It's hard to open a newspaper or your mail these days without seeing some promotion of the HERO Program (Home Energy Renovation Opportunity). Launched in December of 2011, the HERO Program is offered by the Western Riverside Council of Governments (WRCOG) and administered by RenovateAmerica. It began as a local implementation of the more widespread PACE Program, or Property Assessed Clean Energy Program, first introduced in 2008, but the California HERO Program has recently been expanded to cover any jurisdiction in the state.
As presented, the HERO Program provides property owners in California a new way to finance home improvements to conserve water and save energy with minimal upfront financial or administrative burdens. While most of the focus appears to be on solar energy applications, the program also covers the installation of energy efficient air conditioning systems, windows, 'cool' roofing, water capture and drip irrigation systems and artificial turf. There are currently some 50 categories of products available under the HERO Program.
In addition to offering residents an easy way to upgrade their home and reduce costs, the program has also produced jobs for the region. RenovateAmerica claims to have completed some 23,000 projects throughout the region utilizing over 400 certified contractors. Homeowners simply have to apply, (a process that can be completed online), have their project approved, select a contractor to perform the work and sit back and reap the rewards.
So if it's that great and that easy, why the 'Buyer Be Aware' warning? Well, there are few caveats you should be aware of like lifetime cost of the program and evolving technology, but by far the biggest question Realtors have with the HERO Program today is:
· Can I refinance or sell my home with a HERO loan in place?
Depends. You see, a HERO loan is structured so that it appears as an assessment on your tax bill - it is paid through your monthly impound account or your semi-annual tax bill, whichever way you pay it. The tricky part is that it appears there as a super priority, or first lien status loan. That means in the event of a default that loan gets paid off before any other loans do.
What's wrong with that? Nothing, except that Fannie Mae and Freddie Mac don't like that and they currently underwrite about 90% of mortgage loans in this country. But let me quote them directly from a white paper issued on December 22, 2014:
Today, the Federal Housing Finance Agency (FHFA) is alerting homeowners, financial institutions, and state authorities of the agency’s concerns with state-level actions that threaten the first-lien status of single-family loans owned or guaranteed by Fannie Mae and Freddie Mac. The existence of these super-priority liens increases the risk of losses to taxpayers. One such program is known as the Property Assessed Clean Energy (PACE) program, which often provides loans as first-liens and is offered in California and in some other states.
While FHFA fully supports energy retrofit financing programs to allow homeowners to improve energy efficiency, these programs must be structured to ensure protection of the core financing for the home and, therefore, cannot undermine the first-lien status of Fannie Mae and Freddie Mac mortgages.
In issuing this statement, FHFA wants to make clear to homeowners, lenders, other financial institutions, state officials, and the public that Fannie Mae and Freddie Mac’s policies prohibit the purchase of a mortgage where the property has a first-lien PACE loan attached to it. This restriction has two potential implications for borrowers. First, a homeowner with a first-lien PACE loan cannot refinance their existing mortgage with a Fannie Mae or Freddie Mac mortgage. Second, anyone wanting to buy a home that already has a first-lien PACE loan cannot use a Fannie Mae or Freddie Mac loan for the purchase. These restrictions may reduce the marketability of the house or require the homeowner to pay off the PACE loan before selling the house. (Full text available at www.fhfa.gov)
A comment letter to the FHFA from the Mortgage Bankers Association, American Bankers Association, Housing Policy Council and others, made their position equally clear: "While energy efficiency is a worthy goal, PACE super-liens threaten the lien position on which mortgage lenders, servicers, and investors rely, and are disruptive to mortgage markets. PACE financing is not an appropriate method for financing energy efficiency improvements for homes."
So be an informed consumer. Understand that the energy retrofit you are so enamored with may not increase the salability of your home and in some cases may reduce it. It will make it more difficult for a buyer to obtain a loan or to qualify for a loan if they can find a willing lender. After all, they will have to qualify for that extra $200 or $300 /month just as if they were buying a bigger, more expensive home. If they could afford a bigger, more expensive home, that's probably what they would have been looking at to begin with. It may also make it more difficult to refi your home into a lower interest rate. FHFA streamline loans are not available to you at this time unless you pay off that first lien.
If you decide that now is the time for you to take advantage of energy retrofits for your home or property, get all the facts. The HERO Program has been a boon to many homeowners and installers throughout the region but only you can determine if it's right for you.