Sep 4, 2010
hcolosimo
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Chinese Drywall – Will it Fizzle Out Like UFFI or Stick Around Like Mold?

The widespread use of Chinese-made drywall throughout the U.S. between 2004 and 2008 continues to become more apparent, as more and more homes are being found to have this type of drywall.  Once thought to be a localized problem in the southeastern United States, the U.S. Consumer Product Safety Commission (CPSC) reports that it has received complaints about Chinese-made drywall in 37 states.

Drywall from several Chinese manufactures has been found to emit sulfurous gases, including carbon disulfide, carbonyl sulfide, and hydrogen sulfide.  These gases commonly have an odor resembling rotten eggs; however the absence of odor does not mean that the drywall is free of these gases.  Exposure to these gases can cause sickness in humans, most commonly respiratory infections, headaches, and sinus problems.  The gases also react with copper, causing wiring, pipes, air conditioning coils, and appliances to deteriorate and fail prematurely.

On its website, the CPSC reports that it is “aggressively investigating” the problem, including the potential health hazards to occupants.  The Federal Interagency Task Force on Problem Drywall issued interim remediation guidance in April 2010, which recommends removing all problem drywall from a home, as well as all fire safety alarm devices, all electrical components and wiring, and all gas piping and sprinkler system systems.  This essentially means gutting a home down to the studs, at a cost of tens of thousands (or hundreds of thousands) of dollars per home.

So what does this mean for appraisers?  Will we be required to attempt to determine the origin of the drywall when we inspect a home?  What if an appraiser notices a rotten egg smell when inspecting a home?  What will be an appraiser’s liability if a home that was appraised at, say, $250,000 is later found to have Chinese drywall and needs to have $100,000 worth of remediation?  Once the remediation is done, is there still a stigma attached to the home?  Good questions, all.  And there aren’t many answers, at least not at this time.

How long will the Chinese drywall issue last?  And how will it affect appraisers?  We can only look to history for possible answers.  I entered the appraisal profession in 1987, which was before USPAP, before FIRREA, before mandatory certification and licensure.  (In case you didn’t know, the Savings and Loan Crisis was my fault.)   During this time, the scare over Urea Formaldehyde Foam Insulation (UFFI) was at its peak.  I remember certain lender clients who required me to ask every property owner, “Have you added any insulation to your home within the last 10 years?” If they replied in the affirmative, I was then required to follow up with, “What type of insulation was it?”  (If only I had a dollar for every time I heard the reply, “Pink.”)  I was then required to insert a statement regarding this question-and-answer exchange in the appraisal report.  Thankfully, the UFFI scare didn’t last; it fizzled out quickly.  Over the next 2-3 years, interest in UFFI diminished to the point where no one seemed to care about it.

On the other hand, toxic mold has definitely had a longer shelf life.  Approximately 10 years after toxic mold first appeared on the appraiser’s radar screen, it continues to be a problem issue for appraisers and property owners.  Hundreds of attorneys still advertise on the Internet as toxic mold litigation specialists.  While mold fever is certainly down from its peak a few years ago, it hasn’t gone away as quickly as the UFFI scare did.

Unfortunately, looking at the past doesn’t give us all the answers we need, because the effects of Chinese drywall will not be fully known for some time.  Compounding the problem, there is little reliable information for appraisers regarding this issue.  Even E&O companies, who are usually at the forefront of informing appraisers how to handle potential liability issues, have been strangely silent regarding this issue. If drywall-related lawsuits against appraisers become common (and let’s hope they don’t), we can expect additional guidance from E&O companies.  Until that time, appraisers should direct all their questions and concerns regarding Chinese drywall to their E&O companies or their personal attorneys.  Inserting disclaimers in appraisal reports may also be advisable.  Although Fannie Mae and Freddie Mac do not permit appraisers to insert additional limiting conditions into reports, they do permit appraisers to clarify scope of work issues.  Stating that the scope of work of the appraisal does not entail identifying Chinese drywall or testing indoor air quality could help bring an appraiser’s scope of work into sharper focus, and perhaps avoid any misunderstandings about the appraiser’s role.  Until more information and better guidance become available, all appraisers can do is watch and wait.

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