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HomeMy WebLinkAboutHandouts_Regular_AOM_01/12/2017 ��TI�E �ALL STI�EETJO�AII. 7his mpy isforyour perso�l, narmmmacel use my. To arda presedatlar�dy mpias fur mstribution M yaur eo�eagues,.dimb Q astmnersN�it . td�9lwww.dP��ts.wm. • hCp'Ilwww.wsj.eanlatMdes/amevEc�fa4e4�mwing-loan-otegary-has-eerie-ed�oesoT�bpdme�aiss1484080984 MARKEfS - America's �Fastest- Growing Loan Category Has Eerie Echoes of Subprime Crisis . Lenders offering energy-conscious loans care little about borrowers' creditworthiness, contractors function as loan brokers—and investors can't get enough +� �"�� t� �-��. ,,�. , � :...�: �, . �� � :y� . - - - - --- --- - - � - -- ------ -- -- -. .__._� _ . ���-..�,,�- - - --- - ��::� _`��^�`` _ ���-- �. � � ����� ��� � � � t �4 `�a' ."�' t,� ��, - � `'. _ • • Y �" �':�* i{51"::' _.. � � fK Ch �J Y Cindi Ventura helps her mother out of the San Jose, Calif., house where tliey live. They got a PACE loan for $16,732 after eroded sewer pipes caused a flood. PHOTO: PRESTONGANNAWAYFOR7HEW!!LL STREETJOURIVAL By KIRSTEN GRIND Updated Jan.10, 2017 2:41 p.m. ET Deanna White told a contractor she couldn't afford the �42,2001oan he recommended for improvements to her house in Inglewood, Calif. The contractor, she recalled, said she wouldn't be on the hook because the loan was part of a"government program." She applied and was approved. ` � 1�vo years later, Ms. White is struggling to make payments on tlie loan, which was packaged with more than 10,000 similar loans into bonds and sold to investors. Under its terms, Ms. White's five-bedroom house could be foreclosed on if she defaults. � Her loan is part of a booming corner of the lending industry called Property Assessed Clean Energy, or PACE. Such loans, set up by local governments'across the U S., are designed to encourage homeowners to buy energy-efficient solar panels, window insulation and air-conditioning units. � ' ' . About $3.4 billion has been lent so far for residential projects, and industry executives predict the total.will double within the next year. That would likely rank PACE loans as the fastest-gtowing type of financing in the U S. As the loans spread, so do problems that echo the subprime mortgage crisis. Plumbers and repairmen essentially function as loan brokers but have scant training and ' oversight They often pitch PACE loans to help land contracting jobs and earn referral � fees from lenders, according to loan documents and more than two dozen borrowers, industry executives and employees. Creditworthiness matters little to lenders, because loans are based'on tlie:vaTu'e';ofa :.�" homeowner.' PACE loans typically require�notdown:paymen�and the c�`eb�is� .�.� ._ addez� as an assessment. Ms. White's annual property taxes soared to $6,500 from $1,215. I _ � '� —, � Loan growth is fueled partly by investor appetite for bonds created from PACE loans, ,�. D,n„ ,� � t.� r� � � m ��(�,r�l v __.._,--� h�nd�,t • especially among mutual + ' funds and insurers. Investors Home Improvement p ou t benvu.onmen � � Cumulative PACE financing for �endlyreputationandlofty credit ratings. On the other residential projects hand,ratingfirmshavesaid $ 3.5 billi Z b illion � �erearen'tenoughhistorical �. __,_^_ _ �, , data on PACE loans to forecast potential defaults: 3 . 0 ,�,_, _ �� Some local governments that embraced the loans as a way to 2 5 �, bring clean energy to the --..-_-.._____. `_ masses didn't anticipate the ����-Y``L messy consequences. 2.� -- -- - - - - -- - --- -- :- -- --- ------ ---- ----- - - - - - -- -. --- � _____ - "We wanted to put ourselves ' in the thick of this," says Rick 1.5 ` s�snap executive director of -- --- - ------ a--- the Western Riverside Council _ of Governments, a group of 1 city and wunty governments """�-�°�'"-'�""- - �" `-' in California that helps run :� the largest PACE program. �.5 "The downside is now we hear � � � about these stories from � ; people who feel like they've � � been misinformed in some :. ,_ . . — -- . .. ,............_,,. � 2009 '11 '13 '15 , fash'on: � ''°Through Dec. 20 Source: PACENation THE VPALL STREET JOURNAL. The government group tries to resolve problems for borrowers. Riverside County, Calif., has opened an investigation into marketing practices for PACE loans, and California Gov Jerry Brown signed into law in September new requirements establishing uniform disclosures for PACE loans, an effort to make lending terms closer to those for mortgages. Homeowners who get a PACE loan now have three days to back out. T.he largest PACE lender, Renovate America Inc., is accused in three lawsuits filed in November byborrowers of double-charging interest and administrative fees and failing to immediately credit loan payments. The suits seek class-action status. The company denies the allegations and says it will �defend PACE, our company and the program vigorously." In November, the Energy Department urged administrators of the loan programs to clearly explain loan costs and other terms, allow borrowers to cancel their loan during a short period and deter Iflckbacks to contractors. Industry executives say most borrowers are satisfied with their loans and defaults are rare. Lenders are worl�ngwith consumer groups to create nationwide standards "to prevent things that wouldn't benefit consumers," says JP McNeill, Renovate America's founder and chief executive. The growing pains are largely the result of the industry's young age, the executives say. The first PACE program was started in 2007 by Cisco DeVries, then chief of staff to the mayor of Berkeley, Calif. • Thirty four�states;anclWastiington, D:C., have passed legislation allowing the creation of i I '� � II! ' : � 5 4<' .ro� �"z..,T�'� � � � � �R S-y " ; Z �1�'3. �+w � � ` . ?�'i£'. ^ 1 - ` �� . . t � ,�a x � �,�,' � ��� �` ���� : -�' �, � � � �, � . _ � ; ,k-�: � � `��� b���:, �� , $ : ��i ��' . � �s: t" ti. :�' �'�� 5 �, � • + � _ , . Cisco DeVries, ceMe� atlhe Cffies forTomorrow cor�ference in NewYork in July 2D15, calis Fiimself a'capdalist hippie' and is chief executive of clean-enargy company Renew Fnanaal Group. PHOTO: LARRYBUSACCA/GE77YIMAGES PACE prograrns, according to PACENation, an indushy trade group in Pleasantville, N.Y. Mr-.-DeUr-ies, who calls-himself-a �capitalist-hippie"-and-nov�isc�ief-executive of-Renew- -- --�--- - -- - . - Financial Group LLC, a clean-energy finance company in Oakland, Calif, says he is "really proud of what we've accomplished." He adds: "We set out to help people save - money and save energy, and it's under way.A The industry could get a new gcowth spurt from a July decision by the Department of - Housing and Urban Development to allow the Federal Housing Administration to - . purchase mortgages on homes with PACE loans. RACE IoansFrange in size from about $S;OOO;tfi`:inor�ttiaII$100;U00; with an a�e%ag�of abo�$-�S;OU:U;:'and charge interest rates o�6�1'sfii�9% over a repayment period of usually �,.., five;to<2s years.. �4'.�;e�.. _...-A' -, Instead of malflng monthly mortgage payments, PACE borrowers pay what they owe once or twice a year along with their property taxes. Cities and counties collect the loan payments and pass along the mo�ey to lenders. Local governments collect fees from finance companies. In the fiscal year that ended June 30, the Western Riverside Council of Governments collected revenue of $7.1 million, or about 15% of its budget, from the PACE program. Another quirk of PACE loans is that the debt usually goes to the front of the line, ahead of the homeowner's mortgage. Lilce a ty�icaLtaa:assessment, that means if a hoineowner � . . defaults�on'tli�PACET"oan, the�xoge�can.be=seized=ascoflateial ati�`sald�to�repaytlie� °- ` len.d'er>> That setup puts local governments in the awkavard position of potentially foreclosing on their constituents. If that happens and the house t�ns out to be worth less than the amount owed by the homeowner, other tagpayers could be stuck with a loss on the difference. So far, that hasn't happened. Some investors say the extensive involvement in PACE loans by governments across the country amounts to an implicit financial backstop. The belief that governments stand behind the loans is a major reason why investors are attracted to the bond deals, according to investors. �There is such big national and state baclflng" says Mike Warmuth, portfolio management vice president at FBL Financial Group Inc., the owner of Farm Bureau Life Insurance Co. in West Des Moines, Iowa. The insurer owned $22 million of PACE bonds � at the end of September. Mr. Warmuth says the i;nsure�.'s-broT�ersuggested�tiie-b'o�ds„ 'w�Tuclzgenerall.���iEalio�ittF �.4! :'He says he isn't aware of any underwriting defic,iencies with the loans, adding that Farm Bureau only had access to aggregate loan data before buying the bonds. ' Defaults on loans in PACE bond deals overall have been less than 1%, according to Kroll Bond Rating Agency Inc. Cecil Smart, a senior director at the ratings firm, says the bond • deals are structured so that � ' lenders bear the brunt of any Across U��■ losses,ratherthaninvestors. � Number of states with PACE Germany'sDeutscheBankAG is one of the largest packagers legisiation of PACE loans into securities and led a$284 million deal in 35 �* mid-December, which drew far more investor demand 3 O than expected. The bank is �,�.:.:<= awareofproblemsstemming ���' from the role of contractors, 25 �� says a person familiar with the �.___ _...._._�__._.. " �"" ��,�� : matter. ��� T ��'����� - °�•'"�"'�°•�°•� - -.Contractots:offen::line.��:=- - . 2� :� ���� -- --- " ---- -- ------- - -- �--� ,� loans while on house calls and � � �� � � �'..,_." can earn a refeiTaTfeeof'at� ������� , 35 ' � � : �� , ' least;$soo:�erhox.�avCier-, � � � .� , • accord�ng to current and �� �� ���� �� � former em lo ees. The loans 10 ������ P Y � � � � � � � : also are marketed at county � � ��_�' �� �_ fairs and by cold calling, � � � borrowers say. 5 �������,,..� . ������� � Renovate America uses about � ��� R � � 8,00o contractors to help line s , ( �oca�uay .. � ��������������,,,�;, uploans,accordingtobond 2��7 '�9 'll '� '15 documents.Thosecontractors are overseen by 23 employees =�As of Dec. 20 Source: PACENation attheSanDiegocompany. THE WALL STREET JOURNAL The company says it recently put in place a more-stringent contractor management program. Renovate America says only about 20o contractors are actively arranging PACE loans. Cindi Ventura, 65 years old, says she was urged last suminer by her plumber to apply for a PACE loan after sewer pipes eroded underneath her three-bedroom house in San Jose, flooding the property. She said she had recently filed for personal banl�uptcy, didn't have the money to make all the repairs and couldn't qualify for a home-equity line of •' •• �� ,/�- ,s� ��-''� A+� credit . � r I �' She and her mother, 83,recei�ed a�16;7323oaII:fo"r five years from Ygrene Ene�g�Ftiind=r �,v �,� '� 'z. � Y� �� c; �► � Inc. with a 6:510 inteiest �ate. Ygrene ("energy" spelled backward), based �n Santa Rosa, J Calif., is the second-largest provider of PACE financing in the country, based on loan �� �,t �� volume. �{; ���. �.+ !t•:v'� Ms. Ventura, a receptionist, says s�e;was'corifuse�about the loan's terrns because it was � , �� 1�,��Z called an as§essment;She says she called and emailed Ygrene several times with •1 ,.. ,.,.._.,; ;: : . . q ohs ou er cuments and never heard back. "I still don't really ; understand what the program is," she says. � t�� � � � � Louis Lalonde, chief marketing officer of Ygrene, says company representatives had a call with Ms. Ventura and her mother to answer all their questions before the loan was signed. He says he has no record of any further attempts to contact them. � . �, Jl � � � L?.X� The 3,200 contractors who drutn up business for Ygrene are regularly screened for compliance with contractor licensing requirements and receive training before they are „ � allowed to pitch loans to homeowners, he adds. �� L.4 ��� � Malcolm Scott, 61, was planning to pay in cash the $34,000 it would cost for a new air- i r � � � ; '' � � ' �� � � :.;r3� � �+ ? r: , f. C j ' - P� , . �3 '. i . _ `� . ti 1 Cindi Verdura helps her mother sort old family phohogtapha She says she was confused aboutterrts aftheir PACE loan because itwas called an assesme� PHOTO: PRESTON GANNAWAYPoRTNEWALL STREETJOURNAL conditioning unit, furnace and other improvements at his house in Woodland Hills, Cali£ His contractor suggested applying foi a PACE loan. Nfr Seattwasfsurpr�sei�to�n�dou�"less�tti�r2'4=Iionrs'la€erttiat��e•had:been=aggtQUed_:_�ri�,: . -- --- — - ---- - — r° ,-<�z.,� a.,. . . - �r$��€;oU:O. Renovate America says he qualified for the larger loan based on the amount of equity in his house. He decided to borrow just the $34,000. Michael Gardner, who runs Mediterranean Heaiaing & Air Conditioning, which lined up the loan, says he has been recommending loans for about two years and got "an hour or � two" of online training from Renovate America. The program �is real nice because there are no FICO score requirements or anything like that," says Mr. Gardner. Someienders have taken steps to strengthen underwriting . practices, make loan . documents more transparent and boost contractor oversight. Renovate America • now requires in-house representatives to speakwith ". aborrowerbyphone—outside . of the room and away from the contractor—before signing a • homeowner up for a PACE � loan. Renovate America, which is backedbynine private-equity and venture-capital firms, says it has spent the last � several months worldng with consumer groups and regulators to come up with national lending standards for PACE. The new standards � could include a year with no ' payments for borrowers who � are suffering from an economic hardship. "At"the end of the day, PACE is an unre ated indust and � rl', it's just a matter of time before we get regulated," says Mr. Lalonde of Ygrene. - Phil Adleson, a lawyer in San �• , H u n n r � / I nvesto rs Jose, Cali£, who represents , `J' J borrowers, says PACE is "a Tf12 gl'OWt�'1 Of PIQ�E �OcIIIS f1clS ��'�'eatideaimplemented in a dangerous fashion:' been fueled partly by investor appetite for bonds created from Ms.White, theborrowerin the loans Inglewood,aneighborhoodin Los Angeles County, says a Cumulative securitization �ntractor from a company named the House Next Door of residential PACE loans� t old her in late 2014not to by dollars funded worrythatshecouldn'tafford thes�2,2oarloan because "it $3 bllllOrt would� °rbe°-co��n�nu�of�Fis.y°� poc.��'.'� - -- - - -- -- — - -- ---- - --- ----- enew - inancia :— - �- - -�- - ----- The company says no one $288 million therewould ever describe 2 � Ygrene `_� PACE loans like that and says ;;_ Renovate America has held $479 million ��� ��� weekly tr�aining sessions for � ��` � Renovate America `� 5 its contractors for "more than �� $1.96 billi011 ��`� � ayear." 1 �� .._ ,�%� Ms. White says the contractor �.� ;. ' � finished the drought-resistant �� =�' �:� landscaping at her house only . `� after being contacted by a F � - ' , Journal reporter. Renovate � .. ,, . ;, , � � * � '. { America says the contractor �.. , _.... .. , ,.... ,....., _ ;.. .... �.: ,,... , 2014 ' 15 '] (j has been "under suspension" - for the past several weeks. Note: Through Dec.15 ��Ygrene includes some commercial loans Herloanwentintoapoolof Source: PACENation n ,282PACEloansthatare THE WALL STREET JOURNAL. collateral onbonds issued by the Western Riverside Council • of Governments. Deutsche Bank packaged the bonds into a$24o million deal called "HERO �nding Trust 2015 Kroll gave it a AA rating, the $rm's third-highest. According to the latest available figtu�es, fewer than 70 of the underlying PACE loans have defaulted, and Kroll said the transaction "has performed as projected." Ms. White's negt loan payment is due in April. She says she doesn't l�ow how she will be able to pay it. Write to Sirsten Grind at idrsten.grind@wsj.com Copyright &copy,2017 Dow Jones 8amp; Campany, Inc AII Rigtds Reserved This copy (s tor yair petsanal, nan-mmmacml use ony. To ada presv��dur�dy eepfes {or �istrihufian to your m0eagues, dienls Q aisiomers Nsit hitp•lMrww.djrepmits.com. � I ' � i I �