As if the meltdown in residential real estate is not enough, homebuilder Beazer Homes USA is facing a federal probe of its lending practices.  A BusinessWeek Online report (here) notes that the FBI, HUD, and IRS are conducting an investigation of its mortgage lending to low-income borrowers that comes with federal loan guarantees.  Like others in the subprime market, the default rate on Beazer Homes loans has skyrocketed in recent months as real estate values declined and borrowers have been unable to make increased payments for their ARMs.  This is not all that different from what happened in the S&L crisis in the early 1990s, when the decline in real estate — which also included commercial properties — led to the revelation of a number of fraudulent practices in the loan process.  When real estate values are rising, no one quite notices that corners were cut, like inflated appraisals, falsified income and asset statements, and false entries in loan documents like HUD-1s.  When they fall, however, the bodies start to pop to the surface like there’s been a spring thaw.  Don’t be surprised to see the investigation spread to other builders and mortgage lenders.

Beazer Homes is facing the investigation without its general counsel or CFO.  GC Kenneth Gary was fired in February "for cause, under the terms of his employment agreement, for a pattern of personal conduct which includes violations of company policies." (8-K here)  CFO James O’Leary left the company on March 27 to become CEO of another company (8-K here).  Losing two top officers can’t be helpful. (ph)