Beazer probe puts scrutiny on builder finance arms

Construction workers put up second story framing as they build homes in Carlsbad, California November 17, 2005. A U.S. government probe of Beazer Homes USA Inc.'s mortgage business is raising questions about the link between builders and their lending arms, a new worry for investors already reeling from the crisis in the subprime mortgage market.

NEW YORK (Reuters) - A U.S. government probe of Beazer Homes USA Inc.'s (BZH.N) mortgage business is raising questions about the link between builders and their lending arms, a new worry for investors already reeling from the crisis in the subprime mortgage market.

Many U.S. home builders offer lending services, which are designed to give home buyers one-stop shopping for a house and a mortgage. The arrangements are regulated by a 33-year-old federal law barring kickbacks and other improper activity involving builders and lending units.

Beazer said this week that it had received a grand jury subpoena from the U.S. Justice Department for documents related to its mortgage business. The company said it was cooperating with the probe.

It earlier said it believed the government was seeking information related to allegations of aggressive sales tactics in recent Charlotte Observer articles. It said it had found no evidence to support those allegations.

Earlier this week, a representative of the FBI said the agency was conducting "a potential fraud investigation" into Beazer. The builder said it has not received a request for information from the FBI in this regard.

Legal experts say that while details of the Beazer probe are not known, there is potential for abuse at home builders that operate financing arms, particularly if the companies are under pressure to relax lending standards or falsify loan documentation to facilitate sales.

"In any industry where people are under pressure to reach sales targets and the market is not great, there is certainly the propensity for people to cut corners," said Scott Tross, a partner at law firm Herrick Feinstein in Newark, New Jersey, who focuses on real estate.

Still, Tross said, home builders have operated mortgage lending units for many years without major conflicts. Lending arms also are not unique to home builders, he said, noting that auto makers have long offered financing to car buyers.

Leonard Bernstein, a partner at law firm Reed Smith LLP in Philadelphia who handles financial services regulation issues, said builders' financing arms are tightly regulated by a federal law that carries criminal penalties for things such as improper referral fees in mortgage lending.

Under this law, customers must be told when there is an affiliation between lender and builder, and they must be free to choose an outside lender if they prefer, he said.

Several other big builders, including Toll Brothers Inc. (TOL.N), Centex Corp. CTX.N and Lennar Corp. (LEN.N), say they have not received government inquiries regarding their mortgage operations.

KB Home (KBH.N) also said it has not been contacted by any government agencies on lending practices. The company got out of the mortgage origination business in 2005 when Countrywide Financial CFC.N bought most of its loan operations. The two now operate a joint venture that Countrywide oversees.

Pulte Homes Inc. (PHM.N) said its policy is not to comment on any interaction it may or may not be having with government agencies. Hovnanian Enterprises Inc. (HOV.N) and D.R. Horton Inc. (DHI.N) did not immediately respond to requests for comment.

RISKY PROPOSITIONS

The Beazer investigation comes as legislators and regulators are closely examining the housing market, spurred by the woes of mortgage lending companies that cater to risky borrowers.

Beazer, based in Atlanta, specializes in building homes for first-time buyers. In a note this week, Banc of America Securities analyst Donald Oppenheim said questions surrounding Beazer's mortgage business likely will result in tighter lending practices, which could reduce demand for new homes.

"We believe many buyers entered into aggressive mortgages due to the stretched affordability in many markets, but we think it may be difficult to prove fraud," he wrote. The increased regulatory focus "should increase pressure on legislators to curb some of the riskier alternative loans," he said

Home builders say the lending arrangements are welcomed by consumers, who like the convenience of going through one company for their home and mortgage. They also say the mortgage rates are competitive.

"We have homes to sell and we offer our home buyers the option of going with our mortgage company to meet their mortgage needs," said Pulte Homes spokesman Mark Marymee. He said Pulte's 36-year-old mortgage subsidiary "has helped nearly 400,000 customers with the purchase of their new Pulte home."

(Additional reporting by Helen Chernikoff)