BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
PACE Loans
PACE stands for Property Assessed Clean Energy. PACE programs are offered by various governmental entities and provide property owners with a means to finance clean energy and water conservation improvements and pay for them through an assessment on the owner’s property. PACE programs may have different names throughout the state. While there are variations, most PACE programs include improvements such as solar panels, energy star rated core plumbing systems, duct replacement, electric vehicle plug-in stations, pool circulating pumps, water heaters, furnaces, etc.
The PACE programs can be funded by either private or public sources, or a combination. The program generally has a local public agency, such as a city, county or MUD in a Joint Powers Agreement (JPA) creating the PACE loan program. The JPA may administer the program or contract with others to do so. The funds can borrowed from the city or county, private funds, or a bond may be issued.
Typically the property owner contacts a PACE-approved contractor, gets an estimate, and the loan is approved and signed. When a property owner borrows money on a PACE loan, a lien is placed on the borrower’s property for the amount of the loan plus interest. This lien is a special tax assessment and is billed in a similar manner to property taxes until paid off.
This assessment lien is senior to all private liens including any deeds of trusts for existing mortgages. It is this senior position that is causing problems with mortgage lenders.
LENDER ISSUES: Whether or not entering into a PACE loan would violate the borrower’s existing mortgage loan terms will depend on the terms of the note entered into between the borrower and their mortgage lender. But, generally a borrower cannot enter into such a PACE loan agreement if they have a conventional loan which conforms to Fannie Mae or Freddie Mac guidelines, without the consent of the lender. Even most non-Fannie/Freddie loans have such limitations as well. Lenders are unlikely to grant the borrower/owner permission to enter into a PACE loan, unless the Pace loan program will agree to subordinate to the mortgage loan, as some PACE programs are starting to do.
If a borrower/owner enters into a PACE loan in violation of the lender requirements, the borrower could be required to pay off the PACE loan or be in default on their loan and be foreclosed upon. To date lenders have been reluctant to take such actions, but that could change.
REFI: An owner with a typical PACE lien which will not subordinate to the refi mortgage will not be able to obtain a refi loan.
SALE ISSUES: Homeowners with a PACE lien will have difficulty selling their property with the PACE lien in place to buyers with conventional loans unless the PACE loan will be paid off or subordinated to the new mortgage loan. Freddie and Fannie are prohibited from purchasing a mortgage with a senior PACE lien on it.
DISCLOSURE ISSUES:
1. Generally, sellers must disclose to buyer all material facts about the property of which the seller is aware. This would include whether any items which will be on the property at COE are subject to leases or encumbrances.
2. There can be specific contractual disclosure requirements. For example, the CAR RPA paragraph 8.B(4) requires sellers to disclose to the buyer whether any items in paragraph 8.B. of the contract are subject to a lien or encumbrance.
3. A PACE lien should appear on the preliminary title report (PRT). PACE liens are recorded and therefore will appear in the title search. In addition, if the PACE lien has been on the property for a sufficient time, it should appear on the property tax bill which will then be in the tax report portion of an NHD report. If the PACE lien is not recorded in a timely fashion, it might not show up on the PTR. But, the lien will likely appear on an NHD report that includes a tax report.
For more information on PACE loans see CAR Legal Memo on the subject at:
http://www.car.org/legal/financing-folder/PACEprogramsolarleases/
PRACTICE TIPS:
Listing Agents:
1. When taking a listing, always inquire if the seller has placed any loan on the property for clean energy or water conservation improvements. If so, ask the sellers for the loan documents. Ask to see the seller’s tax bill. Ask the title company if they can provide you with a statement of encumbrances against the property (e.g., a PTR or similar document).
2. Advise the seller to fully disclose the existence of such a loan to the buyer if not clearly identified in the PTR or on a NHD tax report. Provide buyer with all related documents.
Selling Agents:
3. If you become aware of a PACE loan, immediately disclose it to your buyer and your buyer’s lender so that any issues can be handled up front.
4. Be especially cautious in areas where PACE liens are common and warn the buyer about the possibility of PACE liens.
DO NOT FORWARD TO CLIENTS OR OTHER THIRD PARTIES. This Weekly Practice Tip is for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.