Saying there’s evidence that employees of its mortgage subsidiary violated HUD regulations governing down-payment-assistance programs, Beazer Homes USA Inc. announced today it will restate earnings going back to 2004.
The restatement could impact financial results going back to 1999, Beazer Homes said in disclosing findings of an internal investigation into its mortgage origination business, Beazer Mortgage Corp., and other accounting and financial reporting issues.
The SEC and the U.S. Attorney’s Office are also investigating Beazer, after a series of stories in the Charlotte Observer documented cases where the company appeared to have broken rules governing down-payment assistance, selling homes to low-income buyers who couldn’t afford them and including the cost of financial incentives in the price of the homes.
Beazer said its own investigation, “found evidence that employees of the Company’s Beazer Mortgage Corporation subsidiary violated certain U.S. Department of Housing and Urban Development regulations, particularly in relation to down-payment assistance programs, in certain Federal Housing Administration (FHA) insured loans originated by Beazer Mortgage Corporation dating back to at least 2000.”
In a series of stories on sales of Beazer homes in North Carolina, the Observer reported in March that 388 of 2,900 homes the company built and sold in Mecklenburg County between 1997 and 2006 had foreclosed. The stories documented instances where home buyers who used FHA loans arranged by Beazer Mortgage paid higher prices than other buyers in the same subdivision.
At the time, Beazer told the Observer that its mortgage subsidiary complied with the law, and that customers signed documents indicating they understood and accepted loan features such as interest-rate buy-downs and down-payment gifts. Beazer officials also said the final decisions about the loans it arranged were made by the lender providing the money.
In May, HUD announced that it would no longer allow home builders or other sellers to provide down-payment assistance on FHA-backed loans. Seller-funded down-payment assistance can artificially inflate home prices and more than double the odds that a loan will end up in default, HUD has said in defending the rule change.
The rule change is scheduled to go into effect at the end of this month, but two nonprofits that serve as conduits for seller-funded down-payment assistance have sued to block its implementation, saying it will have a disproportionate affect on minorities.
Beazer Homes said today it hopes to negotiate a settlement with regulators on the order of $8 million to $15 million, but said “no settlement has been reached with any regulatory authority at this time and there can be no assurance that any such settlement, if reached, will be within this range.” The company also said it faces liability from potential civil suits involving FHA-insured loans.
Because of uncertainties about the company’s ultimate liability, Beazer said, “at this time it is not possible for the company to determine the total financial statement impact related to the mortgage issues identified in the internal investigation.”
Beazer said that its restatement of earnings is related to a review of land development costs and costs to complete closed homes. The review discovered that reserves and other accrued liabilities were first overstated, and then “partially and improperly” counted as income in 2006.
The company said the cumulative impact of the restatement is likely to be a $25 million increase in pre-tax income, after a $20 million downward reduction in pre-tax income in the 2006 fiscal year.
Beazer said the restatement could delay reporting of financial results for the quarter ending Sept. 30. Home closings for the quarter were down 39 percent from at year ago, to 3,940, the company said, and new home orders were down 52 percent to 990 — thanks largely to a 68 percent cancellation rate attributed to “pronounced tightening” in the mortgage markets in August and September.
The company said it “continues to fully cooperate with the U.S. Attorney and SEC investigations” and that it has provided both with the results of its internal investigation.