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The Controversy Surrounding a Fast-Growing Clean Energy Loan Program

It's meant to help property owners afford energy-efficiency upgrades. But some have concerns over lending standards and consumer protections.

By the numbers, the home loan program PACE -- or property assessed clean energy -- is one of the most successful tools for helping property owners pay for otherwise expensive clean energy and environmental upgrades. PACE loans have shot up by more than one-third over the past year alone, to more than $4.6 billion.

Despite that, two governments in California abruptly shut down their PACE programs last summer, citing concerns from mortgage lenders and realtors. Lenders have issues with the fact that PACE loans get repayment priority -- before the mortgage -- and real estate agents say it's harder to sell a property with a PACE loan attached.

Kern County and the county's seat, Bakersfield, decided to stop issuing PACE loans even as the state was in the process of passing legislation that imposes stricter loan standards and requires new regulations to protect borrowers from deceptive financial practices.

The residential loans are typically around $25,000 and are paid back through the borrower's property tax bill, making it up to local governments to allow the program or not.

California is home to the most residential PACE programs in the country, while others exist on a much smaller scale in Florida and Missouri. At the time Bakersfield ended its program, it had issued roughly 2,700 loans, which is almost 4 percent of the city's owner-occupied housing stock.

Alan Tandy, Bakersfield's city manager, says he and other officials felt California's PACE legislation didn't go far enough in addressing their concerns about the disruption to the area's real estate market, where home prices still haven't recovered from the recession. "There were people who bought [a home] without realizing there was a [PACE] lien pending on it," he says. "So, our standard real estate deals were getting to the 11th hour and getting disrupted."

Those concerns were fueled in part by a document put together for the city by the Bakersfield Association of Realtors. It detailed 47 homeowner complaints that included allegations of price gouging and efforts to mislead property owners about the cost. "The problem with almost all of these is the misrepresentation," says Kim Schaefer, government affairs director for the Bakersfield Association of Realtors. "These folks were never told the amount of money they were going to be charged. It just hit them a year later when it showed up on the property tax bill."

The document also found that a total of 19 owners reported they had trouble selling or refinancing their home with the loan still outstanding. Some homeowners said they struggled to make payments after not being able to refinance. And others complained that they were forced to use the equity they had in their home to pay off the loan before selling.

For their part, the clean energy financing industry says such anecdotal evidence is dwarfed by a growing body of research that indicates the clean energy loans are a win-win for homeowners and jurisdictions.

Joaquin McPeek, a spokesman for PACE lender Ygrene, notes that a study published in 2016 in the Journal of Structured Finance found that homes with PACE loans had a higher resale value than comparable properties. It also found that, on average, PACE homeowners recovered the full cost of their investment whereas other home improvement projects, such as a bathroom remodel, typically recovered just 60 percent of the cost. (While the study was independently conducted, the authors received funding from PACE lender Renovate America.)

Still, it's not just lenders and realtors that have looked somewhat dubiously upon PACE loans. Last year, Congress tried to kill PACE financing completely. And in December, the Federal Housing Administration decided to stop insuring mortgages that carry PACE liens, reverting to an earlier policy. The agency had begun insuring such mortgages in 2016 after years of refusing to do so.

Meanwhile, local governments are still embracing PACE at a steady rate. Since June 2017, when Kern County and Bakersfield ended their programs, 66 governments have authorized a PACE program in California alone, according to data from PACE lender Renew Financial. To date, more than 430 governments in California have the PACE program.

That, says Renew Financial CEO Cisco DeVries, is a "powerful" testament to the fact that PACE is working. "We hope and trust that someday Bakersfield will come back in."

Liz Farmer, a former Governing staff writer covering fiscal policy, helps lead the Pew Charitable Trusts’ state fiscal health project’s Fiscal 50 online resource.
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