The commercial mortgaged-backed security (CMBS) industry has been reborn in 2010. CMBS underwriters call their new underwriting paradigm CMBS 2.0. Providers of third party reports such as Phase I Environmental Site Assessments, Property Condition Assessments and Probable Maximum Loss reports ask: What does CMBS 2.0 mean to our trade?
The Phase I Environmental Site Assessment and the Property Condition Assessment are rather standardized and in my opinion are being provided to CMBS lenders with great reliability. The Probable Maximum Loss report needs standardizing. In 2007, ASTM published two new standards for Probable Maximum Loss Reports: ASTM E2026-07 Standard Guide for Seismic Risk Assessment of Buildings, and ASTM E2557 Standard Practice for Probable Maximum Loss (PML) Evaluations for Earthquake Due-Diligence Assessments.
These new ASTM Standards improve the process, but are too flexible. For example, the standards do NOT specify how an engineer should calculate a PML and some engineers perform calculations that are out of the mainstream or worse, do no math at all-they just call it based on their judgment. Of course my colleagues may be very good engineers, but what the industry needs is an objective measurement of seismic risk. The process should be transparent and peer reviewable.
Objective reliable Probable Maximum Loss Reports are easily achievable; we just need some help from our clients. Yes, the clients must do their part. If clients require the following we will be more than half the way there:
- Only order reports from firms with registered engineers on staff;
- Require the engineer to show his/her math;
- Require that the engineer call the Scenario Expected Limit as the PML, but also report the Scenario Upper Limit.
I have participated in writing the Probable Maximum Loss Scope of Work for several lenders and my rational for my recommendations is presented more thoroughly in my RMA Journal article titled Managing Seismic.
Joe Derhake, PE