Myth vs. Fact
Clearing the Air on PACE
MYTH: PACE is causing problems for lots of homeowners.
FACT: PACE provides homeowners a vital option to access credit to replace failing systems and make improvements to their homes, meeting a critical gap in the consumer-financing marketplace. To date, PACE has helped more than 150,000 homeowners obtain long-term financing at competitive rates for energy efficiency, seismic retrofits, hurricane protection, renewable energy and other property renovations. Like any growing industry, there have been speed bumps along the way, but PACE providers have embraced and support additional consumer protections for PACE, including:
- Guaranteeing contractors won’t be paid until the homeowner signs off that the project is done to their satisfaction;
- Confirming proper contractor licensing;
- Offering investigative and dispute resolution support; and
- Providing mortgage-level written disclosures regarding financing specifics, which are reiterated on a live phone call to ensure that participating homeowners understand the mechanics of the PACE product.
Most of these homeowner supports are not provided by other types of financing. PACE providers have committed to these standards, which are detailed in the Department of Energy’s Best Practice Guidelines for Residential PACE and the consumer protection guidelines developed by PACENation, a national non-profit. The California legislature is presently looking to codify many of these requirements, and California law already requires the written disclosures.
MYTH: PACE is going to cause the next housing crisis.
FACT: First, studies show that unlike the reckless lending the mortgage banking industry perpetuated in ten years ago, the home improvements PACE finances (average project size of less than $25,000) benefit homeowners by increasing the value of their homes and help offset financing costs by cutting energy and water bills.
Second, the underwriting standards for PACE are far more robust than the mortgage banking industry’s practices. PACE providers consider a homeowner’s mortgage and property tax payment and bankruptcy history, loan-to-value and combined loan-to-value when determining whether applicants qualify for financing. The result is that homeowners who take advantage of PACE have lower tax delinquency rates than the California average. In fact, homeowners that invest in efficiency improvements are about a third less likely to default.
MYTH: The Wall Street Journal Alleges that PACE Defaults are on the Rise
FACT: The central premise of a recent Wall Street Journal story about PACE financing (“More Borrowers are Defaulting on the ‘Green’ PACE Loans” 8/15) fails to meet its readers’ standards on account of its use of “limited” and unverified data about PACE financing in California. The data incorporated in the story doesn’t account for a third of California’s counties and even admits to its readers that the data shows only “a limited view of overall PACE loan performance.” Yet the story doesn’t hesitate to make flawed, sweeping assertions about PACE financing.
While the story reports a jump in the number of PACE defaults from 245 in 2015-2016 to 1100 in 2016-2017, it fails to take into account the more than 53,000 additional property owners who participated in PACE programs during that same time period, according to the California Alternative Energy and Transportation Financing Authority. The truth is delinquency rates for PACE homeowners have historically been lower than average California homeowners. And tax delinquency rates typically improve throughout the year as homeowners “cure” or get current on their payments.
MYTH: PACE could impact local government revenues.
FACT: PACE financing is a voluntary, free-market, and privately-funded driver of economic prosperity in local communities. PACE has created and sustained more than 30,000 local good-paying jobs across the country at no cost to public budgets while expanding access to credit for responsible borrowers to improve residential properties. Local governments use revenue bonds to fund PACE projects, which PACE providers purchase. Ultimately, PACE providers are advancing private capital to facilitate the installation of PACE improvements, which the benefited homeowner then repays. PACE provides a mechanism for local governments to promote beneficial home improvements without having to spend public dollars. Any cash-flow delinquencies or defaults caused by non-payment by property owners of their PACE payments are borne entirely by the bond buyers (private investors), not by the bond issuers (government).
MYTH: Homeowners don’t understand PACE.
FACT: PACE providers have worked to enhance existing, consumer safeguards. Both the 2016 U.S. Department of Energy Best Practice Guidelines for Residential PACE and PACENation’s 2017 consumer protection standards require written disclosures concerning the features of PACE financing that are modeled after the Consumer Financial Protection Bureau’s Know Before You Owe (KBYO) form for mortgages. Those disclosures are then to be reiterated by phone in a live recorded call. PACE financing providers have committed to these best practices, which require that consumers be informed that PACE financing would be secured as a lien on their property and that they may be required to pay off the balance of their PACE assessment before refinancing or selling their home. Legislation adopted in 2016 in California, in which 95% of PACE projects have been financed, requires KYBO-based disclosures for PACE and legislation is pending in the 2017 session that would mandate confirm terms calls. No other form of financing requires confirm terms calls.
MYTH: PACE shouldn’t be administered through tax assessments.
FACT: For centuries, under state statute and at the option of the locality, local governments across the country have financed public purpose capital improvements (e.g., water/sewer improvements, sidewalks, etc.) through special assessments levied on properties that benefit from the improvements that are collected alongside local property taxes. Similarly, PACE is enabled through state legislation and implemented at the option of local government. PACE allows homeowners to improve their homes, protect them from storm damage, save energy and water, and lower utility bills, which benefits the public more broadly by improving and protecting the housing stock, conserving energy and water, and creating contractor, distributor, and manufacturing jobs by making higher quality improvements accessible for more homeowners. By enabling PACE, state and local governments have determined that the home improvements it finances are in the public interest such that it may be levied and collected as a special assessment.
MYTH: PACE isn’t good public policy.
FACT: PACE is a financing innovation that allows homeowners to obtain long-term financing at competitive rates to replace failing systems with more efficient ones and to make other beneficial property renovations, like seismic retrofits and hurricane protections. PACE meets a critical gap in the consumer-financing marketplace. It provides more homeowners with access to lower cost financing and longer terms, which in turn allows them to make higher quality home repairs and improvements. PACE helps homeowners reduce their energy and water bills, supports small businesses, and benefits the environment. It is estimated that PACE financing has created more than 30,000 local jobs that cannot be automated or off-shored, while also pumping more than $5 billion into local economies. And PACE is on track to reduce carbon dioxide emissions by more than 4 million tons, save more than 15 billion kilowatt hours of energy, which is the equivalent of powering more than 1.5 million homes a year, and conserve more than 10 billion gallons of water. Finally, PACE improvements help homeowners increase property value, increase comfort and improve their quality of life.
MYTH: PACE makes it hard to sell your home.
FACT: No data-based analysis has indicated that PACE has a negative impact on home sales. In fact, the data that does exist indicates that PACE has a positive impact.
- A 2016 peer-reviewed study by Laurie Goodman and Jun Zhu of the Urban Institute, published in the Journal of Structured Finance, found that PACE increased resale values, typically by 100% of the PACE investment (compared to 60% for most other home improvements).
- Realtor Multiple Listing Service data for the Inland Empire in California—where PACE has existed for more than five years—shows that properties with PACE assessments spent fewer days on market and had a higher sale to listing price ratio than properties without them.
One of the unique options PACE presents is that is can remain with property at the time of sale, so that the person benefitting from the improvement is the one responsible for making the payment. Lenders or buyers may require the remaining balance be paid off. Often, the seller and buyer negotiate this element as part of the home buying process. The potentiality of payoff is prominently disclosed to prospective customers in writing. If the PACE payment must be paid off at sale, it’s no different than a home equity loan or second mortgage, both of which must be similarly paid off.
MYTH: By taking a priority lien position PACE unfairly risks existing mortgage holders.
FACT: Local governments across the country finance public purpose capital improvements (e.g., water/sewer improvements, sidewalks, etc.) through special assessments levied on properties that benefit from the improvements that are collected alongside local property taxes. Similarly, PACE is enabled through state legislation and implemented at the option of local government. PACE allows homeowners to improve their homes, protect them from storm damage, save energy and water, and lower utility bills, which benefits the public more broadly by improving and protecting the housing stock, conserving energy and water, and creating contractor, distributor, and manufacturing jobs by making higher quality improvements accessible for more homeowners. By enabling PACE, state and local governments have determined that the home improvements it finances are in the public interest such that it may be levied and collected as a special assessment.
An unpaid special assessment, whether for PACE or another public purpose capital improvement, takes a priority position over existing real estate debt because the state and locality have determined those improvements are in the public interest. However, the special assessment does not accelerate, so the only part of the PACE financing that has senior lien status is the past-due annual payment. This means that if a foreclosure were to occur, only the past due $1,000 annual payment on a ten-year $10,000 improvement would have a claim ahead of the mortgage, not the entire balance. This is part of the reason why the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA) do not view PACE assessments as priming their interest in a first mortgage in the rare case of a foreclosure. Additionally, the average PACE assessment is a tenth the size of a mortgage at less than $25,000, and PACE assessments fund improvements that help reduce energy bill costs. For these reasons, the asset rating firm Morningstar published an analysis this February that concluded: “we believe that a PACE assessment does not materially increase the risk to the underlying mortgage.”
Marketplace data supports this conclusion. A $10 million loss reserve in California that is available to reimburse mortgage lenders for direct losses from PACE assessments has never been tapped despite more than 100,000 PACE assessments in the state. Further, data indicates that property owners with PACE assessments are outperforming state averages with regard to property tax delinquencies.
MYTH: PACE targets low-income homeowners and seniors.
FACT: The age profile of the average PACE customer is consistent with home ownership demographics and the average FICO score of the PACE customer exceeds national credit score averages. PACE financing is an option for homeowners amongst other options available in the marketplace. There is nothing inherently built into underwriting practices to target borrowers based on income, demographics or age. The fundamental channel for PACE financing are the vetted, qualified and trained contractors that respond to customer calls and offer PACE as a financing option for only those products and services that have been deemed PACE-eligible.
Homeowners that decide to utilize PACE may be motivated by a number of different factors: efficiency, hurricane protections, long-term predictability of repayment, comprehensive solutions to functional failures in their home, and others. Only high-performing products that are designed to deliver utility bill savings and help offset costs are eligible for installation.
MYTH: PACE is secured debt that should be regulated like a mortgage.
FACT: The Truth in Lending Act (TILA) regulates mortgages. TILA was not crafted to regulate local property tax assessments and its requirements conflict with state property tax law, the local property tax collection process, and the municipal finance structure. Applying it would constitute an unprecedented federal intrusion into state and local PACE programs, pose an insurmountable burden for local governments, and ultimately eliminate PACE as an option for homeowners. Rather than ending this successful program, we encourage lawmakers to consider regulation that meets the spirit of TILA but that recognizes PACE’s structure and preserves its utility.