Beazer may never pay up in full

Some analysts doubt that the homebuilder will produce the entire $50 million in restitution it promised.

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By Kirsten Valle
kvalle@charlotteobserver.com

July 3, 2009

A day after Beazer Homes promised to pay $50million to victims of its predatory lending practices, analysts say the actual payout might not be as hefty – and that not everyone who deserves money will get it.

Some say the Atlanta homebuilder is on the brink of bankruptcy and, if it files, would cease payments to the restitution fund. Even if the company stays afloat, others say, a settlement agreement that bases payments on Beazer's earnings means the builder is unlikely to shell out the full amount.

“I would advise injured parties to get in line early,” said Vicki Bryan, a homebuilding analyst with corporate bond research firm Gimme Credit.

Denise Beall and her husband, who bought a Beazer home in 2004 and can't sell it now, will be at the front of the line.

“In a way, we are wondering what's available to us, because we are responsible homeowners,” she said. “We want to know what our legal rights are.”

Federal investigators on Wednesday filed mortgage and accounting fraud charges against Beazer. But they said the company would escape prosecution if it accepted responsibility and agreed to pay up to $50million to victims over the next five years. The settlement wrapped up a two-year federal investigation, sparked by a 2007 Observer series that found that Beazer used aggressive sales tactics that contributed to an unusually high foreclosure rate in many of its starter-home communities.

Under the agreement, Beazer will pay $10million immediately into a restitution fund. The payment includes $2.5million that Beazer paid to the N.C. Commissioner of Banks in May. That money is already being doled out to N.C. homebuyers who fell victim to Beazer's fraudulent down-payment assistance and “discount points” programs, which promised homeowners help on their mortgages and failed to deliver. Homeowners affected by those programs are eligible for refunds from the national restitution fund, which is being administered by The Garden City Group Inc., a New York company that oversees settlements for class-action suits and other legal battles.

Some experts say the fund might not be big enough to pay all the homeowners who deserve a payout. Beazer has agreed to pay $1million or 4 percent of its adjusted earnings, whichever is higher, into the fund next fiscal year. Each year after that until 2014, Beazer will pay 4 percent of its adjusted earnings.

The period can be extended to seven years if Beazer has not paid at least $48million by 2014.

But if Beazer files for bankruptcy protection or continues to see losses, the total fund could be a lot smaller.

Officials at the U.S. Attorney's office say the agreement was designed to make Beazer pay the maximum amount without forcing the company out of business. According to court documents, imposing higher payments “would jeopardize the solvency of Beazer” and put its employees and contractors at risk of losing their jobs.

Despite the government's terms, if Beazer files for bankruptcy protection, homebuyers must line up behind secured creditors, such as banks, and others who have a claim to Beazer's assets.

The government can prosecute the company for breaking the agreement, but “if the company's bankrupt, what are you going to do?” Bryan said. Another agency, Egan-Jones Ratings Co., said Thursday it would “not be surprised” if Beazer filed for bankruptcy protection.

“Tough negatives to overcome are: an extremely weak housing market, a market capitalization of only $72M and net debt of $1.1B,” it said. “The collapse in the Company's shares is another cause for concern.”

Beazer, which pulled out of the Charlotte market last year, has taken a financial hit in recent months as the recession deepened, the housing market crumbled and homebuilding dried up.

The company reported closings on 814 homes in the second quarter, down nearly 40 percent in markets where it maintains a presence. Its new-home orders dropped 36 percent in those markets, the company said. In May, Beazer reported a fiscal second-quarter loss of $114.9million. The homebuilder has lost money for the past 10 quarters, including a $952million annual loss in 2008.

Beazer's stock price closed at $1.85 Thursday, down from $5.21 a year ago. A company spokeswoman did not return calls Thursday. Homebuyers say they deserve more than they're likely to get from the settlement.

Beall, who moved into the Beazer home in Huntersville in 2004, turned down the “discount points” Beazer offered her in exchange for a lower interest rate, because her company had offered to pay her closing costs, she said.

She said “responsible” homeowners, rather than those who bought more than they could afford, should get refunds first.

Beall and her husband moved to Davidson a year ago and have been renting out their Beazer home. They can't sell it, she said, because the neighborhood remains unfinished, and foreclosures flank their property.

Verlie Hampton bought a $115,000 home in the Southern Chase neighborhood in Cabarrus County in 1999. She and her husband paid $1,000 toward the down payment and used a “gift” from their lender for the rest.After they moved in, the mortgage payments rose and rose, and in 2005, the Hamptons lost their home to foreclosure.

“They weren't trying to help,” Hampton said of Beazer. “They were just building houses and building houses and taking people's money.”

Another woman, who asked not to be named, bought a house in the Calloway Glen neighborhood in southwest Charlotte in 2006 for $158,000. Soon after, the neighborhood began to go downhill. Foreclosures became common, and the woman began to fear for her safety, she said.

She put the house on the market three times, unsuccessfully. Eventually, her lender foreclosed.

The woman has gotten a check for $3,500 from the state banks commissioner but wants a bigger portion of the nearly $40,000 she says she lost, between her down payment and monthly mortgage payments, after walking away from the home.

“Honestly, I know I have to accept some responsibility, but at the same time, Beazer does, too,” she said. “Beazer didn't do me wrong, but it did my neighborhood wrong.”

Kirsten Valle: 704-358-5248

http://www.charlotteobserver.com/business/story/814273.html