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TRIA Disruption Feared

If the Terrorism Risk Insurance Act is not extended this year, there could be a more profound impact than the impact felt immediately after 9/11, according to Daniel Rubock, a vice president/senior credit officer with Moody's Investors Service.

Speaking at a panel session on the role of the rating agency at the Mortgage Bankers Association's Asset Administration & Technology Conference here, Mr. Rubock noted that about 50%-75% of properties have conditional terrorism coverage and so a large chunk of the coverage could disappear, creating a market disruption.

Moody's is likely to treat any impacted commercial mortgage-backed securities bonds on a one-by-one basis depending on the individual properties backing them.

Some loan documents are addressing the possibility that the terrorism insurance backstop might not be available, he said.

If they want borrowers to get standalone coverage, servicers could cite previous court decisions favoring lenders, he noted. However, this doesn't address the capacity issues relating to the availability of the insurance.

The emergence of "pari passu" split notes - splitting a large loan into a number of different parts that could go into different CMBS pools - in large part came about as a way to deal with the terrorism insurance issue, according to Mr. Rubock.

Erin Stafford, a senior vice president with Dominion Bond Rating Service said that they are adopting a "cautious approach" taking into account the possibility the coverage may not be extended.

Stephanie Petosa, senior director, Fitch Ratings said that the rating agency is going back and taking a look at fusion deals (which combine large deals with smaller ones). They are finding that larger trophy properties do have standalone terrorism coverage.

Kathy Marquardt, senior vice president, GMAC Commercial Holding Corp., noted that the servicer community doesn't want to deal with the consequences of TRIA not being extended and is hopeful that it will get extended.

Some pooling and servicing agreements are looking to special servicers of "B" pieces to make decisions, she said.

There is a lot of stress on servicers because of the possibility of litigation, and not a lot of feedback from investors, according to her. If the backstop is not extended, she said, servicers need to work together as a community so that the burden is not solely on servicers.

Touching on another topic, Ms. Marquardt wondered about the conflicts that rating agencies encounter - between a borrower and an investor, for instance, or between different levels of certificate holders - and how they handle them.

Ms. Petosa observed that while there is an "inherent conflict" for a rating agency that has been talked about by the Securities and Exchange Commission (considering that the rating agencies are paid by borrowers whose bonds they are rating on behalf of investors), the rating agencies are aware that they are only as strong as their reputations and won't risk them.

She also noted that oftentimes rating agencies get blamed. When people ask for something saying that the rating agency wants it, she advises people to "call their bluff."

Mr. Rubock noted that Moody's handles any conflict "very diplomatically" and they also rely a lot on the servicer's judgment. There are different constituencies involved, and he sees it as a matter of managing expectations.

Ms. Stafford said that Dominion works very closely with the issuance side and keeps in touch with what's going on for the life of a deal.

About the various pari passu note structures that have emerged, Ms. Stafford noted that it is difficult coordinating between six different trusts and six different servicers.

Ms. Petosa wondered if the different structures would hold up in a court of law.

Mr. Rubock doesn't believe that pari passu notes are "out of control" yet. These structures have not been tested by a market downturn yet, he noted.

Responding to a query from Ms. Marquardt about how the rating agencies review requests for defeasance, Mark Goldberg, associate director, Standard & Poor's, said that the rating agency sees it as "just a bunch of documents being added."

Ms. Stafford also said that Dominion has come to the conclusion that "we're not adding a lot of value by looking at defeasance."

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