A few months back I wrote a post about the impact PACE style energy retrofit liens were having on our housing market. In our region of Southern California, the PACE Program is primarily implemented as HERO, or Home Energy Renovation Opportunity, a joint venture between our quasi-governmental Western Riverside Council of Governments (WRCOG) and the funding mechanism they put in place to finance energy retrofits, RenovateAmerica.
As noted, the HERO/PACE program can provide a real benefit to homeowners as an affordable way to add solar panels, dual pane windows, artificial turf and hundreds of other energy saving items to a home.
But of immediate concern is the method in which the the items are financed, which is via a tax lien that is then placed in first position on a home - a super-priority lien, if you will. That means if something goes south, the HERO lien gets paid off before the mortgage lender. There are also concerns about the efficacy of dicslosures to consumers along with claims regarding potential savings and appraisals.
But to say that Fannie & Freddie don't much care to have their loans in 2nd position would be an understatement! And that's problematic for homeowners. The FHFA issued their most recent position paper on the matter last December (see attached) with an updated letter sent to the California Legislature earlier this year. The FHA issued a guideline paper in August clarifying their position on the liens as well. (see attached)
Their position, in a nutshell 'we will neither refinance nor issue or underwrite a mortgage on any property with a PACE lien in 1st position'.
Now with Fannie, Freddie and the FHA responsible for issuing or underwriting 90%+ of mortgages in this country, that's a problem and the problem was not being adequately disclosed to prospective clients. 3-4 years into the program, we were starting to see the first wave of sellers attempting to sell homes with HERO liens attached and running into obstacles, having sales canceled, being forced to take their equity to pay off the liens rather than use them towards new home purchases, etc.
And despite numerous meetings and conversations with the HERO folks, despite numerous representations, promises and other chin wagging, it didn't appear much actual progress was being made to further our goal of providing full and transparent disclosure to consumers at a time when HERO was launching aggressive expansion plans throughout the state and country.
So in September, three Realtor® associations in Riverside County, the Southwest Riverside County AOR, the Inland Valley AOR and the Inland Gateway AOR, took the unusual step of issues a policy statement OPPOSING the HERO Program until such time as certain conditions were met. A link to that policy statement is below.
Since then we have had another meeting and additional conversations with the HERO folks. At this time they APPEAR to be making some earnest strides to address our concerns including adding verbiage to their contracts with a disclosure of potential financing problems (not strong enough yet) and they have implemented a case-by-case effort to subordinate their 1st position liens if it becomes a condition of sale (they claim to have successfully subordinated 35 loans out of the total installed base of 35,000).
At this time we are all awaiting a definitive policy paper from the FHA and/or FHFA regarding PACE liens. But from the guidance letter issued by the FHA in August, the future appears pretty clear as the very first line in their guidance reads:
Lien Position: Only PACE liens that preserve payment priority for first lien mortgages through subordination.
Clear enough and, in addition to letting consumers know what they're getting, it's what we've been asking for all along. At this point, HERO would very much like us to drop our opposition and just go away. Barring that, they'd like us to try to prevail on FHFA to modify their underwriting standards to allow PACE liens to continue as super priority liens. We have been very adamant that until such time as adequate consumer protections are included in their contract we will remain opposed. The likelihood of FHFA modifying their position on maintaining their own first priority lien status is also pretty slim.
So be aware. These programs are growing like wildfire across the country and will be coming to a neighborhood near you soon. We are working with the HERO Program because of all the programs out there, they are the largest with over 25,000 installations in our region alone, and they are the most anxious to work with us to address our consumer concerns. We are optimistic that at some future date our concerns, our customers concerns and those of FHFA and FHA will be addressed satisfactorily. Until then, stay tuned.