Collateral Damage: A Lack of Insurance Coverage and Growing Litigation Put Lenders at Risk When Serious Mold Problems Are Discovered in Buildings. but Construction Lenders Could Be Part of the Solution
Perry, Charles L., Jr., Mortgage Banking
THE RECENT GOVERNMENT REPORT ON MOLD-RELATED health problems has confused a lot of people. The press coverage revealed how divided public impressions are of how mold affects human health. On the same day and based on the same health-related release, The Wall Street Journal's headline was "Indoor Mold Linked to Problems Such as Asthma and Coughing," yet The New York Times' headline announced "Panel Finds Mold in Buildings Is No Threat to Most People."
Neither of those stories truly impacts a lender's primary concern when it comes to mold. And that is, "Is my collateral's health impaired if mold is found?" The answer to that question is "Yes, it is."
Perception is reality, and if the perception is there is mold on site, then there are just too many other deals to finance for a lender to want to take on that kind of complication. This is especially true in today's market for several reasons. First, there is no longer any coverage for mold in homeowners and commercial property-casualty insurance--a lender's first line of defense--prior to the last two years.
Second, since that coverage is gone, that means your next alternative for a financial solution is litigation--which is one of the primary reasons lawsuits involving mold and real estate are being filed at the rate of 10 or more a day. That has been the case for the last three years. And who needs litigation if you're a lender simply seeking to be made whole by way of your rights to the collateral?
Finally, having just experienced a decade of environmental changes to lending policies having to do with issues such as asbestos, lead paint, leaking underground storage tanks and the rest, mold is unfortunately an altogether different enemy.
At least with those other environmental hazards, if you removed them you knew they were gone, and you and your borrower moved on. But unfortunately with mold that is absolutely not the case; in fact, it's not even close.
If mold is present and you pay to have a remediator remove it, given the right climate or water-soaked area of the building that can't be seen, give mold 48 hours and it's back for another visit. And if the conditions are right, next year--how about another attack in another area of the building, and let's just add that it, too, is in an area that you'll not see until it's too late. The ugly cycle starts again.
All that said, this problem cries out for prevention. This is truly a problem you never want to have introduced to your collateral in the first place. So the best approach is to stop it before it starts.
While the scientific debate stumbles along over how mold affects physical health, there is no doubt whatsoever that mold affects the financial health of loan collateral in mortgage portfolios. The effects can be so bad, in fact, that the Mortgage Bankers Association (MBA) created a working group on mold. The group was charged with researching the issue, coming to conclusions and reporting back to the full MBA membership on suggested "smart practice guidelines" for mitigating or preferably eliminating the risk of mold contamination of commercial and residential properties. The group has assembled a substantial number of facts and recommendations but the work is not yet complete. The full report is scheduled to be presented and available at MBA's Commercial Real Estate Finance/Multifamily Housing Convention in February. This article offers a number of suggestions aimed at prevention that I think lenders should know about right away.
As a lender for 20 years and as a consultant on lenders' environmental issues for more than 12 years, I believe that unless we make changes with our new construction lending policies along with our policies for rehab, remodeling and remediation, the worst is yet to come. Some say the days of huge multimillion-dollar jury prizes in mold cases are over. This may be true for bad-faith claims between individuals and insurers. …