mark and Lea Tingley, filed a lawsuit Friday seeking class action status against Beazer in Mecklenburg County Superior Court. The suit alleges that Beazer illegally arranged loans that some borrowers could not afford, inevitably producing a high rate of foreclosures and a subsequent decline in property values.

Beazer is already facing difficult times as demand for new homes declines. The company's stock had lost more than half its value from a peak in January 2006 even before Tuesday's news.

In the quarter ended Dec. 31, the company posted a loss of $59 million, compared with a profit of $89.9 million in the same period a year earlier.

Two senior Beazer executives recently left the company. Chief Financial Officer James O'Leary resigned last week to become chief executive of Kaydon, a manufacturing company. The general counsel, Kenneth Gary, was fired in February for what the company called "a pattern of personal conduct which includes violations of company policies."

Beazer's share price dropped more than 17 percent in after-hours trading Tuesday after the investigation was first reported on the Web site of BusinessWeek magazine. The drop erased about $200 million in market value.

Federal prosecutors in the Charlotte area have targeted questionable lending practices for several years, although they declined Tuesday to confirm an investigation of Beazer.

Since 2002, prosecutors have convicted more than 50 people in the Charlotte area in scams involving loans worth $150 million. Among those convicted were mortgage brokers, lawyers, builders, appraisers and real estate agents.

"We take mortgage fraud very seriously ...," said Gretchen Shappert, U.S. attorney for the western district of North Carolina. "If an unscrupulous broker or lender puts an unqualified buyer in a house, they are robbing these families of the American Dream. It is very difficult to recover from a foreclosure and get a house in the future."