Don't reduce your property insurance coverage to reflect lower home values
Experts say it costs more to rebuild than it does to start from scratch, so the market value of a house doesn't indicate the amount of insurance you need.
Reporting from Washington -- There are a number of steps every homeowner should take to lower the cost of property insurance. But reducing the amount of coverage to match today's lower values is probably not one of them.Because it costs more to rebuild than it does to start from scratch, the market value of a house is not a reliable indicator of the amount of insurance you need. Too little coverage and your policy may not assume the cost to return your place to its original condition if needed.
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"There has been a lot of noise lately around market values, but market value and the cost to rebuild are two totally different things," said Elaine Baisden, vice president of national property for Travelers Cos., the Hartford, Conn.-based property casualty insurer. "So lowering policy limits could leave you underinsured."Despite the downward spiral in housing prices, home repair costs increased nearly 4% nationally, according to Xactware, whose software products estimate building and repair costs. Marshall & Swift, an authority on building-cost data, says it can cost as much as 30% more to rebuild a house as opposed to building a new one.Reconstruction costs are greater because the process usually involves the demolition and removal of damaged property. On-site mobility often is limited by the need to work around existing landscaping, power lines and other buildings. There are no economies of scale like there are when building row upon row of houses. Then there's the issue of newer, often more rigid building codes that might have to be met.
Market value, on the other hand, is often influenced by factors that have absolutely nothing to do with the cost to rebuild -- the quality of nearby schools, for example, the local tax base or the proximity to rapid transit.Value also is affected by the cost of the land on which the house sits, and that is something you should factor in when considering how much coverage to carry.Typically, the building lot accounts for 25% of a home's value. But you can get a better reading from your tax bill, which usually separates the value of the land from the value of the house. You shouldn't use the property's assessed value to determine how much coverage you need, but you can use the percentage ratio of the lot to the total to at least get an idea of what's needed.Still, it's probably not a good idea to arbitrarily make these kinds of decisions without first sitting down with your agent and discussing your needs. The wrong choice could prove to be an expensive one, Travelers' Baisden said."Home insurance limits are in place to financially protect your family should something go wrong," she said. "If there's a fire or a significant weather event, you want to make sure you have enough coverage to rebuild your home in its entirety."How to saveHere are some other steps you can take to save money while still protecting what may be your most valuable asset.* Check your credit records. For years, insurers based their rates mainly on the location and age of the property and its distance from the nearest firehouse. Now, like mortgage lenders and other credit issuers, they "score" policyholders based on information in their credit histories.It's a controversial practice, but insurers maintain that insurance scores are highly predictive of risk. Some use scoring only when other factors suggest that you are likely to file more claims, but others use it more extensively as both an underwriting tool and a mechanism for setting rates.Whether you agree with the practice or not, it is important to pay your bills on time and make sure that there are no errors in your credit records.* Avoid nuisance claims. The more claims you file, the more you are going to be charged, even if the claims are legitimate. So use your coverage for its intended purpose -- to protect against losses from which you cannot recover on your own -- and take care of the minor incidents yourself.* Shop around. Prices vary from company to company. You won't be able to negotiate rates, but you may be able to lower your costs by comparison shopping. Premiums can vary substantially from one insurer to the next.Although price is important, there are other factors to consider when choosing an insurer. You want a company that's financially stable, and an agent who takes the time to answer all your questions. And make sure that the company isn't prone to cutting loose anyone and everyone who files a claim.You can check the financial health of the various carriers with rating companies such as A.M. Best and Standard & Poor's. To get an idea about service, talk with friends and relatives about their experiences, or consult consumer guides (such as Consumer Reports) that rate insurers every few years on readers' overall satisfaction with their companies.* Raise your deductible. A deductible is the amount you pay toward a loss before your coverage kicks in. The higher the deductible, the lower the premium.According to the Insurance Information Institute, an industry-supported nonprofit communications organization, bumping the deductible from $250 to $500 could cut your costs 12%. You could save as much as 25% by jumping to a $1,000 deductible, and up to 30% by going to $2,500.But since you will be self-insuring, be careful. Don't go so high that you don't have the cash reserves to cover your share of the loss.* Look for discounts. It may be possible to lower your costs by buying all your insurance from the same company. Some insurers will cut their premiums up to 15% if you buy two or more policies from them. But be sure that the combined price is lower than buying the same coverage from competing companies.Other discounts abound. You may get a break of up to 10% if you're a longtime policyholder, say, for six years or more. And if you are over 55 and retired, you may qualify for a senior discount under the theory that since you're now home more, there's less chance of a major loss because you will be there to catch the fire or leak before it gets out of hand.You usually can obtain a premium reduction ranging from 5% to 25% if you have protective devices such as burglar alarms or even deadbolt locks. Article By Lew Sichelman June 7, 2009 lsichelman@aol.com http://www.latimes.com/classified/realestate/news/la-fi-lew7-2009jun07,0,3514957.story
Friday, July 3, 2009
Is Mediation the Answer?
Is Mediation the Answer?
By Jennifer Harmon
Foreclosures are costly to the borrower, servicers and the investors who take losses on the sale of those properties. It’s also expensive to the taxpayers in the communities where these foreclosures are taking place. Foreclosures drive down property value. They often result in an increased level of blight and crime, and property tax revenue decreases because of the decline in value.
The Obama administration is doing everything in its power to reduce foreclosures through the Home Affordable Modification Program. While many are focusing on the refi and modification components of the plan, the Center for American Progress says that mandatory mediation should be incorporated into that process to make sure that the people who are eligible for these programs will in fact get the assistance that they need.
The report, “It’s Time We Talked: Mandatory Mediation in the Foreclosure Process,” outlines how foreclosures can be reduced by as much as 75% if the federal government takes a more direct role in providing opportunities for mediation.
Philadelphia and Connecticut are two places that have had mediation programs in place for about a year now. About three-quarters of all cases that go through mediation are able to avoid foreclosure, according to Andrew Jakabovics, the organization’s associate director for housing and economics. “That really shows that there is an alternative to foreclosure that is beneficial to everybody,” he said. “I think it can be wrapped up nicely into the ongoing administration’s efforts.”
Mediation is simply a voluntary negotiation between two parties in the presence of a neutral third party. The important thing about it is that it’s voluntary negotiation. It’s not bankruptcy and it’s not a cramdown.
Mandatory mediation begins when a foreclosure notice goes out to both parties at the beginning of the process. The servicer and homeowner are required to appear at a particular time on a particular date for a mediation session.If a servicer is participating in a mediation session and feels like it is not beneficial and doesn’t think he will make more from settling than in foreclosure, the servicer never has to settle.
One of the potential pitfalls in the program is that borrowers who are eligible for HAMP are not necessarily getting the modifications under the program either because the servicers are applying the wrong numbers or they are actively steering borrowers to non-HAMP-compliant loans, said Mr. Jakabovics.
“One of the things mediation would do is simply say if a borrower in the process of getting foreclosed on goes to a mediation session, the servicer is there and says, ‘Look, you didn’t qualify.’ This gives the borrower basically an appeals process that is currently missing from HAMP so the borrower can say, ‘Here are my numbers. What numbers were you looking at?’ The servicer might go back and look at them and see if they can actually reach a deal.”
Given that the compliance checks on HAMP are several months out, the detailed checks are not likely to start until October. There are problems these compliance checks might not catch. “Certainly, come October if something gets flagged and is eligible for HAMP, but the borrower was not offered the modification, it does the borrower very little good if they are already out of their home,” said Mr. Jakabovics.
Getting borrowers and servicers together in the same room appears to have tremendous value. Mediation might be an ideal way to make sure the servicer is getting it right. They are not going to be making any more deals that are less valuable to them than what they would have gotten in foreclosure.
By Jennifer Harmon
Foreclosures are costly to the borrower, servicers and the investors who take losses on the sale of those properties. It’s also expensive to the taxpayers in the communities where these foreclosures are taking place. Foreclosures drive down property value. They often result in an increased level of blight and crime, and property tax revenue decreases because of the decline in value.
The Obama administration is doing everything in its power to reduce foreclosures through the Home Affordable Modification Program. While many are focusing on the refi and modification components of the plan, the Center for American Progress says that mandatory mediation should be incorporated into that process to make sure that the people who are eligible for these programs will in fact get the assistance that they need.
The report, “It’s Time We Talked: Mandatory Mediation in the Foreclosure Process,” outlines how foreclosures can be reduced by as much as 75% if the federal government takes a more direct role in providing opportunities for mediation.
Philadelphia and Connecticut are two places that have had mediation programs in place for about a year now. About three-quarters of all cases that go through mediation are able to avoid foreclosure, according to Andrew Jakabovics, the organization’s associate director for housing and economics. “That really shows that there is an alternative to foreclosure that is beneficial to everybody,” he said. “I think it can be wrapped up nicely into the ongoing administration’s efforts.”
Mediation is simply a voluntary negotiation between two parties in the presence of a neutral third party. The important thing about it is that it’s voluntary negotiation. It’s not bankruptcy and it’s not a cramdown.
Mandatory mediation begins when a foreclosure notice goes out to both parties at the beginning of the process. The servicer and homeowner are required to appear at a particular time on a particular date for a mediation session.If a servicer is participating in a mediation session and feels like it is not beneficial and doesn’t think he will make more from settling than in foreclosure, the servicer never has to settle.
One of the potential pitfalls in the program is that borrowers who are eligible for HAMP are not necessarily getting the modifications under the program either because the servicers are applying the wrong numbers or they are actively steering borrowers to non-HAMP-compliant loans, said Mr. Jakabovics.
“One of the things mediation would do is simply say if a borrower in the process of getting foreclosed on goes to a mediation session, the servicer is there and says, ‘Look, you didn’t qualify.’ This gives the borrower basically an appeals process that is currently missing from HAMP so the borrower can say, ‘Here are my numbers. What numbers were you looking at?’ The servicer might go back and look at them and see if they can actually reach a deal.”
Given that the compliance checks on HAMP are several months out, the detailed checks are not likely to start until October. There are problems these compliance checks might not catch. “Certainly, come October if something gets flagged and is eligible for HAMP, but the borrower was not offered the modification, it does the borrower very little good if they are already out of their home,” said Mr. Jakabovics.
Getting borrowers and servicers together in the same room appears to have tremendous value. Mediation might be an ideal way to make sure the servicer is getting it right. They are not going to be making any more deals that are less valuable to them than what they would have gotten in foreclosure.
Home Sales Going Up, but Prices Should Continue to Drop
Home Sales Going Up, but Prices Should Continue to Drop
By Brian Collins
Recent reports that home sales may have bottomed out appear to have stirred some optimism that the worst of the housing crisis could be over.
Unfortunately, house prices and loan performance are lagging indicators in a recovery — and this downturn has seen the biggest price drops and the worst loan performance since the Great Depression.
Historical patterns show that house prices will fall and defaults and foreclosures will continue to rise until there is an improvement in the job market. If the employment numbers start to increase in mid-2010, as many expect, the turnaround in prices and delinquency rates may not come until the first quarter of 2011.
Nevertheless, sales are expected to trend upward and that is an important development, according to David Berson, chief economist for the PMI Group Inc. in Walnut Creek, Calif. "It is the precursor to everything else improving. Sales had to go up first and that is happening now," Mr. Berson said.
The National Association of Realtors reported a 2.9% increase in existing home sales in April and the trade group is forecasting a major jump in sales during the last three quarters of this year. NAR economists expect home sales will rise to a 5.5 million seasonally adjusted annual rate in the fourth quarter, up 19% from the first quarter, as the $8,000 tax credit for first-time homebuyers boosts sales.
Federal Reserve Board chairman Ben Bernanke even told Congress that he is seeing "some signs of bottoming" in the housing market. And he expects overall economic activity to "bottom out, and then turn up later this year."
Despite the improvement in sales, the PMI chief economist says house prices will continue to fall this year. "It will go down 9% to 10% this year and it will be roughly flat next year," Mr. Berson said. "There are just too many homes for sale," he said, and too many vacant homes.
The PMI Group uses First American Loan Performance data in forecasting house prices, which shows prices have declined by 22% since the peak in the third quarter of 2006. From the first quarter of 2008 through the first quarter of 2009 prices have fallen 11.7%.
Meanwhile, the Census Bureau reported that only 345,000 full-time employees lost their jobs in May, compared 700,000 during the winter months. But the unemployment rate jumped to 9.4% from 8.9% in April.
"It is a good sign and it bolsters the argument that the housing market should bottom in terms of sales and perhaps in (housing) starts" possibly in June or July, according to Scott Anderson, senior economist at Wells Fargo & Co.However, the yield on the 10-year Treasury note has risen sharply in the past few weeks and the
Federal Reserve is struggling to keep mortgage rates low. The average rate on 30-year fixed-rate mortgages hit 5.59% during the week of June 12, according to Freddie Mac. This has already impacted refis. The Mortgage Bankers Association refinancing application index has plummeted to 2,600 from 6,800 on April 3.
"Just as we are hitting bottom in the housing market there is a lot of uncertainty about how strong the recovery will be," the Wells Fargo economist said. "The risk factor is mortgage rates," Mr. Anderson said, which could keep home sales stuck at "moribund levels."
His forecast calls for house prices to drop 5%-10% from April 1 through February 2010. He expects the unemployment rate will peak around 9.7% in the fourth quarter of 2009 or the first quarter of 2010 and remain at that level for most of the year. Defaults and foreclosures won't "top out until some time in 2010," Mr. Anderson said.
Meanwhile, declining house prices undermine homeowners' equity and make it difficult to modify mortgages, especially if the owner losses their job.
A Mortgage Bankers Association delinquency report shows there were 600,000 foreclosure starts in the first quarter. And foreclosure starts on prime loans jumped ahead of subprime loans for the first time this decade.
Defaults on prime loans are the "hardest to fix" because they mostly reflects the loss of a job or other life event, according to MBA chief economist Jay Brinkmann. "Since the mortgage performance lags improvement in the job market, that would put us to the end of 2010 or possibly the first quarter of 2011 before we see a nationwide improvement in the performance of mortgages," Mr. Brinkmann said.
He made his comments in releasing MBA's delinquency report, which shows the serious delinquency rate on all single-family loans (90 days or more past due or in foreclosure) hit an all-time high of 7.38% in the first quarter.
By Brian Collins
Recent reports that home sales may have bottomed out appear to have stirred some optimism that the worst of the housing crisis could be over.
Unfortunately, house prices and loan performance are lagging indicators in a recovery — and this downturn has seen the biggest price drops and the worst loan performance since the Great Depression.
Historical patterns show that house prices will fall and defaults and foreclosures will continue to rise until there is an improvement in the job market. If the employment numbers start to increase in mid-2010, as many expect, the turnaround in prices and delinquency rates may not come until the first quarter of 2011.
Nevertheless, sales are expected to trend upward and that is an important development, according to David Berson, chief economist for the PMI Group Inc. in Walnut Creek, Calif. "It is the precursor to everything else improving. Sales had to go up first and that is happening now," Mr. Berson said.
The National Association of Realtors reported a 2.9% increase in existing home sales in April and the trade group is forecasting a major jump in sales during the last three quarters of this year. NAR economists expect home sales will rise to a 5.5 million seasonally adjusted annual rate in the fourth quarter, up 19% from the first quarter, as the $8,000 tax credit for first-time homebuyers boosts sales.
Federal Reserve Board chairman Ben Bernanke even told Congress that he is seeing "some signs of bottoming" in the housing market. And he expects overall economic activity to "bottom out, and then turn up later this year."
Despite the improvement in sales, the PMI chief economist says house prices will continue to fall this year. "It will go down 9% to 10% this year and it will be roughly flat next year," Mr. Berson said. "There are just too many homes for sale," he said, and too many vacant homes.
The PMI Group uses First American Loan Performance data in forecasting house prices, which shows prices have declined by 22% since the peak in the third quarter of 2006. From the first quarter of 2008 through the first quarter of 2009 prices have fallen 11.7%.
Meanwhile, the Census Bureau reported that only 345,000 full-time employees lost their jobs in May, compared 700,000 during the winter months. But the unemployment rate jumped to 9.4% from 8.9% in April.
"It is a good sign and it bolsters the argument that the housing market should bottom in terms of sales and perhaps in (housing) starts" possibly in June or July, according to Scott Anderson, senior economist at Wells Fargo & Co.However, the yield on the 10-year Treasury note has risen sharply in the past few weeks and the
Federal Reserve is struggling to keep mortgage rates low. The average rate on 30-year fixed-rate mortgages hit 5.59% during the week of June 12, according to Freddie Mac. This has already impacted refis. The Mortgage Bankers Association refinancing application index has plummeted to 2,600 from 6,800 on April 3.
"Just as we are hitting bottom in the housing market there is a lot of uncertainty about how strong the recovery will be," the Wells Fargo economist said. "The risk factor is mortgage rates," Mr. Anderson said, which could keep home sales stuck at "moribund levels."
His forecast calls for house prices to drop 5%-10% from April 1 through February 2010. He expects the unemployment rate will peak around 9.7% in the fourth quarter of 2009 or the first quarter of 2010 and remain at that level for most of the year. Defaults and foreclosures won't "top out until some time in 2010," Mr. Anderson said.
Meanwhile, declining house prices undermine homeowners' equity and make it difficult to modify mortgages, especially if the owner losses their job.
A Mortgage Bankers Association delinquency report shows there were 600,000 foreclosure starts in the first quarter. And foreclosure starts on prime loans jumped ahead of subprime loans for the first time this decade.
Defaults on prime loans are the "hardest to fix" because they mostly reflects the loss of a job or other life event, according to MBA chief economist Jay Brinkmann. "Since the mortgage performance lags improvement in the job market, that would put us to the end of 2010 or possibly the first quarter of 2011 before we see a nationwide improvement in the performance of mortgages," Mr. Brinkmann said.
He made his comments in releasing MBA's delinquency report, which shows the serious delinquency rate on all single-family loans (90 days or more past due or in foreclosure) hit an all-time high of 7.38% in the first quarter.
California shows recovery in Housing
California housing market shows pockets of recoveryA surge in home sales that started in some of California 's more affordable inland areas has begun to spread to several more expensive coastal areas, another indicator that the state's real estate market may be in recovery mode. Many homes in the lower end of the market are receiving multiple offers, with some prospective buyers bidding well above asking prices. Inventory levels for homes priced under $500,000 stood at 3.2 months in May 2009, compared with 9.4 months in May 2008.Some buyers, especially those in historically higher-priced markets such as the San Francisco Bay Area, are newly optimistic about buying homes and are realizing that the combination of low interest rates, favorable home prices, and first-time home buyer tax credits may not realign for many years.Some housing economists caution against interpreting signs of increased sales activity as meaning the market has bottomed. Interest rates on 30-year, fixed-rate prime mortgages have risen above 5 percent in recent weeks and could continue to increase as fears of inflation impact interest rates. Additionally, the federal tax credit for first-time home buyers is scheduled to end Nov. 30, which may remove the incentive to purchase.Although the median price in the state has risen for four consecutivemonths, prices in some higher-income neighborhoods still are declining. Some agents say that declining prices in these neighborhoods are a reflection of borrowers' problems getting jumbo mortgages to make purchases. This month's Market Snapshot features: Buyers who are having difficulty arranging financing or coming up with a down payment may want to consider rent-to-own or lease-options. Generally, these deals require buyers to pay extra amounts of rent each month, in addition to the normal market-rate rent, plus up-front fees of approximately 5 percent of the purchase price. The owner keeps the regular rent, but the additional payments are used to buy down the price of the home. While rent-to-own options may be a viable choice for some buyers, most real estate experts recommend buyers and sellers work with attorneys experienced in drafting lease-option agreements. Although rent-to-own options enable buyers to walk away from the deal for a variety of reasons, including deciding the home or neighborhood isn't a good fit; one drawback is that by walking away, buyers agree to forfeit the up-front fees and the additional monthly rent they've been paying. Additionally, at the end of the term, if the buyer still is unable to secure financing they also may have to forfeit the money.
Fannie Mae and Freddie Mac make more changes to Mortgage
This week's Mortgage Update contains information about lawmakers urging Fannie Mae and Freddie Mac to relax standards for mortgage on new condominiums, and how mortgage lending rules will impact real estate. Changes urged to rules on condo loansIn a letter to the chief executives of Fannie Mae and Freddie Mac, Reps. Barney Frank (D.-Mass.) and Anthony Weiner (D.-N.Y.) urged the GSEs to ease the recently tightened standards for mortgages on new condominiums, saying they could threaten the viability of some developments and slow the housing-market recovery. In March, Fannie Mae said it would no longer guarantee mortgages on condos in buildings where fewer than 70 percent of the units had been sold, up from 51 percent. Fannie Mae also won't purchase mortgages in buildings where 15 percent of owners are delinquent on condo association dues or where one owner has more than 10 percent of units. Freddie Mac plans to implement similar policies next month. Officials at Fannie Mae report that the 70-percent rule does not apply to loan applications submitted through an underwriting program used by major lenders. Developers also are able to apply for exemptions to the new policies for loans that are manually underwritten. Will tough mortgage rules hurt real estate recovery? Real estate may be showing signs of a turnaround in many local markets but the nation's largest mortgage players continue to ratchet up their underwriting rules, making home purchases more difficult for some buyers.Mortgage giant Fannie Mae, for example, issued a laundry list of tougher policies June 8 that could directly affect thousands of buyers in the coming months, especially those involved in job-related transfers. Reversing a long-standing policy, Fannie no longer will permit mortgage applicants to count the income of so-called "trailing spouses" toward the household income needed to qualify for a loan. A trailing spouse is one who joins his or her spouse or partner in a job-related move, but who has yet to obtain employment in the new location. If the main breadwinner's income isn't sufficient to handle the mortgage, the loan application will be rejected; only when the trailing spouse has documented income in the new location will it be counted. Brian Faith, a spokesman for Fannie Mae, said "given the current economic and job market instability, the company has opted to discontinue consideration of trailing secondary wage-earner income in the interest of safer underwriting, since this income would only be anticipated and undocumented." Jan Hatfield-Goldman, a vice president for Worldwide ERC, the international trade association representing the employee relocation industry, said Fannie's decision "makes the current challenging relocation environment even more so. Some transfers will either have to qualify on the basis of one income" - forcing couples to "buy less house than they wanted" - or "they may be required to rent for an extended period of time until the spouse or couple is re-employed. If a couple must wait to purchase a new home until the spouse can find a new job, it could well cause some to reconsider" whether they want to make the job shift at all. Worldwide ERC estimates that about 800,000 households in the United States move in a typical year because of job transfers. Freddie Mac, which with Fannie Mae accounts for 70 percent-plus of all new mortgage volume, still counts trailing spouse or co-borrower income for loan applications, but under strict guidelines:The amount of the trailing co-borrower income cannot exceed 33 percent of the total qualifying income for the mortgage application.That income cannot be from self-employment.The trailing spouse must have been continuously employed in the same occupation for at least two years preceding the relocation.And the co-borrower must provide a statement of intent to find employment in the new location. The loan officer or lender must also analyze that local employment market and verify that there are adequate opportunities and earnings potential for the co-borrower.As part of its June 8 tightening of underwriting rules, Fannie Mae also announced that it plans to discount the values of all borrowers' stock, bond, mutual fund and retirement fund holdings that are claimed toward the applicants' financial reserves needed to qualify for a mortgage. While Fannie previously counted 100 percent of the claimed or documented value of stocks, bonds and mutual funds toward reserves, under its revised policy it will discount them by 30 percent.
Chinese Drywall Litigation about to Snowball Industry
Chinese Drywall Insurance Litigation
Wednesday, 24 June 2009
We have seen this to date from the perspective of increasing claims being made, both state and federal regulators seeking ways to regulate, protect consumers and also determine responsibility and liability for the damages caused by Chinese drywall. Concurrently, the first lawsuits regarding insurance coverage for these claims are starting to move through the courts. Following is a discussion of the issue from that perspective.
Homeowner's PoliciesIn March 2009, Baker v. American Home Assurance Company, No. 09-cv-188 was filed in the United States District Court for the Middle District of Florida. Baker is the first complaint regarding homeowner’s insurance for drywall claims. In the Baker case, two Florida policyholders sued their homeowners’ insurer, seeking coverage for property damage resulting from Chinese drywall in their home. The Complaint filed was rather plain. with the policyholders alleging that they notified their insurer of a loss in December 2008 caused from the gases emitted by drywall. The Complaint alleges further that the insurer verbally denied the claim based on “contamination,” but that no formal declination has been issued. In its answer, the insurer denied coverage based upon policy exclusions for pollution, wear and tear, and faulty materials. The insurer also answered that the claim fell outside the policy period. Apparently, the insurer is trying to base some of its reasoning for denial of coverage that the damage occurred at the time the drywall was installed, not the time it began to emit noxious odors. Commercial General Liability PoliciesInsurance disputes concerning contractors' Commercial General Liability ("CGL") policies are also pending. In April 2009, it was reported that Lennar Corporation, one of the principal defendants in Florida’s Chinese drywall litigation, stated that it believed that its insurance would cover the drywall claims. There has been no comment from the insurer. However, the insurer of another homebuilder commenced a declaratory judgment action in the Eastern District of Virginia, Builders Mutual Insurance Company v. Dragas Management Corporation, 2:09-cv-185. Builders Mutual is seeking a declaration that it did not owe defense or indemnity to its insured for Chinese drywall based on the pollution exclusion and the work-product exclusions.
The Component Not Product ArgumentInsurance industry experts are watching the Chinese drywall suits and comparing them to past litigation involving EIFS (Exterior Insulation and Finishing Systems), a building product that provides exterior walls with an insulated finished surface, and waterproofing in an integrated composite material system. The analogy between Chins Drywall and EIFS is that both products are components incorporated into a structure, and as such were intended to have the same useful life of the structure. In Keck v Dryvit Systems, Inc., 830 So.2d 1 (Ala. 2002), the Alabama Supreme Court held that such components are not “products” within the meaning of the Alabama Extended Manufacturers Liability Doctrine (AEMLD), stating:
The owner of a house or of any building should reasonably expect that many components will have the same useful life as the house or building itself and will not need to be replaced over the life of the building. Such components include, by way of example, an exterior brick wall, a staircase, or a fireplace. There are also certain components of a house or a building the purchaser reasonably expects to wear out and to require replacement in the course of normal and ordinary usage, such as roof shingles, a dishwasher, a furnace, or a hot-water heater. Whether an item that is incorporated into real property may be considered a “product” for purposes of the AEMLD is determined by whether the item is a part of the structural integrity of the house or building that is reasonably expected to last for the useful life of the house or building. If it is, then the item cannot be considered a “product” for purposes of the AEMLD. However, if the item is attached or incorporated into real property and, yet its very function and nature clearly makes it an item that one would reasonably expect to repair or to replace during the useful life of the realty, the item may be considered a “product” for purposes of the AEMLD. For instance, although paint, when applied to the structure of a wall, becomes incorporated into the surface of the wall, paint is a structural improvement that does not have the same useful life as the wall itself or the building to which the wall is attached; one would expect to have to repaint a wall to maintain the quality of the first application. Therefore, paint would be considered a product for purposes of the AEMLD.The Keck Court held that EIFS was intended to last for the useful life of the structure, and was not subject to the AEMLD. Further, the Court also held that it was not a “good” under the Uniform Commercial Code, and therefore was not subject to the rules concerning warranties of merchantability. An analogous argument could made that Chins drywall would satisfy the Court's test in Keck , and would therefore not be classified as either a “product” or a “good.”Of particular interest to the default servicing industry is whether a builder or installer would be potentially held liable on a negligence theory for the installation of Chinese drywall. This could be a key difference between Chinese drywall and EIFS litigation. The negligence theories against builders and installers in EIFS often revolved around arguments that the system was improperly installed, and that installation led to problems with moisture intrusion, termites, and other resulting problems. In contrast, the issues concerning Chins drywall are based upon the problems with the product itself, not the installation.. Note that generally, a builder is not liable for latent defects in building materials that are used and “he is not liable to the owner for the latent defect or liable for the amount of damage to the building caused by such defect.” 13 Am. Jur. 2d, Building and Construction Contracts § 27 (1997); Wood-Hopkins Contracting Co. v. Masonry Contractors, Inc., 235 So.2d 548 (Fla. Ct. App.1970). Unless a building owner is able to show that the builder or installer had knowledge of the problems associated with Chinese drywall, he or she may have problems with holding those entities accountable.
Civil LitigationGovernment and regulatory actions are occurring that may pave the way for a wave of civil lawsuits by or on behalf of homeowners affected by Chinese drywall. Florida Senators Mary Landrieu, D-La. and Bill Nelson, D-Fla, continue to voice concerns regarding Chinese drywall at the federal level. Both state and Federal agencies have been investigating the drywall itself. Procedures for developing interior air quality tests for the presence or impact of Chins drywall are reportedly being developed by a number of federal agenciesNew Orleans Times-Picayune reported on June 7, 2009 that Sen. Landrieu’s staff said that the federal tests could lay the groundwork for the Consumer Product Safety Commission to bring a civil action against the drywall manufacturers. Stephen Mysliwiec, a partner at the law firm DLA Piper, observed that it will not become clear who is liable for the defective product until consensus emerges on the precise cause of the problems. He noted that, one theory ventures that gypsum mined in China contains excessive sulfur, while another ventures that fly ash, a byproduct of the burning of coal, was used during the manufacturing process. "Until the science of what is causing the problem is settled, it is very difficult to know which party is going to be held liable for the cost of making repairs," Mysliwiec said. On June 15, 2009, a panel of federal judges ruled that lawsuits filed around the country against home builders, suppliers and manufacturers of Chinese drywall will be moved to New Orleans, where U.S. District Judge Eldon Fallon will preside over discovery and pre-trial hearings. By transferring all of the cases to federal court in New Orleans, the judicial panel is trying to ensure that lawyers for both the plaintiffs and the defense would not have to duplicate their efforts in multiple courts during discovery. Of equal importance, the panel seeks to prevent judges in different districts from handing down inconsistent rulings.
http://www.nola.com/news/index.ssf/2009/06/chinese_drywall_lawsuits_to_be.html.
A legal conference on Chinese drywall, closed to the public, took place in New Orleans on June 18, 2009. The conference presented by HB Litigation Conferences is designed for representatives of homeowners, builders, insurance companies and government agencies.
http://blog.nola.com/tpmoney/2009/06/new_orleans_hosts_legal_confer.html
Wednesday, 24 June 2009
We have seen this to date from the perspective of increasing claims being made, both state and federal regulators seeking ways to regulate, protect consumers and also determine responsibility and liability for the damages caused by Chinese drywall. Concurrently, the first lawsuits regarding insurance coverage for these claims are starting to move through the courts. Following is a discussion of the issue from that perspective.
Homeowner's PoliciesIn March 2009, Baker v. American Home Assurance Company, No. 09-cv-188 was filed in the United States District Court for the Middle District of Florida. Baker is the first complaint regarding homeowner’s insurance for drywall claims. In the Baker case, two Florida policyholders sued their homeowners’ insurer, seeking coverage for property damage resulting from Chinese drywall in their home. The Complaint filed was rather plain. with the policyholders alleging that they notified their insurer of a loss in December 2008 caused from the gases emitted by drywall. The Complaint alleges further that the insurer verbally denied the claim based on “contamination,” but that no formal declination has been issued. In its answer, the insurer denied coverage based upon policy exclusions for pollution, wear and tear, and faulty materials. The insurer also answered that the claim fell outside the policy period. Apparently, the insurer is trying to base some of its reasoning for denial of coverage that the damage occurred at the time the drywall was installed, not the time it began to emit noxious odors. Commercial General Liability PoliciesInsurance disputes concerning contractors' Commercial General Liability ("CGL") policies are also pending. In April 2009, it was reported that Lennar Corporation, one of the principal defendants in Florida’s Chinese drywall litigation, stated that it believed that its insurance would cover the drywall claims. There has been no comment from the insurer. However, the insurer of another homebuilder commenced a declaratory judgment action in the Eastern District of Virginia, Builders Mutual Insurance Company v. Dragas Management Corporation, 2:09-cv-185. Builders Mutual is seeking a declaration that it did not owe defense or indemnity to its insured for Chinese drywall based on the pollution exclusion and the work-product exclusions.
The Component Not Product ArgumentInsurance industry experts are watching the Chinese drywall suits and comparing them to past litigation involving EIFS (Exterior Insulation and Finishing Systems), a building product that provides exterior walls with an insulated finished surface, and waterproofing in an integrated composite material system. The analogy between Chins Drywall and EIFS is that both products are components incorporated into a structure, and as such were intended to have the same useful life of the structure. In Keck v Dryvit Systems, Inc., 830 So.2d 1 (Ala. 2002), the Alabama Supreme Court held that such components are not “products” within the meaning of the Alabama Extended Manufacturers Liability Doctrine (AEMLD), stating:
The owner of a house or of any building should reasonably expect that many components will have the same useful life as the house or building itself and will not need to be replaced over the life of the building. Such components include, by way of example, an exterior brick wall, a staircase, or a fireplace. There are also certain components of a house or a building the purchaser reasonably expects to wear out and to require replacement in the course of normal and ordinary usage, such as roof shingles, a dishwasher, a furnace, or a hot-water heater. Whether an item that is incorporated into real property may be considered a “product” for purposes of the AEMLD is determined by whether the item is a part of the structural integrity of the house or building that is reasonably expected to last for the useful life of the house or building. If it is, then the item cannot be considered a “product” for purposes of the AEMLD. However, if the item is attached or incorporated into real property and, yet its very function and nature clearly makes it an item that one would reasonably expect to repair or to replace during the useful life of the realty, the item may be considered a “product” for purposes of the AEMLD. For instance, although paint, when applied to the structure of a wall, becomes incorporated into the surface of the wall, paint is a structural improvement that does not have the same useful life as the wall itself or the building to which the wall is attached; one would expect to have to repaint a wall to maintain the quality of the first application. Therefore, paint would be considered a product for purposes of the AEMLD.The Keck Court held that EIFS was intended to last for the useful life of the structure, and was not subject to the AEMLD. Further, the Court also held that it was not a “good” under the Uniform Commercial Code, and therefore was not subject to the rules concerning warranties of merchantability. An analogous argument could made that Chins drywall would satisfy the Court's test in Keck , and would therefore not be classified as either a “product” or a “good.”Of particular interest to the default servicing industry is whether a builder or installer would be potentially held liable on a negligence theory for the installation of Chinese drywall. This could be a key difference between Chinese drywall and EIFS litigation. The negligence theories against builders and installers in EIFS often revolved around arguments that the system was improperly installed, and that installation led to problems with moisture intrusion, termites, and other resulting problems. In contrast, the issues concerning Chins drywall are based upon the problems with the product itself, not the installation.. Note that generally, a builder is not liable for latent defects in building materials that are used and “he is not liable to the owner for the latent defect or liable for the amount of damage to the building caused by such defect.” 13 Am. Jur. 2d, Building and Construction Contracts § 27 (1997); Wood-Hopkins Contracting Co. v. Masonry Contractors, Inc., 235 So.2d 548 (Fla. Ct. App.1970). Unless a building owner is able to show that the builder or installer had knowledge of the problems associated with Chinese drywall, he or she may have problems with holding those entities accountable.
Civil LitigationGovernment and regulatory actions are occurring that may pave the way for a wave of civil lawsuits by or on behalf of homeowners affected by Chinese drywall. Florida Senators Mary Landrieu, D-La. and Bill Nelson, D-Fla, continue to voice concerns regarding Chinese drywall at the federal level. Both state and Federal agencies have been investigating the drywall itself. Procedures for developing interior air quality tests for the presence or impact of Chins drywall are reportedly being developed by a number of federal agenciesNew Orleans Times-Picayune reported on June 7, 2009 that Sen. Landrieu’s staff said that the federal tests could lay the groundwork for the Consumer Product Safety Commission to bring a civil action against the drywall manufacturers. Stephen Mysliwiec, a partner at the law firm DLA Piper, observed that it will not become clear who is liable for the defective product until consensus emerges on the precise cause of the problems. He noted that, one theory ventures that gypsum mined in China contains excessive sulfur, while another ventures that fly ash, a byproduct of the burning of coal, was used during the manufacturing process. "Until the science of what is causing the problem is settled, it is very difficult to know which party is going to be held liable for the cost of making repairs," Mysliwiec said. On June 15, 2009, a panel of federal judges ruled that lawsuits filed around the country against home builders, suppliers and manufacturers of Chinese drywall will be moved to New Orleans, where U.S. District Judge Eldon Fallon will preside over discovery and pre-trial hearings. By transferring all of the cases to federal court in New Orleans, the judicial panel is trying to ensure that lawyers for both the plaintiffs and the defense would not have to duplicate their efforts in multiple courts during discovery. Of equal importance, the panel seeks to prevent judges in different districts from handing down inconsistent rulings.
http://www.nola.com/news/index.ssf/2009/06/chinese_drywall_lawsuits_to_be.html.
A legal conference on Chinese drywall, closed to the public, took place in New Orleans on June 18, 2009. The conference presented by HB Litigation Conferences is designed for representatives of homeowners, builders, insurance companies and government agencies.
http://blog.nola.com/tpmoney/2009/06/new_orleans_hosts_legal_confer.html
U.S. Conference of Mayors 77th Annual Meeting Council for the New American City Session Summary
Council for the New American City "Responding to The Mortgage Foreclosure Crisis: Implementing Neighborhood Stabilization Programs" Session Summary
ModeratorMayor Brenda Lawrence, City of Southfield, MIPresenters
James Diffley, HIS Global Insight
Norman Jacknis, CISCO
Robert Grossinger, Bank of America
Ron Phipps, National Association of Realtors
John Courson, Mortgage Bankers Association
Robert Klein, Safeguard Properties
Mayors in attendance representing municipalities across the country included, but were not limited to:
Burnsville, MN
Bowling Green, KY
West Palm Beach, FL
Carmel, IN
Dallas, TX
Lauderhill, FL
Davenport, IA
North Miami, FL
Dublin, OH
Opening Remarks and Roundtable Introductions
Mayor Brenda Lawrence opened the session by strongly confirming that vacant properties have taken precedence among the Conference of Mayors and municipalities across the country. As foreclosures have expanded to include skilled workers, a division once thought more immune and untouchable to this crisis, municipalities must respond proactively. This session included a panel of leading business representatives contributing to and addressing various aspects of municipal based initiatives.
Mayor Antonio Villaraigosa of Los Angeles concurred with the increasing volume and shifting demographic trend of foreclosures. His City is “loosing ground” on the battle against vacant properties and affirms that the only viable option is to partner and collaborate with the proven efforts of other Mayors across the country.
Overall, Mayors are looking for the input from the business community regarding resources that are needed to meet demands and accomplish initiatives designed for economic improvement and advancement.
Feedback from multiple Mayors in attendance affirmed that when dealing with vacant properties and the foreclosures crisis, earlier intervention and an increased willingness to accommodate the needs of mortgagors, is critical. Mayor Kaplan shared Lauderhill’s (FL) creative application of National Stabilization Program (NSP) dollars to offer homebuyer assistance for the private acquisition of vacant REO properties.
HIS Global Insight
James Diffley offered a summary of the American Recovery Funds Report, including the Metro Summit Report. These reports include, but are not limited to, the following significant observations. The rate of decline is slowing, but not sufficiently enough to allow for growth. Job loss is expected to continue to decline with a national crest of 10.3% in 2010. Although consumer attitudes are improving, they remain stressed and these attitudes to not indicate consumer recovery. Banking will continue to deteriorate as housing values continue to spiral.
The distribution of NSP funding has short changed larger, metropolitan areas with an obvious disparity for transportation projects.
IBSG Public Sector, CISCO
Norman Jacknis shared an update of the assistance CISCO is providing to government leaders with broadband technological applications and empowerment to residents to build and improve the quality of life within cities across the country.
National and foreign examples were provided for cities including urban development, sustainability and mobility initiatives, work centers with support venues in central locations, smart energy models, and eco mapping.
Bank of America
Recognized by Mayor Lawrence for their support of the Dollar Wise program, Rob Grossinger offered an overview of how Bank of America is addressing and refining the process of REO disposition. These procedural improvements integrate more effective communication and streamlined measures.
The disposition process related to broker assignment, appraisals, and marketing strategies at the 30, 60, 90, 120 day milestones were reviewed. Although private homeowners are acquiring a majority of the properties at auction, investors still represent a significant buyer stream.
It is crucial to build partnerships with communities to assist with low valued acquisitions, donations, and demolitions; however there are potential arbitration measures to consider.
Little can be documented on the success of the NSP within the first 10 months of its implementation; this can be attributed, in part, to the fact that banks were omitted from participation at the table to offer technical assistance and expertise with program design.
National Association of Realtors
Ron Phipps, affirming that the Association is a committed participatory member of the housing industry, indicated that recent home closings have included an increased and unprecedented number of short sales and distressed property acquisitions.
Price stabilization is the key to housing recovery.
The lack of capacity for brokers to process the potentially large inventory of REO properties is a grave issue. As significant delays with closings are identified as liability, a source has been noted as the multiple implications associated with the transfer of distressed properties.
Mortgage Bankers Association
John Courson confirmed that MBA members have been directly affected and impacted by the economic crisis, yet are actively involved, responding, and participating in current and future programming.
A brief overview of the general updates regarding the focus of the MBA, specifically related to homebuyer programs, tax incentives, and an ongoing evaluation and review of recommendations and requests of qualifications for programs that are either proposed or already in place by various sectors of the housing industry was offered.
Safeguard Properties
Robert Klein offered an overview of the role and responsibilities of field service companies within communities on a national level.
As Chair of the Mortgage Bankers Association (MBA), Robert Klein confirmed that addressing the negative impacts of vacant properties is a priority among the housing industry. The MBA has initiated and maintained direct contact and collaboration with cities across the country. The MBA, has led the charge by partnering with Mortgage Electronic Registration System (MERS) to create a viable solution for municipalities to reach compliance with exterior property maintenance standards.
Code Enforcement officials documented that the much needed contact information for the responsible parties for a vacant property was not obtainable. In direct response, the Industry upgraded the existing MERS database to include the direct point of contact for both the servicer and field service company.
Over 65 Million loans are currently on MERS, and that number continues to rise through the Initiative. Loans are uploaded through the newly created iReg option upon determination that the property is vacant.
Due to the immense volume of enacted municipal Vacant Property Registration Ordinances, many of which include inconsistent and ineffective language and requirements, MERS has been identified as a viable alternative to hard copy registrations. Based on the overwhelming and documented success of the MERS Initiative within six Pilot Cities since January 2009, the program is now being expanded to over 200 additional cities to a broader, more national level. An invitation was offered to all municipalities to participate in MERS.
As it was announced that the MBA is in the process of drafting and endorsing a Model VPR Ordinance that can serve as a template for municipalities. Citing the shortfall of MERS as only including half of the mortgaged loans, Mayor Kaplan, Lauderhill, FL, indicated that he is also drafting a Model Ordinance with separate consideration to electronic registration.
Read original : http://www.safeguardproperties.com/content/view/2423/106/
ModeratorMayor Brenda Lawrence, City of Southfield, MIPresenters
James Diffley, HIS Global Insight
Norman Jacknis, CISCO
Robert Grossinger, Bank of America
Ron Phipps, National Association of Realtors
John Courson, Mortgage Bankers Association
Robert Klein, Safeguard Properties
Mayors in attendance representing municipalities across the country included, but were not limited to:
Burnsville, MN
Bowling Green, KY
West Palm Beach, FL
Carmel, IN
Dallas, TX
Lauderhill, FL
Davenport, IA
North Miami, FL
Dublin, OH
Opening Remarks and Roundtable Introductions
Mayor Brenda Lawrence opened the session by strongly confirming that vacant properties have taken precedence among the Conference of Mayors and municipalities across the country. As foreclosures have expanded to include skilled workers, a division once thought more immune and untouchable to this crisis, municipalities must respond proactively. This session included a panel of leading business representatives contributing to and addressing various aspects of municipal based initiatives.
Mayor Antonio Villaraigosa of Los Angeles concurred with the increasing volume and shifting demographic trend of foreclosures. His City is “loosing ground” on the battle against vacant properties and affirms that the only viable option is to partner and collaborate with the proven efforts of other Mayors across the country.
Overall, Mayors are looking for the input from the business community regarding resources that are needed to meet demands and accomplish initiatives designed for economic improvement and advancement.
Feedback from multiple Mayors in attendance affirmed that when dealing with vacant properties and the foreclosures crisis, earlier intervention and an increased willingness to accommodate the needs of mortgagors, is critical. Mayor Kaplan shared Lauderhill’s (FL) creative application of National Stabilization Program (NSP) dollars to offer homebuyer assistance for the private acquisition of vacant REO properties.
HIS Global Insight
James Diffley offered a summary of the American Recovery Funds Report, including the Metro Summit Report. These reports include, but are not limited to, the following significant observations. The rate of decline is slowing, but not sufficiently enough to allow for growth. Job loss is expected to continue to decline with a national crest of 10.3% in 2010. Although consumer attitudes are improving, they remain stressed and these attitudes to not indicate consumer recovery. Banking will continue to deteriorate as housing values continue to spiral.
The distribution of NSP funding has short changed larger, metropolitan areas with an obvious disparity for transportation projects.
IBSG Public Sector, CISCO
Norman Jacknis shared an update of the assistance CISCO is providing to government leaders with broadband technological applications and empowerment to residents to build and improve the quality of life within cities across the country.
National and foreign examples were provided for cities including urban development, sustainability and mobility initiatives, work centers with support venues in central locations, smart energy models, and eco mapping.
Bank of America
Recognized by Mayor Lawrence for their support of the Dollar Wise program, Rob Grossinger offered an overview of how Bank of America is addressing and refining the process of REO disposition. These procedural improvements integrate more effective communication and streamlined measures.
The disposition process related to broker assignment, appraisals, and marketing strategies at the 30, 60, 90, 120 day milestones were reviewed. Although private homeowners are acquiring a majority of the properties at auction, investors still represent a significant buyer stream.
It is crucial to build partnerships with communities to assist with low valued acquisitions, donations, and demolitions; however there are potential arbitration measures to consider.
Little can be documented on the success of the NSP within the first 10 months of its implementation; this can be attributed, in part, to the fact that banks were omitted from participation at the table to offer technical assistance and expertise with program design.
National Association of Realtors
Ron Phipps, affirming that the Association is a committed participatory member of the housing industry, indicated that recent home closings have included an increased and unprecedented number of short sales and distressed property acquisitions.
Price stabilization is the key to housing recovery.
The lack of capacity for brokers to process the potentially large inventory of REO properties is a grave issue. As significant delays with closings are identified as liability, a source has been noted as the multiple implications associated with the transfer of distressed properties.
Mortgage Bankers Association
John Courson confirmed that MBA members have been directly affected and impacted by the economic crisis, yet are actively involved, responding, and participating in current and future programming.
A brief overview of the general updates regarding the focus of the MBA, specifically related to homebuyer programs, tax incentives, and an ongoing evaluation and review of recommendations and requests of qualifications for programs that are either proposed or already in place by various sectors of the housing industry was offered.
Safeguard Properties
Robert Klein offered an overview of the role and responsibilities of field service companies within communities on a national level.
As Chair of the Mortgage Bankers Association (MBA), Robert Klein confirmed that addressing the negative impacts of vacant properties is a priority among the housing industry. The MBA has initiated and maintained direct contact and collaboration with cities across the country. The MBA, has led the charge by partnering with Mortgage Electronic Registration System (MERS) to create a viable solution for municipalities to reach compliance with exterior property maintenance standards.
Code Enforcement officials documented that the much needed contact information for the responsible parties for a vacant property was not obtainable. In direct response, the Industry upgraded the existing MERS database to include the direct point of contact for both the servicer and field service company.
Over 65 Million loans are currently on MERS, and that number continues to rise through the Initiative. Loans are uploaded through the newly created iReg option upon determination that the property is vacant.
Due to the immense volume of enacted municipal Vacant Property Registration Ordinances, many of which include inconsistent and ineffective language and requirements, MERS has been identified as a viable alternative to hard copy registrations. Based on the overwhelming and documented success of the MERS Initiative within six Pilot Cities since January 2009, the program is now being expanded to over 200 additional cities to a broader, more national level. An invitation was offered to all municipalities to participate in MERS.
As it was announced that the MBA is in the process of drafting and endorsing a Model VPR Ordinance that can serve as a template for municipalities. Citing the shortfall of MERS as only including half of the mortgaged loans, Mayor Kaplan, Lauderhill, FL, indicated that he is also drafting a Model Ordinance with separate consideration to electronic registration.
Read original : http://www.safeguardproperties.com/content/view/2423/106/
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