HOW may resume defect payments

October 30, 1994|By Daniel B. Wroblewski | Daniel B. Wroblewski,Sun Staff Writer

The HOW Insurance Co., which insures tens of thousands of new homes in Maryland against defects, will likely resume paying on claims in a couple of weeks but probably less than 100 cents on the dollar.

The Virginia Bureau of Insurance took over HOW on Oct. 7 after concluding that the company had insufficient money set aside to pay off claims. Payments for all claims have been halted, and no new policies are being issued.

Patrick Cantilo, the special deputy receiver who is running the company, said he expects HOW to resume paying claims in a couple of weeks but added: "It is highly unlikely that we will pay the entire claims."

The company is not even paying "emergency" claims now because it was too difficult to determine what was an emergency and what was not, he said.

But he noted that homeowners may be able to seek compensation directly from the builder.

"Homeowners should explore whether the builder is responsible," he said. "In many cases, I would guess the builder would be responsible."

Joseph Owens, Maryland's deputy secretary of licensing and regulation, agrees:

"You always have recourse against the builder for poor work. But that involves going to court, and most buyers don't want to do that because of the cost," he said.

HOW, based in Arlington, Va., offers 10-year warranties for new homes. Builders sign up with HOW, then give the warranty to all their homebuyers.

At settlement, builders pay for the program -- based on the home price, $2.75 per $1,000 -- and add the cost to their overhead.

HOW has stopped issuing policies except for homes that were under contract and under construction by Oct. 7, Mr. Cantilo said. For these homes, HOW requires builders and buyers to sign an acknowledgment that HOW is under receivership and may not be able to pay future claims.

"The reason we are making the warranty available is the financing may be contingent on the warranty," Mr. Cantilo said, noting that if the warranty were not offered, the buyer could be forced to seek new financing at a higher interest rate.

"It is only out of concern for not interfering with closing that we are doing this," he said. "[But] we don't want to lead people to believe that by getting a HOW warranty, everything is going to be great."

HOW controls about 50 percent of the national market for new-home warranties. About 30 percent of new homes nationwide are covered by warranties.

In Maryland, the warranties are marketed by the HOW Council, an affiliate of the Home Builders Association of Maryland.

The program covers "workmanship and materials" for one year, "major systems" such as the heating or electrical systems for two years, and "major structural components" for 10 years.

Homeowners generally ask the builder to fix defects; if the builder refuses, HOW pays the bill and tries to recover the money from the builder.

Mr. Owens advises homeowners to file claims with HOW right away, even as they seek help from the builders.

"That's a must," he said. "We're advising anybody to file a claim the same time you hit the builder."

HOW has issued about 3 million warranties nationwide since 1974, with 1.7 million still in effect. About 135,000 were issued in 1993.

HOW has issued 140,000 warranties in Maryland, but does not know how many are still in effect.

Mr. Cantilo said he hopes to restructure the company, perhaps by finding a buyer, in the coming months.

The deputy receiver said holders of HOW warranties can call (800) 433-7657 for more information.

RATES TOP 9%

Mortgage rates climbed above 9 percent for the first time since early 1992.

Rates on 30-year fixed mortgages averaged 9.11 percent last week, according to HSH Associates in Butler, N.J.

Rates for 15-year loans averaged 8.65 percent and one-year adjustable mortgages averaged 6.18 percent.

Mortgage rates have been climbing steeply since February, when 30-year loans averaged about 7 percent.

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