Understanding Probable Maximum Loss Reports

Structured finance is back, and with it comes all of the due diligence requirements, including the often misunderstood Probable Maximum Loss Report. Credit officers and underwriters need to understand a few basics about the Probable Maximum Loss Report to meaningfully use these reports as an underwriting tool.

The goal of the process of rating buildings for seismic risk is to protect your portfolio and downstream investors from a double helping of seismic risk. The PML Report cannot completely eliminate risk from a seismic event—we don’t report the distance of the asset to a nuclear reactor—but the PML will fail buildings that are at greatest risk during an earthquake. Note lenders that don’t require PMLs might find that their portfolio suffers from adverse selection; essentially getting a double helping of seismic risk. To use the Probable Maximum Loss Report well a lender needs consistency. If you are going to measure anything, you want to do it by the same method every time. So here are four basic steps to get consistency.

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