Beazer Homes: A Canary in the Coal Mine?

Implications: By criminalizing the building/lending practices of Beazer, the US Attorney is creating a roadmap for prosecutions in other parts of the country where a combination of poor state regulatory oversight coupled with tenuous federal jurisdiction have contributed to the still emerging mortgage crisis. 

These companies have a higher headline risk, now that foreclosures are starting to accelerate.  The Charlotte Observer broke the story on March 18, and HUD said that they had no knowledge of improper practices by Beazer.  By March 25th, the IRS, US Attorney, FBI, and HUD Inspector General were engaged in a proctoscopic examination of the company, which will likely end in serious fines and prison time for some Beazer execs. 

Enterprizing news outlets around the country will be influenced to pursue similar stories, and local prosecutors, as well as other US Attorney's will see the political opportunity that a successful prosecution will provide.  No one should forget that Rudy Giuliani got his start on the public stage as a relentless US Attorney for the Southern District of New York, walking an earlier generation of Wall Street perps through the streets of Manhattan for the benefit of the cameras. 

Analysis: Beazer is alleged to have both importuned loan applicants to falsify loan data, and of actually changing the provided data on the application without the knowledge of the applicant.  If proved, this is not just an unsavory loan practice, it is clear and outright fraud.  Companies that have pushed the envelope on practices that are aggressive, but not over the line, still shouldn't breathe easy.  The Beazer story, and others like it, will create an extraordinarily difficult public affairs playing field for the industry. In many cases, some legal but ethically questionable practices will bathe the offenders in a very harsh light in the current market. This will likely create a more negative legislative, public relations and regulatory outcome for the industry.

Gretchen Shappert, the US Attorney overseeing the Beazer case, has sent an unmistakable signal that she is playing for keeps.  By stepping in early, and forcefully, she has made it clear that every shred of federal jurisdictional oversight will be exploited.  Behind the scenes, her office, and the FBI, have quieted bureaucratic haggling, and awakened dormant but potentially powerful agencies, such as HUD.

The federal government action was made possible by the fact that a majority of Beazer homes were federally insured under the Federal Housing Administration.  Companies with a high proportion of FHA loans in their portfolio will be receiving increased scrutiny from both the media, and government investigators.