Loan defaults in a popular program meant to finance energy-saving home upgrades have increased substantially, despite lenders' claims that few borrowers have missed payments.
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The small, high-interest-rate loans were made as part of the Property Assessed Clean Energy program, or PACE, a nationwide initiative designed to help people afford solar panels, energy-efficient air-conditioners and other "green" appliances. PACE loans are among the fastest-growing types of loans in the U.S.
The rise in defaults means some borrowers are at risk of losing their homes over relatively small loan amounts and that local governments are put in the awkward position of having to collect troubled debts for private companies.
Private lenders in the PACE program have told Wall Street investors, as well as local and federal government officials, that borrower defaults are rare and that no homeowners have gone into foreclosure as a result of the program, according to investors and public officials.
But a Wall Street Journal analysis of tax data in 40 counties in California -- by far the biggest market for PACE loans -- shows that defaults have jumped over the last year. Roughly 1,100 borrowers have missed two consecutive payments this year through the tax year that ended June 30, compared with 245 over the previous year. That means they are in default, and could potentially have their homes auctioned off by local governments within five years.
The lenders, including Renovate America Inc., Ygrene Energy Fund and Renew Financial Inc., say the overall default rate of less than 2% provided by the Journal's analysis is in line with the average percentage of people who miss property-tax payments.
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A spokeswoman for Renovate America said the partial data gathered by the Journal is more negative than what the company is seeing. Rocco Fabiano, the chief executive of Ygrene, said in a statement that "Ygrene's PACE delinquency rate remains far below that of average property tax delinquencies in California." A spokesman for Renew Financial said property owners in its CaliforniaFIRST PACE program "have similar delinquency and default rates as all other property owners."
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In the PACE program, private companies make the loans and the balances are placed on a homeowner's property tax bill. Local governments are responsible for collecting the payments and, in the event of a default, potentially seizing the home to recoup the loan amount.
The average PACE loan is about $25,000. But unpaid balances get bigger quickly; they accrue additional interest at the rate of 18% annually. Under California law, homes can be auctioned off in a tax sale in up to five years if the homeowners don't pay the balance.
"For us to be the heavy hand and make [borrowers] go through the tax sale process is onerous on us," says Jon Christensen, the tax collector in Riverside County, where 227 PACE borrowers are in default.
Wall Street is hungry for bonds made from PACE loans. In July, asset managers and pension funds piled into a $205 million deal from the largest PACE lender, Renovate America. It was the company's 11th securitization since its 2008 founding.
Investors are attracted to the bonds' relatively high yield of about 4% and the loans' priority structure. If a borrower defaults, PACE lenders are paid back before mortgage lenders. The deals have received high marks from rating agencies, which have said the program is too new to predict future defaults.
Still, some investors are getting nervous.
"If we can't get more data, it's going to limit our ability to take the risk," says Dave Goodson, the head of securitized products at Voya Financial Inc., noting that monthly updates on the PACE bond deal he has invested in don't include default rates. Mr. Goodson said he has shared his concern about lack of delinquency data in the PACE program to lenders.
Indeed, such performance data are hard to come by. It is up to local tax collectors to track default rates. "No one is even collecting all the data," said John Rao, an attorney with the nonprofit National Consumer Law Center.
The Journal analyzed data from the California Association of County Treasurers and Tax Collectors, which collected the information from local tax collectors and from counties. The association is advocating state legislation to increase consumer protections in the PACE program.
The data, which only offer a limited view of overall PACE loan performance, show that the average default rate has climbed to 1.6% from 0.9% last year.
The default rate is lower than the average credit card default rate of roughly 3.5%, and higher than the first mortgage default rate of .6%, according to the S&P Dow Jones Indices.
But the PACE default rate doesn't capture borrowers whose missed payments are covered by mortgage escrow accounts, which appears to be a common occurrence, according to borrowers, banks, real estate agents and attorneys.
Last year, California tax collectors reported that roughly 1.1% of homeowners missed property-tax payments, according to the tax collectors association.
PACE loans totaling nearly $3.7 million are past due across the state, up from about $520,000 in the 2015-2016 tax year. Tax collectors don't know for sure whether homes with PACE loans attached defaulted specifically because a homeowner could have been unable to pay the entire property tax payment as they are lumped together.
PACE lenders have made roughly $3.6 billion in PACE loans nationwide, making the total number of loans roughly 140,000.
Some borrowers say they were pushed into loans by plumbers and repairmen who serve as middlemen in the transactions, and that they were approved for loan amounts they couldn't afford, the Journal has reported.
A bipartisan group of U.S. senators has introduced legislation to subject the loans to the same level of regulations as faced by mortgages.
Kern County, with a population of about 874,500 people in central California, logged just two defaults from PACE loans in the 2015-2016 tax year. As of June 30, 42 borrowers with PACE loans are in danger of losing their homes to tax sales.
The county earlier this year started training its tax collectors on how to deal with struggling PACE borrowers, said county tax collector Jordan Kaufman. In July, Kern County voted to terminate the PACE program.
In Hemet, Calif., homeowner Everett Cain, 87, says he and his wife are on the verge of foreclosure after a contractor representing Renovate America said a PACE loan would "be a complete financial wash" and wouldn't cost anything. Instead, his annual tax bill jumped from $800 to roughly $4,000.
Mr. Cain, who is suing Renovate, says he has missed several tax payments, but his mortgage lender initially pulled the money from his escrow account. Now he is also behind on house payments. A spokeswoman for Renovate declined to comment.
The PACE program, Mr. Cain said, "is a great way to steal someone's home."