TRIA Lapse Puts CMBS, CRE at Risk

WASHINGTON, DC—With the Senate having adjourned Tuesday without passing legislation to extend the Terrorism Risk Insurance Act, the industry is now looking at next steps. Job number one, says the Real Estate Roundtable, is reinstating TRIA sooner rather than later. And Fitch Ratings sees repercussions for CMBS as the program to backstop terrorism insurance expires at year's end.

“With this congressional session now over, we are committed to working with the incoming Congress to finish the job started in this Congress,” says Jeff DeBoer, president and CEO of the Roundtable. “TRIA simply must be reauthorized as soon as possible to mitigate the economic damage that a lack of terrorism insurance will cause over time.” He adds that although TRIA does not prevent terrorist attacks from occurring, “it does disrupt terrorists' goals of damaging our economy.”

At Fitch, managing director Jim Auden notes that the TRIA program, originally enacted in the aftermath of 9/11, is “an important component of the CMBS market and has become common in many transactions. If it is not renewed, we identify approximately 20 Fitch-rated transactions that would be put on Rating Watch Negative.”

Because loan documents require terrorism insurance over the life of the loan, “CMBS servicers may increasingly force-place coverage from their own carriers,” says Auden. “This would likely be at a very high cost, if coverage can be found at all.”

The impact on individual CMBS deals would vary widely, Auden observes. A failure to renew TRIA “would have a negative impact on ratings of office properties with loans in CMBS single-asset transactions, for example.” Potentially, it could also affect some multi-borrower transactions, “if the number and size of the loans lack sufficient coverage, or the risk of terrorism-related losses could not be mitigated by the rest of the pool.”

More broadly, the impact of the lapse in TRIA is hard to determine, says Charles M. Chamness, president/CEO of the National Association of Mutual Insurance Companies. “People have been asking what will happen now that TRIA is set to expire and we have to tell them it's not clear,” he says. “And that's exactly the point. The whole purpose of TRIA was to provide stability and certainty to the market, and Congress has now done the opposite.  The industry will have to spend the holiday season scrambling to get notices out to policyholders, re-evaluating its risk and seeking other remedies.”