Inspection and home warranty law for FHA single family mortgage insurance

Streamlining Inspection and Warranty Requirements for Federal Housing Administration (FHA) Single-Family Mortgage Insurance: Removal of the FHA Inspector Roster and of the Ten-Year Protection Plan Requirements for High Loan-to-Value Ratio Mortgages

Proposed Rule by the Housing and Urban Development Department on 02/06/2013

This proposed rule would streamline the inspection and home warranty requirements for FHA single-family mortgage insurance. First, HUD proposes to remove the regulations for the FHA Inspector Roster (Roster). The Roster is a list of inspectors approved by FHA as eligible to determine if the construction quality of a one- to four-unit property is acceptable as security for an FHA-insured loan. HUD’s regulations currently require the use of an inspector from the Roster as a condition for FHA mortgage insurance where the local jurisdiction does not perform necessary inspections. HUD’s proposal to remove the Roster regulations is based on the recognition of the sufficiency and quality of inspections carried out by certified inspectors and other qualified individuals. Second, this proposed rule would also remove the regulationsrequiring 10-year protection plans in order to qualify for high loan-to-value (LTV), FHA-insured mortgages as a condition of closing for newly constructed single-family homes. The Housing and Economic Recovery Act of 2008 (HERA) removed the statutory requirement for a warranty plan and other special requirements for high LTV mortgages. HUD, however, is retaining the requirement that the Warranty of Completion of Construction (form HUD-92544) be executed by the builder and the buyer of a new construction home, as a condition for FHA mortgage insurance.

There have been 2 comments to the proposed rule.

1) “””My comment would be that FHA regulations was put in place to help homeowners have reasonable and affordable housing financing. The regulation changes will both save money for all parties and make the home buying process a little easier and attainable.”””

2) “””See attached file(s)
registering my objection to the removal of the requirement of the 10 year warranty on new construction.”””

a)  Comments Regarding  [Docket No. FR-5457-P-01] RIN 2502-AJ03

My name is Stella J. Adams, CEO of S J Adams Consulting which is dedicated to the creation of equal housing opportunity and equal access to capital for all citizens regardless of race, color, religion, sex, national origin, disability or familial status.  S J Adams Consulting provides community education in fair housing/fair lending issues; promotes community involvement in fair housing/fair lending issues and performs research and policy development in the areas of fair housing, fair lending and access to capital for all.  I am commenting in opposition to the proposal to eliminate the 10 year warranty requirement for FHA insured properties.

The purpose of the FHA is to improve housing standards and conditions, provide an adequate home financing system through insurance of mortgage loans, and to stabilize the mortgage market. By eliminating the 10-year warranty requirement, homeowners would no longer be required to pay warranty premiums but instead would be vulnerable to the devastating consequences of an uninsured defective home.  This would undermine housing standards and conditions and destabilize the mortgage market for already vulnerable minority communities.

According to the proposed rule change, in 2010 and 2011, an average of 57,415 warranties were issued, with an average warranty rate ranging from $2.75 to $3.75 per $1,000 of coverage. Assuming an average coverage of $170,412 (2010 average) and an average of $3.00 per $1,000 of coverage the average homeowner would pay an annual premium of $510 or $42.50 per month for the long-term coverage against material defects in the construction of their homes and while this is a significant cost, it is a cost that directly benefits the homeowner as opposed to other fees designed to protect the investor with no value to the homeowner.

The FHA lends to a higher percentage of African Americans and Hispanic Americans, as well as younger, credit-constrained borrowers. Studies have shown that “African-American borrowers use FHA products at a rate disproportionate to their makeup within the sum of homebuyers. That propinquity is consistent for both low-income and upper-income African-Americans” (Rust, 2010). Persons who are eligible for FHA mortgage insurance are those most likely to be targeted with defective products and services and the least likely to have the means to protect their investment should a defect occur.

I challenge the FHA’s assertion that the quality of inspections and construction standards is sufficiently high enough to warrant the removal of this standard.  We need go no further back than 2005-2008 when over 65,000 households mostly in the southern states of Florida, Louisiana, Alabama, Mississippi, Texas, and Virginia were exposed to toxic Chinese Drywall (IN RE: CHINESE-MANUFACTURED DRYWALL PRODUCTS LIABILITY, 2013).  Sometime after the installation of Chinese drywall in these properties, homeowners, residents, and occupants began to notice and complain of odd odors, corrosion of metal components, failure of electronics and appliances, and in some cases, physical ailments, such as nose bleeds, skin irritation, and respiratory problems. In response to these complaints, a number of governmental agencies and special interest groups, notably the federal Consumer Products Safety Commission and the Department of Housing and Urban Development, began to investigate, conduct testing, and issue remediation protocols related to Chinese drywall.  A federal judge recently approved five class action settlements in excess of $1 billion dollars for the remediation of homes damaged by this incident (IN RE: CHINESE-MANUFACTURED DRYWALL PRODUCTS LIABILITY, 2013).

Without the 10 year warranty insurance many of these homeowner’s would have been without any recourse other than lengthy and expensive litigation.  Without the 10 year warranty, homeowners would have to pay the cost to repair the home completely;  any additional living expense for when the homeowner is living outside the home during the repair; loss of use of the home for when the home is uninhabitable; loss of market value of the home due to the home being labeled “toxic;’ moving  expenses; storage expenses; the cost to properly dispose of this toxic waste, and various other miscellaneous damages.  Damages for construction defects are not generally covered under homeowner’s insurance policies.  Many of the defects related to Chinese drywall did not become apparent until well after the 1 year warranty had run its course.

Without the 10 year warranty insurance, homeowners face the possibility that the builder, and other entities have gone out of business or have entered bankruptcy and they cannot identify the source of the defective materials.

We cannot have any comfort in the industry policing itself, and we certainly cannot depend upon lender’s acting in the best interests of homeowner’s or investors.  I strongly recommend against the withdrawal of this requirement and recommend additional research into the number of complaints filed with state regulators and local building code officials before asserting that it is not a problem.  It may be that homeowner’s are unaware of the warranty and its usage..

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