The Company

The News

Investors decided a federal probe over mortgage lending put

Beazer Homes

The company on Wednesday confirmed media reports that it's been contacted by federal officials investigating its mortgage loan origination business in the Charlotte, N.C., area, where many houses in its lower-priced developments have foreclosed.

It's another blow to an industry that's already reeling from the protracted collapse of the housing boom. New single-family home sales fell 16% from December to January, then dropped another 4% from January to February, according to data released Monday by the U.S. Census Bureau.

Beazer's woes stem largely from the area around fast-growing Charlotte, where the Charlotte Observer newspaper reported that of the approximately 2,900 homes the company built in Mecklenburg County between 1997 and 2006, at least 388 have foreclosed, nearly 13.4% of the total. That's the highest foreclosure rate among the county's 10 largest builders, the paper reported in an intensive investigative series. National foreclosure rates, even as buyers with subprime mortgages face increasing pressure as their payments rise, are at about 3%.

Federal investigators, in a joint inquiry by the Federal Bureau of Investigation, the Internal Revenue Service, the Justice Department and the Department of Housing and Urban Development, are looking at Beazer's aggressive lending practices with low-income buyers, which the newspaper said included potential falsification of borrowers' incomes. The government has already paid about $5 million to cover loan defaults in one Beazer-built Charlotte neighborhood.

"There's all sorts of potential fraud issues here," FBI spokesman Ken Lucas told Business Week in a story published Tuesday. "We're looking at all types of [potential] fraud associated with Beazer corporate, mortgage, investments."

The company, the nation's sixth-largest home builder, offered brief comments about the investigation on its corporate web site.

"Beazer Homes has been in contact with the U.S. Attorney's Office and, at this time, there have been no allegations of any wrongdoing," the statement said. "Instead, Beazer Homes has received a request for documents generally relating to its mortgage business. We are fully cooperating with this request and the U.S. Attorney's Office. We believe this request was fueled by the articles recently published by the Charlotte Observer. Based on our internal investigations to date, we have found no evidence to support the allegations in these articles."

The company, which didn't return a phone call seeking comment, said it was told by the U.S. Attorney's Office for the Western District of North Carolina that "the statements by the FBI and published by Business Week were not authorized and should not have been made."

The Analysis

Authorized or not, it's the kind of publicity any company is loath to acknowledge, particularly when both the lending and construction arms of the home-building industry are in terrible shape.

Most major home builders have a mortgage origination or brokerage operation along with their construction businesses, but this nice high-margin piece of the puzzle hasn't helped any of the major players.

Beazer stands out from the pack, though. Its stock dropped 50% over the last 52 weeks as of Tuesday's close, worse than even

D.R. Horton

Analysts worry the legal scrutiny might make Beazer's prospects even worse.

"Any time you see the initials F.B.I. in a press release about one of your companies, it's never a good thing," says Rashid Dahod, an analyst at Argus Research. He cautioned, however, that the extent of Beazer's troubles isn't yet clear and could turn out to be a local issue, which kept Dahod from altering his current Hold rating on the stock. "I'd need to find out more from them about who's overseeing what's happening and learn if this is the responsibility of one or two individuals before I change my opinion on the company."

J.P. Morgan analyst Michael Rehaut published a note Wednesday that also raised the possibility of class-action lawsuits against Beazer, and said whatever the fallout is from this investigation it won't go away anytime soon.

"While impossible to determine the outcome of such an investigation, we do note that one scenario is that the investigation ultimately focuses on only a few subdivisions and results in only several millions of dollars in fines, and therefore not be material," Rehaut wrote, adding that "perceptual overhang may linger for several quarters."

The Bottom Line

Between the marketwide woes, the federal investigation, a spate of management departures and the pile-on effect of short-sellers drawn by persistent media attention, it's a lousy time to be under a Beazer roof.

Beazer's finance chief, James O'Leary, must have thought so as well. He left the company on Friday to become CEO of Kaydon Products. Todd Vencil, an analyst at BB&T Capital Markets, wrote at the time that this was likely a career move, but a notice Beazer filed last month with the Securities and Exchange Commission made it clear that wasn't the case with the February firing of Ken Gary as general counsel.

The company cited "a pattern of personal conduct which includes violations of company policies."

Lawrence Ashe, Gary's lawyer, told The Wall Street Journal that there was no connection between his client's firing and the current mortgage issues.

The presence or absence of a connection between alleged Atlanta shenanigans and Charlotte chicanery isn't going to matter to investors, who've seen little reason to touch Beazer with a 10-foot pole. That is, except for the short-sellers, who've borrowed the stock in the expectations it will keep going down. As of Feb. 12, there were 6.8 million shares, or 17.8% of the public float, held short, a rise from 6.1 million shares as of Jan. 12.

Shorting a stock is a risky proposition, but the latest developments around Beazer indicate momentum is on the side of more trouble for the company.