Friday, October 30, 2009

Real toxic assets

As if things aren't bad enough in the housing industry, it now looks like hundreds or even thousands of homeowners will lose their homes to foreclosure because of toxic Chinese drywall.

It's pretty simple, and whether you are making your payments has nothing to do with it.

If you have a mortgage then your mortgage carrier requires you to insure your home. But if your home is found to have toxic drywall, as thousands have, then expect your insurance policy to be revoked and to find that no insurance carrier will insure you. Beyond the actual cost of replacement (meaning tearing out every wall in a home), the drywall emits sulfuric acid fumes that corrode pipes and electrical wiring and cause illness in people who are in the home, so it's a cost that no insurer wants to deal with.

Case closed, your home will be foreclosed on for failure to carry insurance coverage.

Thousands of homeowners nationwide who have bought new houses made with defective building materials are finding their hopes dashed and their lives in limbo. Experts warn that cases like the Ivorys', in which insurers drop policies or send notices of nonrenewal because of tainted Chinese drywall, will become rampant as insurance companies work their way through the hundreds of claims currently in the pipeline.

At least three insurers already have canceled or refused to renew policies after homeowners sought help replacing the bad materials. Because mortgage companies require homeowners to insure their properties, they are then at risk of foreclosure, yet no law prevents the cancellations.

So what can the homeowner do? Not much.

The mortgage company is only acting as a front for what is likely a bank that controls a derivative into which each mortgage is bundled, and anyone who invests in a mortage wants their investment protected. So they require insurance, which is sensible enough.

The insurers have not only been denying the claims for toxic drywall, but they've been dropping coverage. This should not surprise anyone either, because they've been doing the same thing for years with health insurance, rescinding coverage when someone actually gets sick and needs it. Why should anyone be surprised if they look at homeowners policies through the same lens? After all, in most cases homeowners insurance and health insurance are offered through different divisions of the same giant companies.

The Chinese companies which produced the drywall made a defective product. But lots of luck trying to get compensation from them.

There is a class action lawsuit going on against builders, manufacturers and suppliers of the defective drywall. But even if these homeowners join it it is likely that any amount they receive (and in these kinds of suits most of the money goes to the lawyers) might, years or decades from now, cover the cost of the drywall but certainly would not cover the cost of a home foreclosure (in which case it is a given that any down payment or equity in the home is gone, to say nothing of the effect of a foreclosure on their credit rating should they try to get another home.)

What about the inspectors who should have but didn't catch the drywall before it was installed? Well, you can't sue the government, even when they don't do their job very well. As I've written before, in many cases our policy involving imported products (especially imported products from China) seems to be one of 'regulation by recall,' in other words very little is inspected and nothing is done until a defective product actually causes harm at which time the product is recalled.

So who bears the cost of this one? That's right, the little guy (as usual,) the people who bought the home. I know, I know. Some right winger will suggest that it is their fault for buying a defective product without doing adequate research. This is a stupid argument too, I mean when you buy a home do you ask for the name of every manufacturer, supplier and subcontractor that was involved in building it, and then research one by one whether there have been any complaints about that supplier? That kind of argument is about as ridiculous as the people who complain that homebuyers being squeezed out by ARMs, balloon payments or other mortgage 'tricks' are at fault because they didn't read paragraph 4 on page 347 of a 500 page contract written in legalese before signing. According to the letter of the law they may even be right, but morally they are not. We have an obligation to if necessary legislate (yes, that's right it means 'regulate') some way to prevent this kind of tomfoolery from happening.

As someone once said in observing someone else's misery and justifying why they should care, "there but for the grace of God go I."

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