Beazer Homes Reports Surge in Cancellations of Orders

By MICHAEL CORKERY
October 12, 2007; Page A4

Home builder Beazer Homes USA Inc., moving to get legal and accounting problems behind it, now faces another big erosion of orders.

Beazer reported that 68% of its prospective home buyers canceled their orders in the company's fiscal fourth quarter, which ended Sept. 30. The cancellation rate was almost double the 36% of customers who canceled orders and gave up deposits in the prior quarter.

Beazer, which had 2006 revenue of $5.46 billion and is one of the 10 biggest U.S. home builders by sales, is one of the first to detail results from September, when analysts believe the housing market bore the full brunt of the summer's credit-market turmoil. Beazer's pain may be more severe than other builders' because it focuses heavily on entry-level buyers who relied on the shrunken market for subprime mortgages, or loans to buyers with poor credit. Also, buyers may have been wary because of negative publicity tied to Beazer's legal troubles.

"But conditions certainly deteriorated" for the whole industry, said David Goldberg, an analyst at UBS. "I think you are going to hear a lot of that from builders in the coming months."

Disclosing interim results of an internal investigation by a board audit committee, Beazer also said it expects to restate financial results dating back to 1999 to show a $25 million rise in income after correcting accounting problems.

In addition, Beazer said it will likely have to pay a settlement to regulators for lending-law violations involving the use of down-payment assistance to help borrowers take out mortgages insured by the Federal Housing Administration.

Beazer wouldn't detail the violations but said they were concentrated "disproportionately" in North Carolina. Beazer attracted scrutiny from the U.S. Attorney in North Carolina and the U.S. Department of Housing and Urban Development after it was discovered that foreclosures were as high as 20% in Beazer subdivisions in the Charlotte area. Those investigations, as well as a probe by the Securities and Exchange Commission, are continuing, but their scope hasn't been disclosed. (Meanwhile, Democrats in Congress yesterday said they will move to allow Fannie Mae and Freddie Mac to temporarily increase their portfolios to help borrowers with subprime loans refinance. See article¹.)

Many large builders, including Beazer, teamed up with charities to give buyers the money needed for a down payment. Critics allege that the builders reimbursed the charities and then added the amount of the gift to the price of the home, a charge that builders have denied. Earlier this month, HUD banned this type of down-payment assistance.

"Beazer was trying to ensnare people in loans that they couldn't afford" by misrepresenting buyers' incomes and including the cost of the down-payment gift in the cost of the home, said Gary Jackson, a Charlotte attorney representing home buyers suing Beazer in federal court, alleging unfair and deceptive trade practices and seeking monetary damages.

The Atlanta company declined to comment on the pending litigation.

Beazer said it expects to pay regulators $8 million to $15 million to settle losses or fines associated with the improper FHA loans. A few years ago, such loans were obtained by about 30% of Beazer's buyers; now they account for 10%.

The restatement will affect Beazer's financial results from 1999 through the year ended Sept. 30. One accounting problem stemmed from setting aside excessive reserves and accrued liabilities in previous years and then shifting them into the company's income accounts in 2006 as the housing market slowed. Another accounting problem is related to the timing of when profit and revenue were recorded from the sale and leaseback of Beazer's model homes.

Wall Street seemed relieved that the findings reported yesterday weren't worse. At 4 p.m. in New York Stock Exchange composite trading, Beazer shares rose 20 cents to $10.13. The shares are down 78% this year.

"The company has clearly identified some issues," said Beazer's chief financial officer, Allan Merrill. "But the nature of them, at this point, are not company-threatening."

Beazer blamed the increase in cancellations for the quarter ended Sept. 30 partly on the tightening of the mortgage market, which forced buyers to walk away from contracts because they couldn't obtain loans.