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