Lenders next big problem--getting a hold on mold.
Now, however, mortgage lenders are beginning to realize that mold's negative effect on their business is creeping into their bottom line.
A growing number of high-profile insurance claims and facility closings is dominating public awareness of mold, but the financial infestation can spread all the way back to the mortgage lender, with devastating consequences.
The insurance industry, typically the party that takes on property risk, is now underwriting exclusions for mold, which has exposed lenders to a new category of risk.
"Lenders are working furiously to get a hold on mold," said Charles Perry, an official on the Mold Working Group at the Mortgage Bankers Association and principal of Environmental Assurance Group.
"Lenders deserve to be in control of this issue because typically they have 80% of the money at risk. When mold infests a home or business, it can devastate the financial health of all connected parties: owners, developers, lenders, tenants, and insurers.
"To a lender, mold carries property (collateral) value concerns as well as liability concerns. Bankers are whispering that the financial impact of mold could make the fallout from asbestos look like a day at the beach."
If a borrower defaults because mold has damaged his or her property, the lender may not wish to simply recoup the mortgage by foreclosing and becoming the owner. The extent of the mold infestation may cause collateral impairment that could substantially affect the property's market value. In addition to the prospect of taking ownership of a property that will need expensive remediation, the lenders must classify the mortgage in question as "non-performing," which can cause negative reactions from the FDIC and rating agencies among others.
"Faced with this scenario, lenders have three options," said Perry. "They can try to cure the problem by bringing in a mold inspection and remediation team or simply leveling the structure. However, either cure is expensive, and unlike most remediation, this kind of cleanup holds no guarantee that the mold will be permanently eliminated. The third option is to actually prevent the likelihood of mold by setting down specific new requirements in their lending guidelines such as the use of mold resistant building products."
According to Perry, the conditions under which mold occurs are as follows: the existence of spores, moisture in the air, a normal temperature range, and the presence of a food source like paper. Since temperatures, airborne spores, and moisture are facts of life, the only controllable variable is the food source--primarily paper-faced dry wall.
"Paper-faced dry wall is the most common element of any post-50's building, and unfortunately, it makes a great home for mold," said Perry.
"Lenders could require that new construction loans be contingent on the use of paperless dry wall, which has recently been developed. To back that up, lenders could also require post-project inspections that check for the presence of paperless dry wall.
"These two simple steps could save lenders many millions in future losses due to mold."
|Printer friendly Cite/link Email Feedback|
|Title Annotation:||Insiders Outlook|
|Publication:||Real Estate Weekly|
|Date:||Feb 11, 2004|
|Previous Article:||When mold knocks, what do you do?|
|Next Article:||Chapter and verse on trends driving small town prosperity.|