Chinese Drywall, the Next Housing Crisis?

By: DIANA GOLOBAY
June 10, 2009 4:38 PM CST

The US housing market, still absorbing the full shock of massive defaults and foreclosures in the wake of contracting economic conditions, faces a new threat to stability: Chinese drywall.

The building product ends up in frequent headlines these days as complaints about the product’s health and safety hazards circulate. Critics claim chemicals in the drywall lead to costly medical complications and expensive infrastructure problems in residential housing units.

Legislation passed by the House of Representatives in early May but stalled in a Senate banking committee includes an amendment that calls for HUD and the Treasury to study the effect of the presence of drywall imported from China from 2004 to 2007 — and the availability of property insurance for residential structures where the drywall is present — on residential mortgage foreclosures.

The bill, called the Mortgage reform and Anti-Predatory Lending Act, also requires HUD to report to Congress on its findings within 120 days from the enactment of the act.

Richard Wexler and Mario Diaz-Balart, the amendment’s authors, on May 8 wrote a letter to the Environmental Protection Agency (EPA) and the Center for Disease Control and Prevention urging the quick testing of health and safety risks associated with Chinese drywall. They ultimately asked for $2m in emergency funding from the House Appropriations Committee to be given to the federal agencies to complete the testing.

An analysis by the EPA of drywall samples imported from China and used in residential housing units responded to complaints the drywall emitted a “rotten egg” odor and caused copper corrosion in power switches and appliances, which in turn released natural gases, according to a May 7 letter to an environmental health scientist at the Department of Homeland Security.The EPA acknowledged that people exposed to the product also complained of asthma, respiratory irritation, breathing difficulties, coughing, insomnia, eye irritation and headaches, although a correlation between the symptoms and the exposure could not be formed.

A group of attorneys and experts plan to gather in New Orleans on June 18 on the property damage issues related to the drywall.

The financial fallout from residential properties’ faulty infrastructure is unwinding across the industry, as one of HousingWire’s sources says. An investor that made an offer on an interest-only loan on a San Diego condo complex — apartment conversions where Countrywide did about 95% of the loans — soon discovered how badly wrong things could go.

“There were a number of major lawsuits against the contractors for converting this complex from apartments to condos,” says the source. “They supposedly used unlicensed contractors and many code violations exist. Piping is criss crossed, leaks everywhere, no proper sound proofing or insulation between units, dryer ducts channel through heater ducts, heaters never have worked, windows, and patio doors leak and mold grows in units, etc.”

The investor tells HW the seller mentioned nothing about the lawsuits and the loan is so far upside down that a short sale is impossible now.

The claims are only the latest in a long argument against lender impropriety. The only difference between subprime mortgages and Chinese drywall might be the symptoms affected. In case of the former, borrowers develop delinquency and default when it becomes clear the mortgage is unaffordable. In case of the latter, occupants claim to develop health side effects that might prove just as unaffordable.

In both cases, the financial repercussions could prove long-lasting. And now both cases have become a legislative issue.