In the mortgage world, one area appears ready to take off: Property Assessed Clean Energy (PACE) loans. These loans, which first arrived on the scene in 2008, are gaining traction as a financing tool local governments can use to encourage energy-efficiency and water conservation-related improvements to both residential and commercial properties.
As of this writing, PACENation, an industry group, says 33 states and Washington, D.C., have passed legislation allowing this type of financing within their municipalities, potentially opening up the option to 80 percent of the U.S. population. About $3.3 billion in loans have already been made for residential projects, and it’s anticipated that growth could double in the next year. However, it’s still unlikely you have come in contact with these loans…yet.
How the Program Works
As a financing tool, these loans can be a win-win for the environment and the homeowners who use them. However, there are still some issues that need to be resolved. The loans have primarily been promoted and approved outside of regulated channels. Tradesmen and contractors, instead of Loan Officers, present the loan option to potential clients without an evaluation of their financial suitability to the borrower’s circumstances.
Instead of creditworthiness, the loan approval is based on the underlying property’s value. They are payable over five to twenty-five years, but the amount borrowed, plus interest, is treated as a special assessment and appears on the homeowner’s property tax bill.
That last aspect is of particular concern for consumer groups, as well as the MBA. Since the obligation for PACE loans attaches to property tax bills, it has seniority over a mortgage obligation in a foreclosure. This has the potential for mortgages or refinancings of these properties to be treated as riskier, which could raise the interest rates charged when a home is sold with a PACE loan in place despite it being an improved property.
Then, there is the matter of disclosure. As a creation of the Department of Energy (DOE), PACE loans fall outside of the regulatory oversight for other consumer financing. Currently, PACE loans are not subject to the same degree of disclosure as is required with other consumer loans, which is something the MBA is working to change. Although, in recognition of this, the DOE issued best practices guidelines in November 2016. This was the first step toward introducing a higher standard of consumer protection into this area of lending.
What’s Happening Now
In late 2016, the FHA issued Mortgagee Letter 2016-11, which permits FHA financing to be used to purchase or refinance properties that have been improved using PACE financing. The VA has also released parallel documents. While this should help prompt further standardization, until then, Loan Officers who encounter this type of credit during the review of a loan request on a PACE-financed property are responsible for determining if the loan is compliant with the DOE guidelines.
The MBA and consumer protection groups are expected to lobby in the coming year for the introduction of national standards to help foster better communication to consumers. For Loan Officers, this creates an educational opportunity when working with clients who may be looking to make these types of home improvements. Specifically, it is a chance to make them aware of all of their alternative financing options, the associated costs of each, and the market value implications to determine if they will reap the full benefits of a PACE loan.