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Mold Sickens Hurricane Survivors ... and Mortgage Lenders

October 5, 2005
Financial institutions are falling victim to mold. It's not infecting their offices, it's destroying homes and businesses along the Gulf Coast region devastated by Hurricanes Katrina and Rita.

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In the hot and humid aftermath of the storms, mold has quickly taken over abandoned structures, in some cases covering nearly every inch of exposed surfaces. While a little mold affects those who are allergic to it, large amounts of mold are toxic to everyone.

Health officials have warned homeowners not to try to remove the mold themselves. Professionals should be hired to clean mold that covers more than ten square feet (one square meter), they urged.

"Those [surfaces] that can't be cleaned need to be removed," said Steven Redd, chief of the Air Pollution and Respiratory Health Branch of the U.S. Centers for Disease Control and Prevention (CDC).

The effects of the mold are already surfacing in Mississippi, where respiratory problems are among the illnesses doctors there are reporting.

The end result is that many buildings that survived the storms relatively intact have since been effectively destroyed by mold. The only solution for many mold-infested buildings is to knock them down and rebuild.

However, mold damage is not covered by most insurance policies. That means homeowners aren't likely to be compensated for mold damage, which increases the likelihood that thousands of homeowners will simply walk away from their ruined houses.

Indeed, most homeowners who have been evacuated from the region have already stopped making mortgage payments. Unless insurers or government agencies step forward to pay for rebuilding and replacing ruined homes, it's the mortgage lenders who will be stuck with the tab.

"The recent hurricanes have brought the financially catastrophic aspect of the mold issue to the forefront, much the same way that 9/11 highlighted terrorism liabilities for financial institutions," said Charles Perry, a mold consultant to mortgage lenders.

"As insurers proceeded to exclude terrorism coverage, they simultaneously built in mold exclusions, allowing them to avoid billions of dollars in claims on Katrina and Rita damages down the line," Perry said. "However, those in the lending community that rely on healthy real estate loans and the underlying collateral to do business did not respond quickly enough to avert the potentially massive consequences of mold damage caused by the Gulf Coast hurricanes."

The consequences could be dire for many mortgage lenders as well as the investors and underwriters in the secondary market.

Lenders learn quickly, though. Many are already requiring builders to use new mold prevention techniques and mold-resistant building materials in their construction lending guidelines.

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