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Lenders and The Elusive Mold Problems April 2004 Faced with rapidly increasing and unpredictable claims costs from mold damages, the insurance industry has methodically excluded insurance coverage for mold and domestic terrorism losses on virtually all of the property and general liability insurance policies. Together these exclusions leave a broad cross section of insurance buyers including property managers, property owners, and lenders with unprecedented levels of newly uninsured risks. Environmental insurance is a partial solution to these exclusions. See mold claim chart showing the domino effect on insurance companies. Apartment
owners aren't the only ones losing sleep over mold. Lenders are
looking for solutions to the mold problem. "It's
nice that owners are concerned, but the real issue is the lender,"
said Charles Perry, principal of Environmental Assurance Group in West
Hartford, Conn., explaining that owners with a standard 20% down payment
borrow the rest. "If the lender has 80% in a project, he has four
times more money at stake than the owner." Perry
is one of several people leading a Mortgage Bankers Association (MBA) task
force on mold. An
institutional lender for 20 years, Perry said mold is an elusive and
complicated problem. Unlike
lead paint or asbestos, the presence of mold is sometimes difficult to
detect because it may be hidden behind a wall. It's also a difficult issue
because there are thousands and thousands of different types of mold, and
people have different reactions to mold. And last but not least, even if
mold is removed, it may come back. That
makes prevention key. "If I'm a lender, I don't want to fix a
problem," Perry said. "I want to stop it from happening." The
good news is that there appear to be some steps that owners can take to
fight off mold. On
new properties, lenders are beginning to inquire more about the use of
mold-resistant building products, Perry said. About
70% to 80% of the surface of a building is sheetrock or drywall, which is
sheathed with paper, a food source for mold, Perry explained. The
building materials industry has started to introduce paperless drywall
into the marketplace. It's more expensive, but it could help ward off mold
and an even more costly remediation. "The price differential varies,
but, on average, it's about half of 1%," Perry said. Inspections
are also becoming increasingly important to lenders. If it is not already
specified, mold will be added to a list of items to look for during an
inspection of an existing property. Inspectors will also be looking for
construction defects, including leaking roofs and other water-related
problems. The
MBA mold task force is working on a white paper to address mold issues
from a mortgage lender's position. It will likely include a set of
"smart practice" recommendations. The
National Multi-Housing Council has also been active on the mold front. It's a vital issue because most insurance policies exclude mold. Environmental Risk Resources Association (ERRA) is a nonprofit association dedicated to helping its members utilize environmental insurance products and is a great resource on the subject of mold and other environmental risks to property owners, lenders, and insurance companies. "Mold
is very much a symptom of other issues," said Richard Lawch, senior
vice president of multifamily at Fannie Mae. "If
you have a dry and secure building, you generally won't have a mold
issue," he said. Fannie
Mae, he said, expects its lenders to follow good, basic real estate
principles. When looking at a new loan origination, the company expects
that a lender's physical inspection of the property will include looking
for mold and possible moisture problems. "If they see issues related to water or see mold, it will generally require some kind of remediation," Lawch said. Apply Online
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