PACE – Another Financing Scheme for Pick Pocketing the Poor.

The Department of Energy is looking for feedback on the Property Assessed Clean Energy (PACE) loan program. The deadline for comments is today.

I never liked PACE, something always felt perverse about financing Energy Upgrades through your Tax Bill. I mean, why not use the Energy Bill?

Lately, some unpleasant consequences of this stupidly designed loan product have been coming to light. When I found out there was an opportunity to register comments with the Department of Energy, I threw this argument against PACE together:

Dear DOE,

PACE financing is another opaque, complex, perverse financing mechanism that, like NINJA and Teaser Loans, creates short, medium and long term harm to the exact financially unsophisticated and vulnerable demographic that it was intended to help.

Pace allows people whose only asset might be their home, to tap into those assets to finance dubious investments that usually have little to no residual value. These assets are often labeled “energy improvements’ although all evidence suggests energy savings associated with these improvements are usually geometrically overstated.

Pace in practice does nothing to help create meaningful wealth for the poor and middle class. Instead, by creating the appearance of credibility, it actually steals wealth from a class who can ill afford it. It is a wealth creation experiment that places at risk the wealth of those who can least afford the loss.

When compared to other secured financing, Pace interest rates are abusive. The cost of initiating financing is high and confusing, options for prepayment are complex. The only argument for this financing seems to be “look at all the sales this is creating!” This argument has no integrity. It is the same argument used to justify the bad loans that led to the housing crisis, the harms of which are still causing harm to the poor and the general economy nearly a decade later.

Here are links to two well written articles that express problems with PACE more eloquently than I can:

http://bit.ly/pacesucksMBA

http://bit.ly/PACEsucks

If we are to move Residential Energy Efficiency mainstream, there needs to be more cost and benefit transparency, not less. There needs to be on-going direct correlation between cost and savings.

On Bill Recovery Financing, securitized by the energy meter, possibly financed by Utilities as a capital asset (very low capital cost) is a much better solution. The cost and benefit are accounted for on the same bill, providing clarity of net benefits. These programs are having good success in many places (most NY utilities, Midwest Energy, etc…)

http://bit.ly/HowSmartMWE, http://bit.ly/obrNYloan

On Bill Recovery has numerous ancillary benefits beyond transparency, low cost, and accountability. On Bill Recovery allows strengthening of the relationship between utilities and their customers. This provides additional incentive for utilities to focus on more comprehensively serving the client instead of simply serving the meter. This alignment of interests and partner creation will help accelerate deployment of Energy Efficiency.

Pace financing should be relegated to the heap of “bad ideas implemented quickly during desperate times.” It is a bad idea whose time has come and gone.

Sincerely,

Ted Kidd, One Knob Consulting

So what do you think? Is PACE just another way to steal from the poor, keep them enchained in debt?

Did you look at the articles I linked? They help better inform perspective – providing individual cases of harm, how cost disclosure and comparisons to other loans are not required, and point out problems that occur when you can indiscriminately put new loans to first lean position.

Pick pocketing the poor is despicable. Our government should not allow itself to be complicit.

Please leave your thoughts in the comments below!

 

 

 

 

 

 

  • Justin Lie

    Nate/Ted,

    Very thought provoking article.

    In a perfect world I agree that On-Bill financing is a much better solution. Although PACE is a less than perfect solution, I do think it is an overstatement to compare it with NINJA loans and the abuse/corruption that was prevelant during the last housing crisis.

    2 Questions that I have when comparing PACE and On-Bill financing.

    1) Most On-Bill financing rates are extremely low, however, I do not believe that these are market rates and are heavily subisdized by efficiency programs. Is there a utility company that offers rates which are not subsidized (and if so what is the rate)?

    2) Would financing products/upgrades with On-Bill financing and PACE result in the same upgrades being done (besides water related upgrads that are available w/PACE) or would certain upgrades/products be excluded based on savings/payback period etc.?

    Thanks!
    Justin

    • TedKidd

      Hi Justin, thanks for commenting.

      IMO the two worst features that make it abusive are – stealing first lean status, and lack of disclosure requirements.

      Your nephew hasn’t built his credit yet, but he seems responsible and wants to buy a home. You want to help. You have some money you won’t need for a few years, so you loan him $80k to buy a $100k home. Your mortgage has first lean status, which hopefully won’t matter because once he builds his credit he’ll refinance.

      After a year or so he goes and spends $15-$25k on new windows using PACE. Do you see the problem? You have an asset that was first 80k on a 100k asset that is now 2nd 80k on a 100-105k asset after someone else’s 15-25k.

      How do you feel now? How secure is your investment now? Do you feel like someone unfairly forced their way in front of you? Do you feel like if ANYTHING goes wrong, you are likely to be out principle?

      And your Nephew, does he understand the fees and interest rates he’s paying? Does he understand the alternatives that were available to him? Does he understand how much harder he’s made it to refinance your mortgage? Does he realize what he’s done to your investment, which was also a nice favor to him?

      This doesn’t begin to touch on the premise these loans are supposed to reduce energy footprint and increase value. The new windows saved him $28 a year on his energy bill – hard to even see without a magnifying glass. The house value went up maybe $3-4k, a tiny fraction of the investment.

      Do you think the window guy accurately represented the energy benefits or the capital depreciation?

      Doubtful – http://1.usa.gov/1016SzK

      Hope this helps see a tiny slice of the potential problems.

      • Justin Lie

        Hi Ted, thanks for reply!

        Post crisis, the overwhelmingly majority of non-jumbo mortgage loans are those backed by the Gov’t (FN/FH, GNMA, FHA). The FHFA objection to the first lien issue was the reason residential PACE financing came to a stop. California created a loss reserve program to mitigate lender concerns of PACE tax liens having priority. So at least in California, the first lien status is much less of an issue. For the handful of loans where a loan may come from family/friends, then I agree the homeowner should probably not use a PACE loan or at least needs to fully understand the structure (BTW, the nephew or anyone who is borrowing from family/friends should fully understand any loans that they take out which may affect their ability to pay back).

        As for the window example above, this was the main reason for my 2nd question in my comment. Would On-Bill Financing have prevented the homeowner from making this purchase and not financed it? If so, then this would be a clear advantage of OBF. If not, then there is no difference between OBF and PACE financing in terms of protecting the homeowner from contractors who over promise energy benefits.

        I do see the potential problems associated with trying to resell the house that were described in the 2nd article. However, if OBF is transferred to the next homeowner, wouldn’t there be the same issues?

        Lastly, what type of disclosures are required for OBF (I haven’t come across any info related to it)? If there is a $20K outstanding balance, do I have to disclose that to a potential homebuyer? What if I have defaulted on my house and not paid my utility bill, does the new homeowner find out that there is a 20K remaining balance once they try and turn-on the service or is it disclosed?

        • TedKidd

          I don’t know of any OBF that replaces the first mortgage as first lien holder.

          My personal feeling is if the utility is holding the note on the EE asset, and the home goes through foreclosure, I don’t see a problem with them continuing to charge for its repayment so long as the asset DOES provide the energy savings that keeps the bill at or below what it would have been without the improvement. But I’m not a banker or a loan specialist.

          My understanding of On Bill for places like Midwest Energy http://bit.ly/HowSmartMWE is they loan to 95% of projected energy savings. But they track actual savings and adjust their projections so accuracy is continuously improving – so that 95% basically means they’re assuming 5% fudge factor. The funds can transfer to the next owner or be satisfied – either way it’s clear the liability is carrying it’s cost.

          In NY they attempt to base it on savings projections but the program is so screwed up, having never tracked savings, having created a perverse universe of projects being required to meet SIR minimums, and having no accountability for actual outcomes, it is very unlikely the savings carry the improvement cost. When you don’t track where your shots land and simply assume you’ve landed on the green, it’s pretty likely you can’t break 100 when someone finally starts keeping score.

          But the act of keeping score is the thing that starts us on the path to knowing how to hit the ball straight…

          What do you think a fair home improvement loan interest rate should be in the current marketplace?

          How much if it’s securitized?

          What do you think about the rates charged by PACE?

          Do you think people being “sold” improvements under PACE should have energy savings projections provided, and should those savings have some type of accountability?

          Do you think people should be able to easily see the costs associated with improvements that supposedly reduce their energy bills?

          If the typical client can afford $100 towards home improvement projects, and the real benefits from home performance are sigmoidal (http://bit.ly/GulfofDisappointment), what do you think having an additional $10-20 of that limited budget be taken away by financing costs does to the consumer.

          How does that thought make you feel?