In 1985, when newlyweds Ramon and Elena Vidal were earning little and living with his mother, the saleswoman from Jim Walter Homes Inc. made an irresistible offer: a $26,000 home of their own with no money down and easy financing, to be built on a lot the Vidals owned in San Diego, Tex.
They may be wishing they still lived with Ramon's mother. The foundation of the Vidals' house began sinking almost immediately. Now, the house is slipping off its concrete base, and a jack supports the center to keep it from caving in. "It looks like we made a very bad investment," says Elena.
ERODING VALUE? The Vidals and some 400 other unhappy Jim Walter homeowners in South Texas banded together and sued Mid-State Homes Inc., which holds the mortgages on most of the homes built by Jim Walter Homes, the sixth-largest homebuilder in the country. Mid-State, along with Jim Walter, is a subsidiary of Walter Industries Inc. And since Kohlberg Kravis Roberts & Co. acquired Walter in 1987, the irate Texans sued Henry R. Kravis for good measure. In the suit, they allege fraud and deceptive trading practices, among other charges. Walter Industries denies any wrongdoing. KKR and Kravis wouldn't comment.
The Vidals and other homeowners say their initial complaints met with no response. A company spokesman acknowledges that some houses may need repairs, but says Walter has "substantially" lived up to its construction contracts and blames some of the problems on poor maintenance. He notes that out of nearly 84,000 active mortgages, the company faces only 133 other legal claims of construction defects.
But at the urging of their attorney, Hector Gonzalez, the Vidals and hundreds of other Jim Walter homeowners haven't made a monthly mortgage payment in four years. Those payments should be going to Mid-State, and the delinquent mortgages could be of concern to Walter Industries' creditors as the company struggles to get out of Chapter 11. The mortgages in Mid-States' portfolio are the company's largest asset. If they were bundled and sold to investors as mortgage-backed securities, they would be worth about $850 million, creditors say.
The company dismisses suggestions that homeowner dissatisfaction could spread and erode the value of mortgage-backed securities the company might issue in the future. It says its mortgage-delinquency rate has been almost unchanged at 4.5% since 1988. But Gonzalez says he has 40 more cases ready to go and notes that Jim Walter Homes has had a long history of legal trouble. In the late 1970s, without admitting wrongdoing, Walter settled two separate suits involving homeowners in Mississippi and Kentucky.
Gonzalez himself sued the company twice in the 1980s, netting settlements totaling $6.4 million. "Jim Walter Homes has built shoddy houses all over the state," he says. The way he sees it, unhappy Jim Walter customers will keep him busy for quite some time.