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Thursday, June 24, 2004

Builders And Insurers Are Placing "Mold Clauses" In Their Contracts

by Stuart Lieberman

Mold claims can be very costly. Property damage claims relating to mold have, in a few cases, exceeded one million dollars. And personal injury claims can be costly as well. In response to this, corporate America has been busy looking for ways to escape mold related liability.

For example, builders are trying to protect themselves from mold claims by placing mold exclusions in their contracts. Recently I saw a contract from a home seller that disclaimed any liability to the buyer caused by or relating to mold growth.

Your real estate lawyers needs to be watchful for these clauses and must ensure that you understand the risk if you sign an agreement with this exclusion. Personally, I think efforts to immunize builders in this manner are unconscionable.

Mold has been around longer than we have. But it has been a basis for legal liability for a relatively short period. For the most part, mold lawsuits have been around for only the last 10 years.

Mold requires a moisture source and darkness to grow. That being said, why should a builder need any special mold protection?

If the roof isn't leaking, if the piping is sound, if the insulation is properly installed, in other words, if the home is well constructed, why safeguard against mold claims?

Why not simply build a better home? That's a new thought. Eliminate the ongoing water sources. I would be concerned about a home being sold with a mold clause. Maybe the builder lacks confidence in his own ability or that of his subcontractors.

Insurance companies are now concerned about mold as well. What had seldom been a claim basis is turning into a carrier nightmare.

Some carriers are carving out mold claims from their basic policies. If you want that protection, you need to pay extra for it. And even then, it is restricted.

This can be a real problem. Often treating mold means knocking down walls and re-building. What will you do if you have this issue, but have no insurance coverage? People will soon find themselves in this situation.

Because homes are supposedly more energy efficient now than ever before, they tend to trap moisture and therefore, I am told, encourage mold growth. That may be one reason why mold complaints are on the rise.

Also, we are talking about it a lot more now. In the past it simply did not occur to homeowners, or for that matter their lawyers, that claims for mold damage could be filed. You are reading this column, for example. A few years ago no one would have written about this.

The cure is usually easy. Very often mold can be eliminated with bleach. You also need to ensure that moisture sources have been eliminated. Ventilation also helps. State and local health departments have a lot of information concerning simple mold abatement.

The bottom line is this: Home sellers and insurers are cleverly trying to avoid mold liability; read the contracts before you sign. And if they are bad contracts, see a lawyer and protect yourself.

Published: June 24, 2004

Stuart Lieberman, Esq. writes about environmental issues. He was a New Jersey Deputy Attorney General assigned to the State Department of Environmental Protection from 1986 - 1990. Currently he is a shareholder in the environment law firm of Lieberman & Blecher, P.C., located in Princeton, New Jersey. He can be reached at slieberman@liebermanblecher.com.

Copyright © 2004 Realty Times. All Rights Reserved.

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Monthly LIBOR Still Rock Bottom

by Henry Savage

Most of you know that mortgage rates have risen considerably over the last four months. And most analysts expect rates to rise even more in the second half of 2004. I did a little poking around and found some interesting information. While nearly all types of mortgage programs and nearly all indices that drive adjustable-rate mortgages are up, the monthly LIBOR index has hardly budged. Check this out:

The yield on the 10-year treasury bill has soared from the 2004 lows in March of about 3.60 percent to today's yield of 4.70 percent. Unfortunately, fixed-rate mortgages tend to follow the direction of the 10-year bond, so 30- and 15-year mortgage rates are up by close to one percent. That's quite a jump over such a short period.

The yield on the One-Year Treasury Bill has jumped from 1.19 percent to almost 1.80 percent in the same time period. This means that adjustable-rate mortgages that are tied to this index have risen as well.

The six-month LIBOR (London Interbank Offering Rate) has jumped from 1.15 percent to 1.86 percent. Similarly, mortgages tied to the six-month LIBOR have risen by the same amount.
With all of these mortgage indices up by 60 to 100 basis points or more, it's no wonder the refinance market has been squashed. And it appears that the red hot housing market may be cooling down.

However, I did notice one thing: The monthly LIBOR index has moved from 1.10 percent to 1.23 percent -- an increase of only 13 basis points. Mortgages tied to the monthly LIBOR have barely moved. When you compare a six-month LIBOR ARM to a one-month LIBOR ARM, it's not difficult to determine which is the better deal. Let's take a look.

The monthly LIBOR ARM adjusts monthly. This scares a lot of people because the borrower is subject to monthly interest rate fluctuations. The six-month LIBOR ARM adjusts every six months, giving a borrower less frequent rate volatility.

Here's the problem. Assuming a margin of two percent (the margin is the amount added to the index to determine the mortgage rate), let's compare these two LIBOR products. The one month LIBOR ARM would be at 3.23 percent (1.23 percent index plus two percent margin). The six-month LIBOR rate would be 3.86 percent (1.86 percent plus two percent).

After rounding, we have the one-month product at 3.25 percent and the six-month product at 3.875 percent. On a $350,000 loan amount, this is a difference of $182 per month in interest. So the question to ask is whether or not a borrower would be willing to pay an additional $182 every month in order to receive only six month's interest rate security. It's not worth it and let me tell you why.

First, shorter term instruments will carry a lower rate than longer term instruments. That's why the one-month LIBOR carries a lower yield than the six-month LIBOR. Therefore, a mortgage loan tied to the monthly LIBOR should always carry a lower rate. If the LIBOR indices keep rising, the monthly LIBOR mortgage will rise in monthly increments but the six-month LIBOR mortgage will jump every six months. And since the six-month LIBOR is likely to be consistently higher, the mortgage rate will also be higher.

The bottom line is that six months really isn't long enough to give a borrower reasonable protection from interest rate volatility. If you want to avoid being exposed to interest rate risk, pay for a fixed-rate mortgage. But if you want a low rate and are willing to absorb interest rate fluctuations, the one-month LIBOR is still the way to go.

Published: June 24, 2004

Henry Savage, the president of PMC Mortgage Corporation in Alexandria, VA, is a mortgage columnist whose work has appeared in numerous consumer, real estate, and mortgage publications. Mr. Savage welcomes your questions for possible use in this column, however because of the volume of mail received, Mr. Savage cannot answer questions individually.

Copyright © 2004 Realty Times. All Rights Reserved.

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