Predatory lending! Those two words alone are enough to make anyone shudder, but to me the word that sends shivers up my spine is PACE. Property Assessed Clean Energy (PACE) programs sound like a good idea, and they are one way to finance energy-efficient home improvements. These programs, however, are often sold in a predatory fashion, targeting the people they were designed to help.
Structured as a property tax assessment, qualification for PACE financing is based on home equity rather than the borrower’s ability to repay, and that’s where the trouble starts.
Here are some messes I’ve been trying to clean up:
Pomona Client: On disability payments with a low income, and struggling to pay her electric bill during the summer months, she was a prime target for the contractor who came to her door and who told her he could save her money on her electric bill. She was told that it was a Government program (partially true) and that it would save her money (not exactly true), and that it wasn’t going to cost her anything (definitely not true!).
In December solar panels were installed on her roof. The next year when her property tax bill arrived, it had increased from $4,637 to just over $10,000, and she was faced with a 20-year tax assessment to pay off the PACE loan. A PACE loan is structured as a super-priority lien and as such takes repayment priority over the first mortgage. If she had been unable to make her property tax payment, she could have faced foreclosure.
The saving grace for this lady is that because of the equity in her home; I was able to help her keep her home by obtaining a reverse mortgage to pay off the PACE loan.
IMPORTANT NOTE: Due to recent changes in FHA guidelines, FHA Reverse Mortgage products are now no-longer available to homes that are subject to a PACE lien. Even if a homeowner qualifies for a reverse mortgage they cannot use that product to pay off the PACE loan.
Bellflower Client: Mom and dad owned the home, but dad had been bedridden for the past 12 years. Their employed daughter and her high-school age daughter live with them. With summer electric bills costing $2000+ a month, a contractor selling solar panels found a soft-target. Not only did the family commit to solar panels, but also agreed to have energy efficient windows installed because the contractor assured them it would only increase their property tax bill a little bit – about $200-$300. After some installation problems, the system was finally completed a year later by which time the dad had passed away, and their newly revised property tax bill arrived.
Their annual property tax bill of $4231 increased to $8,503 because of the two PACE loans; $31,520 for solar panel, and a second loan of $21,987 for new windows, for a total loan amount of $53,507. Refinancing the home to pay off the PACE loan was easier said than done. Due to their ongoing financial struggle to pay the mortgage on time each month, they were late on two of the monthly payments, and by the time a letter of explanation had been submitted to the bank, they had three late payments on their account.
To add to the family’s problems, they needed an appraisal that would be high enough to qualify to pay off the PACE loans and all the extra fees. Although the amount owed for the PACE programs was $53,507, with all the early pay-off fees, the amount ballooned to $61,106. With continuing late payments and a low appraisal, the bank would not authorize a refinance. This family continues to struggle with no resolution in sight.
Garden Grove Client: The homeowner, a 60-year old widow, had a plan to get a reverse mortgage when she turned 62 to ease her struggle and stress of a monthly house payment. On Friday, a contractor knocked on her door and offered to take care of some of the deferred maintenance issues she had in her house, and told her that a PACE loan was her best option. She specifically asked him “will this prevent me from getting a reverse mortgage in two years time?” and was assured that it would not. She signed on the dotted line, and by Monday, the contractors started work on her home.
During the weekend, she had started to worry about the loan, and she contacted the provider of the loan. She was dismayed to get conflicting answers to her concerns. She researched online, and found a video about PACE and saw a comment I had made and reached out to me.
On Tuesday she contacted the PACE loan provider and said ‘stop everything’ I wish to cancel. Because she was within her legal 3-days right to cancel, the loan was canceled, and she told the contractors to stop work as she had canceled the loan, and couldn’t afford to pay them.
UPDATE: On May 12, 2017 the contractors recorded a Mechanics Lien on her property for the work they had already started on her house, although the homeowner never found out about the lien until August 2, 2017. Legal Aid is trying to help this beleaguered homeowner, and she has filed a complaint with the State Licensing Board against the contractors for fraudulent advertising. I am still trying to help the homeowner resolve this dilemma.
Many PACE loans are packaged with similar loans and sold to investors and homes are quickly foreclosed when homeowners default on the loan. Billions have already been loaned for residential projects, and PACE loans are on track to be the fastest growing financing product in the U.S.
Contractors are selling these loans with little training and oversight. They pitch PACE loans to land contracting jobs and offer lucrative referral fee to consumers. Based on the value of a homeowner’s property, PACE loans typically require no down payment, and creditworthiness doesn’t matter much to lenders
Because these loans involve property tax, PACE is only available where the city council or the county board of supervisors has granted authority. While local governments’ mean well, and see PACE as a way to bring clean energy to the masses, they don’t know about the messy consequences.
As REALTORS® we need to put on our advocacy hat and step forward to speak up because uninformed residents are signing up for these programs. They don’t know clean energy programs can leave them with a nasty financial mess on their hands!
An informative Energy Efficiency Financing flyer created by the Orange County REALTORS® is available for REALTORS® and consumers.
NOTE: Though many in the PACE industry have been receptive to changes in California law, they all strongly oppose an effort in Congress to put the loans under the federal Truth in Lending Act — a move that would treat the financing more like a mortgage and subject the lenders to oversight from the federal Consumer Financial Protection Bureau.