Washington–The Mortgage Bankers Association (MBA) has called on lawmakers to ensure that some form of federal backstop for terrorism insurance remains available in 2006 or risk a serious disruption of the commercial real estate finance industry.
In a letter to House Financial Services Committee Chairman Mike Oxley, R-Ohio, and Ranking Member Barney Frank, D-Mass., the association said that Congress must act to ensure the continued availability of terrorism coverage established under the Terrorism Risk Insurance Act is maintained and not allow the process to be slowed by attempts to improve the program.
In a letter signed by Kurt Pfotenhauer, an MBA senior vice president, the group said, "Our membership can appreciate the interest of many House members to make certain reforms to the program; however, we wish to reiterate that it is most important that terrorism insurance remains available and affordable beyond December 31, 2005."
The issue is especially important to lenders, whom the MBA noted typically finance 80 percent of the value of a property and would, in the absence of TRIA, find themselves shouldering 80 percent of the risk.
The MBA also pointed to the results of a study it conducted in 2004 in which it surveyed loan administrators who serviced more than $656 billion of the then approximately $2 trillion in commercial real estate debt outstanding.
That study found 94 percent of such financing included a requirement for terrorism coverage, including the entire commercial mortgage backed securities market, and that 84 percent already had coverage in place.
Additionally, the study found that there was no correlation between a servicer's average loan size and the percentage of their portfolio with terrorism coverage. "This counters the popular belief that terrorism coverage is only necessary for 'trophy properties,'" Mr. Pfotenhauer said.
Given these requirements from lenders, the MBA said that "the lack of availability of terrorism insurance in a post-TRIA environment would catch a wide range of borrowers, servicers, rating agencies and others between obligations to have terrorism insurance in place and a lack of available and affordable coverage."
The MBA noted that the Treasury Department's report on TRIA said the program had been effective in enhancing financial capacity to write terrorism coverage, making it more available and affordable, and that challenges remain in predicting terrorism risk and loss probability.
"Given these continuing uncertainties, the expiration of TRIA in the short term will result in the commercial real estate investment markets becoming more dysfunctional," Mr. Pfotenhauer said in the letter.
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