PACE financing – “Property Assessed Clean Energy (PACE) programs” – is one way to finance energy-efficient home improvements.
However, such PACE financing can be dangerous for homeowners who should be very careful before making those decisions.
PACE financing in California attaches to the property in the form of a “property tax”. Because this kind of financing involves a property tax, the companies administering the program need a city’s or a county’s tax-levying authority to market it to residents.
So PACE financing is available only where the city council or the county board of supervisors has granted this authority.
What problems are associated with PACE financing in California?
- Predatory Lending: Qualification is based on home equity rather than on the borrower’s ability to repay, which violates the U.S. Department of the Treasury’s prohibition against predatory lending practices.
- Structured as a Property Tax Assessment: Because the amount borrowed is structured as a property tax assessment, it attaches to the property itself rather than to the owner, which negatively affects the owner’s ability either to sell the property or to refinance it and restricts a potential buyer’s ability to qualify for a mortgage on the property.
- “Super-Priority” Lien: The amount borrowed is structured as a “super-priority” lien on the property, which means that, in the event of default, the PACE loan takes repayment priority over even the first mortgage. This arrangement violates the conditions spelled out in most mortgage agreements, negatively affects the owner’s ability either to sell the property or to refinance it, and restricts a buyer’s ability to qualify for a new mortgage on the property.
- No Proof of Benefit or Value: Because the energy-efficient home improvements financed with PACE programs are often sold without either a home energy audit or a third-party certification of their operational effectiveness, the homeowner has no basis for performing a cost-benefit analysis or for assessing the true value of the improvements.
- No Utility Cost Offset: The homeowner is told that he or she will save enough on utility bills to cover the cost of the energy-efficient upgrades, but this utility cost offset seldom materializes. More often, the hapless homeowner ends up deep in the red.
- Price Inflation: PACE contractors inflate their prices for energy-efficient renovations, often charging far more than fair market value.
- No Financial Oversight: Most of the contractors pitching PACE financing options have no financial expertise, and their offers and promises are not currently being scrutinized by any financial institution or government agency.
- High Interest Rates: The interest charged for PACE financing can be as much as twice the amount charged for a home equity loan or on loans obtained via other financing alternatives.
- Inadequate Disclosure: Often the total cost (with applicable fees and interest), the yearly payment amount, the actual payoff schedule, and the anticipated payoff date are not properly disclosed up front.
- Large Payoff Penalties: The penalties for early payoff are large and may include extended interest payments.
- Harsh Late-Payment Penalties: Late payment or failure to pay is penalized in the same way as failure to pay property taxes and could result in foreclosure.
- Automatic Default: A homeowner whose mortgage agreement specifically prohibits any other loan or lien from taking priority over the first mortgage–and most do–will be automatically in default. Thus, the lending institution holding the first mortgage can require accelerated payment or initiate foreclosure.
You as a CA homeowner should be aware of these problems and weaknesses of PACE financing of home improvements. If you are having problems with legal issues regarding PACE financing of your home improvements, you should contact a real estate attorney in your community or geographic area.
By Harrison K. Long – real estate attorney and member of CA State Bar Association #69137. Real estate broker – CALBRE #01410855. Source of information is the California Association of REALTORs® and the Orange County REALTORs®. This is for information only and is not the providing of legal services.