Housing Market on Fire

In a scathing report, "Bonfire of the Builders," BusinessWeek chronicles trouble with the lending practices of some large home-building companies. "Even as the housing supply began to exceed demand last year, builders kept sales brisk by pushing adjustable-rate, interest-only, and other risky loans. In some cases they attracted clientele who couldn't afford conventional mortgages. In others, builders allegedly violated federal lending standards to get customers to sign on the dotted line," according to the report.

The report cites a $3.2 million settlement with KB Home Mortgage Co. to resolve U.S. Housing and Urban Development Department allegations that KB Home's mortgage unit approved loans to ineligible borrowers, approved loans based on overstated or correct income, and failed to properly verify sources of funds, among other charges -- KB admitted no wrongdoing in this settlement.

And a series of investigations and lawsuits have been launched against Beazer Homes USA Inc. related to the lending practices of that builder and a wave of foreclosures among some groups of homes built and financed by Beazer. Michael T. Rand, Beazer's chief accounting officer and senior vice president, was terminated for "attempts to destroy documents in violation of the company's document retention policy," the company reported in June. The company announced that it learned about his actions during an investigation of the company's mortgage-origination business "and related matters."

"Homebuilders really started to push these more aggressive mortgages down the throats of potential buyers to boost sales," G. Hunter Haas IV, a mortgage research and trading professional, told BusinessWeek. Lending practices, coupled with overbuilding in some markets, is now biting back at some major builders.

The report cites an example of developments in the Columbus, Ohio, are that were built by Dominion Homes Inc. and are now "scarred with empty houses, overgrown yards, and front windows with neon-orange foreclosure stickers." The report provides personal accounts by buyers who said they didn't scrutinize their loan documents and quickly got in over their heads.

The "capture rate," or percentage of a builder's homes that were also financed by the builder, has soared for some builders, reaching 90 percent last year for Pulte Homes compared to 64 percent in 2000. And for builder Centex the rate was 80 percent for the fiscal year ended in March, according to information in the report attributed to Daniel Oppenheim of Banc of America Securities.

Some online commenters at the BusinessWeek site are pinning the problems entirely on builders while others say that the buyers are most culpable.

All rights reserved. This content may not be used or reproduced in any manner whatsoever, in part or in whole, without written permission of Inman News. Use of this content without permission is a violation of federal copyright law.