Mold Proves Yet Another Challenge in Wake of Hurricanes

September 29, 2005

The horrific wake of two hurricanes on the Gulf Coast includes near-universal mold damage, a side effect that, while troublesome to home and business owners, may have its largest consequences on real estate lenders.

With insurance coverage for mold damage no longer available, some mortgage lending institutions have reportedly stepped up efforts to avoid future mold risk by including the use of new mold prevention techniques and mold-resistant building materials in their construction lending guidelines.

Many of the mortgages on the Gulf Coast are reportedly going unpaid as borrowers deal with more elemental issues like finding their loved ones or recovering what is left of their belongings. However, for mortgage lenders and those who securitize their loans in the secondary market, the financial consequences could be dire.

“Since insurers recently excluded mold coverage on policies for homeowners and businesses, the fate of exposed parties – mortgage lenders, commercial mortgage-backed securities (CMBS) underwriters, and investors – has been an open question,” said Charles Perry, principal of Environmental Assurance Group and a mold consultant to mortgage lenders. “The recent hurricanes have brought the financially catastrophic aspect of the mold issue to the forefront, much the same way that 9/11 highlighted terrorism liabilities for financial institutions. As insurers proceeded to exclude terrorism coverage, they simultaneously built in mold exclusions, allowing them to avoid billions of dollars in claims on Katrina and Rita damages down the line. However, those in the lending community that rely on healthy real estate loans and the underlying collateral to do business did not respond quickly enough to avert the potentially massive consequences of mold damage caused by the Gulf Coast hurricanes.”

According to Perry, lenders who sell portfolios of loans in the secondary market are now facing the potential of being downgraded because of increased delinquencies and the moldy condition of the properties.

By including the use of newly developed mold-resistant building materials and building practices in their loan documents, real estate lenders mandate the borrower’s builder to adhere to these protocols.

The newest approach reportedly includes on-site inspections for the lenders to insure that the mold prevention building techniques are being followed and the properly prescribed mold-resistant building products have been used during construction or renovation.

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