PACE loans take a hit on their home turf
California was the birthplace of so-called PACE loans — a controversial means of financing energy efficiency upgrades via assessments on property tax bills now practiced in 20 states — and it could prove to be the seed of their undoing.
Several local municipalities are pushing back against the contentious loans, which have a number of critics, including real estate agents who say PACE loans make homes harder to sell.
The board of supervisors of Kern County on Tuesday voted 4-1, with one abstention, to rescind Property Assessed Clean Energy programs in its unincorporated areas. Effective immediately, eight of the nine programs being administered have lost their authorization to conduct new business. (The county is contractually obligated to provide the Western Riverside Council of Governments, which operates under Renovate America's HERO program, six months' notice of termination.)
Kern County, with a population of over 800,000, isn't the first California municipality to reconsider PACE authorization, but in several other counties, these measures failed to pass. The City of Bakersfield, Kern's county seat, is expected to take up the issue in the coming months.
Still, PACE programs continue to expand across the state. Earlier Tuesday the board of supervisors in Tulare County — directly north of Kern — authorized a second PACE program in its unincorporated areas despite opposition from local real estate agents.
Kern County supervisors brushed off accusations from local contractors and PACE administrators that they promised local realty agents months before the issue came to a public vote to kill PACE.
"There was no backroom deal," supervisor Mick Gleason said. "I never once told one individual — and I never do — my stance on any issue until I hit that button" and vote.
Three other supervisors, David Couch, Zack Scrivner and Mike Maggard, also said they did not promise votes. All four said the primary reason they voted against PACE is that the financing creates a "super lien" that must be repaid ahead of a mortgage. This can make it difficult for property owners to refinance or sell. While the lien is not accelerated upon the sale of a property, prospective buyers may have trouble obtaining financing while it is in place.
Supervisor Leticia Perez, who opposed terminating PACE at a board meeting in June, was absent. The vote comes as state lawmakers are considering a bill that would introduce a number of consumer protections, including tighter underwriting criteria, obligations for administrators to monitor contractors and forbearance policies.
The U.S. House and Senate are also considering legislation that would bring PACE assessments within the purview of the Truth in Lending Act, putting this type of lending under the authority of the Consumer Financial Protection Bureau.
The state and federal bills did not sway the vote, Couch said.
"From what I've seen of SB 242 [the California bill], I don't know that it's adequate," he said.
The first commercial and residential PACE programs were established in California in 2008. The residential programs hit a roadblock in 2010, when the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, instructed the two government-sponsored enterprises not to acquire mortgages encumbered by PACE liens. Still, the programs have continued to operate throughout the state.
As heated as the debate in Kern County has become, it is more about PACE's potential harm than actual widespread damage.
As of mid-May, there were 2,510 properties in Kern County with a PACE assessment, and of those, 72 (2.9%) were delinquent on their property tax payments, according to a staff report submitted to the board of supervisors in June. It noted that the overall delinquency rate in the county is around 2%, so the PACE-assessed properties are not materially higher.
Based on data provided to county staff by the HERO program, there has only been one foreclosure in unincorporated Kern of a PACE-assessed property. According to HERO, the homeowners suffered a job loss and were unable to continue paying the mortgage. The foreclosure, therefore, was not initiated by the PACE provider.
Other data support real estate agents' claim that it can be difficult to obtain a mortgage on a property encumbered by PACE, compelling owners to prepay assessments in full if they want to sell or refinance.
Prepayment rates on PACE loans backing HERO transactions have been gradually increasing and now stand at 13% to 15%, according to research published by DBRS. The rating agency says this may, in part, be attributable to the difficulty of selling or refinancing the home as a result of the Federal Housing Finance Agency's opposition to PACE — prepaying the PACE loan is effectively a prerequisite for doing anything else with the home.
Last year, under the Obama administration, the Federal Housing Administration endorsed PACE, increasing financing options. However, DBRS does not expect this to have a significant impact on prepayments since the FHA's share of new mortgage originations is low relative to Fannie and Freddie.