Beazer Homes Mortgage Woes

Implications: There has been considerable recent press coverage about alleged mortgage abuses by Beazer Homes.

This appears to be compounded by overall concerns about subprime mortgage activities.

It is important to maintain perspective on this issue as it relates to Beazer

Analysis: The recent probe into mortgage lending activities in Charlotte as they relate to Beazer Homes has caused considerable discussion with regard to the Company's operating methods and the likelihood this is widespread across Beazer and possibly the overall homebuilding industry.

It is my understanding that the allegations to date have been restricted to the Charlotte location of Beazer.  There are several investigations underway, which are undoubtedly distracting the management team at Beazer.  This is further highlighted by the departure of the general counsel and the chief financial officer.  However, these departures appear to be unrelated to the current investigations.  The general counsel was terminated for unnamed violations of Company policies.  Separately, the CFO announce his resignation to accept a CEO position with a company where he has served on the Board of Directors.  This departure appears to make sense, although the timing is unfortunate.

It is possible that an individual mortgage office or officer in a decentralized environment with numerous divisions could circumvent procedures and perform some inappropriate acts.  However, Beazer is a large company and it is difficult to imagine a widespread pattern of abuse company-wide, particularly in light of the very active home sale market until the last year.  Simply said, there was no need to push to make sales until recently because the overall homebuilding market was so good.  Beazer was making record profits and it is not logical they would have systematically performed fraud on a wide scale to enhance already excellent earnings.

My view is that Beazer is in the wrong place at the wrong time and it us unfortunate they are a poster child for subprime lending for what I believe will prove to be an isolated instance. And, it is possible other builders could have a rouge operation in any division.  I believe it is more likely that subprime abuses were commonplace on a broad scale with certain smaller mortgage brokers that originated such mortgages and sold them off to a consolidator.

In summary, Beazer will suffer reputationally and will endure a significant distraction factor which will hurt them overall.  However, I would be very surprised to see this as a widespread activity that caused a large disruption in the overall operations of the Company.