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Energy loans plunge in California after income-qualifying laws took effect

By Jeff Lazerson

4/11/19

What’s up with mortgage rates? Jeff Lazerson of Mortgage Grader in Laguna Niguel gives us his take.

Rate news summary 

From Freddie Mac’s weekly survey: The 30-year fixed rate averaged 4.12%, up 4 basis points from last week. The 15-year fixed rate averaged 3.60%, also up 4 basis points from last week.

The Mortgage Bankers Association reported a 5.6% percent decrease in loan application volume from the previous week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $484,350 loan, last year’s payment was $85 higher than this week’s payment of $2,346.

What I see: Locally, well-qualified borrowers can get the following fixed rate mortgages with zero points: A15-year FHA (up to $431,250 in the Inland Empire, up to $484,350 in Los Angeles and Orange Counties) at 3.25%, a 30-year FHA at 3.50%, a 15-year conventional at 3.375%, a 30-year conventional at 3.875%, a 30-year FHA high-balance (from $484,351 to $726,525 in L.A. and Orange counties) at 3.75%, a 15-year conventional high-balance (also $484,351 to $726,525) at 3.75%, a 30-year conventional high-balance at 4.25%, a 15-year jumbo (over $726,525) at 4.0% and a 30-year jumbo at 4.50%.

What I think: The volume of PACE energy loans has been plunging since a new state income-qualifying law took effect last year.

That’s the news from Casey Dailey, director of Energy & Environmental Programs for the Western Riverside Council of Governments, which includes Riverside County and 19 cities. According to Dailey, PACE volume decreased almost 60% since April 2018, when the new rules went into effect.

PACE stands for Property Assessed Clean Energy loans, which are paid off through your property tax bills rather than payments directly to the lender.  Homeowners can use those loans to make their homes more energy efficient or to add renewable energy, such as solar panels, to their homes.

The latest data from the California Treasurer’s Office shows borrowers received roughly $1.3 billion in PACE loans in 2017, with almost $700 million of those loans occurring in the last six months of the year.

Last year’s volume fell to just over $700 million – with volume for the last six months of the year (after the new rules took effect) totaling approximately $300 – down roughly 56%.

California Assembly Bill 1284 and Senate Bill 242 require PACE lenders to consider the homeowners income and ability to repay, requires contractor training, bars contractor kickbacks and establishes the California Department of Business Oversight as the program regulator.

While industry standards for PACE financing can range from $5,000 to $200,000, loans in Southern California (the nation’s biggest market for PACE financing) average $20,000 to $25,000, according to Mark Schmidt, chief operating officer at Los Gatos-based PACEfunding.com.

Home energy improvements are not necessarily going away. Ironically, homeowners are more likely to accept faster, easier and perhaps much more expensive “unsecured” financial funding paths for their home energy projects.

Unlike mortgages, these unsecured loans do not use the home as collateral. Unsecured home improvement lenders do not require proof of income or ability to repay. The interest rates run about 5% higher than for PACE loans, Schmidt said.

The average interest rate for a PACE loan is 7.1%, said Mike Lemyre, senior vice president at PACE lender Ygrene.

While it’s difficult to track, several industry stakeholders said homeowners using revolving credit cards or payday type lenders are paying very high interest rates — perhaps more than 20%.

What else?

PACE loan approvals require more homeowner time, energy and effort. Beyond the dramatically lower interest rates for PACE, the interest paid on PACE loans are tax-deductible. The interest charged on unsecured home improvements are not deductible, according to IRS publication 936. Always consult your tax advisor.

Since PACE liens are part of your property tax bill, your property tax bill always come first — even ahead of your mortgage. So, if you can’t afford to pay your property taxes, you could eventually get foreclosed.

“What is unique to California is you don’t need lender consent to add a PACE lien ahead of a mortgage,” said Mark Schmidt. “But lenders can refuse to finance a property if a PACE lien exists.”

So, even though most PACE liens are financed over 20 years, and the liens run with the property, you might have to pay it off when new financing is being contemplated for that parcel.

Your cheapest energy-efficient home improvement route is likely a cash-out refinance of your first mortgage or an equity line of credit. If you don’t want to get rid of your current super-low rate or you are tight on equity, PACE does allow up to a 97 percent total loan-to-value. Safeguards are there with your contractor in mind, and its cheaper than other forms of financing.