Drew H. McCreery

Fannie Mae has just updated its guidance related to seismic risk analysis. The new guide now references the ASTM guides E2026-16a Standard Guide for Seismic Risk Assessment of Buildings and  ASTM E2557-16a Standard Practice for Probable Maximum Loss (PML) Evaluations for Earthquake Due-Diligence Assessments.  Prior to this update, Fannie Mae’s requirements did not explicitly mention ASTM standards for Seismic Risk Assessment.

The formal adoption of the ASTM standards into their guidance is an important step to achieving consistency across the industry.  Per the new guide, Fannie Mae’s Seismic Risk Assessment will become more in line with the determinate factors of Freddie Mac making these reports more consistent.

What Are the Specific Changes?

  • Firstly, Fannie Mae had previously defined Probable Maximum Loss (PML) as Scenario Expected Loss (SEL), but this was not in writing. The current revision makes this official. The Scenario Upper Loss (SUL), building stability and site stability must also be reported under the new requirements.
  • Secondly, guidance on “triggers” (see below) was changed.  Fannie Mae now requires a Seismic Risk Analysis (SRA) report if the Peak Ground Acceleration (PGA) based on the 10% in 50-year exceedance probability (the 475-year return period) is greater than or equal to 0.15g and if one or more of the triggers discussed below is found on the property.

Exception: assessments performed prior to July 1, 2018

Importantly, Fannie Mae’s new guidance includes an exception to current 16a requirements:

  • All seismic risk assessments performed on or before June 30, 2018 can use the PCA assessor to perform the on-site Seismic analysis as long as he or she:
    • has 2 years of experience performing seismic risk assessments of buildings; and
    • meets the Property Condition Assessment (PCA) Consultant or Field Observer qualifications in Form 4099 – Instructions for Performing a Multifamily Property Condition Assessment.

Fannie Mae previously did not specifically require 2 years of experience.

  • Any Assessment that occurs after June 30, 2018 will adopt the current 16a guidelines and qualifications for an assessor.  Specifically, this means the field assessor “responsible for visual assessment must be an engineer licensed to practice civil or structural engineering with at least the following levels of experience, measured concurrently:
    • Five years of general structural engineering of buildings;
    • Three years of seismic design and analysis experience of buildings; and
    • Two years of seismic risk assessment of buildings.”

Revised Trigger Set

As part of the updated guidance, Fannie Mae revised the requirements for when a Seismic Risk Assessment is required and when a loan cannot be issued.  For a Standard DUS Loan, properties that are ineligible for securitization by Fannie are as follows:

  • Unreinforced Masonry Buildings (URM) with no seismic retrofit;
  • Buildings constructed on hillsides with slope exceeding a 30° angle; or
  • A Probable Maximum Loss (PML) greater than 40%

For Small Loans, an SRA is required for loans on:

  • Wood framed buildings built prior to January 1, 1950;
  • Property built prior to January 1, 1980 with tuck under parking or ground floor commercial; or
  • URM construction with a seismic retrofit constructed after original construction

For all other loans, a SRA is required for these properties, if the PGA is ≥ 0.15g:

  • Any property located within 50 feet of an Earthquake Fault Zone as defined by the California Geological Survey;
  • URM buildings which have been retrofitted;
  • Buildings with a weak or soft story at any floor level;
  • Wood framed buildings built prior to January 1, 1950;
  • Buildings constructed prior to January 1, 1994 with reinforced concrete construction;
  • Buildings constructed prior to January 1, 1994 with reinforced concrete masonry (CMU) bearing walls;
  • Buildings constructed prior to January 1, 1994 with wood frame construction over a reinforced concrete podium structure;
  • Buildings constructed prior to January 1, 2000 with wood frame construction and residential units above ground floor or tuck under parking;
  • High Rise properties (≥ 8 stories); or
  • Buildings constructed with direct contact to an adjacent building, regardless of whether the adjacent building is part of the same Property or located on a separate property (not including row houses)

Additionally, Fannie Mae stipulates that “if a retrofit ordinance is in effect in the location of the Subject Property, it must be discussed in the Structural Risk Analysis report. If the retrofit is not completed prior to Rate Lock, Fannie Mae approval is required.”

Fannie Mae’s Minimum Seismic Requirements

Fannie Mae considers a mortgage loan to be acceptable if it is secured by a property where all improvements comply with its current guidelines, have an SEL (aggregate or individual building) at or below 20% and meet the current building stability requirements set forth in the ASTM E2026-16a guidelines.

If a property has an SEL (aggregate or individual building) greater than 20% but less than 40%, or if the property does not meet the current building stability requirements set forth in ASTM E2026-16a further analysis between the Servicer and Fannie Mae is required.  This is typically in the form of a waiver to be submitted to Fannie Mae through the DUS Gateway using the Seismic Guide waiver type.  The most common approval of the waiver will be in remediation or retrofit of the issue in order to bring the SEL to 20% or below unless directly instructed by Fannie Mae otherwise as each situation is different. A property with an SEL of 40% or higher is not eligible for purchase by Fannie.

Typically, Fannie Mae will give six-months for the repairs to occur, post-closing, and the remediation funds will be escrowed at 125% of the estimate.  During this time, earthquake insurance will be required until the retrofit is complete.

In summary, the latest revisions are an important step toward making the findings, determinates and results of seismic analyses more consistent across agency reports.  Please feel free to reach out to me at [email protected] if I can help clarify any specifics in Fannie Mae’s new guidance.