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New Home Defects Can Cast You Into the Money Pit
Home Defect Problems and the Resulting Litigation Now Affect Insurance
Part Two of Two
(If You Missed Part One Please Follow
By the Mortgage Guy / MortgageLoanRequest.com
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
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
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
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
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.