Freddie Mac announced its new seismic risk policy formultifamily seller/servicers to follow on April 24, 2013. Mark Field, Underwriter for the Targeted AffordableGroup, summarized the new procedures on April 24, 2013. Thepolicy will be officially released in the April 30, 2013 Guideupdate and will go into effect for all reports ordered on or afterJune 1, 2013.

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Overview of Forthcoming Freddie Mac SeismicPolicy

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In general, the changes are not dramatic and are generallyconsistent with the requirements of CMBS lenders, life companylenders, and Fannie Mae. Freddie Mac's policieswill recognize ASTM E2026-07 “Standard Guide for Seismic RiskAssessment of Buildings” and ASTM E2557, the most recent seismic riskassessment standards. The changes will bring the Freddie Macseismic policy in closer alignment with the recommended practice inASTM E2557.

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Mr. Field announced that Freddie Mac will use the Scenario Expected Loss (SEL) as their primaryexpression of seismic risk, which is consistent with therecommendations of ASTM E2557. The SEL will be measuredagainst the longtime industry standard of 20%. This isgood for borrowers and lenders as the SEL is lower than theSUL.

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By the way, instead of using the term Probable Maximum Loss (PML), Freddie will beshifting towards the term Seismic Risk Assessment (SRA)—these wordsare generally interchangeable.

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Freddie Mac will continue to use its less expensive desktopproduct that could be considered a Level Zero on many of the assetsin seismic zones 3 and 4. However, the new policywill require the borrower to go straight to a Level 1 Seismic RiskAssessment if the asset exhibits certain high risk characteristics.

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Also, Freddie Mac is requiring that the firm doing the workis qualified. The firm must have a licensed engineer ina seismic state. In my view this is already a requirement ofthe states. You should ask your due diligence firm ifthey employ a registered engineer with the appropriate experiencein earthquake engineering and seismic risk.

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Whether a Level Zero or Level 1 is required initially willdepend on how the Freddie Mac Forms 1117 and level 1105 are filledout. In the good state of the world, the asset will beevaluated the same way as it has always been. If theasset has a risk characteristic of concern then a Level 1 Seismic Risk Assessmentwould be required.

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Upcoming Webinar on Seismic RiskAssessments

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If you are really interested in seismic risk assessments, ourTechnical Director of Structural Engineering, Josh Marrow, isoffering a seismic webinar that will include a summary FreddieMac's new policy on Tuesday, May 7, 2013. The webinar will discuss the science of seismic risk assessment aswell as scope requirements of ASTM, Fannie Mae, Freddie Mac, andHUD. Click on this link to register: Essentials of Seismic Risk AssessmentsWebinar.

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