Where to begin?

April 25, 2005

There were so many interesting things buried in the proxy that HomeBanc (HMB) filed on Friday that it’s hard to know where to begin. Back in 2003, when it purchased the Jacksonville home of newly hired executive Kevin Race for $1.7 million, the company, which happens to be in the mortgage origination business, said it relied on two independent appraisals to set the price. But last year, the company was only able to sell the house for $1.45 million. That $250K loss combined with the $175K the company said it spent on “other costs associated with this transaction” seems particularly unusual given how real estate prices are rising in Northeast Florida, where various studies put Jacksonville in the top 20 for housing appreciation, including one study that showed prices climbing over 60% between 1997 and 2004. So how did HomeBanc wind up losing money on Race’s home? The proxy doesn’t provide any details. Not to mention that the numbers in HomeBanc’s K are slightly different than those in the proxy for the same exact deal. In the K, the company says it lost $300K and spent another $200K on other costs, or nearly 20% more than the amount it says it lost in the proxy.

A few other things in the proxy also jumped out: more than 30% of the options doled out last year went to Race, who is the company’s president and CFO, and Patrick Flood, Chairman and CEO. That’s on top of hefty retention bonuses — $400K to Flood and $250K to Race — paid in June 2004 for the “extraordinary efforts and numerous changes” because of the company’s IPO last July. And then there’s the lawsuit currently pending in the Southern District of New York that claims Race violated federal securities laws related to mortgage servicing rights back when he worked for HomeSide Lending in Jacksonville and presumably lived in what became that rapidly depreciating home. HomeBanc doesn’t say whether it’s covering Race’s legal bills, but it’s a pretty safe bet that they are. Meanwhile, the stock is trading only slightly higher than the $7.50 it went public at, which given the hot real estate market, seems to indicate that all of these self-enrichment deals are taking attention away from the company’s real business.

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