Energy Efficiency Program Is Costing Homeowners, Taxpayers

Published February 15, 2018

A federal clean energy home loan program has come under fire as homeowners taking out loans on the advice of contractors are finding they can’t afford the new payments, with some losing their homes as a result.

Under the Property Assessed Clean Energy (PACE) financing program, companies offer homeowners loans to help pay for energy-efficient upgrades, which are added to the borrower’s property tax bill.

The loans average around $25,000 with a 20 year payback. Nationwide, PACE loans have grown to $4.4 billion in total from just $200 million at the end of 2013.

As increasing numbers of homeowners have defaulted under the weight of their higher tax payments, local governments are becoming unwilling homeowners. As a result, several states have passed regulations intended to reduce the number of defaults.

‘Extremely Perverse Incentives’

Local governments finance homeowners’ upgrades with government bonds, says Paul Blair, strategic initiatives director at Americans for Tax Reform.

“They do this by giving essentially anyone with a home a taxpayer-financed loan for a new roof, windows, solar panels, heating systems, etc., without requiring those homeowners to have credit or cash to pay for the upgrades,” Blair said. “Local government bonds are used to pay the up-front costs, and they become lienholders on the property.

“PACE creates extremely perverse incentives for people to take out loans for home upgrades they can’t afford, and ultimately creates significant taxpayer risk as a result,” said Blair.

‘Putting Taxpayers at Risk’

U.S. Housing and Urban Development Secretary Ben Carson took a step to shield taxpayers from PACE liabilities late in 2017 by prohibiting new federally backed mortgages for properties encumbered with PACE liabilities. 

“FHA 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,” said Carson in a statement. 

If a homeowner can’t pay the higher property taxes that come as a result of PACE loans, cities are put in a position of potentially having to foreclose on someone’s home for nonpayment, says Blair.

“This is a horrible outcome that could prolong a future housing crisis while growing government,” Blair said. “That’s part of the reason several California cities, like Bakersfield, have ended local PACE programs.

“States and local governments elsewhere would be wise to do the same,” said Blair.

Kenneth Artz ([email protected]) writes from Dallas, Texas.