Builders Received Kickbacks, Say
Regulators
Defective Blade Guard Prompts
Recall
Is a drainage ditch a wetland?
FDIC Study Sheds New Light on Boom
Markets
CO Incident Leads to New
Legislation
Homeowners refunded $24 million in
settlement with title insurer
Without admitting any wrongdoing, First American Title
Insurance Co. of Santa Ana, Calif., agreed in February to
refund $24 million to homeowners in Colorado, Arizona,
California, and other states in response to allegations that
the company had in essence paid 16 large production-home
builders to steer business its way. When the Colorado Division
of Insurance opened the investigation of First American in
October 2004, the company took the concerns seriously enough to
stop its practice of forming captive reinsurance arrangements
that gave builders a financial incentive to refer clients to
First American.
Here's how the scheme allegedly worked: Home buyers paid
premiums to First American or one of its subsidiaries, which
had been recommended by the builder. The insurance company in
turn gave a portion of the premium to a captive reinsurance
entity, in exchange for sharing the risk. The problem for
regulators was that the middleman — the captive
reinsurance company — was owned at least in part by the
builder, meaning that money was moving from the title-insurance
company to the builder. While it isn't illegal for a builder to
make a referral, it is illegal for an insurance company to pay
for it.
Another suspicious aspect, according to Erin Toll, deputy
commissioner of compliance for the Colorado Division of
Insurance, was that title insurance carries very little risk to
begin with and normally doesn't need to be reinsured. In fact,
in the May issue of Builder magazine, Toll was reported as
saying, "It's been eight years since the conception of these
arrangements and not a single claim payment has been made."
Also, according to regulators, since the reinsurance company
was being paid more than was reasonable for the risk involved,
the payments appeared to be compensation for the referral,
rather than for reinsurance. In other words, it looked like a
kickback.
First American is not the only title insurance company under
the microscope. Fidelity National Title of Jacksonville, Fla.,
and LandAmerica Financial Group of Richmond, Va., have both
ceased to use captive reinsurance arrangements in response to
regulator concern. All three companies maintain, however, that
the business arrangements were legal.
Colorado's investigation started a small avalanche, as other
states around the country, including Arizona, California, and
Washington, launched their own inquiries. According to an April
7 article in the Insurance Journal, regulators such as
California insurance commissioner John Garamendi are also
considering whether title insurance companies are charging
consumers too much. Said Garamendi, "Ceding 50 percent of their
premiums indicates there's a whole lot of fat in the game."
— Laurie Elden
Defective Blade
Guard Prompts Recall
A circular saw that JLC reviewed in November 2004
("Sidewinder Circ Saws") was included in a May 18 recall by
Robert Bosch Tool Corp. and the U.S. Consumer Product Safety
Commission. Some 69,000 saws sold from February 2004 through
April 2005 are affected by the notice, which revealed that the
company has received a report of amputation caused by a
malfunctioning lower blade guard.
Owners of Bosch saw models CS10, CS20, and CS20-XC should check
the product nameplate on top of the motor housing. If there is
no asterisk in the serial-number box, consumers are advised to
stop using the saw and contact Robert Bosch Tool Corp. at
800/856-9683 or
www.boschtools.com for
a repair kit. An asterisk after the serial number indicates the
problem was corrected by Bosch preshipment and the saw has a
properly functioning guard. — Laurie Elden
Is a drainage ditch a
wetland?
NAHB doesn't think so, and wants Congress to use language in
upcoming legislation that makes this clear. Other items on the
association's May 26 "Wetlands Wish List" include limiting the
wetland-permitting process to 120 days or less, and
streamlining the Nationwide Permit program.
FDIC Study Sheds New Light on
Boom Markets
In case you haven't noticed, there's a nationwide boom going
on in the housing market. For years, pundits have worried and
argued about whether the boom presages an inevitable bust, with
home values dropping, equity disappearing, and work for
builders evaporating.
A recent report by economists at the Federal Deposit Insurance
Corporation (FDIC), the agency that guarantees bank-account
deposits, reaches some interesting conclusions about that
controversy, based on a look back at the history of local real
estate booms and busts. (The full report is online at
www.fdic.gov/bank/analytical/fyi/2005/050205fyi.html)
For one thing, observe study authors Cynthia Angell and Norman
Williams, boom times are not always followed by busts —
it has actually been more common for a boom to end with a
whimper as "a period of price stagnation that allowed local
economic fundamentals to catch up with high home prices."
Defining "boom" in a metro area market as a three-year price
rise of 30 percent or more, and "bust" as a 15 percent price
drop over three years, "boom was found to lead to bust in only
17 percent of cases prior to 1998," says the report.
Historically, local housing booms are
more likely to end with a whimper than with an all-out bust,
says a new report. Still, the authors note some troubling
developments that could dampen the national market's current
euphoria.
Where busts do occur, the study shows, they are usually
traceable to some non-real estate collapse in the local economy
— such as occurred in oil towns like Midland, Texas, when
oil prices plummeted during the mid-1980s. And busts may happen
where there has not been any boom, too; in fact, says the
report, "While 21 housing busts have occurred since 1978 under
this definition, only nine of them occurred on the heels of a
housing boom."
But the authors do note several troubling developments. For one
thing, the number of boom markets has risen sharply in the last
year, from 33 at the end of 2003 to 55 at the end of 2004.
Nationally, home prices rose 11 percent in 2004, compared with
7 percent each year in 2003 and 2002. The spreading use of easy
mortgages involving no down payment or low initial interest
rates could be driving demand, note the authors, and they warn,
"To the extent that credit conditions are in fact driving home
price trends, a reversal in mortgage market conditions could
contribute to an end of the housing boom."
What does all this mean for builders looking to their own
business future? Professor C.F. Sirmans, director of the
University of Connecticut's Center for Real Estate and Urban
Economic Studies, says that in local as well as national terms,
it's the underlying need for housing that counts most.
"My advice to builders would be to always remember the
fundamentals: Housing demand is driven by income growth and
household formation," Sirmans says. "Certainly builders might
be concerned if the supply of new houses is increasing too
rapidly to match these factors." — Ted
Cushman
CO Incident Leads to
New Legislation
No criminal charges will be filed following an investigation
into a deadly carbon monoxide leak on the University of Vermont
campus in Burlington, Vt. (see In the News, 4/05). According to
forensic engineers and state inspectors, the heating system of
the privately owned apartment building where the leak occurred
had a number of preventable defects that contributed to the
January 30 incident, which left one person dead and six others
injured, but they declined to find anyone at fault.
Investigators say the Burlington, Vt.,
gas leak occurred when a boiler misfired and caused an elbow
joint (top) in the Plexvent pipe to separate, allowing exhaust
gases to escape. A dislodged support bracket (bottom) may have
contributed to the incident as well.
The investigation focused on the heating system's 9-foot-long
Plexvent plastic vent pipe, which was subject to a 1998 CPSC
voluntary recall. The accident happened when the building's
Trianco Heatmaker gas boiler misfired, causing an elbow joint
in the Plexvent pipe to separate and leak exhaust gases
containing high levels of CO into the rest of the building.
Investigators agree that the misfire was caused by a
"maladjusted" gas valve in the boiler, which had been serviced
only hours before the incident.
In addition to the gas valve and defective pipe, chief
investigator John Certuse, director of engineering for
Industrial Services & Engineering of Attleboro Falls,
Mass., found several code violations and design flaws in the
heating system. For example, the boiler room lacked sufficient
ventilation to supply both the boiler and the gas water heater
with adequate combustion air, which can cause delayed ignition
and increased exhaust-gas CO levels. Investigators also found
that the 3-inch-diameter Plexvent pipe wasn't pitched
adequately and had a misplaced and partially blocked condensate
drain, allowing water to drain back into the boiler and cause
misfiring and corrosion. And Certuse speculated that a
dislodged support bracket discovered during his investigation
might have allowed the vent pipe to move excessively during a
boiler misfire, contributing to the detached pipe elbow.
Sadly, the incident could have been avoided. Records show that
on at least three occasions, New England Air Systems, the
company servicing the building's boiler, notified the
building's management that the flue pipe needed replacement.
But because the service invoices didn't refer to either the
recall notice or the safety issues involved, no action was
taken. Finally, the building had no CO detectors to alert
residents of the leak. Prompted by the incident, Vermont has
since joined a handful of other states that require carbon
monoxide detectors in all new residences and apartment
buildings. — Andrew Wormer