CPSC has received 1,897 reports of problems with the drywall from residents in 30 states, the District of Colombia, and Puerto Rico, but the product was most widely used in Florida where it is estimated that as many as 35,000 homes may contain the product, and Louisiana. Those two areas were rebuilding after devastating hurricanes so many of those storm victims have now been hit with a double whammy. The drywall was also used extensively in new construction, especially in 2005 and 2006.
Reports of the problems caused by the stuff read like a horror movie. The Consumer Product Safety Commission (CPSC) has been investigating these reports and nothing conclusive has been proven, but the lawyers have been lining up for months, suits have been filed, and homeowner insurance companies are scrambling for ways to deny damage claims.
The drywall is said to emit toxic sulfur fumes. While many homeowners report smelling the characteristic "rotten egg" odor, often at intolerable levels, others report health and structural problems but no odor. Symptoms of exposure include sinus problems, nose bleeds, respiratory problems, and headaches. The house itself often suffers even more. The fumes are reported to corrode metal, especially copper, causing electrical, plumbing, appliances, and especially air conditioning systems to fail. Many metals blacken, even jewelry.
Many people have moved out of their homes until the drywall can be removed; others who cannot afford to pay for temporary lodging and/or repairs have either been forced to stay put and endure the problems or have lost their homes to foreclosure. Remediation is said to cost $75,000 and up.
The Florida insurance commissioner recently ruled that damages caused by the drywall are not recoverable under standard homeowner insurance policies. Commissioner Kevin McCarty said that this is a malfcuntion "based upon a defective material that was installed in the building. And that historically has been excluded from a homeowner's policy." There is also the possiility that homeowners could lose coverage altogether if they move out for an extended period leaving the home vacant.
But homeowners are already finding that their insurance companies weren't waiting around for a legal ruling. Claims have been rejected and then policies canceled simply because a claim was submitted.
A number of lawsuits have been filed, both individual and class action, against the Chinese manufacturers, one of which is owned by the Chinese government. It will be interesting to see how that works out.
No Chinese drywall has been imported into the U.S. in 2009, at least not legally. The Border Patrol is working with CPSC to make sure that it doesn't come in through the back door but there are apparently still stockpiles of the material in U.S. warehouses.
In the meantime, CPSC is actively studying the problem. In late October it released the results of three preliminary studies of the differences between Chinese and non-Chinese drywall. The results of the two laboratory studies indicated that the Chinese product contained elemental sulfur and emits higher concentrations of volaile sulfur compounds than the non-Chinese drywall. It also contains higher concentrations of strontium. The Commission states that the strontium does not pose a radiological risk.
The third study took place in ten Florida and Louisiana homes. Researchers found that sulfur gases were either not present or were present in only limited or occasional concentrations and then only where outdoor levels were also elevated. The study, however, did detect concentrations of acetaldehyde and formaldehyde, both known irritants.
So, nothings scientifally damning so far. Yet people continue to suffer both economically and health wise.
This story has a long way to go.
It’s likely that we’ll set a new record in terms of overall foreclosure activity for the fourth consecutive year. Over 1.3 million U.S. households received a foreclosure notice in 2007; over 2.3 million received notices in 2008; and although the 2009 numbers haven’t been completely counted as this issue goes to press, there will be somewhere in the vicinity of 2.8 to 3 million households in foreclosure. We’re likely to see more than this in 2010, with the number of homeowners in foreclosure probably exceeding 3.5 million, before the trend begins to reverse itself sometime in 2011.
Investors, home buyers and real estate professionals have all been anxiously awaiting a tidal wave of REOs for the past two years. Instead, inventory levels have remained frustratingly low, even in some of the hardest-hit foreclosure markets. Expect more of the same in 2010.
What this means for buyers and sellers is that there will be limited availability of REOs, albeit at higher-than-normal levels. No flood, but a good chance that the trickle on the market today will grow to a more steady stream. While this makes it less likely that we’ll see a “double dip” in home prices, we also won’t see much price appreciation until these distressed assets are finally gobbled up. The most likely scenario is a long, relatively flat period of recovery in the housing market.
A big frustration for potential foreclosure buyers has been the difficulty in buying a property via short sale. Agents have questioned why banks reject a short sale offer 20% below the mortgage amount only to spend tens of thousands of dollars to foreclose on the home and then sell it as an REO at a 50% discount.
We’ll see an increase in the number of short sales if the Treasury Department has anything to say about it. Lenders participating in the Obama Administration’s loan modification program will be strongly encouraged to offer any homeowner who doesn’t meet the requirements for HAMP (Home Affordable Modification Program) a short sale opportunity as an alternative to foreclosure.
But short sales won’t be a panacea, either. In many cases, the presence of a second loan will make negotiating a short sale much more difficult; in other cases, the owner of the primary loan might foreclose on the home, wipe out the second loan, and sell the home, using the amount of the second loan as a “market discount” to move the property.
Working with foreclosure properties will require diligence, persistence and patience. But there has never been a market with as much inventory to choose from, and the combination of deeply discounted pricing and historically low interest rates make many deals once-in-a-lifetime opportunities.
It seems like every day someone is asking about why it is so hard to get a real estate loan. Just two years ago anyone could get a loan to buy a house. Well, these times they have a changed and rules from the lenders have changed right along with the times.
Think for a second of home loan guidelines being similar to the old pendulum clocks. Just a couple years ago the pendulum was to the left, and it was probably too easy to get qualified. But now the pendulum has swung all the way to the right, and it is very difficult to get qualified. Often, the lending industry swings its requirements from one extreme to the other without stopping at a sensible middle ground. For now we will not explore the cause of this change, only the new requirements. Keep in mind though that these will change over time as well, hopefully to a more moderated middle ground but only time will tell.
For those looking to get qualified in this tough market, please note the criteria below:
Fico Scores These must be better than average (600+), and when the credit report is run there must be no Bankruptcy (BK), and likely no "collections" of accounts will be allowed.
Down Payments Buyers must have some money to put down, no longer will the lenders approve 100% financing, most likely the lenders will require 10-20% down (except FHA which allows only 3% (3.5% in 2009)).
Ample Income All income will need to be verified with pay stubs two year period and IRS and State tax filings for 2-3 years. Then they will calculate your debt-to-income ratios (looking to see that you can really make the payments). Each lender has different ratios they will pass or disqualify with. As a general rule, these days they are wanting to see much smaller debt-to-income ratios. In other words, the banks want to see borrowers with more income and less outstanding debt obligations.
Stated Income This (with no verification) is no longer available, meaning quite a hardship on the self-employed, but lenders are very risk averse now. The only exception is if buyers have a very hefty down payment like over 30%.
Proof of Funds A few months worth of recent bank account statements will be required to show that money is really available for closing costs and down payments.
Reserve Funds Many lenders require that the borrower have reserve cash on hand to cover two to six months worth of payments.
Non-Occupants If the property is not going to be the home of the borrower (like a rental) then most lenders will increase the interest rate on the loan.
Limited Holdings Restrictions are also placed on many borrower that this property will not increase their rental holdings to more than 4 units. Lenders are very suspect of investors that might be over leveraging themselves.
Obviously, only very qualified people can meet the above criteria, and that is just what the lenders want in a time of uncertainty and massive losses. For the time being they can’t justify making any more high-risk loans. Hopefully, knowing what is needed in advance to get approved, buyers will understand that it is critical to prepare early and get their ducks in a row before starting the home buying process. For those lucky enough to be qualified in today’s market, a wide range of opportunity awaits them.
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