Risk Or Growth: Are Pace Loans For You

By Dean H. Woodson

As the economy continues to improve, financial institutions are looking to aggressively grow their loan portfolios and improve yields on assets. There are a wide variety of loan purchase/participation opportunities available, such as mortgage pools, SBA and USDA loans, and participation on larger loans with other institutions.

One program, Property Assessed Clean Energy (PACE), that has experienced increasing market share, provides property owners (both consumer and commercial) with loans to make their properties more energy efficient.  The concept has been around for a long time, but more and more states have recently implemented legislation approving this type of financing.

Unique features of these loans include:

  1. The loans are attached to the property, and payments are collected annually when the owner pays the property taxes.
  2. The loans take a first lien position, regardless of whether there is already an outstanding mortgage.
  3. The loans generally have a bit higher interest rate than typical first mortgage real estate loans.
  4. The maturity period for the loans can be from 2-25 years.
  5. The loans remain attached to the property and are not required to be paid off if the property is sold, though some buyers are requesting sale price adjustments for amounts outstanding.

These loans are being originated by various sources, but are then sold either individually or in pools to institutions. They provide an alternative source for increasing an institution’s earning assets. If an institution is considering adding such loans, or other alternative loan purchases, to their portfolio, it should consider the following:

  1. Performing a risk assessment of the product.
  2. Adopting procedures for underwriting, reviewing and approving each loan type.
  3. Establishing portfolio limits on the amount of such loans they would consider adding.
  4. Ensuring the institution addresses these loans when completing the ALLL analysis.
  5. Determining how such loans are going to be serviced, either internally or through a third party.

Whether or not your institution is actively looking for such a product to add to the balance sheet, this is an issue all institutions should be monitoring.

  • As these loans take a first lien position, this can also have an impact on the LTV for an institution’s loans.
  • Currently, there is no requirement for institutions to be notified that such a loan has been placed on a consumer property for which it currently holds a mortgage. In the event of a default and foreclosure, the recoverable value could be adversely impacted if there is an outstanding PACE loan.

Should your institution need assistance in those areas, we are certainly available to assist you with implementing an alternative loan purchase program.