As summer heats up, air conditioners are blasting, and some homeowners are looking to find ways to cool their homes more efficiently. The cost of repairing air conditioners, replacing roofs, updating windows, and other home renovations can quickly add up. For low-income homeowners, the option to install solar panels or retrofit their homes to make them more energy-efficient seems out of reach.
The PACE financing program was introduced to assist owners of residential and commercial properties (C-PACE), but the program presents some problems for homeowners, lenders, and title companies.
What is a PACE loan or financing?
The PACE or Property Assessed Clean Energy program is a government-sponsored financing option for commercial and residential property owners to pay for energy upgrades. Approved projects include permanent improvements like:
- New Roofs
- Solar Panels
- New Air Conditioning Units
- Water Heaters
- Power Generators
- Storm Resistant Windows
- Other Energy-efficient or Weatherization Upgrades
The loan is repaid through the property owner’s tax bill as a special assessment or non-ad Valorem tax.
Right now, California, Florida, and Missouri have active PACE loan programs.
The PACE loan creates a super-priority lien on your property
Homeowners signed up for the program without fully understanding how the loans worked. It’s called a loan, but it’s a voluntary lien, much like a mortgage. Additionally, it’s a super-priority lien, meaning that if there is an outstanding mortgage, the company financing the PACE loan jumps ahead of the mortgage lender to get their payment first.
If taxes are bundled into monthly mortgage payments, homeowners will see those payments increase quickly.
The loan is secured using the home as collateral. Defaulting on this loan could mean losing the house.
Good intentions gone wrong
The PACE program is government-sponsored, but private companies provide the loans and outsource the work to PACE-approved contractors. Unlike traditional loans, there is no required credit check or assessment of the homeowner to determine their ability to repay the loan.
Problems with PACE loans:
- It creates a super-priority lien on your home
- Refinancing is more difficult with a PACE lien
- Selling a home is more difficult, too, as Fannie Mae, Freddie Mac, the Federal Housing Administration, and the Department of Veterans Affairs will not purchase or finance mortgages for properties with a PACE lien
- Some private lenders may also refuse to provide financing for a home with a PACE lien
- Many homeowners don’t understand how the loan is repaid
- In addition to interest, annual administrative fees may be applied
- The total paid can be double the initial cost of the project
- Non-payment could lead to foreclosure
While private companies are getting homeowners to sign on the dotted line, the county tax collector’s office is responsible for gathering repayment. However, some counties, like Hillsborough County and Collier County in Florida and Los Angeles County in California, have ended their programs because of growing consumer protection concerns.
Beware of the Sales Pitch
The salesperson pitching the program won’t necessarily understand or divulge the details of the financing. Often it sounds too good to be true; get the money you need upfront to install solar panels, fix your a/c or make other improvements, and the savings on your monthly energy bill will more than make up for the yearly payments.
But the numbers don’t always pan out that way. There’s no energy audit conducted to see if these energy-efficient upgrades will provide the savings advertised. One Florida woman in Pasco County saw her tax bill quadruple from $300 to $1200 while a Brandon man’s taxes skyrocketed from $900 to $6,250.
For the homeowners on fixed incomes, this increase is unmanageable. Many face the threat of foreclosure or must sell to avoid foreclosure.
There’s also no guarantee of the quality of the work done. The person selling the PACE program to the homeowner isn’t the same company who will complete the project. As a result, PACE participants say the contracting is mismanaged, leading to shoddy work, over-changing for work performed, failing to complete projects on time, and a less energy-efficient home in some cases.
These slick sales tactics and the devastating consequences of PACE lead many to characterize the loan program as predatory lending.
Selling or Refinancing with a PACE lien
The lien placed on a home in the PACE program creates a title defect that must be corrected before selling or refinancing.
Title agents are one of the many professionals involved in a real estate transaction. Their job is to provide title insurance to lenders and homeowners to protect their interest in the property. However, a mortgage lender won’t want to finance a deal where another company has a superior lien, so homeowners with a PACE lien must pay off the lien in full either before or at the time of closing.
Otherwise, since the lien attaches to the property, it will carry over and become the responsibility of the new homeowner and threaten the priority of the mortgage lender’s lien.
Finding and paying off a PACE lien
While finding and clearing title defects is a big part of a title agent’s work, it’s not always easy. That’s especially true with PACE liens. The lien isn’t consistently recorded in the county land records, so they may not be found in a traditional title search. Instead, it will be found in the tax records, but the name that appears on the tax bill may not bear the acronym PACE at all.
For instance, in Broward County, the assessment may appear on the property tax bill as FL Green Finance Authority, FL PACE Funding, Florida Renewable Energy District, or Green Corridor PACE.
Fortunately, title agents in Broward County do have both the Public Records search site (Tax Roll) and the Public Records Search site (Liens) to cross-reference in search of PACE liens.
Title agents must also calculate the payoff amount required to satisfy a lien. With PACE liens, the amount of the loan and amount paid are listed, but interest rates and the principal amount are not usually provided.
Each community with a PACE program will vary in how the lien is recorded, the naming convention, and the process to request a payoff, creating challenges for lenders and title agents to clearly assess the insurability of a home purchase.
Alternatives to the PACE program
The critics of the residential PACE program are becoming more vocal, including Last Week Tonight’s John Oliver. Some suggest adding more safeguards for homeowners. In a Linkedin post, Maria Duanne Andrade mentions how St. Lucie County in Florida assesses a homeowner’s ability to repay before underwriting and provides oversight on the contractor’s work.
Reforming the current program is one approach, but there are other options out there for homeowners without the capital to invest in energy-efficient upgrades to their homes, including:
- Solar and Energy Loan Fund (SELF)
- Single-family Affordable Solar Homes Program (SASH)
- Energy Savings Assistance Program (ESA)
- Low-Income Weatherization Program (LIWP)
Right now, homeowners have massive amounts of equity, hitting a record of $8.1 trillion in the United States. For those who don’t qualify for the programs listed above, there’s also the option to tap into that equity for a Home Equity Line of Credit (HELOC) to fund renovations. Like the PACE program, a HELOC also creates a lien, but functions more like a credit card with variable interest rates. Whatever method a homeowner chooses to finance their projects, the terms and conditions should be carefully reviewed.
The residential PACE program may have begun with good intentions, but homeowners should be wary of the fine print.
For title agents, this is a good reminder to approach property and tax research with caution. Learn more about property taxes and how PropLogix helps title agents uncover all the information needed to issue marketable title policies. Watch our webinar, What You Need to Know About Property Taxes.