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What is PACE?

Property Assessed Clean Energy (PACE) programs are one way to finance energy-efficient home improvements. Unlike other available energy improvement programs, however, PACE financing attaches to the property in the form of a tax. Because this kind of financing involves a property tax, the companies administering the program need a city’s or a county’s tax-levying authority to market it to residents. For this reason, PACE is available only where the city council or the county board of supervisors has granted this authority. 

What problems are associated with PACE? 

  1. Predatory Lending: Qualification is based on home equity rather than on the borrower’s ability to repay, which violates the U.S. Department of the Treasury’s prohibition against predatory lending practices.
  2. Structured as a Property Tax Assessment: Because the amount borrowed is structured as a property tax assessment, it attaches to the property itself rather than to the owner, which negatively affects the owner’s ability either to sell the property or to refinance it and restricts a potential buyer’s ability to qualify for a mortgage on the property. 
  3. “Super-Priority” Lien: The amount borrowed is structured as a “super-priority” lien on the property, which means that, in the event of default, the PACE loan takes repayment priority over even the first mortgage. This arrangement violates the conditions spelled out in most mortgage agreements, negatively affects the owner’s ability either to sell the property or to refinance it, and restricts a buyer’s ability to qualify for a new mortgage on the property. 
  4. No Proof of Benefit or Value: Because the energy-efficient home improvements financed with PACE programs are often sold without either a home energy audit or a third-party certification of their operational effectiveness, the homeowner has no basis for performing a cost-benefit analysis or for assessing the true value of the improvements.
  5. No Utility Cost Offset: The homeowner is told that he or she will save enough on utility bills to cover the cost of the energy-efficient upgrades, but this utility cost offset seldom materializes. More often, the hapless homeowner ends up deep in the red.
  6. Price Inflation: PACE contractors inflate their prices for energy-efficient renovations, often charging far more than fair market value. 
  7. No Financial Oversight: Most of the contractors pitching PACE financing options have no financial expertise, and their offers and promises are not currently being scrutinized by any financial institution or government agency. 
  8. High Interest Rates: The interest charged for PACE financing can be as much as twice the amount charged for a home equity loan or on loans obtained via other financing alternatives. 
  9. Inadequate Disclosure: Often the total cost (with applicable fees and interest), the yearly payment amount, the actual payoff schedule, and the anticipated payoff date are not properly disclosed up front.
  10. Large Payoff Penalties: The penalties for early payoff are large and may include extended interest payments. 
  11. Harsh Late-Payment Penalties: Late payment or failure to pay is penalized in the same way as failure to pay property taxes and could result in foreclosure. 
  12. Automatic Default: A homeowner whose mortgage agreement specifically prohibits any other loan or lien from taking priority over the first mortgage—and most do—will be automatically in default. Thus, the lending institution holding the first mortgage can require accelerated payment or initiate foreclosure.

Are there alternatives to PACE? 

Yes, there are a number of other ways to finance energy-efficient home improvements. 

Energy Efficient Mortgage (EEM): This loan program allows borrowers to finance cost-effective, energy-saving improvements as part of a single mortgage. These mortgages make it possible for property owners to borrow above the appraised value and stretch debt-to-income qualifying ratios. To ensure the effectiveness of EEMs and to make certain proper upgrades are performed, these loans require an energy audit. EEMs are a Federal Housing Administration (FHA) product, but the Veterans Administration (VA) has its own version.

Federal Housing Administration PowerSaver Loans: This loan program offers three financing options for homeowners to make energy-efficient and renewable energy upgrades to their homes.

PowerSaver Home Energy Upgrade (Up to $7,500): This program can be used by homeowners with manageable debt and a credit score of 660 or higher for smaller projects, such as insulation, air and duct sealing, water heating, and upgrading or replacing heating and cooling equipment. Loans of this kind do not require a home appraisal or lien on the property and are insured by FHA. 

PowerSaver Second Mortgage (Up to $25,000): This program is for larger retrofit projects, including energy efficiency, solar photovoltaic, solar hot water, geothermal, or other renewable energy projects. A home appraisal and sufficient equity are generally required, and borrowers will likely not qualify if they already have a second lien or second mortgage on the property.

PowerSaver Energy Rehab (203(k) First Mortgage up to FHA Loan Limits): This program is for the purchase or refinance of a home.  At least $3,500 of the home improvements must consist of eligible PowerSaver measures. FHA insures the mortgage with the improvement project. 

HomeStyle® Energy Mortgage: This Fannie Mae program allows borrowers to make energy-efficient or utility-cost-reducing upgrades within the mortgage when purchasing or refinancing a home. This program also offers $3,500 for certain types of weatherization and water-saving improvements. 

Note: Fannie Mae allows those with a PACE loan to finance with this program.

HomeStyle® Renovation Mortgage: This Fannie Mae program allows borrowers to make renovations, repairs, and improvements totaling up to 50 percent of the as-completed appraised value of the property with a first mortgage. 

Freddie Mac Renovation Mortgage: This program allows borrowers to repair, restore, rehabilitate, or renovate their existing site-built homes within a Freddie Mac mortgage. 

The Southern California Gas Company Home Energy Upgrade Financing (HEUF) Program: This program offers loans ranging from $2,500 to $20,000 for the purchase and installation of energy-efficient upgrades. Eligible technologies include water heaters, refrigerated air conditioners, evaporative coolers, double-pane windows, building and equipment insulation, roofing, spa/pool heaters, insulated plantation shutters, and permanently installed natural gas barbecues.

The California Housing Partnership Corporation Ratepayer Integrated On-Bill Payment Program (RIOPP): This relatively new kind of financing is tailored to low-income multifamily rental properties and allows retrofit costs to be included in a tenant’s energy bill. 

Southern California Edison is expected to roll out a variety of options for financing energy-efficient options in 2017. 

Should cities participate in PACE financing?

No, definitely not. Because cities must enter into a Joint Powers Authority (JPA) agreement to authorize use of their tax-levying authority, they are complicit in the problems PACE creates for their residents. Here are some of the problems cities are likely to encounter. 

No Accountability or Benefits:  It is unconstitutional to give tax-levying authority to a private company. To get around this restriction, government entities, such as the Western Riverside Council of Governments (WRCOG), have been formed. However, when cities enter into a JPA with WRCOG, they do so as a nonvoting member. They also relinquish to WRCOG their ability to claim carbon credits. 

Programs Target Vulnerable Populations:  PACE companies are targeting low-income, elderly, and English-as-a-second-language residents by going door to door and pressuring them into signing up for PACE.  The Western Riverside Council of Governments (WRCOG) Subregional Climate Action Plan Adaptation and Resiliency Strategy (pg. 19) specifically outlines a strategy of expanding the Home Energy Renovation Opportunity (HERO) program, a type of PACE financing program, by targeting vulnerable populations:

Strategy 6.4: Expand participation in the HERO program, identify additional improvements to finance through the HERO program, and consider new approaches to target neighborhoods for focused outreach.

Some residents in the subregion may be unaware of the opportunities the HERO program can offer.  Many of these residents may be elderly individuals, people with limited English skills, low-income individuals, or otherwise members of a disadvantaged community.  WRCOG communities can expand their HERO outreach events to reach locations with a large proportion of disadvantaged individuals as determined by the Social Vulnerability Index. 

The Next Big Short:  PACE financing silently erodes residents’ equity. Should we experience another housing downturn, these residents will be much more vulnerable. If enough homeowners are short on equity, or under water on their mortgages, the local economy is at serious risk. 

Potential Liability:  A class action lawsuit has been filed against Renovate America (A PACE provider), and the County of Los Angeles.  The lawsuit asserts a number of claims.  Many of the claims are similar to those listed above.  The lawsuit also cites Los Angeles County as a "necessary participant" in the PACE program.  The ruling in this case may affect any municipality that enters into a JPA with a PACE administrator. 

What can we do to stop these programs?

Talk to Your Clients and Neighbors:  Many residents are signing up for these programs because they are uninformed. You can be instrumental in informing them. Mention the dangers associated with PACE financing in your marketing materials and your conversations. 

Also, the Orange County Association of REALTORS® has created this Energy Efficiency Financing flyer for you to distribute. 

Contact the Members of Your City Council:  Express to them your concerns as a homeowner, as a resident, as a voter, and as someone who regularly does business in the area.

                Aliso Viejo – Has implemented PACE

                                Mayor Dave Harrington

                                Mayor Pro Tem Phil Tsunoda

                                Council Member Mike Munzing

                                Council Member Bill Phillips

                                Council Member Ross Chun

                Dana Point – Has NOT implemented PACE

                                Mayor Debra Lewis

                                Mayor Pro Tem Paul N Wyatt

                                Council Member Joe Muller

                                Council Member John Tomlinson

                                Council Member Richard Viczorek

                Fountain Valley – Has implemented PACE

                                Mayor John Collins

                                Mayor Pro Tem Michael Vo

                                Council Member Steve Nagel

                                Council Member Mark McCurdy

                                Council Member Cheryl Brothers

                Huntington Beach – Has implemented PACE

                                Mayor Barbara Delgleize

                                Mayor Pro Tem Mike Posey

                                Council Member Patrick Brenden

                                Council Member Jill Hardy

                                Council Member Billy O’Connell

                                Council Member Erik Peterson

                                Council Member Lyn Semeta

                Irvine – Has NOT implemented PACE

                                Mayor Donald P. Wagner

                                Mayor Pro Tem Lynn Schott

                                Council Member Melissa Fox

                                Council Member Jeffrey Lalloway

                                Council Member Christina L. Shea

                Laguna Hills – Has implemented PACE

                                Mayor Don Sedgwick

                                Mayor Pro Tem Melody Carruth

                                Council Member Dr. Dore Gilbert

                                Council Member Barbara Kogerman

                                Council Member Janine Heft

                Laguna Niguel – Has NOT implemented PACE

                                Mayor Jerry Slusiewicz

                                Mayor Pro Tem Fred Minagar

                                Council Member Laurie Davies

                                Council Member Elaine Gennawey

                                Council Member John Mark Jennings

                Laguna Woods – Has NOT implemented PACE

                                Mayor Shari L. Horne

                                Mayor Pro Tem Carol Moore

                                Council Member Cynthia Conners

                                Council Member Bert Hack

                                Council Member Noel Hatch

                Lake Forest – Has implemented PACE

                                Mayor Scott Voigts

                                Mayor Pro Tem Leah Basile

                                Council Member Andrew Hamilton

                                Council Member Dr. Jim Gardner

                                Council Member Dwight Robinson

                Mission Viejo – Has implemented PACE

                                Mayor Wendy Bucknum

                                Mayor Pro Tem Ed Sachs

                                Council Member Greg Raths

                                Council Member Brian Goodell

                                Council Member Patricia Kelley

                Rancho Santa Margarita – Has implemented PACE

                                Mayor Carol Gamble

                                Mayor Pro Tem Michael Vaughn

                                Council Member Tony Beall

                                Council Member Jerry Holloway

                                Council Member Bradley J. McGirr

                San Clemente – Has implemented PACE

                                Mayor Kathleen Ward

                                Mayor Pro Tem Tim Brown

                                Council Member Lori Donchak

                                Council Member Chris Hamm

                                Council Member Steve Swartz

                San Juan Capistrano – Has NOT implemented PACE

                                Mayor Kerry K. Ferguson

                                Council Member Sergio Farias

                                Council Member Brian L. Maryott

                                Council Member Pam Patterson

                                Council Member Derek Reeve

 

Share these articles on Facebook and Twitter: 

America’s Fastest-Growing Loan Category Has Eerie Echoes of Subprime Crisis – Wall Street Journal

San Diego firm named in LA energy-efficiency loans lawsuit – San Diego Union Tribune

LA Resident Files Class Action over HERO Home Improvement Loans – BigClassAction.com

Why You May Want to Rethink a PACE Loan for Energy-Efficient Home Improvements – Yahoo News

Contractor Bills Homeowner $14,000 For Unusual Paint Job – NBC

Homeowners Lured Into Debt Trap By Dubious Claims Of Government Program – CBS

PACE Energy Efficiency Mortgages Still Risky Despite New Department of Energy Guidelines

Is rooftop solar worth it? Californians consider the question as use, complaints rise – The Sacramento Bee

What homeowners should know about PACE clean energy program – Bakersfield.com

Realtors offer word of warning about solar financing program – The Press Enterprise

Green financing has hobbled home sales in California – Reuters

PACE Financing – Los Angeles Sentinel


Local Facebook Groups:

                Aliso Viejo

                                Residents of Aliso Viejo

                Dana Point

                                Dana Point Unplugged

                Fountain Valley

                                Fountain Valley Community Forum

                Huntington Beach

                                Huntington Beach Community Voice

                                Huntington Beach Community Forum

                Laguna Niguel

                                Laguna Niguel, CA Neighborhood Group

                                Residents of Laguna Niguel, CA

                Lake Forest

                                Lake Forest Town Square

                Mission Viejo

                                Mission Viejo Connection

                Rancho Santa Margarita

                                Rancho Santa Margarita, CA

              

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