Handsome government handout for homebuilders

NEW YORK (Fortune) -- Talk about cash for clunkers.

Lennar (LEN), the Miami-based homebuilder that has been gushing red ink since its misguided bets on house prices went bad three years ago, on Thursday posted its first quarterly profit since 2007 -- thanks to a handout from Congress.

The company earned $36 million for the fourth quarter ended in November. In a Thursday morning press release, CEO Stuart Miller pointed to a rare increase in new home orders and reduced spending on giveaways to customers. Lennar shares rose 8% to their highest level since October.

But don't congratulate Miller. The entire profit -- and then some -- came straight from taxpayers' pockets.

The real driver of Lennar's rebound, as the company acknowledged Thursday, was a $353 million tax gain that stems from a bit of congressional largesse in November.

What's more, dozens of zombie homebuilders and other serial money-losers will stake similar claims in coming months, in a cash scramble that could cost the government more than $50 billion.

The gift came in a piece of legislation that was billed as expanding unemployment benefits by 20 weeks and extending the homebuyer tax credit into the middle of this year.

But thanks to months of lobbying by the homebuilders, the measure also gave companies the right to apply losses incurred in 2008 and 2009 to income earned in any five years through 2007. Previously, losses could be counted against profits over just two previous years.

The change was good news for Lennar, which has run up plenty of red ink since the housing bubble collapsed. All told, Lennar has lost $3.4 billion over the past three years, wiping out profits running back to 2003.

But the company now is free to use $1.5 billion of losses over the past two years to offset previous income. It expects to get a $320 million tax refund check this year.

Those funds will allow Lennar "to continue to capitalize on distressed land-buying opportunities, which will improve our operating results in 2010 and beyond," Miller said.

It is curious at a time of bulging national budget deficits that taxpayers should be funding Lennar's land speculation efforts -- particularly given the company's poor record in that area recently. After gorging on land during the boom, the company lost $1.8 billion on land sales in 2007 and 2008.

It's also noteworthy that few homes stand to be built on any federally subsidized land acquisitions for the foreseeable future.

Construction remains slow as builders keep an eye on a growing foreclosure pipeline. Foreclosure rates, while at record levels, are running far below defaults as the government and banks grapple with mortgage modification efforts, California real estate researcher Mark Hanson said. Until that pipeline empties out, he said, the builders will be loath to put actual houses on their cheap land.

"There are enough foreclosures hung up in the pipeline right now to satisfy demand for a long time," Hanson said.

Regardless of what purpose the refunds might serve, Lennar won't be the last homebuilder to claim one. Toll Brothers (TOL) said last month it expects to get a $162 million income tax refund when it files its 2009 taxes, thanks to losses the past two years it can now offset against 2007 income. A Wall Street analyst last month upgraded KB Home (KBH) shares, citing a large expected refund there.

As has so often been the case during the last two bailout-soaked years, those funds will come out of taxpayers' pockets.

In a July paper by John R. Graham and Hyunseob Kim for the National Bureau of Economic Research, Graham and Kim estimated that the so-called tax-loss carrybacks would cost the government $53 billion, with the beneficiaries "concentrated in the homebuilding, automobile, and financial industries."

Somehow, that has a familiar ring to it.