A proposed County program that would loan money for energy-efficient improvements sounds like a good thing, but is it a scam? The Property Assessed Clean Energy, or PACE, program ordinance comes up a vote before the County Commission next Tuesday. The experience of other U.S. communities shows the PACE program is often a wolf in sheep’s clothing, disrupting lending standards by putting PACE “super liens” on homes, which then make it difficult to sell or refinance.
What is the PACE program? PACE permits private lenders to sell loans to homeowners or businesses for the purpose of adding energy efficient improvements—like windows or roof replacements—to their property. PACE loans are different because they are secured by a property tax lien and are collected through the property tax bill. According to the National Consumer Law Center, “typically PACE loans are first-priority liens that jump ahead of existing mortgages.” NCLC also says “many localities fund the program by issuing bonds linked to homeowner tax payments. These bonds are then sold to a private company that securitizes them and sells them on Wall Street. The local government often receives a fee for participating.”
Homeowners who go to sell their property may find that a PACE loan is an obstacle to the sale. When there’s not enough equity to pay off both the mortgage and the PACE loan in full, the mortgage holder objects to taking a loss by being paid after the PACE lien is satisfied—something they never consented to in the first place. The buyer’s mortgage lender may object to being second in line for payment behind a PACE lien that remains attached to the property. Without satisfying the mortgage lender(s), the transaction cannot proceed. Ensuing legal hassles have prevented transactions with PACE loans attached from closing.
Other problems with PACE loans include door-to-door and phone solicitations, which can be signed electronically on the spot, with no ban on kickbacks or rules for broker compensation to avoid conflicts of interest. There may be no assessment of the property owner’s income or ability to pay & no right to cancel. Low income consumers who quality for lower-cost programs may be signed up. PACE loans typically charge 8-9 percent interest, plus a fee, which can add thousand of dollars per year to the property tax bill for 5, 10 or even 20 years, with no required energy audit and concrete evidence of savings.
The County staff memo on PACE recommends strong consumer protections, but the proposed ordinance fails to protect property owners from the fundamental problem: PACE liens taking priority over mortgage loans. The ordinance states: “the risks associated with participating in the PACE program shall be clearly disclosed… including the risks related to the failure of the eligible Participant to make payments, the risk that they may not be able to refinance the home or sell the home unless the PACE assessment is paid off in full first.” So much for strong consumer protection.
The worst case scenario? A PACE loan participant may find if they fail to pay the PACE debt through their property taxes, their home or business is seized by the creditor. Alternatively, if the PACE debt is paid but there is not enough left to pay the mortgage, a property owner may face foreclosure. In California, borrowers have gotten in trouble. “They go out and push these sales and these projects without really any care whether people can actually afford it or not,” said David Hiller, a Pasadena attorney who has handled PACE cases for consumers. “It feels exactly like what was going on with mortgage lending precrisis.” (Los Angeles Times, “These loans were created to help homeowners, but for some they did the opposite”, June 4, 2017 – link below).
The National Consumer Law Center warns: “PACE has few consumer protections. Expensive loans that are often pushed by aggressive contractors for projects with questionable savings pose serious risks of predatory lending. Reports are already surfacing of problems that mimic the home equity scams and subprime abuses of the 1990s and 2000s.” Sarasota County must not act as a conduit for loans with put their constituents property at risk through Wall Street’s latest real estate security game.
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The Sarasota County Commission will vote on a PACE loan ordinance this Tuesday, September 26th. The meeting is in the Commission Chambers at 1660 Ringling Blvd. in downtown Sarasota. The PACE ordinance public hearing is agenda item 48, the last agenda item of the day. It will be heard in the afternoon, likely after 2:30 pm. Members of the public who sign up to speak will have 5 minutes to give input on the PACE ordinance. Come and ask your County Commission to protect their constituents from predatory lending.
Proposed ordinance:
Click to access 107015209242017110900685.PDF
National Consumer Law Center opinion on PACE:
https://www.nclc.org/issues/pace-energy-efficiency-loans.html
PACE experience in California:
http://www.latimes.com/business/la-fi-pace-loans-20170604-story.html
http://www.turnto23.com/news/local-news/pace-home-loan-program-ends
Thanks for getting the word out on this PACE program.
Residential PACE programs are a scam. The fundamental reason is the senior lien status of the loan. This allows PACE lenders (private for profit companies) to lend money for voluntary private transactions with NO risk of lending (a sweetheart deal). Why no risk? Because the State is allowing them to transfer the risk of their lending activities to another entity (first mortgage holders) who are not a party to the PACE transaction.
Don’t be fooled by the so-called “consumer protections” added through the Dept of Energy Best Practices and Sarasota County Commission Ordinance. They are “window dressing” and don’t provide effective internal controls needed for sound lending. They don’t cure the fundamental material internal control deficiency that PACE lenders can operate a lending business and transfer the risks of lending to someone else through their senior lien status. PACE make the profits, someone else gets the losses. It will lead to Sub-Prime Crisis 2.0. Consumers pay more and those who run into financial difficulties risk losing their homes to tax deed sales.
PACE for commercial properties requires mortgage holder consent. This provides the proper internal controls over the PACE lending company. Residential PACE programs don’t require mortgage holder consent. When I asked why I was told that mortgage holders would most likely not agree. That says it all.
PACE loans are for home improvements. For at least a century, homeowners have financed these home improvements through refinancing their mortgages, second mortgages (home equity loans) and vendor financing. All those options still exist today and provide better rates and consumer protections. There is no need for residential PACE financing in Sarasota County.
Thank you Marilynne for bringing this issue to the forefront and for your great research. Hopefully the County will do the right thing.
Thank you for keeping your ear to the ground, doing the work, and informing us.
Thank you Jane for your feedback. Hopefully the County will chart a different course.