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The issue in each case concerns the way PACE loans are originated. Because they’re financed through a governmental body, they come first in the event of foreclosure and that means they come before mortgage loans. According to the Federal Finance Housing Agency (FHFA), “The pro- grams in California and elsewhere look principally to the value of prop- erty to support a loan, rather than
the ability of a homeowner to repay, as was mandated in the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010. The focus on the ability to repay, by no means a new concept, is aimed to correct the asset-based lending that contribut- ed to the financial crisis that began in 2007. In addition to undertaking asset-based lending, the counties or municipalities may charge up to 10 percent for administrative fees and
other charges as imposed by admin- istrators; these numbers are gener- ally well beyond what a second-lien mortgage loan would contemplate.” PACE borrowers do default. Accord- ing to The Wall Street Journal , some 1,100 California borrowers defaulted in 2017, setting up the potential for foreclosure. However, in response to the WSJ article, PACENation points out that “PACE programs have foreclosed on none. Zero.”
CALIFORNIA FORECLOSURE ACTIVITY
DEFAULT AUCTION REO
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curred by the authority beyond the extent to which monies shall have been provided under this division. The authority shall not create any debt, liability, or obligation on the part of the State of California payable from any source whatsoev- er other than the monies provided under this chapter.” According to the state of Mis- souri, the creation of financing districts under a PACE program has made it possible for proper- ty owners to finance renewable onsite generation installations and energy efficiency improvements through a special assessment on their property tax bills that is re- paid over a period up to 20 years. “This voluntary assessment is se- cured by a senior lien on the prop- erty and does not require up front payment. The lien provides debt collateral in the event a property owner defaults on the assessment. In most cases, the assessment PACE IMPACT ON MORTGAGE LENDING
and the lien are transferred upon sale,” said the state. PACE lending sounds like pretty bland stuff and to date there isn’t much of it. The Mortgage Bankers Association (MBA) estimates that mortgages worth $1.63 trillion will be originated in 2019. The PACE pro- gram, with some $5.2 billion in resi- dential funding as of last May, is just a tiny part of the real estate lending business and yet it has managed to stir substantial opposition. HUD | In late 2017, HUD adopted a policy stating that properties encumbered with PACE obliga- tions would no longer be eligible for FHA-insured forward mort- gages. In addition, HUD also stated that properties that will remain encumbered with a PACE obligation would not be eligible for an FHA-insured HECM (a home equity conversion mort- gage or a reverse mortgage). Fannie Mae | Fannie Mae has stated that it will not purchase mortgage loans secured by proper-
ties with an outstanding PACE loan unless the terms of the PACE loan program do not provide for lien priority over first mortgage liens. Freddie Mac | Freddie Mac’s po- sition is that any property sub- ject to a lien that has, or may take a priority position is not eligible for sale to the company. This includes Property Assessed Clean Energy (PACE) obligations that may result in a first lien priority at delinquency. VA | According to the VA, a “property may be subject to the full PACE obligation; however, the property shall not be subject to an enforceable claim (i.e., a lien) superior to the VA-guaran- teed loan for the full outstanding PACE obligation at any time.” USDA | Because PACE loans must take a first-lien position in the event of a foreclosure, properties with existing PACE loans typically are not eligible for a USDA pur- chase or refinance mortgage.
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“Fueling the demand for more PACE loans is Wall Street’s appe- tite for bonds backed by them,” said the National Consumer Law Center (NCLC) in 2017. “As of the third quarter 2016, more than $3.3 billion in PACE bonds had been issued. PACE industry executives forecast that the current PACE financing will double by 2018, making it the fastest-growing
form of financing in the nation. In turn, many of the PACE bonds are packaged and securitized with the new securities being snapped up by Wall Street investors.” The NCLC also argued that a “su- per-priority lien position and high interest rates combine to create an attractive investment. According to the NCLC, these dynamics are cre- ating a push to originate loans with-
out underwriting in the same way that Wall Street fueled the improvi- dent lending that led to the financial crisis. Wall Street may not be at significant risk from PACE loans due to the senior position of loans that are small relative to the value of the property. But the impact on home- owners may well prove to be similar to the impact of the subprime loans of the mid-2000s.”
12 think realty housing news report
may 2019 13
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