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Fannie Mae's Seismic Risk Requirements

Fannie Mae has updated seismic risk assessment requirements to more closely match Freddie Mac's, moving towards more consistency across the agency lending industry.

Fannie Mae's Revised Seismic Guidelines Move Towards Greater Consistency with Freddie Mac's

As of July 1, 2018, Fannie Mae requires all seismic reports to meet level 1 ASTM (16a) standards; a structural engineer must perform the inspection, in the same way required for any Freddie Mac Level 1 seismic report.  This change is defined in Fannie Mae’s Selling and Servicing Guide as updated November 2017, which states, “Any Seismic Risk Assessment dated after June 30, 2018, must have the field investigation performed by a professional that meets the Field Assessor qualifications in the ASTM Standard.” The updated guide references ASTM 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

The formal adoption of the ASTM standards into Fannie Mae’s guidance is an important step to achieving consistency across the industry.  With the July 1 implementation, Fannie Mae’s seismic risk assessments are more in line with the determinate factors of Freddie Mac, making these reports more consistent with each other in terms of findings, determinates and results.

Agency lenders should be advised that pricing for Fannie Mae seismic risk assessments will be impacted by this change according to the increased cost of dispatching a qualified assessor to the field.

The assessor qualifications now require that 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:

(I) Five years of general structural engineering of buildings;

(2) Three years of seismic design and analysis experience of buildings; and

(3) Two years of seismic risk assessment of buildings.”

Fannie Mae’s Current Seismic Risk Guidelines

In addition to the change in field assessor standards, the November 2017 update also provided the following specific changes:

•     First, 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.

•     Second, guidance on “triggers” (see below) was changed.  Fannie Mae requires a Seismic Risk Analysis (SRA) report if the Peak Ground Acceleration (PGA) using 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.

Trigger Set

As part of the guidance at this time, Fannie Mae has set 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 PML greater than 40%

For Small Loans, a SRA is required for loans if the PGA of the property is ≥ 0.15g and if any of the following apply:

•     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 of the property is ≥ 0.15g and if any of the following apply:

•     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)

If the PGA is ≥ 0.15g but none of the above bulleted triggers are found on the property then a SRA is not required. 

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 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.