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New Home Defects Can Cast You Into the Money Pit

Home Defect Problems and the Resulting Litigation Now Affect Insurance Premiums

Part Two of Two

(If You Missed Part One Please Follow This Link)

By the Mortgage Guy / MortgageLoanRequest.com


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In our previous article we extensively covered the growing phenomenon of new and recently built homes falling into the "Money Pit" category due to defective construction. As a result of close to fifteen percent of new homes, that are being placed on the market today having major defects, litigation and settlement for repairs has become an industry unto itself. As a result the insurance underwrites have jacked up the prices for premiums year after year.

In yesterday's article we mentioned that water damage, and the resulting mold, are two of the biggest problems that home owners have had to face. On the surface mold would seem to be a rather innocuous problem, one that could be rectified and not create too much of a disturbance. However, it is quite hazardous to one's health and can force you to abandon your home to live elsewhere. A disruptive and costly scenario, if there ever was one.

The last four or five years have seen insurance premiums climbing as a result of these kinds of problems. In some parts of America the cost of insurance premiums rose nearly twenty percent in 2000 and 2001. 2002 saw a further jump of between ten and fifteen percent. Figures are not in on the years since but it is estimated that they have risen another ten percent.

All across America, in places like California, Texas and Florida, where new home construction is hurtling along at as fast pace as is possible, people are being denied credit for lack of finding an insurer for their prospective new homes.

Home buyers are not the only ones affected. Contractors face ever climbing rates for liability coverage as well. In some Western states, the rates jumped more than four hundred percent for some who were seeking coverage, forcing them to move their contracting businesses elsewhere, and the insures along with them. Many blame condominium associations who they believe are more apt to enter into litigation as a way out of their problems.

Builders and developers, hoping to find a solution to their problems that would favor them over the owners, turned to arbitration in an attempt to stave of this onslaught of legal actions. Contracts that would require a prospective owner to enter into arbitration, before litigation, became mandatory. In this way the courts and the legal system were circumvented and panels, instead of judges, would rule over the disputes. These contracts further state that both parties must abide by the rulings of these panels and that would be final.

Panels, however, have been accused of showing favoritism and siding with industry and developers and that they disallow a person the right to a trial by jury. The builders argue that it is less costly, faster and equitable for all. Owners and consumer advocates still disagree and voice their concerns. One other troubling matter, that owners feel needs to be addressed, is that in many cases once a panel hands down their determination the case is closed, the outcome is sealed, and the public is never allowed to know what transpired. If the courts were employed to take care of these matters the results would be made public, and pressure could be brought to bear on the offending parties, the builders, which would in turn poorly influence their ability to get work in the future. Consumers believe this would be a major deterrent for shoddy workmanship, poor planning, corrupt inspections and defective houses coming onto the market.

In still yet a further attempt, on the part of the building lobby, to frustrate any actions for recourse is what's now known as the "right-to-cure law." In the last couple of years close to twenty states have penned legislation that requires an injured party to allow a contractor to return to the job to make corrections to defects. Most owners are more than willing to allow this; all they really want is the home that they bought and paid for and they do not want it to cost them any more than it has. The problem with this scenario is that if the builder either does not make sufficient repairs, or exhausts a long period of time in the process of making those repairs, the owners may lose their right to litigation because the statue of limitations has since expired.

With the advent of computers, and sophisticated tracking method, insurers are now able to actually archive a house's history in regard to repairs financed through settlements. The Comprehensive Loss Underwriting Exchange and the Automated Property Loss Underwriting System are what keep track of all of this data. Home buyers are encouraged to contact these agencies and find out what their prospective property's history may be. If they find that the home has been the subject of excessive repairs and litigation they may either not be able to insure it, or they will have to invest in extensive and costly repairs before they can.

.The ripple effect from all of this will soon find its way into other sectors. Mortgage companies and banks rely on the collateral value of the homes that they finance. If the value of these homes drops in any more considerable numbers they will be holding paper for assets that are not appraised at the same levels of value as when the original loans were granted.

Remember, we are not talking about defects that would traditionally be discovered during a routine appraisal, which a bank or lender would require before agreeing to underwrite the mortgage. These are hidden defects that are later found, and greatly diminish a home's viability in the market place, without further investment.


Is There a Way to Halt or Reverse This Trend?

Citizen's groups, individuals and consumers affairs advocates can all help to rein in these problems. Lobbying your local, state and federal governments to enact stronger laws that will require higher standards for contractors and tradesmen is one step in the right direction. Creating bigger budgets for inspectors, and training and increasing their numbers, would be another way to alleviate these yearly increases of premium prices and the need for litigation. Finally, legislation needs to be enacted that is similar to the laws that protect consumers from faulty automobiles and other manufactured goods.

Banks and mortgage companies can also help by not only requiring an appraisal as before, but they must also require thorough building inspections by qualified inspectors, before funds are lent to prospective home buyers.

And last but not least, home buyers themselves need to be a lot more cautious, hire good real estate attorneys and employ their own qualified inspectors to protect their better interests.


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