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Rating agency: PACE loans rarely default

Residential Property Assessed Clean Energy (PACE) loans have drawn fire from the mortgage industry and prompted calls in Congress for tighter government regulation. Delinquency data, however, suggests that PACE loans are performing well.

In California, one of the few states where the residential PACE program has taken off, the PACE delinquency rate “is exceptionally low” 22 months after the point of origination, according to an analysis from the credit-rating agency DBRS.

paceloanDBRS evaluated the performance of PACE loans for the 2013-14 through the 2016-17 tax years in the 10 California counties that have the highest number of loans. The loans were originated by the two biggest PACE players, Renovate America and Renew Financial Group, which generated more than 81 percent of the loans packaged into securities over the past two years.

DBRS, which have rated PACE-backed securities since 2015, examined the aggregate performance over a 22-month time frame. The PACE delinquency rate peaked at “a fairly low” range of 2 percent to 4 percent one month after the first installment payment was considered past due, and then falls to under 1 percent within 12 months. In month 22, PACE delinquencies were at “an exceptionally low” level ranging from 23 basis points to 27 basis points, DBRS said.

“This suggests that PACE delinquencies are consistently and quickly resolved within 12 to 18 months following the first installment being past due,” DBRS reported.

DBRS also said that the specific PACE delinquency rates compare favorably to the aggregated delinquency rate for unpaid taxes on residential homes in the 10 counties examined. In the study years, PACE delinquency rates range from 1.4 percent to 1.9 percent versus 1.9 percent to 2.3 percent for the aggregate tax delinquency rate for single-family homes.

PACE loans are generally paid in two installments, and the loan delinquencies tend to spike close to the months of December and April, after payments are considered past due.

PACE loans are a relatively new, special type of financing for energy-efficiency improvements and are only available in areas where the taxing authorities have passed enabling legislation. Unlike a mortgage, the PACE loan is attached to the tax assessment. PACE loans are more common for commercial properties. Residential PACE loans first became available in 2009 in California, then in Florida and Missouri.

These loans are controversial, however. The program’s critics, such as the Mortgage Bankers Association, say that PACE puts homeowners at a higher risk of default. A PACE loan usually takes a senior position to the mortgage. Residential PACE loans also are not subject to the federal Dodd-Frank regulations that ensure that a borrower has been fully informed about the costs and has the ability to repay the financing. California recently passed a regulatory framework that affords similar consumer protections, however. 

"This analysis challenges the narrative some PACE opponents had been spinning in the press – and reinforces for local governments the soundness of one of the most effective financing tools for energy- and water-saving home improvements,” said Greg Frost, the national communications director for Renovate America. 


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