PACE Yourself

The Problems With PACE

Problematically for buyers, sellers, lenders, and counterparties, the financing of these improvements transfers with the title when a home is sold. PACE financing is known as “land secured financing,” so, instead of monthly payments for the PACE borrower, the land-secured debt is repaid through property assessments and added to the real estate tax bill.

When a homeowner goes to sell their home, the new homeowner agrees to assume the PACE obligation. The new first mortgage holder must agree to the PACE lien remaining, and the mortgage lender is now subordinate to the PACE lien. This can create a significant barrier for mortgage lenders when a home is bought, sold, or refinanced.

Because PACE financing is repaid through property tax assessments, the PACE lien takes precedence over the first mortgage lender in the event of default. As a result, PACE liens supersede any existing or future mortgages, leaving homeowners with limited options when it comes to selling or refinancing their property.

Federal rules and regulations prohibit the Federal Housing Administration (FHA), Veterans Administration (VA), Fannie Mae, Freddie Mac, and the Federal Home Loan Bank system from financing homes with PACE liens, unless those liens are clearly subordinated to a new first mortgage. This means that the PACE lien must be repaid before selling the home if the new buyer intends to use a Fannie Mae, Freddie Mac, FHA, or VA mortgage program. 

Unless the proceeds generated by a sale can repay the PACE lien and the outstanding principal mortgage balance, a homeowner’s options for selling their home drop dramatically because buyers will not be able to secure government-backed financing for the home. The PACE repayment also significantly reduces a homeowner’s down-payment capacity for the next home.

This double impact of PACE liens can bring a homebuyer’s dream to a full and complete stop. The presence of a PACE lien on a property can bring the loan officer or lender pursuing a purchase or refinance on that property to a complete stop, too.

The mortgage industry is not opposed to homeowners improving their properties with energy efficiency upgrades, extreme weather-related protections, or accessibility measures. However, programs for financing these modifications must provide full disclosure to counterparties impacted by the liens, including consumer protections with clear disclosures to prevent abuses.

Advocates of increased transparency around PACE programs believe that the complex structure of the financing and the potential for abusive sales tactics necessitate PACE’s adherence to all mortgage-related federal consumer protection requirements, to include truth-in-lending regulations that mandate ability-to-repay protections and clear disclosures. 

Additionally, companies and individuals selling home improvement products financed with PACE programs should operate under the direct supervision of state and federal mortgage regulations, requiring state licensing. Such licensing entails upfront education, thorough background checks, and ongoing education. Efforts to implement these measures, actually, are already underway.

Protecting Consumers, Protecting Lenders

The Consumer Financial Protection Bureau (CFPB) was authorized in 2018 to issue rules that help protect homeowners from the potential dangers and negative impacts posed by PACE liens. The CFPB proposed rules for review and comment in the middle of 2023, but is still reviewing the comments received. A potential rule and revisions are still under development, but it is expected that the CFPB will issue a rule and implement supervision in the next year or so.

PACE programs have been active in California for some time, and were previously offered in many other states like Florida. Many county jurisdictions across Florida adopted PACE programs, only to turn around and cancel them due to consumer complaints. 

Predatory salespeople and contractors have reportedly misrepresented the costs associated with PACE, suggesting that there are no upfront payments or out-of-pocket expenses, creating the impression that these services are free. In California, these abuses lead to the passage of consumer protection statutes in 2017 and 2018, as well as the creation of a consumer awareness website run by the California Department of Financial Protection and Innovation.

Now, a new statute in Florida is bringing PACE back to the headlines and homeowners’ front doors—or rooftops, solar-speaking. The updated PACE statute, effective July 1, 2024, has also garnered the critical attention of many county tax collectors, as local tax collectors are required to oversee the program. The vague language in the statute allows for home improvements beyond energy efficiency to be funded with PACE financing.

So far, the implementation of Florida’s statute absent federal clarity has led to challenges across the Sunshine State on a county-by-county basis. Meanwhile, concerns grow that while waiting for federal standards to be proposed, state legislatures across the country may enact seemingly beneficial bills—that inadvertently lead to consumer harm after implementation.

Fortunately, other states’ statutes model effective PACE legislation for Florida (and other states) to follow. Minnesota and Ohio, for example, have successfully passed legislation requiring PACE liens to be clearly subordinated to any residential mortgage. These efforts provide a framework for effectively managing residential PACE liens in relation to mortgages. 

Diligent lenders and loan officers must carefully monitor state and local laws to identify jurisdictions where PACE liens are available and review the provisions regarding lien priority, and by consulting resources like Fannie Mae’s website, which outlines important considerations for refinancing. By proactively seeking this information, lenders can prevent a PACE lien from complicating the mortgage process and negatively impacting their borrowers’ experiences.

Savvy originators who prioritize managing their client databases and aim to be lifelong lenders actively share information with their customers to raise awareness. These originators recognize the importance of informing both past and future clients about all available financing options for home improvements—from renovation loans and second mortgages to PACE programs, too.

Discovering a PACE lien on the title late in the approval process can derail a loan and hinder future referrals, not just shorting today’s revenue, but tomorrow’s revenue, too. Staying proactive, we can ensure a smooth experience for clients and maintain strong referral networks.