The Schwarzenegger Institute recently published a study discussing the benefits of California’s Property Assessed Clean Energy (PACE) program. The study, funded by Ygrene, largely focuses on the program’s non-market value success derived from green improvements, tax revenue generation, and improvements in GDP. To the disservice of American homeowners and taxpayers, however, it fails to mention the vast issues PACE has created across the country in recent years. 

The PACE program was established in 2008 by the California state government, when Arnold Schwarzenegger was governor. It empowers local governments to provide financial support to private homeowners who want to make their homes more energy efficient. Under the program, municipalities can offer taxpayer-backed bonds to private loan providers on behalf of individuals in their respective districts.  The PACE financing option allows residents to then repay their debts through increased annual assessments on their property tax bills. Over 220,000 PACE loans have been made since 2010, financing projects that have cost over $5.17 billion.

The residential PACE program has proven to be a nightmare. On average, PACE loans for things like new heating and cooling systems, windows, and roofs average roughly $25,000 per home to be paid back over a 20-year period, with an interest rate between 6 and 9 percent. Homeowners are often blindsided by the new amount they are to pay in taxes, tacked onto their property tax bills annually. Data collected by the Wall Street Journal on 40 California counties demonstrated that in 2017 nearly 1,100 homes with PACE loans missed two consecutive payments on their property taxes. This was a 78 percent increase from the year prior. 

Consumer complaints show that many middle and low-income homeowners have been swindled into the PACE program through predatory lending schemes. In California, private contractors have historically been authorized to solicit PACE options going door-to-door. With just a phone call and an electronic signature, applications can be approved, regardless of the borrower’s financial history or credit score. 

PACE loans are not subject to the lending practices established by the Truth in Lending Act (TILA) or the Real Estate Settlement Procedures Act (RESPA), which ensure that borrowers have the ability to repay their loans and offer increased protection to consumers. Absent some of these policies, many homeowners may be signing up for taxpayer-backed loans that they will not be able to repay. In a down economy where foreclosures rise, this presents real problem for the housing markets and the liabilities that local governments are on the hook for. 

Senate Republicans Tom Cotton (R-Ark.), Marco Rubio (R-Fla.) and John Boozman (R-Ark.), along with Rep. Brad Sherman (D-Calif.) and Rep. Ed Royce (R-Calif.) have sought to reform the program in drafting legislation in the House and Senate that would hold PACE to the same standards established in TILA. 

 Because the payments are attached to property taxes, they are afforded senior lien status, or “super-priority” status over other loans. This ensures that in the case of foreclosure or debt collections, PACE loans are paid before all other loans, including mortgages, should a borrower default. The first-lien status has caused Fannie Mae and Freddie Mac, in addition to the Federal Housing authority under Ben Carson’s leadership at the Department of Housing and Urban Development, to withdraw from insuring homes with PACE loans attached to them. 

“FHA can no longer tolerate putting taxpayers at risk by allowing obligations like these to be placed ahead of the mortgage itself in the event of a default,” said Secretary Carson. “Assessments such as these are potentially dangerous for our Mutual Mortgage Insurance Fund and may have serious consequences on a consumer’s ability to repay, or when they attempt to refinance their mortgage or sell their home.”

While the PACE program is growing, expanding to states like Missouri, Florida, Texas and New York, some municipalities are dismayed by its impact in practice. Bakersfield, for example, abandoned the PACE program, citing concerns over first lien status and housing sales. Responding to predatory tactics, California recently enacted ability-to-pay legislation, requiring that residents meet borrowing standards before receiving approval for a PACE loan. Since then, the three major providers- Ygrene, Renovate America and Renew Financial- have seen applications decrease between 40 and 50 percent, and approvals dip 20 to 25 percent. 

The benefits touted by Schwarzenegger can be boiled down to the ability of PACE to put solar panels on roofs. But the Schwarzenegger study misses its impact after the panels are installed. Following installation, PACE lines up taxpayers as collateral for risky loans, paid with a ballooning property tax rate. In response, California is rolling back the program, attempting to save its residents from PACE’s inherent flaws.