PACE inside baseball: Private-label securities to the rescue?

GSE’s bench PACE

If you follow the PACE saga — which we covered in February’s Pacesetter as well as in numerous posts before, you know that it’s attracted enough interest to keep us all hopeful about the prospects for a liquid secondary market for energy efficiency loans.

But, like any saga, there are always curveballs and intrigue to keep us wondering.

GSE’s (government-sponsored entities) Fannie Mae and Freddie Mac supplied the  action in this latest edition of PACEwatch.

They recently sent PACE financing back to the dugout, by declining the purchase of tax-lien secured energy efficiency loans on residential properties, citing concerns with repayment risk associated with the priority of the tax-lien over the senior mortgages.

No, folks,  the tax-lien-priority issue will not just get up and walk away on it’s own.  Market watchers quoted in the article point out that pricing in the theoretical risk and/or clearer underwriting to clarify the value improvements to the retrofitted properties could help the GSE’s and others buy into PACE-related debt.

IMHO, it’s going to take a solid mix of both approaches to get the secondary market comfortable with fund PACE paper.  Altering a senior mortgage’s status makes it tougher for the lender to price and re-sell their loans, even if retrofits improve property valuation. They’ll want compensation for what could be an important change to their contractual structure. It’s always been that way with modifications and I don’t think there’s anything wrong with a lender expecting to be paid a market return for agreeing to re-do a deal.

Additionally, requests to see, touch and feel (and standardize) the control of the retrofit value-creation process, beyond the theoretical math of energy savings is reasonable. Programs that dole out tax payer dollars without robust underwriting and performance measurement are setting themselves up for failure.  No matter how smart we become every economic cycle, a certain percentage of loans typically fail for the same old reasons.  “Failure to properly monitor” loans is one of the oldest, and most typical paths to default.

So, while I greatly wish to see lots more capital flowing towards PACE financing, I still think it’s prudent for any lender to request clarity on the loans they buy and to be paid the right price for the risk and underwriting.

Inside baseball: private-label securitizations to the rescue?

That being said, I suggest we keep our collective eyes on the private-label securities market as an alternative funding source.  Yeah, I know it’s been dead since the economic downturn, but that would be the alternative for PACE to build up a liquid secondary market as long as the GSE’s aren’t stepping up to buy energy loans.

And the idea’s not so far-fetched since the private-label market is now starting to show signs of life.  While the GSE’s are definitely big players in the residential mortgage secondary market, which reached $2 trillion at it’s height in 2006, private-label securities were responsible for as much as 56% of home mortgage securitizations during the same time frame.

Today’s WSJ details how Redwood Trust is taking a shot at offering ~$200 million in jumbo residential mortgages in a private-label sale. This will be the first sale of private-label mortgages in two years. Market watchers say that the timing seems good for private-label securitizations to make a comeback, now that the homeowner default surge that killed the market a couple of years ago has receded. Add to that, the currently tight underwriting guidelines in effect, which strengthens the credit quality of these loans, making them attractive to secondary market investors.

Note that this particular transaction is not a done deal yet, and Redwood may have to postpone the transaction if they can’t generate sufficient interest in the offering.

For us PACE fans, however, this is bit of side action is worth tracking. The private-label securitization market is another potential source of secondary market liquidity, if the GSE’s continue to reject energy efficiency finance.

I’m willing to bet, however, that private-label market will be just as tough on conforming documentation and tight underwriting guidelines. If investors are now able to buy into residential mortgage paper structured  with tight underwriting and and high credit quality, what will compel them to give that up for PACE-paper?

Nothing, I think.

Nonetheless, the game is not over and we’ve still got several more innings to go.

Continued challenges for neighborhood stabilization efforts

Several weeks ago we noted that our recent experience with the Neighborhood Stabilization Program (NSP) revealed significant hurdles facing the program, and highlighted the struggle to realize on-the-ground benefits for target communities.

Unfortunately, the latest news on this front confirms our assessment.

Much of the nearly $4 billion put forward under the NSP to help the country’s most blighted communities is showing limited and inconsistent benefits.

While some cities are finding success, the combination of robust private sector purchases of foreclosed properties along with banks’ unwillingness to systematically support the NSP efforts has fostered frustration.

In what might be viewed as a last ditch effort to see the NSP succeed and overcome the significant operational challenges inherent in the acquisition, rehab and funding of foreclosed homes, a new coordinating entity has emerged as a potential solution: The National Community Stabilization Trust.

A nonprofit organization, The Stabilization Trust will aim to ‘right the ship’ by providing local agencies with services that should counteract the NSP’s underperformance, specifically:

• Streamlined, coordinated access to foreclosed properties, and
• Flexible and timely financing to renovate the properties.

To execute effectively, The Stabilization Trust has established direct partnerships with leading financial institutions, such as Bank of America, Chase, Citi, Fannie Mae, Freddie Mac, GMAC and Wells Fargo, which in theory should for allow municipalities to acquire targeted properties in bulk across specific neighborhood locations.

Bigger picture considerations…

While the success of The Stabilization Trust is still uncertain, the facts on the ground to date feed the skepticism of those who opposed the NSP from its inception. As the next steps play out, current market activity raises some important questions to consider:

• Does the success of private investors (to the detriment of contained and focused city-run rehabs) signal that markets are indeed functioning quite well, thus suggesting the need for government to move aside?

• Are banks’ fiduciary responsibilities to their shareholders the driving force that trumps larger questions of long-term community welfare? If so (and many would argue yes), where is the proper balance between commitment to shareholder wealth, and service to the communities in which a bank operates?

Have an opinion on the effectiveness of the NSP, or the broader policy implications of the program? Leave us a comment, and let us know what you think.

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Things you might want to know:

Do you like this post? We’d love to hear your comments and suggestions.

You can contact us to discuss or initiate a project here.

You can get Our Green Journey by email or via RSS.

Sometimes you can see what we’re doing on Twitter.

Photo credit: JoLin on istockphoto.com

Markets and know-how block greening foreclosed homes

Many communities have become quite passionate about the greening of foreclosed homes as a part of revitalization.

Especially since its an area that received lots of funding attention in the American Recovery and Reinvestment Act, via Neighborhood Stabilization Programs, Weatherization and other programs.

We have been following the efforts of community groups here in the San Franciso Bay Area throughout this year, as they have been applying for ARRA funding in order to purchase and retrofit foreclosed homes to green standards. Afterwards, these homes would be sold to low-to-moderate income residents, preserving housing opportunities for residents in those income groups.

Unfortunately, my latest information is that this market niche only limps along at best, despite having access to better funding than many other types of real estate these days.

A mission-based capital source active in this sector indicates that the problems plaguing these programs are the misfires of painfully basic assumptions overlooked at all governmental levels and community groups alike, during the rush for ARRA funding:

a) Banks not motivated to deal: Most folks assumed that banks would be so injured by the credit crisis, that they would just dump foreclosed homes to community groups at very deep discounts. In reality, realtors are reporting that foreclosed homes sell pretty quickly here in the Bay Area, removing bank motivation to discount their prices. The problem with that is that many groups of homes in the hardest hit areas are actually lumped into portfolios with faster selling homes — and the banks don’t differentiate. The sad result? In some communities, foreclosed homes resell relatively quickly. In lower income, more distressed neighborhoods, the foreclosed homes sit vacant and deteriorating, since the bank does not differentiate their sales practices within pools of homes straddling multiple communities.

b) Lack of experience with scale green home retrofitting: Most groups and their municipal partners overlooked the actual operational process of purchase and green retrofitting. My investor colleagues report frustrating conversations with municipalities, community groups and their partners, as it has become evident that none of these groups have actually ever run any type of scalable existing home purchase/retrofit program — let alone incorporate green remodeling within their training and operational planning. Groups such as Build it Green offer training assistance on the remodeling of existing homes to the GreenPoint Rated standards, however there is a significant business coordination aspect of operating and incorporating these processes within the larger purchase and resale platform that just gets overlooked. Many community groups simply underestimate the level of staff training and time which needs to accompany these type of programs.

For now, the aquisition purchase problem looms (much!) larger than the operational issues for foreclosed homes. Hopefully we can learn from this and not get caught by surprise when needing to adopt scale green retrofit initiatives within our own property portfolios.

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Things you might want to know:

• Do you like this post? We’d love to hear your comments and suggestions.
• You can contact us to discuss or initiate a project here.
• You can get Our Green Journey by email or via RSS.
• Sometimes you can see what we’re doing on Twitter.
• Photo credit: Webking on istockphoto.com

$2 Million Grant for Affordable Zero Energy Housing Village

Bold stimulus and green building plans associated with AB32 are moving from the drawing board to the construction site.

West Village Community Partnership received a $2 million grant from the California Energy Commission for the study and development of advanced energy strategies for a 220-acre, 4,000 student and faculty housing development for UC Davis. The grant award came under the CEC’s Public Interest Energy Research (PIER) Program for Renewable-Based Energy Secure Communities (RESCO).

The grant essentially funds a living laboratory type of study of different energy applications to be designed for and installed in the community.

The developer and UC Davis will be studying how to put together an optimal mix of renewable technologies for the project — including creative financing structures to overcome the first-cost barrier for ultra-efficient green design as well as documenting resident behaviour; whether they actually save or waste more energy in this type of development.  Since the project will be built in several phases, the developer will have a chance to improve each new phase’s energy delivery plans, based upon what is learned by studying prior phases.

I love the intersection of the real estate story with the AB32/2030 Challenge issues– they’re already putting together a mixed use addressing pent up demand in the student and faculty housing market in that area. UC Davis ground leases the land to the developer. His focus will be on getting the project financed, built and sold (and paying ground rent of some amount, of course). The project was reportedly already sustainably designed before the grant was awarded. Now grant money will pay for the advanced energy requirements and “study” (read: actually do) the creative financing.

We also point out that one word is missing from both the story and the project website:  “LEED”. As much as the sustainability of the development is being touted, there is no mention of the design guidelines adhering to any particular third-party rating system, like LEED.

And what about the sustainability objectives?

• Housing units are to be sold at below market prices to attract top talent and students to the University.
• On-site renewable power generation.
• Strong focus on alternative transportation: bicycling and biking will be preferred mode of transport to campus for residents.
• Community layout takes advantage of sun and natural breezes.
• Landscaping is integrated with storm-water systems to cleanse run-off and create habitat areas

The energy strategies to be included are path-breaking for a development of this size. Those to be included and studied with grant funding are:

• energy-efficiency measures in building design (passive and active)
• demand response
• distributed solar photovoltaic to create electricity from the sun
• distributed solar thermal on homes to pre-heat water
• biogas coupled with fuel cell to generate electricity
• advanced energy storage using modern battery techniques
• smartgrid technology to efficiently manage energy supplies

Photo credit: Flickr / Shazari - Eggheads

Are You Funding Green Sprawl?

Today’s post is dedicated to all our euphoric green finance and investment friends who are suffering from PEWS — post-election withdrawal syndrome.

Here’s a delicate question:

>>Are you funding green sprawl?<<

Sustainable Industries recently published an article about the dilemma of having green homes and buildings built in suburban locations.

Their set-up:

While the profusion of buildings that use at least 15 percent less energy and reduce water usage as well as other non-sustainable resources is good news for a country searching for energy independence and a planet combating a variety of environmental ills, some are starting to think more needs to be done.

Top of the list: Considering whether sprawling architecture and 4,200-square-foot McMansions can truly be considered “green.”

For us here, the article highlights some challenges for those builders and investors who have business models focused on commuter-oriented suburban markets,  that now invest in green homes and buildings but ignore the overall smart growth principles that come with sustainable real estate investing.

Here’s an example from the article of a financial opportunity that is buried within implementing smart growth principles in tandem with green building:

Reducing sprawl and its attendant reliance on cars also increases the spending power of individuals, according to a study prepared by Portland-based Impresa Consulting in July 2007. According to the study, residents of Portland travel 20 percent fewer miles per day than the average American. At $3 per gallon, this equates to $1.1 billion saved or $800 million that stays in the local economy each year.

Essentially, funding green buildings in locations without smart growth principles might make a good return for the builder/owner, but it also imposes a quantifiable, lifelong tax on the residents and businesses who move in to those developments.  And as some builders and investors are finding out in these tougher economic times — people can move, the real estate can’t.

As always, we welcome your comments.

Photo credit: Alex-S / Flickr

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