GlobeSt.com: Can you quantify the risk to the CMBS market specifically?

Carlson: It's hard to say since it depends on so many things. Because there doesn't seem to be a way for insurance companies to completely price the risk of a terrorist attack, the impact on CMBS would depend on how many insurers would continue to offer terrorism insurance without some sort of backstop and what rates end up being charged for the coverage. The fewer insurers who offer the coverage, the higher the price and the greater the impact on CMBS.

GlobeSt.com: Can't you project based on what we saw prior to TRIA's passage three years ago?

Carlson: Clearly, there was turmoil in the insurance market and that affected the servicers who were trying to enforce the loan documents that called for all-risk policies and coverage. But there are a few things that are different now. Since Sept. 11, there have been some changes to loan documents that call for coverage as long as it's offered at a reasonable rate. Also, there are certain loan documents that have some sort of cap on the rate for terrorism insurance. Those things are all wild cards in the mix. Today, servicers are going to have to look at each individual loan document to see exactly what the requirements are. It could be a bigger deal now than it was when it was assumed that terrorism insurance was part of an all-risk policy. Things that were negotiated into loan documents that limit what a borrower might pay for terrorism insurance could open up the doors for disagreements between servicers and borrowers on what constitutes reasonable rates. Also, the cap on what you have to pay for an insurance policy is lower than the full coverage amount, so there could be issues with properties not being adequately insured.

GlobeSt.com: What is the likelihood that Congress won't pass a backstop?

Carlson: Clearly, there will be some sort of disruption to the CMBS market if there is no backstop for terrorism insurance, and we see that as a risk for both the bonds and bondholders. Currently the extension is the most logical way to address the backstop issues, but potentially there could be other ways to address the need. There's a report due to Congress from the Treasury Department at the end of June, and everyone is waiting for that to see what the odds of passage are.

GlobeSt.com: Can you see a freeze?

Carlson: It won't shut down the market, but investors like information, and servicers will be hard-pressed to provide good information on coverage on terrorism insurance for a while after the backstop is removed.

GlobeSt.com: And we can expect a new spate of downgrades.

Carlson: Fitch actually looked at all the single-asset deals that we rated and determined that if the asset was high-risk or not and came up with a policy based on that. Then we gathered information from the servicers to see what the terrorism-insurance coverage status was, and if we felt there wasn't adequate insurance we put the property on ratings watch. Currently we don't have any bonds on watch due to insufficient insurance coverage.

GlobeSt.com: Is the policy still in place?

Carlson: It is. CMBS servicers presented a united front—they stuck to their guns--and took the stance that terrorism insurance is important and required it on the mortgages they service. Because of that, borrowers went out and got their coverage, which protects the bondholders. Terrorism insurance coverage is an important structural protection for bondholders, so we're hopeful there will be some solution.