Commercial Servicer: Terrorism Coverage Looms Over Commercial Real Estate Lenders.(Brief Article)

Starting off the year, it looks like insurance issues are going to be a great concern for servicers going forward. With a bill that would have provided a federal backstop for terrorism-related insurance coverage being held up in Congress and with borrowers likely to find that insurers are specifically excluding coverage for "acts of terrorism" when insurance policies come up for renewal, servicers might find themselves on a slippery slope. What used to be a mere administrative matter is likely to turn into something bigger as a result of these developments.

For one, they are likely to get a lot of queries from borrowers whose insurance polices come up for renewal and find that they don't have terrorism coverage. Servicers will then have to devote more resources to looking into documents to see if it is a technical default under the loan documents or not.

Roy Chun, director of surveillance, Standard & Poor's real estate finance group, noted, "Then they have to make a choice - OK, it is a technical default, what do we do? Most of the servicers say that there is not a lot they can do. If the loan is performing and there is no terrorism coverage, even though it is in default under the terms of the document, there is not much that they can do. If it is not available, they can't go to court and force someone to look for something that is not available." He added that even if terrorism-related insurance were available at very expensive rates, it would be uneconomical to go to court and force borrowers to get the coverage.

And Diane Lans, head of CMBS research with Fitch, believes that with properties technically in default, due to lack of terrorism insurance coverage, it might get difficult for the CMBS industry to monitor the true level of delinquencies and defaults. The properties most at risk for lacking terrorism-related insurance coverage are high profile central business district properties, or "trophy" properties. Lenders might also be hesitant to lend on securities backed by these trophy assets. Ms. Lans does not believe that there will be a major impact in the financing of other property types. She noted, "If it is a ...