Beazer Homes USA's independent investigators have found evidence that employees of its mortgage arm violated federal rules related to originating FHA-backed home loans going back at least as far as 2000, following an accusation made by a series of Charlotte Observer stories last spring on high foreclosure rates on Beazer homes.
Specifically, it appears the mortgage company's employees violated regulations governing down-payment-assistance programs for FHA loans. Company officials would not elaborate on the findings.
"The company intends to attempt to negotiate a settlement with regulatory authorities that would allow the company to quantify its exposure associated with reimbursement of losses and payment of regulatory fines, if they are imposed," Beazer stated in news release issued early this morning (Oct. 11). The company statement estimates it could cost it between $8 million and $15 million just to settle with government regulators, but that estimate does not include the potential costs of settling civil lawsuits pending against the company over the issue.
It also won't address any potential reimbursement of losses that might be requested by those who purchased mortgages that later went into default. If fraud occurred, the company might also be liable for losses suffered by mortgage purchasers or the Department of Housing and Urban Development if it had to make good on the loan guarantees.
The company is also being investigated by the Securities and Exchange Commission.
The internal investigation by forensic accountants also uncovered accounting irregularities that will require Beazer to restate earnings going back to 2004. The company doesn't expect the end result to impact its cash position.
In one irregularity, investigators found that Beazer's accountants put more reserves and other accrued funds into land-development costs and the costs-to-complete closed homes than would have been appropriate under generally accepted accounting principals. Then those accumulated funds were "partially and improperly" released into income during 2006. The net result is expected to increase pre-tax income by more than $25 million for past years, but then decrease pre-tax income for fiscal year 2006 by $20 million.
Another irregularity was found in Beazer's model home sale-leaseback accounting that will require restatement of transactions and shift revenue and income from 2006 into future periods. The effect will be that pretax income through June 30 of this year will be reduced by about $20 million, but that income will be realized in future periods.
Beazer fired its chief accounting officer Michael T. Rand in June after discovering that he was attempting to destroy documents in relation to the investigation into its mortgage origination business.
In February it fired its general council Kenneth Gary due to a "pattern of personal conduct which includes violations of company policies."
In March the company's chief financial officer Jim O'Leary announced his resignation from the company to become CEO of Kaydon Corp.
In Thursday's statement, Beazer also announced it now has to put down $108 million in cash plus other company assets to collateralize its revolving line of credit. Beazer had to renegotiate with its lenders after it violated covenants by not reporting full financial information for the quarter that ended June 30. The lenders waived the covenant violations in lieu of the increased securitization requirements for any debt borrowed on the revolver. Beazer says it hasn't released its financials because of the irregularities it was uncovering in its internal investigation.
The company also released preliminary sales figures for its quarter ending Sept. 20. Closings were down 39% from the same quarter the previous year, and orders were down 52%.Beazer Stock (NYSE: BZH) rose on the news, up 2% to $10.10 as of 12:40 p.m., as traders apparently saw the disclosure as an indication that a settlement may be possible and manageable and that the restatements could result in a net increase in net income.
Analysts had a different take. "While the release of interim findings in its ongoing internal audit offers improved visibility, we continue to believe Beazer's exposure to the downturn exceeds peers," wrote David I. Goldberg of UBS Investment Bank in a research note to investors. Goldberg added that Beazer faces more severe financial constraints because of its greater leverage and its significant exposure to entry-level buyers, "as reflected in the 68% cancellation rate this quarter."
And, while Beazer solidified its liquidity by renegotiating its credit facility, he wrote, "We believe having to secure this line is an indication of greater scrutiny from lenders."