During the past several years, there has been a significant increase in the number of California homeowners using a new kind of financing to install solar panels, put in landscaping to save water, and make seismic strengthening improvements.
However, a light needs to shine on this financing – known as property assessed clean energy financing, or PACE – because it ignores longstanding lending principles and fails to make important disclosures to borrowers.
Assemblyman Matt Dababneh has a common-sense solution in Assembly Bill 2693, which is scheduled to go before the Assembly Local Government Committee on Wednesday.
Under existing law, homeowners enter into a voluntary contract for a loan to fund the improvements and repay the loan through an assessment paid with their property tax bill. As security for the loan, the city or county is given priority status on the lien.
AB 2693 requires that these liens come second to the mortgage debt.
An increasing number of companies, acting as agents of the city or county, are aggressively and falsely marketing these loan repayments as assessments that stay with the property. This is true only if the new owner and their lender agree to assume the loan; otherwise the loan must be paid in full at the time of sale.
So the bill also requires that borrowers receive a disclosure form on the financial terms and conditions of PACE loans.
PACE financing has also drawn the attention of the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac. The agency has issued several memos making it clear to homeowners, financial institutions and other lenders, state and local officials and the general public that Fannie Mae and Freddie Mac policies prohibit the purchase of a mortgage where the property has a first-lien PACE loan attached to it.
Given that the federal government backs the overwhelming majority of all new mortgages, this will likely have a chilling effect on the availability of credit and homeowners’ ability to buy or refinance homes. Prospective homebuyers may be reluctant to consider a home with a PACE loan, significantly reducing its marketability. Ultimately, a homeowner needing to refinance or sell their property will be forced to pay the entirety of the PACE loan balance.
Of equal concern is the insufficient review by public agencies or their agents before making a PACE loan. Potential borrowers are not evaluated for their ability to repay, and they are not adequately told of the impact the loan may have on their ability to resell or refinance their home.
Also unclear is how many PACE loans can be made on one parcel. It’s entirely possible that one home may have one for an energy efficiency improvement, a second for water efficiency and a third for seismic strengthening improvements. The potential stacking of these PACE loans complicates title and the rights of lenders.
Rodney K. Brown is president and CEO of the California Bankers Association. He can be contacted at firstname.lastname@example.org.