Renovate America’s next securitization of Property Assessed Clean Energy bonds is the first to include exposure to Missouri.

The Show Me State passed legislation enabling residential and commercial PACE financing in 2010; however, Renovate America only started funding assessments through the Missouri Clean Energy District three months ago, in August 2017. These account for just 3.38% of the initial $192.9 million of collateral for the $298 million HERO Funding 2017-3 transaction, which launched Monday. The remainder of the initial collateral was funded via four California entities: the Western Riverside Council of Governments, San Bernardino Associated Governments, County of Los Angeles and the California Statewide Communities Development Authority.

Another $82.7 million of PACE bonds, or some 30% of the total collateral, will be acquired after the close of the deal. Depending of the mix of assessments that are acquired by the securitization trust, investors’ exposure to Missouri could increase or decrease.

The initial assessments have an average balance of approximately $23,764, little changed from Renovate’s previous transaction, completed in July. The weighted average term is also little changed, at 17.36 years. However, the weighted average annual interest rate of 6.77%, down from 7.32% in the previous deal.

Gateway Arch Property Assessed Clean Energy Missouri
Bloomberg News

The average assessment is 7.04% of the property and the weighted average combined loan to value (including the current mortgage balance) is 64.13%.

PACE financing is used for energy efficiency upgrades; homeowners looking to add attic insulation or install solar panels, for example, agree to assessments that are payable semi-annually in California and annually in Missouri, together with property taxes. Terms range from five to 25 years.

Like property taxes, PACE assessments have a “super” lien putting them ahead of a mortgage in payment priority. This makes them unpopular with many mortgage lenders, who have claims on the same collateral as PACE lenders. Moreover, the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, prohibits the GSEs from acquiring loans on properties already encumbered by a PACE lien. This can make it more difficult to refinance or sell a home. So real estate agents are not big fans, either.

In recent months, various proposals have been made to adopt new regulations affecting PACE Programs or to expand existing law to cover PACE Programs. Most recently, a law was passed in California in September requiring PACE assessments to be underwritten to a borrower’s ability to repay, and not just the value of the home.

Renovate will not begin applying income verification and ability-to-pay underwriting standards until January 2018, however.

Three tranches of notes will be issued in the deal: two senior tranches with preliminary AA ratings from DBRS and Kroll Bond Rating Agency and an AAA rating from Morningstar; a subordinate tranche is provisionally rated BBB by DBRS alone. Initial credit enhancement for the notes consists of 3% overcollateralization and a liquidity reserve account funded at closing with an initial deposit of $1.1 million and will gradually building up to 2% of the target portfolio balance.