More Homeowners Default on 'Green' Loans

Summary

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Podcast Summary: WSJ Your Money Briefing

Episode: More Homeowners Default on 'Green' Loans

Date: August 16, 2017
Host: Charlie Turner
Guest: Kirsten Grind (Wall Street Journal reporter)

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Episode Overview

This episode delves into the rapid growth of PACE (Property Assessed Clean Energy) loans, which are marketed as an option for homeowners to fund energy-saving home improvements like solar panels. The discussion focuses on surprising data showing an upsurge in default rates, the challenges in tracking these defaults, and growing concerns about the program's transparency and oversight.

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Key Discussion Points and Insights

1. What Are PACE Loans?

• Purpose: Designed to help homeowners finance eco-friendly home upgrades—e.g., solar panels, energy-efficient AC units.
• Issuers: Loans are issued by private lenders but collected as part of local property tax bills.
• Program Structure: Requires both state and county legislation to enable participation.

  "You take it out to get solar panels on your roof or maybe like a new air conditioning unit..."
  —Kirsten Grind [00:56]

2. Complexity and Lack of Oversight

• Unique Partnership: There is an unusual setup where private lenders issue loans, local governments collect payments, and loans attach to property tax bills.
• No Central Tracking: The absence of a centralized system means no definitive way to track defaults.

  "There's actually no way to track defaults in the program because of a very unusual partnership between the private lenders and local counties..."
  —Kirsten Grind [01:20]

3. Rising Default Rates

• WSJ Analysis: Reviewed tax data from numerous California counties.
• Findings: Defaults jumped from 225 in the 2015-16 tax year to over 1,000 in 2016-17—disputing lenders' claims that defaults are “rare.”

  "The first discovery was that there were any defaults at all in either year because the lenders have been very clearly telling Wall Street investors and politicians... it's very rare for borrowers to miss payments..."
  —Kirsten Grind [02:21]

4. Loan Terms and the Risk to Homeowners

• Average Loan Size: Approximately $25,000.
• Interest Rates: Start at 5-12%, but jump to 18% annually if a homeowner defaults (in California).
• Foreclosure Risk: Defaulting on a PACE loan means defaulting on the entire property tax bill, which can lead to foreclosure within five years—even for relatively small loan amounts.

  "The odd thing is... 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..."
  —Kirsten Grind [03:56]

5. Consumer Protection Concerns

• Loan Origination: Contractors or repairmen (not lenders directly) often promote and broker these loans, sometimes leaving homeowners unaware of the true costs or risks.

  "A lot of borrowers don't really understand what they're getting into or... how high their loan amounts will be."
  —Kirsten Grind [03:07]

• Oversight Gaps: Little state or federal oversight; patchy state regulation.
• Legislative Response: Bipartisan federal legislation attempting to regulate the program like a mortgage; resistance from lenders.

  "There's virtually no oversight of the lending program... There's been a bill introduced to regulate these loans like mortgages, but obviously the lenders are fighting that extensively."
  —Kirsten Grind [04:51]

6. Local Government Response

• Opting Out: Some counties, like Kern County, have chosen to terminate their involvement with the program.

  "More and more are... just gotten out of the program."
  —Kirsten Grind [05:32]

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Memorable Moments and Notable Quotes

• On Data Scarcity:

  "No central sort of clearing house. And so there’s no real true default rate."
  —Kirsten Grind [01:20]

• On Risks to Homeowners:

  "You’re actually in danger of losing your house because you’ve defaulted on your entire property tax payment."
  —Kirsten Grind [03:56]

• On Industry Appetite:

  "The appetite for these bonds from the loans has been increasing rapidly and investors love the loans."
  —Kirsten Grind [04:51]

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Timestamps for Important Segments

• [00:56] Overview of what PACE loans cover (Kirsten Grind)
• [01:20] Description of the lack of centralized default tracking
• [02:21] Data revealed by WSJ on rising default rates
• [03:07] How borrowers are introduced to PACE loans—role of contractors
• [03:41] Details about interest rates and terms
• [03:56] Risks of foreclosure due to default
• [04:51] Discussion of regulation gaps and federal attempts at oversight
• [05:32] Counties opting out of the PACE program

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Conclusion

This episode exposes the hidden risks and regulatory blind spots of the rapidly expanding PACE loan market. Homeowners considering these “green” loans should be wary of the program’s complexities and the possibility of losing their homes. The episode closes with the hope for more robust oversight to protect borrowers as legislative efforts continue.

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Transcript

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this is yous Money Matters from the Wall Street Journal.

[Charlie Turner]

Welcome to youo Money Matters. I'm Charlie Turner in New York. One of the fastest growing types of loans in the US Comes from a program mean 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 Grind. So, Kirsten, these loans are designed to help people afford items like solar panels, right?

[Kirsten Grind]

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.

[Charlie Turner]

And these loans are issued by private companies?

[Kirsten Grind]

They are issued by private companies, yes. So private lenders in the PACE program.

[Charlie Turner]

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.

[Kirsten Grind]

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 lenders, 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 clearing house. And so there's no real true default rate.

[Charlie Turner]

Okay. And that's how the loans are made, basically through the various state counties.

[Kirsten Grind]

That's exactly right. So states have to pass legislation to enact the program, and then counties also have to pass legislation.

[Charlie Turner]

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 201516 and 2016-17. In other words, the defaults have gone up.

[Kirsten Grind]

That's right. Well, the first discovery was that there were any defaults at all in either year because the lenders have been very clearly telling Wall street investors and politicians across the country and on the h. But it's very rare for borrowers to miss payments and no borrowers have gone into foreclosure. 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.

[Charlie Turner]

I'm speaking with Kirsten Grein of the Wall Street Journal, and you're listening to youo Money Matters. Thanks for listening, everyone. Kirsten, backing up a little. What is the average loan size?

[Kirsten Grind]

Basically, the average loan size is about $25,000. 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. They're the ones that kind of sign you up for the loan, tell you about it. That's been one of the big problems in the program is a lot of borrowers don' really understand what they're getting into or high or how high their loan amounts will be.

[Charlie Turner]

Well, how big is the interest rate?

[Kirsten Grind]

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.

[Charlie Turner]

How many loans total have been made?

[Kirsten Grind]

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.

[Charlie Turner]

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 that lenders are making loans knowing that Wall street is hungry to buy their bonds?

[Kirsten Grind]

I mean, I think it's all of the above. The appetite for these bonds from the loans has been increasing rapidly and investors love the loans. The biggest problem, I think is there's virtually no overs of the lending program, even though it's growing so fast. There's sort of patchwork state oversight. Now a bipartisan group of legislators on the Hill is trying to change that. There's been a bill introduced to regulate these loans like mortgages, but obviously the lenders are fighting that extensively.

[Charlie Turner]

Well, can the counties do anything I notice that you wrote that Kern county in California has just washed its hands and they've terminated the program. The counties, can they do anything?

[Kirsten Grind]

Absolutely. They can get out of the program. And more and more are not just Kern County. There's been several others in California that have just gotten out of the program.

[Charlie Turner]

Kirsten Grein of the Wall Street Journal, thank you very much for joining us.

[Kirsten Grind]

Thanks for having me.

[Charlie Turner]

And that's your money matters. I'm Charlie Turner at the Wall Street Journal.

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