Lenders Find Terrorism Insurance Backstop Has Shortcomings

At a "servicers forum" session at the Commercial Mortgage Securities Association's annual CMBS investors conference here, servicers talked about the shortcomings in the recently-passed terrorism backstop legislation.

As well, an emerging issue relating to certification on CMBS deals to comply with the Sarbanes-Oxley legislation was discussed.

Bob Vestewig, COO of the Houston-based GEMSA (he is also the chair of the Mortgage Bankers Association's Commercial and Multifamily Board of Governors insurance task force), said that insurers who really don't want to write terrorism insurance coverage are "construing it (the legislation) as narrowly as they can."

And in the interim period of waiting for a final guidance from the Treasury on the legislation, the process of certifying an act as an act of terrorism is not clear, Mr. Vestewig said.

As well, it is not clear what the $5 million threshold in the act refers to.

The Treasury has been charged with gathering data on the effects of the law, Mr. Vestewig said.

After the initial three-year horizon of the legislation, it might be extended "on some basis or the other," he expects.

Another servicer said that insurance companies have found creative ways of not making the coverage as widely available as expected.

Servicers also complained about not getting any responses from borrowers about their actions when insurers make the insurance available to them.

In general, there is an "issue of lack of notification to the servicer community."

Jan Sternin of Midland Loan Services said that they are "not seeing any trend except that we're not getting any response."

There is a 90-day window from the Nov. 26 passage of the legislation for insurers to get notices out to borrowers about the availability, with borrowers having another 30 days to respond.

She expects "a flurry after Feb. 26 and March 26."

Mr. Vestewig also wondered what would happen at the end of the 120-day period if borrowers don't want to go in for the insurance.

In that case, the issue of force-placed insurance might not die out.

A requirement for certification on CMBS deals under the Sarbanes-Oxley corporate governance legislation that was passed last year in the wake of various corporate bookkeeping scandals was also brought up.

Keith Dunsmore, an attorney with the firm of Strauss Hauer & Feld, briefed the audience that the five-point certification has to be included with 10-k and 8-k filings, with the certifying officer having personal liability.

The servicer and the trustee to the CMBS deal are the ones that are required to certify.

Copyright 2003 Thomson Media Inc. All Rights Reserved.