Mold becoming toxic problem for lenders

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http://dallas.bcentral.com/dallas/stories/2002/01/28/story3.html

From the January 25, 2002 print edition

Mold becoming toxic problem for lenders

Turmoil over insurance for mold damage is stalling loan transactions,

putting the state's home-mortgage industry in a `critical situation'

Hala Habal Staff Writer

GREATER METROPLEX -- Mortgage lenders are grappling with insurance issues

related to toxic mold that could hobble the state's residential-lending

industry.

Toxic mold has already caused the state's major insurers to temporarily

cease writing new homeowners policies or to alter existing coverage, without

which home loans can't be underwritten.

Now, experts say, the secondary mortgage market -- mainly the Federal

National Mortgage Association and the Federal Home Mortgage Corp. -- could

stop purchasing Texas lenders' home loans if they deem the insurance

coverage to be inadequate.

That would force lenders to keep such loans in their portfolios, cutting

into their bottom lines.

Ann Graham, senior vice president of the legal division at the Texas Bankers

Association, said that if anything interferes with reselling loans to the

secondary market, real estate transactions in Texas would suffer major

disruption.

" I think it's an issue with huge potential ramifications for Texans and for

the lending industry, " Graham said.

" The long-term consequences might be increased interest rates, because the

lender would be unable to resell the loan, so there would be increased

administration, time and costs, " she said. " That would be the biggest

potential disruption, and it would be huge.

" But, until there are some clearer indications from the insurance industry

about coverage and premiums, we can't be sure what those impacts are going

to be, " Graham said. " Our hope is that everyone will take this issue

seriously, study it carefully and look at the long-term impact on Texas

homeowners, Texas business and the Texas economy. "

The three biggest homeowners insurance writers in Texas -- State Farm,

Farmers and Allstate, in that order -- account for about two-thirds of the

state's $2.9 billion homeowners insurance industry, according to Lee ,

a spokesman for the Texas Department of Insurance.

Texas insurance regulators require that carriers use state-approved policy

forms and dictate the type of coverage companies must offer. Texas has three

homeowners policy types, commonly referred to as Homeowners A, B or C. A

represents the least comprehensive coverage and C is the most comprehensive;

B is the most commonly issued.

The B coverage reads that all types of water damage, most of which leads to

mold damage, must be covered. With mold claims increasing around the state,

however, insurers have balked at that language, saying the policy should

only require coverage for " sudden and accidental " water damage.

" Farmers and Allstate have essentially acted to bring the (Homeowners A

policies) close to the policies that they use in other states, " said.

" State Farm will issue Homeowners B to renewals, but not to new business;

Allstate and Farmers are writing new business, but not Homeowners B; and

each piece you add to the Homeowners A costs you an additional premium, "

said.

Mold " is bad enough for the market to have really gone into a rather

critical situation, " he said. " Critical in the sense that we hear a lot from

consumers who are in a situation where they need to buy a policy because

they are buying or selling a house, and the lack of adequate coverage is

holding up the loan transaction. "

Mortgage experts say the more comprehensive B or C coverage is still

available from smaller insurers, but for much higher premiums. That, in

turn, results in lost income for lenders.

" When people see their coverage change and see their premiums go up, the

first person they're going to complain to is probably their lender, because

those premiums are probably being escrowed and paid by the lender on their

behalf -- even though the lender is not the one who's changing the coverage

or the premium, " Graham said.

" So, we've been talking about how to deal with that misperception on the

part of the consumer about who to really express their concerns to: the

insurance industry, the insurance commissioner and the Texas Legislature, "

Graham said.

According to the state insurance department, water damage is the

second-leading cause of homeowners' loss in the state. Most homeowners

initially worry about fire coverage, which is the third-leading cause of

loss; hail and wind damage rank first. As a result, insurance companies are

pushing harder to use the same policies they use in other states. Those

other policies generally don't provide the generous water coverage offered

in the Texas Homeowners B policy.

The insurance department said there is a request pending from the Insurance

Services Office -- a national service organization that drafts standard

policy language that companies can adopt for their own use -- to bring a

more standardized insurance form to the state.

Tom Yenne, executive vice president and managing director of the retail

lending group at Guaranty Bank in Dallas, said the mold issue is an

insurance concern -- and something that could affect future lending. Joe

Rossa, Guaranty's senior vice president of consumer lending, agreed that

mortgage lenders and brokers are worried about producing loans and how the

issue might impact their production.

" When you've been in a boom market, you're always looking for that brick

wall you might run into. This may or may not be that brick wall, but it's

something that's got them all concerned, " Yenne said. " I don't think we know

right now what the fallout could be, but if the insurance companies stop

writing homeowners' insurance, then absolutely that's the brick wall. "

Contact DBJ writer Hala Habal at hhabal@... or (214) 696-5959.