House of horror
May 8, 2011 12:39 PM   Subscribe

What responsibility does a mortgage company have for the approval they granted to a builder (before paying the builder) on a house that is now an utter disaster?

I took out a major 'construction loan' with my mortgage company. They did not give me the money but paid it out, bit by bit, to the contractor/builder -- during the remodel process -- twice a month. They would only make payments to the contractor after they did inspections to see that the contractor's work was legitimate and up to par.

Three years later the house is a complete disaster, with floors sinking, walls filling with water, roofing issues, etc. I want to stop paying the mortgage at this point.

What liability does the mortgage company have in this nightmare?

I'm curious to hear from anyone else who might have been in a similar situation. And yes I have an attorney, but I'd still like to hear some 'real life' experiences related to this. Thanks.
posted by zenpop to Work & Money (11 answers total) 1 user marked this as a favorite
I hate to not answer a question directly, but why aren't you going after the builder to get warranty work completed?
posted by geoff. at 12:59 PM on May 8, 2011 [1 favorite]

Lawyer. Disengage your emotions and get a lawyer to help you get it made right.
posted by theora55 at 1:07 PM on May 8, 2011 [1 favorite]

Oh and I'm not a lawyer, and haven't worked on a project that was funded by a loan, but I'd be very surprised if you could go after a lender for this. From the way you phrase the question, with regards to the bank's inspections, you seem to be equating the lender with a construction manager. They aren't, their obligation was to give you money to complete the project.
posted by geoff. at 1:21 PM on May 8, 2011

Is there a reason you're not going after the contractor? There's obvious potential for liability there.

Just a guess w/r/t the lender - they could have assumed a fiduciary relationship with you during this process, which could require the exercise of reasonable care in these progress inspections they made. Then, if they were negligent in that process, they would be liable for their negligence - which would be based on proof of what damages are attributable to their negligence (not the contractor's negligence, so it could be a lesser amount).

Bigger picture guess: There's liability (primarily from the general contractor) to make repairs. You don't just get to walk away from the mortgage, unless you're willing to take the credit hit and all the other stuff that goes with walking away from a mortgage under any circumstances.

Again, this is all just a guess. You have a lawyer, so let her tell you what your rights are.
posted by J. Wilson at 1:32 PM on May 8, 2011

In my understanding of the perhaps-comparable HUD 203k program, the inspector that was hired (that the borrower hires) is easier to hold liable than the bank. But that is due to the documents the borrower signs.

There are so many variables. Your question is quite unlikely to get an accurate answer here. Someone with expertise needs to sit down and read the documents. I'm in a similar situation, and a good lawyer (the fourth one I tried) and an experienced construction defect expert witness made a huge difference.
posted by slidell at 1:46 PM on May 8, 2011

I found the lawyer through the construction defect expert, by the way. That attorney's cases revolve around exactly this situation, unlike the relative generalists I found via the Bar Association. Reading between the lines, you may not be getting the help you need, because I stopped wanting to Ask Metafilter once that fourth attorney got involved.
posted by slidell at 1:50 PM on May 8, 2011 [1 favorite]

Last point -- to those asking why go after the bank, it's obvious: you can find banks and they have money (both of which may not be true of the builder), and in general, it makes sense to bring in everyone with some responsibility to maximize the likelihood of things being made right. Anyway, the OP didn't say they weren't going after the contractor.
posted by slidell at 1:59 PM on May 8, 2011

Response by poster: Hi Folks

Thanks for the feedback. I have an attorney, we're going after the contractor. In fact we enter into mediation next month. But I just went through one of those tossing and turning nights last night, thinking about this situation with the mortgage company not really paying attention to what they were supposedly 'inspecting' -- and then paying the contractor anyway. And my mortgage is sky high.

I'm hoping to modify the mortgage, showing the lender that the house is not just under water, (which it is, like so many homes nowadays) but is a structural nightmare (thanks to their negligence), that no one would really want.
posted by zenpop at 2:11 PM on May 8, 2011

IANAL, but my understanding is that when the bank inspects the house as it is being built, it does so to protect itself, not you; their interest is in being sure that their collateral is worth the value of the loan.
posted by jon1270 at 2:36 PM on May 8, 2011

Response by poster: Hi jon1270. I got the same guess from my realtor, who I just got off the phone with. She said they probably inspected just to make sure work was being completed -- but didn't really look into the quality of the work.

posted by zenpop at 2:40 PM on May 8, 2011

Best answer: Unless the lender colluded with the contractor to cover up defects or otherwise committed fraud, you're going to have a really hard time going after them.

The inspections are for their benefit only, and if you look through your contract documents, you'll probably see strong language to that effect.

On the plus side, having read your earlier questions, I think you're in a good place. The contractor had insurance and you're going into mediation which is better than going to trial. It might not seem that way to you, but trust me, going to trial is slow. To paraphrase our very good construction attorney, "buildings aren't suppose to leak," he never lost a case in which buildings leaked.
posted by geoff. at 2:50 PM on May 8, 2011

« Older I don't want to create the universe, just recreate...   |   How do I move to Texas? Newer »
This thread is closed to new comments.