"There are a terrible lot of lies going about the world, and the worst of it is that half of them are true." –Winston Churchill
Baltimore, MD-True or not, rumors definitely have power, and the ongoing mortgage morass has produced them by the barrel-full lately. Unfortunately, in this case Churchill would be wildly off of the mark. Within the pain of the housing bubble, it seems, most of them–not just half–eventually turn out to be true.
The latest rumor to blow across bubbleland involves Beazer Homes USA Inc., one of the largest homebuilders in the nation. Whispered stories of its pending bankruptcy sent shares of the company off the cliff yesterday as investors in the troubled company headed en masse for the exits.
Shares of the company plunged as much as 42% to $8.10 on those rumors before the company had the chance to deny them as "scurrilous and unfounded."
Beazer stock, by the way, reached a peak of over $80.00 a share in 2006.
But the rumor-fueled damage had already been done. Beazer finished the session down 18% and led all of its peers lower, as the Standard & Poor’s homebuilding index slid as much as 8.5% on the day.
"We’re hearing that Beazer is supposedly going bankrupt," said Michael Nasto, senior trader at U.S. Global Investors Inc, an organization that manages some $5 billion in assets. "If in fact that comes to fruition, the market’s going to be in a world of hurt."
What makes the story that much more interesting and less likely to be some wild tall tale is that the troubled company’s problems go far beyond a housing market that has slammed on its brakes. Aside from the huge losses that the company reported last week, Beazer’s business dealings have also drawn the interest of the FBI and the SEC.
Two weeks ago the SEC made its informal investigation formal as it tries to determine whether any person or entity related to the company violated federal securities laws.
Meanwhile, the Federal Bureau of Investigation said in March it was investigating the company for potential fraud after the Charlotte Observer newspaper reported Beazer had sold homes to low-income buyers who couldn’t afford them.
After a rash of foreclosures within Beazer built communities, the Observer reported that the company routinely altered the loan applications of its borrowers to ensure that they would qualify for loans that they otherwise couldn’t have gotten.
According to the Observer, the company changed the monthly income of some of its applicants and left portions of their debt off the falsified applications so that their FHA loans would be approved.
Falsifying information on a loan application is a federal crime, which may be why CFO Michael T. Rand was recently caught destroying documents related to the investigation. Rand was later fired.
Not surprisingly, the foreclosure rate in the same Beazer communities averaged some 20% vs. the 3% nationwide average. In one North Carolina Beazer community, Southern Chase, 77 homes out of the 406 fell into foreclosure.
And, as if the attention of SEC and the FBI weren’t enough bad news, the company is also the named defendant in several class-action lawsuits related to alleged share-price manipulation and fraudulent mortgage practices.
So while the fine folks at Beazer Homes may have been able to tamp down those nasty rumors with reassuring talk about their $500 million credit line and their $300 million in cash, there are real and growing dangers to the company’s survival that can’t be put off by mere sanctimony.
That’s what makes rumors so powerful, because some of the turn out to be true.
Just ask the good folks at New Century Mortgage–they swore that things were fine there too, just months before they went belly up.
By the Way: I got an important bulletin yesterday from a lender that I regularly used to do business with. It came from National City Mortgage, one of the nations biggest lenders.
It’s full of mortgagese, but I can assure you that it is just another sign that the lenders are beginning to pull up the ladder, which is going to leave a ton of troubled borrowers bobbing in the water with no hope.
It reads as follows, with my own translation in blue:
RE: Discontinuing & Restricting Products–Effective Immediately
Due to current market conditions the following changes are effective immediately:
(Since we can’t make a ton of dough on these products anymore, we won’t be offering them to you.)
All Expanded Criteria Products–No New Registrations and No New Locks.
(Things are so bad with this stuff that no one is crazy enough to buy it.)
All Non-Conforming Products–Allowing registration and locks on full documentation only. All stated income options including Home Quick are not allowed.
(Your word may be your bond, but that doesn’t mean that we’re crazy enough to take it these days.)
All Second Mortgages–Allowing registrations on Piggyback, Full Documentation, CLTV <=90%, FICO > 700. All standalone and stated options are not allowed.
(Got 10% down and great credit? no problem…otherwise move along)
Payment Option ARM–No new registrations and no new locks.
(Let’s face it… it’s a miracle that this junk lasted as long as it did)
Talk about a seismic shift.
The bottom in housing is nowhere in sight.
Wishing you happiness, health, and wealth,
Steve Christ, Editor