Energy loans lower utility bills – but at a price
By JEFF LAZERSON / CONTRIBUTING COLUMNIST
This week, the White House made a bombshell announcement. The controversial PACE, or property assessed clean energy super lien, is getting the green light to finance energy efficiency home improvements on Federal Housing Administration (FHA) and Veteran’s Administration (VA) loans but not conventional Fannie Mae and Freddie Mac loans.
Earlier this year, I wrote that PACE funds up to 15 percent of your property value, not to exceed 100 percent of your property value when combined with all mortgage liens.
You pay it as part of your property tax bill, similar to how Mello-Roos or other special assessments are paid.
PACE interest rates go from 6 to 9 percent, typically amortizing over 15 or 20 years. And, you will get hit with a loan origination fee of about 5 percent of the renovation loan amount.
When it comes to delinquencies and foreclosures, this lien becomes superior to FHA and VA loans and runs with the property. New owners are responsible for the remainder of the PACE assessment should the home be sold or title assigned.
What’s terrific about PACE is you have a financing instrument needing little equity to greatly improve energy efficiencies, knocking down your utility bills in the process.
What’s terrible about PACE is it’s the safest and maybe highest yielding of money grabs for Wall Street type investors. That’s always at the home owners’ expense. No matter who, no matter what, that lien is getting paid just like property taxes.
Many more California homeowners will be exploited because there is no mortgage cop on the corner empowered to police any company or anyone selling you a PACE lien.
I give Fannie and Freddie credit for offering first trust deed renovation type financing that competes with PACE but is much safer.
Approvals are easier when taking out a PACE loan after your FHA or VA mortgage is completed. But you undergo more scrutiny when PACE liens already exist or are taken out at the same time as a new FHA and VA loan.
Wasn’t the housing collapse and Great Recession largely caused by jacked up interest rates and fees and no-equity loans? And, here we are (so soon) again!
Another slippery slope is when you go to sell or refinance a property with a PACE lien. If the new buyer is using Fan or Fred financing, or if you are trying to get away from the FHA mortgage insurance by way of conventional refinancing, then no dice, baby.
PACE would have to be completely paid off.
Take out a PACE lien if you must. If you can, pace yourself and wait a few years. Payday lenders and subprime auto finance folks will jump in and you’ll see rates and fees fall.
Federal legislation will eventually happen, empowering the Consumer Financial Protection Bureau or some other agency to police what is now the wild West of PACE pricing and qualifying.
Jeff Lazerson - Mortgage Columnist since 2011