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.

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

Galley Eco Capital Joins the greenMix Alliance

Galley Eco Capital announced today that it joins a new alliance with the goodMix and Green Key Real Estate, both leading eco-preneurs in the San Francisco Bay Area. The greenMix Alliance was specifically created in order to make a positive impact on the way developers communicate and sell to the green homebuyer. The goodMix will supply the alliance with public relations and advertising needs associated with green housing development. Green Key Real Estate brings a strong bench of Eco-Brokers and salespeople who are trained and passionate about the quality that green homes can bring to homebuyers lives.

Galley Eco Capital will provide the alliance with expert real estate financial services tailored to green real estate, including helping developers to quantify the savings and benefits their green homes will bring to the homebuyers.

Here is a link to the full press release: Galley Eco Capital Joins the greenMix Alliance