Problems with PACE Financing for Single-Family Homes

What are PACE Loans?

Property Assessed Clean Energy (PACE) program is a means of financing energy-efficient upgrades by attaching the costs of the upgrades to a property’s tax bill.

Under PACE programs, municipalities and counties form special tax districts to help property owners finance energy retrofits by allowing a property owner to place an additional tax assessment on his or her property. Property owners who invest in energy efficiency (EE) measures and small renewable energy (RE) systems repay these assessments over 15 to 25 years via additional annual payments on their property tax bills.

Many homeowners are using these loans to finance solar panel installations, energy-efficient window upgrades, and other projects to improve their home’s energy efficiency.

Which Contra Costa Communities are Participating in the PACE Program?

According to CaliforniaFirst.org, a public/private financing program that allows you to receive upfront funding for EE improvements, the following cities in Contra Costa County are participating in the PACE program:

• Antioch
• Brentwood
• Clayton
• Concord
• Danville
• El Cerrito
• Lafayette
• Martinez
• Oakley
• Pittsburg
• Pleasant Hill
• Richmond
• San Pablo
• San Ramon
• Walnut Creek

What’s Wrong with PACE Financing?

PACE itself isn’t a bad program. However, it may affect the ability of a homeowner to sell a home because of financing.

How? Well, according to the Federal Housing Finance Agency (FHFA), the two biggest purchasers of mortgages on the secondary market, Fannie Mae & Freddie Mac, prohibit the purchase of a mortgage that may be subordinated to a PACE loan. As well they won’t refinance a mortgage with this type of financing in place.

From the FHFA Website:

​In issuing this statement, FHFA wants to make clear to homeowners, lenders, other financial institutions, state officials, and the public that Fannie Mae and Freddie Mac’s policies prohibit the purchase of a mortgage where the property has a first-lien PACE loan attached to it.  This restriction has two potential implications for borrowers.  First, a homeowner with a first-lien PACE loan cannot refinance their existing mortgage with a Fannie Mae or Freddie Mac mortgage.  Second, anyone wanting to buy a home that already has a first-lien PACE loan cannot use a Fannie Mae or Freddie Mac loan for the purchase.  These restrictions may reduce the marketability of the house or require the homeowner to pay off the PACE loan before selling the house.

What does this mean?

Basically the FHFA is saying that because PACE loans go on the tax bill, they have a priority over a loan from Fannie or Freddie. Consequently, should Fannie or Freddie foreclose on a property, they would be responsible for repaying the debt incurred through the PACE program. This is an additional risk that a lender doesn’t want to take on. Consequently, they won’t finance properties with this type of lien on title.

Since most mortgage companies make loans with at least the option, if not the intention, of selling the mortgage to Fannie Mae or Freddie Mac this makes finding financing a home with an outstanding PACE loan very difficult. Lenders don’t want to limit the pool of interested buyers for their mortgages, especially to the two largest buyers of mortgages.

What are the solutions?

What is a homeowner to do if they want to sell their home and they have a PACE loan in place?

1) Don’t sell. Just hold the property until the PACE loan is repaid. This is fine if this is your dream home and you plan on living there through the life of your loan.

2) Find a cash buyer. Cash buyers don’t need a mortgage so it won’t impact them. They may have a slightly higher tax obligation, but the benefits of energy efficiency should offset that.

3) Pay off the PACE loan at the sale. This is the most likely scenario. The PACE loan will likely have to be repaid from the sales proceeds at the time of sale. This means that if you borrow $20,000 to install new windows or a new solar system, likely you will have to repay that $20,000 at the time of the sale of your home during escrow. This will decrease the proceeds you obtain to buy your next home.

4) If you plan to sell in the near future, avoid using a PACE loan to finance upgrades. Until this situation is resolved, it may be best to avoid financing energy-efficient upgrades with this type of loan program.

PACE may be a useful tool to finance energy-efficient upgrades to your home. However, it may hinder your ability to refinance or sell your home.

If you have other real estate related questions, please feel free to call Peter Maclennan with Perception Real Estate.

Additional Reading:

• PACE LOANS: THE GOOD AND THE NOT-SO-GOOD
• Some Homeowners Looking to Move Must Deal With a Change of PACE
• California REALTOR® officials voice concern over PACE financing
• Green financing has hobbled home sales in California

*Photo Credit: Solar Panels by wallheater used by Creative Commons License 2.0