Loans Don't Tell Full Story On Terrorism Risk

The reinsurance market is still not there, he said. If another attack occurs, Mr. Lawson said, and there is no reinsurance, the impact on the economy would be extremely serious.

Gary Karr, a representative of the Washington-based American Insurance Association, added that concerns over the lack of terrorism insurance, and the need for Congress to address this issue, are reflected in other quarters. He cited a recent report that New York-based Moody's Investor Service is planning to downgrade its ratings of commercial mortgage-backed securities unless Congress enacts terrorism insurance legislation by Memorial Day.

The comments came in response to what could be a blow to efforts to enact a federal backstop in the terrorism insurance market.

In its April 2002 survey of senior loan officers, the Fed reported that 90 percent of domestic banks are rejecting loan applications for high-profile properties at about the same rate as before Sept. 11.

Meanwhile, some 60 percent of foreign banks also reported that their rejection rate had not changed substantially.

In addition, the Fed reported that some 80 percent of domestic banks and more than 70 percent of foreign banks indicated little or no change in demand for loans to finance high-profile properties because potential borrowers were unable to acquire affordable terrorism insurance.

Generally, the Fed reported, about 75 percent of domestic banks said they require terrorism insurance on less than 10 percent of loans financing high-profile properties.

Many banks, the Fed said, note that their standard commercial real estate loan contracts, especially for loans of less than $10 million, generally do not require terrorism insurance.

The Fed said that six domestic and six foreign banks reported that they require terrorism insurance on more than 90 percent of loans for high-profile properties. The six domestic banks, the Fed said, account for about 8 percent of all commercial real estate loans in the United States, while the six foreign banks account for less than 2 percent.

The Fed's survey also reported that 70 percent of domestic banks have less than 5 percent of the dollar volume of their commercial real estate loans in high-profile properties.

In the survey, banks were asked what they would do if an existing borrower were to be unable to acquire adequate terrorism insurance on a property for which insurance is required. According to the Fed, domestic banks said their most likely response would be to ask for additional collateral and to modify the existing loan covenants to allow for partial coverage.

Foreign banks, by contrast, said they would most likely increase fees or interest rates associated with the loan. Four foreign banks said they would either call the loan or refuse to roll it over when it comes due.

But Mr. Lawson said the question is whether developers are able to acquire affordable terrorism coverage. Based on what is known from developers, he said, the rate they are being asked to pay is prohibitive. The amount of new construction, Mr. Lawson said, is not where it would be if Congress enacts legislation.

Mr. Lawson said that it is hard for people to maintain a sense of urgency. There is a desire, he said, to return to a sense of normalcy. But while there have not been any major terrorist events in the United States since Sept. 11, he said, many people have warned about the possibility.

"There is still a significant perception of risk," Mr. Lawson said.