PSAR REALTOR® members should be aware about the pitfalls of the Property Assessed Clean Energy (PACE) program and PACE liens. Here is some background about this important issue.
First, the PACE program allows homeowners to finance through an assessment on their property various energy conservation-related improvements, such as energy-rated water heaters, windows, and solar panels. But, when the house is sold, the assessment may transfer with the property and become the responsibility of the new owner. The loans are repaid over as long as 20 years. A PACE lien is similar to a property tax lien. In fact, it’s a line item on the homeowner’s property tax bill and is paid at the same time and in the same way as property taxes.
There are definitely some downsides and hidden risks to this increasingly popular program that should concern every REALTOR®. Here are five key realities about PACE liens:
-- Reality No. 1: A homeowner may wind up borrowing too much on their property because the limits are very generous. For example, the owner of a $400,000 home could borrow up to $60,000 on their home. However, caution is needed to avoid overleveraging the home with a PACE lien. Like a mortgage, the PACE lien comes out of the available equity.
-- Reality No. 2: A homeowner may not be able to refinance their mortgage with a conventional mortgage. Fannie Mae and Freddie Mac are prohibited from purchasing mortgages with PACE liens on them because as tax liens, they put lenders in a secondary position if the loan cannot be repaid.
-- Reality No. 3: A PACE lien can be very expensive for homeowners. Interest rates are generally much higher than those for mortgages or home equity lines of credit. Worse, your client will likely have to pay off the lien in order to sell the property to a buyer who wants to obtain conventional financing. Paying off a PACE lien will reduce the amount the homeowner can realize from the sale of their home, and in some cases, could impose a financial hardship and make the home impossible to sell.
-- Reality No. 4: A homeowner may have a hard time finding potential buyers for their home. Because Fannie Mae and Freddie Mac will not approve mortgages for properties with an existing PACE lien, conventional buyers will not be able to purchase your client’s property unless the lien is paid off before the close of escrow. This could limit the buyer pool to all-cash and nonconventional buyers.
-- Reality No. 5: Limited mortgage options can create an unfortunate ripple effect. If fewer people can buy your client’s property, then it may take longer to sell. The longer a house sits on the market, the less desirable it may become, which could result in a lower sales price.
The bottom line is this: Are the risks and pitfalls associated with PACE liens worth it? That’s a question that that all REALTORS® and homeowners must answer for themselves.