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?
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.
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.
“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.
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.
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.
Price Inflation: PACE contractors inflate their prices for energy-efficient renovations, often charging far more than fair market value.
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.
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.
Large Payoff Penalties: The penalties for early payoff are large and may include extended interest payments.
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.
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 abovetheappraised 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.