Mold Also a Concern for Commercial Servicers
A growing concern for lenders and servicers is how to manage mold since the problem has expanded from the residential side of the mortgage market into the commercial arena where claims are occurring more frequently, according to the Mortgage Bankers Association's Commercial/Multifamily Mold Working Group.
The group, which is comprised of MBA members who work in commercial real estate finance, property inspections and insurance, has released a white paper, "Mold: Steps Toward Clarity," to be used as a educational tool to effectively mitigate mold and dampness for indoor commercial spaces.
Don Glitz, vice president, corporate risk manager at GMAC Commercial Holding Corp. and chair of the Mold Working Group, said the most important thing is for lenders and servicers to develop and impose routine programs for control and containment of mold on building owners and managers.
"There are particular areas of the country where rainfall is more common, more frequent. You have to seek out potential sources of water and eliminate them. In some parts of country such as Florida and California, there are more cases of mold because of the climate. But there are also mold issues in upstate New York and Pennsylvania," Mr. Glitz told Mortgage Servicing News.
"There are certain structures that are more susceptible such as multifamily housing, motels and hotels, and assisted-care facilities where there is a lot of heating and air-conditioning equipment in places where water can accumulate."
The Mold Work Group worked for over a year to develop the paper, which was open for a 45-day comment period at which time key industry experts were asked by the working group to thoroughly review, question and comment on the paper before releasing the final version to the public.
"We worked with lenders, servicers, engineers, insurance people, ratings organizations, technology people and contractors. All of them said this is a great paper. At the same time, some said to add more for the steps to remediation," said Mr. Glitz, whose own background is in insurance.
"The basic premise of the paper was to provide guidance for the lending and servicing industry. It's all spelled out here ... things are changing. All of the people who play a part in the building - whether it be the lender, servicer, contractor, or building owner - they could all ultimately be brought into litigation."
According to the white paper, before the 2000, there were few insurance mold claims, which were generally settled for a few thousand dollars. High-profile cases soon occurred in Texas and California and increased in 2001. "Estimates suggest that at least 10,000 toxic mold cases were filed in the U.S. and Canada, of which just over half were bad-faith actions against insurance companies," said the paper. The Mold Working Group discovered the amounts to resolve these claims sometimes grew to $100,000 or more with commercial claims in the millions.
If mold and dampness goes unmanaged and there is no routine program in place, a lender could suffer direct damage to the building or its contents, loss or use of the building, rental value, and the stigma damage associated with the building. "All third-party liability can be incurred because someone feels they have contracted an illness.
In the paper, we bring out facts surrounding litigation," said Mr. Glitz.
In "Damp Indoor Spaces and Health," a report from the National Academy of Sciences, which is cited in the white paper, a committee found that there is "insufficient evidence to support many claims of linkage between mold and dampness and serious illness or disease," which includes cancer, reproductive disease and other immune diseases.
"People who suffer from asthma or immune problems, they are impacted by mold but mold doesn't cause it. We were quite pleased to hear that," said Mr. Glitz. "Plaintiffs will now have a lot harder time trying to win a case saying mold caused a particular problem."
Statistics suggest the average cost of remediation, which includes eliminating moisture and isolating the outbreak, for residential mold claims to be between $10,000 and $25,000 and $200,000 for commercial losses, according to the paper. "Underwriting remains difficult because of the size of the potential universe of legal claims remains uncertain. The simple cost of defending can be substantial and drain an insurer's resources," the paper said.
"Within the loan document, there should be a statement that the borrower or owner is responsible to maintain property in good condition. Most mold conditions develop later. You can have a phase one inspection and no mold is detected, but 72 hours later it's there. It's not just about phase one and feeling comfortable clear and clean. Situations develop right away because of humidity and moisture."
In the end, it's also smart to document how and when maintenance is carried out. "It provides a framework of information, a record of how you went about doing business," he said. That is why it's crucial for lenders and servicers to make sure there is a regular maintenance and moisture control program in place, said Mr. Glitz. The first phase includes visual inspection for water stains, signs of water intrusions along roof lines, window joints, drains and supply lines, as well as inspection of uninsulated piping, swimming pools and fountains.
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