While debt for homebuilders across the board has fallen in recent weeks due to subprime fears, Beazer Homes was hit with news it is being investigated by the Federal Bureau of Investigation for possible mortgage fraud. Beazer's 8.375% '12s were down 4 3/4 points to 96 1/2 and its 8.625% '11 notes were down 3 1/4 to 98 1/4 Wednesday morning. The bonds were quoted as much as 10 points lower in aftermarket trading Tuesday night after the announcement, according to a KDP Investment Advisor report.
Although it seems to be a riskier credit, the paper has only dropped a few points because the debt is generally held in cash hands, a trader explained. "When they start to trade at a better discount, people are going to buy it more," he said. The protection market is where the most activity is, he explained. The company's five-year credit default swaps widened 116 basis points to 402 on news of the investigation. "The wise guys are leaning on it you can get more money in derivatives," he said.
According to news reports, the FBI inquiry began the week of March 19 and involves "fraud in general" and more specifically is related to corporate, mortgage and investment issues. The Charlotte Observer reported the same week that Beazer had an unusually high rate of foreclosures in many developments around Charlotte, N.C. The paper reported that of the 2,900 Beazer homes built in the Southern Chase subdivision in Charlotte between 1997 and 2006, at least 388 have foreclosed -- a rate above 13%.
Beazer responded in a release it is fully cooperating with a request from the U.S. Attorney's Office for documents generally relating to its mortgage business. It also stated through its own investigations that it has not found any evidence supporting the claims in the Charlotte Observer. Calls to a company spokesman were not returned.