KBRA Releases Comment on FHA Announcement of Anticipated Guidelines Relating to Subordinated PACE Financing

NEW YORK--()--The Federal Housing Administration (FHA) has announced that it will soon issue guidance relating to residential Property Assessed Clean Energy (PACE) financing. PACE financing involves extending credit for renewable energy improvements on a borrower’s property, with such financing being repaid via a tax assessment on the property payable over the course of many years. In the residential space, the Federal Housing Finance Agency (FHFA) has voiced its strong opposition to programs that result in senior PACE liens priming mortgages purchased by Fannie Mae or Freddie Mac. In contrast, the FHFA has signaled its support for programs offering PACE liens that are subordinate to existing or subsequent mortgage liens.

In an attempt to incentivize subordinated PACE lending, the FHA has posted general guidelines of what types of properties with subordinated PACE liens can be purchased. KBRA expects this initiative to significantly increase the number of subordinated PACE programs nationwide and potentially spur other public-private partnership mechanisms for encouraging renewable energy improvements. The announcement was largely silent as to the continued existence of senior PACE lien programs, some of which are rated by KBRA (please see “Related Publications” below).

KBRA does not view yesterday’s announcement by the FHA as having a negative credit effect on the senior PACE lien asset class. It is possible this new initiative may prompt PACE lenders to encourage existing senior PACE lien borrowers to refinance and subordinate their PACE liens to mortgage liens so that the borrowers’ homes are eligible for FHA financing, in which case outstanding PACE transactions may experience an increase in prepayments. Because KBRA expects that any resulting increase in prepayments should be randomly distributed and not disproportionately affect collateral with higher interest rates, increased prepayment frequency should not result in significant deterioration of excess spread.

As a result, KBRA will not be taking any rating actions at this time and will continue to monitor the developments in this space.

Related Publications:

ABS: HERO Funding Class A Notes, Series 2014-1 New Issue Report
ABS: HERO Funding Class A Notes, Series 2014-2 New Issue Report
ABS: HERO Funding Class A Notes, Series 2015-1 New Issue Report
ABS: HERO Funding Class A Notes, Series 2015-2 New Issue Report

About Kroll Bond Rating Agency

KBRA is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (NRSRO). In addition, KBRA is recognized by the National Association of Insurance Commissioners (NAIC) as a Credit Rating Provider (CRP).

Contacts

Analytical:
KBRA
Anthony Nocera, 646-731-2350
Managing Director
anocera@kbra.com
or
Lenny Giltman, 646-731-2378
Senior Director
lgiltman@kbra.com
or
Cecil Smart, 646-731-2381
Senior Director
csmart@kbra.com

Contacts

Analytical:
KBRA
Anthony Nocera, 646-731-2350
Managing Director
anocera@kbra.com
or
Lenny Giltman, 646-731-2378
Senior Director
lgiltman@kbra.com
or
Cecil Smart, 646-731-2381
Senior Director
csmart@kbra.com