PACE Solar Program Slows Chances of Economic Recovery

by Brian Brady

Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL

Author website

Residential real estate finance is ill and getting worse.  I cautioned that the elixir that got us into this mess should be removed for a robust private market solution but the mix makers upped the dosage.  It’s gonna make us even more sick.

Last year, I saw an opportunity to finance energy efficient improvements, specifically solar panels.  My motives weren’t a political demonstration but rooted in financial analysis.  Often, an investment in a solar panels installation returns as much as 15% annually through cost savings.  Prescient building contractors reworked business plans to meet the expected demand. The global warming religion heightened awareness to self-produced energy systems and California consumers want in.  The challenge is that little if any home improvement capital exists in the mortgage market; that spelled opportunity for me.

I taught some of these contractors how to structure, price, and make junior loans, to finance their work.  Armed with my database of investors, I started a small secondary market for these “solar loans”.  The contractor would make a loan, hire me to sell that loan to an investor, and pay me a  fee for arranging that sale from the proceeds.  The loan was cross-collateralized by the subject property and an assignation of tax credits to the lender. The loans averaged $25,000 and I intended to build up a servicing portfolio, earning a fee to collect payments and remit them to the investors.

What I didn’t realize was that I had a competitor, a competitor that had a lot more money and influence than I did.  This competitor is able rewrite laws to its advantage, so that it had a first lien position, which is assumable by a purchasing homeowner.  My loans were junior liens with a due-on-sale clause.  That competitor is the PACE program, armed with $150 million of Federal money and the borrowing power of states and municipalities.

That’s a formidable foe for a small-town mortgage broker and his retired golf-buddy investors.  Needless to say, I abandoned the idea last month.  Today, there’s hope for my little venture.  The PACE program forgot that the existing secondary mortgage market doesn’t take kindly to being pushed around:

But in May, Fannie Mae and Freddie Mac, which buy and resell most mortgage loans in the country, said they might not buy any mortgages for properties participating in the programs, and didn’t tell lenders how to deal with properties that already have such loans.

That undercut one of the key points of the program — the idea that installing solar panels wouldn’t be a problem when it’s time to sell the house.  The city held back on its plans to give out loans. The statewide program was put on hold.

“We’ve been working on this program about 18 months,” Sanders said. “We got it ready to go, and all of a sudden the issue comes up with Fannie and Freddie.”

For the mortgage agencies, the question is basic: Who should be paid first if there’s a default?  Government liens, like those that pay for the solar panels and other improvements, generally should be paid first, they say. But Fannie and Freddie won’t guarantee mortgages if someone else will be paid first. They fear taxpayers will lose out if the house faces foreclosure.

That’s caused problems for a few of the several thousand people around the country who have already taken advantage of the program but want to sell their homes. Some mortgage lenders have demanded that the loans be paid off before they write a new mortgage.

The political class is furious that it can’t push an agenda, through real estate finance concessions, even though the “agenda” is profitable enough for capital investment from the private sector.  The political class wants homeowners to get a no money down deal with a bribe (tax credit).  We offer a chance for the homeowner to pay off his solar improvements in ten years or less.

I thought this loan product could build up a $50 million servicing portfolio in 2-3 years.  I saw a chance to build a business and hire  10-15 employees.  I thought we could help homeowners to reduce their reliance on the local electric monopoly and earn a healthy return on the capital improvements they made.  I expected to help a couple of hundred retirees earn an above average return on their money.

My personal experience with the government crowding of business  is but a small example of the larger problem with the economy.  Investors and entrepreneurs hate political uncertainty and “competing against the G” is something no profitable concern can do.  If we’re not careful, the government will control more than half of the economic activity in this country.  Then, there’s no turning back.