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Clean Energy Loans Make Sales Messy

Clean Energy Loans Make Sales Messy

Structure of special borrowing programs may complicate the sale of a home 

November 7, 2015 | Joe Light 

Lori Laine’s foray into a California clean-energy program made it tough for her to sell her house and ended up costing her hundreds of dollars and months of aggravation.

The culprit: a nearly $8,000 loan she took out last year to pay for a new air-conditioning unit to replace her broken one, part of a statewide push to promote clean energy with low-interest loans.

“I would never do this again,” Ms. Laine said.

A well-intentioned government program has become a mess for some of the homeowners who have tapped it and then tried to sell or refinance. While the effort, known as Property Assessed Clean Energy, or PACE, has spurred solar- panel installations and other improvements, it also has thrown a wrench into home sales and refinances, and proved costly to some sellers.

The problem is the state laws that authorize PACE loans usually structure them as tax assessments, which are paid off before mortgages in the event of a foreclosure.

That breaks rules set by the Federal Housing Administration and Fannie Mae and Freddie Mac, which back the vast majority of U.S. mortgage loans. They all require that their mortgages stay at the top of the pecking order, and have rejected loans on homes with PACE financing.

The largest PACE lender, Renovate America Inc., says 25% of the roughly 7,400 homeowners who were financed through their program and then sold or refinanced paid off the assessment at the time of the sale or refinance. Many of them would have preferred to transfer the loan to the new owner or mortgage. The other 37,000 or so homeowners who Renovate America has financed haven’t yet sold or refinanced.

California has the most active residential PACE market, but 32 states have passed laws enabling some version of the program since 2008, according to PACENow, a nonprofit that promotes the program.

Wil Herring, a real-estate agent in Riverside, Calif., said that about half of the transactions he encounters now have PACE financing attached. He said that when he first ran across PACE loans a couple years ago, some lenders didn’t realize they ran afoul of the government’s guidelines.

“PACE has been a nightmare for us,” Mr. Herring said.

Ms. Laine said her air-conditioning contractor told her the financing would transfer to a new owner if she sold the home, though she admits the documents she signed from San Diego-based lender Renovate America Inc. stated there could be difficulties.

When she tried to sell her Highland, Calif., home last October, the buyer said Ms. Laine would need to pay off the balance in full before the buyer could get a mortgage.

Ms. Laine took the home off the market in hopes the rules would change, but earlier this year, she gave in and paid it off in order to sell the house.

PACE proponents say they benefit consumers because the energy-efficiency improvements can pay for themselves over the term of the loan, which can last the lifetime of the improvement project or up to 30 years. What’s more, advocates say the PACE program spurs local contracting jobs and helps the environment.

The FHA and the White House in August released preliminary guidance that said PACE financing could be acceptable for FHA-backed mortgages as long as the programs were restructured to be subordinate, among other stipulations. An FHA spokesman said the finalized guidance is unlikely to come this year.

But Fannie and Freddie haven’t yet said if they will follow the FHA’s lead. A spokesman for their regulator, the Federal Housing Finance Agency, said it is open to ways of encouraging green homes as long as they don’t subsume the priority of the Fannie or Freddie- backed mortgage.

Meanwhile, some real-estate agents say companies making PACE loans have improved the disclosures they make to borrowers in response to the complaints.

Renovate America said it has put greater emphasis on the fact that many homeowners might end up having to pay off the financing themselves if they want to sell. Chief Executive J.P. McNeill said the firm will start to make all of its loans subordinate to federally backed mortgages when a homeowner sells.

 

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