Beazer Cleans House

News that Beazer Homes (NYSE: BZH) was getting out of the mortgage business shouldn't come as a surprise. Under investigation for knowingly putting people into homes they couldn't afford, the builder finally admitted it had violated federal regulations.

To reach a settlement sooner, it's a smart move to abandon the business that got you into trouble in the first place. Beazer also will no longer build in a handful of markets, including Charlotte, N.C., where the seeds of its troubles were first sown.

Getting a mortgage through the builder who just put up your home is often a faster way to close on the property, and often works out for both parties. The buyer can receive incentives when using the builder's lender, such as discounts on closing costs, and the builder closes on a house faster so it doesn't have carrying costs for an empty home.

A number of builders have mortgage origination teams, including Ryland (NYSE: RYL) and Centex (NYSE: CTX). Beazer, though, had it down to a science. At the height of the housing bubble, it offered houses for as little as $1 down: a $500 deposit often came with $499 refunded to the buyer at closing. For 2006, the latest year Beazer filed an annual report, it earned $4.5 million from mortgages on $54 million in segment revenues, though that was less than half the profit it earned the year before.

Unfortunately, when the bubble burst, the lab rat turned on the builder. The FBI and housing regulators launched investigations into Beazer's lending practices, and the homebuilder's chief accounting officer was caught shredding documents related to its mortgage practices. Beazer ultimately admitted to violating regulations, and even securities regulators are investigating the company.

The odd man out in all this is Homebuilders Financial Network, which Beazer Mortgage used to finance the mortgages. It announced it was dropping the subsidiary of Fidelity National Information Services (NYSE: FIS) and that Countrywide Financial (NYSE: CFC) is its new mortgage provider.

While Homebuilders Financial has not been implicated in any of Beazer's wrongdoing, the mortgage facilitator made it easy for builders like Beazer to offer mortgages to its buyers, and in fact refers to itself as the originator of the "mortgage company in a box" concept. Builders didn't have to worry about the messy financial paperwork involved in running a mortgage company and could instead concentrate on building homes.

Beazer's stock has risen over the past month, as has that of many builders, including Hovnanian (NYSE: HOV), which is up more than 60% so far this year. But we've been through these "dead cat bounces" before, and Beazer's position is still precarious. It will take a substantial charge for abandoning the various housing markets, plus its financials remain a shambles. Add in that new home orders declined 29% year over year, closings dropped 24%, and nearly half of its orders were canceled last quarter, and Beazer is not so much a stock on sale as one ready to be condemned.

Build on Beazer's business with these related Foolish articles:

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