The disparate damage estimates surrounding Hurricanes Katrina and Rita indicate the challenges commercial loan servicers face in evaluating the adverse effects on properties located in these disaster areas. There are many operational quagmires facing loan servicers, who bear much responsibility for restoring order to the affected communities. These responsibilities include:
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responding to questions from both borrowers and investors regarding the adequacy of insurance on properties affected by the hurricanes;
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determining the best way to gain access to the properties to properly assess their condition;
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evaluating environmental concerns;
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balancing investors' demands with the difficulties involved in contacting and assisting displaced borrowers; and
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managing borrower cash flows.
Servicers are on the front lines working to answer hurricane-related questions. The Mortgage Bankers Association (MBA) has hosted industry calls to share information. Commercial/multifamily lenders and servicers alike have underscored the need for a case-by-case approach to evaluating the hurricanes' effect on properties. Many have noted difficulties in accessing the properties in New Orleans to determine the extent of the damage.
Insurance challenges
To expedite claims processing, one insurance company has deployed 500 claims adjusters. Adding to the complexity of determining whether damage has been caused by high winds or flooding, some insurance companies are considering whether the failure of utilities to function caused properties to be uninhabitable.
Loan administrators continue to experience difficulties in securing copies of insurance policies from insurance agents, exacerbating the challenges in solving insurance inquiries. To assist servicers, MBA recently furnished links to insurance companies' call centers through the assistance of the National Association of Insurance Commissioners. This link is a component of MBA's Commercial/Multifamily Hurricane Resource Center, located at mortgagebankers.org.
EDR, a national provider of environmental risk management data, has identified 667 sites in the flooded area that are potential sources of contamination, such as generators of large quantities of hazardous waste and facilities with underground tanks storing petroleum products.
EDR also identified 89 sites in the flooded area with known contamination that were either in the process of being cleaned up, or had been cleaned up, including sites with leaking underground storage tanks. MBA supports tax deductions for costs incurred in the remediation and clean-up of contaminated sites, including those affected by petroleum.
Mold problems widespread
Environmental site assessments have assumed a higher profile, given the propensity for mold to grow in moist areas. Several MBA members who have participated on conference calls have stated that mold has been discovered in properties even without flood damage, due to the lack of working HVAC systems.
In June, MBA's Mold Working Group released “Mold: Steps Toward Clarity,” a white paper to assist the industry in wading through lenders' underwriting practices, insurance availability, litigation outcomes, best practices for prevention and early detection, and means to remediate mold. This white paper also is available at MBA's Commercial/Multifamily Hurricane Resource Center.
Loan administrators also are grappling with managing borrowers' cash flows. Many believe that delinquency rates on loans secured by properties in the affected areas will rise in the short term. Servicers are investigating on a monthly, case-by-case basis whether some loans should be deemed “non-recoverable.”
Many lenders and servicers noted that the pooling and servicing agreements (PSAs) governing commercial mortgage-backed securities (CMBS) transactions preclude a waiver of loan payment provisions that hinder their ability to assist displaced borrowers.
Effective resource tool
In order to expedite the process of assessing properties damaged by hurricanes Katrina and Rita and provide useful information, MBA opted to launch an online resource tool. The Web site includes a capital markets section where parties can share ideas and solutions.
For example, Fitch Ratings, Bank of America, Standard & Poor's, JP Morgan, Merrill Lynch, Morgan Lewis and Wachovia have posted useful information related to flood insurance, other insurance coverage and mold.
Once again, borrowers and lenders can access the Hurricane Resource Center by logging on to mortgagebankers.org.
Gail Davis Cardwell serves as senior vice president of MBA's Commercial/Multifamily Group.