The Western Riverside Council of Governments priced $240 million of securities backed by HERO Funding Property Assessed Clean Energy (PACE) bond last week.

The 10.3-year, ‘AA’ rated, class A notes issued under HERO 2015-1 yield 180 basis points over interpolated swaps, for an interest rate of 3.85%.

By comparison the issuer’s ‘AA’ rated, 10.6-year notes issued from HERO 2014-2 on Oct. 16 of last year yield 4.0%. The 'AA' notes issued from the first HERO transaction in March 2014 yield 4.75%.

HERO 2015-1 is the third PACE securitization and increased the total volume of issuance to $473 million. Kroll Bond Ratings has rated all three transactions and Deutsche Bank was the lead manager on the deals.

Each PACE bond used as collateral is secured by assessments levied on residential properties in represented California counties. In total the bonds securitized in HERO 2015-1 are secured by 11,282 assessments levied against 11,011 residential properties in 21 counties. The average PACE Assessment is $21,941 with an average annual payment of $2,991.

The major difference between this transaction and the previous one is the inclusion of 10 new counties representing 2.3% of the collateral. According to Kroll, HERO 2015-1 features four counties (Riverside, San Bernardino, San Diego and Los Angeles) that represent a majority (82.1%) of the collateral.

WRCOG launched its HERO program in 2012. The council’s residential PACE loan program is administered and funded by Renovate America, a San Diego based company founded in 2008. Renovate America is directly responsible for developing and marketing the program and originating each assessment.  

The HERO program now accounts for approximately 95% of all residential PACE projects nationwide — all transactions have been backed by PACE assessments located in California. Four other U.S. states have active residential programs in place: Georgia, Florida, Missouri, and New York; however California is the only state with significant PACE financings. Under California law, PACE assessments have equal lien priority with real estate taxes and other special assessments and are senior to all non-tax liens, including mortgages.

“Over the next few years, ABS issuance will likely be confined to transactions backed by assessments originated in California, as municipalities continue to opt into the HERO Program and other California PACE programs become more active,” Barclays stated in a report publisehd this week. “We also may see PACE ABS backed by assessments in Florida and Georgia in the next few years, as programs in those states are becoming more active”.

However the frequency and size of PACE securitization is likely to remain limited until the the Federal Housing Finance Agency, “softens its stance on PACE,” stated Barclays. The conservator of Fannie Mae and Freddie Mac, believes that the loans contravene the terms of mortgage insurance provided by the two companies. This means that there is a risk that the FHFA could challenge the validity of a PACE lien in court, resulting in an impairment.

On December 22, 2014, the FHFA issued a statement reiterating that “Fannie Mae and Freddie Mac’s policies prohibit the purchase of a mortgage where the property has a first-lien PACE loan attached to it.”  

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