Lenders pass the buck on mold

11/3/02

Sacramento, CA – Mold hasn’t caused problems for lenders in California. They see it as a headache for insurers that lenders can mostly leave alone.

That could change if insurance gets scarce, too expensive or even disappears. Suddenly the house or office building that’s the collateral for the loan would be exposed to uninsured losses.

“We can’t do any loans if we can’t get insurance,” says Mike McGee, president of the California Association of Mortgage Brokers. “But we haven’t seen any of that yet in California.”

Even so, some in the industry are keeping watch.

In Texas, huge mold lawsuit settlements caused several lenders to temporarily suspend writing new policies for homes or commercial buildings. The suspension delayed buyers from closing on loans, because it took them longer to get insurance.

Texas has seen more claims for mold because homeowner’s policies in the Lone Star state, unlike policies in the rest of the nation, require insurers to pay for water damage caused by maintenance problems.

Some critics say the Texas experience is more a problem of insurance companies dragging their feet or denying claims they should have approved, only to lose big later in court. But whatever the cause, mold problems are growing across the country.

“It is something that is possibly going to impact everyone in the U.S. with everyone having to pay higher insurance rates. It is an issue we are watching and keeping an eye on,” says Julie Campbell, spokeswoman with Wells Fargo & Co., whose Wells Fargo Home Mortgage is one of the largest originators of mortgages.

She adds, however, that mold problems so far have “had no impact on us in California or in Texas.”

Insurance continue to be available in California, even though State Farm Insurance Cos. stopped writing new homeowner’s policies in the state. State Farm is the largest underwriter of homes in California.

No interest in uninsured property: Finding financing for buildings relies on finding insurance for those buildings. If mold-related problems cause more insurers to pull out of the market, the shrinking supply of insurance would probably drive premiums higher. If the supply of new policies dried up altogether, no lenders would lend. They don’t want to lend money against uninsured property.

“What would put us at risk is if the insurance underwriters wouldn’t write new policies,” says Everett Orrick, senior vice president and Sacramento group manager with Comerica Bank. “Because we won’t lend on property that can’t be insured.”

Bankers generally are interested to know how much the collateral on a loan is worth in case the lender has to take the property back.

From the lenders’ view, mold would become a much bigger problem if insurance became unavailable or too expensive for homeowners with existing policies. Banks have already committed to those loans.

“We don’t like to speculate. Right now, we aren’t seeing the problems affecting us,” says Alfred King, spokesman for Fannie Mae, the national organization that provides a secondary market for mortgages. “There may be some insurance companies that are out of it, but borrowers are still able to acquire insurance.”

Both Freddie Mac and Fannie Mae buy mortgages in Texas and California. They are huge secondary markets that sell bonds to buy huge pools of mortgages.

Foothills bank disclosed and sold: “So far, it hasn’t been an issue for us. We won’t close a loan without an insurance policy. The insurance covers us. If there was a problem and they couldn’t get insurance, then we wouldn’t close the loan,” says Tom Meuser, president of El Dorado Savings Bank of Placerville.

His bank has taken back a property that had mold. It disclosed the problem and sold the property.

Such sales would become more difficult if the marketplace — goaded by rising claims for mold damage, or perhaps by research proving that mold is a significant health risk — concluded that property with a claim of mold or water damage was too risky to insure at a reasonable cost. A building that couldn’t be insured would be very hard to sell.

The mold issue brings up interesting legal questions for property owners.

Consider a local situation in which a commercial building had mold damage. The owner’s equity was less than the cost of cleaning and mitigating the mold, says an attorney who knows about the case.

So should the owner simply hand the property to the bank that held the loan? A complication was that the mold could be considered a sign of poor maintenance and therefore a “waste to the property,” which means the owner could have been held liable for the damage anyway.

The owner cleaned and kept the property, rather than be sued to clean it by the bank that would foreclose on it.

Maybe you require an annual test: “If those insurance underwriters stop writing policies, then everyone is going to have to come to the table and work something out,” Orrick says. “No matter what, this is going to hurt. It is going to cost more for insurance.”

The long-term answer may be annual building inspections for airborne mold, to detect problems that could be fixed before a house has to be burned to the ground or completely gutted, Orrick says. The inspection could potentially cost $200, but it would be cheaper than paying an additional $1,000 annually to get insurance.

“A lot of the worst problems seem to be that someone has let something get out of hand,” he says. “The longer you wait, the worse it gets, and that’s when it gets really expensive.”