Property Assessed Clean Energy Loans, known as PACE Loans, allow people to finance energy efficient, renewable energy, and water conservation upgrades to residential and commercial buildings. This loan covers an array of improvements including installing solar energy panels, energy efficient windows and water conserving water heaters. The program is not available in every state but where it is active PACE loans have complicated the home purchasing process.
PACE Loan Structure
The home improvements financed through PACE can attract potential purchasers however the structure of the loan serves as a deterrent. The homeowner applies for a PACE Loan, which is financed by venture capital-backed startups, and 100% of the cost of the upgrade is paid through PACE. In most states the borrowed amount is included in city and town property taxes, basically operating as a special tax assessment. Through this structure, the PACE Loan is attached to the property taxes and in the event of a foreclosure it must be paid before the mortgage company receives any compensation.
PACE Impact on Home Purchases
Because of the structure of PACE Loans, the Federal Housing Finance Agency has barred Fannie Mae and Freddie Mac from lending to homebuyers where there is an outstanding PACE loan. These companies are the nation’s leading mortgage lenders and their actions severally limit financing options for potential homebuyers.
Many homeowners must repay the loan early, including interest and fees, to attract potential buyers. In some instances the buyers have been able to assume the loan or homeowners were successful in refinancing with the loan still in place but the process has not been as easy as the PACE program insists it should be.
The Federal Housing Finance Agency is an outspoken opponent of the PACE loan system despite efforts in California to protect lenders. Homeowners are caught in the middle, unable to pay off the PACE loan and therefore unable to find buyers.
HUD Seeks a Balance
The Federal Housing Finance Agency recently announced it will reconsider its stance against PACE at the urging of the Department of Housing and Urban Development. HUD intends to issue guidelines that preserves FHA loan status over PACE, which removes the primary obstacle of FHA financing. These guidelines will have varied impact on homeowners depending on specific state structures of the PACE loans but the overall effect should be positive.
Over 30 states have some level of PACE programing and there are efforts to expand it throughout the US. The existence of a PACE loan can be difficult to find through a normal title search as it is structured as a special assessment on the property tax rather than a traditional lien. The loan is attached to the property rather than the borrower so it will transfer with a sale.
Avoid unwanted surprises at closing or throughout the sale/purchase process by using DataTree.com with FlexSearch. Type the words “PACE” or “Property Assessed Clear Energy” and the system will identify all documents in a specified geography that contains references to PACE loans. If the property in question is subject to this loan, you can advise your client accordingly. Knowledge of this potential problem is the only way to protect your client’s interests and DataTree.com is your best resource.