Demand for loans that allow homeowners to finance energy-efficiency upgrades by increasing their property taxes is booming and Ygrene Energy Fund is planning regular trips to the securitization market to finance its programs.
The California-based originator of Property Assessed Clean Energy (PACE) financing is preparing its first public PACE bond securitization as early as this summer, in a $150 million transaction that will be rated by Kroll Bond Rating Agency. Another $200 million transaction is planned for the fall. And by 2017, it expects to come to market quarterly.
To date, Ygrene has completed one securitization, a private placement, in 2015, in a deal privately rated by KBRA.
To fund all of these energy efficiency projects for homes and businesses, it has obtained a new $250 million warehouse credit facility from three undisclosed banks, boosting total committed capital to over $785 million. Ygrene is riding a surge of interest in the PACE arena, which in 2016 expects to see $2 billion of loans originated – equaling the volume that dozens of PACE programs nationwide have issued for approximately the past eight years.
“What we’re seeing in the marketplace is a massive [increase] in volume,” said Stacey Lawton, Ygrene’s chief executive, in an interview with Asset Securitization Report.
That is still just a sliver of the overall $200 billion energy-upgrade market, according to Lawson. But she said there is plenty of demand for “green” investments such as bonds backed by pools of residential energy efficiency and renewable energy improvement loans.
PACE loans provide an alternative financing vehicle for homeowners and companies by offering loans that are repaid through local or state tax assessments. While PACE loans are relatively small-dollar in relation to the house value, they hold a first-lien position on improved properties (a potential conflict with federally guaranteed loans backed by the Federal Housing Finance Agency). They provide institutional investors which have long-term liabilities – such as life insurance companies or pension funds – with matching long-life, lower-risk assets providing yield on extended terms of up to 20 years.
Ygrene’s initial securitization was placed with a single investor, a U.S. insurer.
Renovate America, another PACE originator, has been a pioneer in PACE securitizations with five rated deals since 2013. Last month it placed $305.3 million of ‘AA’-rated bonds.
A standard PACE loan usually prescribes that cost savings from energy upgrades exceed the annual levies from the special assessment assigned by the PACE lien. (In Renovate’s latest HERO trust, the 13,432 assessments had an average balance of $23,433 with average annual payments of $3,149).
Energy upgrades are more than solar panels; many of Ygrene’s loans fund HVAC installations, energy-efficient window upgrades, and LED lighting. PACE programs are also being expanded for use in home improvements to mitigate climate concerns. PACE loans have been used to build sea walls and raise foundations to better protect Florida residences from hurricanes or to back water conservation or irrigation improvements in drought-stricken California.
The expansion of PACE utilization is matching the geographic expanse of PACE programs to more than 30 states, and an institutional investor base than has exceeded 60 firms, Lawson said. What is attracting many to the sector is PACE’s hybrid structure as a tax-lien securitization within a traditional residential mortgage-based securities model: the pool of assets in a PACE securitization involves thousands of homes with attached PACE assessments, typically with balances in the $20,000 region. But instead of proceeds from P&I receivables, the investor returns come from tax collections – a far more reliable cash flow resource for investors.
As a result of the asset class’s short history and limited data on performance and losses, ratings agencies like Kroll are having to adapt new ratings methodologies for the hybrid RMBS structure funded by tax revenues. For instance, Kroll has to rate PACE ABS’s (such as the HERO 2016 2-A transaction) without an initial liquidity reserve account since the first of the semiannual payments are more than six months out.
Limits on historical data, such as defaults, and the uncertainty of the legal concerns over GSE objections to PACE loans has kept rating agencies from assigning ratings higher than double-A. But Lawson believes that rating agencies will soon feel comfortable assigning triple-A ratings as origination volume increases and robust secondary market develops.
There is also the belief that Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, is relenting on the issue over PACE liens on homes are senior to those of the two housing agencies. Although California law (and state court decisions) have validated the PACE assessments as a first-priority lien, the FHFA has previously stated it believes the PACE liens violate the GSE’s prohibition on senior liens, and could sue to prohibit the enforcement of the liens to protect the mortgage security.
But that possibility has been largely dismissed by ratings agencies such as Kroll, which in presale reports on PACE securitizations has called the threat of a Fannie/Freddie challenge a “small but material risk” that has yet to emerge. Lawson said that the GSEs are approving mortgage guarantees on homes with PACE liens. Only a small number of Fannie/Freddie-backed loans have been contingent on a PACE lien payoff, Lawson said. “You might see prepay speeds go up a little bit [6-8%], and that is already factored into many of the models of the ABS securitizations we’ve seen,” Lawson said.