This is an old story that I've recently come across from the Houston Chronicle. Apparently KB Homes (NYSE: KBH) a leading homebuilder has been forced to pay some fines to the government lately for some bad behavior. One of the fines had to do with not allowing customers to sue for shoddy construction--ok, but no big deal: I'm not surprised that construction is bad, and that they sought out via contracts to protect themselves legally. But the other fine caught my eye:
KB Home Mortgage Co., a subsidiary of KB Home, has agreed to pay a $3.2 million settlement to the Department of Housing and Urban Development over alleged mortgage violations.
HUD alleged that the company approved federally issued mortgage loans based on overstated or incorrect incomes and failed to include all borrowers' debts.
The loans were originated in Texas, Colorado and New Mexico. HUD said 75 of those loans were made in Houston.
The Los Angeles-based KB Home has a large home-building operation here.
In 2004, the company turned over the keys to 2,645 homes in Houston.
HUD initiated the investigation because KB Mortgage's default rate was "significantly higher than average," HUD spokesman Lemar Wooley said.
Why, when Homebuilders are posting monster earnings is KB resorting to what basically ammounts to fraud? Don't they have enough demand that they wouldn't have to lie about numbers in order for their clients to get loans?
My gut is that this kind of practice could widespread. After all, with all of the problems that have faced Fannie Mae and Freddie Mac, I doubt theres much oversight into the homebuilders books.
I'd love to short some homebuilders stocks, but there are two problems with this. Their earnings have been looking great, and even with a close reading, I couldn't find any obvious red flags to suggest that not all is well underneath and the stocks have been on such a tear, some nearly doubling in the last 12 months, that they seem risky. Besides any reason I'd have to short them today, I could have said 12 months ago, and perhaps I'd still have 12 months from now.
But stuff like this is interesting. If practices like this are widespread, I could see some serious problems going foreward. Certainly something for the gutsy investor to watch for.
And for your amusement and education, check out the website KB Homes Suck which presents a littany of problems and complaints that people have had with the company--some of them legal and financial and others having to do with the product that they sell.