Is Mold a New Crisis?
Mr. Johnson is executive director, Environmental Education Foundation and a United Nations Environmental, Health & Safety consultant. This viewpoint is an excerpt from an article prepared by the EEF about how mold litigation is affecting lenders. For additional information, please visit www.enviro-ed.org.
'No one likes to talk about mold. Yet it is quickly becoming a multibillion-dollar problem for bankers and other industries that support the real estate sector, it has become topic "A" in many states. It is a problem that will get worse before it gets better. In 2001 alone, mold cost insurance underwriters more than $1.3 billion, with that number predicted to go up in ensuing years. And now bankers are feeling its toxic effects in ever increasing dollar amounts.
The Environmental Educational Foundation, a national 501(c)(3) charity dedicated to developing and disseminating information regarding environmental hazards and "bridging the gap" between industry professionals, financial institutions, owners or prospective buyers, as well as to the public generally, has taken a hard look at the ramifications of this emerging crisis.
Industries such as mortgage lending, insurance, real estate and construction, as well as the legal profession will each feel mold's impact in one form or another. Mold holds the potential to become the next asbestos, so certain industries must get smart about it immediately.
Mold is a naturally occurring fungus that's been around since the dawn of time. It was not an issue then of course, but the advent of enclosed structures occupied by humans has made it so. Many people are allergic to it, and won't purchase a home if its presence is detected - and there is an enormous uptick in testing for mold these days. Insurers are looking at remediation costs that in some states average more than $35,000 per cleanup, according to the Insurance Information Institute, and they are operating in an area where standards and practices are not well established, if at all. So many are quickly moving away from providing such coverage or limiting it for both commercial and residential buildings.
This presents some serious issues for lenders. As a prerequisite for underwriting a mortgage, many banks are now requiring mold insurance on real estate such as multifamily dwellings, where the stakes are high and potentially costly. But insurers are backing away from providing such coverage in the absence of standards and the escalating cost of remediation. New legislation and tort reform may yield the only remedies, but it's not helping the banks.
Noted Renata Harrison, a director of capital management in Fannie Mae's multifamily housing group, "Mold and its dollar impact on the multifamily housing market and beyond, is becoming a serious issue. We're seeing insurance exclusions on policies and rising litigation against builders. There are no federal or state standards for a tolerable level of mold, so this must be addressed at the property level. It'll take some time before all this - the health impacts, the costs for insurers and bankers, efficient remediation and new building techniques - straightens out."
The cascade of events produced by the presence of mold in turn places real estate brokers in the compromised position of trying to sell a structure that is not fully insurable. And mortgage lenders, equally at risk, are reluctant to underwrite loans they can't profitably sell to the likes of the Federal Home Mortgage Corp. or the Federal National Mortgage Association, among the dominant players in the secondary mortgage market. If lenders can't dispose of mortgages and make money doing so as in the past, they must keep them and suffer the bottom-line consequences. Insurance premiums and lending rates may go up to fill this new profit gap in these two vital industries.
Pressure is also on builders, and so the construction industry is altering certain practices. Modern buildings are sealed tight against the external environment - air seepage is minimized or eliminated to save energy. Yet this condition helps establish a suitable condition for the onset of mold: just add water and don't stir the air. According to the Building Industry Association of Washington, homeowners are now suing construction companies, claiming defective construction that causes mold. What was once a boon - tight buildings - is now a bane of modern techniques.
Mold thrives in the presence of moisture in an airless space and can spread like wildfire under the right conditions. Inner walls, ceilings, under the floors ... places hidden from light and, unfortunately, from view (making early detection difficult), create ideal conditions to establish and grow this blight.
The 90s saw an enormous increase in the detection of mold and the lawsuits and proposed legislation meant to deal with its consequences. There are now an estimated 9,000 legal cases pending claiming property damage, personal injury and related losses. Awards for such claims are running between $200,000 and $400,000.
States such as California and Texas have taken the lead in experiencing a geometric increase in mold-related claims. For example in Texas, Farmers Insurance Group had virtually no mold claims in 1999. But just two years later, by 2001, there were more than 10,000, and the entire industry nationwide took note. California is actively seeking legislative solutions.
"Experts" who call themselves remediators paid attention to recent developments as well. They remove mold for a living, and return the damaged area to its previously healthy condition. Many are honest and capable practitioners. Some are not and are taking unfair advantage of consumers and industries alike. And this has nurtured the Wild West environment surrounding mold and the businesses cropping up around it.
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