California’s Property Assessed Clean Energy (PACE) program has been plagued with issues since its 2008 inception, to the point that many local governments have cut the program altogether. Recent legislation attempts to do damage control and salvage the program, but will the changes be enough?
The PACE program enables property owners to purchase free or low-cost energy upgrades, helping them to save on energy bills and bring the state closer to its energy-saving goals. PACE is run through the state’s local governments, and each city which grants PACE assessments is repaid through a tax assessment on the improved property.
However, many PACE participants have found their energy savings do not always offset their PACE lien payment on their annual tax bill. In fact, in many cases, the owners of a PACE-assessed home have found themselves with unaffordable tax bills.
How does this happen? Before the 2018 legislation passed, the program qualified homeowners based mostly on home equity and not their ability to repay.
PACE’s unexpectedly high tax bills have inevitably led to defaults, which spiked in 40 California counties from 245 in 2016 to 1,110 in 2017, according to the Wall Street Journal’s analysis of PACE accounts. These homeowners face tax lien foreclosures, which do not eliminate the PACE lien.
Lenders’ main issue with the program is the first-lien status PACE loans enjoy. In fact, the Federal Housing Administration (FHA), the Department of Veteran Affairs (VA), Fannie Mae and Freddie Mac no longer insure mortgages associated with PACE-participating homes since the lien takes repayment priority in a foreclosure.
This so-called “super lien” is an issue for real estate agents as well, since it stays with the property and makes it difficult for PACE-participating homeowners to sell.
2019 PACE updates
While PACE administrators are directed to consider a homeowner’s ability to pay, new laws in 2019 break down this directive, making it more meaningful.
Beginning January 1, 2019, before an administrator first makes a reasonable good faith determination that the homeowner has the ability to pay the PACE assessment, Assembly Bill 2063 prohibits the administrator from:
- executing an assessment contract or home improvement contract; and
- allowing any work financed by an assessment contract to commence on the home. [Calif. Financial Code §22684]
PACE administrators are now able to use the income of a homeowner’s spouse or domestic partner to determine their ability to pay, even when that individual is not listed on the property’s title. However, when the spouse’s or partner’s income is used, that individual also needs to be listed on the assessment. [Fin C §§22687(a)(3)(A); 5898.24(d)(2)(A)]
Beginning January 1, 2019, Senate Bill 1087 requires the PACE program to ensure property owners are current on all mortgage debt as of the application date before approving a PACE assessment. Previously, there was confusion around when the homeowner needed to be current on their mortgage debt to be eligible for the program. [Fin C §22684(e)]
SB 1087 also makes allowances for when a PACE administrator is unable to verify a homeowner applicant’s income. When they are unable to verify the homeowner’s income before executing the contract, they need to verify it in a timely manner following the execution of the contract. [Fin C §22687(e)(7)]
PACE administrators determine property value by relying on an appraisal completed within the six months preceding the application date. Beginning January 1, 2019, they may use an appraisal ordered by the homeowner and conducted by a state-licensed or -certified appraiser, when it was obtained in connection with the home’s purchase, refinance or extension of a home equity line of credit (HELOC). [Fin C §22685(a)(2)]
Editor’s note — These changes are an attempt to clarify confusing aspects of AB 1284, which passed at the end of 2017. AB 1284 required PACE administrators to consider homeowners’ income and ability to pay, where previously the main consideration was the home’s equity.