By S. E. Williams
A Closer Look At Western Riverside Council of Governments’ PACE Program Part 1 of 2
As more and varied consumer complaints focus media attention on a popular home improvement-financing program, questions are being raised regarding potential risks associated with participation in such a program even as it is promoted as a winning strategy for all involved.
The Home Energy Renovation Opportunity (HERO) Program is administered under the auspices of the Western Riverside Council of Governments (WRCOG) in partnership with San Diego based, Renovate America. Renovate America provides the Residential Property Assessed Clean Energy (PACE) funding for the HERO program.
The Western Riverside Council of Governments (WRCOG) is a Joint Powers Authority that consists of representatives from 17 local cities and the Riverside County Board of Supervisors among others. The WRCOG agencies joined together to provide the area with a collective voice on important regional issues; while, Renovate America described itself as the leading provider of residential PACE financing in the United States. The public-private partnership between WRCOG and Renovate America is the foundation for the residential HERO program.
According to WRCOG, it originally planned to create a large municipal bond program to fund the HERO loans. Like other places in the country, however, that plan changed as a result of concerns raised by Freddie Mac and Fannie Mae. Freddie Mac and Fannie Mae are government sponsored enterprises that buy mortgages from lenders that are either retained in their portfolios or packaged into mortgage-backed securities (MBS) and sold.
As a result of Freddie Mac and Fannie Mae concerns, consultants suggested WRCOG consider public-private partnerships instead. In addition to the residential partnership with Renovate America, a separate partnership was established for small to medium businesses; and, still another for large commercial projects.
PACE financing was designed to fund energy efficient and renewable energy improvements on private property in states where enacted legislation provided such authorization. When California’s Assembly Bill 811 was signed into law in 2008, it authorized all California cities and counties to designate areas where property owners are allowed to enter into contractual assessments to finance the installation of distributed renewable energy systems. Distributed renewable energy systems generate clean, renewable electricity at the location where the energy will be used. The most common example is solar panels.
The legislative authorization also extended to other improvements in energy efficiency as long as it was permanently attached to the owner’s property. This included windows, new heating and cooling systems, light improvements, insulation, etc.
The bill authorized (PACE) funding through low-interest loans to be repaid as part of the owner’s property tax bill over a period of years. Here is an important caveat; the funding is available only if the property owner agrees to a contractual assessment. In other words, in order to participate in the program, the homeowner must agree to repayment via their property tax bill over a period of between five and 20 years.
Other qualifiers include an applicant’s need to be current on the mortgage and property taxes and have a clean title. The interest rate must be fixed. The HERO loan assessment, interest and penalties remain as a lien against the property until it is paid in full. The lien must take priority position when recorded against the title. Applicants are not required to put any money down and the interest on the loan is tax deductible.
Beginning in 2009, with the passage of AB474, California included water efficiency improvements to the HERO strategy.
HERO is now recognized as the fastest growing residential PACE program in the country. It is available in 13 counties including Riverside, San Bernardino, Los Angeles, Orange and San Diego—nearly 10 million California residents now have access to the program.
Purportedly, all involved in the HERO program have an opportunity to win. Firstly, participants are able to secure long term financing at competitive rates that are payable through their property tax bills; and, the interest is tax deductible. Also, because the loan is considered “off balance sheet financing” there is no FICO score qualification. In addition, homeowners should experience lower electricity bills and see increased value in their properties as a result of the HERO upgrades.
Secondly, communities win when they realize the promised reduction in greenhouse emissions; the creation of local jobs; and, experience increased revenues without the burden of normal staff costs usually associated with the implementation of such programs.
Finally, contractors win too. With an increased demand for their services, many are able to hire more employees and some have grown their business; although, there are growing criticisms some contractors have over-charged for their products and/or services.
Since 2011, more than 30,000 property owners have made over $600 million in improvements to their homes through the HERO Program; improvements which reduced energy and water consumption; produced savings in utility costs and water; and, allegedly created thousands of local jobs in the process.
At the end of April, Renovate America attained $240 million, the company’s third securitization. Securitization is taking an illiquid asset, or group of assets, and through financial engineering, transforming them into a security. A typical example of securitization is a mortgage-backed security or MBS. This terminology alone is enough to raise a red flag.
According to Securitization: Cause or Remedy of the Financial Crisis?, a research paper’s analysis of the recent recession, “The losses in residential mortgage-backed securities (MBS) were the proximate cause of the meltdown of the financial system in the fall of 2008.” The document further stressed, “At the root of the mortgage problem was a new class of specialized mortgage lenders and securitizers unrestricted by regulations governing traditional lending and securitization.”
For a variety of reasons, during the great recession, African-American and Latino families were disproportionately affected by foreclosures in relation to their share of mortgage loans.
Similar concerns are currently being raised regarding how the HERO program may be setting the stage for a similar fall for homeowners in these communities. All it takes to get into trouble is to have equity in your home and leverage it through the HERO program for energy efficient or renewable energy improvements without fully understanding the rules of the program. Remember, approvals are based on the equity in the home, not a homeowner’s credit score or ability to pay.
Pace projects are started with no money down and homeowner’s get low, fixed rate loans with flexible terms for five to twenty years. Homeowners must have at least 10 percent equity in their property to participate. Contractors agree to be paid only after the project is completed to the homeowner’s satisfaction—but, what are the rules when the homeowner is not satisfied with the contractor’s work? What happens to the loan (which in reality is a tax lien attached to the property) when the property owner wants to sell? When the contractor’s products or services are over-priced?
Next week, The Voice will explore whether the federal government’s push for deployment of clean energy technology and local municipalities’ quests for jobs has left vulnerable communities at economic risk in regards to the HERO program.