California has been the model for the PACE loan, which stands for Property Assessed Clean Energy. It is a special program designed to make it easier and less expensive for homeowners to add energy-efficient improvements to their homes. It has created some bad energy among mortgage finance companies, however.
Here’s how the PACE program works: A homeowner borrows money for things like solar panels and energy-efficient windows. The PACE legislation then authorizes cities and towns to add the money needed to pay off the loan to the taxes on the property. The tax collector takes a small percentage to pay for administrative costs and sends the balance to the lender. The PACE program is funded by venture-capital-backed startups like Renovate America Inc, Renew Financial LLC, and Ygrene Energy Fund Inc.
In essence the improvement becomes a special tax assessment. Because the loan is part of the tax liability on the property, investors are willing to loan money at a lower rate than they would ordinarily. But there’s a catch. (Isn’t there always?) Because the PACE loan is included in the taxes on the property, it has priority over the first mortgage in the event of default.
Mortgage lenders don’t care for that one bit. In fact, according to Reuters, both the Federal Housing Administration and the Federal Housing Finance Agency, while saying they support energy efficiency, have not supported the program up to now because the first lien position of mortgages is not assured. In 2010, the Federal Housing Finance Agency directed mortgage finance giants Fannie Mae and Freddie Mac not to buy mortgages on properties with PACE loans.
“There is a general principle in mortgage banking: first in time, first in line,” said Pete Mills, senior vice president with the Washington-based Mortgage Bankers Association. “Taxing authorities are always a risk of jumping ahead, but that’s a far different matter than a private company selling energy improvements being able to jump ahead.”
Sancho Lopez, a Riverside police officer and homeowner in southern California, experienced the problem first hand. He and his wife financed the $40,000 cost of 21 dual-pane, energy-efficient windows and two sliding doors with a PACE loan. When they decided to sell their house, their realtor warned them it wouldn’t be easy. The house sat on the market for 10 months, and it is in escrow now, Lopez said, only because he has agreed to pay off the loan balance – now $46,000 because of interest and fees. “I wouldn’t ever do it again,” Lopez said of the PACE program he used to pay for the windows.
In response, the FHA has agreed to rethink its policies to allow PACE loans to be subordinated to first mortgages in some circumstances, according to the Press Enterprise. The FHA says it will create minimum standards to preserve payment priority for first mortgage holders through subordination. “This change alone may be sufficient to ensure that the next generation of PACE loans no longer create unexpectedly costly burdens on the borrowers,” said Paul Herrera, government affairs director for Inland Valleys Association of Realtors.
“This is a significant step forward for PACE,” said J.P. McNeill, CEO of San Diego-based Renovate America, which runs the HERO program locally through the Western Riverside Council of Governments. It will unite national renewable energy and water efficiency goals with federal housing policy objectives, he said.
Renovate America, through its HERO program, has been successfully subordinating assessments since April, McNeill said in a press release. Guidance from federal agencies like the FHA that endorse these contracts will not only preserve the features of PACE, but help unlock additional sources of capital to accelerate renewable energy and efficiency retrofits for households, he said.
The PACE concept is an innovative approach that can make it possible for homeowners to secure financing for home improvements that benefit not only them but the community at large. In August, the White House said it will work with the Federal Housing Administration to boost adoption of PACE financing nationwide. Nearly 30 states, including Texas, have passed laws to enable residential PACE, but most states other than California have sat on the sidelines pending a resolution to the controversy. The conflict between mortgage lenders and PACE lenders must be resolved before the full power of the PACE program can be realized.