What Do You Know About PACE, A Once Fast-Growing Home Improvement Loan?

PACE is not limited to clean energy nor is PACE a good fit for every homeowner.

If you are a homeowner living in California, Florida or parts of Missouri and have not already had installed solar panels or new roofing with a PACE loan, there is still a good chance that you know a friend or neighbor who has, or you've been pitched by private contractors selling PACE.

PACE is an abbreviation for Property Assessed Clean Energy. As the name indicates, PACE provides financing for green and renewable energy home improvements, although it is not limited to such. Retrofitting properties with energy upgrades is costly, and PACE provides incentives such as 100% long-term financing. Additionally, PACE does not require monthly loan payments but is structured as a special tax assessment or tax lien attached to the property and onto a homeowners' tax bill. Currently, local municipalities across California, Florida and St. Louis county and the City of St. Louis in Missouri have partnered with private lenders and contractors to provide homeowners access to PACE loans.^[1]

Pay-As-You-Go Loan: Incentivizing Private Initiatives on Clean Energy

Since a PACE loan is attached to the property as a tax lien, they can further incentivize investment in clean energy as homeowners are responsible for the cost of the investment - while also reaping the benefits - only for the duration of owning the property. When a change of property ownership occurs, the cost or any remaining obligation of the outstanding PACE amount could be passed onto current homeowners.

PACE is Not Limited to Clean Energy

Although the PACE acronym denotes clean energy, PACE programs are not limited to funding clean or renewable energy. A variety of energy-related home improvements - including replacement of heating and cooling systems or hot water heaters, air sealing and insulation, ENERGY STAR windows, doors and roofing, ENERGY STAR appliances, LED lighting or HVAC upgrades - are all eligible under PACE.^[2]

Nor Is PACE A Good Fit for Every Homeowner

While PACE financing can be a good source for a variety of energy upgrades, it is certainly not a good fit for everyone. For homeowners who have well-established credit history, a home equity or home equity line of credit (HELOC) loan is a less expensive source of financing. However, PACE may meet the needs of homeowners who would otherwise have difficulty securing a home equity loan or HELOC from banks or mortgage companies. For these homeowners, PACE offers additional benefits such as long-term financing to stretch the loan to 20 to 30 years, making the repayment more affordable.

Sticker Shock

The special tax assessment on PACE loans often come as a surprise to homeowners when the tax bill arrives. PACE loan payments are due along with annual property taxes, so either once a year (Florida, for instance) or in two installments (in California). A drawback of infrequent PACE loan payments is that each installment will be larger than if spread over 12 months or when compared to the monthly payment on a home equity or HELOC loan, making it harder to budget.

Figure 1 shows the typical or median amount of special tax assessment attached to PACE liens for California homeowners. Annual PACE tax assessment runs typically in the $2,600-$2,700 range, dropping only slightly in 2020 and 2021 as interest rates hit historical lows. The large increase to the total taxes owed could become particularly burdensome for borrowers with low- to moderate-income and limited credit history and who find PACE financing accessible but may have difficulty securing financing with a home equity or HELOC loan.

Figure 1: Typical Special Tax Assessment On PACE Liens

New Demand for PACE Financing in Retreat

According to PACENation, the national trade association that promotes PACE financing, the PACE programs in CA, FL and MO have provided homeowners access to $7.7 billion in financing for undertaking more than 323,000 energy-saving or energy-resilient home improvements, averaging $24,000 per investment.

To provide a gauge of how demand for PACE has progressed over time, Figure 2 disaggregates the cumulative data from PACENation to show annual volume in PACE financing. With almost no market penetration in 2012, PACE financing began to take off and emerged as the fastest-growing lending vehicle between 2013 and 2016. At its peak demand in 2016, PACE loans provided $1.7 billion financing for approximately 71,250 home improvement projects.

Figure 2: Residential PACE Loan Originations (in millions), 2012-2021

Homeowners' participation in PACE has since slowed considerably, declining year over year beginning in 2017 with the latest disaggregated 2021 data showing a drop of 35% from 2020. About $543 million, or approximately 22,625 loans, were made in 2021, a decline of nearly 70% from its heyday.

It is likely that some of the retreat in PACE demand could be due to rising market saturation as many past or current homeowners have made the investment. Meanwhile, fresh new demand could emerge from homeowners in states that already have passed PACE legislation (38 states and counting) to support implementation of PACE programs.

Challenges to Current and Future PACE Programs

Consumer advocacy groups have called for better consumer protection on PACE lending.^[3] PACE loans have been criticized for charging high interest rates and fees and putting uninformed homeowners at the risk of owing additional taxes they could not afford. Many PACE loans have been made to low- to moderate-income homeowners who find PACE financing accessible but otherwise have difficulty securing traditional financing with a home equity or HELOC loan. With additional annual tax assessment in the thousands, some homeowners may struggle to make payments.

PACE lenders are not traditional mortgage lenders but private investment firms, venture capitals and other private investors. At the federal level, PACE loans are currently not subject to consumer protection regulations as required of banks and mortgage companies engaged in residential mortgage lending.^[4] In addition, marketing of PACE loans is frequently through door-to-door sales, giving rise to concerns on proper disclosure of the cost of the loans or potential energy savings to justify the costs.

Finally, the FHA and the GSEs prohibit PACE liens on properties and mortgages they insure or guarantee, making it burdensome for homeowners when selling the property despite PACE being touted as transferrable at the sale of the property.^[5]

^[1] While only three states (CA, FL, MO) launched residential PACE programs, 28 states and the District of Columbia have launched commercial PACE programs. Currently, 38 states have passed PACE legislations. Source: https://www.pacenation.org/

^[2] Source: https://www.energy.gov/eere/slsc/property-assessed-clean-energy-programs.

^[3] See PACE Energy Efficiency Loans: Good Intentions, Big Risks for Consumers - National Consumer Law Center (nclc.org)

^[4] In 2019, the Consumer Financial Protection Bureau issued an Advanced Notice of Proposed Rulemaking on applying Truth-in-Lending Act to residential PACE loans.

^[5] PACE encumbered properties may be eligible for VA-guaranteed financing provided that lenders can satisfy a number of underwriting requirements set out by the VA. For more details, see https://www.benefits.va.gov/HOMELOANS/documents/circulars/26_16_18.pdf