Build the Secondary Market
Developing a secondary market for residential energy efficiency/renewable energy loan portfolios is one U.S. Department of Energy objective because a vibrant secondary market will provide a path to commercial sustainability of clean energy lending after American Recovery and Reinvestment Act (ARRA) funds are expended.
Some financial institutions will decide to originate loans, assemble portfolios, and then seek to refinance or sell the portfolios to a “secondary market” capital source. A typical target portfolio size for an early-stage secondary market transaction is $20 to $25 million although later transactions may be much larger, in excess of $100 million. Availability of financing from the secondary market can drive development of the primary market and also lower the costs of capital. Loan loss reserve funds (LRFs) support the primary lender, but the benefits and risk coverage of the LRF should be made assignable to the secondary market capital source (provider) in the LRF agreement between the grantee and financial institution.
ARRA grantees will need to be well informed about the standard underwriting guidelines and conforming residential energy efficiency/renewable energy loan documents that are being developed as part of this secondary market initiative and work to incorporate the principles and best practices into their own lending programs.
To facilitate the scaling up of clean energy lending programs in the future, grantees should allow participating financial institutions the option of selling their loan portfolios. Note that the standard underwriting guidelines may, in fact, become minimum guidelines; financial institutions could add additional underwriting criteria to make their guidelines more stringent than those minimums.