The Western Riverside Council of Governments is preparing its first securitization of Property Assessed Clean Energy (PACE) bonds of the year, and the collateral is slightly more geographically diverse than its previous deals.
HERO Funding Trust 2015-1 will issue $240.1 million of class A notes with a preliminary AA’ rating from Kroll Ratings. The notes have an expected maturity of 2040.
The notes are secured by 16 limited obligation improvement bonds issued by the Western Riverside Council of Governments and San Bernardino Associated Governments. Each PACE Bond is secured by certain PACE Assessments levied on residential properties in the counties. The PACE Bonds are secured by 11,282 assessments levied against 11,011 residential properties in 21 California 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.
The PACE Bond Portfolio’s weighted average coupon is 8.35%. KBRA’s analysis assumes an ABS note rate equal to 4.00%, resulting in 4.35% of initial excess spread available to cover losses.
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.
The Federal Housing Finance Agency, the conservator of Fannie Mae and Freddie Mac, believes that they 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.
Kroll views this risk as remote, but has nevertheless applied a stress test assuming that the 36% of mortgage in the pool encumbered by Fannie or Freddie mortgages defaulted and had their PACE liens nullified.