DBRS: R-PACE ABS likely to withstand pandemic challenges

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The COVID-19 pandemic’s longer-term impact on residential mortgage-backed securities remains uncertain, but for now DBRS Morningstar’s outlook for the residential property assessed clean energy asset-backed securities sector remains stable.

Also available for commercial projects, the R-PACE model enables property owners to finance the upfront cost of energy or other eligible improvements on a property and then pay the costs back over time through a voluntary assessment attached to the property. The assessments are secured by the property itself and paid as an addition to the owners' property tax bills.

“While we expect more pronounced performance deterioration in higher-credit-risk portfolios, the structural features and protections in typical R-PACE transactions will likely help mitigate the effect of deteriorating consumer credit,” DBRS says.

R-PACE asset-backed-securities issuance volume peaked in 2016, at $1.8 billion, and for the last two years has hovered just over $700 million, according to DBRS.

DBRS’s “moderate” ratings-analysis scenario primarily considers declining GDP growth and increased unemployment levels, and the unemployment rate provides the basis measuring performance expectations.

Although the unemployment rate unexpectedly dipped in May, it remains at an historically high level. So far, however, DRBS has yet to observe a consistent pattern of increasing delinquencies across R-PACE transactions. The rating agency acknowledges that a steep increase in mortgage-payment defaults could translate into similar increases in R-PACE assessment delinquencies, but said it believes the impact will be limited for several reasons.

One, the government’s direct economic aid to consumers, mortgage payment assistance, and foreclosure suspension directives should mitigate defaults, plus most PACE assessments are due annually or semiannually, affording homeowners time to stabilize their financial situations.

In addition, since the payments of PACE assessments are made with property taxes, they are a higher priority payment for homeowners. And in the event of the borrower’s failure to pay, the combination of senior-priority payment—in line with property taxes — and low leverage gives the first mortgage lender strong incentive to accommodate borrowers to maintain their lien on the property.

DBRS sees little impact even on junior classes in the ABS deals, and economic challenges making it less likely for borrowers to move or prepay loans further strengthen junior notes.

“In the unlikely event that a payment default forces a foreclosure sale and change of ownership, the new property owner would be required to make delinquent payments, pay any late fees, and take over future payments,” DBRS says.

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