Friday, October 12, 2007
Residential home builder Beazer Homes USA Inc. issued an 8-K (here) disclosing the results of its internal investigation of accounting irregularities and problems in its mortgage unit. On the accounting side, the investigation coordinated by Alston & Bird found problems with its reserves and accruals for certain land development costs, i.e. cookie jar reserves, and the improper recording of sale-leaseback transactions. The company will have to issue a restatement and adjust its financials going back to 1999. At its mortgage unit, Beazer Homes disclosed that there were violations of "certain U.S. Department of Housing and Urban Development (HUD) 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."
The company states that it hopes to resolve the regulatory violations through a settlement, which it estimates will cost anywhere from $8 to $15 million. In addition, Beazer Homes previously disclosed receiving a grand jury subpoena from the U.S. Attorney's Office for the Western District of North Carolina and that the SEC issued a formal order of investigation related to its accounting. Resolving those investigations might be a bit more difficult because, at least on the criminal side, the government is likely to want the company to enter into a deferred prosecution agreement, given all the attention being paid to abuses in some mortgage lending sectors. The problems in its FHA loans probably means that there were falsified documents, such as verification of income and assets or the amount of a down payment, which can be a violation of Sec. 1001. To the extent employees of the mortgage subsidiary were involved in the creation of any false records or approving transactions in violation of HUD rules, that would make the company criminally liable. Resolving investigations with at least three different federal agencies is not an easy process, so it may be a while before Beazer can put these issues behind it. Too bad the downturn in the housing market can be negotiated away. (ph)