Renovate PACE ABS spreads tight despite headlines, high CPRs; deal expected next month - Debtwire

Renovate PACE ABS spreads tight despite headlines, high CPRs; deal expected next month

12 October 2017 - 12:00 am

Yields on Renovate America PACE ABS are unchanged to tighter in recent trading despite a spate of negative headlines and prepayments that are higher than expected at origination, according to two sources familiar with Renovate’s securitizations, an analyst and Finra TRACE data.


The spread situation has Renovate poised to issue a new USD 200m-USD 250m securitization of Property Assessed Clean Energy assessments in early November, according to one of the sources familiar.


For instance, HERO Funding Trust 2016-2 As traded on 4 October at a yield of 3.468% and 101.625 price, according to the first source and TRACE. That compares to a 26 July trade at 3.5% and 102.75, and a 24 August trade at 3.49% and 102.906.


HERO 2016-3 Bs traded on 4 October at a 4.368% yield and 101.875 price, compared to trades on 22 June at 5.03% and 101.688, and on 16 August at 5.018% and 102.125.


Similarly, yields on HERO 2016-3 A1s have remained steady in the 3.2% range even as their dollar prices dipped into the 98.781-98.875 range in trades last week from the 100.406-101.406 range over the summer, according to TRACE and the sources. And HERO 2016-4 A1 yields have held steady in the 3.3% area even as prices dipped to 101.063-101.125 last week from prices mostly with 102 handles over the summer, according to TRACE and the sources.


“The bonds are down slightly because the benchmark yields have increased,” said the analyst. But “the credit spreads for these bonds have tightened.”


Investors bid PACE ABS on their spread, rather than their dollar prices, the sources and analyst said. Because swap rates have risen recently, those spread bids result in lower dollar prices in some cases, the sources said.


“Interest rates (swaps, Treasuries) are up as much as 40bps,” said the second source. “The price of the securities are affected by the risk-free rate. Spreads however have actually remained flat or tightened, reflecting investor demand remains strong. So rates [are] up, [prices are] down.”


Five-year USD swap rates have climbed to 2.024 today from 1.794 on 1 September, according to ICE. Seven-year swaps have climbed over the same period to 2.145 from 1.938.


The HERO ABS are backed by limited obligation improvement bonds, or PACE bonds, issued by the government entities. The underlying PACE bonds are secured by PACE assessments against residential properties. While some PACE programs exist in Florida and other states, 99% are in California, according to the second analyst. Their purpose is to fund energy efficiency improvements.


Headline woes


Renovate is the largest PACE lender. It and other PACE lenders were the subject of a Wall Street Journal story in January raising questions about claims subcontractors made to borrowers. Renovate denied any wrongdoing and detailed how it had tightened its underwriting standards. In the same story, the Journal reported that the company has been sued by three borrowers for allegedly double-charging interest and administrative fees, and failing to credit loan payments quickly. Renovate denied the allegations.


Journal stories later in the year explored whether Renovate and other lenders are properly disclosing information to investors about delinquency rates. Renovate and the other companies maintain that their delinquency rates are low and adequately disclosed. Yet a third Journal story accused Renovate of “masking” payments it made on behalf of struggling borrowers. Renovate’s CEO told the Journal that the payments weren’t disclosed because they were immaterial.


The Journal on 27 September reported that a contractor with whom Renovate does business is being investigated by the FBI, and that the SEC is investigating loan payments the company made on behalf of some borrowers. A Renovate executive told the Journal that the company has been told it is not the target of an FBI investigation. A Renovate spokesperson told the Journal that the company is cooperating with the SEC and does not expect its inquiry to have a material impact on the company.


On 4 October, the company replaced its CEO and announced other senior management change (see story, 4 October).


Renovate’s ABS role limited


HERO Funding assessments are originated by Renovate, but the company has very little to do with the assessments after they are securitized, according to the analyst and a second analyst. Unlike many ABS, the issuer does not service the assessments.


“These transactions are designed to be on autopilot without Renovate being in the picture,” said the first analyst. “The tax collectors are basically the servicers here.”


Renovate originates and initially funds the PACE assessments, but they are ultimately handed off to the government entities that authorize the assessments — in Renovate’s case, the Western Riverside Council of Governments, the San Bernardino Associated Governments and the County of Los Angeles. Those government entities employ David Taussig & Associates as assessment administrator to ensure that homeowners are being correctly assessed for their PACE loans on their tax bills, and are making payments. Taussig reports delinquencies, and the government entities are responsible for any foreclosures, according to the first analyst.


As such, Renovate’s HERO ABS won’t be affected by anything that happens to Renovate, according to the analysts.


“The demand for PACE [ABS] is still very strong notwithstanding the background noise,” the analyst said.


Prepayments typically occur when homeowners sell or refinance their homes. Because of FHFA opposition to PACE assessments’ first-lien priority over mortgages homeowners cannot secure agency mortgages if they have a PACE assessment. As such, homeowners who want to refinance their homes into agency mortgages must first pay off their PACE assessments, the second analyst said. The average PACE assessment ranges USD 20,000-USD 30,000, he said.


Prepayments have been higher than expected at issuance, according to both sources familiar and the first analyst. “Spreads have tightened even as speeds have moved faster,” said the second source.


CPRs in July ranged from 11.95% in HERO 2016-4 to 15.7% in HERO 2016-2, for a simple average of 14.44% across eight deals, according to DBRS data. The deals are priced on an assumption of a 12% CPR.


PACE 2.0


Most market participants expect PACE to spread to more areas of the country after California Governor Jerry Brown last week signed two bills designed to beef up underwriting standards and homeowner disclosure requirements. The bills also require originators to assess homeowner’s ability to repay PACE assessments and establish a licensing and regulatory framework for the PACE industry.


Renovate lauded the measures in statements. The laws will increase confidence in PACE, put the asset class on a par with other types of consumer finance and will serve as a model for regulatory regimes in other states, said the first analyst. That is likely to lead to greater PACE assessment issuance, and more ABS, he said.


PACE issuers are also eyeing other structural innovations, as reported (see story, 19 September)


But the FHFA’s opposition to allowing agency mortgages to be originated on homes with a PACE assessment remains “the gating issue that needs to be resolved” before PACE can truly take off, the analyst said.


The PACE industry has been talking to the FHFA about the issue for years, he said, but there are no indications a resolution is near.


by John Wilen