PACE & HERO Loans and their possible effects to both Investors and Mortgage Brokers
Over the past decade several “Government Sponsored Financing Programs” were set up to provide property owners an alternative way to pay for necessary or desired property upgrades.
The “2” main Government Sponsored Loan Programs are:
PACE Property Assessed Clean Energy
HERO Home Energy Renovation Opportunity
Each loan program is government sponsored but funded by non-government lenders and each have their own allowable “list” of improvements or upgrades that homeowners can make to their property from the net proceeds from each respective loan.
It has become a growing issue in the mortgage industry. The way both PACE and HERO loans are secured against a Subject Property, and further how the payments are collected from the Homeowner/Borrower.
Both PACE & HERO Loan Payments are incorporated into the County Property Tax bill assessed to the Subject Property. They are collected by the County twice a year when Borrowers/Homeowners pay their Property Tax Bill. The County then forwards the collected funds representing the share of monies owing for principal and interest to the PACE or HERO Lender.
The Advantages for Borrowers are:
Easier Qualifying Standards
Flexible Financing Terms
The loan payments are combined into the Simi-Annual Property Tax Payments
Interest may be tax deductible
The Disadvantages for Borrowers are:
Interest Rates are typically higher than traditional financing
The loan origination costs can be very high
The additional assessment to the Property Taxes remains with the Property
If the loan has not been paid off, selling the property might be more difficult
But there are “Other” possible negative effects that both Mortgage Brokers and Trust Deed Investors need to be aware of and further investigate prior to arranging and funding a Private Equity Loan.
Whenever a Borrower contacts our company requesting financing for a 1 to 4 residential property, we always make it a condition of funding any proposed loan that an investigation is done. Confirming that there are NO PACE or HERO loans associated with the proposed Subject Property.
We have seen on Preliminary Title Reports that an Exempted Item is listed which makes reference to a recorded Document that is normally titled: Payment Contractual Assessment.
Typically, there isn’t a recorded Deed of Trust listed on a Preliminary Title Report, indicating the Borrower’s debt and further the Pace or HERO lender’s lien against the Subject Property.
If a careful review of the Preliminary Title Report is Not done, then a PACE or HERO Loan could be missed due to there not being a Deed of Trust recorded against the Subject Property. If missed, would cause an Investor to possibly fund a loan at a higher LTV than would normally be done.
The Net Effect is that an Investor that believes and further has been assured by a Mortgage Broker that a proposed loan is at 60% LTV, may in realty be at higher LTV because of the Outstanding Loan balance associated with a PACE or Hero Loan.
The negative effect inherent in each Loan Program is that each loan program has Supremacy to the liens recorded to Trust Deed Investors.
Each loan program has the ability to supersede an existing 1st Trust Deed lender, thus negatively effecting a lender by allowing a new lien to gain priority over a properly recorded Deed of Trust.
While both PACE & HERO loan programs do allow for the subordination of their liens to a new 1st Trust Deed, their payment for both Principal & Interest always remains superior, due to the inclusion in the property’s tax bill.
A careful due diligence must always be done when originating loans intended to be secured against 1 to 4 residential properties to confirm that NO PACE or HERO loan is secured by the intended Subject Property.
We’ll delve into the specifics relating to the possibility of Subordinating both a PACE or HERO loan. In addition to the possible effects of PACE and HERO loans funded behind an existing 1st Trust Deed Loan in an upcoming Blog.
For now, we encourage any comments on this subject by either E-Mailing us at firstname.lastname@example.org or by calling our office at (888) 797-7970.