Wild Fires Fuel Loan Risk Exposure

The wild fires raging through California are fueling commercial loan risk exposure. According to credit rating agency DBRS, there are approximately 10 properties with a total loan balance of $300 million of risk exposure as a result of the Hill and Woosley fires in the Los Angeles area. These properties are located in areas where the fires have occurred. FEMA, however, has designated the entire county of Los Angeles a disaster impact area, which inflates the loan risk exposure numbers significantly.

Tracking loan exposure during natural disasters is part of DBRS’ standard oversight. “We look for areas of potential exposure so that we can send questions to the servicer, and the servicer does that once the event happens,” Gwen Roush, VP of North American CMBS at DBRS, tells GlobeSt.com. “Once the event happens, we can get a firm county of the number of properties and that is really where the work to get our arms around the potential exposure begins.”

Because the fires are ongoing and could potentially spread, it is more difficult to get a handle on the potential risk exposure than in other types of natural disaster. “Our process was different with the fires,” says Roush. “With a hurricane, for example, usually within hours of the event, FEMA will designate counties, and we will use those county designations to identify where the potential exposure is. We have even gone so far as to take projected impact maps and then widdle that down once the event actually happens. The initial list that FEMA put out essentially designated the whole of L.A. County.”

Once a property is identified, DBRS contacts the servicer, which produces a significant insurance event report. “We look to those reports as they are doing the communication with the borrowers getting their arms around what their next steps are,” explains Roush about managing risk exposure due to natural disasters. “As things progress, the property will go onto the servicers watch list if there is a significant damage. That hits our radar to watch that loan, and we will send updates through the course of the repair work and make judgments.”

In some instances, DBRS will form a credit opinion on the default probability of a property based on a market impacted by natural disasters. “Houston is a good example. That market had a natural disaster, but it also had a period of economic difficulty with the downturn of the energy markets,” adds Roush. “We were already applying pretty high vacancy rates in our underwriting of those loans. Within Houston, because there were 100-year flood plains, they didn’t require flood coverage to be in place. You would see a lot of properties that weren’t covered for the damage that happened. If there is coverage that we don’t deem to be efficient, we will do an extra probability of default on those loans. That might be something that we consider going forward for a market like Houston.”

However, in the event of wild fires, Roush doesn’t imagine increasing the probability of default. “It might make sense to up the coverage limits, and that is something that lenders would be looking at, she says. “I can’t think of anything in our analysis that we would increase the probability of default because of wild fires.”