More Homeowners Default on 'Green' Loans
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This is Your Money Matters from The Wall Street Journal.
Welcome to Your Money Matters. I'm Charlie Turner in New York. One of the fastest growing types of loans in the U.S. comes from a program meant to finance energy-saving upgrades to a home. The small high-interest rate loans are part of an initiative called PACE, or the Property Assessed Clean Energy Program. The Wall Street Journal reports that loan defaults in the PACE program have increased substantially. Let's get some details from this from Wall Street Journal reporter Kirsten Grein. So, Kirsten, these loans are designed to help people afford items like solar panels, right?
That's exactly right. You take it out to get solar panels on your roof or maybe like a new air conditioning unit or something like that. And these loans are issued by private companies?
What are PACE loans and how do they finance home energy upgrades?
They are issued by private companies, yes. So private lenders in the PACE program. All right.
Now, one thing about this is an argument or disagreement. Part of it is that the lenders have been saying these loan defaults are rare.
Right.
Right. There is actually no way to track defaults in the program because of a very unusual partnership between the private lenders and local counties across the country. So even though the private lenders are making the loans, the local governments are actually the ones collecting the payments because the loans are put on a homeowner's property tax payment. So because of that, there's no central sort of clearinghouse. And so there's no real true default rate.
Okay, and that's how the loans are made, basically, through the various state counties?
That's exactly right. So states have to pass legislation to enact the program, and then counties also have to pass legislation.
The Wall Street Journal did an analysis of tax data in dozens of California counties. I'll let you get into the specifics, but it seems to me it found that there was a big difference, an upward difference in the loan defaults between 2015-16 and 2016-17.
That's right. Last year, in the 2015-2016 tax year, there were 225 defaults. Now there's well over 1,000 just in the California counties I studied, which is a limited view of what's actually going on but kind of the only data we could get.
I'm speaking with Kirsten Grein of The Wall Street Journal, and you're listening to Your Money Matters. Thanks for listening, everyone. Kirsten, backing up a little, what is the average loan size, basically?
The average loan size is about $25,000. And something odd about this program is while the private lenders are making them, the loans are actually brokered through your local repairman or contractor that might be in your house or is advertising in your neighborhood.
Who issues PACE loans and why is tracking defaults difficult?
They're the ones that kind of sign you up for the loan, tell you about it. And that's been one of the big problems in the program is a lot of borrowers don't really understand what they're getting into or how high their loan amounts will be.
Well, how big is the interest rate?
The initial interest rate can be anywhere from 5% to 12%. However, if you default, it starts accruing rapidly in California at 18% a year. How many loans total have been made? Again, they don't even release that number, but our sort of back of the envelope math, it's about $4 billion in total volume nationwide, which is about 160,000 loans. The odd thing is, though, when you're in default in this program, you're actually in danger of losing your house because you've defaulted on your entire property tax payment. So that means that the county can actually take over your entire house within five years of your default, even though the actual loan amount in the PACE program is small.
So the loans are added to the property tax and in total. That's right. That's what you owe. What is the key problem here? Is it that homeowners are being pushed into PACE loans that they have little chance of paying back? You mentioned plumbers and repairmen who have a vested interest in this. Or is it lenders are making loans knowing that Wall Street is hungry to buy their bonds?
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