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Federal investigators on Wednesday filed mortgage and accounting fraud charges against Beazer Homes USA, but the homebuilder will escape prosecution because it agreed to pay $50 million to victims and accepted responsibility for its actions.
The charges, entered in U.S. District Court in Charlotte, relate to Beazer's participation in a scheme designed to increase its mortgage company's profits and sell homes, as well as an accounting scheme designed to “smooth earnings.”
As a result, authorities said, banks suffered as homebuyers defaulted on their loans, and neighborhoods plagued with foreclosures watched their home values plummet.
As part of its settlement agreement with the government, Atlanta-based Beazer “accepts and acknowledges that it is responsible for the criminal acts of its former employees,” according to court documents.
In a statement, Beazer's chief executive, Ian McCarthy, said: “We deeply regret these matters and have used what we have learned to strengthen our control and compliance culture and reinforce our absolute commitment to act according to the highest standards of ethical conduct throughout our organization.”
Although Wednesday's charges settle the two-year investigation into the company, the federal probe is ongoing and could start to turn toward Beazer officials. Earlier Wednesday, the Securities and Exchange Commission sued Beazer's former chief accounting officer, Michael Rand, in federal court in Georgia, saying he ran a fraudulent earnings management scheme and misled outside auditors and internal accountants.
Rand's attorney did not return phone calls Wednesday.
Beazer has been the subject of state and federal investigations since an Observer series in March 2007, which found that Beazer, once a major Charlotte-area homebuilder, used aggressive sales tactics that contributed to an unusually high foreclosure rate in many of its local starter-home communities, such as Southern Chase in Cabarrus County.
The paper found that Beazer, which operated as a builder and mortgage broker, arranged larger loans than some buyers could afford.
At the time, Beazer denied any wrongdoing and said its employees were using industry-accepted practices.
Within days of the Observer series, an FBI spokesman said the agency's Charlotte office had launched a joint investigation with the Department of Housing and Urban Development and the Internal Revenue Service. The N.C. Real Estate Commission also began investigating Beazer in 2007.
Since then, foreclosures have climbed and homebuilding has dried up in the region. Beazer pulled out of the Charlotte market last year, about the time it stopped mortgage lending, and is suffering financially, like a number of other homebuilders.
Under the agreement with the U.S. Attorney's office, the homebuilder accepts responsibility for fraudulent practices and will pay $10 million immediately toward restitution for victimized homebuyers, plus additional money up to a total of $50 million as the company recovers financially. The U.S. Attorney's office has agreed not to prosecute the company as long as it satisfies its obligations in the next five years.
Court documents filed Wednesday say imposing payments above that amount “would jeopardize the solvency of Beazer” and put its employees and contractors at risk of losing their jobs.
The $10 million includes a $2.5 million settlement Beazer paid to the N.C. Commissioner of Banks in May to compensate homebuyers. The rest will be paid into a national restitution fund, as will any additional payments.
In May, the builder said in its earnings report it would set aside $13 million to potentially settle an ongoing federal investigation into its lending practices, and it estimated the payment could eventually total $50 million.
Shortly before that, Beazer agreed to pay $30.5 million to settle a class-action lawsuit over its lending practices.
Beazer said Wednesday it has also reached a settlement agreement with the Department of Housing and Urban Development and the Department of Justice. Several of Beazer's subsidiaries have entered into a settlement agreement with the N.C. Real Estate Commission.
“I'm glad they actually admitted to their mistakes,” said Lea Tingley, who along with her husband, Mark, filed a lawsuit against Beazer in 2007 alleging the builder's actions caused property values to fall in Southern Chase. “… I don't think they're being punished enough.”
A federal judge dismissed the lawsuit last year, saying the neighborhood's troubles couldn't be directly connected to Beazer.
The Tingleys bought their home in 2001 with down-payment help from Beazer and loans based on misstated figures, according to documents provided by the Tingleys for the Observer's investigation. Among other things, Lea Tingley omitted from her application, at a Beazer employee's suggestion, a monthly car payment of $350.
The U.S. Attorney's office charged Beazer Wednesday with mortgage fraud and accounting fraud. As part of the alleged mortgage fraud scheme, employees used fraudulently inflated home prices to offset down-payment “gifts” and encouraged homebuyers to overstate their income to qualify for loans, the court filings say.
Leasa Wright, who bought a Beazer home in the Oak Hill neighborhood in 2003, said she received down-payment help from Beazer. She also paid $1,000 in exchange for a lower interest rate; still, her 6.5 percent mortgage rate was more than one point above the market average at the time, she said.
“They sold houses to people who couldn't afford it,” she said. “They could've told me at first that I didn't qualify. I might have done something different.”
The charges also say Beazer misled investors by using “cookie-jar accounting” – understating its income when business was booming and then using those reserves to “smooth earnings” when times got tighter.
In September, the company reached a settlement with the SEC over claims it fraudulently misstated its earnings. It agreed to stop violating federal securities laws and regulations, though it did not have to pay a fine.
Beazer built about 2,900 homes in Mecklenburg County between 1997 and 2006. About 400 foreclosed, a 13 percent rate, the highest among the county's most prolific builders
With the housing market's downturn and homebuilding drying up, authorities have started taking a closer look at companies that may have had a role in putting people in houses they couldn't afford.
Last year, FBI officials said they were conducting criminal investigations of 16 real-estate related companies, while investigators at the SEC were probing nearly two dozen more, according to the Washington Post. The investigations targeted homebuilders, lenders, credit-rating agencies and banks.
Permits for single-family homes in Mecklenburg fell 47 percent in May from May 2008. The county's home construction peaked in 2006, and permits have logged double-digit declines every months since February 2007.
Beazer has taken a financial hit in recent months as the recession deepened. It reported closings on 814 homes in the second quarter this year, down nearly 40 percent in markets where the company maintains a presence. Its new-home orders dropped 36 percent in those markets, the company said.
In May, it reported a fiscal second-quarter loss of $114.9 million, or $2.97 per share. The company used insurance money to cover its class-action payment, but Beazer will cover the cost of the U.S. attorney settlement, it has said.
Beazer's stock price was at $1.83 Wednesday, down from $5.39 a year ago. Staff writer Peter St. Onge and staff researcher Maria David contributed.
