These government approved high interest green loans are shaking up mortgages
When Lucia Chavez saw her mortgage bill, she thought there must be some mistake.
For years, the 70-year-old owner of Vista, California had paid around $ 990 a month. But in early 2015, after installing solar panels on her roof, Chavez, a retiree, discovered that a total of $ 1,500, an amount she could not afford, had been paid from her account. banking.
Chavez said the company that featured her on the panels, Fidelity Home Energy, had not explained how expensive they would be, or suggested that they consider another way of financing other than the loan they offered. , which has an interest rate of 10.32% and gets paid as part of his mortgage bill.
They told her she would get a $ 10,000 tax break – but not that such an incentive is unnecessary for people of her income level.
Fidelity sold the panels to Chavez under a program called Property Assessed Clean Energy, which is renamed locally as Home Energy Renovation Opportunity, or HERO, in California. PACE loans date back to 2009, and 32 states and the District of Columbia have passed laws allowing for programs. And as of this summer, the programs have had the overt support of the White House, including President Obama himself.
For his part, Fidelity Home Energy CEO Brad Smith told MarketWatch that the program has been explained repeatedly, at several stages of the process, to Chavez.
“We have installed over 5,500 solar systems and I think this is the first time a customer has complained about a problem like this,” Smith wrote in an email. “With the due diligence exercised by HERO, there is very little wiggle room for any type of shady deal. Everything is disclosed. We are very attentive to compliance. We have many safeguards in place to identify situations like this. We have met Ms. Chavez on several occasions and not once has she raised this issue.
Mortgage priority – at the worst possible time
While energy-efficient home improvements can be an important goal, critics say there are too many negatives on loans and too many homeowners like Chavez can be at risk. The National Consumer Law Center says it has received several complaints from seniors, non-English speakers and low-income homeowners.
Not only is PACE financing for upgrades sold at high interest rates and often at higher prices than you might find elsewhere, but many customers claim that their claims of energy savings do not happen often. And the funding can be used for everything from solar panels to AstroTurf and pool covers.
But perhaps most important is the fact that PACE loans take precedence over the mortgage in situations like foreclosures, a feature that subverts the entire structure of the mortgage lending process. For Chavez, this meant that when she fell behind on her mortgage payments, she suddenly owed a full year of PACE payments – $ 4,115.54.
Loans are tied to the property, not the owner. This means that if a homeowner has an outstanding PACE loan, they transfer the obligation to the next homeowner upon sale – or must pay the entire outstanding balance on the spot.
For years, the priority lien barred PACE loans to government mortgage agencies. But in July, the Federal Housing Administration began authorizing the use of its financing for loans. This sparked an outcry from consumer groups such as the NCLC and industry groups representing real estate agents, mortgage bankers, appraisers, title seekers, etc.
“These are mortgages,” Lauren Saunders, NCLC Washington bureau chief, told MarketWatch. “They are structured with the same issues that led to the crisis, and they must have the protections that we fought so hard for after the crisis.”
“It’s not good lending practice,” said Pete Mills, who heads residential policy for the Mortgage Bankers Association.
In response to a request for comment, the FHA referred MarketWatch to a statement announcing its decision to fund mortgages “on certain properties with PACE ratings.”
The new FHA guidelines state that PACE assessments cannot take priority over mortgage payments except when payments are past due. But it is precisely at this point that the question of who has priority must be decided.
“Allowing a PACE loan amount to hold a top priority undermines the collateral position of the lender (and the government) and disrupts the very nature of secured loans,” one wrote. coalition of groups ranging from the American Bankers Association to the National Association of Realtors in an August letter.
The groups also noted that the FHA guidelines “simply state that a PACE loan structured like a tax assessment is not a super privilege. But this statement is a form of substance escape that does not protect the FHA Mutual Mortgage Insurance Fund and the VA Loan Guarantee Program.
The White House on board
The Obama administration pushed for FHA policy change. In July, the White House published A press release, as well as a video of President Obama promoting clean energy savings.
When MarketWatch fired the White House at the letter from industry groups, one official only said that the Obama administration believed the FHA’s policy addressed concerns raised in the letter.
Many critics of the PACE program believe it was developed as a commodity for bonds and other investments for Wall Street rather than for its environmental goals. Companies like Renovate America, Renewable Funding and Ygrene Financial have offered several securitization transactions based on the income that companies like Fidelity receive from owners. Large banks including Deutsche Bank and Morgan Stanley have signed these agreements.
One of the most damning aspects of how PACE loans affect consumers, according to several sources, is that there is no assessment of the borrower’s ability to pay. Instead, lenders assess borrowers based on their home equity – a practice that uncomfortably reflects the stages that led to the housing crisis.
As Mills of the MBA put it, “Why is a funding deal that’s virtually risk-free?” [to the investor] because it is attached to the tax notice, why is the interest rate 6.5% to 7% to 8%?
Realtors say transactions are blocked
As with so many innovations in the housing market, the ground zero for PACE home financing has been in California. A growing number of homeowners who have found themselves unable to sell or refinance homes with PACE privileges attached have prompted the California Association of Realtors to push for a bill to fix some of the issues.
At the end of September, Governor Jerry Brown signed Assembly Bill 2693 place. Among other things, homeowners who take out such loans will now receive a disclosure similar to national “Know before you owe” legislation for conventional mortgages. They will also be told that they might not be able to refinance or sell without first paying off the PACE loan.
Alex Creel, chief lobbyist for CAR, told MarketWatch that PACE loans hadn’t been a problem for homeowners for a few years, until early adopters attempted to sell, refinance or take out loans. reverse mortgages. “We’re only seeing the beginning of the problems with these things,” Creel said. “As we move forward, you will see this problem manifest itself more.”
Now that the FHA is clearing PACE loans, Creel believes the problem will get worse. Many people take out an FHA loan as the first step towards buying a home, with the intention of refinancing soon after to a more attractive mortgage. If a homeowner takes out a PACE loan, it could doom this refinancing effort.
CAR will attempt to resolve the priority lien issue in California law next year, Creel said.
Chavez is working with a lawyer, Dan Mulligan, to explore a lawsuit against Fidelity – and also to contact his bank about a modification to his mortgage.
“I feel bad and didn’t sleep some nights because I was so upset,” Chavez said in an interview. “I feel bad that at my age they did this to me.”