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   ARTICLE   |   From Scotsman Guide Residential Edition   |   June 2018

Viewpoint: Borrowers Need Straight Talk About Green Financing

Informing homeowners about the good and bad of PACE loans is smart business

Consumers are regularly hit with product marketing pitches touting environmentally friendly improvements for their homes, such as solar panels, drought-tolerant landscaping, double-pane windows and other water and energy-saving ideas. They also are bombarded with pitches for financial products that go hand-in-glove with these upgrades.

These green-financing products include local government-sponsored programs such as Property Assessed Clean Energy (PACE) programs — often referred to as Home Energy Renovation Opportunity (HERO) loans. This PACE financing is one way to pay for green improvements to a home — including energy- and water-efficiency upgrades, and even earthquake-safety improvements.

These so-called green-financing programs, however, can have drawbacks. A savvy mortgage originator can build strong relationships — and gain future referrals — by knowing and conveying the strengths and weaknesses of this type of financing.

Pros and cons

PACE programs have been approved in more than 30 states throughout the country, but these programs are operated at the city and county levels. The financing is repaid as an assessment on the property’s regular tax bill, in much the same way as assessments are levied for public infrastructure, such as sidewalks and sewers, according to the trade group PACENation.

Advocates say the financing is a way to pay for upgrades that lower utility bills with no upfront out-of-pocket costs to the homeowner. Supporters also say that the improvements can add value to homes. An independent analyst conducted a study a few years ago showed PACE homes sold for as much as $9,000 more than homes that hadn’t been upgraded.

Critics argue that there are many problems with PACE financing. For one, they say the energy savings seldom offset the cost of improvements. These critics also contend that the upgrades are often made without a home-energy audit or a third-party certification, so the homeowner has no idea of the true value of the improvements.

Homeowners who take out the financing can have problems selling or refinancing the property because the assessment for the PACE financing is attached to the property itself, rather than the owner. Critics also contend that this type of financing silently erodes the homeowner’s equity and, in the event of another downturn, could cause serious problems in a community by putting more people underwater on their mortgages.

Recent articles in the Los Angeles Times and Wall Street Journal have highlighted the stories of people who took out the financing but later regretted it. The articles describe aggressive tactics employed by contractors making cold calls or engaging in door-to-door marketing and convincing consumers to undertake unnecessary projects. Some contractors were inflating the cost of their services and misrepresenting how much the PACE loans cost or how the money would be paid back, according to the Los Angeles Times’ reporting.

Added oversight

Last year, California Gov. Jerry Brown signed two bills into law that boost consumer protections for PACE-loan borrowers. Eligibility for these programs in California was largely based on home equity and credit scores. Income was not a factor.

One of the reforms requires the borrower’s income to be factored into the underwriting for PACE financing. The legislation also barred kickbacks from lenders to contractors and established minimum training requirements for contractors marketing PACE financing projects, according to the Los Angeles Times.

It’s better for mortgage professionals to educate clients, including pointing out that clean-energy financing can sometimes have messy consequences.

The Federal Housing Administration (FHA) also has weighed in on the issue. The agency no longer allows homeowners to take out FHA-approved reverse mortgages on properties that are subject to PACE loan liens. Even if a homeowner qualifies for a reverse mortgage, they cannot use that product to pay off the PACE loan.

In addition, this past December, the FHA decided it will no longer insure new mortgages on properties that include PACE assessments, reversing a policy it adopted a year earlier. U.S. Department of Housing and Urban Development Secretary Ben Carson said at the time that the federal government can no longer “tolerate putting taxpayers at risk by allowing obligations like these to be placed ahead of the mortgage itself in the event of a default.”

He added that the PACE assessments may have serious consequences for a borrower’s ability to repay or refinance their mortgage or sell their home. The agency also expressed concern about PACE obligations placed on FHA-insured mortgages that are already outstanding.

Building trust

The success of a top-producing originator is not predicated on selling financial products alone. Flourishing originators also are adept at developing relationships that lead to new business.

They understand that it’s not subtle to ask clients, “Do you know anyone who is intending to buy a house.” It is a poorly disguised attempt at getting a referral, and they know this approach can sometimes backfire and make their clients feel uncomfortable, as if they have been put on the spot. 

In order to cultivate new business, it’s better for mortgage professionals to educate clients, including pointing out that clean-energy financing can sometimes have messy consequences for homeowners. Being transparent in this way represents the mortgage industry in a positive light.

By reaching out to their clients and providing candid advice, originators stay top of mind with them. At the same time, originators can demonstrate their value to clients by providing advice that proves to be on the mark.

In some cases, originators can even dissuade a client from making a decision that can lead to a bad out-come — such as entering into a green-financing deal that results in them over-leveraging their property. Proving their value in this way is a great way for originators to get quality referrals for new business.


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