Mold Problems Still Growing for Real Estate Lenders

Source: Mortgage Servicing News, July 3, 2006
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The steady growth of mold litigation has not slowed in the commercial and resident real estate industries, according to the Greenguard Environmental Institute, which says this expanding legal gray area has compelled lenders to protect their mortgage portfolios by working with insurers and environmental consultants on new risk mitigation programs.

The recently launched GreenguardĀ Mold Protection Program, which is overseen by GEI, a nonprofit organization, sets guidelines for lenders involved in new construction, including best practices for safeguarding against the damage and resulting losses caused by mold.

“Protecting your portfolio has never been more difficult,” said Carl Smith, chief executive officer, executive director of GEI. “Lender liability concerns have now spread to other loan categories as state legislatures have stepped into the equation, making it possible for multiple lender exposures and potential losses from just one instance of mold contamination.”

In light of the multiplying liability issues, lenders should attempt to prevent the presence of mold. Laws like those in California, which target developers and contractors responsible for structural defects within the first 10 years of occupancy, could mean millions in liability losses for each case of mold contamination, according to GEI.

“The next context of this law has paralyzed many California builders, sending ripples through the community,” Mr. Smith said.

Instead of just worrying about mold’s financial impact on the collateral supporting the mortgage industry, especially new construction, lenders now have to additionally guard against the weakening of their business loans to builders and contractors, he said. “If builders, who borrow money for their business, are hit with mold-related suits under the California law, they can be held liable for 10 years post-construction, therefore affecting their own financial status and the relationship with their lender. And this is just the beginning. We’ve just heard that 17 other states are considering similar legislation.”

If mold dramatically decreases property values, it could force these loans into a “nonperforming” category. Mr. Smith said that classification causes a negative chain reaction from ratings agencies, regulatory authorities and shareholders.

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