PACE Financing: Promising, But Not Without Concerns

paceProperty Assessed Clean Energy (PACE) financing is not without its risks. The Week looks at the dangers in a story that focuses on the residential side. However, the piece is relevant to businesses because the basic structure of the loans is similar and failures at the residential level are sure to have ramifications for the health of the overall category.

The theme of the article is that the inherent danger in PACE financing is that the loans are tied to the property, not the homeowner. On the highest level, this is one of the most attractive elements of PACE because it allows homeowners and businesses to upgrade energy performance without laying out money.

However, that very benefit has hidden dangers. Homeowners may be surprised by the amount PACE loans add to monthly property-related outlays. In many cases, the story points out, the PACE loan is considered before mortgage itself. Thus, a homeowner who defaults on their PACE loan can lose the property, though the mortgage itself is up to date. A lien caused by PACE default likely would make the property more difficult to sell, since it would be passed on to the buyer.

The problem has not yet manifested itself. The story is more of a warning, according to the writer:

The PACE program has a low default rate at this point. The Kroll Bond Rating Agency notes that default on securitized PACE loans is below 1 percent. However, just as in the subprime housing crisis, the conditions are ripe for future problems. The current system is likely to produce more future defaults based on PACE loans’ explosive growth, unique structure, and form of risk assessment. Because the program is relatively new, bond agencies don’t have enough history to forecast future default rates accurately — thus risk may be significantly understated.

Despite what some would consider yellow flags, the advantages of PACE loans is extolled in an op-ed at the Billings Gazette. The piece explains the program and then advocates passage of SB 30, which would let Montana join more than 30 states in allowing PACE loans:

PACE can power economic development in Montana. When property owners can affordably finance upgrades to existing buildings, more projects are undertaken and completed using the local workforce — creating more jobs for HVAC, insulation, lighting, and electrical contractors, engineers, and suppliers. And when businesses and individuals spend less on utilities, they have more disposable income to reinvest in their business or spend elsewhere.

The story points out passage of SB 30 only would make it possible for cities and counties decide whether or not to implement PACE financing. The final decision is local.

Smart Efficient Solutions, a provider of Property Assessed Clean Energy (PACE) financing, is now offering its services in Hillsborough County, FL.

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