Terrorism Reinsurance Backstop Needed

June 4, 2002

Bankers Group Says $7 Billion In Mortgage-Backed Securities At Risk

Inman News Features

The Mortgage Bankers Association called on the Senate today to take immediate action to create a federal terrorism reinsurance backstop after Moody's Investors Service announced that it would put commercial mortgage-backed securities totaling $7 billion on its watch list for possible downgrade. The announcement was made because terrorism insurance coverage on the properties behind those securities has expired, will expire in the next few months or is insufficient, according to the MBA.

The watch list actions announced by Moody's affect 11 single-asset securitizations backed by large office buildings, and three debt issues dominated by large loans on hotels or office buildings.

"This move by Moody's is exactly what we had anticipated would happen in light of Senate inaction. Those most immediately impacted will be those individuals, such as retirees who rely on this income for their livelihood, who have invested with pension funds and insurance companies holding these securities. These individual investors, unfortunately, will be most adversely affected as the value of their investments decline," said James M. Murphy, MBA's chairman. "This will also have a cascading effect on the rest of the real estate market as capital becomes more expensive."

As Moody's begins to downgrade certain CMBS that include properties with inadequate or no terrorism coverage, it will have ramifications throughout the capital markets and put at risk the vitality of the U.S. economy, according to the MBA.

The commercial real estate finance industry has total outstanding commercial mortgage debt equaling $1.7 trillion. Property taxes alone provide almost half of all local government funding and more than 70 percent of the local tax base throughout the country. Therefore, reductions in real estate values could have adverse implications on public services provided to local communities, according to the association.

Washington, D.C.-based MBA is the national association representing the real estate finance industry.

Copyright: Inman News Service

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