FEATURED ARTICLE: The New Solar Economy: A Hazy Path Toward Harnessing the Power of the Sun
U.S. COMPLETED FORECLOSURES
AVERAGE U.S. HOME OWNERSHIP TENURE (YEARS)
Attorney Richard J. Andreano, Jr., with the Ballard Spahr law firm, explains that “among other items of information,” the CFPB wants to know about current underwriting standards, whether the consum- er’s ability to repay is considered, how applications are approved or denied, and the role of state or local governments in the origination and underwriting process. PACE financing changes the risk level faced by traditional mortgage investors because it has a senior position in a default situation. More risk, in turn, can justify higher mort- gage rates and thus hurt borrowers. For the mortgage industry, the big question is this: if renewable energy systems can be financed through local governments then why can’t other projects? How about roof repairs after a storm? Foundation improvements in earthquake zones? New construction where it floods? The problems faced by homeowners receiving unaffordable PACE loans and obtaining limited or misleading information, the looming spread of PACE loans throughout the country, and the hidden way in which PACE loans have developed outside our consumer protection framework have brought us together to urge the Bureau to initiate rule-making." 2018 CFPB LETTER
9
1,200,000
8
1,050,500
7
1,000,000
918,376
6
861,664
800,000
5
4
600,000
3
404,849
400,000
2
268,532
1
200,000
0
-
2006
2007
2008
2009
2010
“PACE loans,” says the Mortgage Bankers Association, “are consum- er loans secured by real property – with all the attributes of a mortgage product – yet they are not subject to related federal consumer protec- tions. Unfortunately, they have been cleverly classified as a tax assess- ment rather than a loan.” According to the National Asso- ciation of Realtors (NAR), “PACE loans are not typically accompanied by federal Consumer Financial Protection Bureau disclosures and protections associated with home mortgages, as PACE financing has been classified as a tax assessment rather than a loan. Borrowers may not fully understand the conse- quences of assuming an increased financial obligation on their tax bill. Thus, the lack of adequate disclo- sures increases the risk of borrower delinquency, which could lead FHA to incur higher mortgage defaults
with a PACE lien in place. That means owners simply cannot sell without addressing PACE financing. There are options, says attorney Hugo V. Alvarez with the Coral Ga- bles law firm of Becker & Poliakoff. “Property owners can pay off their PACE assessment prior to sale or at closing,” Alvarez told the Housing News Report. “FHA, Fan- nie Mae, and Freddie Mac will not insure mortgages with PACE liens which is why they are to be paid off if an owner decides to refinance.” As an example, seller Smith can walk away with $100,000 from closing. However, to settle a $20,000 PACE obligation, she instructs the closing agent to pay $20,000 to the PACE lender and then gets a closing check for $80,000. In this situation, there is no longer a PACE lien on the property. The buyers can finance as they like. This is the same as paying off any debt from closing funds.
and increased systemic risk.” In a joint 2018 letter sent to the Consumer Financial Protection Bu- reau (CFPB), and signed by groups as diverse as the American Bankers Association and Public Citizen, it is argued that PACE financing should be regulated in the same way as other forms of consumer lending. “The problems faced by home- owners receiving unaffordable PACE loans and obtaining limited or misleading information, the looming spread of PACE loans throughout the country, and the hidden way in which PACE loans have developed outside our consumer protection framework have brought us togeth- er to urge the Bureau to initiate rule-making,” said the letter. The CFPB has heard the call. In early March it opened a 60-day comment period that could lead to expansive PACE regulations under the Truth-in-Lending Act.
But, not all purchasers require financing. A property with PACE financing can be sold to a cash buyer with PACE financing in place. This can be done by transferring the PACE financing balance to the new owner. For those buyers who do require financing, an alternative approach is to finance with a portfolio lender who will not sell the loan to Fannie Mae, Freddie Mac, or an investor. Alvarez explains that “non-federally backed mortgages such as those held by private lenders may choose to allow the PACE assessment to remain on the property upon purchase.” In oth- er words, a portfolio lender can have underwriting requirements which differ from FHA, VA and conforming loans. This might allow PACE financ- ing to remain in place. PACE loans generally do not include prepayment penalties. However, according to the South Florida Sun-Sentinel , some older
PACE IMPACT ON HOME SALE TRANSACTIONS
PACE financing is attached to the property rather than an individual requesting the funds. That raises the question of what happens in a sale situation. Most real estate buyers purchase with new financing. According to the National Association of Realtors, 88 percent of all existing home purchas- es in 2018 were financed and the typical down payment was 13 percent. We can expect that many, if not most, PACE properties will be sold one or more times during the projected 20- year term of a PACE lien. Figures from ATTOM Data Solutions show that in mid-2018, the typical home was owned a little more than eight years. The problem is that property owners cannot generally refinance a property while a PACE lien remains in place. Similarly, buyers cannot typically finance a home purchase
14 think realty housing news report
may 2019 15
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