Terror, Windstorm Coverage Highlight Risks

Insurance issues have been at the forefront for some time now, starting off with terrorism-related insurance in 2001, and windstorm insurance has come to the fore more recently. The industry is looking toward the extension of the Terrorism Risk Insurance Act, which is slated to expire this year, or for a more permanent solution to the issue. Servicers are also looking to address windstorm insurance issues.

At the Mortgage Bankers Association's recent commercial real estate finance convention in San Diego, some industry participants addressed the challenges of obtaining windstorm insurance and ways to deal with the situation.

Kenneth A. Travers, a senior vice president with ABS Corporate Solutions, gave an outlook of what to expect for the 2007 hurricane season. Based on a forecast from William Gray of Colorado State University, Mr. Travers said as many as 14 named storms could hit the United States this season, including up to seven hurricanes and three major hurricanes. The probability that they will hit the U.S. coastline is 64%, and it's a 40% probability that they will land on the East Coast.

These are higher-than-average probabilities compared to an average year.

Damian Wach, director, real estate investment banking, Eurohypo AG, noted that lenders have for the most part not changed their "proverbial line in the sand" approach, which has been typically how much would it cost to replace a building in the event of a total loss. He is seeing more and more lenders allowing borrowers to self-insure.

At least one state, Florida, has an insurance program that allows the state to be the insurer of last resort. This is geared to the residential side and is now spilling over into smaller commercial properties. And two of the major credit rating agencies - Fitch and Moody's - have looked at the possibility of using a probable maximum loss solution.

Wendy Melton, vice president, DB Berkshire Mortgage, observed that the availability of insurance has suffered and premiums are up as much as 50% to 600%. Deductibles are also up from 3% to 10% on a per-building basis, rather than on a per-occurrence basis. Insurance caps are in place, with caps in general at $5 million, and caps for named windstorms ranging from $2.5 million to $100 million.

As to what the government-allied agencies - Fannie Mae, Freddie Mac and FHA - are doing to address the situation, Ms. Melton noted that Fannie Mae is looking at things on a case-by-case basis and increasing deductibles from 5%-10%. Fannie Mae will not consider the PML approach since they don't want to take the risk of deciding what is necessary. Freddie Mac is asking for personal guarantees for the difference between required insurance amounts and the insurance that is obtainable. The GSE is also considering LOCs or escrows. As for HUD, there is not much flexibility with HUD requirements.

As for some possible long-term solutions that could be considered, Mr. Wach mentioned developing an accurate and reliable PML standard for windstorm damage, educating lenders on risks of alternative windstorm insurance and exploring windstorm solutions tailored to a lender's needs. Another possible long-term solution that Mr. Travers mentioned is securitizing away the risk with the help of catastrophe bonds, which he sees as "an effective alternative to risk transfer in certain markets and for certain portfolios."

Kathleen Dufraine, vice president, Global Realty Outsourcing, touched on a Florida property insurance bill, which though geared towards single-family "may bleed into" the multifamily and small commercial property area. This bill would allow homeowners to purchase insurance from the state's catastrophe fund. While this would lower costs, the bad news is that if the fund cannot support the loss, homeowners would have to pay. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com