The Federal Housing Administration’s recent determination that loans used to finance energy efficient home improvements rank second in payment priority, behind mortgages, isn’t the setback that it might seem to be.
That’s the conclusion of panelists at IMN’s ABS East conference.
One reason cited is that the actual percentage of loans that would be affected by the FHA’s determination is quite small.
PACE loans are repaid through a tax assessment, as such they had been widely considered to have claims on a property that are senior to a mortgage.
But the FHA’s determination only impacts PACE on properties that are being sold or refinanced and the new loan includes an FHA product, said Stacey Lawson, CEO of Ygrene Energy Fund, a PACE originator that completed a rated securitization of commercial and residential PACE loans last July. “It’s a very small percentage of cases where it would apply,” she said.
Lawson insists that PACE loans have the senior claim.
“The right to tax is wholly the jurisdiction of the states,” she said. “PACE is a tax, and so by its nature, it is senior to the mortgage on the property.”
Lawson said that prepayment rates for the PACE loans originated by Ygrene is currently 1.2%, and roughly half of those of those are refis or purchases. And within that reduced number, only a fraction involve FHA loans, since about 8-10% of the country’s residential mortgage loans have some sort of FHA component.
Ari Matusiak, senior vice-president of corporate development at Renovate America, another PACE securitizer, pointed out that it was five years ago that the FHFA — which oversees Fannie Mae and Freddie Mac — released a statement saying the GSEs wouldn’t be able to guarantee mortgages on homes with a PACE lien on them. Since then, there have been a number of private and public securitizations.
Matusiak also noted that President Obama has touted PACE programs, adding weight to the belief that the agencies are likely to tread lightly on the sector.
Lawson said she does not know of a single case where the FHFA has actually required the prepayment of a Ygrene PACE lien in a refinance or purchase involving a GSE loan.
Players are waiting for further guidance from the FHA but none seemed particularly concerned that the agency’s steps would hurt either origination — estimated at a $1 billion this year nationwide and growing fast — or securitization.
Kroll Bond Rating Agency, which has rated deals in the sector, said in a statement in late August that FHA’s move could increase the number of subordinated PACE programs across the country.
But it didn’t expect the FHA announcement to have a negative credit effect on the senior PACE lien asset class. It could, however, spur an increase in prepayments of the PACE loans in cases where the home is refinanced or sold.