Entry by JoeDerhake
As an engineer that has been providing lenders Probable Maximum Loss (PML) reports for the past 15 years, I was hopeful that the two new ASTM Standards published in 2007 would standardize the practice of PMLs. However, the ASTM Standards are overly flexible and have not resulted in sufficient uniformity.
For a real estate financing transaction, a failing PML often precipitates onerous requirements that may affect the economics of the deal. Lenders want to understand why a building passes or fails and they need a PML engineer to produce reports that can be trusted.
The PML has long been somewhat controversial, as too often they have seen two engineers return two significantly different PML numbers for the same building. One reason for this variance is that the methods employed to calculate the PMLs by engineers vary widely. Recently, ASTM has updated their original PML Standard with ASTM 2026-2007 and published a new standard directed to lenders, ASTM 2557-2007. These new standards have created uniform definitions for key terms and have nudged the industry towards uniformity. However, ASTM 2026-2007 is a very flexible standard; this standard is a big tool box that offers many ways for an engineer to calculate a PML. For a banker, PMLs that are calculated differently create inconsistency in their underwriting process.
Bankers can get greater consistence they must manage their PML providers by specifying their order request, just as bankers ask for specifics beyond the standard Phase I ESA, they should be more specific with their PML orders.
Here is how to order a PML. ASTM 2557 recommends that the PML is reported as the Scenario Expected Limit, Design Build Earthquake, 475-Year-Event. I recommend adding: Level 1 Building Damageability Assessment, Level 1 Building Stability Assessment, Level 1 Site Stability Assessment, and Calculated by the Thiel Zsutty Method. I know that is a lot of variables, but if you do not control for these variables you will get different product engineer to engineer.
One more recommendation: require the engineers should show the math. For a report to be peer reviewable, the report must show the math. Many downstream users do not completely trust the process and the best way to make them comfortable is by making the method calculation transparent.