Federal prosecutors say they won’t pursue criminal charges against Beazer Homes USA Inc. as long as the company remains in compliance with an agreement to pay up to $50 million in restitution to homebuyers who were allegedly victimized by the builder’s mortgage company.

The case serves as a dramatic illustration of the Department of Housing and Urban Development’s complaints about seller-funded down-payment assistance programs, and homebuilders’ affiliated mortgage and title insurance companies.

Beazer and its subsidiary, Beazer Mortgage Corp., admitted to engaging in several fraudulent mortgage origination practices, prosecutors said, including keeping discount points that should have been used to provide some homebuyers with a reduced interest rate.

Other homebuyers were told they were receiving a "gift" from a charity to cover their down payment when, in fact, the purchase price of the home they purchased was increased to offset the supposed "gift."

Beazer also accepted responsibility for fraudulently circumventing HUD’s "Neighborhood Watch" and "Credit Watch" programs, and of instituting a strategy of "willful blindness" with regard to some stated-income loans, prosecutors said.

Prosecutors on Wednesday filed a criminal information detailing mortgage and accounting fraud charges against Beazer, along with a deferred prosecution agreement in the U.S. District Court for the Western District of North Carolina.

Prosecutors said they were willing to settle the case because of efforts by Beazer’s audit committee to investigate and report to them fraudulent mortgage and accounting practices, and because Beazer Mortgage was shut down in February 2008 and no longer poses a risk to consumers.

Beazer has also fired employees identified as being responsible for the misconduct and has agreed to continue cooperating in an ongoing investigation, prosecutors said.

Additional criminal penalties "would jeopardize the solvency of Beazer and put at risk the employment of approximately 15,000 employees and full-time contractors not involved in the criminal wrongdoing," the Justice Department said in announcing the agreement.

Beazer said the settlement allows the company "to close an unfortunate chapter in its history" and to focus on "executing the company’s financial and operating business plan" for the benefit of shareholders, employees and customers.

The deferred prosecution agreement requires Beazer to immediately pay $10 million toward restitution, including $2.5 million already paid to the North Carolina Commissioner of Banks in May.

Two Beazer executives — Ian J. McCarthy, president and chief executive officer; and Michael Furlow, executive vice president and chief operating officer — are personally paying into the restitution fund amounts equal to the after-tax proceeds of their 2008 bonuses, the company said.

The agreement gives the company immunity from prosecution for five years, as long as it’s making up to $50 million in payments into a restitution fund under a formula based on its pre-tax earnings. The agreement can be extended until the obligation is met.

Analysts who follow the company say it may declare bankruptcy and stop paying into the fund, and that banks and other secured creditors would be paid before homeowners in a liquidation of the company’s assets, the Charlotte Observer reported. …CONTINUED

Even if Beazer remains in business, the restitution fund may not be big enough to repay victims. Although the agreement requires Beazer to pay 4 percent of its adjusted earnings into the fund each year, the company reported a $114.9 million second-quarter loss and a $952 million annual loss in 2008, the Observer reported.

The U.S. Attorney’s Office began investigating Beazer in 2007, after a series of stories in the Observer documented cases where the company appeared to have violated HUD regulations governing down-payment assistance programs.

HUD, which claimed seller-funded down-payment assistance can artificially inflate home prices and more than double the odds that a loan will end up in default, tried to end the practice but was thwarted for a time by lawsuits by nonprofits that served as conduits for the programs.

Congress passed legislation that became effective Oct. 1 prohibiting the Federal Housing Administration from accepting seller-funded down-payment assistance. The National Association of Realtors, which supported HUD’s attempts to shut down seller-funded down-payment assistance programs, has endorsed legislation that’s intended to restore the programs while limiting abuses (see story).

Rep. Al Green, D-Texas, on Jan. 16 reintroduced a bill, HR 600, that would resurrect seller-funded down-payment assistance programs for FHA-backed loans.

HUD has also faced opposition in its attempts to tighten the rules for applying the Real Estate Settlement Procedures Act, or RESPA, to homebuilders’ affiliated mortgage and title insurance companies.

HUD had planned to implement a new "required use" provision on Jan. 16, which would have barred homebuilders from offering consumers incentives that could be claimed only if they used builders’ affiliated mortgage and title insurance companies.

Homebuilders often make up for incentives they offer for using their affiliated businesses by charging a higher interest rate, increasing a home’s price, or inflating closing costs, HUD said.

The National Association of Home Builders sued HUD on Dec. 22, claiming the rule change was arbitrary. Affiliated businesses formed by settlement services providers like title insurers would still be allowed to offer discounts and settlement services packages, NAHB said.

HUD first pushed back implementation of the new required use provision, then withdrew it altogether. The provisions was drafted by the Bush administration in a way that was "confusing and flawed and neither protected consumers nor provided needed guidance to industry participants," incoming Secretary of Housing Shaun Donovan told Realtors in May.

The Obama administration remains committed to the consumer protection intentions of the "required use" provision, and plans to issue revised language for public comment, Donovan said (see story).

In 2007, Beazer was among 11 homebuilders and one lender that agreed to pay nearly $5 million to settle allegations that they violated RESPA by creating subsidiary companies to "reinsure" homebuyers’ title insurance policies.

Beazer maintained that its captive title reinsurance subsidiary, Security Title, was not subject to RESPA because it did not provide settlement services, but paid $261,000 to settle the charges (see story).


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