Have you ever wanted to upgrade your home to make it more energy efficient? Not only making your home more aesthetically appealing but more importantly save more money in the long run? Congratulations, The Government rolled out the Property Assessed Clean Energy (PACE) programs in 2007. The program is available in 35 states with California being the first. The programs allow you to make energy retrofits such as installing solar panels, EER air conditioners, new windows, adding more insulation to the roof and a few others. These programs are regulated at the state level and for California, your energy retrofit “loan” will be repaid over a selected term depending on your finance agreement via an annual assessment on your property tax bill. Just like mello-roos, or special assessments that you may need to pay on top of your ordinary property taxes. Unlike home loans, the programs financing decision is based on your home equity, your property tax payment history, and recent bankruptcy. Income, credit, and the ability to repay is not considered. Keep in mind, these loans are attached to the property rather than the individual who took out the PACE loan.
Since its first introduction back in 2007, like any new programs, it comes with issues. We combat those problems as it arises. One of the biggest downfalls of these programs is that it has a negative impact on Fannie Mae and Freddie Mac backed mortgages. Property taxes take priority over any first lien mortgage on your property. With these PACE liens being attached to your property taxes, they take first priority too. Lenders understood the penalties; these home improvement assessments, if defaulted, had to be paid for by the Lender/Mortgage Company to protect their interest. The Housing and Urban Development soon required PACE to subordinate any FHA guaranteed mortgage. If you are unsuccessful in subordinating the PACE assessment, you would not be able to refinance.
Moreover, in 2010, Fannie Mae and Freddie Mac refused to back mortgages with PACE assessments on them. If the property owner wanted to sell the property with a PACE assessment attached onto the property, the homeowner would be required to pay off the lien(s) prior to selling the home. Some times that is not always feasible.
Legislatures has passed two new laws in hopes to address the existing slack. SB242, which began in January 1, 2018 requires PACE providers to have a recorded telephone conversation with the homeowner to confirm the terms of the contract. The three-day right of recission expanded to a separate home improvement contract. AB1284 will begin in January 1, 2019. Among other things, it will require PACE administrators to be licensed, a new set of underwriting standards to be established based on income, ability to repay and consider new and existing debt.
The idea of these two new laws is to reduce the number of overburdened homeowners and the following defaults due to inability to repay or simply didn’t know what we were getting ourselves into. The law still allows PACE liens to be assessed as part of your property taxes so it still has the mortgage lenders interest at risk. The new laws although may still need a few tweaks, it is moving towards the right direction. As far as relieving mortgage lenders of scrutiny, only time can tell.
I dont think this is a bad program. In fact, I think this can be a great program. Many people who want to upgrade their home with air conditioners or new windows may not have the set aside savings to do so, or dont want to spend that much money up front. This is where the PACE program can be of help. Some programs out there allowing you to pay $0 down to get new windows or solar panels and breaking down your obligations to 2 payments each year over a course of 5-25 years sound great but as the homeowner and debtor, we also need to do our homework. Do we have the extra cash per monthly or bi yearly to pay for these energy efficient upgrades? Lets look at the amortization schedule. How much more will my property taxes go up? After monthly expenses and typical bills paid, can we afford this added bill?
As always, I hope you found this read informative. If you would like more information on the PACE programs, CLICK HERE