'Residential Has Most PACE Securitization Promise'

Three hot “new” asset classes discussed at an ABS Vegas panel on esoterics aren’t all that new: property assessed clean energy loans, rental properties, and solar panels.

Chuck Weilamann, senior vice president at DBRS, said he started looking at PACE loans four years ago, but to date, there has not been a single securitization, just some aggregation of assets.

In areas with PACE legislation in place, municipal governments issue bonds and use the proceeds to loan money to consumers and businesses to make energy efficient upgrades. The loans are repaid via an annual assessment on the borrower's property tax bill.

Weilamann said there is greater potential for securitization of residential PACE loans, because of "greater certainty around the product." However one big stumbling block is that Fannie Mae and Freddie Mac are unhappy about having their liens on properties subordinate to PACE loans.

There has been at least one securitization of leases on residential solar panels: last year SolarCity sold $54.4 million of securities backed by leases on solar photovoltaic installations. Chris DiAngelo, a partner at Katten Muchin Rosenman, said future deals might be backed by loans, rather than leases. He said that the lease structure has been driven by reliance on state and federal tax incentives. Once these incentives burn off, it probably makes more sense to fund installations via loans. 

Looking further ahead, DiAngelo said, there’s a push to get Fannie Mae and Feddie Mac to change their appraisal standards to take value of solar system into account. “If that happens, [solar panels] will be part of new construction … it will just be part of the house,” he said.

The REO to rental market has also seen at least one securitization, a $479 million transaction by Invitation Homes, a portfolio company of the Blackstone Group.

Industry players initially viewed this as an investment opportunity with a relatively short life span, since large class of renters created by the financial crisis would eventually be in a position to purchase a home again. 

"Many people thought that once housing prices go back up, there would be no reason for the asset class to exist," DiAngelo said. But he said t's looking increasingly likely that many of these consumers will continue to rent for some time. “You’ve got legal and regulatory issues tamping down mortgage credit demand at the consumer level,” he said. “Maybe this will turn into a permanent asset class, or a longer term one than people thought it was.”

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