What do you know about PACE, a fast-growing home improvement loan?

PACE is not just about clean energy, nor is PACE suitable for all homeowners.

If you’re a homeowner living in California, Florida, or parts of Missouri and haven’t yet installed solar panels or a new roof with a PACE loan, chances are you still know a friend. or a neighbor who has, or you have been started by private entrepreneurs selling PACE.

PACE stands for Property Assessed Clean Energy. As the name suggests, PACE provides financing for home improvement through green and renewable energy, although it is not limited to that. Renovating properties with energy upgrades is expensive, and PACE offers incentives such as 100% long-term financing. Additionally, PACE does not require monthly installments on the loan, but is structured as a special tax assessment or tax lien attached to the property and a homeowners tax bill. Currently, local municipalities in California, Florida, and St. Louis County and the City of St. Louis, Missouri have partnered with private lenders and contractors to provide homeowners with access to PACE loans.[1]

Pay-as-you-go lending: encouraging private initiatives in clean energy

Since a PACE loan is attached to the property as a tax lien, it can further encourage clean energy investment, as owners are responsible for the cost of the investment – ​​while reaping the benefits – only for the duration of ownership of the property. When a change in ownership occurs, the cost or any remaining obligation of the unpaid PACE amount could be passed on to the current owners.

PACE is not just about clean energy

Although the acronym PACE stands for clean energy, PACE programs are not limited to funding clean or renewable energy. A variety of energy-related home improvements – including replacing heating and cooling systems or water heaters, air sealing and insulation, windows, doors and roofing ENERGY STAR, ENERGY STAR appliances, LED lighting or HVAC upgrades – all qualify for PACE.[2]

PACE is also not a good choice for every owner

Although PACE funding can be a good source for a variety of energy upgrades, it is certainly not for everyone. For homeowners with an established credit history, a home equity loan or home equity line of credit (HELOC) is a less expensive source of financing. However, PACE can meet the needs of homeowners who would otherwise have difficulty obtaining a home equity loan or HELOC from banks or mortgage companies. For these owners, PACE offers additional benefits such as long-term financing to extend the loan to 20 to 30 years, making repayment more affordable.

Shock Sticker

The special tax assessment on PACE loans often surprises homeowners when the tax bill arrives. PACE loan payments are due with annual property taxes, either once a year (Florida, for example) or in two installments (in California). A disadvantage of infrequent PACE loan payments is that each payment will be larger than if it were spread over 12 months or compared to the monthly payment of a home loan or HELOC loan, which makes budgeting more difficult. .

Figure 1 shows the typical or median amount of special tax assessment attached to PACE liens for California homeowners. The annual PACE tax assessment typically ranges between $2,600 and $2,700, dropping only slightly in 2020 and 2021 as interest rates hit historic lows. The large increase in total taxes owed could become particularly burdensome for low-to-moderate income borrowers with limited credit histories who find PACE financing accessible but may have difficulty obtaining financing with a home loan or loan. HELOC.

Figure 1: Typical Special Tax Assessment on PACE Liens

New request for PACE funding in retirement

According to PACENation, the national trade association that promotes PACE financing, PACE programs in CA, FL and MO have provided homeowners with access to $7.7 billion in financing to undertake more than 323,000 energy-efficient home improvements or resilient, averaging $24,000 per investment. .

To give an idea of ​​how demand for PACE has changed over time, Figure 2 disaggregates cumulative data from PACENation to show the annual volume of PACE funding. With almost no market penetration in 2012, PACE financing began to take off and became the fastest growing lending vehicle between 2013 and 2016. At its peak in demand in 2016, PACE loans provided financing $1.7 billion for approximately 71,250 home improvement projects.

Figure 2: Origin of PACE residential loans (in millions), 2012-2021

Homeowner participation in PACE has since slowed significantly, declining year over year from 2017, with the latest disaggregated data for 2021 showing a 35% decline from 2020. About $543 million, or about 22,625 loans , were granted in 2021, a drop of almost 70% from its peak.

It’s likely that some of the decline in PACE demand could be due to growing market saturation, as many past or current owners have made the investment. Meanwhile, new fresh demand may emerge from landlords in states that have already passed PACE legislation (38+ states) to support the implementation of PACE programs.

Challenges for current and future PACE programs

Consumer advocacy groups have called for better consumer protection on PACE loans.[3] PACE loans have been criticized for charging high interest rates and fees and exposing uninformed homeowners to the risk of owing additional taxes they could not afford. Many PACE loans have been made to low-to-moderate income homeowners who find PACE financing accessible but otherwise have difficulty obtaining traditional financing with a home loan or HELOC loan. With additional annual tax assessments in the thousands, some homeowners may struggle to make their payments.

PACE lenders are not traditional mortgage lenders, but private investment firms, venture capitalists and other private investors. At the federal level, PACE loans are not currently subject to consumer protection regulations, as required by banks and mortgage companies engaged in residential mortgages.[4] In addition, PACE loans are frequently marketed through door-to-door sales, raising concerns about appropriate disclosure of the cost of the loans or potential energy savings to justify the costs.

Finally, the FHA and GSE prohibit PACE liens on properties and mortgages they insure or guarantee, making it more difficult for homeowners when selling the property, although PACE is presented as transferable upon sale. of the property.[5]

[1] While only three states (CA, FL, MO) have launched residential PACE programs, 28 states and the District of Columbia have launched commercial PACE programs. Currently, 38 states have passed PACE legislation. Source: https://www.pacenation.org/

[2] Source: https://www.energy.gov/eere/slsc/property-assessed-clean-energy-programs.

[3] See PACE Energy Efficiency Loans: Good Intentions, Big Risks for Consumers – National Consumer Law Center (nclc.org)

[4] In 2019, the Consumer Financial Protection Bureau issued a Regulatory Proposal Notice on the application of the Truth in Lending Act to PACE residential loans.

[5] PACE-encumbered properties may be eligible for VA-secured financing provided lenders can meet a number of underwriting requirements set by the VA. For details, see https://www.benefits.va.gov/HOMELOANS/documents/circulars/26_16_18.pdf

© 2022 CoreLogic, Inc., All Rights Reserved.

About Sharon Joseph

Check Also

Apply for a car loan? It’s complicated right now

Auto credit rose for a second consecutive month in October, but the news was not …