Some more problems for "home builders"

Missold loans are blow for US builders
By Doug Cameron in Chicago
Published: August 12 2007 18:42 | Last updated: August 12 2007 18:42
US homebuilders are facing a fresh bout of legal and regulatory challenges to their ability to rebound from sluggish demand and the fallout from the subprime loan crisis.

Some of the largest builders have been hit with class-action suits over their lending practices and at least two companies have been surrounded in recent weeks by speculation that they could be forced to file for bankruptcy protection.

The problems deepened after the market close on Friday when Beazer Homes USA said it would delay filing its second-quarter earnings with the Securities and Exchange Commission amid multiple probes into possible accounting irregularities.

The Atlanta-based group is already the subject of federal and civil actions into alleged misselling of home loans after cut-price offers led to a surge in foreclosures in North Carolina. DR Horton, the largest US builder, revealed last week that it had become the latest target of a class-action suit into its selling policies.

Beazer, the subject of a formal investigation by the SEC, said an internal accounting probe revealed possible problems with the recording of “reserves and other accrued liabilities” related to land-development and building costs, which may have deflated expenses.

The announcement came a week after Beazer’s share price slumped by more than 40 per cent in a single day amid speculation it could be forced to file for Chapter 11 protection. Shares in the seventh-largest US builder by revenues have slid by almost 70 per cent so far this year, weighed by the legal uncertainty and the weak demand which has spread through the sector over the past 18 months. Citadel, the hedge fund manager which has already snapped up some distressed subprime lenders, has since taken a 5.7 per cent stake in the group.

Beazer has insisted it does not face a liquidity squeeze, and banks have continued to extend credit, albeit halving the size of its current unsecured line.

Standard Pacific, a California-based builder with exposure to the overheated markets in Phoenix and Florida, was also hit by speculation last week that it could be forced to file for bankruptcy protection. The company said it had reopened talks with banks about easing its lending covenants.

Credit experts said banks were unwilling to push any of the leading builders into liquidation by enforcing the strictest covenants. Banks hope to remain primary lenders when the industry recovers – although this could take well into next year – and are also wary of ending up with a glut of foreclosed home assets at a time when excess inventory is pushing down prices in most parts of the US.

Copyright The Financial Times Limited 2007