Green financing has hobbled home sales in California
By Nichola Groom | ORIGINAL ARTICLE | Mon Oct 19, 2015
An innovative, government-sponsored program aimed at funding energy-saving home improvements has drawn praise from powerful supporters, including President Obama. But complaints from a growing number of homeowners, lenders and realtors in California suggest the financing is making homes more difficult to sell and disrupting the mortgage market.
More than 50,000 California households have signed up for Property Assessed Clean Energy (PACE) financing since state legislators passed a law in 2008 allowing residents to borrow money for such things as solar panels and energy-efficient windows. The financing method, authorized by cities and counties, and funded by venture capital-backed startups like Renovate America Inc, Renew Financial LLC and Ygrene Energy Fund Inc, is then paid off through special assessments on property tax bills.
Because the improvements stay with the home, and subsequent owners will reap the benefits of them, the assessments are intended to remain with the property in the event of a sale.
But some homeowners trying to sell their houses have found potential buyers scared off by the higher tax assessments. And now realtors in the state are organizing against PACE, saying it makes getting new mortgages much tougher and can leave sellers stuck in their homes.
In Riverside County, an inland part of Southern California where PACE has been particularly popular, Paul Herrera, government affairs director for two realtor groups, said he gets daily phone calls from agents reporting difficulties selling homes with PACE assessments.
Sancho Lopez, a Riverside police officer and homeowner in an adjacent county, experienced the problem first-hand. He and his wife financed the $40,000 cost of 21 dual-pane, energy efficient windows and two sliding doors with a PACE loan. When they decided to sell their house, their realtor warned them it wouldn’t be easy.
The house sat on the market for 10 months, and it is in escrow now, Lopez said, only because he has agreed to pay off the loan balance – now $46,000 because of interest and fees.
“I wouldn’t ever do it again,” Lopez said of the PACE program he used to pay for the windows.
Banks dislike PACE loans because they take precedent over mortgage debt in the event of a default, upending a basic tenet of the market.
“There is a general principle in mortgage banking: first in time, first in line,” said Pete Mills, senior vice president with the Washington-based Mortgage Bankers Association. “Taxing authorities are always a risk of jumping ahead, but that’s a far different matter than a private company selling energy improvements being able to jump ahead.”
Both the Federal Housing Administration and the Federal Housing Finance Agency, while saying they support energy efficiency, have not supported the program up to now because the first lien position of mortgages is not assured. In 2010, the Federal Housing Finance Agency directed mortgage finance giants Fannie Mae and Freddie Mac not to buy mortgages on properties with PACE liens.
That has exacerbated the problems in Riverside County, Herrera said, where most mortgages are backed by Fannie or Freddie or insured by the FHA.
The federal housing regulators’ reluctance has caught the attention of President Obama, who has said he wants the program to succeed and grow because it helps citizens participate in reducing energy consumption and greenhouse gas emissions.
In August, the White House said it will work with the Federal Housing Administration to boost adoption of PACE financing nationwide. Nearly 30 states have passed laws to enable residential PACE, but states other than California have sat on the sidelines pending a resolution to the controversy.
JOLT FOR GREEN ECONOMY
The PACE program was created at a time when California’s construction sector had been hit hard by the housing crisis. A new funding source for green home improvements was seen as a way of both putting contractors back to work and helping meet climate goals.
Seven years on, supporters say the program is working. Renovate America, which has financed 90 percent of the residential PACE deals in California through its HERO program, said its 47,000 projects have created more than 8,000 jobs and reduced carbon dioxide emissions by an amount equal to taking 330,000 sport utility vehicles off the road for a year.
Wall Street also likes it. Investors have snapped up hundreds of millions of dollars of bonds backed by PACE projects, which are regarded as low risk because they enjoy priority over a mortgage.
Renovate America has raised more than $600 million through bond sales over the last two years.
“PACE is the only financing that allows the seller to transfer the remaining debt to a new buyer,” Renovate America spokeswoman Ellen Qualls points out, noting that even under current federal policy, about 45% of home sellers with PACE financing from her company have been able to pass the assessments on to new buyers.
It’s difficult to quantify how many homeowners have had difficulty selling their homes since real estate agents don’t keep data on deals that don’t happen, Herrera said.
Rich Simonin, owner of Westcoe Realtors, a Riverside County real estate company that sells about 700 homes a year, said PACE assessments pose challenges in about 5 to 10 percent of his deals.
Renovate America has responded to criticism from realtors and others by improving disclosures in its contracts and creating a division focused on resolving issues with home sales.
“I’m not a realtor. I’m a software guy,” McNeill said. “When you create something you tend to not know 100 percent about where you are going to go until you get feedback.”
Renovate has also started allowing homeowners who ask – generally when trying to refinance or sell – to subordinate their assessments through a separate contract. But if subordinating PACE liens becomes the industry norm, providers argue that could hurt the credit quality of their securities and raise borrowing costs when they issue bonds.
In the meantime, people continue to be caught in the middle.
Steve Lista used Riverside County’s PACE program to pay for a nearly $27,000 prepaid lease of solar panels for his Eastvale home. The account manager for an automobile auction company put his 5-bedroom house on the market in June, but despite receiving at least six offers couldn’t find a buyer willing to take on the $3,000-a-year assessment.
“No one was comfortable taking over the terms,” he said.
Lista, who had hoped to sell his home to pay off some debt, took his house off the market last week.
(Reporting by Nichola Groom; Additional reporting by Will Caiger-Smith; Editing by Terry Wade and Sue Horton)