Terrorism Threat Hurts Realty Lending.(terrorism insurance for commercial loans)(Brief Article)

Mr. Quinn, president and CEO of Column Financial, an Atlanta-based subsidiary of Credit Suisse First Boston, testified on behalf of the Mortgage Bankers Association of America at a recent congressional hearing on terrorism insurance. Excerpts of his remarks constitute this month's viewpoint.

Today we will not consider any loans in excess of $50 million without full terrorism insurance coverage and we are scrutinizing all loans in excess of $20 million if they have any terrorism exclusions. Recently, I have turned down six loans valued at approximately $300 million, and have discouraged many more. My competitors are acting likewise, and the current situation is only going to get worse.

High-rise office buildings in high-profile cities such as New York, Washington, Chicago and Los Angeles would be extremely difficult to finance without terrorism coverage. If another attack occurs, the markets will shut down.

To put the commercial real estate financial industry in perspective, total outstanding commercial mortgage debt equals $1.7 trillion. The real estate finance industry provides the strong tax base that allows communities to thrive. Property taxes alone provide almost half of all local government funding and more than 70% of the local tax base throughout the country.

Loan production volumes for 2002 will be at risk if terrorism insurance coverage remains unavailable. For example, during 2001,commercial real estate finance activity in Chicago was approximately $10 billion dollars; in New York it was $12 billion; and in Los Angeles it was $10 billion.

Furthermore, pension funds and life insurance companies have a significant amount of their investors' money in commercial real estate holdings and commercial mortgage-backed securities. If there is a downturn in the commercial real estate industry, average Americans will be adversely affected.

Currently, there is a risk transfer occurring from the insurance industry to commercial businesses. Insurance commissioners in 45 states have approved exclusions for terrorism, war and military action, and the use of nuclear, biological or chemical materials. This risk is being transferred to borrowers and lenders, thus making the lenders the insurers of last resort. If this situation remains, lenders will not be able continue to make loans.