HomeMy WebLinkAbout02-16-2016 Item 1, DelmartiniCOUNCIL MEETING:
ITEM NO.: (
To:
Subject:
Maier, John Paul
RE: Regarding PACE loans
FEB 16 2016
From: Steve Delmartini [
Sent: Saturday, February 13, 2016 9:32 AM
To: Marx, Jan
Cc: Carpenter, Dan; Ashbaugh, John; Christianson, Carlyn; Rivoire, Dan
Subject: Regarding PACE loans
Good day to all
Please, please review this article that was in one of the last California of Realtors magazines regarding PACE/HERO loans.
These loans have created hardships for people in some areas of Calif. to sell and/or refinance their properties.
Many people including you, may not fully understand that these types of loans go on the tax bill and become a senior
loan/priority lien to a First Trust Deed loan and in many cases the PACE loans won't subordinate, so it impedes the
potential sale or refinance of a property. They are not always assumable and may need to be actually paid off prior to
funding another loan.
Please make sure you all understand what and where financing disclosures regarding these loans are in the paperwork
that potential borrowers must sign prior to receiving one of these loans.
Not against any type of energy savings weather that is a roof top solar system, new windows, new doors, insulation etc..
I just believe that people don't know what may happen when this loan is funded as it relates to their future ability to sell
and/or refinance.
If you read the article there is push back from the FHFA (Freddie Mae and Fannie Mae) to even allow any loans on
properties with existing PACE loans.
I believe their will be legislation introduced this year to try and straighten this out.
I believe there is discussion with PACE/HERO to create subordination agreements or other means of resolution. I do not
know where those conversations stand today. They could all be close to an agreement or solution.
I suggest you wait to decide, or if you move forward then make sure you have the ability to get out of any commitment
you make in a very timely fashion if needed.
Thank you for your consideration, Steve Delmartini
LEG&UI By Sanjay Wagle, Esq.
PACE Liens and
Real Estate Transactions
roperty Assessed Clean Energy (PACE) programs provide assis-
tance for homeowners who wish to finance the purchase of energy
efficiency, renewable energy and water conservation improve-
ments for their homes. As of September, there have been over 51,000
homes upgraded as a result of the program, according to PACE
data. Sixty-seven percent of these upgraded homes tapped into energy efficiency
improvements, 19 percent utilized renewable energy updates, and 14 percent used
a combination of both.
Such improvements can both save
money for the homeowner and benefit
the environment. Furthermore, financ-
ing is secured by a lien on the home-
owner's property; the payments for the
lien appear on and are due at the same
time as the homeowner's property tax
bill. PACE programs are increasingly
popular, although many people don't
realize that they are participating in
a PACE program as many of the most
popular programs, do not include the ac-
ronym "PACE" in their names.
For example, the HERO program,
California First and Ygrene are all PACE
programs. This article will review how
PACE programs work and, in particular,
how PACE liens can impact the transfer-
ability of properties.
PACE programs are initiated by a lo-
cal public entity, such as a city or county.
The programs can be administered by
private entities. While programs vary in
their administration, generally if a home-
owner wants to finance an improvement
that falls within the program's guidelines,
the homeowner applies to the program to
see how much he or she can be approved
for. Following that, the owner contacts
a program -approved contractor, signs
off on the financing documents, and the
work is performed. The contractoris paid
directly by the program.
PACE programs are appealing be-
cause the financing process is relatively
easy. Financing is generally true -100
percent financing with no down pay-
ment or up front expenses. In fact, most
programs do not require a credit check
or many of other potentially onerous
requirements of underwriters for equity
loans on the property. Also, unlike home
equity loans, the PACE lien follows the
property and does not have to be paid
off at the time of transfer, as long as the
buyer of the home is willing to take on
the lien. Finally, repayment terms gener-
ally vary from five to 25 years.
That is not to say there are no require-
ments, Homeowners generally must be
current on their property taxes, cannot
be delinquent on existing mortgages and
must have a good history in their pay-
ment of property taxes, and the property
cannot be upside down, Also, the total
amount of any annual property tax as-
sessment and the assessment for the
PACE lien cannot exceed 5 percent of
the market value of the property at the
time the PACE lien is approved.
While PACE programs make it easy
to finance improvements, homeowners
10 CALIFORNIA REAL ESTATE • NOVEMBER/DECEMBER 2015
should carefully examine whether the
cost of the financing makes sense for
them. Interest rates and origination, and
administrative fees for these programs,
can be higher than home equity loans
and can add significantly to the base
cost of the improvement being financed.
Unlike regular lenders, PACE programs
are not required to provide the same up
front truth in lending disclosures in their
advertising. So consumers must be more
vigilant.
One of the critical attributes of PACE
liens is that they are super priority liens.
Therefore, these liens take priority over
any mortgages that are on the property,
in much the way that property tax liens
do. This super priority status has cre-
ated a major problem with the Federal
Housing Finance Agency (FHFA) which
is the conservator of both Fannie Mae
and Freddie Mac. FHFA has stated that
it will not allow the purchase of a mort-
gage for a property with a PACE lien on
it, due to its super priority status.
As most lenders also follow the Fan-
nie and Freddie guidelines for their port-
folio loans, this effectively means that
a homeowner cannot refinance their
mortgage with conventional financing,
and a buyer cannot purchase a home
with an existing PACE lien using con-
ventional financing while the PACE lien
maintains its super priority status.
As a result of FHFA's position, a
homeowner who wishes to refinance or
wishes to have a property which will be
available for purchase by buyers who
will be purchasing with conventional
financing will generally have to pay off
the PACE lien. Generally, this can be
done without penalty but some PACE
programs do have prepayment penal-
ties. Depending on the amount that was
financed, the requirement to pay off the
lien could be a minimal issue or could
significantly impact the amount of the
proceeds the sellerwas hoping to obtain
or make refinancing uneconomical.
The need to possibly pay off the PACE
lien when the property is sold to buyers
with conventional financing reduces the
attractiveness of the program, particu-
larly for expensive improvements. The
HERO program has now tried to ad-
dress this by offering (generally for a fee)
to subordinate its lien and others may
follow. True subordination of the lien is
not possible as the liens are super pri-
ority by law, but the program will agree
contractually to preserve the priority of
any new first mortgage.
But does an agreement allowing a
conventional lender to maintain prior-
ity above the PACE lien satisfy FHFA?
So far the answer is no. FHFA has not
changed its stance and no other lend-
ers have taken a blanket position on
approving such agreements. There ap-
parently have been some successful
transfers with these types of contractual
agreements but they are by transaction,
and it is unclear why some go through
and others do not.
There is concern that consumers are
not getting sufficient information on
the issues surrounding transferability
nor sufficient up front disclosures on
financing. In part because of these is-
sues, three Associations of REALTORSQO
in Riverside County adopted motions
in June, 2015 opposing the PACE pro-
gram in their area until such issues are
resoived. PACE programs are aware of
these concerns and have been very re-
ceptive to engaging in talks with those
Boards and other concerned parties to
resolve REALTORI" concerns.
The Federal Housing Administration
(FHA) recently issued a statement on
the PACE programs and says it wishes
to support such programs, and is devel-
oping PACE guidance. FHA has said
that guidance will require that a PACE
program preserve payment priority for
first lien mortgages through subordina-
tion. Whether the contractual subordi-
nation currently offered by some PACE
programs will be sufficient is unknown
at this point. The pending guidance will
also require additional consumer pro-
tections. The pending FHA guidelines
if followed by the PACE programs may
end up resolving REALTOR® concerns
about the program. So what are you
to do if you are in a transaction with a
PACE lien? If it is a cash deal or some
type of non -conventional financing,
the lien can transfer; the transfer of the
lien would just be a negotiating point.
However, if the seller would like to make
the property available to buyers who
might use conventional financing—in
the hopes of bringing in a higher price—
the seller and/or agent should contact
the PACE program to discuss options
upon transfer. If the PACE program
offers subordination, the buyer's side
would need to check with the lender to
see if that will satisfy the lender. If the
buyer's lender will not issue a loan with
the PACE lien regardless of any subor-
dination, either the seller would need to
pay off the lien or the buyer assuming
contingencies are in place could can-
cel the agreement without penalty. The
buyer's ability and willingness to accept
a lien on a fixture on the property is a
contingency of the C.A.R. residential
purchase agreement.
The situation with PACE liens is
in flux, and government agencies, the
PACE programs, REALTORS", and oth-
er interested parties are trying to resolve
various concerns about the program. In
the meantime, however, sellers with such
liens or homeowners thinking about
taking on such liens need to be aware of
the possible need to pay them off at We
which, depending on the amount of the
lien and the timeline for when the seller
wants to sell, may influence whether a
homeowner should take on such a lien
in the first place.
Sanjay Wagle, Esq., is Senior Counsel
with C.A.R.'s Member Legal Services.
NOVEMNERMECEMEER 2015 • CALIFORNIA REAL ESTATE 11