Mission Viejo

                     Beware the Risks of PACE Solar Financing

                                      By Cathy Schlicht, Mayor, City of Mission Viejo

 Property Assessed Clean Energy (PACE) or “HERO” financing is a taxpayer-backed government loan program available for property owners to finance energy-saving upgrades such as solar power. The loan is attached to the property as a voluntary tax assessment, and it becomes a "super lien," jumping ahead of all existing liens on the property. 

On August 25, our city council passed the PACE/HERO financing with a 3-2 vote, even with the knowledge that the Office of the Comptroller issued warnings to its national banks not to approve financing for a property carrying PACE-type financing. Councilman Ed Sachs and I cast the dissenting votes.

 Earlier this month, I received an e-mail from the Director of Finance for New Jersey PACE, asking me to share my reasons for rejecting PACE-type financing. Following is my (paraphrased) explanation.
I voted “No” on the PACE programs because these programs are non-bank consumer loans that are not regulated by standardized disclosure laws enforced by governmental financial regulatory agencies. So, consumers, especially those on fixed incomes, are at risk of signing up for the program without understanding the true expense of the financing or the actual energy cost savings.

One problem with this type of financing for homeowners is that the cost of it reduces their home equity. As a result, when they sell their home, they must either negotiate with the buyer to take over the financing; decrease the sale price to pay for the financing, or pay off the loan with the proceeds of the sale. In the latter case, the seller has paid in full for a product without realizing full benefit.

There also appear to be constitutional issues with creating these super liens, as they interfere with the contractual relationship between homeowners and mortgage lenders. A bank's security in the property is the equity, and these super liens take away or reduce the equity position of the bank. I believe the banks have the legal right to foreclose on a homeowner for placing its lien in jeopardy. While I am not aware of any financial institution taking those steps, I believe they have the contractual authority to do so for violating the terms of its contract.

California has created a $10-million reserve fund to protect lienholders from defaults, but that does not address the real risks associated with this type of financing. The super lien runs with the land, and any subsequent property owner, whether it be the foreclosing bank or a bidder at the sale, will be responsible for paying off the PACE financing.

On a personal note, I do NOT believe it is the role of government to be a collection agency for such financing. This is a bad precedent and a gateway to allow other forms of “creative financing” that benefit the investors by reducing their risk, while at the same time putting at risk the equity of the property, jeopardizing both the property owner and the bank. 

The consequence of super liens will be added costs to all our institutional loans, as rate and risk go hand in hand. PACE super lien financing creates a bigger risk to financial institutions; therefore, the costs for our conventional loans will increase in both rate and fees.

The only real benefactors behind these municipal-funded loans are the investors, the contractors and the various PACE agencies.

Fortunately, there are other alternatives. Some companies now offer what are called “Power Purchase Agreements”, which allow the customer to purchase solar power at a rate lower than what electricity providers are charging. The customer agrees to purchase solar power at a fixed rate; no down payment is required; the solar company installs and maintains the panels and should the homeowner decide to sell, the company removes the panels. Of course, potential customers should check out the solar provider’s reputation and read contracts thoroughly to understand what they are agreeing to long-term, but at least options exist.

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