MBA Survey Shows Impact on All Property Types Across U.S.
June 3, 2004
More Than $400 Billion of Commercial/Multifamily Debt at Risk for Loss of Terrorism Risk Insurance Without Extension of TRIA 'Make-Available' Provision
Washington, D.C - The Mortgage Bankers Association (MBA) released today the results of a survey it conducted to determine the prevalence of terrorism risk insurance coverage and the impact the removal of the "make-available" provision of the Terrorism Risk Insurance Act (TRIA) would have on commercial/multifamily real estate finance.
Of the $656 billion commercial/multifamily debt reviewed in the MBA study, $616 billion, or 93.9 percent, is required to have terrorism insurance by the mortgage investor and/or servicer. A full $548 billion, or 83.5 percent of the outstanding balance of the commercial/multifamily debt reviewed, had terrorism insurance in place.
Insurance specialists at every loan servicer involved in the study, expect that if the "make-available" provision of TRIA is not extended, terrorism endorsements that are currently in place will be cancelled or excluded. Without the "make-available" extension, insurance specialists estimate by the spring of 2005 only 20 percent, or $132 billion, of their collective portfolios would have terrorism risk insurance coverage in place. This represents a reduction of 76 percent-or $416 billion-in the balance of loans that would be covered for losses due to terrorism.
The clear implications of such reductions would increase costs and reduce availability of credit, a reduction on the yield of existing loans and reductions in market liquidity.
"The results of this survey clearly demonstrate that terrorism risk insurance is widely used and is more available and affordable today than before TRIA was enacted," said Gail Davis Cardwell, MBA's senior vice president, Commercial/Multifamily group. "It also underscores the significant need for an extension of the 'make-available' provision to ensure that terrorism insurance is priced within reach and that there is continued availability. MBA is urging the U.S. Department of the Treasury to extend this provision to avoid a potential market collapse."
In addition, the survey showed that with "make-available" in place, 83 percent of the servicing firms said they expect to always/almost always notify the borrower of requirements and work with him/her to purchase the necessary coverage when adequate coverage is not in place. Twenty-eight percent expect to always/almost always "force-place coverage," wherein the servicer purchases the coverage and bills the borrower for its cost. However, 44 percent expect to seldom use this approach.
In today's marketplace where mandatory coverage is statutorily mandated to be offered by commercial insurance carriers, more than half (56 percent) of the servicing firms seldom expect to declare an "event of default," with another one-third (33 percent) expecting to never/almost never declare default to ensure adequate coverage. "Litigation to require borrower to purchase coverage" is currently a little-used approach in resolving a lack of coverage-with no servicers expecting to always/almost always use this approach and two-thirds (67 percent) expecting to never/almost never use this approach.
"Without TRIA and 'make-available,' there would again be no or very few insurers offering the required coverage at an acceptable cost," said Robert Vestewig, chief operating officer of Houston-based GEMSA Loan Services, LP, which services 8,000 loans totaling approximately $61 billion for more than 100 institutional investors. "TRIA and 'make-available' allow the risk of terrorism losses to be adequately insured against, just as other perils, such as fire and windstorm, are insured against. Should TRIA and 'make-available' not be extended, the risk once again shifts from the insurance industry to the real estate finance industry, which will hit our lender and investor clients hard. Additionally, the availability of 'force- placed' terrorism coverage would likely disappear if TRIA and 'make-available' are not extended. It is also likely that without TRIA and 'make-available' lawsuits to require borrowers to obtain terrorism coverage, as required by the loan documents, other attendant servicing expenses will increase."
Ninety-four percent of commercial/multifamily servicers responding to the survey expect expenses, including additional staffing and costs of litigation, to rise if the "make-available" provision is not extended and 59 percent expect those expenses to increase significantly.
The MBA survey includes information from all of the top 10 commercial/multifamily servicers, as well as 14 of the top 20 and 18 of the top 50 commercial/multifamily mortgage servicers-one-third of the total $2 trillion market. The study covered more than 122,800 commercial/multifamily loans. The average loan size covered by the study is $5.3 million. This indicates that terrorism insurance coverage is wide and deep, not just for trophy properties but across the entire commercial/multifamily real estate spectrum.