Article about PACE green financing program
Reuters has a story this morning under the headline “Green financing has hobbled home sales in California.” I found it at http://news.yahoo.com/innovative-green-financing-hobbled-home-sales-california-053520629–sector.html. I would be interested to hear other people’s reactions to it.
The article discusses a green financing option called PACE that gets paid back via a special property tax assessment. Realtors are upset because potential house buyers are scared off by the assessment. Mortgage lenders are upset because these “loans” are not subordinate to a mortgage like a home equity loan. Window installers and solar installers like the program because it provides a source of financing for customers.
Is this a problem of people using the program to do improvements that have a poor economic return, sort of like using government backed education loans for a degree in art history? Or, is the problem that realtors are not stepping up to the challenge of marketing the value of the improvement? One example in the article was someone spending $40K to replace windows in Riverside county. The article didn’t describe the repayment terms. Somehow, the guy who spent $40K on windows owed $46K when he decided to pay it off. The article also didn’t say anything about the approval process for the program. Is there an economic return criteria for the work to be done? Is there a home equity requirement?
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Replies
Reid,
If you enter "PACE financing" into the GBA search box, you will find links to 6 or 8 articles on the topic.
This is interesting and being from that state I'm embarrassed to say I didn't know about PACE. I agree with the gist of the article that this may not be a good way to finance green improvements to a home. Generally, when you make an improvement to a home one has no guarantee that the cost of the improvement will be full reflected in the sale price of the home. Most (wise) people take this fact for granted and make a provisional decision that their improvement is intrinsically important enough to their enjoyment of the home that it is worth it to them regardless of whether they fully recoup their cost. Different improvements will recoup more of the cost than others.
This program does not seem to take that market truth into account. And since it sounds like it subordinates other kinds of mortgage debt it becomes an albatross attached to the house. It is like saying "Here are my green values reflected in my home. You better respect that at 100 percent of my cost (plus interest) even if the rest of the real estate market does not." This seems like a real problem to me that completely ignores the way the world actually works. In other words, all sales transactions are a form of negotiation even if that fact is not explicit. PACE seems to be constructed to act as if the world doesn't work that way.
When I read the article, I had the impression that PACE was relatively new and mostly in California. The articles Martin refers to in the first response are from the 2009-2011 time frame, so this has been around for awhile. It sounds like this is something that different localities can implement differently. At the time of those 2010 articles, there was some federal legislation being debated to address some of the issues. I have no idea if anything became of those proposals.
Reid, it sounds like there are twin issues that are the big problem with PACE in California. The first is that the big two mortgage insurers are not guaranteeing the loans because they take precedence over the other loans. The second is that the payments are tacked on in the form of additional property taxes that are transferable to new owners. Those two features may only be a feature of the California PACE program. I have no idea as I'm new to this. But overall those two features don't seem like good ones to me as it tends to circumvent the normal housing market pricing mechanisms. When that happens markets freeze up. This could have been foreseen, it seems to me. We always seem to be at the forefront of these experiments, which always seem to be carried out at the beginning for perfectly reasonable reasons. Oops.
These four articles will give GBA readers an overview of developments with PACE financing programs:
January 2010: Innovative Financing for Energy Improvements
July 2010: Scenes from PACE v. Fannie and Freddie
September 2010: Fannie, Freddie Hold Firm on PACE Program Impasse
July 2011: A Bipartisan Team Pitches a PACE Revivals
I actually work for Renew Financial, the program administrator of CaliforniaFIRST, one of the CA PACE providers. (Our competitor HERO was the main program featured in the article).
I'm not the best one to speak to the larger policy picture of PACE, but I can answer your questions about approval. The programs allow only certain products that are known to save energy or water. There is a verification process for each product submitted by the contractor. Home equity is the main factor in determining their financial qualification for the lien (it's not a personal loan, so it's not based on FICO score).