In a comment in the previous post, reader Cbass links to a Business Week article that helps flesh out what’s happening to U.S. homebuilders’ mortgage units.

But when it appeared that the Mottos might not qualify financially for the loan, things took a troubling turn. Beazer, according to the couple, inflated the pair’s earnings in loan-application documents by incorrectly stating they were collecting rental income from the house they were leaving. “I don’t want to misrepresent myself,” Elizabeth said in e-mail correspondence with Beazer’s outside mortgage service, dated July 14, 2006. But in the end, the couple signed the documents, and soon after they closed on the Clarksburg house.

Wow! Sure sounds like fraud. It seems both the builder and the buyer were conspiring to defraud the ultimate buyer of that loan.

… Beazer revealed that the Securities & Exchange Commission had elevated an informal inquiry into its mortgage business to a formal investigation. The company warned that criminal penalties could follow. Earlier this year, Beazer received a subpoena from the Justice Dept. seeking documents related to its home loans, and the company is also under civil investigation by the North Carolina Attorney General’s office.

Beazer is the poster child for such accusations but it goes further.

Now the bust is taking a brutal toll. In January, industry analysts predicted that the 10 biggest builders would have average earnings per share of $3.69 for 2007; the latest forecast is for a loss of $1.18.

Of course the decline went beyond concerns about builders’ lending businesses and potential for related litigation, but it didn’t help.

Sheer overbuilding, a symptom of every housing bubble, is the most obvious explanation for the new ghost towns sprinkled around the country. But increased builder lending helped feed the trend. Statistics are scarce because developers don’t break out their lending revenues, but some analysts track “capture rates,” or the percentage of home sales financed by builders themselves. Pulte Homes, the largest developer by market cap, had a capture rate of 90% last year, up from 64% in 2000, according to Daniel Oppenheim of Banc of America Securities (BAC ). No. 3 Centex had a rate of 80% for the fiscal year that ended in March, up from 61%.

“Ghost towns” is a large exaggeration but certainly builder lending did help fuel the boom.

Even some home buyers who are content with their loans claim they’ve been injured by builders’ lending to others. Robert V. Phillips, a lawyer in Rock Hill, S.C., represents residents of a subdivision in Columbia, S.C., who allege in a federal court suit that the value of their homes has fallen as a result of foreclosures stemming from Beazer’s reckless mortgage practices with other customers. The suit, which seeks class-action status, claims that Beazer salespeople encouraged prospective buyers to “falsify information on loan applications.” This made it “inevitable that the subdivisions…would experience a foreclosure rate which significantly exceeds the statewide average,” and that has hurt the value of the plaintiffs’ houses, the suit alleges.

“falsify information on loan applications”

Again we see liar’s loans are part of the story but this time with the help of the builders.

Hmmm, a growing industry, class-action lawsuits against builders. I think the lawsuits from all the mortgage fraud are just beginning.

Beazer has about 15 communities in metro Phoenix that are currently selling homes.

ADDED: The chart below from Credit Suisse shows how Arizona builders were the leaders in no/low doc “liar’s” loans.

Arizona builder no/low doc loans

If that 71% number is in the right ballpark, these Arizona home builders have been incredibly irresponsible. Either they were steering many people into low/no doc loans because the lender makes more money, or they were steering people into low/no doc loans because many buyers simply wouldn’t qualify for a home loan otherwise. 71% is way too high. It’s suspiciously high.