The year is barely half over, but already it's clear that Dominion Homes won't look back on 2006 fondly. Last year was bad enough: The Dublin, Ohio–based company's closings and revenue dropped 24 percent and 23 percent, respectively. This year's results have been even worse—preliminary second quarter closings and revenue were off 46 percent—and compounded by filings of class action suits against the builder, a negative HUD audit, and a loss of $3.9 million in the first quarter.
Just three years ago, the company ranked among the nation's top 30 home builders (it fell to No. 44 last year). Much of its growth had come from the strength of the first-time home buyer market. Many of those buyers, unable to qualify for prime-rate mortgages, financed their homes with loans backed by the FHA.
Because Dominion's mortgage division, Dominion Homes Financial Services, brokered the FHA loans, it has been subject to routine audits by HUD. HUD examined 151 loans in its most recent audit of Dominion. It found 49 violations, including borrowers who didn't meet minimum credit requirements and loan files lacking adequate documentation, according to the Columbus Dispatch. (Builder filed a Freedom of Information Act request to view the audit findings; at press time, HUD had not yet processed the request.)
William Cornely, Dominion's CFO, says that most of HUD's findings involved incomplete paperwork, which the company addressed in a response letter to the department at the end of June. He's quick to point out that Dominion originated, but did not underwrite or approve, the mortgages. “If the [HUD] judgment is on underwriting, they need to take that up with the lender. We didn't make the decision, so it's harder to defend.”
The problems with Dominion's loans reach beyond the HUD audit. Of the FHA-backed mortgages Dominion originated since June 1, 2004, 6.2 percent have defaulted. Delinquency and foreclosure rates are usually higher for FHA loans than for prime loans due to borrowers' lesser credit quality, but the Dominion record stands in contrast to a 3.27 percent default rate for all FHA loans in Ohio and 2.65 percent nationwide, according to HUD's Neighborhood Watch data.
Battered by waves of criticism, Dominion has taken steps to repair its reputation. It shuttered its mortgage division, partnering with Wells Fargo in a mortgage company that will provide origination services to Dominion customers. Wells Fargo owns the majority share of the mortgage company and will be responsible for day-to-day operations and regulatory compliance.
Dominion is adding other pieces to develop more-educated buyers. The company reformed its sales policies, mandating 40 hours of annual training for sales associates and exchanging its compensation package based on commission and quotas for one with a base salary and that emphasizes customer education and satisfaction. It's reinforcing that education through partnerships with nonprofits to counsel buyers in credit-worthiness.
Bill Evans, president of HER Real Living, a Columbus, Ohio–based residential real estate brokerage firm, welcomes more buyer education. “Financial markets have loosened their requirements for obtaining a loan,” he says, adding that lenders, real estate agents, and builders should do more to ensure that buyers don't overextend themselves.
Meanwhile, Dominion, not expecting to make a profit this year, is trying to right its finances. Saddled with a 10-year supply of lots, the company is aggressively selling land. It's also paying down debt and trimming its credit line from $300 million to $200 million. Rick Murray, an analyst with Raymond James and Associates, maintains an “underperform” rating on Dominion's stock but agrees with the approach: “Generating liquidity, paying down debt, and trying to trim your cost structure are about the best things you can do until you get a breather in the market.”
Learn more about markets featured in this article: Columbus, OH.