Not long ago we wrote about the increasingly popular PACE (Property Assessed Clean Energy) loans that can be used to finance a variety of energy-saving home improvements. One reason these loans are popular is that they do not require conventional income and credit qualifications. Moreover, loan costs and origination fees are built into the loan amount. Money out of pocket is not required at closing. An especially appealing aspect of the loans is that they are treated very much like tax liens. They are added to the property tax bill and payment is collected along with regular property taxes.
As wonderful as all that is, the California Association of REALTORS® (CAR) is supporting legislation (Assembly Bill 2693, Dababneh) that is likely to have a significant negative effect on the current volume of PACE loan originations. Why?
First, we note that PACE loans are not all that wonderful from everyone's perspective. Not only do they look and feel like regular property tax liens, they are also treated like them with respect to priority. That is, a PACE loan on a property has so-called "super priority" status. Should there, for example, be a foreclosure against the property by a mortgage holder, the PACE lien would have to be paid off first, before the mortgage lender received proceeds. Mortgage lenders do not like this.
Thus, the super-priority status of PACE loans has resulted in the fact that neither Freddie Mac nor Fannie Mae will lend on properties that have existing PACE liens. If you have a PACE lien on your property, you cannot refinance with Fannie Mae or Freddie Mac, unless the PACE lien is paid off. Similarly, you can't sell a property with a PACE lien and simply allow the buyer to assume it (as he would assume the tax bill). The PACE lien must be paid off in order to have new purchase financing placed against the property.
Well, that might not seem so bad to some people, but for others it is a big -- and not so nice -- surprise. It shouldn't be a surprise, but it is likely to be because PACE loans are not accompanied by all the disclosures that we are generally used to when it comes to real estate financing. Thus the CAR-supported bill. Not only would the bill require a full listing of loan costs and fees, but also it would show whether or not the loan was assumable by a new buyer. Included is the following language:
I understand that if I refinance my home, my mortgage company may require me to pay off the full remaining balance of this obligation. If I sell my home, the buyer or their mortgage company may require me to pay off the full remaining balance of this obligation.
Support truth in lending. Support AB 2693.