When Lucia Chavez saw her mortgage bill, she thought there had to be a mistake.
For years, the 70-year-old Vista, California homeowner had paid about $990 every month. But in early 2015, after solar panels were installed on her roof, Chavez, a retiree, discovered a total of $1,500, a sum she couldn’t afford, had been paid from her bank account.
Chavez said the company that pitched her on the panels, Fidelity Home Energy, did not explain how expensive they would be, nor suggest that she consider a different means of financing other than the loan they offered, which has a 10.32% interest rate and gets paid as part of her mortgage bill.
They did tell her she’d get a $10,000 tax break—but not that such an incentive is useless to people at her income level.
Fidelity sold the panels to Chavez through a program called Property Assessed Clean Energy, which takes the local name 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 enabling programs to be set up. And as of this summer, the programs have the overt backing of the White House—including from President Obama himself.
For its part, Fidelity Home Energy’s CEO, Brad Smith, told MarketWatch that the program had been explained several times, at multiple steps throughout the process, to Chavez.
“We have installed over 5,500 solar systems and I believe this is the first time a customer has complained about an issue like this,” Smith wrote in an email. “With the due diligence that HERO performs, there is very little wiggle room for any kind of shady dealings. Everything is disclosed. We are very careful about compliance. We have many safeguards in place to identify situations like this. We met with Mrs. Chavez on several occasions and not once did she bring up this issue.”
Priority over mortgages—at the worst time
While energy efficient upgrades for homes may be an important goal, critics say there are too many negatives about the loans, and too many homeowners like Chavez may be at risk. The National Consumer Law Center says it’s received multiple complaints from seniors, non-English speakers, and lower-income homeowners.
Not only is PACE financing for upgrades sold with high interest rates, and often at higher prices than might be found elsewhere, but many customers say their claims of energy savings don’t often come true. And the financing can be used for everything from solar panels to AstroTurf and pool covers.
But perhaps most important is the fact that PACE loans take priority over the mortgage in situations like foreclosures, a feature that subverts the entire structure of the home lending process. For Chavez, that means that when she fell behind on her mortgage payments, she suddenly owed an entire year’s worth of PACE payments—$4,115.54.
The loans are attached to the property, not to the homeowner. That means that if a homeowner has an outstanding PACE loan, he or she passes the obligation on to the next homeowner in case of a sale—or must pay off the entire outstanding balance on the spot.
For years, the priority lien made PACE loans off-limits to the government mortgage agencies. But in July, the Federal Housing Administration began to allow its financing to be used for the loans. That prompted an outcry from consumer groups like the NCLC and industry groups representing real-estate agents, mortgage bankers, appraisers, title researchers, and more.
“These are mortgages,” Lauren Saunders, head of the Washington office of the NCLC, told MarketWatch. “They are structured with the very same problems that led to the crisis, and they need to have the protections that we fought so hard for after the crisis.”
“This is not sound lending practice,” said Pete Mills, who heads residential policy for the Mortgage Bankers Association.
In response to a request for comment, FHA referred MarketWatch to a release announcing its decision to finance mortgages “on certain properties with PACE assessments.”
FHA’s new guidelines mandate that PACE assessments cannot take priority over the mortgage payments, except when the payments are delinquent. But that’s precisely the moment at which the question of who takes priority must be settled.
“Allowing any PACE loan amount to hold a senior priority undermines the lender’s (and the government’s) collateral position and disrupts the very nature of secured lending,” wrote a 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’s guidelines “simply declares that a PACE loan structured as a tax assessment is not a super lien. But this declaration is a form over substance evasion that fails to protect the FHA Mutual Mortgage Insurance Fund and the VA loan guaranty program.”
White House on board
The Obama administration pushed for the change in FHA policy. In July, the White House issued a press release, along with a video of President Obama touting clean energy savings.
When MarketWatch referred the White House to the letter from the industry groups, an official said only that the Obama Administration believes the FHA policy address the concerns raised in the letter.
Many critics of the PACE program believe it has been developed as raw material for bonds and other investments for Wall Street rather than for its environmental goals. Companies including Renovate America, Renewable Funding, and Ygrene Financial have offered several securitization deals based on the revenues companies like Fidelity take in from homeowners. Big banks including Deutsche Bank and Morgan Stanley have underwritten these deals.
One of the most damning aspects of how PACE loans touch 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 mirrors the steps that led to the housing crisis.
As the MBA’s Mills put it, “Why is a financing agreement that is virtually risk-free [to the investor] because it’s attached to the tax assessment, why is the interest rate 6.5% to 7% to 8%?”
Realtors say transactions are being held up
As with so many housing market innovations, ground zero for residential PACE financing has been in California. A growing number of homeowners who’ve found themselves unable to sell or refinance homes with PACE liens attached prompted the California Association of Realtors to lobby for a bill to address some of the issues.
In late September, Governor Jerry Brown signed Assembly Bill 2693 into law. Among other things, homeowners taking out such loans will now be provided a disclosure similar to the national “Know Before You Owe” legislation for conventional mortgages. They will also be told that they may not be able to refinance or sell without paying off the PACE loan first.
Alex Creel, CAR’s chief lobbyist, told MarketWatch that the PACE loans hadn’t been a problem for homeowners for a couple of years, until early adopters tried to sell, refinance, or take out reverse mortgages. “We’re just seeing the beginning of the problems with these things,” Creel said. “As we roll forward you’re going to see this problem manifest itself more.”
Now that FHA is allowing PACE loans, Creel thinks the problem will worsen. Many people take out an FHA loan as an initial step toward buying a home, intending to refinance into a more attractive mortgage soon after. If a homeowner takes out a PACE loan, it could doom that refinancing effort.
CAR will try to address the priority lien issue in legislation in California next year, Creel said.
Chavez is working with a lawyer, Dan Mulligan, to explore legal action against Fidelity—and also to approach her bank about a modification to her mortgage.
“I feel bad and I didn’t sleep some nights because I was so upset,” Chavez said in an interview. “I feel bad that at my age they did that to me.”