Fitch: Mold Back as U.S. CMBS Issue After Katrina

September 19, 2005

While the existence of mold as an environmental problem is not a new issue, extensive flooding in the New Orleans and the Gulf Coast brought on by Hurricane Katrina brings the problem back into focus for the U.S. commercial mortgage-backed securities marketplace, according to Fitch Ratings.

Certain kinds of mold contamination can quickly lead to the shutting down of income-producing properties, and while hotel and multifamily properties are most vulnerable to those actions, office properties can also be impacted, according to Fitch Senior Director Mary O’Rourke. ‘The tearing down of a major New York City office building in the wake of the World Trade Center attacks, is largely due to mold contamination,’ said O’Rourke.

‘CMBS loan originators should encourage borrowers to purchase additional insurance to cover mold claims in any region where additional coverage is available,’ said O’Rourke.

A potential problem for borrowers, however, may be in finding an insurer that will provide mold coverage. The awarding of millions of dollars in lawsuits settling mold-related claims dramatically thinned the insurer playing field in recent years.

Most insurers reportedly eliminated mold coverage from their standard policies, while many others stopped doing business in states with damp, warm climates where high rates of mold may be detected, like the ones affected by Katrina.

Fitch notes that the limited availability of insurance makes mold site assessment procedures even more critical in CMBS transactions. ‘Mold exclusions in property and casualty policies are an added burden on site inspections, so the need for thoroughness and expertise on the part of the consultants is obvious,’ said O’Rourke.

‘Mold: Katrina’s Lingering Legacy’ is available on the Fitch Ratings Web site at

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