Mold White Paper Published by Lenders
"The fight against dampness and mold begins at the moment the first sketch for a new structure is put on paper," according to a white paper entitled Mold: Steps Toward Clarity, published last week by the Mortgage Bankers Association.
The white paper discusses the emergence of mold as a health concern, the reaction of the insurance industry, inspection, prevention and remediation practices and the efforts to create mold resistant building materials. It summarizes (and perhaps takes undue comfort) from the findings of the National Academy of Science Institute of Health report on the health effects of mold.
As to why lenders need to concern themselves about mold, the white paper states:
For lenders, servicers, and others involved with real estate loans, dampness and mold growth can lead to problems at several levels. These include:
• Direct damage to building or contents. Mold or dampness can damage building materials and contents requiring the owner or manager to expend funds for repairs and remediation. If these sums are substantial, a borrower’s ability to repay a loan and the collateral value of the structure may be negatively affected.
• Loss of use/loss of rental value. Areas affected by significant amounts of mold or dampness may become unusable, unfit for rental, or rentable only at a reduced rate. Unaffected sections of a building may have to be closed off to effect repairs. This loss of income can have a negative impact on cash flow in addition to costs associated with remediation.
• Stigma damages. Even after a successful remediation, the stigma associated with a prior mold outbreak (picture remediation contractors going in and out of a building in “moonsuits”) may reduce the market value of or ability to rent space in an affected property, with direct negative effects on collateral value or cash flow a possible result. In multifamily residential units, residents may break leases with increased frequency or demand other concessions.
• Third party liability. Occupants and users of an affected building may sue for indirect harm or injuries they believe were caused by mold. Workers compensation claims have also been filed by occupants for exposure to mold. While these suits may not ultimately result in large awards, an owner’s or manager’s costs to defend them are likely to be high enough to have a negative impact on income.
The existence of significant mold or dampness problems in a structure can also have more direct effects upon a lender or servicer. The presence of large amounts of mold in a structure may be a negative constraint on a lender’s decision whether to foreclose and resell or continue operations. Mold concerns may also affect the refinancing options available to the borrower, leaving the lender without one possible exit strategy. For servicers, mold and dampness issues can affect operating budgets or maintenance holdbacks and make work-outs or restructuring of non-performing loans more difficult.
Many of these concerns also apply to the developer, the owner, the occupants and the builder.