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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